<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 8, 1997
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
PAULA FINANCIAL
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 6331 95-4640368
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
GATEWAY PLAZA
300 NORTH LAKE AVENUE, SUITE 300
PASADENA, CALIFORNIA 91101
(626) 304-0401
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
----------------
MR. BRADLEY K. SERWIN
SENIOR VICE PRESIDENT AND GENERAL COUNSEL
PAULA FINANCIAL
GATEWAY PLAZA
300 NORTH LAKE AVENUE, SUITE 300
PASADENA, CALIFORNIA 91101
(626) 304-0401
(Name, address, including zip code, and telephone number,
including area code, of agent for service of process)
----------------
Copies to:
<TABLE>
<S> <C>
RICHARD A. STRONG, ESQ. JOHN L. SAVVA, ESQ.
GIBSON, DUNN & CRUTCHER LLP SULLIVAN & CROMWELL
333 SOUTH GRAND AVENUE 444 SOUTH FLOWER STREET
LOS ANGELES, CA 90071 LOS ANGELES, CA 90071
(213) 229-7000 (213) 955-8000
</TABLE>
----------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C>
Common Stock, $.01 par value.......... $45,000,000 $13,637
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED AUGUST 8, 1997
[PAULA
SHARES
LOGO]
PAULA FINANCIAL
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
--------------
Of the shares of Common Stock offered hereby, shares are being
sold by the Company and 54,902 shares are being sold by the Selling Stockholder.
See "Principal and Selling Stockholders". The Company will not receive any of
the proceeds from the sale of the shares being sold by the Selling Stockholder.
Prior to this offering, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering price
per share will be between $ and $ . For factors to be considered
in determining the initial public offering price, see "Underwriting".
SEE "RISK FACTORS" ON PAGE 10 FOR CERTAIN CONSIDERATIONS RELEVANT TO AN
INVESTMENT IN THE COMMON STOCK.
Application will be made for quotation of the Common Stock on the Nasdaq
National Market under the symbol "PFCO".
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
OFFERING PRICE DISCOUNT(1) COMPANY(2) STOCKHOLDER
-------------- ------------- ------------ -------------------
<S> <C> <C> <C> <C>
Per Share............................. $ $ $ $
Total (3)............................. $ $ $ $
</TABLE>
- --------------
(1) The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933.
(2) Before deducting estimated expenses of $ payable by the Company.
(3) The Company has granted the Underwriters an option for 30 days to purchase
up to an additional shares at the initial public offering price per
share, less the underwriting discount, solely to cover over-allotments. If
such option is exercised in full, the total initial public offering price,
underwriting discount and proceeds to Company will be $ , $
and $ , respectively. See "Underwriting".
----------------
The shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part. It is expected that certificates
for the shares will be ready for delivery in New York, New York, on or about
, 1997, against payment therefor in immediately available funds.
GOLDMAN, SACHS & CO. CONNING & COMPANY
----------
The date of this Prospectus is , 1997.
<PAGE>
A map of the United States depicting the states and communities where the
Company has operations and is licensed for business. Several photographs of
agribusiness settings and Company personnel will accompany the map and an
indication of the location of the depicted areas will appear by connecting the
photographs to areas on the map. A topic sentence will accompany the graphic,
"PAULA's presence in agribusiness communities."
[photo/map]
--------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING".
2
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C., a Registration Statement on Form S-1 under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
common stock, par value $.01 per share (the "Common Stock"), of the Company
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto. For
further information with respect to the Company and such Common Stock, reference
is hereby made to such Registration Statement and the exhibits and schedules
thereto. Statements contained in this Prospectus as to the contents of any
contract or any other document are not necessarily complete, and in each
instance reference is made to the copy of such contract or document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. The Registration Statement, including the
exhibits and schedules thereto, may be inspected and copied at the public
reference facilities maintained by the Commission at its principal office
located at 450 Fifth Street, N.W., Washington, D.C. 20549, the New York Regional
Office located at 7 World Trade Center, 13th Floor, New York, New York 10048,
and the Chicago Regional Office located at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can be
obtained from the Public Reference Section of the Commission, at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates and from the
Commission's website at http://www.sec.gov.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements examined and reported upon by
independent certified public accountants and with quarterly reports containing
unaudited interim financial information for each of the first three fiscal
quarters of each fiscal year.
--------------
PAULA FINANCIAL OWNS ALL OF THE CAPITAL STOCK OF PAULA INSURANCE COMPANY
("PICO") AND PAULA ASSURANCE COMPANY ("PACO"). BOTH PICO AND PACO ARE INSURANCE
COMPANIES DOMICILED IN THE STATE OF CALIFORNIA. THE INSURANCE LAWS OF CALIFORNIA
PROVIDE THAT NO PERSON MAY ACQUIRE CONTROL OF AN INSURANCE COMPANY DOMICILED IN
THE STATE OF CALIFORNIA UNLESS SUCH PERSON HAS RECEIVED THE APPROVAL OF THE
CALIFORNIA DEPARTMENT OF INSURANCE (THE "CALIFORNIA DOI") OR THE CALIFORNIA DOI
DOES NOT DISAPPROVE THE ACQUISITION WITHIN 60 DAYS AFTER AN APPLICATION HAS BEEN
FILED. ANY PERSON WHO, DIRECTLY OR INDIRECTLY, OWNS, HOLDS THE POWER TO VOTE,
HOLDS PROXIES REPRESENTING OR OTHERWISE CONTROLS 10% OR MORE OF THE OUTSTANDING
VOTING SECURITIES OF AN INSURANCE COMPANY DOMICILED IN CALIFORNIA OR ITS HOLDING
COMPANY IS PRESUMED TO "CONTROL" THE INSURANCE COMPANY UNLESS THE CALIFORNIA
DOI, UPON APPLICATION, DETERMINES OTHERWISE. ACCORDINGLY, ANY PERSON WHO
PURCHASES IN THIS OFFERING SHARES OF THE COMPANY'S COMMON STOCK WHICH, WHEN
COMBINED WITH ALL OTHER VOTING SECURITIES OWNED OR OTHERWISE CONTROLLED BY THAT
PERSON, TOTAL 10% OR MORE OF THE VOTING SECURITIES OF THE COMPANY WILL BE DEEMED
TO HAVE ACQUIRED CONTROL OF PICO AND PACO, UNLESS THE CALIFORNIA DOI DETERMINES
OTHERWISE. SEE "RISK FACTORS--ANTI-TAKEOVER CONSIDERATIONS".
--------------
FOR NORTH CAROLINA INVESTORS: THE COMMISSIONER OF INSURANCE OF NORTH
CAROLINA HAS NOT APPROVED OR DISAPPROVED THIS OFFERING, NOR HAS THE COMMISSIONER
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
3
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED
INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS.
PRIOR TO THE CONSUMMATION OF THE OFFERING, PAULA FINANCIAL, WHICH IS CURRENTLY
DOMICILED IN CALIFORNIA, WILL EFFECT A REINCORPORATION IN THE STATE OF DELAWARE
PURSUANT TO WHICH IT WILL MERGE WITH AND INTO A WHOLLY-OWNED DELAWARE SUBSIDIARY
FORMED SOLELY FOR PURPOSES OF THE REINCORPORATION. THE TERM "COMPANY" MEANS
PAULA FINANCIAL, A DELAWARE CORPORATION, ITS CONSOLIDATED SUBSIDIARIES AND ITS
PREDECESSORS, AFTER GIVING EFFECT TO THE REINCORPORATION. "PICO" REFERS TO THE
COMPANY'S WORKERS' COMPENSATION INSURANCE SUBSIDIARY, PAULA INSURANCE COMPANY.
THE TERM "PAN AM" MEANS THE COMPANY'S THREE PRINCIPAL INSURANCE AGENCY
SUBSIDIARIES COLLECTIVELY UNLESS THE CONTEXT OTHERWISE REQUIRES. SEE "GLOSSARY
OF SELECTED INSURANCE TERMS" ON PAGE G-1 FOR DEFINITIONS OF CERTAIN INSURANCE
TERMS USED IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION IN
THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION WILL NOT BE
EXERCISED. SEE "UNDERWRITING". ALL FINANCIAL INFORMATION REGARDING THE COMPANY
IN THIS PROSPECTUS IS PRESENTED ON THE BASIS OF GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES ("GAAP"), EXCEPT AS OTHERWISE INDICATED. STATUTORY DATA INCLUDED
HEREIN HAS BEEN DERIVED FROM THE ANNUAL AND QUARTERLY STATEMENTS OF THE
COMPANY'S INSURANCE SUBSIDIARIES AS FILED WITH INSURANCE REGULATORY AUTHORITIES
AND PREPARED IN ACCORDANCE WITH STATUTORY ACCOUNTING PRACTICES ("SAP").
THE COMPANY
The Company is a California-based specialty underwriter and distributor of
commercial insurance products which, through its subsidiary PICO, is one of the
largest underwriters specializing in workers' compensation insurance products
and services for the agribusiness industry. The Company began operations in 1946
as an insurance agency providing workers' compensation and group medical
employee benefits to agribusiness employers in underserved rural markets. In
1974, PICO was formed to underwrite the workers' compensation portion of the
business distributed by Pan Am, the Company's insurance agency. In late 1994,
the Company added to its management team and its board of directors and embarked
on a strategy of growth, including expansion into new states, while maintaining
its focus on the agribusiness market.
For the six months ended June 30, 1997, the Company had $45.9 million of
premiums written, compared to $27.7 million for the comparable period in 1996,
an increase of 65.3%. For the year ended December 31, 1996, the Company had
premiums written of $63.6 million. The Company's primary geographic markets are
California, Arizona, and Oregon, which accounted for approximately 67.8%, 13.6%
and 12.0%, respectively, of premiums written for the six months ended June 30,
1997. Since 1995, the Company has commenced operations in Idaho, Texas, Florida
and Alaska and has been licensed in New Mexico.
The Company believes that its cumulative experience serving the agribusiness
industry has led to superior underwriting results and strong growth in
stockholders' equity per share. PICO's SAP combined ratio for the five years
ended December 31, 1996 averaged 99.6%, approximately 10.7 percentage points
below the California average for the workers' compensation insurance industry
(source: California Workers' Compensation Insurance Rating Bureau ("WCIRB")) and
10.8 percentage points below the national average for the workers' compensation
insurance industry (source: A.M. Best Company, Inc. ("A.M. Best"); Best's
Insurance Reports, Property/Casualty, 1997 edition). The Company's adjusted net
stockholders' equity per share has grown at a compound annual growth rate of
19.3% from January 1, 1981 to June 30, 1997 (21.5% over the 10 years ended June
30, 1997).
The Company's primary insurance subsidiary, PICO, is currently rated "A-
(Excellent)" by A.M. Best. As of June 30, 1997, the Company had total assets of
$ million and net stockholders' equity of $ million (both on a pro forma
basis after giving effect to the offering and other adjustments described under
"Capitalization"). As of June 30, 1997, 92.7% of the Company's investment
portfolio was invested in fixed maturity securities, all of which were rated "A"
or better by Standard & Poor's
4
<PAGE>
Corporation ("S&P"), Moody's Investors Service, Inc. ("Moody's") or Fitch
Investors Service, Inc. ("Fitch") as of such date. The Company's other principal
subsidiaries include PAULA Assurance Company ("PACO"), a life and health
carrier, and Pan Pacific Benefit Administrators, Inc. ("Pan Pacific"), a third
party administrator. The Company's address is 300 North Lake Avenue, Suite 300,
Pasadena, California 91101, and its telephone number is (626) 304-0401.
BUSINESS STRATEGY
The Company believes that its differentiated approach as a provider of
insurance services to the agribusiness industry and its expertise with immigrant
employee groups, partial year workforces and businesses in rural communities
have been critical to its success. The Company views its key strengths as: (i)
its integrated distribution and underwriting activities; (ii) the distinctive
labor relations and cost containment services it provides; and (iii) its
underwriting and risk management expertise with respect to agribusiness risks.
The Company intends to leverage these strengths to grow profitably while
maintaining a reputation as a premier provider of high quality insurance
products and services to small- and medium-sized agribusiness employers. PICO's
book of business, as measured by Estimated Annual Premium ("EAP"), has grown
from $49.3 million as of June 30, 1996 to $77.6 million as of June 30, 1997, an
increase of 57.5%. The Company's growth has been achieved without the
acquisition of other insurance companies.
The Company plans to grow its workers' compensation insurance business
further by: (i) expanding the Company's agribusiness franchise outside of
California and Arizona; (ii) increasing the Company's penetration of rural
communities within California and Arizona; and (iii) expanding into other
industries whose risk characteristics and service requirements are similar to
those of agribusiness. The Company intends to support its growth strategy by
continuing to affiliate with well-regarded, rural-focused insurance agencies and
by developing additional relationships with trade associations and safety
groups.
The Company's target agribusiness market includes those employers who farm,
harvest, transport, pack and process tree fruit, vegetables, fiber, flowers,
vine fruit and dairy products. Labor intensive agribusiness employers rely on
their workforces performing to maximum productivity in order to deliver their
fresh product to market at the best price. Agribusiness insurance risks are
generally characterized by: (i) monolingual Spanish speaking workforces; (ii)
moving work sites and a relative lack of machinery and equipment, making loss
control engineering more difficult; (iii) large seasonal fluctuations and high
turnover in the employee pool, making timely and frequent safety training more
critical and increasing the opportunity for filing fraudulent claims; (iv) fewer
opportunities for discounts from health providers in rural locations; and (v) a
relatively young workforce performing physically demanding labor for low hourly
or piece-work wages. The Company's knowledge of these risk characteristics has
enabled the Company to help its clients satisfy the benefits needs of their
workforces and assisted it to achieve underwriting profitability.
INTEGRATED DISTRIBUTION
The Company has developed an expertise in the agribusiness industry through
its long history of both distributing and underwriting insurance and through a
focus on the agent-customer relationship. PICO was formed by the owners of Pan
Am in 1974 to underwrite the workers' compensation portion of the business
distributed by Pan Am. The Company believes that Pan Am's direct interest in the
Company's success results in a cooperative relationship among the agent, the
underwriter, loss control consultants, claims management personnel and the
customer and its employees. Pan Am, which has 17 locations in California, Oregon
and Arizona, is the largest distributor for PICO, accounting for 46.4% of PICO's
premiums written for the six months ended June 30, 1997.
To enhance the Company's presence in rural areas not served by Pan Am, the
Company affiliates with insurance agencies of similar size and operating
histories to Pan Am. In late 1996 and early 1997, the Company made minority
equity investments aggregating $1.9 million in two regional commercial
5
<PAGE>
insurance agencies, James G. Parker Insurance Associates ("Parker"),
headquartered in Fresno, California, and CAPAX Management and Insurance Services
("CAPAX"), headquartered in Modesto, California. In 1996, the Company, Parker
and CAPAX formed the PAULA Trading Company (the "PTC") to affiliate with other
independent agencies. Typically, PTC member agencies have extensive operating
histories, a significant commercial insurance presence in rural communities and
historically high client persistency rates. As of June 30, 1997, ten agencies,
including Parker and CAPAX, have affiliated with the PTC. Pan Am and the other
PTC agencies together distributed 70.8% of PICO's Estimated Annual Premium
("EAP") as of June 30, 1997. The Company believes that its close relationships
with PTC member agencies assist it in lowering its loss ratio, raising
persistency rates and lowering acquisition costs.
The Company believes it gains significant marketing benefits from the
exclusive endorsements Pan Am has developed for the Company. These endorsements
by 21 prominent agribusiness trade associations have allowed the Company to be
identified with brand names significant to agribusiness customers. In addition,
they provide the Company with access to large groups of potential customers
without the usual sales process of prospecting individual clients. The Company
believes that solicitation of association members results in a higher percentage
of sales than do individual unaffiliated solicitations.
DISTINCTIVE SERVICES TO AGRIBUSINESS EMPLOYERS
Throughout its history, the Company has tailored its labor relations and
cost containment services to the unique needs of the agribusiness employer. From
the initial reporting of a claim to the careful explanation of benefits to the
medical treatment delivery to the return of an employee to work, the Company's
capabilities are field-based, bilingual, cross-cultural and sensitive to the
unique fraud-prevention and cost-containment issues present in agribusiness. The
Company's safety training, early return to work efforts, case management and
case settlement operations are tailored specifically to the labor relations and
cost containment needs of agribusiness employers and to the needs of Hispanic
and other immigrant laborers.
The Company's field representatives, Special Investigation Unit and claims
staff are central to the Company's service culture. Combined, these services
significantly enhance the agribusiness employer's human resource management
capabilities. The Company's field representatives train crew foremen and field
supervisors on safety practices and hold employee safety training for the
Company's clients and their employees. Field representatives also hand deliver
first-time benefit checks and explain benefits in the language of preference of
the claimant, a long-standing and distinctive practice of the Company which it
believes helps to reduce the cost of claims, particularly by reducing the number
of litigated claims. The Company's Special Investigation Unit reviews each claim
for potential fraud as it is reported to the Company rather than only those
claims referred to the unit by claims adjusters after they suspect fraud, as the
Company believes is more typical in the industry. The Company's claims staff is
bilingual, has an average of 13 years of claims experience and typically manages
only 125 open claims per examiner, which the Company believes is lower than the
industry average.
The Company also distinguishes itself in California and Arizona by offering
the option of occupational medical care in Mexico. The Company offers medical
treatment options in Mexico in three approved clinics in Tijuana, Mexicali and
San Luis. The Company believes it is the only carrier to provide this service.
AGRIBUSINESS UNDERWRITING EXPERTISE
The Company underwrites and prices its products with the objective of
earning an underwriting profit. The Company believes that its expertise and long
history serving agribusiness employers assist it in achieving this objective.
Though agribusiness is widely considered to be a "substandard" class of
insurance, the Company has consistently reported underwriting profitability
above industry averages. For the five years ended December 31, 1996, PICO's SAP
combined ratios have averaged 99.6% as
6
<PAGE>
compared to workers' compensation insurance industry averages in California and
nationally of 110.3% and 110.4 %, respectively, for the same time period
(source: WCIRB and A.M. Best, respectively). The Company's in-depth
understanding of the risks in its target market and its ability to price its
product appropriately are the keys to these results.
The Company's proprietary loss experience database, its trade association
endorsements and its understanding of the risk management needs of agribusiness
employers are the key elements of its underwriting capabilities. The Company's
rate-making process benefits significantly from more than 50 years of claim
experience in the agribusiness industry and a proprietary database built over 23
years. This experience has enabled the Company to differentiate risks by
creating more than 35 farm classes and subclasses, reflecting the unique
characteristics of job classifications and differences in farming operations. In
comparison, the WCIRB publishes only 15 payroll classifications in its schedule
of farm rating reports.
The Company enjoys the exclusive endorsement of 21 prominent agribusiness
trade associations and has relationships with 40 other safety groups. This helps
the Company to achieve the actuarial benefit of writing larger pools, to provide
safety training and services to small accounts more efficiently and to promote
the selection of good risks and safety practices by linking the self-interest of
each group member.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company............................ shares
Common Stock offered by the Selling Stockholder................ 54,902 shares
Common Stock to be outstanding after the offering (1).......... shares
Proposed Nasdaq National Market symbol......................... PFCO
Use of proceeds to the Company................................. To contribute $ million
to PICO as capital to
increase its capacity to
underwrite additional
insurance, to repay $11.5
million of bank debt and
other notes payable, and
for general corporate
purposes
</TABLE>
- --------------
(1) Excludes 390,325 shares of Common Stock reserved for issuance upon exercise
of options outstanding as of June 30, 1997 pursuant to grants to directors,
officers and employees of the Company. Includes shares of Common Stock
issuable upon exercise of warrants to purchase Common Stock and 941,177
shares of Common Stock to be issued upon the automatic conversion of shares
of the Series A Preferred Stock, $.01 par value ("Preferred Stock"), of the
Company upon consummation of the offering. See Notes 8 and 9 of the Notes to
Consolidated Financial Statements.
RISK FACTORS
Prospective investors should consider carefully, in addition to the other
information contained in this Prospectus, the matters set forth under the
caption "Risk Factors" before purchasing shares of the Common Stock offered
hereby.
7
<PAGE>
SUMMARY FINANCIAL DATA
The summary data presented below under the captions "Income Statement Data"
and "Balance Sheet Data" as of and for each of the years in the five-year period
ended December 31, 1996 are derived from the consolidated financial statements
of the Company, which financial statements have been audited by KPMG Peat
Marwick LLP, independent certified public accountants. The consolidated
financial statements as of December 31, 1995 and 1996 and for each of the years
in the three-year period ended December 31, 1996 and the report thereon are
included elsewhere in this Prospectus. The summary data presented below under
the captions "Income Statement Data" and "Balance Sheet Data" for the six-month
period ended June 30, 1996 and as of and for the six month period ended June 30,
1997, are derived from the unaudited consolidated financial statements of the
Company included elsewhere in this Prospectus and include, in the opinion of
management, all adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation of the information for such periods. The
information presented below under the captions "Adjusted Balance Sheet Data" and
"Other Data" is unaudited. The results of operations for the six months ended
June 30, 1997 are not necessarily indicative of the results to be expected for
the full year. The summary financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" ("MD&A") and the Consolidated Financial Statements
and notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Premiums written............................ $ 62,658 $ 53,502 $ 53,545 $ 46,762 $ 63,606 $ 27,745 $ 45,871
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Premiums earned:
Workers' compensation..................... $ 47,235 $ 50,857 $ 50,977 $ 44,224 $ 54,563 $ 21,751 $ 41,303
Group medical and life.................... 13,496 163 312 307 941 471 475
Commissions................................. 3,187 3,514 4,299 3,964 4,213 2,061 1,716
Net investment income....................... 4,983 4,495 4,536 4,817 4,701 2,322 2,499
Net realized investment gains............... 1,585 132 -- 37 444 427 --
Other....................................... 784 1,375 1,712 1,569 896 514 347
--------- --------- --------- --------- --------- --------- ---------
Total revenue............................. $ 71,270 $ 60,536 $ 61,836 $ 54,918 $ 65,758 $ 27,546 $ 46,340
Losses and loss adjustment expenses
incurred.................................. 47,238 30,852 28,618 29,363 33,900 13,937 28,447
Dividends provided for policyholders........ 2,647 5,806 6,221 3,438 1,628 620 309
Operating expenses.......................... 16,656 16,838 20,720 22,608 25,480 10,484 14,752
--------- --------- --------- --------- --------- --------- ---------
Total expenses............................ $ 66,541 $ 53,496 $ 55,559 $ 55,409 $ 61,008 $ 25,041 $ 43,508
Income (loss) before taxes.................. 4,729 7,040 6,277 (491) 4,750 2,505 2,832
Income tax expense (benefit)................ 1,236 1,875 1,572 (791) 827 443 538
--------- --------- --------- --------- --------- --------- ---------
Net income................................ $ 3,493 $ 5,165 $ 4,705 $ 300 $ 3,923 $ 2,062 $ 2,294
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Earnings per share (1)...................... $ 1.92 $ 2.83 $ 2.39 $ 0.15 $ 1.95 $ 1.05 $ 1.14
Weighted average shares outstanding (1)..... 1,824 1,824 1,972 1,940 2,007 1,970 2,006
</TABLE>
8
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<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30, 1997
----------------------------------------------------- -----------------------
AS
1992 1993 1994 1995 1996 ACTUAL ADJUSTED(2)
--------- --------- --------- --------- --------- --------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Investments (3).................. $ 79,879 $ 81,737 $ 83,084 $ 83,991 $ 86,792 $ 93,379 $
Total assets..................... 104,833 108,898 117,297 118,906 125,127 141,920
Unpaid losses and loss adjustment
expenses....................... 66,170 62,629 60,473 57,049 55,720 64,972
Notes payable.................... 3,966 3,370 4,205 10,824 11,279 11,468
Total liabilities................ 93,058 95,793 90,384 93,301 99,151 113,602
Net stockholders' equity......... 11,775 13,105 26,913 25,605 25,976 28,318
ADJUSTED BALANCE SHEET DATA:
Adjusted net stockholders' equity
(4)............................ 23,118 28,131 38,350 35,205 38,825 41,213
Adjusted net stockholders' equity
per share (4).................. $ 13.10 $ 15.93 $ 17.46 $ 17.97 $ 19.66 $ 20.88 $
<CAPTION>
AS OF AND FOR THE
SIX MONTHS ENDED JUNE
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 30,
----------------------------------------------------- -----------------------
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
PICO AND PACO GAAP RATIOS:
Loss ratio....................... 77.8% 60.5% 55.8% 65.9% 61.1% 62.7% 68.1%
Expense ratio.................... 23.0 24.4 26.7 32.3 32.1 34.0 28.2
Policyholder dividend ratio...... 4.4 11.4 12.1 7.7 2.9 2.8 0.7
--------- --------- --------- --------- --------- --------- ------------
Combined ratio................. 105.2% 96.3% 94.6% 105.9% 96.1% 99.5% 97.0%
--------- --------- --------- --------- --------- --------- ------------
--------- --------- --------- --------- --------- --------- ------------
PICO STATUTORY DATA:
Statutory net income............. $ 1,787 $ 2,079 $ 5,217 $ 3,175 $ 5,051 $ 1,918 $ 2,902
Statutory surplus................ 21,736 23,085 19,381 25,992 31,135 27,764 31,821
Premiums/surplus................. 2.1x 2.2x 2.6x 1.7x 1.9x N/A N/A
Loss ratio....................... 78.1% 66.0% 55.9% 65.9% 61.0% 62.7% 68.1%
Expense ratio.................... 21.8 23.4 25.9 30.9 29.4 28.5 27.2
Policyholder dividend ratio...... 5.2 11.4 12.2 7.8 3.0 2.8 0.7
--------- --------- --------- --------- --------- --------- ------------
Combined ratio................. 105.1% 100.8% 94.0% 104.6% 93.4% 94.0% 96.0%
--------- --------- --------- --------- --------- --------- ------------
--------- --------- --------- --------- --------- --------- ------------
OTHER DATA:
Industry average statutory
combined ratio (5)............. 114.9% 109.0% 107.3% 107.6% 113.1% N/A N/A
Number of PICO policies (period-
end)........................... 1,522 1,901 2,227 4,041 6,481 5,245 8,148
Number of Company employees
(period-end)................... 248 247 272 237 242 228 249
PICO Estimated Annual Premium (6)
(period-end)................... $ 41,134 $ 44,133 $ 41,929 $ 41,176 $ 61,316 $ 49,296 $ 77,634
</TABLE>
- ------------------
(1) See Note 1 of the Notes to the Consolidated Financial Statements for a
description of the calculation of weighted average shares outstanding and
earnings per share.
(2) Gives effect to the sale of the shares offered by the Company hereby
at an assumed initial public offering price of $ per share and the
initial application of the estimated net proceeds therefrom. Also gives
effect to the elimination of the Company's contractual obligation to
repurchase shares of Common Stock of separated employees under the terms of
the ESOP and the exercise of warrants to purchase 82,353 shares of Common
Stock.
(3) Investments as of December 31, 1992 and 1993 are reflected at amortized
cost. As of December 31, 1994, a portion of the portfolio was classified as
held to maturity and was therefore reflected at amortized cost and the
remaining portfolio was shown at market value. Investments as of December
31, 1995 and 1996 are reflected at market value.
(4) Adjusted to reflect (i) the elimination of the Company's contractual
obligation to repurchase shares of Common Stock of separated employees under
the terms of the PAULA Financial and Subsidiaries Employee Stock Ownership
Plan and its companion PAULA Financial and Subsidiaries Employee Stock
Ownership Trust (collectively, the "ESOP"); (ii) the automatic conversion of
the Preferred Stock to Common Stock; and (iii) the exercise of all
outstanding warrants, each of which will be effected upon consummation of
the offering.
(5) National average for workers' compensation insurance companies. Source: A.M.
Best; Best's Insurance Reports, Property/ Casualty, 1997 edition.
(6) "PICO Estimated Annual Premium" means, as of any date, the estimated total
annualized premiums for all policies written by PICO in force on that date,
whether earned prior to or after such date.
9
<PAGE>
RISK FACTORS
INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS, IN ADDITION
TO ALL THE OTHER INFORMATION APPEARING IN THIS PROSPECTUS, IN CONNECTION WITH AN
INVESTMENT IN THE COMMON STOCK. CERTAIN STATEMENTS INCLUDED IN THIS PROSPECTUS,
INCLUDING, WITHOUT LIMITATION, STATEMENTS CONTAINING THE WORDS "BELIEVES",
"ANTICIPATES", "INTENDS", "EXPECTS" AND WORDS OF SIMILAR IMPORT, CONSTITUTE
FORWARD-LOOKING STATEMENTS. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND
UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE THE ACTUAL
RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO BE MATERIALLY DIFFERENT
FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY
SUCH FORWARD-LOOKING STATEMENTS. SUCH FACTORS INCLUDE, AMONG OTHER THINGS, THE
IMPORTANT FACTORS SET FORTH BELOW AND ELSEWHERE IN THIS PROSPECTUS. GIVEN THESE
UNCERTAINTIES, POTENTIAL PURCHASERS OF THE COMMON STOCK OFFERED HEREBY ARE
CAUTIONED NOT TO PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS. THE
COMPANY DISCLAIMS ANY OBLIGATION TO UPDATE ANY SUCH FACTORS OR TO PUBLICLY
ANNOUNCE THE RESULT OF ANY REVISION TO ANY OF THE FORWARD-LOOKING STATEMENTS
INCLUDED HEREIN TO REFLECT FUTURE EVENTS OR DEVELOPMENTS.
VARIABILITY OF OPERATING RESULTS
The Company operates in a cyclical industry affected by many factors that
may cause fluctuations in its results of operations. The factors that may
adversely affect the operations and profitability of the Company include: the
severity and frequency of claims; government regulations; court decisions and
the judicial climate, which could lead to escalating damage awards; the
incidence of fraudulent claims; competition; general economic and business
conditions and trends; and fluctuations in interest rates and other changes in
the investment environment which affect market prices of the Company's
investments and the income from those investments. Many of these factors are
beyond the control of the Company. The foregoing factors have contributed to
significant, industry-wide year-to-year and quarter-to-quarter fluctuations in
underwriting results and in net income, and could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"MD&A".
In recent years, the Company's results of operations have been significantly
affected by the favorable development of PICO's loss experience. The Company's
income (loss) before taxes in calendar years 1994, 1995 and 1996 was positively
affected by reserve recoveries by PICO of $4.0 million, $3.9 million and $2.6
million, respectively. These reserve recoveries were primarily attributable to
the favorable development of the 1993, 1994 and 1995 accident years. The Company
believes this favorable development was due in part to legislation enacted in
California in 1993 that contributed to an industry-wide reduction in claims
frequency and led to a stabilization of claims severity, as well as PICO's
continued improvement in claims management and management of the medical and
legal components of its workers' compensation claims. PICO determined its
reserves for recent accident years with the benefit of information indicating
favorable development in the immediate prior accident years. There can be no
assurance that the Company will have any reserve recoveries in future periods.
See "MD&A" and "Business--Losses and Loss Reserves".
GEOGRAPHIC AND INDUSTRY CONCENTRATION
The Company's current business is concentrated geographically, with
approximately 67.8% of its premiums written in the first six months of 1997 in
California, 13.6% in Arizona, and 12.0% in Oregon, and a majority of the
Company's policyholders are in the agriculture industry. Due to the Company's
focus on the agribusiness industry, it is more exposed to the effects of
injuries and diseases more prevalent in this industry, as well as economic
conditions and regulatory changes affecting labor relations in this industry,
than its more diversified competitors. In addition, changes in the nature and
extent of regulation of workers' compensation insurance companies or adverse
economic or other conditions in the Company's geographic area of operations
would have a more severe impact on the Company than on a more diversified
insurance company. See "--Regulation".
10
<PAGE>
ADEQUACY OF LOSS RESERVES
The Company's insurance subsidiaries are required to establish and maintain
reserves to cover their estimated ultimate liability for losses and loss
adjustment expenses ("LAE") with respect to reported claims and claims incurred
but not yet reported as of the end of each accounting period. These reserves do
not represent an exact calculation of liabilities but rather are estimates
involving actuarial projections at a given time of what the Company expects the
ultimate settlement and administration of claims will cost. These estimates are
based on facts and circumstances then known, predictions of future events,
estimates of future trends in claims frequency and severity and judicial
theories of liability, as well as other factors such as inflation. In addition,
because certain workers' compensation claims may not be fully paid for a number
of years, estimating reserves for such claims can be more difficult and
uncertain than estimating reserves in certain other lines of insurance where the
period between occurrence of the claim and final determination of the loss is
shorter.
The establishment of appropriate reserves is an inherently uncertain
process, and there can be no assurance that ultimate losses will not exceed the
Company's loss reserves and have a material adverse effect on the Company's
results of operations and financial condition. The Company believes, however, on
the basis of its internal procedures which analyze, among other things, the
Company's experience with similar cases and historical trends such as reserving
patterns, loss payments and pending levels of unpaid claims, as well as court
decisions, economic conditions and public attitudes, that the Company's loss
reserves are adequate. If the Company's reserves should be inadequate, the
Company will be required to increase reserves with a corresponding increase in
losses and loss adjustment expenses incurred and reduction in the Company's net
income and stockholders' equity in the period in which the deficiency is
identified. See "MD&A" and "Business--Losses and Loss Reserves".
COMPETITION
The insurance industry is highly competitive. The Company's competitors
include, among others, insurance companies, specialized provider groups,
in-house or multiple employer benefits administrators, and state insurance
pools. Many of the Company's existing or potential competitors are larger and
have considerably greater financial and other resources than the Company. To the
extent that any of these existing or potential competitors concentrates
increased resources in the Company's specific market segments, increases
commissions paid to producers or offers more or better services or lower premium
rates in any of the Company's market segments, the Company could be adversely
affected. The Company's largest competitor in its current markets is the state
insurance fund established by each of those states. Changes in marketing
practices by these not-for-profit competitors could adversely affect the
Company's business, financial condition and results of operations. See
"Business-- Competition".
MANAGEMENT OF GROWTH; EXPANSION STRATEGY
Since 1995, the Company has experienced significant growth in its revenues,
policyholders and scope of operations. This growth has required and will
continue to require the Company to obtain additional capital, primarily to
capitalize PICO, its principal insurance subsidiary. The Company intends to use
a significant portion of the net proceeds from this offering to increase the
capital of PICO. If the Company is unable to generate sufficient capital, either
internally or from outside sources, it could be required to reduce its growth.
The Company intends to pursue further growth opportunities through greater
penetration in existing markets and expansion into new jurisdictions. As the
Company expands, the Company will be underwriting policies for insureds in
industries and geographic areas less familiar to the Company. The Company's
workers' compensation insurance experience has been developed over many years
primarily in the agribusiness industry in California and Arizona and, more
recently, in Oregon, and there can be no assurance that this experience will
enable the Company to compete successfully in these new markets or underwrite or
price risks in these markets appropriately. In addition,
11
<PAGE>
the Company may rely to a greater extent on third party providers for assistance
in adjusting claims and various administrative matters in its new markets. The
Company's growth has also resulted in, and is expected to continue to create,
new and increased responsibilities for management personnel, as well as
additional demands on the Company's operating and financial systems. The
Company's future growth will depend on the efforts of key management personnel
and the Company's ability to attract and retain qualified persons, to enhance
managerial systems for its operations, and to successfully integrate new
employees and systems into its existing operations. If the Company is unable to
continue to manage growth effectively, the Company's business, financial
condition and results of operations could be materially adversely affected. See
"MD&A" and "Business--Business Strategy".
RELIANCE ON INDEPENDENT AGENTS
The Company markets its workers' compensation products and services through
Pan Am, and, like other companies in its industry, through independent agents.
For the six months ended June 30, 1997, independent agents (including members of
the PTC other than Pan Am) accounted for approximately 53.6% of PICO's premiums
written. These agents are not obligated to promote the Company's products and
services and may sell competitors' insurance products. As a result, the
Company's business depends in part on the marketing effort of these agents and
on the Company's ability to continue to offer workers' compensation products and
services that meet the requirements of these agents and their customers. In
addition, as the Company expands into additional states and industries, it
expects to establish relationships with additional independent agents. Failure
of these independent insurance agents to market successfully the Company's
products and services could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--
Distribution".
REGULATION
The Company and its insurance subsidiaries, as California-domiciled
insurers, are subject to extensive regulation by the California DOI, and by
departments of insurance in Alaska, Arizona, Florida, Idaho, New Mexico, Oregon
and Texas. The Company and its subsidiaries will also become subject to
regulation in each additional jurisdiction in which they become licensed to
transact business. The nature and extent of such regulation varies from
jurisdiction to jurisdiction, but typically involves: (i) standards of solvency
and minimum amounts of capital and surplus which must be maintained; (ii) limits
on types and amounts of investments; (iii) restrictions on the size of risks
which may be insured by a single company; (iv) licensing of insurers and their
agents; (v) required deposits of securities for the benefit of policyholders;
(vi) approval of policy forms; (vii) establishment of statutory reporting
practices and the form and content of statutory financial statements; (viii)
establishment of methods for setting statutory loss and expense reserves; (ix)
review, and in some instances, prior approval of premium rates; (x) limits on
transactions among insurers and their affiliates; (xi) approval of all proposed
changes of control; (xii) approval of dividends; (xiii) setting and collecting
guarantee fund assessments; and (xiv) required filing of annual and other
reports with respect to the financial condition and operation of insurers. In
addition, state regulatory examiners perform periodic financial and underwriting
examinations of insurers. State insurance regulation is intended for the benefit
and protection of policyholders and claimants under insurance policies, rather
than stockholders.
In recent years, the insurance regulatory framework has been subject to
increased scrutiny by the National Association of Insurance Commissioners (the
"NAIC"), state legislatures and insurance regulators and the United States
Congress. The NAIC is a voluntary organization of state regulators. Its
principal mission is to encourage uniformity in state regulation of insurance
through the drafting of model laws and the continuing refinement of insurance
accounting practices and reporting procedures. None of the NAIC's pronouncements
has any legal effect unless enacted by individual states. The NAIC is currently
engaged in a project to codify statutory accounting practices that is likely to
change the
12
<PAGE>
definition of what constitutes prescribed versus permitted statutory accounting
practices and may result in changes to the accounting policies that insurance
enterprises use to prepare their statutory financial statements. At this time,
the Company is unable to predict how such project may affect its insurance
subsidiaries' statutory financial statements or how insurance rating agencies
will interpret or react to any such changes. No assurance can be given that
future legislative or regulatory changes resulting from such activities will not
adversely affect the Company and its subsidiaries. See "Business--Regulation".
ESTABLISHMENT OF RATES
Approximately 67.8% of premiums written by the Company in the first six
months of 1997 were from policies written in California. Prior to January 1,
1995, minimum premium rates for workers' compensation insurance were set by the
California DOI. Since January 1, 1995, California has allowed workers'
compensation insurers to determine their own workers' compensation insurance
premium rates, subject to no statutory or regulatory minimum other than the
requirement that an insurer's premium rates not tend to impair or threaten the
insurer's solvency or tend to create a monopoly in the market.
In 1994, in anticipation of the introduction of open rating on January 1,
1995, significant price competition developed among workers' compensation
insurers in California, resulting in a significant decline in workers'
compensation premiums. According to statistics developed by the WCIRB,
California workers' compensation insurance premiums have declined from a high of
approximately $9.0 billion for 1993 to approximately $5.9 billion for 1995 and
$5.8 billion for 1996. See "Business--Regulation".
HOLDING COMPANY STRUCTURE; RESTRICTIONS ON DIVIDENDS
As a holding company with no significant business operations of its own,
PAULA Financial relies on dividends from its subsidiaries, which are primarily
domiciled in California, as the principal source of cash to meet its
obligations, including the payment of principal and interest on its debt
obligations and the payment of dividends to holders of its capital stock.
California law places significant restrictions on the ability of the Company's
insurance company subsidiaries to pay dividends to PAULA Financial. In
particular, all dividends from PICO and PACO, as California-domiciled insurers,
require prior notice to the California DOI. All "extraordinary" dividends must
be approved in advance by the California DOI. A dividend is deemed
"extraordinary" if, when aggregated with all other dividends paid within the
preceding twelve months, the dividend exceeds the greater of (i) PICO's
statutory net income or PACO's statutory net gain from operations (both
excluding unrealized capital gains) for the preceding calendar year or (ii) 10%
of policyholder surplus as of the preceding December 31st. Additionally, unless
approved in advance by the California DOI, no dividend may be paid by PICO or
PACO except from earned surplus. The California DOI may disallow the payment of
any dividend if, in the California DOI's opinion, the payment would in any way
violate the California Insurance Code or be hazardous to policyholders,
creditors or the public. Based on these limitations and statutory results, as of
December 31, 1996, PAULA Financial would be able to receive $5.4 million in
dividends in 1997 from its direct insurance subsidiaries without obtaining prior
regulatory approval from the California DOI. There can be no assurance that
dividends will be declared by PAULA Financial or its subsidiaries in the future
or that any required approvals for payment of dividends by the Company's
insurance subsidiaries will be obtained from the applicable state insurance
departments. See "Dividend Policy" and "Business-- Regulation".
IMPORTANCE OF MAINTAINING A.M. BEST RATING
Ratings are an important factor in communicating the claims paying ability
and financial strength of insurance companies. PICO, the Company's principal
insurance subsidiary, is currently assigned a letter rating of "A- (Excellent)"
from A.M. Best, the leading national insurance rating agency. A.M. Best ratings
range from "A++ (Superior)" to "F (in liquidation)". The "A- (Excellent)" rating
is assigned to companies that, in the opinion of A.M. Best, have demonstrated
excellent overall financial condition and
13
<PAGE>
operating performance when compared to the quantitative and qualitative
standards established by A.M. Best. A.M. Best considers "A-(Excellent)" rated
companies to have a strong ability to meet their obligations to policyholders
over a long period of time. A.M. Best ratings are based on a comparative
analysis of the financial condition and operating performance of insurance
companies as determined by their publicly available reports and meetings with
such companies' officers. A.M. Best's ratings are based on factors considered to
be of concern to insureds and are not directed toward the protection of
investors and should not be relied upon by an investor in making a decision to
invest in shares of Common Stock offered hereby. A.M. Best reviews its ratings
periodically and there can be no assurance that PICO's current rating will be
maintained in the future. The Company believes that the absence of a rating, or
an unfavorable rating, is a competitive disadvantage because certain potential
clients will not purchase coverage from unrated or lower rated companies and
certain independent insurance agencies will not place coverage with such
companies. A downgrade in PICO's rating by A.M. Best could have a material
adverse effect on the Company's business, financial condition and results of
operations.
DEPENDENCE ON KEY PERSONNEL
The Company's success is largely dependent on the efforts of a number of key
employees, including Jeffrey Snider, its Chairman of the Board, President, and
Chief Executive Officer, Andrew Slavitt, its Chief Operating Officer, James
Nicholson, its Chief Financial Officer, and Victor Gloria, its Senior Vice
President of Claims Administration. See "Management". None of these employees
has a written employment agreement with the Company. The loss of the services of
any of these key employees could have a material adverse effect on the Company's
business, financial condition and results of operations.
INVESTMENT PORTFOLIO EXPOSURE TO INTEREST RATE RISK
The Company depends upon income from its investment portfolio for a
significant portion of its revenues and earnings. Substantially all of the
Company's investment portfolio is invested in investment-grade, fixed maturity
securities. The market value of these and the Company's other invested assets
fluctuates depending on general economic and market conditions and changes in
prevailing interest rates. In general, the market value of fixed maturity
securities held by the Company increases or decreases in inverse relationship
with fluctuations in interest rates.
REINSURANCE
Like many workers' compensation insurance companies, the Company uses
reinsurance to reduce its liability on individual claims and to protect against
catastrophic losses. Reinsurance is subject to prevailing market conditions,
both in terms of price, which can affect the Company's profitability, and
availability, which can affect the Company's ability to grow its underwriting
capacity. In addition, reinsurance does not relieve an insurer of direct
liability to policyholders. Accordingly, the Company is subject to the risk that
its reinsurers will not pay amounts owed by them as and when due. Since 1974,
General Reinsurance Corporation ("GenRe") has been the Company's primary
reinsurer. GenRe is currently assigned a letter rating of "A++ (Superior)" by
A.M. Best. Although the Company believes that suitable alternative reinsurance
treaties are readily obtainable at the present time, no assurance can be given
that alternative reinsurance treaties will be available to the Company in the
future or, if available, will be on terms acceptable to the Company.
NO PRIOR PUBLIC MARKET FOR COMMON STOCK; DETERMINATION OF OFFERING PRICE
Prior to this offering, there has been no public market for the Common Stock
and there can be no assurance that an active trading market will develop or be
sustained following the completion of this offering. The initial public offering
price of the Common Stock offered hereby will be determined by
14
<PAGE>
negotiations between the Company and the representatives of the Underwriters and
may not be indicative of the market price of the Common Stock after this
offering. See "Underwriting" for a discussion of the factors to be considered in
determining the initial public offering price.
ANTI-TAKEOVER CONSIDERATIONS
Under the terms of California law governing insurance holding companies, any
person or entity desiring to acquire 10% or more of the Company's outstanding
voting securities is required to obtain prior approval of the California DOI. In
addition, certain other factors may have the effect of deterring, delaying, or
preventing a change in control of the Company without further action by the
stockholders, may discourage bids for the Common Stock at a premium over the
market price of the Common Stock, and may adversely affect the market price of,
and the voting and other rights of the holders of, Common Stock. These include
the absence of cumulative voting, staggered terms for the Company's directors,
the ability of the Company's directors to issue "blank check" preferred stock
and provisions of Delaware law. See "Business--Regulation--Restrictions on
Acquisitions of Control" and "Description of Capital Stock".
SHARES AVAILABLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
shares of Common Stock (after giving effect to the conversion of the Preferred
Stock into Common Stock and exercise of outstanding warrants for Common Stock
upon the closing of this offering). Of these shares, the shares of Common
Stock offered hereby will be freely tradable in the public market without
restriction under the Securities Act. Substantially all of the remaining
shares of outstanding Common Stock will be eligible for sale in the
public market pursuant to Rule 144 under the Act and approximately % of such
shares, which are held by the Company's ESOP, may be eligible for resale without
compliance with Rule 144 upon the distribution of such shares to participants in
the ESOP upon termination of employment. The Company, its executive officers and
directors, the ESOP and certain other holders of Common Stock, which in the
aggregate will hold approximately % of the Common Stock outstanding after the
offering, have agreed that, during the period beginning from the date of this
Prospectus and continuing to and including the date 180 days after the date of
this Prospectus, they will not offer, sell, contract to sell or otherwise
dispose of, or, with certain exceptions, file or cause to be filed with the
Commission a registration statement with respect to, shares of Common Stock
(other than, in the case of the Company, pursuant to employee stock option plans
existing on the date of this Prospectus and, in the case of the ESOP,
distributions of shares to participants in the ESOP upon termination of such
participants' employment with the Company) or any securities of the Company
which are substantially similar to the shares of Common Stock or which are
convertible into or exchangeable for shares of Common Stock or securities which
are substantially similar to the shares of Common Stock without the prior
written consent of the representatives of the Underwriters, except for the
shares of Common Stock offered in connection with the offering. See "Shares
Eligible for Future Sale" and "Underwriting". Sales of substantial amounts of
shares of Common Stock (or the prospect of such sales) could adversely affect
the market price of the Common Stock.
DILUTION
The initial public offering price is substantially higher than the net
tangible book value per share of Common Stock. Accordingly, purchasers of shares
of Common Stock offered hereby will suffer immediate and substantial dilution in
net tangible book value per share of Common Stock. In addition, an integral part
of the Company's compensation policies has been the granting of employee stock
options. Purchasers of shares of Common Stock offered hereby will incur
additional dilution to the extent outstanding stock options are exercised. See
"Dilution".
15
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
shares of Common Stock offered by the Company hereby (based on an assumed
initial public offering price per share of $ and after deducting an
assumed underwriting discount and estimated offering expenses payable by the
Company) are estimated to be $ ($ if the Underwriters'
over-allotment option is exercised in full). The Company expects that
approximately $ of such proceeds will be contributed to PICO as capital
to strengthen its capacity to underwrite insurance, approximately $9.5 million
will be used to repay outstanding bank debt bearing interest at a variable rate
(7.64% per annum as of June 30, 1997) and maturing on December 31, 1999 and $2.0
million will be used to repay notes due former stockholders bearing interest at
a weighted average rate, as of June 30, 1997, of 8.25% per annum and maturing on
January 10, 1998 and January 1, 2000. The balance of such proceeds will be used
for general corporate purposes. Pending the Company's application of the
proceeds from this offering, such proceeds will be invested primarily in
investment-grade, fixed maturity securities in accordance with the Company's
normal investment policy.
The Company will not receive any of the proceeds from the sale of the shares
of Common Stock being sold by the Selling Stockholder.
DIVIDEND POLICY
The Company has not paid cash dividends to its stockholders in either of the
two most recent fiscal years. Subject to the declaration by the Board of
Directors, the Company intends to pay a quarterly dividend of $ per share
of Common Stock commencing in the fourth quarter of 1997.
Although the Company currently intends to pay dividends, the declaration and
payment of dividends is subject to the discretion of the Company's Board of
Directors and will depend upon, among other things, the Company's results of
operations, financial condition, cash requirements, future prospects and capital
requirements, regulatory restrictions on the payment of dividends by the
Company's insurance company subsidiaries, general economic and business
conditions and other factors deemed relevant by the Board of Directors. There
can be no assurance that the Company will declare and pay any dividends. The
ability of the Company's subsidiaries to pay dividends to the Company is subject
to substantial regulation. In addition, the Company's line of credit restricts
the payment of dividends under certain circumstances. See "Risk
Factors--Regulation--Holding Company Structure; Restrictions on Dividends",
"MD&A--Liquidity and Capital Resources", "Business--Regulation" and Note 10 of
Notes to Consolidated Financial Statements.
16
<PAGE>
DILUTION
As of June 30, 1997, the pro forma net tangible book value of the Company
(after giving effect to the automatic conversion of the Preferred Stock into
Common Stock, the exercise of all outstanding warrants and elimination of the
Company's obligation to repurchase Common Stock of separated employees under the
terms of the ESOP as a result of this offering as described under
"Capitalization") would have been $ million, or $ per share. Net tangible
book value per share is determined by dividing the tangible net worth of the
Company (tangible assets minus total liabilities) by the number of shares of
Common Stock outstanding. After giving effect to the sale by the Company of
shares of Common Stock at an assumed initial public offering price of
$ per share, the pro forma net tangible book value of the Company as of June
30, 1997 (after deducting an assumed underwriting discount and estimated
offering expenses payable by the Company) would have been $ million, or $
per share. This represents an immediate increase in pro forma net tangible book
value of $ per share to the existing stockholders and an immediate dilution
of $ per share to new investors purchasing shares at the initial public
offering price as illustrated in the following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price................................. $
---------
Pro forma net tangible book value per share before offering......... $
Increase per share attributable to new investors....................
---------
Estimated pro forma net tangible book value per share after
offering............................................................ $
---------
Immediate dilution in pro forma net tangible book value per share to
new investors....................................................... $
---------
---------
</TABLE>
The following table sets forth, as of June 30, 1997, on a pro forma basis,
the respective positions of the Company's existing stockholders and new
investors with respect to the number of shares purchased from the Company, the
total consideration paid to the Company and the average price paid per share,
assuming an initial public offering price of $ per share without giving
effect to underwriting discounts and offering expenses payable by the Company.
<TABLE>
<CAPTION>
SHARES PURCHASED CONSIDERATION PAID AVERAGE
------------------------ --------------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
----------- ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
New investors...................................... % $ % $
Existing stockholders..............................
----------- ----- -------------- -----
Total.......................................... 100.0% $ 100.0%
----------- ----- -------------- -----
----------- ----- -------------- -----
</TABLE>
The information set forth above does not give effect to the potential
exercise of options outstanding as of June 30, 1997 to purchase 390,325 shares
of Common Stock at a weighted average price of $18.02 per share. Purchasers of
shares of Common Stock offered hereby will incur additional dilution to the
extent outstanding stock options are exercised.
17
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1997, and as adjusted to reflect (i) the sale of the shares of Common Stock
offered hereby; (ii) the application of the estimated net proceeds to the
Company of the offering as described under "Use of Proceeds"; (iii) the
elimination upon consummation of the offering of the Company's contractual
obligation to repurchase shares of Common Stock of separated employees under the
terms of the ESOP; (iv) the automatic conversion of the Preferred Stock to
Common Stock upon consummation of the offering; and (v) the exercise of all
outstanding warrants upon consummation of the offering.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
-----------------------
ACTUAL AS ADJUSTED
--------- ------------
<S> <C> <C>
(IN THOUSANDS)
Notes payable........................................................................... $ 11,468 $ 196
Obligation on stock held by ESOP (1).................................................... 11,495 --
Stockholders' equity:
Preferred Stock, $.01 par value, 5,000,000 shares authorized;
941,177 shares outstanding (0 as adjusted).......................................... 14,905 --
Common Stock, $.01 par value, 15,000,000 shares authorized;
950,488 outstanding ( as adjusted) (2)....................................... 10
Additional paid-in capital............................................................ 1,724
Retained earnings..................................................................... 23,994
Net unrealized gain on investments.................................................... 862
Less:
Treasury Stock, at cost............................................................... 1,486 --
Guarantee of notes payable of ESOP.................................................... 196 196
Obligation on stock held by ESOP (1).................................................. 11,495 --
--------- ------------
Net stockholders' equity.............................................................. 28,318 $
--------- ------------
Total capitalization.............................................................. $ 51,281 $
--------- ------------
--------- ------------
</TABLE>
- --------------
(1) Represents the Company's contractual obligation to repurchase shares of
Common Stock of separated employees under the terms of the ESOP. Such
obligation will be eliminated upon consummation of this offering. See Note 9
of Notes to Consolidated Financial Statements.
(2) Excludes 390,325 shares of Common Stock reserved for issuance upon exercise
of options outstanding as of June 30, 1997 pursuant to grants to directors,
officers and employees of the Company. See "Management--Stock Incentive
Plans" and "--Other Management Stock Options". The as adjusted amount
includes 941,177 shares of Common Stock issuable upon automatic conversion
of the Preferred Stock into Common Stock and shares of Common Stock
to be issued upon exercise of all outstanding warrants.
18
<PAGE>
SELECTED FINANCIAL DATA
The selected data presented below under the captions "Income Statement Data"
and "Balance Sheet Data" as of and for each of the years in the five-year period
ended December 31, 1996, are derived from the consolidated financial statements
of the Company, which financial statements have been audited by KPMG Peat
Marwick LLP, independent certified public accountants. The consolidated
financial statements as of December 31, 1995 and 1996 and for each of the years
in the three-year period ended December 31, 1996, and the report thereon are
included elsewhere in this Prospectus. The selected data presented below under
the captions "Income Statement Data" and "Balance Sheet Data" for the six-month
period ended June 30, 1996 and as of and for the six month period ended June 30,
1997, are derived from the unaudited consolidated financial statements of the
Company included elsewhere in this Prospectus and include, in the opinion of
management, all adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation of the information for such periods. The
information presented below under the captions "Adjusted Balance Sheet Data" and
"Other Data" is unaudited. The results of operations for the six months ended
June 30, 1997 are not necessarily indicative of the results to be expected for
the full year. The selected financial data set forth below should be read in
conjunction with "MD&A" and the Consolidated Financial Statements and notes
thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Premiums written............................ $ 62,658 $ 53,502 $ 53,545 $ 46,762 $ 63,606 $ 27,745 $ 45,871
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Premiums earned:
Workers' compensation..................... $ 47,235 $ 50,857 $ 50,977 $ 44,224 $ 54,563 $ 21,751 $ 41,303
Group medical and life.................... 13,496 163 312 307 941 471 475
Commissions................................. 3,187 3,514 4,299 3,964 4,213 2,061 1,716
Net investment income....................... 4,983 4,495 4,536 4,817 4,701 2,322 2,499
Net realized investment gains............... 1,585 132 -- 37 444 427 --
Other....................................... 784 1,375 1,712 1,569 896 514 347
--------- --------- --------- --------- --------- --------- ---------
Total revenue............................. $ 71,270 $ 60,536 $ 61,836 $ 54,918 $ 65,758 $ 27,546 $ 46,340
Losses and loss adjustment expenses
incurred.................................. 47,238 30,852 28,618 29,363 33,900 13,937 28,447
Dividends provided for policyholders........ 2,647 5,806 6,221 3,438 1,628 620 309
Operating expenses.......................... 16,656 16,838 20,720 22,608 25,480 10,484 14,752
--------- --------- --------- --------- --------- --------- ---------
Total expenses............................ $ 66,541 $ 53,496 $ 55,559 $ 55,409 $ 61,008 $ 25,041 $ 43,508
Income (loss) before taxes.................. 4,729 7,040 6,277 (491) 4,750 2,505 2,832
Income tax expense (benefit)................ 1,236 1,875 1,572 (791) 827 443 538
--------- --------- --------- --------- --------- --------- ---------
Net income................................ $ 3,493 $ 5,165 $ 4,705 $ 300 $ 3,923 $ 2,062 $ 2,294
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Earnings per share (1)...................... $ 1.92 $ 2.83 $ 2.39 $ 0.15 $ 1.95 $ 1.05 $ 1.14
Weighted average shares outstanding (1)..... 1,824 1,824 1,972 1,940 2,007 1,970 2,006
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30, 1997
----------------------------------------------------- -----------------------
AS
1992 1993 1994 1995 1996 ACTUAL ADJUSTED(2)
--------- --------- --------- --------- --------- --------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Investments (3).................. $ 79,879 $ 81,737 $ 83,084 $ 83,991 $ 86,792 $ 93,379 $
Total assets..................... 104,833 108,898 117,297 118,906 125,127 141,920
Unpaid losses and loss adjustment
expenses....................... 66,170 62,629 60,473 57,049 55,720 64,972
Notes payable.................... 3,966 3,370 4,205 10,824 11,279 11,468
Total liabilities................ 93,058 95,793 90,384 93,301 99,151 113,602
Net stockholders' equity......... 11,775 13,105 26,913 25,605 25,976 28,318
ADJUSTED BALANCE SHEET DATA:
Adjusted net stockholders' equity
(4)............................ 23,118 28,131 38,350 35,205 38,825 41,213
Adjusted net stockholders' equity
per share (4).................. $ 13.10 $ 15.93 $ 17.46 $ 17.97 $ 19.66 $ 20.88 $
<CAPTION>
AS OF AND FOR THE
SIX MONTHS ENDED JUNE
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 30,
----------------------------------------------------- -----------------------
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
PICO AND PACO GAAP RATIOS:
Loss ratio....................... 77.8% 60.5% 55.8% 65.9% 61.1% 62.7% 68.1%
Expense ratio.................... 23.0 24.4 26.7 32.3 32.1 34.0 28.2
Policyholder dividend ratio...... 4.4 11.4 12.1 7.7 2.9 2.8 0.7
--------- --------- --------- --------- --------- --------- ------------
Combined ratio................. 105.2% 96.3% 94.6% 105.9% 96.1% 99.5% 97.0%
--------- --------- --------- --------- --------- --------- ------------
--------- --------- --------- --------- --------- --------- ------------
PICO STATUTORY DATA:
Statutory net income............. $ 1,787 $ 2,079 $ 5,217 $ 3,175 $ 5,051 $ 1,918 $ 2,902
Statutory surplus................ 21,736 23,085 19,381 25,992 31,135 27,764 31,821
Premiums/surplus................. 2.1x 2.2x 2.6x 1.7x 1.9x N/A N/A
Loss ratio....................... 78.1% 66.0% 55.9% 65.9% 61.0% 62.7% 68.1%
Expense ratio.................... 21.8 23.4 25.9 30.9 29.4 28.5 27.2
Policyholder dividend ratio...... 5.2 11.4 12.2 7.8 3.0 2.8 0.7
--------- --------- --------- --------- --------- --------- ------------
Combined ratio................. 105.1% 100.8% 94.0% 104.6% 93.4% 94.0% 96.0%
--------- --------- --------- --------- --------- --------- ------------
--------- --------- --------- --------- --------- --------- ------------
OTHER DATA:
Industry average statutory
combined ratio (5)............. 114.9% 109.0% 107.3% 107.6% 113.1% N/A N/A
Number of PICO policies (period-
end)........................... 1,522 1,901 2,227 4,041 6,481 5,245 8,148
Number of Company employees
(period-end)................... 248 247 272 237 242 228 249
PICO Estimated Annual Premium (6)
(period-end)................... $ 41,134 $ 44,133 $ 41,929 $ 41,176 $ 61,316 $ 49,296 $ 77,634
</TABLE>
- ------------------
(1) See Note 1 of the Notes to the Consolidated Financial Statements for a
description of the calculation of weighted average shares outstanding and
earnings per share.
(2) Gives effect to the sale of the shares offered by the Company hereby
at an assumed initial public offering price of $ per share and the
initial application of the estimated net proceeds therefrom. Also gives
effect to the elimination of the Company's contractual obligation to
repurchase shares of Common Stock of separated employees under the terms of
the ESOP and the exercise of warrants to purchase 82,353 shares of Common
Stock.
(3) Investments as of December 31, 1992 and 1993 are reflected at amortized
cost. As of December 31, 1994, a portion of the portfolio was classified as
held to maturity and was therefore reflected at amortized cost and the
remaining portfolio was shown at market value. Investments as of December
31, 1995 and 1996 are reflected at market value.
(4) Adjusted to reflect (i) the elimination of the Company's contractual
obligation to repurchase shares of Common Stock of separated employees under
the terms of the ESOP; (ii) the automatic conversion of the Preferred Stock
to Common Stock; and (iii) the exercise of all outstanding warrants, each of
which will be effected upon consummation of the offering.
(5) National average for workers' compensation insurance companies. Source: A.M.
Best; Best's Insurance Reports, Property/ Casualty, 1997 edition.
(6) "PICO Estimated Annual Premium" means, as of any date, the estimated total
annualized premiums for all policies written by PICO in force on that date,
whether earned prior to or after such date.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a California-based specialty underwriter and distributor of
commercial insurance products which, through its subsidiary PICO, is one of the
largest underwriters specializing in workers' compensation insurance products
and services for the agribusiness industry. The Company sells complementary
products through Pan Am, including group health and life products provided by
the Company's subsidiary PACO, and third-party administration services provided
by the Company's subsidiary Pan Pacific.
The Company's revenues have consisted primarily of premiums earned from
workers' compensation insurance underwriting, premiums earned from group medical
insurance, commission income, net investment income and other income. Premiums
earned during a period are the direct premiums earned by the Company on in force
policies, net of reinsurance. Commission income is earned from Pan Am's
distribution of insurance for insurers other than PICO and PACO. Net investment
income represents earnings on the Company's investment portfolio, less
investment expenses. Other income consists primarily of third party
administration fees.
The components of the Company's revenues are set forth below for the periods
presented:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Premiums earned
Workers' compensation................................ $ 50,977 $ 44,224 $ 54,563 $ 21,751 $ 41,303
Group medical and life............................... 312 307 941 471 475
--------- --------- --------- --------- ---------
Total premiums earned................................ $ 51,289 $ 44,531 $ 55,504 $ 22,222 $ 41,778
Commissions............................................ 4,299 3,964 4,213 2,061 1,716
Net investment income.................................. 4,536 4,817 4,701 2,322 2,499
Net realized investment gains.......................... -- 37 444 427 --
Other.................................................. 1,712 1,569 896 514 347
--------- --------- --------- --------- ---------
Total revenues....................................... $ 61,836 $ 54,918 $ 65,758 $ 27,546 $ 46,340
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The Company's expenses have consisted of losses and loss adjustment expenses
incurred, dividends provided for policyholders and operating expenses. Losses
include reserves for future payments for medical care and rehabilitation costs
and indemnity payments for lost wages. Loss adjustment expenses include expenses
incurred in connection with services provided by third parties, including
expenses of independent medical examinations, surveillance costs, and legal
expenses as well as staff and related expenses incurred to administer and settle
claims. Loss and loss adjustment expenses are offset in part by estimated
recoveries from reinsurers under excess of loss reinsurance treaties. Operating
expenses include commission expenses to third party insurance agencies and other
expenses that vary with premium volume, such as premium taxes, state guaranty
fund assessments and underwriting and marketing expenses, as well as general and
administrative expenses, which are less closely related to premium volume.
The Company's results of operations are affected by, among other things, (i)
the amount of the Company's insurance in force, which the Company measures using
EAP; (ii) the Company's ability to select risks in which it is skilled in
underwriting; (iii) its ability to price these risks appropriately; (iv) the
frequency and severity of claims; (v) the cost of acquiring business; (vi) the
cost of providing service and
21
<PAGE>
meeting general operating expenses; (vii) net investment income; (viii) the
adequacy of loss reserves for prior year claims; (ix) the general regulatory and
competitive environment; and (x) the capital structure or leverage of the
Company. In addition, the Company's revenues are seasonal, and have tended to be
highest in the second and third quarters of each year. This is due primarily to
the seasonality of the size of the workforce employed by the Company's
agribusiness clients.
RECENT OPERATING RESULTS
The Company's recent operating results have been affected by additions to
its senior management team, the advent of open rating in California and changes
in California workers' compensation legislation in 1993. In late 1994, the
Company added to its management team and its board of directors and embarked on
a strategy of growth, including expansion into new states, while maintaining its
focus on the agribusiness market. For the six months ended June 30, 1997, the
Company's premiums earned were $41.8 million, an 88.0% increase over premiums
earned of $22.2 million in the comparable 1996 period. For the six month periods
ended June 30, 1997 and 1996, the Company's combined ratio remained relatively
constant at 97.0% and 99.5%, respectively.
The Company's premiums earned depend in part on the amount of PICO's
insurance in force, which the Company measures using EAP. EAP as of any date
represents the estimated total annualized premiums for all policies in force on
that date, whether reflected in premiums earned prior to that date or to be
reflected in premiums earned thereafter. The extent to which EAP is reflected in
future premiums earned depends, among other things, on the persistency rate of
the Company's policies in force and changes in premium rates at renewal. PICO's
EAP increased from $49.3 million as of June 30, 1996 to $77.6 million as of June
30, 1997, an increase of 57.5%. The Company's growth has been achieved without
the acquisition of other insurance companies. The following table sets forth
selected information relating to the growth of PICO's workers' compensation
insurance book of business:
<TABLE>
<CAPTION>
AS OF AND FOR THE
AS OF AND FOR THE SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
EAP (period-end)....................................... $ 41,929 $ 41,176 $ 61,316 $ 49,296 $ 77,634
Premiums written....................................... 53,234 46,455 62,665 27,274 45,396
Premiums earned........................................ 50,977 44,224 54,563 21,751 41,303
Policyholder persistency rate.......................... 91.8% 87.8% 86.8%
Number of policies (period-end)........................ 2,227 4,041 6,481 5,245 8,148
</TABLE>
The Company's premiums earned are affected by changes in the competitive and
regulatory environment that impact workers' compensation insurance rates. Prior
to January 1, 1995, California had required workers' compensation insurers to
adhere to minimum rates approved by the California DOI. Under this system, price
competition among insurers had been generally restricted to the payment of
dividends under participating policies. Effective January 1, 1995, this system
was replaced with a file and use rate system, in which insurers may use any rate
after filing it with the California DOI unless such rate is specifically
disapproved. The repeal of the former minimum rate system in California has
resulted in increased competition among workers' compensation insurers in
California and has caused a material decrease in average rates charged by PICO.
The Company's underwriting results are also affected by its loss experience.
The Company believes that legislation enacted in California in 1993 contributed
to an industry-wide reduction in claims frequency and led to a stabilization of
claims severity, which has helped improve the Company's loss experience. Among
other things, the 1993 legislation: (i) tightened standards relating to
stress-related claims; (ii) limited post-termination claims; (iii) placed
restrictions, including payment limitations, on vocational rehabilitation
claims; (iv) increased measures to reduce fraudulent claims; (v) increased the
ability of insurance companies and employers to contract with managed care
organizations and to direct claimants' medical care; and (vi) changed procedures
for second medical evaluations. The Company
22
<PAGE>
believes that the limitation of post-termination claims was especially
beneficial to the Company due to large seasonal fluctuations and high turnover
among farm workers. Due in part to the effect of these reforms, as well as to
PICO's continued improvement in claims management and management of the medical
and legal components of its workers' compensation claims, PICO experienced
favorable development of reserves for the 1993-1995 accident years and recovered
reserves of $4.0 million, $3.9 million, and $2.6 million in calendar years 1994,
1995 and 1996, respectively. These reserve recoveries were primarily
attributable to favorable development in the 1993, 1994 and 1995 accident years.
PICO determined its reserve for recent accident years with the benefit of
information indicating favorable development in the immediately prior accident
years. Accordingly, there can be no assurance that the Company will have any
reserve recoveries in future periods. See "Business--Losses and Loss Reserves".
Workers' compensation policies can be written on a participating or
non-participating basis. Participating policies allow the Company to declare and
pay dividends to a policyholder after the expiration of the policy based upon a
policyholder's specific loss experience (or, if the policyholder is part of a
safety group, the group's specific loss experience), the Company's overall loss
experience and competitive conditions. Prior to the advent of open rating in
California, California's workers' compensation insurers typically charged
minimum rates for premiums and used policyholder dividends as a means of
competitive pricing. With the advent of open rating in California and an
emphasis on, among other things, overall pricing at inception, the Company's
dividends provided for policyholders decreased significantly in 1996. Although
the Company believes policyholder dividends are relatively insignificant as an
element in workers' compensation in California, the Company intends to continue
to issue participating policies that are eligible for policyholder dividend
consideration in states outside of California.
PICO's and PACO's operating expenses as a percentage of premiums are an
important component of the Company's profitability. In this regard, the Company
has benefited from recent growth. For the six months ended June 30, 1997, PICO's
and PACO's expense ratio improved 5.8 percentage points from 34.0% for the
comparable 1996 period to 28.2%.
The following table provides information with respect to the Company's
insurance company subsidiaries for the periods presented:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Premiums written....................................... $ 53,545 $ 46,762 $ 63,606 $ 27,745 $ 45,871
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Premiums earned........................................ $ 51,289 $ 44,531 $ 55,504 $ 22,222 $ 41,778
Losses and loss adjustment expenses incurred........... 28,618 29,363 33,900 13,937 28,447
Dividends provided for policyholders................... 6,221 3,438 1,628 620 309
Underwriting expenses.................................. 13,697 14,367 17,828 7,546 11,769
--------- --------- --------- --------- ---------
Underwriting income (loss)........................... $ 2,753 $ (2,637) $ 2,148 $ 119 $ 1,253
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
PICO and PACO GAAP ratios:
Loss ratio........................................... 55.8% 65.9% 61.1% 62.7% 68.1%
Expense ratio........................................ 26.7 32.3 32.1 34.0 28.2
Policyholder dividend ratio.......................... 12.1 7.7 2.9 2.8 0.7
--------- --------- --------- --------- ---------
Combined ratio..................................... 94.6% 105.9% 96.1% 99.5% 97.0%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
PICO SAP combined ratio................................ 94.0% 104.6% 93.4% 94.0% 96.0%
Industry average statutory combined ratio(1)........... 107.3 107.6 113.1 N/A N/A
</TABLE>
- --------------
(1) National average for worker's compensation insurance companies. Source: A.M.
Best; Best's Insurance Reports, Property/Casualty, 1997 edition.
23
<PAGE>
Over the five year period ended December 31, 1996, PICO's SAP combined ratio
averaged 99.6%, approximately 10.7 percentage points below the California
average for the workers' compensation insurance industry (source: WCIRB) and
10.8 percentage points below the national average for the workers' compensation
insurance industry (source: A.M. Best; Best's Insurance Reports, Property/
Casualty, 1996 edition). The Company believes its strong underwriting results
have been due in part to its focus on underwriting and pricing insurance
policies with the objective of generating an underwriting profit, its
understanding of the risks in the agribusiness market and its integrated
distribution of products through Pan Am.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
PREMIUMS WRITTEN. The Company's premiums written for the six months ended
June 30, 1997 increased 65.3% to $45.9 million from $27.7 million for the
comparable 1996 period. The growth in premiums written was primarily
attributable to the net addition of new policyholders and increased policyholder
payrolls, partially offset by lower premium rates resulting from increased price
competition.
PREMIUMS EARNED. For the reasons described above for premiums written, the
Company's premiums earned for the six months ended June 30, 1997 increased 88.0%
to $41.8 million from $22.2 million for the comparable 1996 period.
COMMISSION INCOME. Commission income decreased 16.7% to $1.7 million for
the six months ended June 30, 1997 from $2.1 million for the comparable 1996
period. The decrease was primarily the result of decreased premiums placed with
carriers other than PICO and PACO, a result of the Company's decision to focus
on writing PICO workers' compensation insurance. Commission income is earned on
premiums placed with carriers other than PICO and PACO. Commission income paid
by PICO and PACO to Pan Am are eliminated in consolidation.
NET INVESTMENT INCOME. Net investment income increased 7.6% to $2.5 million
for the six months ended June 30, 1997 from $2.3 million for the comparable 1996
period. The increase was the result of significant cash flow increases from
PICO's underwriting activity. Average invested assets increased to $88.8 million
for the six months ended June 30, 1997 from $82.4 million for the comparable
period in 1996. The Company's average yield on its portfolio was 5.6% in both
periods.
NET REALIZED INVESTMENT GAINS. The Company had no net realized investment
gains for the six months ended June 30, 1997 compared to $0.4 million for the
comparable 1996 period.
OTHER INCOME. Other income decreased 32.5% to $0.3 million for the six
months ended June 30, 1997 from $0.5 million for the comparable period in 1996.
LOSSES AND LOSS ADJUSTMENT EXPENSES INCURRED. The Company's loss ratio for
the six months ended June 30, 1997 increased to 68.1% from 62.7% for the
comparable 1996 period. The Company's loss ratio for the six months ended June
30, 1996 was positively impacted by net recoveries from loss and loss adjustment
expense reserves for prior years of $2.9 million compared with a positive impact
of net recoveries from prior years of $0.8 million for the comparable 1997
period.
DIVIDENDS PROVIDED FOR POLICYHOLDERS. Dividends provided for policyholders
decreased 50.2% to $0.3 million for the six months ended June 30, 1997 from $0.6
million for the comparable 1996 period and decreased as a percentage of premiums
earned for the six months ended June 30, 1997 to 0.7% from 2.8% for the
comparable 1996 period, as a result of the virtual elimination of dividend
activity by the Company in California.
24
<PAGE>
OPERATING EXPENSES. Operating expenses increased 40.7% to $14.8 million for
the six months ended June 30, 1997 from $10.5 million for the comparable 1996
period due in part to a $1.9 million increase in commissions paid to
unaffiliated agencies.
INCOME TAXES. Income tax expense for the six months ended June 30, 1997
increased to $0.5 million from $0.4 million for the six months ended June 30,
1996. The effective combined income tax rates for the six months ended June 30,
1997 and June 30, 1996 were 19.0% and 17.7%, respectively. These rates are below
the combined statutory rate due to the significant portion of the Company's
investment portfolio consisting of tax-exempt securities.
1996 COMPARED TO 1995
PREMIUMS WRITTEN. The Company's premiums written for 1996 increased 36.0%
to $63.6 million from $46.8 million for 1995. The increase was primarily
attributable to an increase in PICO's California writings of $11.4 million (an
increase of 39.8%) principally from newly-appointed independent agencies and the
establishment of the PTC, net of California reductions due to increased price
competition, and an increase of PICO's Oregon writings of $4.8 million (an
increase of 104.3%).
PREMIUMS EARNED. For the reasons described above for premiums written, the
Company's premiums earned for 1996 increased 24.6% to $55.5 million from $44.5
million for 1995.
COMMISSION INCOME. Commission income increased 6.3% to $4.2 million for
1996 from $4.0 million for 1995.
NET INVESTMENT INCOME. Net investment income decreased 2.4% to $4.7 million
for 1996 from $4.8 million for 1995. The Company's average yield on its
portfolio was 5.6% for 1996 compared to 5.8% for 1995, reflecting generally
lower market interest rates in 1996 compared to 1995. Average invested assets
increased $0.7 million to $83.6 million in 1996 from $82.9 million in 1995.
NET REALIZED INVESTMENT GAINS. During 1996, the Company sold $17.2 million
of its invested assets and realized $0.4 million of investment gains. There were
no material investment gains realized in 1995. During 1996, the Company
repositioned $7.0 million of its portfolio into AAA-rated agency-backed
collateralized mortgage obligations to increase yield.
OTHER INCOME. Other income decreased 42.9% to $0.9 million for 1996 from
$1.6 million for 1995, primarily as a result of the termination of a large third
party administration client contract in early 1996 which was matched with a
comparable reduction in expenses.
LOSSES AND LOSS ADJUSTMENT EXPENSES INCURRED. The Company's loss ratio for
1996 improved to 61.1% from 65.9% for 1995. The improvement in this ratio is due
to several factors, including a reduction in the incidence and severity of
workers' compensation claims and the expedited closing of claims. Losses for
1996 include the effect of recoveries from prior years' reserves of $2.6
million, or 4.8% of 1996 premiums earned, compared with prior year recoveries of
$3.9 million for 1995, or 8.8% of 1995 premiums earned. The Company believes its
loss experience was improved by overall trends in the industry due to regulatory
reforms, a reduction and capitation of the Company's claims related legal
expenses, the implementation of early return to work programs by the Company's
clients and an aggressive program by the Company to combat workers' compensation
insurance fraud.
DIVIDENDS PROVIDED FOR POLICYHOLDERS. Dividends provided for policyholders
decreased to $1.6 million in 1996 from $3.4 million in 1995 and decreased as a
percentage of premiums earned for 1996 to 2.9% from 7.7% for 1995, as a result
of the virtual elimination of dividend activity by the Company in California.
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OPERATING EXPENSES. Operating expenses increased 12.7% to $25.5 million for
1996 from $22.6 million for 1995 due in part to a $2.2 million increase in
commissions paid to unaffiliated agencies.
INCOME TAXES. Income tax expense for 1996 was $0.8 million compared to a
$0.8 million tax recovery for 1995. The effective combined income tax rate for
1996 was 17.4%. These rates are below the combined statutory rate due to the
significant portion of the Company's investment portfolio consisting of
tax-exempt securities.
1995 COMPARED TO 1994
PREMIUMS WRITTEN. The Company's premiums written for 1995 decreased 12.7%
to $46.8 million from $53.5 million for 1994. The decrease was primarily
attributable to a 29.7% decrease in PICO's California writings as a result of
the introduction of open rating effective January 1, 1995 and the related price
competition in the California marketplace. This reduction was offset in part by
increased writings in the Company's Arizona market in 1995 of 5.6% and $4.6
million of new premiums written in the Oregon market in 1995. During the initial
phases of open rating the Company chose to focus on smaller accounts and not to
aggressively compete for large account business which it perceived to be more
subject to price competition. The Company did not commence writing insurance in
Oregon until January 1, 1995.
PREMIUMS EARNED. For the reasons described above for premiums written, the
Company's premiums earned for 1995 decreased 13.2% to $44.5 million from $51.3
million for 1994.
COMMISSION INCOME. Commission income decreased 7.8% to $4.0 million for
1995 from $4.3 million for 1994.
NET INVESTMENT INCOME. Net investment income increased 6.2% to $4.8 million
for 1995 from $4.5 million for 1994. The Company's average yield on its
portfolio was 5.8% for 1995 and 5.5% for 1994. There was no significant change
in average invested assets between 1995 and 1994.
NET REALIZED INVESTMENT GAINS. There were no material realized capital
gains for 1995 or 1994.
OTHER INCOME. There was no material change in the amount of other income
from 1994 to 1995.
LOSSES AND LOSS ADJUSTMENT EXPENSES INCURRED. The loss ratio for 1995 was
65.9% compared to 55.8% in 1994. The 1995 loss ratio increase was primarily
attributable to a decline in average premium rates in California as a result of
open rating, which began in 1995. Losses for 1995 include the effect of
recoveries from prior years' reserves of $3.9 million, or 8.8% of 1995 premiums
earned, compared with prior year recoveries of $4.0 million in 1994, or 7.9% of
1994 premiums earned. The reduction of prior year reserves in 1995 and 1994 was
due to favorable development as a result of regulatory reform in California and
an aggressive program by the industry to combat workers' compensation insurance
fraud.
DIVIDENDS PROVIDED FOR POLICYHOLDERS. Dividends provided for policyholders
decreased $2.8 million to $3.4 million for 1995 from $6.2 million for 1994 as a
result of open rating in California and decreased as a percentage of premiums
earned for 1995 to 7.7% from 12.1% for 1994. The 1995 dividend accrual included
additional dividend accruals of $0.9 million for the 1993 and 1994 policy years.
OPERATING EXPENSES. Operating expenses increased 9.1% to $22.6 million for
1995 from $20.7 million for 1994 primarily due to an increase in commissions and
commission rebates paid to third parties.
INCOME TAXES. The Company recorded an income tax benefit of $0.8 million
for 1995 compared to income tax expense of $1.6 million for 1994. The effective
combined income tax rate for 1994 was 25.0%. This rate is below the combined
statutory rate due to the significant portion of the Company's investment
portfolio consisting of tax-exempt securities.
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LIQUIDITY AND CAPITAL RESOURCES
THE PARENT COMPANY
As a holding company, PAULA Financial's principal sources of funds are
dividends and expense reimbursements from its operating subsidiaries, proceeds
from loans, and proceeds from the sale of its capital stock. PAULA Financial's
principal uses of funds are capital contributions to its subsidiaries, payment
of operating expenses and, following the completion of this offering, dividends
to its stockholders. In the past, PAULA Financial has also used substantial
amounts of capital to repurchase its Common Stock from stockholders upon their
separation from employment. As of June 30, 1997, the primary obligations of the
Company were $9.4 million principal amount of borrowings under the Company's
$15.0 million revolving credit agreement (the "Credit Agreement"), $1.9 million
principal amount of notes due to former stockholders incurred to repurchase
their Common Stock and a liability of $11.5 million representing the Company's
commitments to repurchase Common Stock under the terms of the ESOP. Upon
consummation of the offering, the Company's obligation to the ESOP will be
eliminated and the Company will repay approximately $9.5 million in principal
and interest under the Credit Agreement and approximately $2.0 million of
principal and interest on stockholder notes.
California law places significant restrictions on the ability of the
insurance subsidiaries to pay dividends to PAULA Financial. All dividends from
PICO and PACO, as California-domiciled insurers, require prior notice to the
California DOI. All "extraordinary" dividends must be approved in advance by the
California DOI. A dividend is deemed "extraordinary" if, when aggregated with
all other dividends paid within the preceding twelve months, the dividend
exceeds the greater of (i) PICO's statutory net income or PACO's statutory net
gain from operations (both excluding unrealized capital gains) for the preceding
calendar year or (ii) 10% of policyholder surplus as of the preceding December
31st. Additionally, unless approved in advance by the California DOI, no
dividend may be paid by PICO or PACO except from earned surplus. Dividends paid
from earned surplus which do not exceed the definition of "extraordinary" must
be reported to the California DOI within five business days after declaration.
Insurers are prohibited from paying such dividends until ten business days after
the California DOI's receipt of such notice. The California DOI may disallow
payment of any dividend if, in the California DOI's opinion, the payment would
in any way violate the California Insurance Code or be hazardous to
policyholders, creditors or the public. Based on these limitations and statutory
results, as of December 31, 1996, PAULA Financial would be able to receive $5.4
million in dividends in 1997 from its insurance subsidiaries without obtaining
prior regulatory approval from the California DOI.
The Company expects to retain $ from the proceeds of the offering at
the parent company level. Management believes that this cash, combined with
expense reimbursements and dividends from its operating subsidiaries, will be
sufficient to meet the parent company's operating cash needs in the foreseeable
future.
In March 1997, PAULA Financial entered into the Credit Agreement with a
commercial bank providing PAULA Financial with a revolving credit facility of
$15.0 million until December 31, 1999. At such time PAULA Financial may elect to
convert all or a portion of the borrowings then outstanding under such facility
into a term loan payable in quarterly installments and maturing on December 31,
2001. Borrowings under the Credit Agreement bear interest at variable interest
rates. The Credit Agreement limits the Company's ability to (i) enter new lines
of business; (ii) incur or assume debt; (iii) pay dividends and repurchase or
retire capital stock upon a default or event of default; and (iv) make
acquisitions, investments and capital expenditures. The Credit Agreement
contains financial covenants with respect to minimum stockholders' equity,
minimum statutory surplus, a ratio of debt to stockholders' equity, a ratio of
PICO's premiums written to statutory surplus and excess statutory reserves, a
debt service coverage ratio, A.M. Best rating and risk-based capital levels.
Each of PAULA Financial's non-insurance subsidiaries has guaranteed all
obligations of PAULA Financial under the Credit Agreement.
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OPERATING SUBSIDIARIES
The sources of funds of the Company's operating subsidiaries are cash flows
from operating activities, investment income and capital contributions from
PAULA Financial. The insurance company operating subsidiaries' major uses of
funds are claim payments and underwriting and administrative expenses and
maintaining the required surplus to expand their insurance business. The agency
and TPA operating subsidiaries' major use of funds are operating expenses. The
nature of the workers' compensation insurance business is such that claim
payments are made over a longer period of time than the period over which
related premiums are collected. Operating cash flows and the portion of the
investment portfolio consisting of cash and liquid securities have historically
met the insurance company operating subsidiaries' liquidity requirements.
Operating cash flows and intercompany loans from PAULA Financial have
historically met the agency and TPA subsidiaries' liquidity requirements.
The Company's investments consist primarily of taxable and tax-exempt United
States government and other investment grade securities and investment grade
fixed maturity commercial paper and, to a lesser extent, equity securities. The
Company does not generally invest in below investment grade fixed maturity
securities, mortgage loans or real estate. The Company has invested in the
equity securities of the two founders of PTC other than Pan Am as part of the
PICO investment portfolio. The Company's investments in fixed maturity
securities are carried at market value as such securities may be sold in
response to changes in interest rates, tax planning considerations or other
aspects of asset/liability management. As of June 30, 1997, the carrying value
of the Company's fixed maturity securities portfolio was $86.6 million and all
of the portfolio was rated "A" or better by S&P, Moody's or Fitch. See
"Business--Investments and Investment Results".
California workers' compensation insurance companies are required to
maintain some of their investments on deposit with the California DOI for the
protection of policyholders. Other states in which PICO is licensed have also
required PICO to post deposits for the protection of those states'
policyholders. Pursuant to applicable state laws, PICO had, as of June 30, 1997,
securities with a book value of $67.8 million held by authorized depositories
pursuant to these deposit requirements. In addition to the deposits, the
insurance company operating subsidiaries must maintain capital and surplus
levels related to premiums written and the risks retained by the subsidiaries.
Operating leverage for workers' compensation insurers is measured by the
ratio of net premiums written to surplus. Ratios in excess of 3 to 1 are
considered outside the usual range by the NAIC. In addition, insurance
regulators and rating agencies monitor this ratio. As of December 31, 1994, 1995
and 1996, PICO's ratio of net premiums written to statutory surplus was 2.6x,
1.7x, and 1.9x, respectively.
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BUSINESS
THE COMPANY
The Company is a California-based specialty underwriter and distributor of
commercial insurance products which, through its subsidiary PICO, is one of the
largest underwriters specializing in workers' compensation insurance products
and services for the agribusiness industry. The Company began operations in 1946
as an insurance agency providing workers' compensation and group medical
employee benefits to agribusiness employers in underserved rural markets. In
1974, PICO was formed to underwrite the workers' compensation portion of the
business distributed by Pan Am, the Company's insurance agency. In late 1994,
the Company added to its management team and its board of directors and embarked
on a strategy of growth, including expansion into new states, while maintaining
its focus on the agribusiness market.
For the six months ended June 30, 1997, the Company had $45.9 million of
premiums written, compared to $27.7 million for the comparable period in 1996,
an increase of 65.3%. For the year ended December 31, 1996, the Company had
premiums written of $63.6 million. The Company's primary geographic markets are
California, Arizona, and Oregon, which accounted for approximately 67.8%, 13.6%
and 12.0%, respectively, of premiums written for the six months ended June 30,
1997. Since 1995, the Company has commenced operations in Idaho, Texas, Florida
and Alaska and has been licensed in New Mexico.
The Company believes that its cumulative experience serving the agribusiness
industry has led to superior underwriting results and strong growth in
stockholders' equity per share. PICO's SAP combined ratio for the five years
ended December 31, 1996 averaged 99.6%, approximately 10.7 percentage points
below the California average for the workers' compensation insurance industry
(source: WCIRB) and 10.8 percentage points below the national average for the
workers' compensation insurance industry (source: A.M. Best; Best's Insurance
Reports, Property/Casualty, 1997 edition). The Company's adjusted net
stockholders' equity per share has grown at a compound annual growth rate of
19.3% from January 1, 1981 to June 30, 1997 (21.5% over the 10 years ended June
30, 1997).
The Company's primary insurance subsidiary, PICO, is currently rated "A-
(Excellent)" by A.M. Best. As of June 30, 1997, the Company had total assets of
$ million and net stockholders' equity of $ million (both on a pro
forma basis after giving effect to the offering and other adjustments described
under "Capitalization"). As of June 30, 1997, 92.7% of the Company's investment
portfolio was invested in fixed maturity securities, all of which were rated "A"
or better by S&P, Moody's or Fitch as of such date. The Company's other
principal subsidiaries include PACO, a life and health carrier, and Pan Pacific,
a third party administrator.
WORKERS' COMPENSATION SYSTEM
Workers' compensation is a statutory system under which an employer is
required to reimburse its employees for the costs of medical care and other
specified benefits for work-related injuries or illnesses. Most employers comply
with this requirement by purchasing workers' compensation insurance. The
principal concept underlying workers' compensation laws is that an employee
injured in the course of his employment has only the legal remedies for that
injury available under workers' compensation law and does not have any other
claims against his or her employer. Generally, workers are covered for injuries
which occur in the course and scope of their employment. The obligation to pay
such compensation does not depend on any negligence or wrong on the part of the
employer and exists even for injuries that result from the negligence or wrongs
of another person, including the employee.
Workers' compensation insurance policies obligate the carrier to pay all
benefits which the insured employer may become obligated to pay under applicable
workers' compensation laws. Each individual state has its own workers'
compensation regulatory system that determines the level of wage replacement to
be paid, the level of medical care required to be provided and the cost of
permanent impairment.
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For instance, there are four types of benefits payable under California workers'
compensation policies: (i) temporary or permanent disability benefits (either in
the form of short-term to life-term payments or lump sum payments); (ii)
vocational rehabilitation benefits; (iii) medical benefits; and (iv) death
benefits. The amount of benefits payable for various types of claims is
determined by regulation and varies with the severity and nature of the injury
or illness and the wage, occupation and age of the employee.
BUSINESS STRATEGY
The Company believes that its differentiated approach as a provider of
insurance services to the agribusiness industry and its expertise with immigrant
employee groups, partial year workforces and businesses in rural communities
have been critical to its success. The Company views its key strengths as: (i)
its integrated distribution and underwriting activities; (ii) the distinctive
labor relations and cost containment services it provides; and (iii) its
underwriting and risk management expertise with respect to agribusiness risks.
The Company intends to leverage these strengths to grow profitably while
maintaining a reputation as a premier provider of high quality insurance
products and services to small- and medium-sized agribusiness employers. PICO's
book of business, as measured by EAP, has grown from $49.3 million as of June
30, 1996 to $77.6 million as of June 30, 1997, an increase of 57.5%. The
Company's growth has been achieved without the acquisition of other insurance
companies.
The Company's target agribusiness market includes those employers who farm,
harvest, transport, pack and process tree fruit, vegetables, fiber, flowers,
vine fruit and dairy products. Labor intensive agribusiness employers rely on
their workforces performing to maximum productivity in order to deliver their
fresh product to market at the best price. Agribusiness insurance risks are
generally characterized by: (i) monolingual Spanish speaking workforces; (ii)
moving work sites and a relative lack of machinery and equipment, making loss
control engineering more difficult; (iii) large seasonal fluctuations and high
turnover in the employee pool, making timely and frequent safety training more
critical and increasing the opportunity for filing fraudulent claims; (iv) fewer
opportunities for discounts from health providers in rural locations; and (v) a
relatively young workforce performing physically demanding labor for low hourly
or piece-work wages. The Company's knowledge of these risk characteristics has
enabled the Company to help its clients satisfy the benefits needs of their
workforces and assisted it to achieve underwriting profitability.
INTEGRATED DISTRIBUTION
The Company has developed an expertise in the agribusiness industry through
its long history of both distributing and underwriting insurance and through a
focus on the agent-customer relationship. PICO was formed by the owners of Pan
Am in 1974 to underwrite the workers' compensation portion of the business
distributed by Pan Am. The Company believes that Pan Am's direct interest in the
Company's success results in a cooperative relationship among the agent, the
underwriter, loss control consultants, claims management personnel and the
customer and its employees. Pan Am, which has 17 locations in California, Oregon
and Arizona, is the largest distributor for PICO, accounting for 46.4% of PICO's
premiums written for the six months ended June 30, 1997.
To enhance the Company's presence in rural areas not served by Pan Am, the
Company affiliates with insurance agencies of similar size and operating
histories to Pan Am. In late 1996 and early 1997, the Company made minority
equity investments aggregating $1.9 million in two regional commercial insurance
agencies, Parker, headquartered in Fresno, California, and CAPAX, headquartered
in Modesto, California. In 1996, the Company, Parker and CAPAX formed the PTC to
affiliate with other independent agencies. Typically, PTC member agencies have
extensive operating histories, a significant commercial insurance presence in
rural communities and historically high client persistency rates. As of June 30,
1997, ten agencies, including Parker and CAPAX, have affiliated with the PTC.
Pan Am and the other PTC agencies together distributed 70.8% of PICO's EAP as of
June 30, 1997. The Company
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believes that its close relationships with PTC member agencies assist it in
lowering its loss ratio, raising persistency rates and lowering acquisition
costs.
The Company believes it gains significant marketing benefits from the
exclusive endorsements Pan Am has developed for the Company. These endorsements
by 21 prominent agribusiness trade associations have allowed the Company to be
identified with brand names significant to agribusiness customers. In addition,
they provide the Company with access to large groups of potential customers
without the usual sales process of prospecting individual clients. The Company
believes that solicitation of association members results in a higher percentage
of sales than do individual unaffiliated solicitations.
LOWER LOSS RATIOS. The Company believes its ownership of Pan Am and its
minority equity interests in CAPAX and Parker result in the submission of better
risks by such agencies to PICO. Moreover, the Company believes that these
agencies better assist PICO in developing direct relationships with their
customers, aiding the Company's loss control efforts.
HIGHER PERSISTENCY RATES. For the five years ended December 31, 1996, the
Company retained an average of 89.4% of its customers annually, based on policy
count. In 1996, the Company retained 86.8% of its customers, based on policy
count. The Company believes this persistency rate is attributable in part to the
tailored services the Company provides to its agribusiness customers and its
integrated distribution strategy, which reduces the likelihood that agents will
move business to other insurers.
LOWER ACQUISITION COSTS. The Company believes that in order to compete for
business, many insurance companies have increased commission rates. Rather than
competing primarily based on commission rates, the Company attracts agencies to
the PTC by offering innovative products and distinctive services to agribusiness
employers. The commission the Company pays to Pan Am is eliminated when the
Company's operations are consolidated. The Company's adjusted acquisition costs
(defined as (i) commissions paid to third parties plus Pan Am's total expenses
less revenues from third parties divided by (ii) premiums earned) was 13.4% for
the six months ended June 30, 1997, which the Company believes is advantageous.
Pan Am third party revenues are generated primarily from the sale of group
medical, general liability, life and disability insurance products on behalf of
unaffiliated insurance companies.
DISTINCTIVE SERVICES TO AGRIBUSINESS EMPLOYERS
Throughout its history, the Company has tailored its labor relations and
cost containment services to the unique needs of the agribusiness employer. From
the initial reporting of a claim to the careful explanation of benefits to the
medical treatment delivery to the return of an employee to work, the Company's
capabilities are field-based, bilingual, cross-cultural and sensitive to the
unique fraud-prevention and cost-containment issues present in agribusiness. The
Company's safety training, early return to work efforts, case management and
case settlement operations are tailored specifically to the labor relations and
cost containment needs of agribusiness employers and to the needs of Hispanic
and other immigrant laborers.
LOSS PREVENTION. Since employee turnover is high among agribusiness
employers and labor intensive agribusiness requires little fixed equipment, the
Company's field representatives hold employee safety training, forklift training
and tail-gate sessions for the Company's clients and their employees. In
addition, the Company's field representatives train crew foremen and field
supervisors on safety practices, visit the workplace to help prevent fraudulent
claims and report safety concerns to the Company's loss control consultants and
underwriters. The Company's field representatives are a team of 16
community-based bilingual employees with agribusiness employment backgrounds.
CLAIMS REPORTING AND FRAUD DETECTION. The Company's Special Investigation
Unit reviews each claim for potential fraud as it is reported to the Company
rather than only those claims referred to the unit by claims adjusters after
they suspect fraud, as the Company believes is more typical in the industry. By
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reviewing every claim at an early stage, the Company is able to take advantage
of its experience in identifying the principal indicators of fraud and thereby
mitigate its exposure to fraudulent claims. The Company has also implemented a
toll-free injury reporting telephone number which allows employers and injured
workers to report claims more quickly.
CLAIMS MANAGEMENT EXPERTISE. The Company commits significant resources to
its claims operations. The Company's claims staff is bilingual, has an average
of 13 years of claims experience and typically manages 125 open claims per
examiner, which the Company believes is lower than the industry average.
BENEFIT DELIVERY AND EXPLANATION OF BENEFITS TO FARM WORKERS. It has been a
long-standing and distinctive practice of the Company's field representatives to
hand deliver first-time benefit checks and explain benefits in the language of
preference of the claimant. The Company believes this helps to reduce the cost
of claims, particularly by reducing the number of litigated claims. The
Company's field representatives also assist in returning employees to modified
duty as part of the Company's early return to work program.
RURAL MEDICAL CARE DELIVERY. The ability of an insurer to influence medical
costs is substantially different in rural areas than in metropolitan areas where
insurers can negotiate for meaningful discounts to physicians' fee schedules.
The Company believes that its longstanding relationships with rural medical
providers and its claims management approach, which emphasizes proper medical
protocol and utilization rather than significant fee discounting, allows it to
operate at a lower cost and return workers to the job more quickly.
MEDICAL DELIVERY IN MEXICO. The Company offers occupational medical
treatment options in Mexico in three approved clinics in Tijuana, Mexicali and
San Luis. The Company believes it is the only carrier to provide this service,
which allows covered employees to obtain culturally-compatible care in
sought-after private medical facilities in Mexico. The Company realizes
significant average cost savings from Mexico-based medical care compared with
comparable care in the United States.
AGRIBUSINESS UNDERWRITING EXPERTISE
The Company underwrites and prices its products with the objective of
earning an underwriting profit. The Company believes that its expertise and long
history serving agribusiness employers assist it in achieving this objective.
Though agribusiness is widely considered to be a "substandard" class of
insurance, the Company has consistently reported underwriting profitability
above industry averages. For the five years ended December 31, 1996, PICO's SAP
combined ratios have averaged 99.6% as compared to workers' compensation
insurance industry averages in California and nationally of 110.3% and 110.4%,
respectively, for the same time period (source: WCIRB and A.M. Best,
respectively). The Company's in-depth understanding of the risks in its target
market and its ability to price its product appropriately are the keys to these
results.
KNOWLEDGE OF AGRIBUSINESS RISKS. The Company's proprietary loss experience
database, its trade association endorsements and its understanding of the risk
management needs of agribusiness employers are the key elements of its
underwriting capabilities. The Company's rate making process benefits
significantly from more than 50 years of claim experience in the agribusiness
industry and a proprietary database built over 23 years. This experience has
enabled the Company to differentiate risks by creating more than 35 farm classes
and subclasses, reflecting the unique characteristics of job classifications and
differences in farming operations. In comparison, the WCIRB publishes only 15
payroll classifications in its schedule of farm rating reports.
TRADE ASSOCIATION ENDORSEMENTS AND SAFETY GROUPS. The Company enjoys
exclusive endorsement of 21 agribusiness trade associations and has
relationships with 40 other safety groups. Each
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employer participating in these groups is individually underwritten and then
pooled with other homogeneous employers for the purpose of rating experience.
These groups help the Company to achieve the actuarial benefit of writing larger
pools, to provide safety training and services to small accounts more
efficiently and to promote the selection of good risks and safety practices by
linking the self interest of each group member. The Company believes that the
loss ratios of its trade association and safety group customers have been lower
than that of its customers as a whole. The trade association endorsements, in
particular, are also a good source of marketing and provide penetration
opportunities through access to association mailing lists. As of June 30, 1997,
approximately 64.2% of the Company's policies and 44.0% of the Company's EAP
were in trade associations and safety groups.
RISK MANAGEMENT. Risk management is the process of identifying and
analyzing loss exposures and taking steps to minimize the financial impact of
those exposures. The Company's loss control consultants, all of whom are
bilingual and are trained and certified in various farm safety practices, assist
the underwriters in reviewing new accounts and in initiating safety programs
based on industry best practices for each type of customer. The Company runs a
customized software system which networks the underwriters to field
representatives, loss control consultants, premium auditors, credit and
collections personnel and claims supervisors to provide renewal data and
schedule service visits. A record of all customer interaction is maintained for
review by the applicable underwriter, agent and customer.
GROWTH STRATEGY
The Company plans to grow its workers' compensation insurance business
further by: (i) expanding the Company's agribusiness franchise outside of
California and Arizona; (ii) increasing the Company's penetration of rural
communities within California and Arizona; and (iii) expanding into other
industries whose risk characteristics and service requirements are similar to
those of agribusiness. The Company intends to support its growth strategy by
continuing to affiliate with well-regarded, rural-focused insurance agencies and
by developing additional relationships with trade associations and safety
groups.
EXPANSION INTO NEW STATES
The Company believes that it has significant growth opportunities outside of
its historic California and Arizona markets. In 1994, the Company began its
expansion by entering the Oregon market. Since then, it has entered five
additional states: Idaho, Texas, Florida, Alaska and New Mexico. Between January
1, 1995 and June 30, 1997, the Company added approximately 2,600 new customers,
as measured by policy count, outside of California and Arizona. In new states,
the Company targets the same types of small- to medium-sized agribusiness
operations that it has historically served. With the addition of New Mexico and
Texas, the Company is now licensed in all states that share a border with
Mexico. Migrant labor pools, however, stretch into Oregon, Idaho and any other
location where fresh food is hand harvested in the United States.
INCREASED PENETRATION WITHIN CALIFORNIA AND ARIZONA AGRIBUSINESS MARKETS
The Company believes that there are opportunities to grow within its
historic markets. The agribusiness economy in California is very large.
According to data compiled by the California Farm Bureau in 1996, California
farming enterprises, which are a portion of the Company's target market,
generated 9.5% of the state's total annual income and supported 1.4 million
jobs, or nearly 10% of the state total. The California Farm Bureau estimates
that California has over 80,000 farms, widely distributed in rural areas
throughout the state. The Company believes that these agribusiness employers
prefer to build long-term relationships with agents and to trade locally.
Accordingly, the Company has focused on building market share within
well-defined rural communities rather than broadly throughout the state. The
Company has offices in 12 communities in California and has identified over 75
additional communities in California that it believes represent significant
growth opportunities for the Company.
33
<PAGE>
EXPANSION INTO RELATED INDUSTRIES
The Company has capitalized on its experience working in the agribusiness
industry by expanding into other industries with immigrant workforces,
including, grocery stores, restaurants and garment manufacturers. As of June 30,
1997, the Company insured 288 employers in the grocery industry, 789 employers
in the restaurant industry, and 511 employers in the garment industry. Like
agribusiness employers, these businesses typically hire low-wage immigrant labor
forces to perform semi-skilled labor and have risk characteristics and service
requirements similar to those of the Company's agribusiness client base. PTC
member agencies with expertise in these industries have been the key factor
behind the Company's growth in non-agribusiness industries. As of June 30, 1997,
the Company's non-agribusiness clients had EAP of $27.1 million, or 34.9% of the
Company's total EAP.
CUSTOMERS
AGRIBUSINESS
The Company has served the insurance needs of western agribusiness employers
and other employers of immigrant workers for over 50 years. The Company defines
"agribusiness" to include those employers who farm, harvest, transport, pack and
process tree fruit, vegetables, fiber, flowers, vine fruit, and dairy products.
Because the Company focuses on clients in a limited number of industries, it
believes it has developed expertise in assessing the risks associated with those
industries.
The agribusiness employer is typically a small, rural business with a
preference for building long-term relationships. These insurance buyers tend to
exhibit a high degree of loyalty to their insurance agent and typically transact
business locally. For the five years ended December 31, 1996, the Company
retained an average of 89.4% of its customers annually, based on policy count.
Employers involved in the growing and harvesting of fresh food are dependent on
the productive employment of their typically lower-wage, non-English speaking
work force. Only with well-supervised, high performing workers can agribusiness
employers take advantage of the short window of opportunity to sell their
product for its highest price during its "season". The Company's knowledge of
these issues and its ability to provide value-added benefits to these employers
has enabled the Company to help its clients satisfy the benefits needs of their
work forces and thereby help to keep those laborers productive.
Labor intensive agribusiness insurance risks are generally characterized by:
(i) monolingual Spanish speaking workforces; (ii) moving work sites and a
relative lack of machinery and equipment, making loss control engineering more
difficult; (iii) large seasonal fluctuations and high turnover in the employee
pool, making timely and frequent safety training more critical and increasing
the opportunity for filing fraudulent claims; (iv) fewer opportunities for
discounts from health providers in rural locations; and (v) a relatively young
workforce performing physically demanding labor for low hourly or piece-work
wages. The Company's knowledge of these risk characteristics has enabled the
Company to help its clients satisfy the benefits needs of their workforces and
assisted it to achieve underwriting profitability.
The Company believes that the experience level required to be successful in
serving the agribusiness industry makes it difficult for competitors to enter
this market. In each state in which it operates, the Company's single largest
competitor for agribusiness is that state's workers' compensation insurance
fund. Due in part to the limited number of non-governmental carriers, state
funds have built substantial market share in the states where they exist.
TRADE ASSOCIATIONS AND SAFETY GROUPS
Two significant factors in the Company's recent growth and profitability
have been the success of Pan Am in obtaining exclusive endorsements from
agricultural trade associations and in organizing successful safety groups. As
of June 30, 1997, the Company had 61 such relationships, including 21 exclusive
trade association endorsements and 40 safety groups. As of June 30, 1997, EAP
from the members of these organizations totaled $34.2 million, or 44.0% of the
Company's total EAP (64.2% of
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<PAGE>
total policies). The Company believes that it gains significant marketing and
underwriting benefits from these relationships.
Trade association endorsements are exclusive and, while they are made and
renewed on an annual basis, the Company's endorsements have historically been
renewed. As of June 30, 1997, no single trade association accounted for more
than 2% of the Company's EAP. Trade associations offer the Company's products
and services as a benefit of membership. However, the Company individually
underwrites each policy and is not obligated to offer insurance to any trade
association member. Trade association endorsements give the Company visibility
and recognition through association with a brand name significant to its
customers. They also allow the Company actuarial benefits from the pooling of
homogenous insurance risks and access to large groups of potential customers
without the usual sales process of prospecting individual clients. The Company
believes that once the Company has obtained an association's endorsement,
solicitation of association members results in a higher percentage of sales than
do individual unaffiliated solicitations. In connection with the Company's
recent entry into the Idaho workers' compensation insurance marketplace, the
Company's product was endorsed by some of the principal agricultural
associations in the state, including potato, cattle, dairy, and grain
associations. These endorsements were a significant factor in the Company's
early success in this market.
The Company works with significant independent employers or groups of
employers in selected crops or industries to form safety groups for group
insurance purchasing and safety training purposes. Safety groups are chartered
business entities which are registered with the applicable Department of
Insurance and formed primarily to encourage workplace safety among employer
members of the group and to purchase workers' compensation insurance as a group.
Generally, safety groups do not charge membership fees. Safety groups and trade
associations help the Company to achieve the actuarial benefit of writing larger
pools, to provide safety training and services to small accounts more
efficiently and to promote the selection of good risks and safety practices by
linking the self interest of each employer.
OTHER EMPLOYERS OF HISPANIC AND IMMIGRANT LABORERS
In recent years, the Company has leveraged its experience working with
non-English speaking immigrant workers into serving the needs of other
businesses employing low-wage, Hispanic workers and other immigrant populations.
Examples include Company programs focused on grocery stores, restaurants and
garment manufacturers. The Company has hired completely bi-cultural (of Hispanic
or Asian descent) loss control personnel and works closely with ethnic insurance
agency forces in these programs.
DISTRIBUTION
DIRECT
The Company, operating through its wholly-owned subsidiary Pan Am,
distributes its workers' compensation products to employers in California,
Arizona and Oregon. Management believes Pan Am is one of the largest agency
operations specializing in offering employee benefit products to
agribusiness-related employers in California and Arizona. Pan Am primarily has
grown internally, to a current full-time sales force of approximately 40, with
commission revenues (before intercompany eliminations) of $10.0 million in 1996
and $4.5 million in the six months ended June 30, 1997. Pan Am, as agent and
broker, offers its customers a wide range of insurance products tailored to
agribusiness employers' specific needs.
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<PAGE>
Pan Am's revenues are derived from commissions from the placement of
insurance with insurance carriers, including PICO and PACO. In 1996, Pan Am
placed 48.3% of its total insurance premiums with PICO and PACO. The Company's
integration of the sales and underwriting elements of the workers' compensation
insurance business sold through Pan Am enhances the Company's ability to retain
this business. PICO's insurance business sold through Pan Am is not subject to
being moved at the sole discretion of the agent, although PICO's insurance sold
through Pan Am is still subject to competition from other insurance carriers.
For the six months ended June 30, 1997, approximately 46.4% of PICO's premiums
written was sold through Pan Am.
Pan Am has approximately 70 full-time equivalent employees operating from 17
offices in California, Arizona and Oregon. Many of these locations also house
PICO personnel and operations. This provides Pan Am sales personnel with direct
access to insurance company underwriting and claims personnel which, the Company
believes, improves the effectiveness of Pan Am's sales and servicing efforts.
PAULA TRADING COMPANY
To enhance the Company's presence in rural areas not served by Pan Am, the
Company affiliates with insurance agencies of similar size and operating
histories to Pan Am. In late 1996 and early 1997, the Company made minority
equity investments aggregating $1.9 million in Parker and CAPAX, two regional
commercial insurance agencies. In 1996, the Company, Parker and CAPAX formed the
PTC to affiliate with other independent agencies. Typically, PTC member agencies
have extensive operating histories, a significant commercial insurance presence
in rural communities and historically high client persistency rates. As of June
30, 1997, ten agencies, including Parker and CAPAX, have affiliated with the
PTC. Pan Am and the other PTC agencies together distributed 70.8% of PICO's EAP
as of June 30, 1997. The Company believes that its close relationships with PTC
member agencies assist it in lowering its loss ratio, raising persistency rates
and lowering acquisition costs.
The insurance agencies that have been selected to join the PTC are expected
to submit applications on risks where there is a high likelihood of PICO
successfully writing the business. PICO also typically expects the first and
last chance to quote agribusiness or Hispanic-focused workers' compensation
business written by a PTC member. The agencies also pay an annual fee to the
PTC. PTC members have access to PAULA's innovative product features such as the
employment practices liability insurance products described below and have the
potential to join an insurance agency marketing arrangement established by the
founders of the PTC. The Company believes the PTC allows the Company to receive
better quality insurance submissions, face less price competition and maintain
relatively low insurance business acquisition costs.
INDEPENDENT INSURANCE AGENTS
The Company has appointed a limited number of independent insurance agents
to sell its workers' compensation insurance, primarily in jurisdictions not well
covered by PTC members. The Company favors appointing independent agents who
will primarily represent the Company in its desired agribusiness focused markets
rather than presenting the Company as one of many competing quotes together in a
pricing comparison. As of June 30, 1997, independent insurance agencies,
exclusive of the PTC agencies, accounted for 29.2% of PICO's EAP.
OTHER AGENCY OPERATIONS
Other products and services offered by Pan Am include group health
insurance, third party administration, managed care programs, property and
casualty insurance, crop insurance, life and disability insurance and other
financial services.
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<PAGE>
SCOPE OF OPERATIONS
The Company has operated successfully in California for more than 50 years
and Arizona for more than 40 years. In 1994, the Company commenced operations in
Oregon to test whether its business formula would prove successful in other
jurisdictions. The Company wrote its first policy in Oregon on January 1, 1995.
For the years ended December 31, 1995 and 1996 and for the six months ended June
30, 1997, the Company recorded premiums written in Oregon of $4.6 million, $9.5
million, and $5.5 million, respectively. The Company next commenced operations
in Idaho, where it wrote its first policy on July 1, 1996, just prior to the
legislative requirement that workers' compensation insurance become mandatory
for agricultural employers for the first time in January 1997. For the year
ended December 31, 1996 and the six months ended June 30, 1997, the Company
recorded premiums written in Idaho of $0.7 million and $2.2 million,
respectively. As of June 30, 1997, the Company had approximately 1,750 policies
in Oregon and approximately 730 policies in Idaho. Most recently, based on the
success of the Company's Oregon and Idaho expansion, the Company has expanded
into Texas, Florida, Alaska and New Mexico.
The Company believes that a positive reception in new states depends, in
large part, on its ability to: (i) communicate its agribusiness expertise; (ii)
establish strong relationships with local agents; (iii) leverage its current
endorsements and attract new endorsements from agribusiness associations; and
(iv) deliver a high level of service to employers. The Company has focused its
expansion in states with significant labor-intensive agribusiness insurance
opportunities. The Company anticipates that it will continue to expand into
additional states with significant labor-intensive agribusiness payrolls in
future years, although no particular expansion is planned. The Company plans to
grow its business within each of these new states by identifying and marketing
its products to agribusiness employers in rural areas.
The Company wrote its first policy in Texas in early 1997. The Company was
admitted to write workers' compensation insurance in New Mexico and Florida in
early 1997, wrote its first policy in Florida in July 1997 and has not yet
commenced writing insurance in New Mexico. The Company commenced writing
policies in Alaska in 1996. The Company believes it is the only carrier
primarily focused on the workers' compensation insurance needs of agribusiness
employers in Arizona, Oregon, Idaho and Texas.
The following table sets forth the geographic distribution of premiums
written:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 1997
------------------------ ------------------------
% OF TOTAL % OF TOTAL
PREMIUMS PREMIUMS PREMIUMS PREMIUMS
STATE WRITTEN WRITTEN WRITTEN WRITTEN
- ---------------------------------------------------------------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
California...................................................... $ 40,811 64.2% $ 31,086 67.8%
Arizona......................................................... 12,473 19.6 6,256 13.6
Oregon.......................................................... 9,472 14.9 5,500 12.0
Idaho........................................................... 685 1.1 2,199 4.8
Alaska.......................................................... 165 0.2 660 1.4
Texas........................................................... -- -- 170 0.4
----------- ----- ----------- -----
Total......................................................... $ 63,606 100.0% $ 45,871 100.0%
----------- ----- ----------- -----
----------- ----- ----------- -----
</TABLE>
PRODUCTS AND SERVICES
The Company's principal product consists of workers' compensation insurance
policies sold primarily to agribusiness employers. For the year ended December
31, 1996 and the six months ended
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June 30, 1997, workers' compensation premiums earned accounted for 83.0% and
89.1%, respectively, of the Company's revenues.
In order to differentiate its product from its competitors and provide the
members of the PTC with points of difference to aid them with the sale and
retention of business, the Company has developed a number of innovative product
features, including: (i) automatic coverage in California for discrimination
claims based on an employee's intent to file a workers' compensation claim; (ii)
employment practices liability insurance in California ("EPL"), which provides
coverage for sexual harassment, wrongful termination and discrimination; (iii)
automatic benefits for the provision of occupational medicine to workers'
compensation claimants in Mexico; and (iv) additional premium credit to the
insured employer in California when the agent provides both the workers'
compensation and health insurance to the employer client and its employees. The
Company has entered into a quota-share reinsurance agreement with the Venton
Syndicate of Lloyd's of London with respect to the underwriting risk of its EPL
product.
The Company sells "AmeriMex", a product underwritten by PACO, which is
typically sold alongside PICO's workers' compensation product in California, and
which provides group medical benefits for services rendered at three provider
hospitals in Mexico. PACO also offers low limit group term life and accidental
death and dismemberment insurance to employer groups. The Company's TPA services
consist of the independent administration of claims and related matters for
self-insured employers' health benefit plans. For the six months ended June 30,
1997, TPA, group medical and group life products accounted for an aggregate of
less than 2% of the Company's revenues. These products are typically sold to the
same employers that purchase the Company's workers' compensation products.
As a general commercial agent, Pan Am distributes group health insurance,
property and casualty insurance, life and disability insurance and other
products underwritten by unaffiliated insurance companies to the Company's
agribusiness clients. The Company believes that the ability of Pan Am to offer
these products and the ability of Pan Am and the PTC member agencies to offer
the Company's distinctive products strengthen the relationship between the agent
and the Company's policyholders.
UNDERWRITING
RISK SELECTION
The Company's proprietary loss experience database, its trade association
endorsements and its understanding of the risk management needs of agribusiness
employers are the key elements of its underwriting and marketing capabilities.
The Company's rate making process benefits significantly from more than 50 years
of claim experience in the agribusiness industry and a proprietary database
built over 23 years. This experience has enabled the Company to differentiate
risks by creating more than 35 farm classes and subclasses, reflecting the
unique characteristics of job classifications and differences in farming
operations. In comparison, the WCIRB publishes only 15 payroll classifications
in its schedule of farm rating reports.
The Company's focus allows it to concentrate on agribusiness in rural areas
where litigation, fraud and abuse, which tend to increase the frequency of
claims as well as the Company's LAE, are less pronounced. The Company believes
the historically lower claim frequency and LAE in these areas are due in large
part to the stronger work ethic and lower wage level in these areas coupled with
a lower density of attorneys and medical-legal injury evaluation clinics.
Substantially all of PICO's business is produced through Pan Am and a group
of selected independent agents which have a local presence in the major
agricultural areas throughout the Company's operating markets. The Company
believes that this local involvement in rural communities allows its agents to
gain insight into the insureds' financial stability, ability to run their
business, attitudes toward
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<PAGE>
safety and loss control and willingness to work as partners with the Company in
the management of their workers' compensation program.
The Company focuses on small- to medium-sized accounts which make up the
broadest segment of agribusiness employers. PICO's average annual workers'
compensation policy premium, as measured by EAP, was approximately $9,500 as of
December 31, 1996. The Company has found that smaller businesses tend to be
supervised by the owner rather than management staff. The Company believes that
an employer's claims experience directly depends on the owner's commitment to
workplace safety and its hiring practices. By underwriting small- to
medium-sized accounts, the Company has an opportunity to assess directly the
owners' commitment to workplace safety rather than trying to assess such
commitment through interaction with management staff.
UNDERWRITING PROCESS
PICO's relationship with Pan Am and other agents allows the pre-screening by
such agents of new workers' compensation accounts according to criteria
established by PICO, including the employers' prior loss experience, hiring
practices, safety record, credit history, geographic location and types of job
assignments within employment classifications. The Company's agents also meet
with the employer's management to assess the extent to which management is
committed to safety in the workplace. The Company believes that this initial
screening of potential clients improves risk selection.
Once an account passes this initial screening process and prior to approving
an application, the Company's underwriting department reviews each employer
applicant's prior loss experience, safety record, operations, geographic
location and payroll classifications and the types of job assignments within
employment classifications. If necessary, and in most cases for accounts with
EAP of $250,000 or greater, a pre-inspection is conducted by the Company's loss
control department to evaluate safety in the workplace, hiring practices,
industrial health hazards and the potential insured's enthusiasm for loss
control and workplace safety. The Company's underwriters evaluate the potential
profitability of each insurance application by analyzing the various potential
loss exposures related to that particular risk compared to the standard
exposures in that classification. The Company's concentration in the
agribusiness industry permits this comparison to be done in a more thorough and
cost effective manner.
The Company runs a customized software system which networks the
underwriters to field representatives, loss control consultants, premium
auditors, credit and collections personnel and claims supervisors to provide
renewal data and schedule service visits. A record of all customer interaction
is maintained for the underwriters' review. On larger risks, the Company's
underwriters consult with the Company's senior claims management personnel
during the underwriting process. For new business submissions, this process
improves the Company's ability to estimate an employer's expected claims
experience. For renewing businesses, this process informs the underwriters of
the Company's experience handling claims for the particular employer and the
employer's attitude toward safety, cooperation in the claims settlement process,
return to work efforts and collection payment history. Any expected change in
reserves is also discussed in the renewal business claims review.
Once an account is written, a service plan is put into place utilizing a
team of bilingual field representatives, certified loss control specialists and
employer personnel to establish and periodically review formal and informal
safety programs, safety committees, conformity with OSHA standards, procedures
for reporting injuries, medical cost containment, anti-fraud information,
accident investigation, safety incentive/rewards programs and claims review
procedures. A service call by claims and field personnel is scheduled with each
account with EAP in excess of $25,000. The Company's field representatives
provide a number of valuable services for the Company's underwriting and claims
personnel as well as to the Company's insured employers. All of the field
representatives speak English and Spanish. The field representatives spend their
working hours making periodic visits to the Company's insured employers and
their workers. Among other things, the field representatives provide feedback to
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<PAGE>
the Company's underwriting personnel about particular accounts and their
attitude toward, and actions to implement, workplace safety. Input from the
field representatives influences rating and pricing decisions by the Company's
underwriters. The Company uses its bilingual, state-certified loss control
personnel to hold safety seminars to train insureds' employees.
The Company has established an underwriting referral policy designed to
allow the Company's senior underwriting officer to review all large and unusual
underwriting opportunities. All accounts with (i) high EAP, (ii) high experience
modifications (indicating poor prior claims experience), (iii) a projected
overall rate reduction at renewal, or (iv) large variations from the Company's
standard rates are reviewed by the senior underwriting officer, together with
the senior claims officer, senior loss control officer and chief operating
officer.
UNDERWRITING PERSONNEL
The Company's underwriting department consists of nine senior underwriters
with an average of 22 years experience in property/casualty underwriting and
eight other underwriting staff members. Each of the senior underwriters is given
individually determined binding authority. All of the Company's underwriters are
expected to spend a significant portion of their time out of the office visiting
agents and policyholders.
PRICING
The amount of premium the Company charges for workers' compensation
insurance is dependent on the size of an employer's payroll, the job
classifications of its employees and the application of the Company's rating
plan to each individual employer. The Company's rating plan varies from state to
state due to differences in regulatory environments. In certain states, the
premium rate charged to a particular employer may be affected by a risk premium
modifier if the employer is a member of a safety group or meets certain safety
or other requirements. Each employer's indicated premium is then adjusted based
on the employer's experience modification, which is determined by a third party
rating bureau. Application of the experience modification factor results in an
increase or decrease to the indicated premium rate based on the employer's loss
experience and, therefore, provides an incentive to employers to reduce
work-related injuries and illnesses.
In certain states, at the time the Company issues a policy to an employer,
the Company is paid a deposit premium, which is a percentage of the EAP of the
policy at the time of issuance. The percentage ranges from 10% to 100% of the
EAP depending, among other things, on the premium payment schedule, the
employer's credit history and employment classifications. The employer remits
its premiums either in installments based on a payment plan or in amounts
calculated from periodic reports of its payrolls. At the end of the policy term,
or when the policy is cancelled, a final audit of the employer's records is
conducted by the Company to determine the correct amount of premium due to the
Company.
For a description of regulation of workers' compensation insurance premium
rates, see
"Business--Regulation--Regulation of PICO's Business in Each State in Which it
is Licensed".
CLAIMS
The Company's policy is to protect injured workers or their dependents and
policyholders by promptly investigating each loss occurrence, administering
benefits in a prompt, efficient and cost effective manner and maintaining an
appropriate reserve estimate on each claim through closure. The Company expends
significant efforts to improve its insureds' claim experience. Because the
Company charges insurance rates based in part on an insured's claims experience
over a three-year period, improvements in an insured's claims experience are not
immediately reflected in lower rates, thereby
40
<PAGE>
providing an opportunity for the Company's loss ratio to improve as each
accounts' claims experience is reduced.
MANAGEMENT OF CLAIMS COSTS
The Company's Special Investigation Unit reviews each claim for potential
fraud as it is reported to the Company rather than only those claims referred to
the unit by claims adjusters after they suspect fraud, as the Company believes
is more typical in the industry. By reviewing every claim at an early stage, the
Company is able to take advantage of its experience in identifying the principal
indicators of fraud and thereby mitigate its exposure to fraudulent claims. The
Company believes its Special Investigation Unit's review of every claim
diminishes the number of fraudulent claims paid by the Company and is
responsible in part for lowering the Company's loss ratio. The Company has also
established a separate litigation management unit, utilizing its own
administrative hearing representatives, which makes extensive use of alternative
dispute resolution techniques to settle claims prior to these claims going
before local workers' compensation appeals boards. The Company holds special
one-day arbitration conferences with retired workers' compensation judges at
least quarterly and attempts to settle pending claims at these conferences.
In addition, the Company has taken significant steps to reduce its outside
legal fee expenses when litigated claims cannot be resolved by the Company's
in-house litigation personnel. The Company has entered into capitation
arrangements with each of the members of its panel of outside law firms. These
arrangements limit the amount the Company will be charged by its attorneys for
given legal actions. The Company believes these capitation arrangements have
materially reduced its claims costs for litigated claims.
As an integral part of its claims operations, PICO utilizes specially
trained personnel, both employees and independent contractors, to carry out cost
containment techniques in the areas of medical management, litigation
management, vocational rehabilitation management, subrogation management, fraud
investigation, bill review, utilization review and benefit delivery compliance.
The Company's medical management efforts are devoted to providing medical
utilization review and quality assurance with the objectives of controlling unit
cost, volume of services and lost work days due to work-related injury and
illness. In particular, due to its long experience in rural markets, the Company
understands how the delivery of occupational medical services varies in rural
areas from metropolitan areas, allowing the Company, it believes, to more
effectively utilize its rights to direct injured workers to medical providers
approved by the Company during the first weeks after an injury occurs.
Claims management is further enhanced by the Company's bilingual field
representatives who assist in the benefit-delivery process and the explanation
of benefits to injured workers in their language of preference. A substantial
majority of the Company's loss control and field representatives have prior work
experience in the businesses in which the Company's clients operate. The Company
believes that it can mitigate claim incidence and duration and prevent the
settlement of claims from becoming an adversarial process by maintaining open
communication with the farm worker communities. To that end, the Company's field
representatives personally deliver the first claims payment to each injured
worker, which the Company believes leads to greater cooperation in the ultimate
settlement of claims and fulfills a fraud prevention function by allowing
Company personnel to meet and evaluate the injured worker. In addition, the
Company's claims department has operated for many years with a bilingual and
cross-cultural claims examination workforce, which facilitates more rapid
explanation of benefits and settlement of claims with Spanish speaking
claimants.
The Company has implemented a toll-free injury reporting telephone number
which allows employers and injured workers to report claims more quickly.
Callers receive assistance reporting their claim and the Company's claims
personnel receive a "head start" on the management of the costs of that claim.
The head start allows the Company to investigate the circumstances of the injury
to determine the claim status, assist the injured worker in the selection of
medical providers approved by the Company
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<PAGE>
and assist the injured party through the claims process in a manner designed to
reduce the likelihood that the injured party will need to seek the assistance of
legal counsel with the claims process. The Company believes that there is a
direct relationship between the speed with which it learns of a claim and its
ability to reduce the cost of the claim to its lowest possible value.
The Company has created a panel of medical providers practicing in three
facilities in Mexico who are skilled in delivering occupational medicine in a
manner consistent with the requirements of the California workers' compensation
system at less cost than United States providers for those workers more
comfortable with Mexico clinics and hospitals. For instance, a common inguinal
hernia repair which may cost over $4,000 in the United States costs as little as
$1,600 in one of these medical-provider facilities.
CLAIMS PERSONNEL
The Company's claims management is conducted under the direction of 14
claims management personnel with an average of 18 years of experience in the
industry. The Company's claims examiners are responsible for the management of
caseloads typically averaging below 125 claims per examiner, which the Company
believes is lower than the industry average. Due to the combination of
experience and manageable caseloads, the Company's claims personnel can be
effective at managing claims through frequent contact with policyholders,
injured workers and medical providers. Moreover, the Company's claims personnel
are able to quickly and cost effectively respond to changes in mandated workers'
compensation benefits. The Company maintains claims processing offices with
Spanish-speaking bilingual staff in seven of its 21 offices.
LOSSES AND LOSS RESERVES
In many cases, significant periods of time may elapse between the occurrence
of an insured loss, the reporting of the loss to the insurer and the insurer's
payment of that loss. To recognize liabilities for unpaid losses, insurers
establish reserves, which are balance sheet liabilities representing estimates
of future amounts needed to pay claims with respect to insured events that have
occurred, including events that have occurred but have not yet been reported to
the insurer. Reserves are also established for LAE representing the estimated
expenses of settling claims, including legal and other fees, and general
expenses of administering the claims adjustment process.
Reserves for losses and LAE are based not only on historical experience but
also on management's judgment of the effects of factors such as future economic
and social forces likely to impact the insurer's experience relative to the type
of risk involved, benefit changes, circumstances surrounding individual claims
and trends that may affect the probable number and nature of claims arising from
losses not yet reported. Consequently, loss reserves are inherently subject to a
number of highly variable circumstances.
Reserves for losses and LAE are evaluated quarterly using a variety of
actuarial and statistical techniques for producing current estimates of expected
claim costs. Claim frequency and severity and other economic and social factors
are considered in the evaluation process. Since the Company relies on both
actual historical data, which reflect past inflation, and on other factors which
are judged to be appropriate modifiers of past experience, the Company uses an
implied, rather than explicit, provision for inflation in its calculation of
estimated future claim costs. Adjustments to reserves are reflected in operating
results for the periods in which they are made.
The Company sets an initial case reserve upon being notified of an insured
injury. Since 1992, the Company has employed automated computer technology
utilizing a database comprised of data from participating unaffiliated workers'
compensation carriers to assist the Company in setting such initial reserves. As
more facts regarding the loss become known, the Company reviews and, if
appropriate, revises the initial case loss reserve.
In addition to case reserves, the Company also establishes bulk reserves.
Bulk reserves are established on an aggregate basis to provide for losses
incurred but not yet reported to the insurer and
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<PAGE>
to supplement the overall adequacy of reported case reserves and estimated
expenses of settling such claims, including legal and other fees and general
expenses of administering the claims adjustment process. The Company establishes
bulk reserves by estimating the ultimate net liability for losses and LAE by
using actuarial reserving techniques. Such techniques are used to adjust, in the
aggregate, the amount estimated for individually established case reserves, as
well as to establish estimates for reserves for unreported claims. Adjustments
are made for changes in the volume and mix of business, mix of claim categories,
claims processing and other items which affect the development patterns over
time.
On the basis of the Company's internal procedures which analyze, among other
things, the Company's experience with similar cases and historical trends such
as reserving patterns, loss payments and pending levels of unpaid claims, as
well as court decisions, economic conditions and public attitudes, management
believes that adequate provision has been made for the Company's unpaid losses
and LAE. However, because the establishment of loss reserves is an inherently
uncertain process, there can be no assurance that ultimate losses and LAE will
not exceed the Company's reserves. There can be no assurance that future loss
development will not require reserves for prior periods to be increased, which
would adversely affect earnings in future periods.
The following table sets forth a reconciliation of beginning and ending
reserves for losses and LAE after reinsurance deductions for the periods
indicated. There are no material differences between the Company's reserves for
losses and LAE shown below calculated in accordance with GAAP and those
calculated in accordance with SAP. The Company does not discount claim reserves
on either a GAAP basis or under SAP.
RECONCILIATION OF RESERVES FOR LOSSES AND LAE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS
------------------------------- ENDED JUNE 30,
1994 1995 1996 1997
--------- --------- --------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Unpaid loss and loss adjustment expenses beginning of
period..................................................... $ 62,629 $ 60,473 $ 57,049 $ 55,720
Less: reinsurance recoverable on unpaid losses and LAE....... 5,402 6,886 6,775 6,427
PACO reserves............................................ 435 300 292 533
--------- --------- --------- ---------------
Net PICO balance, beginning of period...................... $ 56,792 $ 53,287 $ 49,982 $ 48,760
Incurred related to:
Current period............................................. 32,469 33,048 35,938 28,937
Prior periods.............................................. (3,955) (3,884) (2,646) (800)
--------- --------- --------- ---------------
$ 28,514 $ 29,164 $ 33,292 $ 28,137
Paid related to:
Current period............................................. 10,307 10,727 12,833 4,948
Prior periods.............................................. 21,712 21,742 21,681 13,997
--------- --------- --------- ---------------
$ 32,019 $ 32,469 $ 34,514 $ 18,945
Net PICO balance, end of period............................ 53,287 49,982 48,760 57,952
Plus: reinsurance recoverable on unpaid losses and LAE....... 6,886 6,775 6,427 6,437
PACO reserves............................................ 300 292 533 583
--------- --------- --------- ---------------
Unpaid loss and loss adjustment expenses, end of period...... $ 60,473 $ 57,049 $ 55,720 $ 64,972
--------- --------- --------- ---------------
--------- --------- --------- ---------------
</TABLE>
43
<PAGE>
The table below shows changes in historical workers' compensation net loss
and LAE reserves for PICO for each year since 1986. Reported reserve development
is derived from information included in PICO's statutory financial statements.
The first line of the upper portion of the table shows the net reserves as of
December 31 of each of the indicated years, representing the estimated amounts
of net outstanding losses and LAE for claims arising during that year and in all
prior years that are unpaid, including losses that have been incurred but not
yet reported to the Company. The upper portion of the table shows the
reestimated amount of the previously recorded net reserves for each year based
on experience as of the end of each succeeding year. The estimate changes as
more information becomes known about claims for individual years. The lower
portion of the table shows the cumulative net amounts paid as of December 31 of
successive years with respect to the net reserve liability for each year.
In evaluating the information in the table below, it should be noted that
each amount includes the effects of all changes in amounts for prior periods.
For example, if a loss determined in 1990 to be $10,000 was first reserved in
1987 at $8,000, the $2,000 deficiency would be included in the cumulative
redundancy (deficiency) for each of the years 1987 through 1990 shown below.
This table, unlike the table headed "Calendar Year Development by Accident Year"
that follows, does not present accident or policy year development data.
Conditions and trends that have affected the development of liability in the
past may not necessarily occur in the future. Accordingly, it may not be
appropriate to extrapolate future redundancies or deficiencies based on this
table.
44
<PAGE>
CHANGES IN HISTORICAL NET RESERVES FOR LOSSES AND LAE
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1986 1987 1988 1989 1990 1991 1992 1993 1994
--------- --------- --------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
Unpaid losses and loss
adjustment expenses at
end of year.............. $ 43,620 $ 49,221 $ 52,893 $ 49,994 $ 49,104 $ 57,909 $ 59,492 $ 56,792 $ 53,287
Reserve reestimated as
of:
One year later......... 43,278 46,450 47,061 47,833 52,209 58,618 57,000 52,837 49,403
Two years later........ 41,175 44,777 46,462 50,060 53,491 60,095 57,115 50,480 48,189
Three years later...... 40,020 44,294 47,725 49,970 54,316 60,733 55,305 50,647
Four years later....... 39,564 44,507 47,473 50,321 55,269 59,806 56,725
Five years later....... 39,619 44,336 47,064 51,095 54,808 60,286
Six years later........ 39,192 43,948 47,444 51,025 55,184
Seven years later...... 38,889 44,092 47,346 51,348
Eight years later...... 39,111 44,077 47,847
Nine years later....... 39,074 44,468
Ten years later........ 39,434
Cumulative redundancy
(deficiency)............. 4,186 4,753 5,046 (1,354) (6,080) (2,377) 2,767 6,145 5,098
Cumulative paid as of:
One year later......... 12,587 14,289 16,761 19,757 21,736 25,543 23,464 21,711 21,742
Two years later........ 21,466 25,290 29,212 32,602 36,021 40,328 37,040 34,721 33,601
Three years later...... 27,965 33,298 36,832 40,456 43,482 48,429 45,529 41,855
Four years later....... 32,536 37,758 41,251 44,254 47,923 53,416 50,395
Five years later....... 35,124 40,320 43,271 46,682 50,713 56,250
Six years later........ 36,632 41,295 44,676 48,430 52,442
Seven years later...... 37,046 42,083 45,562 49,406
Eight years later...... 37,675 42,723 46,465
Nine years later....... 38,105 43,388
Ten years later........ 38,641
Net unpaid losses and
loss adjustment
expenses--December 31.... $ 56,792 $ 53,287
Reinsurance Recoverable.. 5,402 6,886
--------- ---------
Gross unpaid losses and
loss adjustment
expenses--December 31.... $ 62,194 $ 60,173
--------- ---------
--------- ---------
Re-estimated net unpaid
losses and loss
adjustment expenses...... $ 50,647 $ 48,189
Re-estimated reinsurance
recoverable.............. 6,497 5,947
--------- ---------
Re-estimated gross unpaid
losses and loss
adjustment expenses...... $ 57,144 $ 54,136
--------- ---------
--------- ---------
Gross cumulative
redundancy
(deficiency)............. $ 5,050 $ 6,037
--------- ---------
--------- ---------
<CAPTION>
<S> <C> <C>
1995 1996
--------- ---------
Unpaid losses and loss
adjustment expenses at
end of year.............. $ 49,982 $ 48,760
Reserve reestimated as
of:
One year later......... 47,335
Two years later........
Three years later......
Four years later.......
Five years later.......
Six years later........
Seven years later......
Eight years later......
Nine years later.......
Ten years later........
Cumulative redundancy
(deficiency)............. 2,647
Cumulative paid as of:
One year later......... 21,680
Two years later........
Three years later......
Four years later.......
Five years later.......
Six years later........
Seven years later......
Eight years later......
Nine years later.......
Ten years later........
Net unpaid losses and
loss adjustment
expenses--December 31.... $ 49,982 $ 48,760
Reinsurance Recoverable.. 6,775 6,427
--------- ---------
Gross unpaid losses and
loss adjustment
expenses--December 31.... $ 56,757 $ 55,187
--------- ---------
--------- ---------
Re-estimated net unpaid
losses and loss
adjustment expenses...... $ 47,335
Re-estimated reinsurance
recoverable.............. 5,786
---------
Re-estimated gross unpaid
losses and loss
adjustment expenses...... $ 53,121
---------
---------
Gross cumulative
redundancy
(deficiency)............. $ 3,636
---------
---------
</TABLE>
45
<PAGE>
The following table is derived from the table above and summarizes the
effect of reserve reestimates net of ceded reinsurance on calendar year
operations for the same ten-year period ended December 31, 1996. The total of
each row details the amount of reserve reestimates made in the indicated
calendar year and shows the accident years to which the reestimates are
applicable. The total of each accident year column represents the cumulative
reserve reestimates for the indicated accident year(s).
CALENDAR YEAR DEVELOPMENT BY ACCIDENT YEAR
<TABLE>
<CAPTION>
ACCIDENT YEAR
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1986
AND
PRIOR 1987 1988 1989 1990 1991 1992 1993 1994 1995
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
(INCREASE) DECREASE IN RESERVES (IN THOUSANDS)
Calendar
Years ---------
1996.................. $ (360) $ (31) $ (110) $ 178 $ (53) $ (104) $ (940) $ 1,253 $ 1,381 $ 1,433
1995.................. 37 (22) 83 (28) 391 466 883 547 1,527
1994.................. (222) 78 (236) (394) (179) 315 523 4,070
1993.................. 303 85 21 (760) (474) (652) 3,969
1992.................. 427 (256) 81 (162) (1,372) 573
1991.................. (55) (158) (1,050) (964) (878)
1990.................. 456 27 116 1,562
1989.................. 1,155 518 4,159
1988.................. 2,103 668
1987.................. 342
Cumulative Reestimates
For Each Accident
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Year................ $ 4,186 $ 909 $ 3,064 $ (568) $ (2,565) $ 598 $ 4,435 $ 5,870 $ 2,908 $ 1,433
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
<CAPTION>
<S> <C>
TOTAL
CALENDAR
YEAR EFFECT
-----------
Calendar
Years ---------
1996.................. $ 2,647
1995.................. 3,884
1994.................. 3,955
1993.................. 2,492
1992.................. (709)
1991.................. (3,105)
1990.................. 2,161
1989.................. 5,832
1988.................. 2,771
1987.................. 342
Cumulative Reestimates
For Each Accident
-----------
Year................ $ 20,270
-----------
-----------
</TABLE>
As illustrated by this table, there have been no significant adverse
developments in PICO's reserve for any accident year from 1986 through 1995
except for 1990 which is discussed below. There can be no assurance that
significant adverse developments in PICO's reserves will not occur in the
future.
PICO and the California workers' compensation industry as a whole
experienced relatively high incurred losses and LAE during accident years 1989 -
1992 as a result of laws enacted in 1989 which had the unintended effect of
permitting the filing of fraudulent and abusive workers' compensation claims.
PICO, like most California insurance carriers, determined reserves for accident
years 1993 and 1994, and to a lesser extent, 1995 and 1996, based on the
relatively high incurred loss and LAE trends for the 1989 - 1992 accident years.
PICO's actual incurred losses and LAE for the 1993 - 1995 accident years proved
to be lower than anticipated and PICO's original reserves for these periods,
like those of other California companies, were ultimately redundant. PICO's
favorable development of reserves for the 1993 and 1994 accident years and, to a
lesser extent, for the 1995 accident year is attributable to the implementation
of significant workers' compensation reform in California in 1993 and aggressive
fraud enforcement by PICO, the industry and California authorities beginning
around the same time.
PICO determined its reserves for the 1994 - 1996 accident years with the
benefit of information indicating favorable development in the immediate prior
accident years. Development of the 1994 and 1995 accident years has more closely
approximated the development anticipated when reserves for those years were
initially established.
46
<PAGE>
In 1996, PICO experienced an aggregate of approximately $2.6 million in
reserve recoveries attributable primarily to favorable development on losses and
LAE for the 1993 - 1995 accident years, offset in part by mildly negative
development for the 1990 - 1992 accident years. PICO attributes this favorable
development in part to favorable industry trends as well as to PICO's continued
improvement in claims management and management of the medical and legal
components of its workers' compensation claims. In particular, in late 1995 PICO
implemented a change in the manner in which it pays legal counsel for work
performed in connection with litigated claims which had the effect of
significantly reducing PICO's LAE reserves for open claims from prior years.
During 1995, PICO experienced an aggregate of approximately $3.9 million in
reserve recoveries attributable primarily to favorable development on losses and
LAE for accident years 1990 - 1994. During 1994, PICO experienced an aggregate
of approximately $4.0 million in reserve recoveries, primarily attributable to
favorable development for the 1993 accident year. PICO's reserve recoveries
during 1994 and 1995 are directly related to the more favorable loss patterns
experienced by PICO in 1993 and 1994 compared with those anticipated by PICO
based on the patterns exhibited during 1990 - 1992. PICO recognized the
favorable development associated with the California reforms and related fraud
abatement activities in the early 1990's over time as more credible loss
development information became available confirming the existence of a favorable
trend.
During the six months ended June 30, 1997, PICO recorded losses and LAE of
$28.1 million, consisting of paid losses and LAE of $18.9 million and an
increase in reserves for losses and LAE for 1997 and all prior years of $9.2
million. The 1997 increase in reserves is net of recoveries of an aggregate of
approximately $0.8 million of reserves for accident years 1991 - 1993.
POLICYHOLDER DIVIDENDS
Workers' compensation policies can be written on a participating or
non-participating basis. Participating policies allow the Company to declare and
pay dividends to a policyholder after the expiration of the policy based upon a
policyholder's specific loss experience (or, if the policyholder is part of a
safety group, the group's specific loss experience), the Company's overall loss
experience and competitive conditions. Since January 1, 1997, substantially all
workers' compensation insurance underwritten by the Company in California,
Alaska and Texas has been written on non-participating policy forms.
Substantially all of the insurance underwritten by the Company in Arizona,
Oregon, Idaho and Florida is written on participating policy forms. Currently,
workers' compensation insurers in Arizona and Florida generally use policyholder
dividends to reward favorable loss experience as a means of competitive pricing.
In Oregon and Idaho, dividends are sometimes used as a competitive pricing tool,
although rates are more flexible in those states. Dividends play little role in
Alaska and Texas, due to the flexibility in the rating plans in those states.
The Company makes the determination of the amount of the dividends it chooses to
pay on its participating policies generally 12 to 30 months after policy
expiration, and such payments require approval by PICO's board of directors. The
Company intends to continue to issue policies in Arizona, Oregon, Idaho and
Florida that are eligible for policyholder dividend consideration.
REINSURANCE
Insurance risk is ceded primarily to reduce the liability on individual
claims and to protect against catastrophic losses. The Company follows the
industry practice of reinsuring a portion of its risks on an excess of loss
reinsurance basis. For this coverage, the Company pays the reinsurer a portion
of the premiums received on all policies. In return, the reinsurer agrees to
reimburse the Company for all losses in excess of a predetermined amount,
commonly referred to as the insurance company's retention.
The Company maintains excess of loss reinsurance treaties with various
reinsurers for workers' compensation. Since 1974, GenRe has been the Company's
primary reinsurer. GenRe is currently assigned a letter rating of "A++
(Superior)" by A.M. Best. Reinsurance receivables reflected in the
47
<PAGE>
Consolidated Financial Statements are due primarily from GenRe. Under the
current workers' compensation reinsurance treaties, various reinsurers assume
liability on that portion of the loss that exceeds $250,000 per accident, up to
a maximum of $30 million per accident. The Company's per accident retention was
$150,000 until October 1993 and $200,000 thereafter until July 1, 1996. An
accident is defined as a single event, whether it affects one or more persons.
Although reinsurance makes the assuming reinsurer liable to PICO to the extent
of the reinsurance ceded, it does not legally discharge PICO from its primary
liability for the full amount of the policy liability. The Company has
encountered no disputes with its reinsurers and has not experienced any
difficulty on the part of reinsurers to fulfill their obligations under
reinsurance treaties. The Company believes that suitable alternative reinsurance
treaties are readily obtainable at the present time.
INVESTMENTS AND INVESTMENT RESULTS
The Company employs a conservative investment strategy emphasizing asset
quality and the matching of maturities of its fixed maturity investments to the
Company's anticipated claim payments and expenditures or other liabilities. The
Company employs Conning Asset Management Company ("Conning Asset Management") to
act as its independent investment advisor pursuant to the terms of a written
agreement with Conning Asset Management and the Company's written investment
guidelines.
Conning Asset Management has discretion to enter into investment
transactions within the Company's investment guidelines. In practice, this
discretion is generally exercised only with respect to the reinvestment of
maturing securities in similar securities. In the case of sales of securities
prior to maturity, or the acquisition of securities which differ from the types
of securities already present in the portfolio, Conning Asset Management will
routinely consult with the Company's Chief Financial Officer, who chairs the
Company's investment committee, prior to entering into such transactions. Among
other things, Conning Asset Management seeks to match the average duration of
the portfolio's assets with the estimated average duration of the Company's
liabilities. Conning Asset Management's fee is based on the amount of assets in
the portfolio and is not dependent upon investment results or portfolio
turnover. Conning Asset Management is affiliated with one of the Company's
principal stockholders. See "Certain Transactions".
The amount and types of investments that may be made by the Company's
insurance subsidiaries are regulated under the California Insurance Code and
related rules and regulations promulgated by the California DOI. Subject to such
applicable state laws and regulations, investment policies and investment
decisions are approved by the Company's investment committee and are reviewed by
the Board of Directors. The Company modifies its mix of tax-exempt and taxable
securities from time to time based in large part on effective after-tax yield
considerations. Management intends to hold all of the Company's fixed maturity
investments for indefinite periods of time but these investments are available
for sale in response to changes in interest rates, tax planning considerations
or other aspects of asset/liability management.
48
<PAGE>
As of June 30, 1997, the carrying value of the Company's investment
portfolio was approximately $93.4 million and amortized cost was approximately
$92.1 million. The diversification of the Company's investment portfolio as of
December 31, 1996 and June 30, 1997 is shown in the table below:
CONSOLIDATED INVESTMENT POSITION
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996 AS OF JUNE 30, 1997
----------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
PERCENT OF PERCENT OF
CARRYING AMORTIZED CARRYING CARRYING AMORTIZED CARRYING
TYPE OF INVESTMENT VALUE (1) COST VALUE VALUE (1) COST VALUE
- ---------------------------------------- --------- ----------- ----------- --------- ----------- -----------
(DOLLARS IN THOUSANDS)
Fixed maturities: (2)
United States government agencies and
authorities......................... $ 16,799 $ 16,619 19.4% $ 13,761 $ 13,676 14.7%
States, municipalities and political
subdivisions........................ 48,008 47,238 55.3 55,860 54,957 59.8
Corporate securities.................. 9,560 9,370 11.0 9,364 9,215 10.0
Collateralized mortgage obligations... 7,004 7,025 8.1 7,620 7,637 8.2
--------- ----------- ----- --------- ----------- -----
Total fixed maturities................ $ 81,371 $ 80,252 93.8% $ 86,605 $ 85,485 92.7%
Equity securities (3)................... 1,810 1,748 2.1 2,929 2,741 3.2
Invested cash........................... 3,611 3,611 4.1 3,845 3,845 4.1
--------- ----------- ----- --------- ----------- -----
Total investments..................... $ 86,792 $ 85,611 100.0% $ 93,379 $ 92,071 100.0%
--------- ----------- ----- --------- ----------- -----
--------- ----------- ----- --------- ----------- -----
</TABLE>
- --------------
(1) All securities are carried at market value except invested cash is carried
at cost, which approximates market value.
(2) All fixed maturity securities have been designated as available for sale.
(3) Excludes the Company's minority investments in Parker and CAPAX, which had a
carrying value as of December 31, 1996 and June 30, 1997 of $1.9 million.
It is the Company's practice to purchase almost exclusively investment grade
fixed maturity securities. As of June 30, 1997, the Company did not own any
below investment grade or non-performing fixed maturity securities, or any
mortgages or real estate. As of June 30, 1997, all of the Company's fixed
maturity securities carried a NAIC Class 1 designation (or a comparable rating
agency designation).
At June 30, 1997, the Company owned a total of $7.6 million amortized cost
of AAA-rated Collateralized Mortgage Obligations ("CMOs"). The Company's
holdings of CMOs consist of Planned Amortization Class CMOs, which are
structured to have a higher degree of cash flow certainty over a variety of
prepayment scenarios, and have remaining average lives from six months to three
years.
49
<PAGE>
The following table sets forth certain information regarding the investment
ratings of the Company's fixed maturity investment portfolio as of June 30,
1997:
LONG TERM FIXED MATURITY PORTFOLIO BY STANDARD & POOR'S RATING
<TABLE>
<CAPTION>
PERCENTAGE
CARRYING AMORTIZED OF CARRYING
RATINGS (1) VALUE COST VALUE
- -------------------------------------------------------------------------- ----------- ----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
AAA (2)................................................................... $ 58,903 $ 58,207 68.0%
AA........................................................................ 10,636 10,474 12.3
A......................................................................... 17,066 16,804 19.7
----------- ----------- -----
Total..................................................................... $ 86,605 $ 85,485 100.0%
----------- ----------- -----
----------- ----------- -----
</TABLE>
- --------------
(1) Ratings assigned by S&P when available, otherwise equivalent ratings
assigned by Moody's or Fitch.
(2) Includes $2.0 million of United States government securities which are not
rated by the rating agencies but are generally considered "AAA".
The following table sets forth certain information regarding the maturity
profile of the Company's fixed maturity securities as of June 30, 1997 based on
the earlier of the pre-escrowed date or the scheduled maturity date:
INVESTMENT PORTFOLIO BY YEARS TO MATURITY
<TABLE>
<CAPTION>
PERCENTAGE OF
MATURITY CARRYING VALUE CARRYING VALUE
- -------------------------------------------------------------------------------- --------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
One year or less................................................................ $ 10,993 12.7%
After one year through five years............................................... 48,979 56.5
After five years through ten years.............................................. 19,013 22.0
Mortgage and asset backed securities (1)........................................ 7,620 8.8
--------------- -----
Total........................................................................... $ 86,605 100.0%
--------------- -----
--------------- -----
</TABLE>
- --------------
(1) Mortgage-backed securities generally are more likely to be prepaid than
other fixed maturity securities. Therefore, contractual maturities are
excluded from this table since they may not be indicative of actual
maturities.
50
<PAGE>
The Company's investment results for each of the three years ended December
31, 1994, 1995 and 1996 and for the six months ended June 30, 1997 were as
follows:
INVESTMENT PORTFOLIO RESULTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------- SIX MONTHS ENDED
1994 1995 1996 JUNE 30, 1997
--------- --------- --------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net pre-tax investment income (1)......................... $ 4,536 $ 4,817 $ 4,701 $ 2,499
Average total invested assets (2)......................... 82,858 82,851 83,644 88,840
Annual pre-tax yield on average total invested assets
(3)..................................................... 5.5% 5.8% 5.6% 5.6%
Net pre-tax realized investment gains..................... $ -- $ 37 $ 444 $ --
</TABLE>
- --------------
(1) Calculated net of investment expenses and excluding capital gains and losses
and provision for income taxes.
(2) Calculated based on an average of the beginning and end of period total
investments. For the purpose of this calculation, investment balances were
at cost (fixed income securities at amortized cost).
(3) Pre-tax yield is calculated as investment income (including dividend income
in the case of equities) divided by average total invested assets. The yield
for the six months ended June 30, 1997 is on an annualized basis.
The following table summarizes net investment income from the Company's
portfolio for the years ended December 31, 1994, 1995 and 1996 and for the six
months ended June 30, 1997:
NET INVESTMENT INCOME BY INVESTMENT TYPE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------------------
1994 1995 1996
--------------------------------------- ----------------------------------------- --------------------------
% REALIZED % REALIZED %
PRE-TAX GAINS PRE-TAX GAINS PRE-TAX
INCOME YIELD (1) (LOSSES) INCOME YIELD (1) (LOSSES) INCOME YIELD (1)
----------- ------------- ----------- ----------- ------------- ------------- ----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed maturity
securities:
Tax-exempt (2)... $ 1,868 4.4% $ 16 $ 2,383 5.1% $ (10) $ 2,660 5.5%
Taxable.......... 2,384 6.4 -- 2,302 7.0 47 1,841 6.0
Equities (3)....... 87 10.9 (16) 51 6.9 -- 62 5.8
Short-term......... 417 8.4 -- 278 5.9 -- 338 8.6
----------- ----------- ----------- --- -----------
Total............ $ 4,756 5.7% $ -- $ 5,014 6.1% $ 37 $ 4,901 5.9%
----------- ----------- ----------- --- -----------
Less investment
expense.......... 220 -- 197 -- 200
----------- ----------- ----------- --- -----------
Total............ $ 4,536 5.5% $ -- $ 4,817 5.8% $ 37 $ 4,701 5.6%
----------- ----------- ----------- --- -----------
----------- ----------- ----------- --- -----------
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1997
-------------------------------------
REALIZED % REALIZED
GAINS PRE-TAX GAINS
(LOSSES) INCOME YIELD (1) (LOSSES)
------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Fixed maturity
securities:
Tax-exempt (2)... $ 248 $ 1,234 4.8% $ --
Taxable.......... 196 1,018 6.4 --
Equities (3)....... -- 74 6.6 --
Short-term......... -- 266 13.0 --
----- ----------- -----------
Total............ $ 444 $ 2,592 5.8% $ --
----- ----------- -----------
Less investment
expense.......... -- 93 --
----- ----------- -----------
Total............ $ 444 $ 2,499 5.6% $ --
----- ----------- -----------
----- ----------- -----------
</TABLE>
- ------------------
(1) Pre-tax yield is calculated as investment income (including dividend income
in the case of equities) divided by the average of the beginning and end of
year investment balances. For the purpose of this calculation, investment
balances were at cost (fixed income securities at amortized cost). The
yields for the six months ended June 30, 1997 are on an annualized basis.
(2) For purposes of comparison to yields on taxable securities, those yields on
tax-exempt securities are equivalent to average pre-tax yields of 5.6% for
1994, 6.5% for 1995, 7.1% for 1996, and 6.2% for the six months ended June
30, 1997 assuming that the tax rate was 34% and further assuming that 15% of
a portion of the tax-exempt interest was subject to federal income tax under
certain provisions applicable only to insurance companies.
(3) Excludes the Company's minority investments in Parker and CAPAX, which had a
carrying value as of June 30, 1997 of $1.9 million.
51
<PAGE>
REGULATION
GENERAL
PAULA Financial and its subsidiaries are subject to regulation by the
departments of insurance in each jurisdiction in which they transact insurance.
These departments of insurance have broad regulatory, supervisory and
administrative powers over the insurance subsidiaries. Primary regulatory
authority, however, rests with the California DOI, the regulator in the
Company's insurance subsidiaries' state of domicile. While the exercise of their
authority may have company-wide ramifications, regulators in non-domiciliary
states focus primarily on the operation of an insurer within their respective
states.
State insurance regulation is generally intended for the benefit and
protection of policyholders and claimants under insurance policies rather than
stockholders. The nature and extent of such regulation varies from jurisdiction
to jurisdiction, but typically involve: (i) standards of solvency and minimum
amounts of capital and surplus which must be maintained; (ii) limits on types
and amounts of investments; (iii) restrictions on the size of risks which may be
insured by a single company; (iv) licensing of insurers and their agents; (v)
required deposits of securities for the benefit of policyholders; (vi) approval
of policy forms; (vii) establishment of statutory reporting practices and the
form and content of statutory financial statements; (viii) establishment of
methods for setting statutory loss and expense reserves; (ix) review, and in
certain instances prior-approval, of premium rates; (x) limits on transactions
among insurers and their affiliates; (xi) approval of all proposed changes of
control; (xii) approval of dividends; (xiii) setting and collecting guarantee
fund assessments; and (xiv) required filing of annual and other reports with
respect to the financial condition and operation of insurers. In addition, state
regulatory examiners perform periodic financial and underwriting examinations of
insurers.
DOMICILE AND LICENSING
PICO and PACO are domiciled in California. PICO is licensed to transact
insurance in Alaska, Arizona, California, Florida, Idaho, New Mexico, Oregon and
Texas. PACO is licensed to transact insurance in Arizona and California. PICO
and PACO may seek to become licensed in additional states.
RESTRICTIONS ON ACQUISITIONS OF CONTROL
The California Insurance Code provides that any direct or indirect
acquisition or change in "control" of a domestic insurer cannot be consummated
without the prior approval of the California DOI. The California Insurance Code
provides further that, unless the California DOI upon application determines
otherwise, a presumption of "control" arises from the ownership, control,
possession with the power to vote or possession of proxies with respect to 10%
or more of the voting securities of a domestic insurer or of a person or entity
that controls a domestic insurer.
Any person who purchases in this offering, or through any other transaction,
shares of the Common Stock which, when combined with all other voting securities
owned or otherwise controlled by that person, total 10% or more of the voting
securities of the Company, will be deemed to have acquired control of the
insurance subsidiaries unless the California DOI, upon application determines
otherwise. Any such acquisition of control is prohibited under the California
Insurance Code unless prior approval of the California DOI is obtained or the
California DOI does not disapprove the acquisition within 60 days after an
application has been filed. The California DOI is authorized to disapprove any
acquisition which (i) would cause the insurance subsidiaries to cease to qualify
for their licenses to transact insurance, (ii) would substantially lessen
competition or tend to create a monopoly, (iii) might, due to the financial
condition of the acquiring person, jeopardize the financial stability of the
insurance subsidiaries or prejudice the interests of their policyholders, (iv)
would result in a major change in the insurance subsidiaries' business or
corporate structure or management which is not fair and reasonable to
policyholders, or (v) would result in control over the insurance subsidiaries by
persons whose competence, experience and integrity indicate that it is not in
the interest of policyholders or the public to permit them to assume control.
52
<PAGE>
The need for such action, and the possibility of disapproval by the
California DOI, could deter, delay or prevent certain transactions affecting the
control of the Company or the ownership of the Company's Common Stock. Since the
statutory disapproval criteria focus primarily on policyholder, rather than
stockholder, interests, these requirements could deter, delay or prevent
transactions which could be advantageous to the stockholders of the Company.
RESTRICTIONS ON STOCKHOLDER DIVIDENDS PAYABLE BY THE INSURANCE SUBSIDIARIES TO
THE COMPANY
PAULA Financial, as a non-insurer, is generally not restricted directly
under applicable insurance laws with respect to the payment of dividends to
stockholders or the acquisition of non-regulated businesses. PAULA Financial,
however, is subject to regulation with respect to all transactions involving the
insurance subsidiaries. Additionally, as a nonoperating holding company, a
principal source of the PAULA Financial's liquidity is cash dividends received
from its subsidiaries, including the insurance subsidiaries.
California law places significant restrictions on the ability of the
insurance subsidiaries to pay dividends to PAULA Financial. All dividends from
PICO and PACO, as California-domiciled insurers, require prior notice to the
California DOI. All "extraordinary" dividends must be approved in advance by the
California DOI. A dividend is deemed "extraordinary" if, when aggregated with
all other dividends paid within the preceding twelve months, the dividend
exceeds the greater of (i) PICO's statutory net income or PACO's statutory net
gain from operations (both excluding unrealized capital gains) for the preceding
calendar year or (ii) 10% of policyholder surplus as of the preceding December
31st. Additionally, unless approved in advance by the California DOI, no
dividend may be paid by PICO or PACO except from earned surplus. Dividends paid
from earned surplus which do not exceed the definition of "extraordinary" must
be reported to the California DOI within five business days after declaration.
Insurers are prohibited from paying such dividends until ten business days after
the California DOI's receipt of such notice. The California DOI may disallow
payment of any dividend if, in the California DOI's opinion, the payment would
in any way violate the California Insurance Code or be hazardous to
policyholders, creditors or the public. Based on these limitations and statutory
results, as of December 31, 1996, PAULA Financial would be able to receive $5.4
million in dividends in 1997 from its insurance subsidiaries without obtaining
prior regulatory approval from the California DOI.
RESTRICTIONS ON TRANSACTIONS AMONG AFFILIATES OF THE INSURANCE SUBSIDIARIES
In addition to dividend restrictions, California law restricts the ability
of the insurance subsidiaries to make other types of payments to their
affiliates, including PAULA Financial. Certain material transactions between an
insurance company and its affiliates, including sales, loans or investments
which in any twelve month period aggregate at least 3% of its admitted assets or
25% of policyholders' surplus, whichever is less, are subject to thirty day
prior notice to the California DOI during which period the California DOI may
disapprove the transaction. All management, administrative, cost-sharing and
similar agreements between an insurance company and its affiliates are also
subject to thirty day prior notice and non-disapproval by the California DOI.
The California Insurance Code requires that all affiliate transactions be fair
and reasonable to the insurer, that such transactions be documented according to
specified standards, and that the insurer's surplus after the transaction
remains reasonable in relation to the insurer's liabilities and adequate to its
financial needs.
EXAMINATIONS
The accounts and businesses of PICO and PACO are subject to periodic
statutory examination by the California DOI and by the Departments of Insurance
in each jurisdiction in which they transact business. The California DOI has
completed its examination of PICO and PACO for the three-year period ended
December 31, 1993. The report disclosed no material problems or adjustments to
statutory
53
<PAGE>
surplus. PICO is currently undergoing a routine statutory examination for the
three-year period ended December 31, 1996. While the examination is not yet
complete, the California DOI has not indicated to PICO's management the
existence of any material deficiency. In addition, the Internal Revenue Service
has requested information from the Company relating to a net operating loss
carryback with regard to its 1995 federal income tax return. The Company
supplied the requested information and the Service has not advised the Company
of any disagreements over the matter.
NAIC STATUTORY ACCOUNTING INITIATIVE
The NAIC currently has a project to codify accounting practices that is
likely to change the definition of what constitutes prescribed versus permitted
statutory accounting practices and may result in changes to the accounting
policies that insurance enterprises use to prepare their statutory financial
statements. The Company is unable to predict how such project will affect its
insurance subsidiaries' statutory financial statements or how insurance rating
agencies will interpret or react to any such changes. No assurance can be given
that future legislative or regulatory changes resulting from such activities
will not adversely affect the Company and its subsidiaries.
RISK-BASED CAPITAL AND IRIS RATIOS
California, as well as numerous other states, uses analytical tools
developed by the NAIC in the course of its financial surveillance of insurers.
Among these is a recently developed methodology for assessing the adequacy of
statutory surplus of property/casualty insurers and life/health insurers using a
risk-based capital ("RBC") formula. The RBC formula attempts to measure
statutory capital and surplus needs based on the risks in a company's mix of
products and investment portfolio. The formula is designed to allow state
regulators to identify potentially under-capitalized companies. Under the
formula, a company determines its RBC by taking into account certain risks
related to the insurer's assets (including risks related to its investment
portfolio and ceded reinsurance) and the insurer's liabilities (including
underwriting risks related to the nature and experience of its insurance
business). The RBC rules provide for different levels of regulatory attention
depending upon the ratio of the company's total adjusted capital to its
"authorized control level" of RBC. As of December 31, 1996, PICO's RBC was $27.8
million in excess of the threshold requiring the least regulatory attention,
which amount was $3.3 million. As of December 31, 1996, PACO's RBC was $3.9
million in excess of the threshold requiring the least regulatory attention,
which amount was $0.1 million.
California and other states also utilize the NAIC Insurance Regulatory
Information System ("IRIS"). IRIS identifies eleven ratios for property/casualty
insurance companies and twelve ratios for life/health insurance companies. IRIS
specifies a range of "usual values" for each ratio. Departure from the "usual
value" range on four or more ratios may lead to increased regulatory oversight
from individual state insurance commissioners. In 1996, PICO had one ratio
outside its usual value, which was caused by excess premium growth. The range
for this ratio is (-33%) to 33%. PICO experienced a 36% growth in 1996. In 1996,
PACO had three ratios outside their usual values, which were caused by (i) 206%
premium growth, (ii) change in product mix of 9.9% and (iii) excess adequacy of
investment income.
REGULATION OF PICO'S BUSINESS IN EACH STATE IN WHICH IT IS LICENSED
PICO's transaction of workers' compensation insurance is closely regulated
by departments of insurance in Alaska, Arizona, California, Florida, Idaho, New
Mexico, Oregon and Texas. In each of these states, the workers' compensation
system is a mechanism to promptly compensate and rehabilitate injured workers
without regard to fault. In most of these states, participation in the workers'
compensation system is compulsory. Employers are required by law either to
obtain workers' compensation insurance from a licensed insurer or to comply with
specific requirements to self-insure.
54
<PAGE>
Workers' compensation benefits are established by law in each of the states
where PICO is licensed. While benefit levels vary from state to state, they fall
generally into three categories: (1) medical benefits for treatment of covered
injuries or diseases; (2) disability benefits that indemnify covered claimants
for loss of income, and (3) death benefits to compensate statutorily enumerated
dependents of workers who have died because of covered accidents or diseases.
Individual state statutes, regulations, administrative rulings and judicial
opinions have created a complex body of law to determine when an injury, disease
or death is employment related, when and to what extent it is compensable, and
whether employees may sue employers, coworkers or other parties for damages
outside of the no-fault workers' compensation system.
Workers' compensation has been the subject of significant reform efforts in
recent years, particularly in the areas of cost management and fraud detection.
For example, legislation enacted in California in 1993 significantly reformed
many areas of the workers' compensation system. Among other things, the 1993
legislation (i) granted employer's rights regarding disclosure of insurer claims
information; (ii) required insurers to provide minimum levels of occupational
safety and health loss control consultation services; (iii) increased benefits,
phased in over a three-year period commencing July 1, 1994; (iv) tightened
standards relating to stress-related claims; (v) limited post-termination
claims; (vi) placed restrictions, including payment limitations, on vocational
rehabilitation claims, (vii) increased measures to reduce fraudulent claims;
(viii) increased the ability of insurance companies and employers to contract
with managed care organizations and to direct claimants' medical care; and (ix)
changed procedures for medical-legal evaluations. Similarly, legislation adopted
in Oregon in 1995, among other things, reformed requirements pertaining to
pre-existing conditions, vocational rehabilitation, payment of death benefits,
review of benefit awards and dispute resolution.
To protect persons covered under policies of workers' compensation
insurance, several states impose special deposit requirements on insurers. Under
these requirements, PICO maintains special deposits in Arizona, California,
Idaho, Oregon and New Mexico. Additional special deposits may be required if
PICO becomes licensed in additional states, or if Alaska, Florida or Texas enact
deposit requirements.
While deposit requirements vary somewhat, they generally require insurers to
deposit cash or securities with each states' treasurer, or an approved
depository, in an amount based on a company's loss and loss expense reserves
plus a percentage of its unearned premium reserves on workers' compensation
insurance business transacted in each individual state. Thus, the size of the
required deposit correlates positively with the amount of workers' compensation
insurance sold by PICO in such state. PICO maintains deposits of securities in
California, Arizona, Oregon, Idaho and New Mexico, having a book value as of
June 30, 1997 of $47.6 million, $14.5 million, $5.3 million, $0.3 million and
$0.1 million, respectively.
An important aspect of workers' compensation insurance regulated by
individual states is the setting of premiums. Among the states where it is
currently licensed, PICO is allowed to establish its own rates under a "file and
use" system in Alaska, California and Texas. Prior approval by insurance
regulators is required for workers' compensation insurance rates in Florida, New
Mexico and Oregon. Hybrid systems exist in Arizona and Idaho, where workers'
compensation insurance rates are determined initially by the National Council on
Compensation Insurance ("NCCI"), a rating organization. Upon the request of an
individual insurer, the Arizona or Idaho DOI, as applicable, may approve rates
that deviate from those recommended by the NCCI.
Prior to January 1, 1995, California had required workers' compensation
insurers to adhere to minimum rates approved by the California DOI. Under this
system, price competition among insurers had been generally restricted to the
payment of dividends under participating policies. This system was replaced with
a file and use system, in which insurers may use any rate within 30 days after
filing it with the California DOI unless such rate is specifically disapproved.
The repeal of the former minimum rate
55
<PAGE>
system in California has resulted in increased competition among workers'
compensation insurers in California and has caused a material decrease in
average rates charged by PICO.
Competition among workers' compensation insurers is also affected in several
states by the presence of quasi-public workers' compensation insurance funds,
which compete against private insurers and which frequently serve as insurers of
last resort to employers unable to secure coverage elsewhere. Among the states
where PICO is licensed, active state funds exist in Arizona, California, Idaho,
New Mexico, Oregon and Texas.
MEMBERSHIP IN INSOLVENCY FUNDS AND ASSOCIATIONS
The Company's insurance subsidiaries, like other insurers, are required to
participate in insolvency funds and associations and may be subject to
assessments from time to time to cover unpaid policyholder claims of insolvent
insurers participating in the same lines of business as the Company. The maximum
assessment required by law in any one year has varied between 1% and 2% of
annual premiums written in that state. Most of these payments are recoverable
through future policy surcharges and premium tax reductions. No material
assessments have been made on the Company's insurance subsidiaries since prior
to December 31, 1990.
COMPETITION
The workers' compensation insurance industry is highly competitive. Although
there are 260 companies licensed to write workers' compensation insurance
policies in California, the 20 largest companies accounted for more than 79% of
the workers' compensation premiums written in California during 1996 (source:
A.M. Best, State/Line Report, Property/Casualty, 1997 Edition). In each state in
which the Company operates, the Company's single largest competitor in its
targeted agricultural markets is the applicable state fund.
Periodically, the Company competes with alternative risk funding
arrangements such as self-insurance or captive insurance programs. Captive
insurance companies are insurance or reinsurance companies in which an insured
or a group of insureds holds significant ownership. Employers have the option of
self insuring against workers' compensation liabilities. Normally, those
companies who choose to self insure are very large employers and are not among
the targeted insurance underwriting prospects of the Company.
In those states without minimum premium laws, such as California, Oregon,
Idaho, Alaska and Texas, the Company faces competition on the basis of price as
well as on the services which it delivers to policyholders. As a result of
Arizona's single deviated rate plan and Florida's minimum rate law, there has
been no significant price competition in those states in terms of premiums
charged. Competition among workers' compensation insurance carriers in those
states has been based in large part on emphasizing dividends to policyholders,
loss control and claims management services and maintaining relations with and
varying commission rates paid to brokers and agents. The Company believes that
its ability to compete successfully with larger carriers and to obtain and
retain its accounts is due to its claims expertise, extensive experience in the
agribusiness market and emphasis on service to policyholders. See "Risk
Factors--Competition".
EMPLOYEES
As of June 30, 1997, the Company employed approximately 250 full-time
employees including 78 in its agency and TPA operations, 165 in its underwriting
operations and six in corporate administration and finance. The Company
considers its relationship with its employees to be excellent. All employees
with at least one year of service are eligible to participate in the ESOP except
for those employees employed on an hourly basis. See "Management--Employee Stock
Ownership Plan".
56
<PAGE>
FACILITIES
The Company's principal executive offices, comprised of approximately 34,000
square feet of office space leased through April 1999, are located in Pasadena,
California. The Company holds an option to extend its home office lease through
April 2004. In addition, the Company maintains 20 branch offices in various
locations in the western United States and Florida in leased facilities with
various lease terms. Management believes that the Company's facilities are
suitable and adequate for their intended uses.
LEGAL PROCEEDINGS
Except for ordinary, routine litigation incidental to the Company's
business, there are no pending legal proceedings to which the Company is a party
or which any of its properties are subject. The nature of the Company's business
subjects it to claims or litigation relating to policies of insurance it has
issued. Management believes that the Company is not a party to, and none of its
properties is the subject of, any pending legal proceedings which are likely to
have a material adverse effect on its business, financial conditions or results
of operations.
57
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the Company's
directors and executive officers:
<TABLE>
<CAPTION>
NAME DIRECTOR CLASS AGE POSITION
- -------------------------------------------- ----------------- --- --------------------------------------------
<S> <C> <C> <C>
Jeffrey A. Snider........................... III 45 Chairman, Chief Executive Officer, President
and Director of the Company and all of its
subsidiaries
Andrew M. Slavitt........................... III 30 Chief Operating Officer, Senior Vice
President and Director of the Company and
all of its subsidiaries
James A. Nicholson.......................... II 52 Chief Financial Officer, Senior Vice
President and Director of the Company and
all of its subsidiaries
Bradley K. Serwin........................... I 36 General Counsel, Senior Vice President,
Secretary and Director of the Company and
all of its subsidiaries
John B. Clinton............................. III 42 Director of the Company
Owen S. Crihfield (1)....................... II 44 Director of the Company
Jerry M. Miller (1)(2)...................... II 56 Director of the Company
Gerard Vecchio (2).......................... I 36 Director of the Company
Ronald W. Waisner (1)(2).................... I 59 Director of the Company
Victor Gloria III........................... N/A 43 Senior Vice President and Director of PICO
James M. Hannah............................. N/A 49 Vice President and Director of PICO
</TABLE>
- --------------
(1) Member of the Executive Compensation Committee.
(2) Member of the Audit Committee.
Officers are appointed by and serve at the discretion of the Board of
Directors.
Mr. Jeffrey A. Snider has been Chairman of the Board of Directors, President
and Chief Executive Officer of the Company since December 1994. Mr. Snider
joined the Company in 1975 and served as President and Chief Executive Officer
of the Company and a member of its Board of Directors from 1984 to 1988. Mr.
Snider resigned from the Company and its Board of Directors in June 1988. From
January 1989 until July 1990, Mr. Snider served as director of the Jimmy Carter
Work Project of Habitat for Humanity International Inc. in San Diego, California
and Tijuana, Mexico. In July 1990, Mr. Snider accepted a position as the first
Executive Vice President and Chief Operating Officer of Habitat, serving in that
position until December 1993, when he returned as President and Chief Executive
Officer of the Company's insurance subsidiaries. Mr. Snider was re-elected to
the Company's Board of Directors in November 1992.
Mr. Andrew M. Slavitt has served as the Chief Operating Officer of the
Company since November 1995 and as a Senior Vice President and Director of the
Company since July 1995 when he joined
58
<PAGE>
the Company. Prior to joining the Company, Mr. Slavitt served as a consultant
with McKinsey & Company, an international management consulting firm, for two
years and prior to that time attended the Harvard Business School where he
received an M.B.A. degree in 1993. From 1988 to 1991, Mr. Slavitt worked for
Goldman, Sachs & Co. as an investment banker.
Mr. James A. Nicholson has served as a Senior Vice President and Chief
Financial Officer of the Company since April 1988. He was first elected to the
Company's Board of Directors in 1986. Mr. Nicholson has been with the Company
since 1972.
Mr. Bradley K. Serwin has served as General Counsel, Senior Vice President,
Secretary and director of the Company since March 1995 when he joined the
Company. Prior to joining the Company, Mr. Serwin practiced law for nine years
with Gibson, Dunn & Crutcher, a nationwide law firm.
Mr. John B. Clinton has served as an outside director of the Company since
August 1994 as a representative of Conning & Company, the general partner of
four partnerships, each of which is a holder of Preferred Stock. Mr. Clinton has
been a Senior Vice President of Conning & Company, an insurance asset management
and research firm, since February 1992.
Mr. Owen S. Crihfield has served as an outside director of the Company since
August 1994 as a representative of Saugatuck Capital Company, a holder of
Preferred Stock. Mr. Crihfield has been a general partner of Saugatuck Capital
Company L.P., an investment firm, for more than the last five years.
Mr. Jerry M. Miller has served as an outside director of the Company since
his election to the Board of Directors in November 1992. Mr. Miller is a
Certified Public Accountant and was an audit partner with KPMG Peat Marwick LLP
from 1974 until his retirement in 1991.
Mr. Gerard Vecchio has served as an outside director of the Company since
August 1994 as a representative of Conning & Company, the general partner of
four partnerships, each of which is a holder of preferred stock. Mr. Vecchio has
been a Vice President of Conning & Company, an insurance asset management and
research firm, since October 1992 and served as a Vice President of Firemark,
Inc., an insurance research and investment firm, from January 1992 until October
1992.
Mr. Ronald W. Waisner has served as an outside director of the Company since
his election to the Board of Directors in November 1992. Prior to his retirement
in 1991, Mr. Waisner worked for Continental Insurance Company beginning in 1959.
His last position with Continental prior to retirement was Senior Vice President
and Regional Manager of the Pacific Region responsible for insurance operations
and marketing. He has served on the Boards of Directors of National Automobile
Club, California Insurance Guarantee Association, Maryland Fair Plan and the
Maryland Auto Insurance Fund.
Mr. Victor Gloria has been with the Company since 1972 and has served in
PICO's Workers' Compensation Claims Department for the majority of that time. He
has served as Manager of that Department since 1987 and was appointed Senior
Vice President of PICO in 1987. Mr. Gloria has obtained the certificated
designation of Associate in Claims. Mr. Gloria was first elected to the PICO
Board of Directors in April 1987.
Mr. James M. Hannah joined the Company in March 1995, assuming the position
of Vice President and Chief Underwriting Officer of PICO. Prior to joining the
Company, Mr. Hannah served as Vice President of American Home Assurance Co., a
property and casualty insurance company, Manager of New Hampshire Insurance Co.
from January 1993 to November 1993 and as Vice President of SAIF Corporation,
the Oregon State insurance fund, for nine years prior to that time. Mr. Hannah
was first elected to the PICO Board of Directors in April 1995.
Messrs. Clinton, Crihfield and Vecchio were nominated to the Board of
Directors pursuant to the terms of the Series A Preferred Stock Purchase
Agreement entered into in connection with the Company's offering of Preferred
Stock. See "Certain Transactions".
59
<PAGE>
The Board of Directors currently has an Audit Committee comprised of Messrs.
Miller, Vecchio and Waisner; an Executive Compensation Committee comprised of
Messrs. Crihfield, Miller and Waisner; an Executive Committee comprised of
Messrs. Snider, Slavitt, Nicholson and Serwin; and a Capital Finance Committee
comprised of Messrs. Snider, Slavitt, Nicholson and Serwin.
STAGGERED BOARD OF DIRECTORS
The Board of Directors has nine members. Pursuant to the Company's Bylaws,
the Board is divided into three classes. Class I Directors serve for a term
ending at the first annual meeting held after the date of the Company's
reincorporation in Delaware (the "Incorporation Date"), Class II Directors serve
for a term ending at the second annual meeting held after the Incorporation
Date, and Class III Directors serve for a term ending at the third annual
meeting held after the Incorporation Date.
COMPENSATION OF DIRECTORS
Each member of the holding company's Board of Directors who is not an
employee of the Company or any of its subsidiaries receives a director fee of
$10,000 per year, plus a $500 fee per meeting and has received a grant of stock
options and is eligible for grants under the Company's 1997 Stock Incentive
Plan. See "--Stock Incentive Plans". These directors are reimbursed for
out-of-pocket expenses reasonably incurred for attending meetings. It is
expected that at least four board meetings will be held during each calendar
year.
60
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth summary information regarding the annual and
long-term compensation for services in all capacities to the Company for the
three years ended December 31, 1996 for those persons who were, as of December
31, 1996, the Chief Executive Officer and the four other most highly compensated
named officers of the Company who received in excess of $100,000 for the year
ended December 31, 1996 (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
AWARDS
------------------------ ALL
ANNUAL COMPENSATION RESTRICTED SECURITIES OTHER
------------------------ STOCK UNDERLYING COMPEN-
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) AWARDS ($) OPTIONS (#) SATION (1)
- ---------------------------------------- --------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey A. Snider....................... 1996 $ 250,000 $ 25,000(2) $ -- 150,000 $ 25,347
Chairman of the Board, Chief Executive 1995 250,000 -- -- -- 24,440
Officer, and President 1994 183,000 50,000 -- 50,000 5,925
Andrew M. Slavitt....................... 1996 145,000 10,000(2) 23,640 57,000 5,050
Chief Operating Officer (3) 1995 73,000 31,500 -- 10,000 --
1994 -- -- -- -- --
James A. Nicholson...................... 1996 180,000 10,000(2) -- 11,500 8,190
Chief Financial Officer 1995 180,000 -- -- -- 7,469
1994 164,000 50,000 -- 20,000
Bradley K. Serwin....................... 1996 135,000 10,000(2) 15,760 28,500 5,936
General Counsel (4) 1995 102,500 27,000 -- -- --
1994 -- -- -- -- --
Victor Gloria III....................... 1996 126,000 40,000 15,760 13,000 7,590
Senior Vice President--Claims 1995 123,500 25,000 -- -- 5,939
Administration 1994 113,000 45,000 10,836 600 5,344
</TABLE>
- --------------
(1) Amounts in this column consist of contributions by the Company to the ESOP,
matching contributions to the PAULA Financial and Subsidiaries 401K
Retirement Savings Plan and split dollar life insurance paid by the Company
on behalf of the Named Executive Officers.
(2) Since January 1, 1996, the annual bonuses paid to Messrs. Snider, Slavitt,
Nicholson and Serwin have been determined and paid in March of the year
following the year to which the bonus relates since the bonus is based on
company-wide results for the previous year. Bonuses paid in 1996 related to
1995 results. Bonuses paid to such persons in 1997 were $175,000, $80,000,
$50,000 and $45,000, respectively.
(3) Mr. Slavitt joined the Company in July 1995.
(4) Mr. Serwin joined the Company in March 1995.
61
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information with respect to stock options
granted during the year ended December 31, 1996 to the Named Executive Officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION ----------------------------
NAME GRANTED (#) FISCAL YEAR SHARE ($) DATE 5% ($) 10% ($)
- -------------------------------------- ------------ ----------------- ----------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey A. Snider..................... 25,000 8.3% $ 15.76 02/01/06 $ 247,784 $ 627,935
125,000 41.3 19.00 10/26/06 1,493,625 3,785,138
Andrew M. Slavitt..................... 10,000 3.3 15.76 02/01/06 99,114 251,174
47,000 15.5 19.00 10/26/06 561,603 1,423,212
James A. Nicholson.................... 7,500 2.5 15.76 02/01/06 74,335 188,380
4,000 1.3 19.00 10/26/06 47,796 121,124
Bradley K. Serwin..................... 7,500 2.5 15.76 02/01/06 74,335 188,380
21,000 6.9 19.00 10/26/06 250,929 635,903
Victor Gloria III..................... 5,000 1.7 15.76 02/01/06 49,557 125,587
8,000 2.6 19.00 10/26/06 95,592 242,249
</TABLE>
FISCAL YEAR-END OPTION VALUES
The following table contains certain information regarding options to
purchase shares of Common Stock held as of December 31, 1996 by each of the
Named Executive Officers. None of such Named Executive Officers exercised any
options during 1996.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
YEAR-END (#) FISCAL YEAR-END ($) (1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------------------------- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
Jeffrey A. Snider.................................... 106,250 93,750 $ 463,625 $ 249,375
Andrew M. Slavitt.................................... 31,750 35,250 126,255 93,765
James A. Nicholson................................... 28,500 3,000 140,110 7,980
Bradley K. Serwin.................................... 12,750 15,750 58,215 41,895
Victor Gloria III.................................... 7,240 6,360 35,684 17,256
</TABLE>
- --------------
(1) Based on the fair market value of the Common Stock as of December 31, 1996
(as determined by an independent valuation firm) less the exercise price
payable for such shares.
STOCK INCENTIVE PLANS
The Board of Directors and Stockholders of the Company have adopted the 1994
Stock Incentive Plan (the "1994 Plan") and the 1997 Stock Incentive Plan (the
"1997 Plan" and, collectively with the 1994 Plan, the "Plans") pursuant to which
officers, directors, employees and independent consultants of the Company or any
of its subsidiaries or affiliates are eligible to receive options and other
awards tied to the value of the Common Stock. The purpose of the Plans is to
enable the Company to attract, retain and motivate employees by providing for or
increasing their proprietary interests in the Company and, in the case of
non-employee directors and consultants, to attract such directors and key
consultants and further align their interests with those of the Company's
stockholders by providing for or increasing their proprietary interest in the
Company. Of the 275,000 shares of Common Stock authorized for grant under the
1994 Plan, 12,625 shares were available for grant as of June 30, 1997. All of
the 100,000 shares of Common Stock authorized for grant under the 1997 Plan were
available for grant as of June 30, 1997.
62
<PAGE>
The 1994 Plan is administered by a committee of three disinterested,
non-employee directors appointed by the Board of Directors of the Company (the
"Committee"), except that grants to non-employee directors will be made by the
Board of Directors pursuant to a predetermined formula. The 1997 Plan is also
administered by the Committee, but no predetermined grants will be made under
the 1997 Plan. The Committee has final and conclusive authority to select the
employees, directors and consultants to receive awards and to grant such awards.
Subject to the provisions of the Plans, the Committee has a wide degree of
flexibility in determining the terms and conditions of awards, including the
number of shares to be issued pursuant thereto, the exercise price thereof and
conditioning the receipt or vesting of awards upon achievement by the Company of
specified performance criteria.
OTHER MANAGEMENT STOCK OPTIONS
In addition to awards available for grant under the Plans, the Company has
granted options to purchase an aggregate of 188,000 shares of Common Stock to
eight executive officers and directors of the Company. These grants were made
pursuant to written agreements with terms substantially similar to those set
forth in the Plans.
EMPLOYEE STOCK OWNERSHIP PLAN
The Company and each of its subsidiaries has adopted the ESOP. The ESOP was
established for the benefit of all of the employees of the Company and each of
its subsidiaries who have completed one year of service with the Company or its
subsidiaries except for those employees who are paid on an hourly basis (each,
an "Eligible Employee"). The ESOP is intended to qualify under Sections 401(a)
and 4975(e)(7) of the Internal Revenue Code of 1986, as amended (the "Code").
The ESOP provides that the amount of the contribution by the Company and
each of its subsidiaries each year is discretionary with the Board of Directors
of each separate corporation. Under the terms of the ESOP, neither the Company
nor any of its subsidiaries is obligated to make any contribution to the ESOP
for any year. However, in practice, the Company's contribution to the ESOP each
year has been not less than the amount, if any, needed to provide the ESOP with
sufficient cash assets to permit the ESOP to meet its distribution obligations
to plan participants and, when shares of the Company's stock have been
distributed instead of cash, to meet its repurchase obligations for stock
reacquired by it from terminated plan participants.
Contributions to the ESOP by the Company and its subsidiaries are allocated
among plan participants who are employed as Eligible Employees on the last day
of the year in the same ratio to the total contribution as each such
participant's units for the year bear to the total units of all participants
entitled to share in the allocation. Under the ESOP, each participant receives
units based on their compensation during the year, subject to specified
limitations, and their years of service.
Separate accounts are maintained for each participant in the ESOP. Each
participant's benefits become fully vested upon termination of employment due to
death, disability (as defined in the ESOP) or attainment of normal retirement
age (as defined in the ESOP). Otherwise, participants become vested based on
their years of service in accordance with the following schedule:
<TABLE>
<CAPTION>
YEARS OF PERCENTAGE
SERVICE VESTED
- --------------- ---------------
<S> <C>
1........... 10%
2........... 20
3........... 30
4........... 40
5........... 60
6........... 80
7........... 100
</TABLE>
63
<PAGE>
The ESOP is designed so that the Trustee may invest the trust assets
primarily in shares of the Company's Common Stock which meets the definition of
"Employer Securities" as set forth in Section 409(e) of the Code. As of December
31, 1996, the ESOP held assets having an overall value of approximately $14.2
million. Among these assets were 547,063 shares of Common Stock having an
aggregate fair market value, as determined by the ESOP's independent appraisal
firm, of $11.8 million, as of December 31, 1996.
When a participant terminates employment with the Company or a subsidiary,
he will receive a distribution of his account balance. The distribution will
normally be made to the participant as soon as it is administratively feasible
during the plan year following the plan year in which the participant incurs a
break in service. A break in service is a plan year during which the participant
is credited with less than 501 hours of service. The distribution will either be
in cash or shares of Common Stock, with each participant having the right to
demand that his distribution be made in shares of Common Stock. If a Participant
receives a distribution of shares of Common Stock, and if the shares are not
publicly traded, he will have the right for limited designated periods of time
to require that either the Company or the ESOP repurchase the shares. Under
these circumstances, the ESOP has the first right to repurchase the shares and,
if the ESOP declines, the Company must purchase the shares.
This right to require that either the Company or the ESOP repurchase shares
of Common Stock distributed to a terminated participant is called a "put
option," and if the participant elects to exercise the put option, the purchase
price for the shares may, at the election of the Company or the ESOP, whichever
is the purchaser, be paid with an installment note ("Note"). The ESOP currently
is obligated under six such Notes, executed in favor of terminated participants
who sold shares of Common Stock to the ESOP upon exercise of a put option. In
each case, the shares purchased by the ESOP were pledged to each respective
former participant as security for the payment of the ESOP Note and the shares
were held in an unallocated suspense account pending payment of the Note
pursuant to the terms of the ESOP. As the ESOP Trustee repays the Note each year
with contributions made to the ESOP by the Company and the subsidiaries, a
portion of the shares held in the suspense account are released and allocated to
ESOP participants in the same manner as other cash contributions are allocated.
The number of shares released each year, in general, bears the same relationship
to the total number of shares held in the suspense account as the principal
portion of the Note repaid for the year bears to the total principal balance of
the Note as of the date the payment is made. Under the terms of the Note, the
ESOP's indebtedness is nonrecourse and, except for the Common Stock pledged as
security, the only assets of the ESOP which can be used to repay the Notes are
contributions made to the ESOP by the Company and the subsidiaries, and earnings
on such contributions.
If the shares of Common Stock distributed to plan participants are publicly
traded, then the foregoing repurchase obligations will not apply, except to the
extent the shares are subject to certain trading limitations, and, for this
reason, the Company believes that the repurchase obligations will terminate upon
the consummation of this offering.
Presently, Company stock held by the ESOP is voted by the Trustee in
accordance with the directions of the Committee (as defined in the ESOP), except
when a vote concerns a corporate matter
64
<PAGE>
involving a merger, consolidation, recapitalization, reclassification,
liquidation, dissolution, sale of substantially all assets of a trade or
business, or other similar transactions. In such an event, the Trustee will vote
Company stock allocated to participants' accounts in accordance with their
instructions. Company stock allocated to participants' accounts for which the
Trustee does not receive voting instructions will be voted by the Trustee, as it
determines, in its sole discretion. Following the consummation of this offering,
the ESOP will be amended to conform with Section 409(e)(2) of the Code, and ESOP
participants will be entitled to direct the Trustee as to the manner in which
all shares allocated to their respective accounts will be voted with respect to
all matters subject to shareholder vote. The Trustee will continue to vote
Company stock held in the suspense account in accordance with the directions of
the Committee.
CERTAIN TRANSACTIONS
The Company completed an offering of Preferred Stock in 1994. As a result of
such offering, Conning & Company (as the direct or indirect general partner of
four investment partnerships), RFE Investment Partners IV, L.P. and Saugatuck
Capital Company acquired beneficial ownership of 25.4%, 12.0% and 12.0%,
respectively, of the Common Stock as of June 30, 1997. See "Principal and
Selling Stockholders". In connection with the Preferred Stock offering, the
Company entered into the Series A Preferred Stock Purchase Agreement (the
"Preferred Stock Purchase Agreement") with the purchasers of the Preferred
Stock. Pursuant to the Preferred Stock Purchase Agreement, among other things,
(i) affiliates of Conning & Company, as purchasers of Preferred Stock, were
granted the right to designate two members of the Company's Board of Directors
and the other purchasers of Preferred Stock, collectively, were granted the
right to designate one member of the Board of Directors (see
"Management--Directors and Executive Officers"); (ii) the purchasers of
Preferred Stock were collectively granted the right to designate one member to
each of the Executive Compensation and Stock Option Committee and Audit
Committee of the Board of Directors; (iii) the purchasers of the Preferred Stock
were granted certain rights of first refusal with respect to issuances of Common
Stock and certain other securities by the Company; and (iv) the purchasers of
the Preferred Stock were granted certain "demand" and "incidental" registration
rights. The provisions of the Preferred Stock Purchase Agreement relating to
Board of Directors and committee membership and rights of first refusal will
terminate as a result of consummation of this offering. See "Shares Eligible for
Future Sale" for a description of the registration rights provisions of the
Preferred Stock Purchase Agreement, which will continue in effect following
consummation of this offering. Conning & Company acted as a placement agent in
connection with the sale of the Preferred Stock, for which it received customary
compensation, including warrants to purchase 27,451 shares of Common Stock at an
exercise price of $17.00 per share, which will be exercised in a cashless
transaction upon consummation of the offering.
Since February 1995, the Company's investment portfolio manager has been
Conning Asset Management, an affiliate of Conning & Company. The Company paid
Conning Asset Management fees for services in such capacity of $119,000,
$146,000 and $81,000 in 1995, 1996 and for the six months ended June 30, 1997,
respectively. In addition, Conning & Company is acting as a representative of
the Underwriters in connection with this offering, for which it will receive
customary underwriting discounts and commissions. See "Underwriting".
The Company believes that the terms of the transactions described above are
no less favorable to the Company than terms that could have been obtained from
unaffiliated third parties.
65
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table, which gives effect to the conversion of all outstanding
shares of Preferred Stock into Common Stock upon the consummation of the
offering, sets forth information as to the ownership of Common Stock as of June
30, 1997, and after giving effect to the sale of the Common Stock offered hereby
by the Company and the Selling Stockholder, by (i) each person who is known to
the Company to own beneficially more than 5% of the outstanding shares of the
Common Stock of the Company, (ii) each director, (iii) each Named Executive
Officer, (iv) executive officers and directors as a group and (v) the Selling
Stockholder.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK SHARES OF COMMON
BENEFICIALLY STOCK TO BE
OWNED PRIOR TO SHARES TO BE BENEFICIALLY OWNED
THE OFFERING (1) SOLD AFTER THE OFFERING
---------------------------- ----------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
NAME NUMBER % NUMBER % NUMBER %
- ---------------------------------------- ---------------- ---------- ----------- ---------- ---------------- ----------
NAMED EXECUTIVE OFFICERS AND DIRECTORS
Jeffrey A. Snider ...................... 230,713(2) 10.7% -- --% 230,713 (2) -- %
300 N. Lake Ave., Ste. 300
Pasadena, CA 91101
Andrew M. Slavitt....................... 68,624 (3) 3.5 -- -- 68,624 (3)
James A. Nicholson...................... 91,181 (4) 4.6 -- -- 91,181 (4)
Bradley K Serwin........................ 29,624 (5) 1.5 -- -- 29,624 (5)
Victor Gloria, III...................... 52,847 (6) 2.7 -- -- 52,847 (6)
Jerry M. Miller......................... 8,500 (7) * -- -- 8,500 (7)
Ronald W. Waisner....................... 7,500 (7) * -- -- 7,500 (7)
John B. Clinton......................... 2,000 (8) * -- -- 2,000 (8)
Gerard Vecchio.......................... 2,000 (8) * -- -- 2,000 (8)
Owen S. Crihfield....................... 2,000 (8) * -- -- 2,000 (8)
OTHER BENEFICIAL OWNERS
PAULA Financial and Subsidiaries 547,063 27.9 -- -- 547,063
Employee Stock Ownership Plan(9)......
Conning & Company ...................... 498,040 11) 25.4 -- -- 498,040 11)
City Place II
185 Asylum Street
Hartford, CT 06103
RFE Investment Partners IV, L.P. ....... 237,294 12) 12.0 -- -- 237,294 12)
36 Grove Street
New Canaan, CT 06840
Saugatuck Capital Company .............. 237,294 12) 12.0 -- -- 237,294 10)
One Canterbury Green
Stamford, CT 06901
All executive officers and directors as 492,989 13) 21.3 -- -- 492,989 13)
a group (10 persons)..................
SELLING STOCKHOLDER
Prudential Securities Incorporated...... 54,902 14) 2.9 54,902 100.0 -- --
</TABLE>
- ----------------
* Less than 1%
(1) Such holder directly or indirectly has sole voting and investment power
with respect to the shares listed except for shares allocated to the
employee in the ESOP pursuant to the last allocation of shares in the ESOP
which was December 31, 1996.
(2) Includes (i) options to purchase 200,000 shares of Common Stock and (ii)
513 shares of Common Stock allocated to Mr. Snider in the ESOP with respect
to which he currently has shared voting power, and, upon the consummation
of the offering, will have sole voting power.
(3) Includes (i) options to purchase 67,000 shares of Common Stock and (ii) 124
shares of Common Stock allocated to Mr. Slavitt in the ESOP with respect to
which he currently has shared voting power, and, upon the consummation of
the offering, will have sole voting power.
66
<PAGE>
(4) Includes (i) options to purchase 31,500 shares of Common Stock and (ii)
27,501 shares of Common Stock allocated to Mr. Nicholson in the ESOP with
respect to which he currently has shared voting power, and, upon the
consummation of the offering, will have sole voting power.
(5) Includes (i) options to purchase 28,500 shares of Common Stock and (ii) 124
shares of Common Stock allocated to Mr. Serwin in the ESOP with respect to
which he currently has shared voting power, and, upon the consummation of
the offering, will have sole voting power.
(6) Includes (i) options to purchase 13,600 shares of Common Stock and (ii)
20,311 shares of Common Stock allocated to Mr. Gloria in the ESOP with
respect to which he currently has shared voting power, and, upon the
consummation of the offering, will have sole voting power.
(7) Includes options to purchase 7,500 shares of Common Stock.
(8) Includes options to purchase 2,000 shares of Common Stock. Mr. Crihfield's
options are held of record by Saugatuck Capital Company.
(9) Pursuant to the terms of the ESOP, shares of the ESOP are voted by the
Trustee pursuant to instructions from the PAULA Financial and Subsidiaries
Employee Stock Ownership Plan Administrative Committee. Participants have
limited voting power concerning specified issues set forth in the ESOP with
respect to the shares held in the ESOP.
(10) Represents shares of Preferred Stock. Upon the consummation of the
offering, each share of Preferred Stock will convert into one share of
Common Stock.
(11) Includes warrants to purchase 27,451 shares which will be exercised without
the payment of cash upon consummation of the offering resulting in the
issuance of shares of Common Stock to the holder. Conning Insurance
Capital Limited Partnership II is the owner of 110,588 shares of Preferred
Stock, Conning Insurance Capital International Partners II is the owner of
124,706 shares of Preferred Stock, Conning Insurance Capital Limited
Partnership III is the owner of 193,271 shares of Preferred Stock and
Conning Insurance Capital International Partners III, L.P. is the owner of
42,024 shares of Preferred Stock and Conning Corporation is the owner of
warrants to purchase 27,451 shares of Common Stock. Each of the foregoing
entities is an affiliate of Conning & Company.
(12) Includes options to purchase 2,000 shares of Common Stock.
(13) Includes options to purchase 361,600 shares of Common Stock and 78,573
shares of Common Stock allocated to such executive officers and directors
in the ESOP with respect to which such holders have shared voting power,
and, upon the consummation of the offering, will have sole voting power.
(14) Consists of warrants to purchase 54,902 shares for $17.00 per share.
67
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 15,000,000 shares of
Common Stock, $.01 par value and 5,000,000 shares of preferred stock, $.01 par
value. As of June 30, 1997, 950,488 shares of Common Stock were outstanding and
were held of record by 179 stockholders and 941,177 shares of Preferred Stock
were issued and outstanding and were held of record by six stockholders. The
following statements are summaries of certain provisions relating to the
Company's Common Stock and preferred stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on each matter submitted to a vote of stockholders. In general, the
approval of proposals submitted to a vote of stockholders requires a favorable
vote of either the majority of the voting power of the holders of Common Stock
or the majority of the voting power of the shares represented and voting at a
duly held meeting at which a quorum is present.
Shares of Common Stock do not have cumulative voting rights with respect to
the election of directors.
Holders of Common Stock do not have any preemptive rights or rights to
subscribe for additional securities of the Company. Shares of Common Stock are
not redeemable and there are no sinking fund provisions. The shares of Common
Stock are not convertible into any other series or class of the Company's
securities.
Subject to the preferences applicable to preferred stock outstanding at the
time, holders of shares of Common Stock are entitled to dividends if, when and
as declared by the Board of Directors from funds legally available therefor, and
are entitled, in the event of liquidation, to share ratably in all assets
remaining after payment of liabilities and preferred stock preferences, if any.
PREFERRED STOCK
Upon the consummation of the offering, the Company will have no outstanding
preferred stock, but the Board of Directors of the Company, without further
action by the holders of the Common Stock, is authorized to fix the dividend
rights and terms, conversion or exchange rights, voting rights, redemption
rights and terms, liquidation preferences, sinking fund and any other
designations, powers, rights, preferences, privileges, qualifications,
limitations and restrictions applicable to each series of preferred stock. The
issuance of preferred stock could adversely affect the voting power and other
rights of the holders of Common Stock.
The authority possessed by the Board of Directors to issue preferred stock
could potentially be used to discourage attempts by others to obtain control of
the Company through a merger, tender offer, proxy contest or otherwise by making
such attempts more difficult or more costly to successfully complete. The Board
of Directors may issue preferred stock with voting, dividend or liquidation and
conversion rights that could adversely affect the rights of the holders of
Common Stock. There are no agreements or understandings for the issuance of
preferred stock, and the Board of Directors has no present intention to issue
any preferred stock.
As of June 30, 1997 the Board of Directors had designated one series of
preferred stock, comprised of 941,177 shares of the Preferred Stock, all of
which were outstanding. Each share of the Preferred Stock has a stated value of
$17.00. Upon the consummation of the offering, each share of the Preferred Stock
will, pursuant to the terms of the Series A Preferred Stock Certificate of
Designations, automatically be converted into one share of Common Stock.
68
<PAGE>
CERTAIN CHARTER AND BYLAWS PROVISIONS
The Company's Certificate of Incorporation provides that, subject to the
rights of preferred stockholders to take action by written consent, no action
required to be taken at a meeting of the stockholders may be taken by written
consent, unless the board unanimously consents thereto.
The Company's bylaws provide that the Board be divided into three classes.
Class I Directors serve for a term ending at the first annual meeting held after
the Incorporation Date, Class II Directors serve for a term ending at the second
annual meeting held after the Incorporation Date, and Class III Directors serve
for a term ending at the third annual meeting held after the Incorporation Date.
The Company's bylaws also require stockholders to provide advance notice of any
stockholder nominations for directors and of any business to be brought before
any meeting of stockholders.
CERTAIN PROVISIONS OF DELAWARE LAW
The Company is incorporated under the Delaware General Corporation law (the
"DGCL"). The Company is subject to Section 203 of the DGCL, which, subject to
certain exceptions, restricts certain transactions and "business combinations"
between a Delaware corporation and an "interested stockholder" (defined
generally as any person who beneficially owns 15% or more of the outstanding
voting stock of the Company or any person affiliated with such person), for a
period of three years following the time that such stockholder becomes an
interested stockholder, unless (i) prior to such time the board of directors of
the corporation approved either the business combination or the transaction that
resulted in the stockholder becoming an interested stockholder; (ii) upon
consummation of the transaction that resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (excluding for purposes of determining the number of shares
outstanding those shares owned (x) by persons who are directors and also
officers of the corporation and (y) by employee stock plans in which employee
participants do not have the right to determine confidentially whether shares
held subject to the plan will be tendered in a tender or exchange offer); or
(iii) at or subsequent to such time the business combination is approved by the
board of directors of the corporation and authorized at a meeting of the
stockholders (and not by written consent) by the affirmative vote of at least
66 2/3% of the outstanding voting stock of the corporation that is not owned by
the interested stockholder.
Section 203 and the provisions of the Company's Certificate of Incorporation
and Bylaws described above may make it more difficult for a third party to
acquire, or discourage acquisition bids for, the Company. Section 203 and these
provisions could have the effect of inhibiting attempts to change the membership
of the Company's Board of Directors.
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is .
QUOTATION
The Common Stock will be quoted on the Nasdaq National Market under the
symbol "PFCO".
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 102 of the DGCL authorizes a Delaware corporation to include a
provision in its certificate of incorporation limiting or eliminating the
personal liability of its directors to the corporation and its stockholders for
monetary damages for breach of the directors' fiduciary duty of care. The duty
of care requires that, when acting on behalf of the corporation, directors
exercise an informed business judgment based on all material information
reasonably available to them. Absent the limitations authorized by such
provision, directors are accountable to corporations and their stockholders for
monetary
69
<PAGE>
damages for conduct constituting gross negligence in the exercise of their duty
of care. Although Section 102 of the DGCL does not change a director's duty of
care, it enables corporations to limit available relief to equitable remedies
such as injunction or rescission. The Company's Certificate of Incorporation and
Bylaws include provisions which limit or eliminate the personal liability of its
directors to the fullest extent permitted by Section 102 of the DGCL.
Consequently, a director or officer will not be personally liable to the Company
or its stockholders for monetary damages for breach of fiduciary duty as a
director, except for (i) any breach of the director's duty of loyalty to the
Company or its stockholders, (ii) acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) unlawful
payments of dividends or unlawful stock repurchases, redemptions or other
distributions and (iv) any transaction from which the director derived an
improper personal benefit.
The Company's Certificate of Incorporation and Bylaws also provide, in
effect, that, to the fullest extent and under the circumstances permitted by
Section 145 of the DGCL, the Company will indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he or she is a director or officer of
the Company, or is or was serving at the request of the Company as a director or
officer of another corporation or enterprise. The inclusion of these
indemnification provisions in the Company's Certificate of Incorporation and
Bylaws is intended to enable the Company to attract qualified persons to serve
as directors and officers who might otherwise be reluctant to do so. The Company
may, in its discretion, similarly indemnify its employees and agents.
Depending upon the character of the proceeding, the Company may indemnify
its directors and officers against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
in connection with any action, suit or proceeding if the person indemnified
acted in good faith and in a manner he or she reasonably believed to be in or
not opposed to the best interests of the Company, and, with respect to any
criminal action or proceeding, had no cause to believe his or her conduct was
unlawful. To the extent that a director or officer of the Company has been
successful in the defense of any action, suit or proceeding referred to above,
under the DGCL, the Company would have the obligation to indemnify him or her
against expenses (including attorneys' fees) actually and reasonably incurred in
connection therewith.
In addition, the limited liability provisions in the Certificate of
Incorporation and the indemnification provisions in the Certificate of
Incorporation and Bylaws may discourage stockholders from bringing a lawsuit
against directors for breach of their fiduciary duty (including breaches
resulting from grossly negligent conduct) and may have the effect of reducing
the likelihood of derivative litigation against directors and officers, even
though such an action, if successful, might otherwise have benefited the Company
and its stockholders. Furthermore, a stockholder's investment in the Company may
be adversely affected to the extent the Company pays the costs of settlement and
damage awards against directors and officers of the Company pursuant to the
indemnification provisions in the Company's Bylaws. The limited liability
provisions in the Certificate of Incorporation will not limit the liability of
directors under federal securities laws.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
shares of Common Stock (after giving effect to the conversion of the
Preferred Stock into Common Stock and exercise of outstanding warrants for
Common Stock upon the closing of this offering), shares of which will be
"restricted securities" for purposes of Rule 144 promulgated under the
Securities Act. In addition, the Company intends to file a registration
statement under the Securities Act within 90 days of the date of this Prospectus
to register 375,000 shares of Common Stock reserved for issuance pursuant to the
Plans, and an additional 188,000 shares issuable upon exercise of options issued
outside of the Plans. Shares issued upon exercise of outstanding options and
distributed to participants of the ESOP after the
70
<PAGE>
effective date of such registration statement generally may be sold on the open
market without restriction. See "Management--Stock Incentive Plans".
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are required to be aggregated), including affiliates of the
Company, who has beneficially owned "restricted securities" for at least one
year may sell within any three-month period a number of such shares that does
not exceed the greater of (i) one percent of the total number of outstanding
shares of Common Stock or (ii) the reported average weekly trading volume of the
Common Stock on the Nasdaq National Market during the four calendar weeks
preceding the date on which notice of the sale is filed with the Commission.
Sales under Rule 144 are also subject to certain manner-of-sale provisions or
notice requirements and the availability of current public information about the
Company. A person who is not deemed to have been an "affiliate" of the Company
at any time during the 90 days preceding a sale, and who has beneficially owned
"restricted securities" for at least two years, may sell such shares under Rule
144(k) without regard to the volume limitations, manner-of-sale provisions or
notice requirements. Sales of "restricted securities" by affiliates, even after
a two-year holding period, must continue to be made in brokers' transactions
subject to the volume limitations described above. As defined in Rule 144, an
"affiliate" of an issuer is a person that directly, or indirectly through one or
more intermediaries, controls, or is controlled by, or is under common control
with, such issuer. The above summary of Rule 144 is not intended to be a
complete description of that rule. Substantially all of the shares of Common
Stock outstanding prior to this offering are eligible for sale under Rule 144,
subject to lock-up arrangements with the Underwriters described below, and
547,063 shares which are held by the ESOP may be eligible for resale without
compliance with Rule 144 upon the distribution of such shares to participants in
the ESOP upon termination of employment.
Pursuant to the Preferred Stock Purchase Agreement, the purchasers of the
Preferred Stock were entitled to certain rights with respect to the registration
under the Securities Act of shares of Common Stock issuable upon conversion of
the Preferred Stock and other shares of capital stock acquired by such
purchasers (collectively, the "Registrable Securities"). The Preferred Stock
Purchase Agreement provides that holders of at least 51% of the Registrable
Securities may request that the Company file a registration statement under the
Securities Act with respect to any of the Registrable Securities and, upon such
request, the Company is required to use its best efforts to effect such
registration. The Company is not required to effect more than two such
registrations. In addition, subject to certain exceptions and limitations, if
the Company's proposes to register any of its securities, the Company is
required to notify the holders of Registrable Securities and to include in such
registration some or all of the Registrable Securities which such holders may
request. Shares of Common Stock registered pursuant to the exercise of such
registration rights will be freely salable without restriction.
The Company, its executive officers and directors, the ESOP and certain
other holders (including the holders of % of the Registrable Securities) of
Common Stock, which in the aggregate will hold approximately % of the Common
Stock outstanding after the offering, have agreed that, during the period
beginning from the date of this Prospectus and continuing to and including the
date 180 days after the date of this Prospectus, they will not offer, sell,
contract to sell or otherwise dispose of, or, with certain exceptions, file or
cause to be filed with the Commission a registration statement with respect to,
shares of Common Stock (other than, in the case of the Company, pursuant to
employee stock option plans existing, or on the conversion or exchange of
convertible or exchangeable securities outstanding, on the date of this
Prospectus and, in the case of the ESOP, distributions of shares to participants
in the ESOP upon termination of such participants' employment with the Company)
or any securities of the Company which are substantially similar to the shares
of Common Stock or which are convertible into or exchangeable for shares of
Common Stock or securities which are substantially similar to the shares of
Common Stock without the prior written consent of the representatives of the
Underwriters, except for the shares of Common Stock offered in connection with
the offering.
71
<PAGE>
Prior to this offering, there has been no public market for the Common
Stock. No prediction can be made as to the effect, if any, that future sales of
shares pursuant to a future registration statement or Rule 144 or the
availability of shares for future sale will have on the market price of the
Common Stock prevailing from time to time. Sales of substantial amounts of the
Common Stock in the public market or the prospect of such sales could adversely
affect prevailing market prices.
VALIDITY OF COMMON STOCK
The validity of the Common Stock offered hereby will be passed upon for the
Company by Gibson, Dunn & Crutcher LLP, Los Angeles, California, and for the
Underwriters by Sullivan & Cromwell, Los Angeles, California.
EXPERTS
The consolidated financial statements and schedules of the Company as of
December 31, 1995 and 1996, and for each of the years in the three-year period
ended December 31, 1996, included herein and elsewhere in the Registration
Statement have been included herein and in the Registration Statement in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein and upon the authority of such firm as
experts in accounting and auditing.
72
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Independent Auditors' Report.............................................................................. F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 and June 30, 1997 (unaudited)................ F-3
Consolidated Statements of Income for each of the three years in the period ended December 31, 1996 and
the six months ended June 30, 1996 and 1997 (unaudited)................................................. F-5
Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December
31, 1996 and the six months ended June 30, 1996 and 1997 (unaudited).................................... F-6
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1996
and the six months ended June 30, 1996 and 1997 (unaudited)............................................. F-7
Notes to Consolidated Financial Statements as of December 31, 1995 and 1996 and June 30, 1997
(unaudited)............................................................................................. F-8
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
When the transactions referred to in Note 8 of the notes to the consolidated
financial statements have been consummated, we will be in a position to render
the following report.
/s/ KPMG Peat Marwick LLP
The Board of Directors
PAULA Financial:
We have audited the accompanying consolidated balance sheets of PAULA
Financial and subsidiaries as of December 31, 1995 and 1996 and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the years in the three-year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of PAULA
Financial and subsidiaries as of December 31, 1995 and 1996 and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996 in conformity with generally accepted accounting
principles.
Also, in our opinion, the information set forth under the captions "Income
Statement Data" and "Balance Sheet Data" in the selected consolidated financial
data as of December 31, 1995 and 1996 and for each of the years in the
three-year period ended December 31, 1996, appearing on pages 19 and 20, is
fairly stated, in all material respects, in relation to the consolidated
financial statements from which it has been derived.
Los Angeles, California
July 31, 1997
F-2
<PAGE>
PAULA FINANCIAL AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1996
----------- --------- JUNE 30,
1997
-----------
(UNAUDITED)
<S> <C> <C> <C>
Investments:
Fixed maturities, available for sale, at market (amortized cost $78,694,
$80,252 and $85,485 (unaudited) at December 31, 1995 and 1996 and June
30, 1997, respectively)................................................ $ 81,053 81,371 86,605
Preferred stock, at market (cost $1,014 and $2,007 (unaudited) at
December 31, 1996 and June 30, 1997, respectively)..................... -- 1,033 2,045
Common stock, at market (cost $734 at December 31, 1995 and 1996 and $734
(unaudited) at June 30, 1997).......................................... 690 777 884
Invested cash, at cost (approximates market)............................. 2,248 3,611 3,845
----------- --------- -----------
Total investments.................................................... 83,991 86,792 93,379
----------- --------- -----------
Cash, unrestricted......................................................... 1,294 6,264 4,734
Cash, restricted........................................................... 3,117 832 1,908
Accrued investment income.................................................. 1,559 1,483 1,492
Receivables:
Accounts receivable, net of allowance for uncollectible accounts ($358,
$500 and $525 (unaudited) at December 31, 1995 and 1996 and June 30,
1997, respectively).................................................... 5,369 6,274 11,775
Unbilled premiums........................................................ 5,234 5,279 7,750
Reinsurance recoverable on paid losses and loss adjustment expenses...... 144 172 61
Reinsurance recoverable on unpaid losses and loss adjustment expenses.... 6,775 6,427 6,437
Income taxes recoverable................................................. 2,051 432 2,011
Other.................................................................... 197 317 353
----------- --------- -----------
Total receivables.................................................... 19,770 18,901 28,387
----------- --------- -----------
Property and equipment, at cost:
Office furniture, fixtures and equipment................................. 5,989 6,668 7,065
Automobiles.............................................................. 636 590 590
Leasehold improvements................................................... 203 211 220
----------- --------- -----------
6,828 7,469 7,875
Less accumulated depreciation............................................ (4,541) (5,403) (5,654)
----------- --------- -----------
Net property and equipment........................................... 2,287 2,066 2,221
----------- --------- -----------
Other assets............................................................... 529 2,077 4,118
Excess of cost over net assets acquired, net............................... 2,198 1,883 1,652
Deferred income taxes...................................................... 4,161 4,829 4,029
----------- --------- -----------
$ 118,906 125,127 141,920
----------- --------- -----------
----------- --------- -----------
</TABLE>
(Continued)
F-3
<PAGE>
PAULA FINANCIAL AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1996
----------- --------- JUNE 30,
1997
-----------
(UNAUDITED)
<S> <C> <C> <C>
Unpaid losses and loss adjustment expenses................................. $ 57,049 55,720 64,972
Unearned premiums.......................................................... 4,609 10,655 13,364
Accrued policyholder dividends............................................. 5,008 3,981 3,586
Due to underwriters and assureds........................................... 4,938 2,176 3,605
Accounts payable and accrued expenses...................................... 2,673 3,891 5,112
Notes payable.............................................................. 5,302 3,789 2,107
Note payable to bank....................................................... 5,522 7,490 9,361
Obligation on stock held by ESOP........................................... 8,200 11,449 11,495
----------- --------- -----------
93,301 99,151 113,602
----------- --------- -----------
Stockholders' equity:
Series A Preferred Stock, convertible, redeemable after December 31,
1998, $0.01 par value. Authorized 5,000,000 shares; issued 941,177
shares at December 31, 1995 and 1996 and June 30, 1997 (unaudited)..... 14,905 14,905 14,905
Common stock, $0.01 par value. Authorized 15,000,000 shares; issued
1,133,195 shares, 1,083,728 shares and 1,016,537 shares (unaudited) at
December 31, 1995 and 1996 and June 30, 1997, respectively............. 11 11 10
Additional paid-in capital............................................... 1,414 1,748 1,724
Retained earnings........................................................ 20,724 23,176 23,994
Net unrealized gain on investments....................................... 1,528 778 862
----------- --------- -----------
38,582 40,618 41,495
Less:
Treasury stock, at cost (198,147 shares, 132,098 shares and 66,049
shares (unaudited) at December 31, 1995 and 1996 and June 30, 1997,
respectively)........................................................ (4,458) (2,972) (1,486)
Obligation on stock held by ESOP....................................... (8,200) (11,449) (11,495)
Guarantee of notes payable of ESOP..................................... (319) (221) (196)
----------- --------- -----------
Net stockholders' equity............................................. 25,605 25,976 28,318
Commitments and contingencies
----------- --------- -----------
$ 118,906 125,127 141,920
----------- --------- -----------
----------- --------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
PAULA FINANCIAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEARS ENDED DECEMBER 31, 30,
------------------------------------- ------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Income:
Premiums earned:
Workers' compensation.................... $ 50,977 44,224 54,563 21,751 41,303
Group medical and life................... 312 307 941 471 475
Commissions................................ 4,299 3,964 4,213 2,061 1,716
Net investment income...................... 4,536 4,817 4,701 2,322 2,499
Net realized investment gains.............. -- 37 444 427 --
Other...................................... 1,712 1,569 896 514 347
----------- ----------- ----------- ----------- -----------
61,836 54,918 65,758 27,546 46,340
----------- ----------- ----------- ----------- -----------
Expenses:
Losses and loss adjustment expenses
incurred................................. 28,618 29,363 33,900 13,937 28,447
Dividends provided for policyholders....... 6,221 3,438 1,628 620 309
Operating.................................. 20,720 22,608 25,480 10,484 14,752
----------- ----------- ----------- ----------- -----------
55,559 55,409 61,008 25,041 43,508
----------- ----------- ----------- ----------- -----------
Income (loss) before income tax
expense (benefit).......................... 6,277 (491) 4,750 2,505 2,832
Income tax expense (benefit)................. 1,572 (791) 827 443 538
----------- ----------- ----------- ----------- -----------
Net income........................... $ 4,705 300 3,923 2,062 2,294
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Earnings per share........................... $ 2.39 0.15 1.95 1.05 1.14
Weighted average shares outstanding.......... 1,972,055 1,939,884 2,007,236 1,969,542 2,005,569
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
PAULA FINANCIAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SERIES A PREFERRED
STOCK COMMON STOCK
---------------------- ------------------------ ADDITIONAL
NUMBER OF BOOK NUMBER OF PAID IN RETAINED
SHARES VALUE SHARES BOOK VALUE CAPITAL EARNINGS
----------- --------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993.................. $ 1,765,419 $ 18 265 28,193
Net income.................................... 4,705
Issuance of preferred stock................... 941,177 14,905
Retirement of common stock.................... (622,647) (6) (86)
Issuance of common stock...................... 30,000 510 (10,492)
Cumulative effect of change in accounting, net
of taxes....................................
Net change in unrealized gain on investments
(net of tax)................................
Change in obligation of stock held by ESOP....
Change in guarantee of notes payable of ESOP..
----------- --------- ----------- --- ----- -----------
Balance at December 31, 1994.................. 941,177 14,905 1,172,772 12 689 22,406
----------- --------- ----------- --- ----- -----------
Net income.................................... 300
Restricted stock grants....................... 14,350 259
Restricted stock forfeitures.................. (4,750) (86)
Retirement of common stock.................... (84,908) (1) (12) (1,982)
Issuance of common stock...................... 35,731 564
Net change in unrealized gain on investments
(net of tax)................................
Repurchase of common stock....................
Change in obligation of stock held by ESOP....
Change in guarantee of notes payable of ESOP..
----------- --------- ----------- --- ----- -----------
Balance at December 31, 1995.................. 941,177 14,905 1,133,195 11 1,414 20,724
----------- --------- ----------- --- ----- -----------
Net income.................................... 3,923
Restricted stock grants....................... 11,250 177
Restricted stock forfeitures.................. (700) (12)
Retirement of common stock.................... (66,049) (10) (1,471)
Issuance of common stock...................... 6,032 179
Net change in unrealized gain on investments
(net of tax)................................
Change in obligation of stock held by ESOP....
Change in guarantee of notes payable of ESOP..
----------- --------- ----------- --- ----- -----------
Balance at December 31, 1996.................. 941,177 14,905 1,083,728 11 1,748 23,176
----------- --------- ----------- --- ----- -----------
Net income.................................... 2,294
Restricted stock forfeitures.................. (100) (2)
Retirement of common stock.................... (67,719) (1) (36)
Issuance of common stock...................... 628 14
Retirement of common stock.................... (1,476)
Net change in unrealized gain on investments
(net of tax)................................
Retirement of common stock....................
Change in obligation of stock held by ESOP....
Change in guarantee of notes payable of ESOP..
----------- --------- ----------- --- ----- -----------
Balance at June 30, 1997...................... 941,177 $ 14,905 1,016,537 $ 10 1,724 23,994
----------- --------- ----------- --- ----- -----------
----------- --------- ----------- --- ----- -----------
<CAPTION>
NET UNREALIZED OBLIGATION ON GUARANTEE OF NET
GAIN (LOSS) ON TREASURY STOCK HELD BY NOTES PAYABLE OF STOCKHOLDERS'
INVESTMENTS STOCK ESOP ESOP EQUITY
----------------- ----------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993.................. 47 (15,026) (392) 13,105
Net income.................................... 4,705
Issuance of preferred stock................... 14,905
Retirement of common stock.................... (92)
Issuance of common stock...................... (9,982)
Cumulative effect of change in accounting, net
of taxes.................................... 931 931
Net change in unrealized gain on investments
(net of tax)................................ (1,599) (1,599)
Change in obligation of stock held by ESOP.... (49) (49)
Change in guarantee of notes payable of ESOP.. 4,989 4,989
------ ----------- ------- --- -------
Balance at December 31, 1994.................. (621) -- (10,037) (441) 26,913
------ ----------- ------- --- -------
Net income.................................... 300
Restricted stock grants....................... 259
Restricted stock forfeitures.................. (86)
Retirement of common stock.................... (1,995)
Issuance of common stock...................... 564
Net change in unrealized gain on investments
(net of tax)................................ 2,149 2,149
Repurchase of common stock.................... (4,458) (4,458)
Change in obligation of stock held by ESOP.... 1,837 1,837
Change in guarantee of notes payable of ESOP.. 122 122
------ ----------- ------- --- -------
Balance at December 31, 1995.................. 1,528 (4,458) (8,200) (319) 25,605
------ ----------- ------- --- -------
Net income.................................... 3,923
Restricted stock grants....................... 177
Restricted stock forfeitures.................. (12)
Retirement of common stock.................... 1,486 5
Issuance of common stock...................... 179
Net change in unrealized gain on investments
(net of tax)................................ (750) (750)
Change in obligation of stock held by ESOP.... (3,249) (3,249)
Change in guarantee of notes payable of ESOP.. 98 98
------ ----------- ------- --- -------
Balance at December 31, 1996.................. 778 (2,972) (11,449) (221) 25,976
------ ----------- ------- --- -------
Net income.................................... 2,294
Restricted stock forfeitures.................. (2)
Retirement of common stock.................... (37)
Issuance of common stock...................... 14
Retirement of common stock.................... (1,476)
Net change in unrealized gain on investments
(net of tax)................................ 84 84
Retirement of common stock.................... 1,486 1,486
Change in obligation of stock held by ESOP.... (46) (46)
Change in guarantee of notes payable of ESOP.. 25 25
------ ----------- ------- --- -------
Balance at June 30, 1997...................... 862 (1,486) (11,495) (196) 28,318
------ ----------- ------- --- -------
------ ----------- ------- --- -------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
PAULA FINANCIAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------- ----------------------------
1994 1995 1996 1996 1997
--------- --------- --------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.............................................. $ 4,705 300 3,923 2,062 2,294
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization......................... 981 1,357 1,509 703 621
Amortization of fixed maturity premium, net........... 1,322 965 797 436 326
(Gain) loss on sale of property and equipment......... 48 37 (12) 6 13
Gain on sales and calls of equity and fixed
maturities.......................................... -- (37) (444) (427) --
(Increase) decrease in receivables.................... (2,986) (3,888) 946 (1,493) (9,495)
(Increase) decrease in deferred taxes................. (439) 799 (282) (35) 757
Increase (decrease) in unpaid losses and loss
adjustment expenses................................. (2,156) (3,424) (1,328) (1,452) 9,252
Increase (decrease) in accrued policyholder
dividends........................................... (297) 69 (1,027) (425) (395)
Increase (decrease) in accounts payable and accrued
expenses............................................ 948 1,095 (1,544) (1,628) 2,649
Increase in unearned premiums......................... 251 395 6,046 4,600 2,709
Other, net............................................ 181 72 80 (175) (637)
--------- --------- --------- ------------- -------------
Net cash provided by (used in) operating
activities...................................... 2,558 (2,260) 8,664 2,172 8,094
--------- --------- --------- ------------- -------------
Cash flows from investing activities:
Proceeds from sale of common stock...................... 586 -- -- -- --
Proceeds from sale of available for sale fixed
maturities............................................ 1,591 22,615 17,236 12,547 --
Proceeds from maturities and calls of available for sale
fixed maturities...................................... 4,500 454 7,930 800 4,494
Proceeds from maturities and calls of held to maturity
fixed maturities...................................... 4,740 -- -- -- --
Proceeds from sale of property and equipment............ 176 139 146 65 (29)
Purchase of available for sale common stock............. (479) -- -- -- --
Purchase of available for sale preferred stock.......... -- -- (1,014) -- (2,183)
Purchase of available for sale fixed maturities......... (7,841) (21,700) (26,456) (14,169) (10,152)
Purchase of held to maturity fixed maturities........... (6,103) -- -- -- --
Purchase of property and equipment...................... (1,172) (1,138) (1,029) (252) (588)
Purchase of other assets................................ -- -- (703) -- --
Purchase of insurance agency............................ (1,691) (65) (38) (100) (20)
--------- --------- --------- ------------- -------------
Net cash provided by (used in) investing
activities...................................... (5,693) 305 (3,928) (1,109) (8,478)
--------- --------- --------- ------------- -------------
Cash flows from financing activities:
Borrowings under line of credit agreement, net.......... 150 3,122 1,968 2,118 1,871
Payments on notes payable............................... (289) (1,054) (1,782) (1,630) (1,682)
Issuance of notes payable............................... 926 214 269 -- --
Proceeds from sale of preferred stock................... 14,905 -- -- -- --
Sale of common stock.................................... 510 4 343 -- 14
Retirement of common stock.............................. (10,585) (1,994) (1,486) (10) (39)
--------- --------- --------- ------------- -------------
Net cash provided by (used in) financing
activities...................................... 5,617 292 (688) 478 164
--------- --------- --------- ------------- -------------
Net increase (decrease) in cash and invested
cash............................................ 2,482 (1,663) 4,048 1,541 (220)
Cash and invested cash at beginning of period............. 5,840 8,322 6,659 6,659 10,707
--------- --------- --------- ------------- -------------
Cash and invested cash at end of period................... $ 8,322 6,659 10,707 8,200 10,487
--------- --------- --------- ------------- -------------
--------- --------- --------- ------------- -------------
Supplemental schedule of noncash financing activities:
In 1995, the Company purchased common stock from the retiring chairman through the issuance of a note payable in the
amount of $4,458 (see note 8).
In 1995, the Company granted to employees 14,350 shares of restricted common stock for a total value of $259. Also in
1995, 4,750 shares were forfeited at a value of $86 (see note 9).
In November 1995, the Company acquired Desert Benefits, Inc. for a total purchase price of $700. Common stock was
issued to settle $560 of the purchase price (see note 12).
In 1996, the Company granted to employees 11,250 shares of restricted common stock for a total value of $177. Also in
1996, 700 shares were forfeited at a value of $12 (see note 9).
In 1996, the Company purchased Guinn Sinclair Insurance Services for a total purchase price of $221. Common stock was
issued to settle $176 of the purchase price (see note 12).
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
PAULA FINANCIAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996 AND JUNE 30, 1997 (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF OPERATIONS
PAULA Financial and subsidiaries (collectively referred to as the Company)
is an integrated insurance organization specializing in the production,
underwriting and servicing of workers' compensation and accident and health
insurance for agribusiness clients in California, Arizona, Oregon, Idaho,
Alaska, Texas and Florida. For the year ended December 31, 1996, 66% of premiums
earned were generated in California, and Arizona accounted for 22% of premiums
earned. For the six months ended June 30, 1997, California, Arizona and Oregon
accounted for 69%, 15% and 12% (unaudited), respectively, of premiums earned.
The Company operates from many offices located throughout prime agricultural
areas and places coverage with its insurance company subsidiaries and
nonaffiliated insurance companies. The Company has recently obtained a license
in the state of New Mexico.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
PAULA Financial and its wholly owned subsidiaries. The principal subsidiaries
are: Pan American Underwriters, Inc., Pan American Underwriters Insurance Agents
and Brokers, Inc., Agri-Comp Insurance Agency, Inc. and PAULA Trading Company
Insurance Agents and Brokers, Inc. (insurance brokerages); Pan Pacific Benefit
Administrators, Inc. (third-party administration operation); PAULA Mexico S.A.
de C.V.; PAULA Insurance Company (casualty insurance); and PAULA Assurance
Company (group accident and health and life insurance).
All significant intercompany balances and transactions have been eliminated
in consolidation.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities as of the
date of the consolidated financial statements and revenues and expenses for the
period. Actual results could differ significantly from those estimates.
The unaudited consolidated financial statements as of and for the six months
ended June 30, 1996 and 1997 include, in the opinion of management, all
adjustments (consisting only of normal recurring accruals) necessary for a fair
presentation of the information for such periods.
The results of operations for the six months ended June 30, 1997 are not
necessarily indicative of the results to be expected for the full year.
INVESTMENTS AND CASH
At December 31, 1995 and 1996 and June 30, 1997, the entire investment
portfolio is classified as available-for-sale and is reflected at estimated fair
value with unrealized gains and losses recorded as a separate component of
stockholders' equity, net of related deferred income taxes. The premium and
discount on fixed maturities and collateralized mortgage obligations are
amortized using the scientific method. Amortization and accretion of premiums
and discounts on collateralized mortgage obligations are adjusted for principal
paydowns and changes in expected maturities. Investments in which the decline in
market value is deemed other than temporary are reduced to the estimated
realizable value through a charge to income.
F-8
<PAGE>
PAULA FINANCIAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
On January 1, 1994, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (SFAS 115). At adoption, the Company's portfolio was
divided between the held to maturity and available-for-sale classifications. The
impact of adoption of SFAS 115 was a net unrealized gain on investments of $931
in January 1994, net of taxes of $479.
On November 21, 1995, the Company transferred its entire held-to-maturity
portfolio to available-for-sale. The amortized cost at the transfer date was
$37,508. The transfer resulted in an unrealized gain of $396, net of the tax
impact. The transfer was made in accordance with implementation guidance
provided in the Financial Accounting Standards Board's Special Report, "A Guide
to Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities."
Invested cash consists primarily of commercial paper.
Realized gains and losses on sales of investments are computed on the
specific-identification basis.
Restricted cash consists of premiums collected by the insurance brokerage
subsidiaries but not yet remitted to insurance companies which is restricted as
to use by law in the states in which the brokerage subsidiaries operate.
For purposes of cash flow disclosure, cash and invested cash is defined as
cash and invested cash that have original maturities of less than three months.
REVENUE RECOGNITION
Premiums are earned by the insurance subsidiaries on a monthly pro rata
basis over the terms of the policies. Commission income is recorded on the
effective date of the policy or the billing date, whichever is later. Contingent
commissions are recorded when ascertained.
PROPERTY AND EQUIPMENT
Depreciation and amortization is provided over the estimated useful lives of
the respective assets, primarily using the modified accelerated cost recovery
system (which approximates the double-declining-balance method). Principal
estimated useful lives used in computing the depreciation provisions are five
years for automobiles and five to seven years for furniture and equipment.
Leasehold improvements are depreciated on a straight-line basis over the
term of the lease or the estimated useful life of the improvement if less than
the lease term.
EXCESS OF COST OVER NET ASSETS ACQUIRED
Excess of cost over net assets acquired is amortized on a straight-line
basis over seven years. The Company assesses the recoverability of this
intangible asset by determining whether the amortization of the balance over its
remaining life can be recovered through the undiscounted future operating cash
flows of the acquired operation. Accumulated amortization totaled $397, $766 and
$957 (unaudited) at December 31, 1995 and 1996, and June 30, 1997, respectively.
F-9
<PAGE>
PAULA FINANCIAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
The liability for unpaid losses and loss adjustment expenses represents (a)
case basis estimates of reported losses and loss adjustment expenses and (b)
estimates based on past experience of unreported losses and loss adjustment
expenses. Management believes that the provisions for losses and loss adjustment
expenses are adequate to cover the net cost of incurred losses and loss
adjustment expenses; however, the liability is by necessity based on estimates,
and accordingly, there can be no assurance that the ultimate liability will not
differ from such estimates.
There is a high level of uncertainty inherent in the evaluation of the
liability for unpaid losses and loss adjustment expenses. The ultimate costs of
such claims are dependent upon future events, the outcomes of which are affected
by many factors. Loss reserving procedures and settlement philosophy, current
and perceived social and economic factors, inflation, current and future court
rulings and jury attitudes, and many other economic, scientific, legal,
political and social factors can all have significant effects on the ultimate
costs of claims. Changes in Company operations and management philosophy may
also cause actual developments to vary from the past.
POLICYHOLDER DIVIDENDS
The insurance subsidiaries underwrite workers' compensation, accident and
health and life insurance policies. Participating workers' compensation policies
represented approximately 81%, 89%, 84% and 85% (unaudited) of net written
premium for the years ended December 31, 1994, 1995 and 1996, and the six months
ended June 30, 1997, respectively. Dividends are recorded as a liability based
on estimates of ultimate amounts expected to be declared by the insurance
subsidiaries' Boards of Directors.
INCOME TAXES
The Company accounts for income taxes under the asset and liability method.
Accordingly, deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of financial instruments are estimates of the fair values at
a specific point in time using appropriate valuation methodologies. These
estimates are subjective in nature and involve uncertainties and significant
judgment in the interpretation of current market data. Therefore, the fair
values presented are not necessarily indicative of amounts the Company could
realize or settle currently. The Company does not necessarily intend to dispose
of or liquidate such instruments prior to maturity.
The fair values of notes payable and note payable to bank are estimated
using discounted cash flow analyses based on current market interest rates. The
estimated fair values approximate the related carrying values.
F-10
<PAGE>
PAULA FINANCIAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
EARNINGS PER SHARE (EPS)
The EPS calculations for the years ended December 31, 1994, 1995 and 1996
and the six months ended June 30, 1996 and 1997 were based upon the weighted
average number of shares of common stock outstanding adjusted for the effect of
convertible securities, options and warrants considered to be common stock
equivalents and options issued since August 1996 pursuant to Staff Accounting
Bulletin No. 83. Stock options and warrants are considered to be common stock
equivalents, except when their effect is antidilutive.
SUPPLEMENTAL INFORMATION
The June 30, 1996 information presented in these consolidated financial
statements is for an unaudited interim period which is presented for comparative
purposes only.
(2) INVESTMENTS
Investments in fixed maturities are all held in investment grade securities.
Fair values were obtained from published securities quotation services.
F-11
<PAGE>
PAULA FINANCIAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(2) INVESTMENTS (Continued)
FIXED MATURITIES
The amortized cost and estimated fair value of investments in fixed
maturities classified as available for sale at December 31, 1995 and 1996 and
June 30, 1997 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of U.S. Government
corporations and agencies..................................... $ 20,248 588 (11) 20,825
Obligations of states and political subdivisions................ 50,366 1,254 (1) 51,619
Corporate securities............................................ 8,080 529 -- 8,609
----------- ----- --- -----------
Total....................................................... $ 78,694 2,371 (12) 81,053
----------- ----- --- -----------
----------- ----- --- -----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of U.S. Government
corporations and agencies..................................... $ 16,619 207 (27) 16,799
Obligations of states and political subdivisions................ 47,238 798 (28) 48,008
Corporate securities............................................ 9,370 193 (3) 9,560
Collateralized mortgage obligations............................. 7,025 2 (23) 7,004
----------- ----- --- -----------
Total....................................................... $ 80,252 1,200 (81) 81,371
----------- ----- --- -----------
----------- ----- --- -----------
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997 (UNAUDITED)
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ----------- --------------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of U.S. Government
corporations and agencies..................................... $ 13,676 109 25 13,761
Obligations of states and political subdivisions................ 54,957 915 12 55,860
Corporate securities............................................ 9,215 155 6 9,364
Collateralized mortgage obligations............................. 7,637 5 21 7,620
--
----------- ----- -----------
Total....................................................... $ 85,485 1,184 64 86,605
--
--
----------- ----- -----------
----------- ----- -----------
</TABLE>
F-12
<PAGE>
PAULA FINANCIAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(2) INVESTMENTS (Continued)
The amortized cost and estimated fair value of fixed maturities classified
as available for sale at December 31, 1996 and June 30, 1997 by the earlier of
the pre-escrowed date or contractual maturity are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
----------- -----------
<S> <C> <C>
Due in one year or less.............................................. $ 13,516 13,623
Due after one year through five years................................ 28,898 29,286
Due after five years through ten years............................... 30,813 31,458
Collateralized mortgage obligations.................................. 7,025 7,004
----------- -----------
$ 80,252 81,371
----------- -----------
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
(UNAUDITED)
------------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
----------- -----------
<S> <C> <C>
Due in one year or less.............................................. $ 10,954 10,993
Due after one year through five years................................ 48,191 48,979
Due after five years through ten years............................... 18,703 19,013
Collateralized mortgage obligations.................................. 7,637 7,620
----------- -----------
$ 85,485 86,605
----------- -----------
----------- -----------
</TABLE>
Fixed maturities with a book value of $66,955 and $67,769 (unaudited) were
on deposit with various regulatory authorities as of December 31, 1996 and June
30, 1997, respectively, as required.
PREFERRED STOCK
Unrealized investment gains (losses) on preferred stock at December 31, 1995
and 1996 and June 30, 1997 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------- JUNE 30
1995 1996 1997
--------- ----- -----------------
(UNAUDITED)
<S> <C> <C> <C>
Gross unrealized gains........................................... $ -- 19 38
Gross unrealized losses.......................................... -- -- --
-- --
---------
$ -- 19 38
-- --
-- --
---------
---------
</TABLE>
F-13
<PAGE>
PAULA FINANCIAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(2) INVESTMENTS (Continued)
COMMON STOCK
Unrealized investment gains (losses) on common stock at December 31, 1995
and 1996 and June 30, 1997 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------- JUNE 30
1995 1996 1997
--------- ----- ---------------
(UNAUDITED)
<S> <C> <C> <C>
Gross unrealized gains.......................................... $ 27 72 172
Gross unrealized losses......................................... (71) (29) (22)
--------- --- ---
$ (44) 43 150
--------- --- ---
--------- --- ---
</TABLE>
NET INVESTMENT INCOME
Net investment income is summarized as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest......................................... $ 4,669 4,963 4,839 2,382 2,518
Dividends........................................ 87 51 62 31 74
--------- --------- --------- --------- ---------
4,756 5,014 4,901 2,413 2,592
Less investment expenses......................... (220) (197) (200) (91) (93)
--------- --------- --------- --------- ---------
$ 4,536 4,817 4,701 2,322 2,499
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
An affiliate of a significant holder of the Company's preferred stock also
acts as the Company's investment advisor. Fees paid for such investment services
totaled $119 and $146 in 1995 and 1996, respectively. For the six months ended
June 30, 1996 and 1997, such fees totaled $74 (unaudited) and $81 (unaudited),
respectively.
NET REALIZED INVESTMENT GAINS (LOSSES)
Net realized investment gains (losses) are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS
ENDED JUNE 30,
----------------------------------- ------------------------
1994 1995 1996 1996 1997
--------- ----- ----- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Fixed maturities:
Gross realized gains............................ $ 16 81 449 429 --
Gross realized losses........................... -- (44) (5) (2) --
Common stock:
Gross realized gains............................ 23 -- -- -- --
Gross realized losses........................... (39) -- -- -- --
--
--- --- --- ---
$ -- 37 444 427 --
--
--
--- --- --- ---
--- --- --- ---
</TABLE>
F-14
<PAGE>
PAULA FINANCIAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(3) UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
Activity in the liability for unpaid losses and loss adjustment expenses is
summarized as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period........ $ 62,629 60,473 57,049 57,049 55,720
Less reinsurance recoverable on
unpaid losses and loss adjustment
expenses.......................... 5,402 6,886 6,775 6,775 6,427
--------- --------- --------- --------- ---------
Net balance at beginning of period.... 57,227 53,587 50,274 50,274 49,293
--------- --------- --------- --------- ---------
Incurred related to:
Current period...................... 32,677 33,261 36,554 16,841 29,245
Prior periods....................... (4,059) (3,898) (2,654) (2,904) (798)
--------- --------- --------- --------- ---------
Total incurred.................... 28,618 29,363 33,900 13,937 28,447
--------- --------- --------- --------- ---------
Paid related to:
Current period...................... 10,455 10,870 13,143 3,862 5,130
Prior periods....................... 21,803 21,806 21,738 12,487 14,075
--------- --------- --------- --------- ---------
Total paid........................ 32,258 32,676 34,881 16,349 19,205
--------- --------- --------- --------- ---------
Net balance at end of period.......... 53,587 50,274 49,293 47,862 58,535
Plus reinsurance recoverable on
unpaid losses and loss adjustment
expenses.......................... 6,886 6,775 6,427 6,427 6,437
--------- --------- --------- --------- ---------
Balance at end of period.............. $ 60,473 57,049 55,720 54,289 64,972
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The favorable development in the liability for unpaid losses and loss
adjustment expenses for prior years relates principally to reduced claim
frequency and stable severity.
(4) NOTES PAYABLE
The Company has issued notes payable to current and retiring employees for
repurchase of Company common stock, which are due in annual installments with
initial terms ranging from one to six years. Interest, expensed monthly, is
adjusted to prime at various specified dates each year.
F-15
<PAGE>
PAULA FINANCIAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(4) NOTES PAYABLE (Continued)
A summary of notes payable at December 31, 1995 and 1996 and June 30, 1997
is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------- JUNE 30,
1995 1996 1997
--------- --------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Notes payable to former stockholders (interest 8.75% at December 31, 1995 and
1996, and 8.25% (unaudited) at June 30, 1997 due at various dates through
January 1999), secured by 210,017 shares and 141,594 shares of the Company's
common stock at December 31, 1995 and 1996, respectively, and 73,171 shares
(unaudited) at June 30, 1997.................................................... $ 4,672 3,143 1,614
Notes payable to former stockholders (interest at 8.5% and 8.25% at December 31,
1995 and 1996, respectively, due at various dates through 1997), unsecured...... 157 51 --
Note payable (interest at 8.75% and 8.25% at December 31, 1995 and 1996,
respectively, and 8.25% (unaudited) at June 30, 1997 due 1998), unsecured....... 154 105 78
Note payable (interest at 0.0% at December 31, 1996 and June 30, 1997
(unaudited), due 1999) unsecured................................................ -- 269 219
Notes payable of employee stock ownership plan (interest at 8.75% and 8.25% at
December 31, 1995 and 1996, respectively, and 8.25% (unaudited) at June 30, 1997
due March 1999), secured by 26,964 shares and 18,507 shares of the Company's
common stock at December 31, 1995 and 1996, respectively, and 16,374 shares
(unaudited) at June 30, 1997, guaranteed by the Company......................... 319 221 196
--------- --------- -----
$ 5,302 3,789 2,107
--------- --------- -----
--------- --------- -----
</TABLE>
Aggregate annual commitments under notes payable are as follows at December
31, 1996:
<TABLE>
<S> <C>
1997..................................................... $ 1,832
1998..................................................... 1,778
1999..................................................... 136
2000..................................................... 43
-----------
$ 3,789
-----------
-----------
</TABLE>
Aggregate annual commitments under notes payable are as follows at June 30,
1997:
<TABLE>
<CAPTION>
(UNAUDITED)
<S> <C>
1997................................................................... $ 78
1998................................................................... 1,876
1999................................................................... 110
2000................................................................... 43
-----------
$ 2,107
-----------
-----------
</TABLE>
F-16
<PAGE>
PAULA FINANCIAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(4) NOTES PAYABLE (Continued)
Total interest paid by the Company on all notes during the years ended
December 31, 1994, 1995 and 1996 was $188, $419 and $1,300, respectively. Total
interest paid by the Company for the six months ended June 30, 1996 and 1997 was
$677 (unaudited) and $395 (unaudited), respectively.
(5) NOTE PAYABLE TO BANK
At December 31, 1995 and 1996, the Company had an unsecured line of credit
with a commercial bank of $10,500. As of December 31, 1996, the Company had
drawn $7,490 on the line of credit. The interest rate on the line of credit was
based on various indices. The average interest rate at December 31, 1996 was
7.8%. The line of credit required no principal payments during its term and
matured December 31, 1998. The line of credit imposed certain financial
covenants.
On March 31, 1997, the Company entered into a $15,000 unsecured line of
credit with another commercial bank. The line of credit requires no principal
payments during its term and matures December 31, 1999 and, at the Company's
option, converts to a two-year term note. The interest rate on the line of
credit is based on various indices. The line of credit imposes certain financial
covenants. On March 31, 1997, the Company drew on the line of credit to repay in
full and terminate the first line of credit.
As of June 30, 1997, the Company had an outstanding balance of $9,361
(unaudited) on the line of credit. The average interest rate at June 30, 1997
was 7.6% (unaudited).
F-17
<PAGE>
PAULA FINANCIAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(6) INCOME TAXES
The Company and its subsidiaries file a consolidated Federal income tax
return. Income tax expense (benefit) for the years ended December 31, 1994, 1995
and 1996 is shown as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, FEDERAL STATE TOTAL
- ---------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
1994:
Current....................................................... $ 1,698 (7) 1,691
Deferred...................................................... (119) -- (119)
--------- --------- ---------
$ 1,579 (7) 1,572
--------- --------- ---------
--------- --------- ---------
1995:
Current....................................................... $ (1,615) 25 (1,590)
Deferred...................................................... 799 -- 799
--------- --------- ---------
$ (816) 25 (791)
--------- --------- ---------
--------- --------- ---------
1996:
Current....................................................... $ 1,079 30 1,109
Deferred...................................................... (282) -- (282)
--------- --------- ---------
$ 797 30 827
--------- --------- ---------
--------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
- ----------------------------------------------------------------
<S> <C> <C> <C>
1996 (unaudited)
Current....................................................... $ 474 4 478
Deferred...................................................... (35) -- (35)
--------- --------- ---------
$ 439 4 443
--------- --------- ---------
--------- --------- ---------
1997 (unaudited)
Current....................................................... $ (233) 14 (219)
Deferred...................................................... 757 -- 757
--------- --------- ---------
$ 524 14 538
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-18
<PAGE>
PAULA FINANCIAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(6) INCOME TAXES (Continued)
The total tax expense (benefit) is different from the applicable Federal
income tax rate of 34% for the reasons reflected in the following
reconciliation:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31,
JUNE 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Expected tax expense (benefit)......................................... $ 2,134 (167) 1,615 852 963
Municipal bond interest................................................ (615) (688) (782) (417) (417)
Dividends-received deduction........................................... (17) (10) (5) (2) (6)
Nondeductible expenses................................................. 61 55 55 28 33
State income taxes, net of Federal benefit............................. (4) 17 20 3 10
Other, net............................................................. 13 2 (76) (21) (45)
--------- --- --------- --- ---
$ 1,572 (791) 827 443 538
--------- --- --------- --- ---
--------- --- --------- --- ---
</TABLE>
Temporary differences which give rise to a significant portion of deferred
tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1995 1996
--------- --------- JUNE 30
1997
-----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Loss reserve discounting..................................................... $ 3,878 3,611 4,183
Policyholder dividends....................................................... 1,594 1,354 1,219
Salvage and subrogation...................................................... 163 306 408
Unearned premiums............................................................ 313 725 909
Unbilled premiums............................................................ 410 329 410
Other........................................................................ 406 778 593
--------- --------- -----------
Gross deferred tax assets................................................ 6,764 7,103 7,722
--------- --------- -----------
Deferred tax liabilities:
Unbilled premiums............................................................ (1,779) (1,795) (2,635)
Tax on net unrealized gain on securities carried at market value............. (787) (401) (444)
Other........................................................................ (37) (78) (614)
--------- --------- -----------
Gross deferred tax liabilities........................................... (2,603) (2,274) (3,693)
--------- --------- -----------
Net deferred tax asset................................................... $ 4,161 4,829 4,029
--------- --------- -----------
--------- --------- -----------
</TABLE>
The recoverability of the net deferred tax asset is demonstrated by taxes
paid in prior years and available tax planning strategies. Management believes
that it is more likely than not that the results of future operations and
various tax planning strategies will generate sufficient taxable income in the
periods necessary to realize the net deferred tax asset.
F-19
<PAGE>
PAULA FINANCIAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(6) INCOME TAXES (Continued)
The Company paid $2,103, $375 and $1,400 of Federal income taxes during the
years ended December 31, 1994, 1995 and 1996, respectively. The Company paid $0
(unaudited) and $1,300 (unaudited) for the six months ended June 30, 1996 and
1997, respectively.
(7) REINSURANCE
In the ordinary course of business, the insurance subsidiaries cede
insurance for the purpose of obtaining greater risk diversification and
minimizing the maximum net loss potential arising from large claims. The
insurance subsidiaries, however, are contingently liable in the event that their
reinsurers become unable to meet their contractual obligations. A large portion
of the reinsurance is effected under reinsurance contracts known as treaties.
PAULA Insurance Company (PICO) maintains excess of loss and catastrophic
reinsurance arrangements to protect it against losses above its retention on
workers' compensation policies. The maximum retention on workers' compensation
policies is $200 in 1994 through June 30, 1996 and $250 for the last six months
of 1996 and 1997 for each loss occurrence.
The following amounts have been deducted in the accompanying consolidated
financial statements as a result of reinsurance ceded:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------- ----------------------------
1994 1995 1996 1996 1997
--------- --------- --------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Premiums earned........................................... $ 2,006 1,836 2,056 914 1,384
Losses and loss expenses incurred......................... 2,644 811 940 2,039 471
--------- --------- --------- ----- -----
--------- --------- --------- ----- -----
</TABLE>
Substantially all reinsurance balances are with General Reinsurance Corporation.
(8) STOCKHOLDERS' EQUITY
In August 1994, the Company completed a private placement of 941,177 shares
of Series A -- convertible preferred stock. Gross proceeds of $16,000 were
received from three institutional investor groups which obtained the stock for
their own portfolios or investment funds. In addition to a cash commission paid
in connection with the private placement, the Company issued warrants to
purchase 82,353 shares of common stock at the fair market value at the date of
issuance of $17.00 per share to the placement agents. The offering was initiated
to strengthen the Company's capital position, to provide some liquidity to the
ESOP and to provide funds to assist the Company in its long-term goal to expand
its operations.
The preferred stock has dividend and voting rights consistent with common
stockholders on an if-converted basis, and has a liquidation preference of
$17.00 per share plus all accrued and unpaid dividends. The preferred stock is
convertible into common shares on a one-for-one basis at the holder's option or
automatically upon consummation of a qualified initial public offering with
aggregate proceeds in excess of $20,000 and a per share price greater than
$25.50 (a "Qualified Initial Public Offering"). The preferred stock is
redeemable at the holder's option beginning December 31, 1998 at the greater of
fair value as determined by an independent party or 1.15 times the book value of
the preferred stock. Such redemption right terminates upon the effectiveness of
a registration statement for a Qualified Initial Public Offering. The preferred
stock restricts both dividend payments and the repurchase of stock from
F-20
<PAGE>
PAULA FINANCIAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(8) STOCKHOLDERS' EQUITY (Continued)
the Company's employees and directors so long as the preferred stock remains
outstanding. The preferred stock purchase agreement imposes certain additional
covenants.
In January 1995, the Company agreed to repurchase 259,309 shares of common
stock and options to acquire 20,000 shares, for a purchase price of $22.50 per
share and $5.50 per option, from the retiring Chairman of the Board. The per
share price was based on a third-party offer. The amount of the repurchase
totaled $6,284, of which $1,486 was paid in each of January 1995 and 1996. The
remaining balance is included in a note payable with annual principal and
interest payments through 1998. The interest rate on the note equals the prime
rate. At June 30, 1997, the outstanding balance on the note was $1,486
(unaudited).
Upon reincorporation of the Company as a Delaware corporation, the par value
of the common and preferred stock was changed to $0.01 from no par value stock
and the number of common shares authorized was increased from 10,000,000 to
15,000,000.
The Company is obligated under the terms of its ESOP to repurchase shares
allocated to ESOP participants when the participants qualify for a distribution
(i.e., retirement or break in service) in the event the participants choose to
sell such shares and the ESOP is unable to repurchase the shares directly (see
note 9).
The purchase price of the Company's shares has historically been evaluated
and determined annually by an independent appraisal firm, as required, and is
approved by the ESOP committee. This appraisal is used for determining the
market value of the shares with respect to the ESOP.
PAULA Financial is dependent on the transfer of funds from its subsidiaries.
Dividends and advances from PICO and PACO are restricted by law and minimum
capitalization requirements and, above certain thresholds, subject to approval
by insurance regulatory authorities. Net assets of the insurance subsidiaries in
the amount of $37,403, $39,800 and $42,812 (unaudited) at December 31, 1995 and
1996 and June 30, 1997, respectively, are restricted as to their availability
for advances or dividends to PAULA Financial due to insurance regulatory
requirements.
(9) EMPLOYEE BENEFIT PLANS
The Company maintains a defined contribution employee stock ownership plan
(ESOP) covering all full-time employees, excluding hourly employees. The ESOP
has assets principally comprised of 547,063 shares of the Company's common stock
at December 31, 1995 and 1996 and 547,063 shares (unaudited) at June 30, 1997.
The Company can make annual contributions to the ESOP in cash or shares of the
Company's common stock in amounts determined by the Company's Board of
Directors, except that such contributions must be in cash to the extent the ESOP
requires liquid funds to meet its obligations. The Company expensed cash
contributions of $150 in each of the years ended December 31, 1994, 1995 and
1996. The Company expensed cash contributions of $75 (unaudited) and $76
(unaudited) for the six months ended June 30, 1996 and 1997, respectively.
The Company is obligated under the terms of its ESOP to repurchase shares
distributed to ESOP participants when the participants qualify for a
distribution (i.e., retirement or break in service) in the event the
participants choose to sell such shares and the ESOP is unable to repurchase the
shares
F-21
<PAGE>
PAULA FINANCIAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(9) EMPLOYEE BENEFIT PLANS (Continued)
directly. Such shares must be paid for within five years. This commitment, if
all shares were distributed, would be approximately $11,449 as of December 31,
1996 and $11,495 (unaudited) at June 30, 1997.
During 1994, the Company repurchased 367,647 shares of common stock from the
ESOP with funds obtained from the preferred stock private placement. This
provided the ESOP with a cash flow of $6,250.
The Company maintains a 401(k) plan covering substantially all employees.
Employees may contribute up to 17% of their compensation. The Company makes a
matching contribution of 50% of the employee contribution, limited to 6% of
compensation. Total employer costs under the plan were $192, $208 and $208 for
the years ended December 31, 1994, 1995 and 1996, respectively. Total employer
costs under the plan were $95 (unaudited) and $115 (unaudited) for the six
months ended June 30, 1996 and 1997, respectively.
Employees of the Company receive an annual year-end bonus based upon the
profitability of the Company. Amounts expensed under bonus programs were $871,
$427 and $1,053 for the years ended December 31, 1994, 1995 and 1996,
respectively. Amounts expensed under these bonus programs were $369 (unaudited)
and $295 (unaudited) for the six months ended June 30, 1996 and 1997,
respectively.
In 1994, the Company adopted a stock incentive plan, reserving 275,000
shares of common stock, which provides for granting of stock options and
restricted stock bonuses to officers and directors and key employees of the
Company. Options and restricted stock are granted at the discretion of the
Executive Compensation Committee of the Board of Directors. Options are granted
at fair value as determined by the Executive Compensation Committee of the Board
of Directors.
Stock options vest either immediately or over periods not to exceed five
years and carry an exercise price equal to or in excess of the fair market value
of the common stock on the date of grant. The stock options are exercisable for
a ten-year term.
F-22
<PAGE>
PAULA FINANCIAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(9) EMPLOYEE BENEFIT PLANS (Continued)
Changes in the status of options granted under the plan are summarized as
follows:
<TABLE>
<CAPTION>
1994
--------------------------------------------
WEIGHTED
EXERCISE AVERAGE
SHARES PRICE EXERCISE PRICE
--------- ----------------- --------------
<S> <C> <C> <C>
Beginning of year.............................. -- $ -- --
Granted.................................... 83,650 17.00 - 18.06 17.05
Canceled................................... -- -- --
Exercised or redeemed...................... -- -- --
--------- ----------------- -------
End of year.................................... 83,650 $ 17.00 - 18.06 17.05
--------- ----------------- -------
--------- ----------------- -------
Exercisable.................................... 83,650 $ 17.00 - 18.06 17.05
--------- ----------------- -------
--------- ----------------- -------
</TABLE>
<TABLE>
<CAPTION>
1995
--------------------------------------------
WEIGHTED
EXERCISE AVERAGE
SHARES PRICE EXERCISE PRICE
--------- ----------------- --------------
<S> <C> <C> <C>
Beginning of year.............................. 83,650 $ 17.00 - 18.06 17.05
Granted.................................... 15,500 18.06 18.06
Canceled................................... (1,175) 18.06 18.06
Exercised or redeemed...................... (40,000) 17.00 17.00
--------- ----------------- -------
End of year.................................... 57,975 $ 17.00 - 18.06 17.33
--------- ----------------- -------
--------- ----------------- -------
Exercisable.................................... 47,500 $ 17.00 - 18.06 17.33
--------- ----------------- -------
--------- ----------------- -------
</TABLE>
<TABLE>
<CAPTION>
1996
--------------------------------------------
WEIGHTED
EXERCISE AVERAGE
SHARES PRICE EXERCISE PRICE
--------- ----------------- --------------
<S> <C> <C> <C>
Beginning of year.............................. 57,975 $ 17.00 - 18.06 17.33
Granted.................................... 144,650 15.76 - 25.00 17.66
Canceled................................... (300) 18.06 18.06
Exercised or redeemed...................... -- -- --
--------- ----------------- -------
End of year.................................... 202,325 $ 15.76 - 25.00 17.56
--------- ----------------- -------
--------- ----------------- -------
Exercisable.................................... 140,350 $ 15.76 - 25.00 17.56
--------- ----------------- -------
--------- ----------------- -------
</TABLE>
No options have been granted, cancelled, exercised or redeemed during the
six months ended June 30, 1997 (unaudited).
Pursuant to the plan, the Company granted 14,350 shares at $18.06 per share
and 11,250 shares at $15.76 per share of restricted common stock in 1995 and
1996, respectively. The per share price for
F-23
<PAGE>
PAULA FINANCIAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(9) EMPLOYEE BENEFIT PLANS (Continued)
these awards was based on an annual independent appraisal. The restrictions
lapse pursuant to various vesting schedules. Holders of restricted stock are
entitled to vote such shares and receive dividends, which are not subject to
restrictions. As of December 31, 1996, the restrictions on an aggregate of 1,700
shares of restricted stock have lapsed; 4,750 and 700 shares in 1995 and 1996,
respectively, were forfeited based upon voluntary termination. No restricted
stock was granted in the six months ending June 30, 1997, and 100 shares were
forfeited based upon voluntary termination (unaudited).
At December 31, 1996, 12,525 shares of common stock were available for
issuance under the plan. At June 30, 1997, 12,625 shares (unaudited) were
available for issuance under the plan.
In addition, in 1996, the Company issued options to purchase an aggregate of
158,000 shares of common stock to officers and directors of the Company outside
the Plan. The options carry an exercise price of $19.00 per share. Also,
outstanding is an option to purchase an aggregate of 30,000 shares of common
stock to an officer of the Company outside of the plan granted at $17.00 per
share in 1994. The options were granted at fair value as determined by the
Executive Compensation Committee of the Board of Directors. Such options have
the same terms as options granted under the plan and are immediately
exercisable.
In 1997, the Company adopted its 1997 Stock Incentive Plan, reserving
100,000 shares of common stock, none of which have been granted as of June 30,
1997 (unaudited).
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (Opinion 25), and related
interpretations in accounting for its employee stock options and adopt the
disclosure requirements of Statement of Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (Statement 123). Had compensation cost
for the Company's stock-based compensation plan been reflected in the
accompanying consolidated financial statements based on the fair value at the
grant dates for option awards consistent with the method of Statement 123, the
Company's net income would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------
1995 1996
--------- --------- SIX MONTHS
ENDED JUNE
30,
1997
-------------
(UNAUDITED)
<S> <C> <C> <C>
As reported $ 300 3,923 2,294
Pro forma 257 3,326 2,151
--------- --------- -----
--------- --------- -----
</TABLE>
The fair value for these options was estimated at the date of grant using
the minimum value method. The risk free interest rate used for options granted
during 1995 and 1996 was 6.4%. An average option exercise period of seven years
was used. Pro forma net income reflects only options granted in 1995 and 1996.
During the initial phase-in period of Statement 123, the full impact of
calculating compensation cost for stock options is not reflected in the pro
forma net income amounts presented above because compensation cost is reflected
over the options' vesting periods and compensation cost for options granted
prior to January 1, 1995 is not considered.
F-24
<PAGE>
PAULA FINANCIAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(10) STATUTORY ACCOUNTING PRACTICES
The insurance subsidiaries are required to file statutory financial
statements with state insurance regulatory authorities. Accounting principles
used to prepare these statutory financial statements differ from generally
accepted accounting principles (GAAP). Amounts reported to regulatory
authorities as compared to amounts included in the accompanying consolidated
financial statements on a GAAP basis for the years ended December 31, 1994, 1995
and 1996 and the six months ended June 30, 1996 and 1997 follow:
<TABLE>
<CAPTION>
AS INCLUDED
IN THE
ACCOMPANYING
CONSOLIDATED AS REPORTED
FINANCIAL TO REGULATORY
STATEMENTS AUTHORITIES
-------------- -------------
<S> <C> <C>
Years ended December 31
1994:
Net earnings................................................ $ 5,366 5,368
-------------- -------------
-------------- -------------
Stockholders' equity........................................ $ 38,146 19,381
-------------- -------------
-------------- -------------
1995:
Net earnings................................................ $ 2,052 3,122
-------------- -------------
-------------- -------------
Stockholders' equity........................................ $ 41,003 30,271
-------------- -------------
-------------- -------------
1996:
Net earnings................................................ $ 5,770 5,080
-------------- -------------
-------------- -------------
Stockholders' equity........................................ $ 45,202 35,144
-------------- -------------
-------------- -------------
Six months ended June 30
1996 (unaudited):
Net earnings................................................ $ 2,470 1,935
-------------- -------------
-------------- -------------
Stockholders' equity........................................ $ 42,269 32,060
-------------- -------------
-------------- -------------
1997 (unaudited):
Net earnings................................................ $ 2,927 2,972
-------------- -------------
-------------- -------------
Stockholders' equity........................................ $ 48,214 35,901
-------------- -------------
-------------- -------------
</TABLE>
Statutory accounting practices for the insurance subsidiaries are prescribed
or permitted by the Department of Insurance of the State of California.
Prescribed accounting practices include a variety of publications of the
National Association of Insurance Commissioners (NAIC) as well as state laws,
regulations and general administrative rules. Permitted statutory accounting
practices encompass all accounting practices that are not prescribed; such
practices differ from state to state, may differ from company to company within
a state and may change in the future. Furthermore, the National Association of
Insurance Commissioners has a project to codify statutory accounting practices,
the result of which is expected to constitute the only source of "prescribed"
statutory accounting practices. Accordingly, that
F-25
<PAGE>
PAULA FINANCIAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(10) STATUTORY ACCOUNTING PRACTICES (Continued)
project will likely change the definition of what comprises prescribed versus
permitted statutory accounting practices and may result in changes to the
accounting policies that insurance enterprises use to prepare their statutory
financial statements.
Insurance regulatory authorities impose various restrictions on the payment
of dividends and advances by insurance companies. As of December 31, 1996, the
maximum dividend and advance payments that may be made during 1997 by the
insurance subsidiaries to PAULA Financial without prior approval of the
regulatory authorities are limited to the greater of net income for the
preceding year or 10% of policyholder surplus as of the preceding December 31
and approximate $5.4 million.
(11) COMMITMENTS AND CONTINGENCIES
The Company leases buildings for its home office and certain other premises
under long-term operating leases that expire in various years to 2002. Certain
of these leases are with related parties. Rent expense was $1,342, $1,483 and
$1,657 for the years ended December 31, 1994, 1995 and 1996, respectively. Rent
expense for the six months ended June 30, 1996 and 1997 was $798 (unaudited) and
$777 (unaudited), respectively. Included in rent expense is rent paid to related
parties of the Company totaling $129, $230 and $149 for the years ended December
31, 1994, 1995 and 1996, respectively and $91 (unaudited) and $52 (unaudited)
for the six months ended June 30, 1996 and 1997, respectively.
Approximate aggregate minimum rental commitments under operating leases at
December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997............................................................... $ 1,399
1998............................................................... 1,425
1999............................................................... 682
2000............................................................... 211
2001 and thereafter................................................ 186
---------
$ 3,903
---------
---------
</TABLE>
Approximate aggregate minimum rental commitments under operating leases at
June 30, 1997 are as follows:
<TABLE>
<CAPTION>
(UNAUDITED)
<S> <C>
1997............................................................................. $ 717
1998............................................................................. 1,425
1999............................................................................. 682
2000............................................................................. 211
2001 and thereafter.............................................................. 186
-----------
$ 3,221
-----------
-----------
</TABLE>
Certain of these leases contain renewal provisions.
F-26
<PAGE>
PAULA FINANCIAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(11) COMMITMENTS AND CONTINGENCIES (Continued)
In the ordinary course of business, the Company's subsidiaries are
defendants in various lawsuits. Management believes that the ultimate
disposition of the litigation will not result in a material impact to the
financial position or operating results of the Company.
The NAIC has adopted a risk-based capital formula for both property and
casualty and life insurance companies. These formulas calculate a minimum level
of capital and surplus which should be maintained by each insurer. At December
31, 1996, both PICO and PACO's adjusted capital and surplus exceeded their
respective risk-based capital requirements.
(12) ACQUISITIONS
In December 1994, the Company acquired the assets of the predecessors of
Agri-Comp Insurance Agency, Inc. for a purchase price of $1,800. The acquisition
has been accounted for using the purchase method of accounting and the
operations from the date of acquisition have been included in the accompanying
consolidated financial statements. The purchase price has principally been
allocated to the excess of cost over net assets acquired.
In November 1995, the Company acquired the assets of Desert Benefits, Inc.,
an insurance agency specializing in agribusiness and rural market medical
benefit programs, for total consideration of $700. The purchase price was
comprised of a $140 cash payment and the issuance of common stock for the
remaining balance (35,533 shares). The acquisition has been accounted for using
the purchase method of accounting and the operations have been included in the
accompanying consolidated financial statements from the date of acquisition. The
purchase price has principally been allocated to the excess of cost over net
assets acquired.
In August 1996, the Company acquired the assets of Guinn Sinclair Insurance
Services, an insurance agency specializing in farm labor contractor insurance
needs, for total consideration of $221. The purchase price was comprised of a
$44 cash payment and the issuance of common stock for the remaining balance
(5,882 shares). The acquisition has been accounted for as an asset purchase and
the operations have been included in the accompanying consolidated financial
statements from the date of acquisition. The purchase price has principally been
allocated to the excess of cost over net assets acquired.
F-27
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company and the Selling Stockholder have agreed to sell to each of the
Underwriters named below, and each of such Underwriters, for whom Goldman, Sachs
& Co. and Conning & Company are acting as representatives, has severally agreed
to purchase from the Company and the Selling Stockholder, the respective number
of shares of Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
COMMON
UNDERWRITER STOCK
- ------------------------------------------------------------------------------------------- -----------
<S> <C>
Goldman, Sachs & Co........................................................................
Conning & Company..........................................................................
-----------
Total..................................................................................
-----------
-----------
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered hereby,
if any are taken.
The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and in part to certain securities dealers at such
price less a concession of $ per share. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $ per share to
certain brokers and dealers. After the shares of Common Stock are released for
sale to the public, the offering price and other selling terms may from time to
time be varied by the representatives.
The Company has granted the Underwriters an option exercisable for 30 days
after the date of this Prospectus to purchase up to an aggregate of
additional shares of Common Stock solely to cover over-allotments, if any.
If the Underwriters exercise their over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares to be purchased by each of
them, as shown in the foregoing table, bears to the shares of Common Stock
offered.
The Company, its executive officers and directors, the ESOP and certain
other holders of Common Stock, which in the aggregate will hold approximately
% of the outstanding shares of the Company after the offering, have agreed
that, during the period beginning from the date of this Prospectus and
continuing to and including the date 180 days after the date of this Prospectus,
they will not offer, sell, contract to sell or otherwise dispose of, or, with
certain exceptions, file or cause to be filed with the Commission a registration
statement with respect to, shares of Common Stock (other than, in the case of
the Company, pursuant to employee stock option plans existing, or on the
conversion or exchange of convertible or exchangeable securities outstanding, on
the date of this Prospectus and, in the case of the ESOP, distributions of
shares to the participants in the ESOP upon termination of such participants'
employment with the Company) or any securities of the Company which are
substantially similar to the shares of Common Stock or which are convertible
into or exchangeable for shares of Common Stock or securities which are
substantially similar to the shares of Common Stock without the prior written
U-1
<PAGE>
consent of the representatives, except for the shares of Common Stock offered in
connection with the offering.
Conning Asset Management, an affiliate of Conning & Company, acts as the
Company's investment advisor and receives customary compensation for its
services in such capacity. See "Business-- Investments and Investment Results"
and "Certain Transactions". In addition, Conning & Company beneficially owned in
the aggregate 25.4% of the Common Stock as of June 30, 1997 ( % upon
consummation of the offering). See "Principal and Selling Stockholders".
Pursuant to the provisions of the Preferred Stock Purchase Agreement, Conning &
Company has designated two members of the Company's Board of Directors. The
provisions of the Preferred Stock Purchase Agreement providing for such
designation will terminate upon consummation of the offering. See
"Management--Directors and Executive Officers".
Under Rule 2720 of the National Association of Securities Dealers, Inc. (the
"NASD"), the Company may be deemed an affiliate of Conning & Company. This
offering is being conducted in accordance with Rule 2720, which provides that,
among other things, when an NASD member participates in the underwriting of an
affiliate's equity securities, the initial public offering price can be no
higher than that recommended by a "qualified independent underwriter" meeting
certain standards. In accordance with this requirement, Goldman, Sachs & Co. has
served in such role and has recommended a price in compliance with the
requirements of Rule 2720. Goldman, Sachs & Co. will receive compensation from
the Company in the amount of $10,000 for serving in such role. In connection
with the offering, Goldman, Sachs & Co. in its role as qualified independent
underwriter has performed due diligence investigations and reviewed and
participated in the preparation of this Prospectus and the Registration
Statement of which this Prospectus forms a part. In addition, the Underwriters
may not confirm sales to any discretionary account without the prior specific
written approval of the customer.
In connection with the offering, the Underwriters may purchase and sell
shares of Common Stock in the open market. These transactions may include
over-allotment and stabilizing transactions and purchases to cover syndicate
short positions created in connection with the offering. Stabilizing
transactions consist of certain bids or purchases for the purpose of preventing
or retarding a decline in the market price of the shares of Common Stock; and
syndicate short positions involve the sale by the Underwriters of a greater
number of shares of Common Stock than they are required to purchase from the
Company in the offering. The Underwriters also may impose a penalty bid, whereby
selling concessions allowed to syndicate members or other broker-dealers in
respect of the securities sold in the offering for their account may be
reclaimed by the syndicate if such shares of Common Stock are repurchased by the
syndicate in stabilizing or covering transactions. These activities may
stabilize, maintain or otherwise affect the market price of the shares of Common
Stock, which may be higher than the price that might otherwise prevail in the
open market; and these activities, if commenced, may be discontinued at any
time. These transactions may be effected in the over-the-counter market or
otherwise.
Prior to this offering, there has been no public market for the shares. The
initial public offering price will be negotiated among the Company and the
representatives. Among the factors to be considered in determining the initial
public offering price of the Common Stock, in addition to prevailing market
conditions, will be the Company's historical performance, estimates of the
business potential and earnings prospects of the Company, an assessment of the
Company's management and the consideration of the above factors in relation to
market valuation of companies in related businesses.
The Common Stock will be quoted on the Nasdaq National Market under the
symbol "PFCO".
The Company and the Selling Stockholder have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1993.
U-2
<PAGE>
GLOSSARY OF SELECTED INSURANCE TERMS
The following terms when used in this Prospectus have the following meaning:
<TABLE>
<CAPTION>
<S> <C>
Accident Year............................. The calendar year in which the event giving rise to a claim occurs
regardless of the year during which the policy covering the event was
written.
Cede...................................... To transfer to a reinsurer all or a portion of a risk in consideration of a
premium.
Combined ratio............................ The sum of the loss ratio, the expense ratio and the policyholder dividend
ratio, expressed as a percentage, determined in accordance with either SAP
or GAAP.
Earned surplus............................ The cumulative amount of retained net profits from insurance operations,
including investment income, as determined under SAP.
Estimated Annual Premium ("EAP").......... As of any date, the sum of the estimated total annualized premiums for all
policies in force on that date, whether earned prior to or after such date.
Excess of loss reinsurance................ A form of reinsurance in which the reinsurer indemnifies the ceding company
against all or a portion of the amount of loss in excess of a specific
retention.
Expense ratio............................. The percentage arrived at by dividing the amount of underwriting expenses by
the amount of premium earned, in the case of a GAAP expense ratio, and
premium written, in the case of a SAP expense ratio.
Experience modification................... A factor applied to each policyholder's premium rates established by the
applicable statistical rating bureau which reflects the policyholder's
historical loss experience.
Frequency................................. The number of claims occurring under a given coverage divided by the number
of exposures for the given coverage.
GAAP...................................... Generally accepted accounting principles.
Incurred but not reported ("IBNR") Claims that have been incurred but not reported to the insurer.
claims....................................
Loss adjustment expenses ("LAE").......... The expenses of settling claims, including legal and other fees, and general
expenses of administering the claims adjustment process.
Loss ratio................................ For SAP and GAAP, net losses and loss adjustment expenses incurred, divided
by net premiums earned, expressed as a percentage.
Participating policy...................... An insurance policy where the policyholder may receive a "dividend", which
is a partial return of premium, after the expiration of a policy period,
subject to declaration by the Board of Directors.
Policyholder dividend ratio............... The percentage arrived at by dividing the amount of policyholder dividends
incurred by the amount of net premium earned.
Premiums earned........................... The amount of premiums recognized as revenue for accounting purposes during
a given period. Generally, premiums are earned ratably over the term of the
related policy.
</TABLE>
G-1
<PAGE>
<TABLE>
<CAPTION>
Premiums written.......................... Gross premiums received by an insurer during a given period.
<S> <C>
Reinsurance............................... A procedure whereby an original insurer remits a portion of the premium to a
reinsurer as payment for the reinsurer's assumption of all or a portion of
the risk.
Reserve for losses and LAE................ The estimated liability for unpaid losses and LAE representing estimates of
amounts needed to pay and settle reported and unreported claims and the
related LAE.
Statutory Accounting Practices or "SAP"... Recording accounting transactions and preparing financial statements in
accordance with the rules and procedures prescribed or permitted by state
insurance regulatory agencies. The principal differences between SAP and
GAAP are as follows: (a) under SAP, certain assets (nonadmitted assets) are
eliminated from the balance sheet; (b) under SAP, policy acquisition costs
are expensed upon policy inception, while under GAAP they are deferred and
amortized over the term of the policies; (c) under SAP, no provision is made
for deferred income taxes; and (d) under SAP, certain reserves are
recognized which are not recognized under GAAP.
Severity.................................. The cost of a claim under an insurance policy.
Statutory surplus......................... The amount remaining after all liabilities are subtracted from all admitted
assets, as determined in accordance with SAP. This amount is regarded as
financial protection to policyholders in the event the insurance company
suffers unexpected or catastrophic losses.
Treaty.................................... A reinsurance agreement between the ceding company and the reinsurer,
typically for one year or longer, which stipulates the terms of the
reinsurance applicable to some class or classes of business.
Underwriting.............................. The process whereby an insurer reviews applications submitted for insurance
coverage and determines whether it will accept all or part, and at what
premium, of the coverage being requested.
Underwriting expenses..................... The aggregate of policy acquisition costs and the portion of administrative,
general and other expenses attributable to the underwriting process as they
are accrued and expensed.
Underwriting profit (loss)................ The amount of pretax income (loss) from insurance operations, exclusive of
net investment income and capital gains or losses.
</TABLE>
G-2
<PAGE>
A collage of logos of a representative list of the Company's endorsements will
appear with the heading, "PAULA's representative agribusiness endorsements."
[LOGOS]
<PAGE>
- ----------------------------------------------
----------------------------------------------
- ----------------------------------------------
----------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
-----------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 3
Prospectus Summary........................................................ 4
Risk Factors.............................................................. 10
Use of Proceeds........................................................... 16
Dividend Policy........................................................... 16
Dilution.................................................................. 17
Capitalization............................................................ 18
Selected Financial Data................................................... 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 21
Business.................................................................. 29
Management................................................................ 58
Certain Transactions...................................................... 65
Principal and Selling Stockholders........................................ 66
Description of Capital Stock.............................................. 68
Shares Eligible for Future Sale........................................... 70
Validity of Common Stock.................................................. 72
Experts................................................................... 72
Index to Consolidated Financial Statements................................ F-1
Underwriting.............................................................. U-1
Glossary of Selected Insurance Terms...................................... G-1
</TABLE>
-----------------------
THROUGH AND INCLUDING , 1997 (THE 25TH DAY AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
SHARES
PAULA FINANCIAL
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
------------------
[ L O G O ]
------------------
GOLDMAN, SACHS & CO.
CONNING & COMPANY
REPRESENTATIVES OF THE UNDERWRITERS
- ----------------------------------------------
----------------------------------------------
- ----------------------------------------------
----------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table itemizes the expenses incurred by the Registrant in
connection with the issuance and distribution of the securities being
registered, other than underwriting discounts. All the amounts shown are
estimates except the Securities and Exchange Commission registration fee, the
National Association of Securities Dealers, Inc. filing fee and the Nasdaq
listing fee.
<TABLE>
<S> <C>
Registration Fee--Securities and Exchange Commission............. $ 13,637
Filing Fee--National Association of Securities Dealers, Inc...... 5,000
Nasdaq Listing Fee............................................... To be determined.
Legal Fees and Expenses (other than Blue Sky).................... 170,000
Accounting Fees and Expenses..................................... 125,000
Blue Sky Fees and Expenses, including Legal Fees................. 10,000
Printing, including Registration Statement, Prospectus, etc...... 100,000
Transfer Agent and Registrar Fees................................ 15,000
Miscellaneous Expenses........................................... 310,000
---------
Total........................................................ $
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the DGCL makes provision for the indemnification of officers
and directors in terms sufficiently broad to indemnify officers and directors of
Company under certain circumstances from liabilities (including reimbursement
for expenses incurred) arising under the Securities Act. The Certificate of
Incorporation and Bylaws of the Company provide, in effect, that, to the fullest
extent and under the circumstances permitted by Section 145 of the DGCL, the
Company will indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that he or she is a director or officer of the Company or is or was serving at
the request of the Company as a director or officer of another corporation or
enterprise. In addition, the Company has entered into indemnification agreements
with its directors and officers providing, subject to the terms therein, that
the Company will indemnify such individuals for damages suffered by reason of
the fact that any such individual is a director or officer of the Company or is
or was serving at the request of the Company as a director or officer of another
corporation or enterprise. The Certificate of Incorporation and Bylaws of the
Company, together with such indemnification agreements, relieve its directors
from monetary damages for breach of such director's fiduciary duty as directors
to the fullest extent permitted by the DGCL. Consequently, a director or officer
will not be personally liable to the Company or its stockholders for monetary
damages for any breach of their fiduciary duty as directors except (i) for a
breach of the duty of loyalty, (ii) for failure to act in good faith, (iii) for
intentional misconduct or knowing violation of law, (iv) for willful or
negligent violation of certain provisions in the DGCL imposing certain
requirements with respect to stock repurchases, redemption and dividends, or (v)
for any transactions from which the director derived an improper personal
benefit. Depending upon the character of the proceeding, under Delaware law, the
Company may indemnify against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred in
connection with any action, suit or proceeding if the person indemnified acted
in good faith and in a manner he or she reasonably believed to be in or not
opposed to the best interest of the Company and, with respect to any criminal
action or proceeding, had no cause to believe his or her conduct was unlawful.
To the extent that a director or officer of the Company has been successful in
the defense of any action, suit or proceeding referred to above, the
II-1
<PAGE>
Company will be obligated to indemnify him or her against expenses (including
attorneys' fees) actually and reasonably incurred in connection therewith.
Pursuant to the Underwriting Agreement, a copy of which is filed as Exhibit
1 to this Registration Statement, the Company has agreed to indemnify the
Underwriters against certain liabilities which may be incurred in connection
with the offering made by the Prospectus forming a part of the Registration
Statement, including liabilities under the Securities Act, and the Underwriters
have agreed to indemnify the Company and their officers and directors against
certain similar liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The Registrant issued shares upon the reincorporation. The predecessor
of the Registrant did not issue any securities during the past three years other
than (i) warrants to purchase an aggregate of 82,353 shares of Common Stock for
$17.00 per share issued to the Preferred Stock placement agents in August 1994;
(ii) 941,177 shares of Preferred Stock issued to the Preferred Stockholders in
August 1994 for $17.00 per share; (iii) 30,000 shares of Common Stock issued to
the current Chief Executive Officer of the Company in August 1994 for $17.00 per
share; (iv) options to purchase an aggregate of 243,800 shares of Common Stock
at exercise prices ranging from $15.76 to $19.00 issued under the 1994 Plan
between August 28, 1993 and October 25, 1996; (v) an aggregate of 25,600 shares
of restricted Common Stock issued under the 1994 Plan between December 31, 1994
and February 1, 1996 with fair market values determined by the Executive
Compensation Committee between $15.76 and $18.06; (vi) options to purchase an
aggregate of 188,000 shares of Common Stock at exercise prices ranging from
$17.00 to $19.00 issued to Company officers and directors other than under the
Plans between July 26, 1994 and October 25, 1996; (vii) 150 and 128 shares of
Common Stock issued to Company employees as compensation bonuses in 1996 and
1997, respectively, with fair market values determined by the Executive
Compensation Committee of $15.76 and $19.00, respectively; (viii) 34,263 shares
of Common Stock issued in connection with an acquisition in November 1995 with a
fair market value determined by the Board of Directors of $15.76 per share; (ix)
5,882 shares of Common Stock issued in connection with an acquisition in
September 1996 with an agreed upon value of $30.00 per share; and (x) 500 shares
of Common Stock issued to an unaffiliated consultant to the Company in January
1997 with a fair market value determined by the Board of Directors of $21.66 per
share. Such issuances were exempt from registration under Section 4(2) of the
Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
1 Form of Underwriting Agreement.
2.1 Asset Purchase Agreement dated December 8, 1994 by and between Registrant,
Oregon Ag Insurance Services, Inc., Agri-Comp. Inc., Oregon-Comp. Inc.
and Oregon Risk Management, Inc.
2.2 Asset Purchase Agreement dated November 10, 1995 by and between Pan
American Underwriters, Inc. (PAU), Desert Benefits, Inc., Employee
Benefits & Insurance Services, Fredric J. Klicka and Fredric J. Klicka
II.
2.3 Agreement dated July 25, 1996 by and among Registrant, PAULA Insurance
Company (PICO), James G. Parker Insurance Associates (Parker) and
certain individual stockholders of Parker.
2.4 Asset Purchase Agreement dated August 23, 1996 by and among PAU, Guinn
Sinclair Insurance Services, Margaret Funnell and Yolanda Ibarrez.
2.5 Series A Preferred Stock Purchase Agreement dated March 11, 1997 by and
between PICO and CAPAX Management & Insurance Services (CAPAX).
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
3.1 Certificate of Incorporation of Registrant.
3.2 Certificate of Designation of Series A Preferred Stock of PAULA Financial,
as amended.
3.3 Bylaws of Registrant.
4.2 Specimen certificate of Common Stock.*
5 Opinion of Gibson, Dunn & Crutcher LLP.*
10.1 Lease for Registrant's Pasadena, California office, between Pasadena
Gateway Plaza, as Lessor, and PAU, as Lessee, dated January 1, 1989 and
last amended May 12, 1995 and the Assignment and Assumption of Lease and
Consent between LACERA Gateway Property, Inc., PAU and PICO.
10.2 Lease for Registrant's Lake Oswego, Oregon office, dated September 23,
1996 and amended May 13, 1997 between WCB Thirty-Two Limited
Partnership, as Lessor, and PICO, as Lessee.
10.3 Lease for Registrant's Fresno, California office dated October 18, 1994
and amended January 10, 1997 between Altaffer Survivor Trust, as Lessor,
and PAU, as Lessee.
10.4 Agreement of Reinsurance, No. 7448, dated February 16, 1990 and last
amended July 1, 1996 between General Reinsurance Corporation and PICO.
10.5 Workers' Compensation and Employers' Liability Excess of Loss Reinsurance
Agreement, No. 380, dated July 1, 1995 and last amended July 1, 1996
between PICO and certain reinsurers named therein.
10.6 PAULA Financial and Subsidiaries 1994 Stock Incentive Plan.
10.7 PAULA Financial and Subsidiaries 1997 Stock Incentive Plan.
10.8 Form of Stock Option Agreement (Immediate Vesting - Non-Plan) issued in
connection with the grant of stock options under the 1994 Plan.
10.9 Form of Stock Option Agreement (Executive - Non-Plan) issued in connection
with the grant of stock options other than under the 1994 Plan.
10.10 Form of Stock Option Agreement (Immediate Vesting) issued under the 1994
Plan.
10.11 Form of Stock Option Agreement (Executive) issued under the 1994 Plan.
10.12 Form of Stock Option Agreement (Stepped Vesting) issued under the 1994
Plan.
10.13 Form of Indemnification Agreement between Registrant and each of its
directors.
10.14 Convertible Revolving Loan Note dated March 31, 1997 made by Registrant in
favor of Sanwa Bank California.
10.15 Credit Agreement dated March 31, 1997 between Registrant and Sanwa Bank
California.
10.16 Form of Credit Guaranty dated March 31, 1997 made by each of PAU, Pan
American Underwriters Insurance Agents & Brokers, Inc. (PAUIAB),
Agri-Comp Insurance Agency, Inc. and Pan Pacific Benefit Administrators,
Inc. (PPBA).
10.17 Series A Preferred Stock Purchase Agreement dated August 3, 1994 between
Registrant and certain purchasers of Series A Preferred Stock.
10.18 Form of Warrant Agreement dated August 3, 1994 between Registrant and
Prudential Securities Incorporated and Conning & Company (Conning).
10.19 Warrant Certificates dated August 3, 1994 in the name of Prudential
Securities and Conning.
10.20 Voting Agreement dated August 3, 1994 between Registrant, certain
stockholders and certain purchasers of Series A Preferred Stock.
10.21 Asset Management Agreement dated February 1, 1995 between PICO and
Conning.
10.22 Agency and Affiliates Cost Allocation and Reimbursement Agreement dated
March 1, 1992 and last amended December 1, 1996 between PAU and PAUIAB,
as Agency, and PICO, PACO and PPBA, as Affiliates.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
10.23 PAULA Insurance Company Insurance Carrier and Affiliates Cost Allocation
and Reimbursement Agreement dated March 1, 1992 and last amended
December 9, 1994 between PICO, as Carrier, and PACO, PAU, PAUIAB and
PPBA, as Affiliates.
10.24 PAULA Financial Parent and Affiliates Cost Allocation and Reimbursement
Agreement dated January 1, 1993 and last amended December 9, 1994
between Registrant, as Parent, and PICO, PACO, PAU, PAUIAB and PPBA, as
Affiliates.
10.25 Managing Agreement dated January 1, 1993 and last amended April 28, 1995
between PACO and PPBA, as Manager.
10.26 Federal Income Tax Allocation Agreement dated April 10, 1997 between
Registrant and its subsidiaries.
10.27 Agency Agreement dated March 1, 1992 and last amended April 1, 1997
between PAU and PICO.
10.28 Agency Agreement dated March 1, 1992 and last amended April 1, 1997
between PAUIAB and PICO.
10.29 Agency Agreement dated December 8, 1994 and last amended April 1, 1997
among Agri-Comp Insurance Agency, Inc. and PICO.
10.30 Purchase Option dated March 11, 1997 between Registrant and CAPAX.
11 Statement re computation of per share earnings.
19 1997 Proxy Statement of PAULA Financial.
20 PAULA Financial and Subsidiaries Stockholder Report for the Twelve Months
Ended December 31, 1996.
21 List of subsidiaries of PAULA Financial.
23.1 Consent of Gibson, Dunn & Crutcher LLP (included in Exhibit 5).*
23.2 Consent of KPMG Peat Marwick LLP (included in S-1).
24 Power of Attorney.**
27 Financial Data Schedule.
28.1 Schedule P to 1996 Annual Statement of PICO.
28.2 Schedule O to 1996 Annual Statement of PACO.
</TABLE>
- --------------
* To be filed by Amendment.
** Set forth on page II-6 of the Registration Statement.
(b) Financial Statement Schedules:
<TABLE>
<CAPTION>
SCHEDULE
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
I Summary of Investments
II Condensed Financial Information of Registrant
III Supplementary Insurance Information
IV Reinsurance
V Valuation and Qualifying Accounts and Reserves
VI Supplemental Property and Casualty Insurance Information
</TABLE>
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities rising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or
II-4
<PAGE>
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned registrants hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Pasadena, State of
California, on the 7th day of August 1997.
PAULA FINANCIAL
By /s/ JEFFREY A. SNIDER
-----------------------------------------
Jeffrey A. Snider
CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF
EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature to this
Registration Statement appears below hereby constitutes and appoints each of
James A. Nicholson and Bradley K. Serwin as such person's true and lawful
attorney-in-fact and agent, with full power of substitution, for such person and
in such person's name, place and stead, in any and all capacities, to sign and
to file with the Securities and Exchange Commission, any and all amendments and
post-effective amendments to this Registration Statement, with all exhibits
thereto and other documents in connection therewith, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as such person might or could do
in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or any substitute therefor, may lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
Chairman of the Board,
/s/ JEFFREY A. SNIDER President and Chief
- ------------------------------ Executive Officer August 7, 1997
Jeffrey A. Snider (Principal Executive
Officer)
Senior Vice President and
/s/ JAMES A. NICHOLSON Chief Financial Officer
- ------------------------------ (Principal Financial and August 7, 1997
James A. Nicholson Principal Accounting
Officer)
/s/ ANDREW M. SLAVITT
- ------------------------------ Director August 7, 1997
Andrew M. Slavitt
/s/ BRADLEY K. SERWIN
- ------------------------------ Director August 7, 1997
Bradley K. Serwin
/s/ JERRY M. MILLER
- ------------------------------ Director August 7, 1997
Jerry M. Miller
/s/ RONALD W. WAISNER
- ------------------------------ Director August 7, 1997
Ronald W. Waisner
/s/ JOHN B. CLINTON
- ------------------------------ Director August 7, 1997
John B. Clinton
/s/ GERARD VECCHIO
- ------------------------------ Director August 7, 1997
Gerard Vecchio
/s/ OWEN S. CRIHFIELD
- ------------------------------ Director August 7, 1997
Owen S. Crihfield
II-6
<PAGE>
SCHEDULES
<TABLE>
<CAPTION>
SCHEDULE
NO. DESCRIPTION PAGE
- ------ -------------------------------------------------------------------------- ---------
<C> <S> <C>
Independent Auditors' Report and Consent S-2
I Summary of Investments.................................................... S-3
II Condensed Financial Information of Registrant............................. S-4
III Supplementary Insurance Information....................................... S-8
IV Reinsurance............................................................... S-9
V Valuation and Qualifying Accounts and Reserves............................ S-10
VI Supplemental Property and Casualty Insurance Information.................. S-11
</TABLE>
S-1
<PAGE>
INDEPENDENT AUDITORS' REPORT AND CONSENT
When the transactions referred to in Note8 of the notes to the consolidated
financial statements have been consummated, we will be in a position to render
the following report.
/s/ KPMG Peat Marwick LLP
The Board of Directors
PAULA Financial:
The audits referred to in our report dated July 31, 1997, included the
related financial statement schedules as of December31, 1995 and 1996 and for
each of the years in the three-year period ended December31, 1996 included in
the registration statement. These financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statement schedules based on our audits. In our
opinion, such financial statement schedules, when considered in relation to the
basic consolidated financial statements, taken as a whole, present fairly in all
material respects the information set forth therein.
We consent to the use of our reports included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
Los Angeles, California
August 8, 1997
S-2
<PAGE>
SCHEDULE I
PAULA FINANCIAL AND SUBSIDIARIES
SUMMARY OF INVESTMENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
-------------------------------------------
COLUMN D
AMOUNT AT WHICH
COLUMN A COLUMN B COLUMN C SHOWN IN THE
TYPE OF INVESTMENTS COST VALUE BALANCE SHEET
- -------------------------------------------------------------------- ----------- ----------- -----------------
<S> <C> <C> <C>
Fixed maturities:
Bonds:
U.S. Treasury securities and obligations of U.S. Government
corporations and agencies..................................... $ 16,619 $ 16,799 $ 16,799
States, municipalities and political subdivisions............... 47,238 48,008 48,008
Corporate securities............................................ 9,370 9,560 9,560
Collateralized mortgage obligations............................. 7,025 7,004 7,004
----------- ----------- --------
Total fixed maturities...................................... 80,252 81,371 81,371
----------- ----------- --------
Equity securities:
Common stock.................................................... 734 777 777
Nonredeemable preferred stock................................... 1,014 1,033 1,033
----------- ----------- --------
Total equity securities..................................... 1,748 1,810 1,810
Short-term investments............................................ 3,611 3,611 3,611
----------- ----------- --------
Total investments........................................... $ 85,611 $ 86,792 $ 86,792
----------- ----------- --------
----------- ----------- --------
</TABLE>
S-3
<PAGE>
SCHEDULE II.1
PAULA FINANCIAL AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PAULA FINANCIAL
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1996
--------- ---------- JUNE 30,
1997
-----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and invested cash...................................................... $ 8 $ 539 $ 133
Property and equipment, net................................................. 170 94 69
Investment in subsidiaries.................................................. 43,876 48,209 50,567
Deferred income taxes....................................................... 11 241 58
Other assets................................................................ 403 182 555
--------- ---------- -----------
$ 44,468 $ 49,265 $ 51,382
--------- ---------- -----------
--------- ---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable............................................................... $ 10,213 $ 10,854 $ 11,172
Accounts payable and other liabilities...................................... 450 986 397
Obligation on stock held by ESOP............................................ 8,200 11,449 11,495
--------- ---------- -----------
18,863 23,289 23,064
Stockholders' equity:
Series A Preferred stock, convertible, redeemable after December 31, 1998,
$0.01 par value; Authorized 5,000,000 shares: issued and outstanding
941,177 shares at December 31, 1995 and 1996, and June 30, 1997
(unaudited)............................................................... 14,905 14,905 14,905
Common stock, $0.01 par value; Authorized 15,000,000 shares:
issued, 1,133,195 shares in 1995, 1,083,728 shares in 1996 and 1,016,537,
shares (unaudited) at June 30, 1997....................................... 11 11 10
Additional paid-in capital.................................................. 1,414 1,748 1,724
Retained earnings........................................................... 20,724 23,176 23,994
Net unrealized gain on investments.......................................... 1,528 778 862
Treasury stock.............................................................. (4,458) (2,972) (1,486)
Obligation on stock held by ESOP............................................ (8,200) (11,449) (11,495)
Guarantee of notes payable of ESOP.......................................... (319) (221) (196)
--------- ---------- -----------
Net stockholders' equity................................................ 25,605 25,976 28,318
--------- ---------- -----------
$ 44,468 $ 49,265 $ 51,382
--------- ---------- -----------
--------- ---------- -----------
</TABLE>
See notes to condensed financial information
S-4
<PAGE>
SCHEDULE II.2
PAULA FINANCIAL AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PAULA FINANCIAL
STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS
------------------------------------- ENDED
1994 1995 1996 JUNE 30,
----------- ----------- ----------- 1997
-----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Income:
Net investment income.................................... $ 124 $ 120 $ 31 $ --
Service fees............................................. 1,429 1,057 871 403
Other.................................................... 198 202 112 23
----------- ----------- ----------- -----------
1,751 1,379 1,014 426
Expenses:
Interest expense......................................... 131 742 635 431
Service fees............................................. 568 135 865 330
Operating................................................ 1,829 1,325 1,649 275
----------- ----------- ----------- -----------
2,528 2,202 3,149 1,036
Loss from operations before income tax benefit and equity
in net income (loss) of subsidiaries..................... (777) (823) (2,135) (610)
Income tax benefit....................................... (205) (182) (727) (199)
----------- ----------- ----------- -----------
Loss from operations before equity in net income (loss) of
subsidiaries............................................. (572) (641) (1,408) (411)
Equity in net income of subsidiaries....................... 5,277 941 5,331 2,705
----------- ----------- ----------- -----------
Net income........................................... $ 4,705 $ 300 $ 3,923 $ 2,294
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Earnings per share......................................... 2.39 0.15 1.95 1.14
Weighted average shares outstanding........................ 1,972,005 1,939,884 2,007,236 2,005,569
</TABLE>
See notes to condensed financial information
S-5
<PAGE>
SCHEDULE II.3
PAULA FINANCIAL AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PAULA FINANCIAL
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- --------- SIX MONTHS
ENDED
JUNE 30, 1997
-------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................................................ $ 4,705 $ 300 $ 3,923 $ 2,294
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization....................................... 134 83 45 16
(Income) loss from subsidiaries..................................... (5,277) (941) (5,331) (2,705)
Dividends received from subsidiaries................................ 975 935 820 --
Loss on sale of fixed assets........................................ 64 33 5 4
(Increase) decrease in accounts receivable.......................... (347) 1,071 (530) 431
(Increase) decrease in other assets................................. 17 (312) (9) (190)
Increase (decrease) in accounts payable and other liabilities....... 107 151 536 (589)
Other............................................................... 2 (80) (195) 35
--------- --------- --------- -------------
Net cash provided by (used in) operating activities............... 380 1,240 (736) (704)
--------- --------- --------- -------------
Cash flows from investing activities:
Proceeds from sale of property and equipment........................ 176 80 88 6
Purchase of property and equipment.................................. (11) (89) (74) --
Capital contribution to subsidiary.................................. (3,750) -- -- --
Purchase of insurance agency........................................ (901) -- -- --
--------- --------- --------- -------------
Net cash provided by (used in) investing activities............... (4,486) (9) 14 6
--------- --------- --------- -------------
Cash flows from financing activities:
Borrowings under line of credit agreement, net...................... 150 2,822 2,268 1,871
Payments on notes payable........................................... (289) (2,923) (1,627) (1,554)
Issuance of notes payable........................................... -- 214 269 --
Proceeds from sale of preferred stock............................... 14,905 -- -- --
Sale of common stock................................................ 510 4 343 14
Retirement of common stock.......................................... (10,585) (1,994) -- (39)
--------- --------- --------- -------------
Net cash provided (used in) financing activities.................. 4,691 (1,877) 1,253 292
--------- --------- --------- -------------
Net increase (decrease) in cash and invested cash..................... 585 (646) 531 (406)
Cash and invested cash at beginning of period......................... 69 654 8 539
--------- --------- --------- -------------
Cash and invested cash at end of period............................... $ 654 $ 8 $ 539 $ 133
--------- --------- --------- -------------
--------- --------- --------- -------------
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes........................ $ 1 $ 1 $ 1 $ --
--------- --------- --------- -------------
--------- --------- --------- -------------
Cash paid during the period for interest............................ $ 188 $ 363 $ 557 $ 323
--------- --------- --------- -------------
--------- --------- --------- -------------
</TABLE>
See notes to condensed financial information
S-6
<PAGE>
SCHEDULE II.4
PAULA FINANCIAL AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PAULA FINANCIAL
NOTES TO CONDENSED FINANCIAL INFORMATION
DECEMBER 31, 1995 AND 1996 AND JUNE 30, 1997 (UNAUDITED)
(IN THOUSANDS)
1. BASIS OF PRESENTATION
In accordance with the requirements of Regulation S-X of the Securities and
Exchange Commission, the financial statements of the registrant are condensed
and omit many disclosures presented in the consolidated financial statements and
the notes thereto.
2. NOTES PAYABLE
The following is a summary of the notes payable balances at period end:
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, 1997
-------------------- -----------
1995 1996
--------- --------- (UNAUDITED)
<S> <C> <C> <C>
Note payable to bank..................................... $ 5,222 $ 7,490 $ 9,361
Notes payable to former shareholders..................... 4,672 3,143 1,615
Notes of employee stock ownership plan................... 319 221 196
--------- --------- -----------
Balance at end of period................................. $ 10,213 $ 10,854 $ 11,172
--------- --------- -----------
--------- --------- -----------
</TABLE>
Maturities of notes payable for the next five years are as follows:
<TABLE>
<CAPTION>
JUNE 30,
1997
DECEMBER 31, -----------
FISCAL YEAR 1996
- ---------------------------------------------------------------- -------------- (UNAUDITED)
<S> <C> <C>
1997............................................................ $ 1,625 $ 72
1998............................................................ 1,627 1,627
1999............................................................ 7,559 9,430
2000............................................................ 43 43
-------------- -----------
Total........................................................... $ 10,854 $ 11,172
-------------- -----------
-------------- -----------
</TABLE>
3. DIVIDENDS FROM SUBSIDIARIES
During 1994, 1995, and 1996, a cash dividend of $975, $935, and $820,
respectively, was paid to PAULA Financial by its consolidated subsidiaries.
During the first six months of 1997, there were no dividends paid to PAULA
Financial by its consolidated subsidiaries (unaudited).
4. CONTINGENCIES
The Company is subject to various litigation which arises in the ordinary
course of business. Based upon discussions with counsel, management is of the
opinion that such litigation will not have a material adverse effect on the
consolidated financial position of the Company or its consolidated results of
operations.
S-7
<PAGE>
SCHEDULE III
PAULA FINANCIAL AND SUBSIDIARIES
SUPPLEMENTAL INSURANCE INFORMATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN
COLUMN COLUMN H
B E COLUMN -----------
----------- COLUMN ------------- COLUMN G BENEFITS,
DEFERRED D OTHER POLICY F ----------- CLAIMS,
POLICY ----------- CLAIMS AND --------- NET LOSSES AND
COLUMN ACQUISITION UNEARNED BENEFITS PREMIUM INVESTMENT SETTLEMENT
A COSTS PREMIUM PAYABLE REVENUE INCOME EXPENSES
- ------------------------------------ ----------- ----------- ------------- --------- ----------- -----------
COLUMN
C
-----------
FUTURE
POLICY
BENEFITS,
LOSSES,
CLAIMS AND
LOSS
EXPENSES
-----------
<S> <C> <C> <C> <C> <C> <C> <C>
1994
Workers Compensation................ $ 643 $ 60,173 $ 4,214 -- $ 50,977 $ 4,037 $ 28,513
Group A&H........................... -- 210 -- -- 44 121 48
Group Life.......................... -- 90 -- -- 268 124 57
----------- ----------- ----------- --- --------- ----------- -----------
Total............................. $ 643 $ 60,473 $ 4,214 -- $ 51,289 $ 4,282 $ 28,618
----------- ----------- ----------- --- --------- ----------- -----------
----------- ----------- ----------- --- --------- ----------- -----------
1995
Workers Compensation................ $ 645 $ 56,757 $ 4,609 -- $ 44,224 $ 4,220 $ 29,164
Group A&H........................... -- 210 -- -- 27 167 98
Group life.......................... -- 82 -- -- 280 161 101
----------- ----------- ----------- --- --------- ----------- -----------
Total............................. $ 645 $ 57,049 $ 4,609 -- $ 44,531 $ 4,548 $ 29,363
----------- ----------- ----------- --- --------- ----------- -----------
----------- ----------- ----------- --- --------- ----------- -----------
1996
Workers Compensation................ $ 1,330 $ 55,187 $ 10,655 -- $ 54,563 $ 4,288 $ 33,293
Group A&H........................... -- 400 -- -- 551 152 407
Group Life.......................... -- 133 -- -- 390 145 200
----------- ----------- ----------- --- --------- ----------- -----------
Total............................. $ 1,330 $ 55,720 $ 10,655 -- $ 55,504 $ 4,585 $ 33,900
----------- ----------- ----------- --- --------- ----------- -----------
----------- ----------- ----------- --- --------- ----------- -----------
6 MONTHS ENDED 6/30/97
Workers Compensation................ $ 1,805 $ 64,389 $ 13,364 -- $ 41,303 $ 2,333 $ 28,137
Group A&H........................... -- 443 -- -- 318 75 221
Group Life.......................... -- 140 -- -- 157 72 89
----------- ----------- ----------- --- --------- ----------- -----------
Total............................. $ 1,805 $ 64,972 $ 13,364 -- $ 41,778 $ 2,480 $ 28,447
----------- ----------- ----------- --- --------- ----------- -----------
----------- ----------- ----------- --- --------- ----------- -----------
<CAPTION>
COLUMN
I
------------- COLUMN
AMORTIZATION J COLUMN
OF DEFERRED ----------- K
POLICY OTHER -----------
COLUMN ACQUISITION OPERATING PREMIUMS
A COSTS EXPENSES WRITTEN
- ------------------------------------ ------------- ----------- -----------
<S> <C> <C> <C>
1994
Workers Compensation................ $ 940 $ 13,473 $ 51,228
Group A&H........................... -- 27 44
Group Life.......................... -- 197 268
------------- ----------- -----------
Total............................. $ 940 $ 13,697 $ 51,540
------------- ----------- -----------
------------- ----------- -----------
1995
Workers Compensation................ $ 922 $ 13,847 $ 44,619
Group A&H........................... -- 45 27
Group life.......................... -- 475 280
------------- ----------- -----------
Total............................. $ 922 $ 14,367 $ 44,926
------------- ----------- -----------
------------- ----------- -----------
1996
Workers Compensation................ $ 2,421 $ 17,256 $ 60,609
Group A&H........................... -- 338 551
Group Life.......................... -- 234 390
------------- ----------- -----------
Total............................. $ 2,421 $ 17,828 $ 61,550
------------- ----------- -----------
------------- ----------- -----------
6 MONTHS ENDED 6/30/97
Workers Compensation................ $ 3,549 $ 11,565 $ 44,012
Group A&H........................... -- 146 318
Group Life.......................... -- 58 157
------------- ----------- -----------
Total............................. $ 3,549 $ 11,769 $ 44,487
------------- ----------- -----------
------------- ----------- -----------
</TABLE>
S-8
<PAGE>
SCHEDULE IV
PAULA FINANCIAL AND SUBSIDIARIES
REINSURANCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN F
COLUMN C COLUMN D ---------------
COLUMN B ------------ -------------
COLUMN A ----------- CEDED TO ASSUMED FROM COLUMN E PERCENTAGE OF
- --------------------------------------------- GROSS OTHER OTHER ----------- AMOUNT
DESCRIPTION AMOUNT COMPANIES COMPANIES NET AMOUNT ASSUMED TO NET
- --------------------------------------------- ----------- ------------ ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1994
Premiums:
Workers' compensation insurance.............. $ 52,818 $ 2,006 $ 165 $ 50,977 0.3%
Group A&H.................................... 44 -- -- 44 0.0%
Group Life................................... 268 -- -- 268 0.0%
--
----------- ------------ ----- -----------
Total Premiums............................... $ 53,130 $ 2,006 $ 165 $ 51,289 0.3%
--
--
----------- ------------ ----- -----------
----------- ------------ ----- -----------
YEAR ENDED DECEMBER 31, 1995
Premiums:
Workers' compensation insurance.............. $ 45,951 $ 1,836 $ 109 $ 44,224 0.2%
Group A&H.................................... 27 -- -- 27 0.0%
Group Life................................... 280 -- -- 280 0.0%
--
----------- ------------ ----- -----------
Total Premiums............................... $ 46,258 $ 1,836 $ 109 $ 44,531 0.2%
--
--
----------- ------------ ----- -----------
----------- ------------ ----- -----------
YEAR ENDED DECEMBER 31, 1996
Premiums:
Workers' compensation insurance.............. $ 56,197 $ 2,056 $ 422 $ 54,563 0.8%
Group A&H.................................... 551 -- -- 551 0.0%
Group Life................................... 390 -- -- 390 0.0%
--
----------- ------------ ----- -----------
Total Premiums............................... $ 57,138 $ 2,056 $ 422 $ 55,504 0.8%
--
--
----------- ------------ ----- -----------
----------- ------------ ----- -----------
SIX MONTHS ENDED 6/30/97 (UNAUDITED)
Premiums:
Workers' compensation insurance.............. $ 42,541 $ 1,384 $ 146 $ 41,303 0.4%
Group A&H.................................... 318 -- -- 318 0.0%
Group Life................................... 157 -- -- 157 0.0%
--
----------- ------------ ----- -----------
Total Premiums............................... $ 43,016 $ 1,384 $ 146 $ 41,778 0.4%
--
--
----------- ------------ ----- -----------
----------- ------------ ----- -----------
</TABLE>
S-9
<PAGE>
SCHEDULE V
PAULA FINANCIAL AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------------------------------- ------------- ---------------------------- ------------- -------------
ADDITIONS
----------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END
OF PERIOD EXPENSE ACCOUNTS DEDUCTIONS OF PERIOD
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1994
Allowance for uncollectible
accounts.......................... $ 350 $ -- $ -- $ -- $ 350
----- ----- ----- ----- -----
----- ----- ----- ----- -----
YEAR ENDED DECEMBER 31, 1995
Allowance for uncollectible
accounts.......................... $ 350 $ 8 $ -- $ -- $ 358
----- ----- ----- ----- -----
----- ----- ----- ----- -----
YEAR ENDED DECEMBER 31, 1996
Allowance for uncollectible
accounts.......................... $ 358 $ 142 $ -- $ -- $ 500
----- ----- ----- ----- -----
----- ----- ----- ----- -----
SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
Allowance for uncollectible
accounts.......................... $ 500 $ 75 $ -- $ 50 $ 525
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
S-10
<PAGE>
SCHEDULE VI
PAULA FINANCIAL AND SUBSIDIARIES
SUPPLEMENTAL PROPERTY AND CASUALTY INSURANCE INFORMATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN
C
COLUMN -----------
B RESERVES COLUMN
------------- FOR UNPAID COLUMN COLUMN G
DEFERRED CLAIMS AND E F -------------
POLICY CLAIMS ----------- ----------- NET
COLUMN ACQUISITION ADJUSTMENT UNEARNED EARNED INVESTMENT
A COSTS EXPENSE PREMIUM PREMIUM INCOME
- ------------------------------------- ------------- ----------- ----------- ----------- -------------
COLUMN
D
-----------------
DISCOUNT IF ANY,
DEDUCTED IN
RESERVES FOR
UNPAID CLAIMS AND
CLAIM ADJUSTMENT
EXPENSES
-----------------
<S> <C> <C> <C> <C> <C> <C>
1994
Workers Compensation................. $ 643 $ 60,173 $ -- $ 4,214 $ 50,977 $ 4,037
1995
Workers Compensation................. $ 645 $ 56,757 $ -- $ 4,609 $ 44,224 $ 4,220
1996
Workers Compensation................. $ 1,330 $ 55,187 $ -- $ 10,655 $ 54,563 $ 4,288
SIX MONTHS ENDED 6/30/97 (UNAUDITED)
Workers Compensation................. $ 1,805 $ 64,389 $ -- $ 13,364 $ 41,303 $ 2,333
<CAPTION>
COLUMN
H
------------------------
COLUMN
CLAIMS AND CLAIM I COLUMN
ADJUSTMENT EXPENSES ------------- J
INCURRED AMORTIZATION ----------- COLUMN
RELATED TO: OF DEFERRED PAID CLAIMS K
------------------------ POLICY AND CLAIM -----------
COLUMN CURRENT ACQUISITION ADJUSTMENT PREMIUMS
A YEAR PRIOR YEAR COSTS EXPENSES WRITTEN
- ------------------------------------- ----------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1994
Workers Compensation................. $ 32,469 $ (3,955) $ 940 $ 32,019 $ 51,228
1995
Workers Compensation................. $ 33,048 $ (3,884) $ 922 $ 32,469 $ 44,619
1996
Workers Compensation................. $ 35,938 $ (2,646) $ 2,421 $ 34,514 $ 60,609
SIX MONTHS ENDED 6/30/97 (UNAUDITED)
Workers Compensation................. $ 28,937 $ (800) $ 3,549 $ 18,945 $ 44,012
</TABLE>
S-11
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ----------- ----------------------------------------------------------------------------------------- -----------------
<C> <S> <C>
1 Form of Underwriting Agreement...........................................................
2.1 Asset Purchase Agreement dated December 8, 1994 by and between Registrant, Oregon Ag
Insurance Services, Inc., Agri-Comp. Inc., Oregon-Comp. Inc. and Oregon Risk
Management, Inc........................................................................
2.2 Asset Purchase Agreement dated November 10, 1995 by and between Pan American
Underwriters, Inc. (PAU), Desert Benefits, Inc., Employee Benefits & Insurance
Services, Fredric J. Klicka and Fredric J. Klicka II...................................
2.3 Agreement dated July 25, 1996 by and among Registrant, PAULA Insurance Company (PICO),
James G. Parker Insurance Associates (Parker) and certain individual stockholders of
Parker.................................................................................
2.4 Asset Purchase Agreement dated August 23, 1996 by and among PAU, Guinn Sinclair Insurance
Services, Margaret Funnell and Yolanda Ibarrez.........................................
2.5 Series A Preferred Stock Purchase Agreement dated March 11, 1997 by and between PICO and
CAPAX Management & Insurance Services (CAPAX)..........................................
3.1 Certificate of Incorporation of Registrant...............................................
3.2 Certificate of Designation of Series A Preferred Stock of PAULA Financial, as amended....
3.3 Bylaws of Registrant.....................................................................
4.2 Specimen certificate of Common Stock.*...................................................
5 Opinion of Gibson, Dunn & Crutcher LLP.*.................................................
10.1 Lease for Registrant's Pasadena, California office, between Pasadena Gateway Plaza, as
Lessor, and PAU, as Lessee, dated January 1, 1989 and last amended May 12, 1995 and the
Assignment and Assumption of Lease and Consent between LACERA Gateway Property, Inc.,
PAU and PICO...........................................................................
10.2 Lease for Registrant's Lake Oswego, Oregon office, dated September 23, 1996 and amended
May 13, 1997 between WCB Thirty-Two Limited Partnership, as Lessor, and PICO, as
Lessee.................................................................................
10.3 Lease for Registrant's Fresno, California office dated October 18, 1994 and amended
January 10, 1997 between Altaffer Survivor Trust, as Lessor, and PAU, as Lessee........
10.4 Agreement of Reinsurance, No. 7448, dated February 16, 1990 and last amended July 1, 1996
between General Reinsurance Corporation and PICO.......................................
10.5 Workers' Compensation and Employers' Liability Excess of Loss Reinsurance Agreement, No.
380, dated July 1, 1995 and last amended July 1, 1996 between PICO and certain
reinsurers named therein...............................................................
10.6 PAULA Financial and Subsidiaries 1994 Stock Incentive Plan...............................
10.7 PAULA Financial and Subsidiaries 1997 Stock Incentive Plan...............................
10.8 Form of Stock Option Agreement (Immediate Vesting - Non-Plan) issued in connection with
the grant of stock options under the 1994 Plan.........................................
10.9 Form of Stock Option Agreement (Executive - Non-Plan) issued in connection with the grant
of stock options other than under the 1994 Plan........................................
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ----------- ----------------------------------------------------------------------------------------- -----------------
<C> <S> <C>
10.10 Form of Stock Option Agreement (Immediate Vesting) issued under the 1994 Plan............
10.11 Form of Stock Option Agreement (Executive) issued under the 1994 Plan....................
10.12 Form of Stock Option Agreement (Stepped Vesting) issued under the 1994 Plan..............
10.13 Form of Indemnification Agreement between Registrant and each of its directors...........
10.14 Convertible Revolving Loan Note dated March 31, 1997 made by Registrant in favor of Sanwa
Bank California........................................................................
10.15 Credit Agreement dated March 31, 1997 between Registrant and Sanwa Bank California.......
10.16 Form of Credit Guaranty dated March 31, 1997 made by each of PAU, Pan American
Underwriters Insurance Agents & Brokers, Inc. (PAUIAB), Agri-Comp Insurance Agency,
Inc. and Pan Pacific Benefit Administrators, Inc. (PPBA)...............................
10.17 Series A Preferred Stock Purchase Agreement dated August 3, 1994 between Registrant and
certain purchasers of Series A Preferred Stock.........................................
10.18 Form of Warrant Agreement dated August 3, 1994 between Registrant and Prudential
Securities Incorporated and Conning & Company (Conning)................................
10.19 Warrant Certificates dated August 3, 1994 in the name of Prudential Securities and
Conning................................................................................
10.20 Voting Agreement dated August 3, 1994 between Registrant, certain stockholders and
certain purchasers of Series A Preferred Stock.........................................
10.21 Asset Management Agreement dated February 1, 1995 between PICO and Conning...............
10.22 Agency and Affiliates Cost Allocation and Reimbursement Agreement dated March 1, 1992 and
last amended December 1, 1996 between PAU and PAUIAB, as Agency, and PICO, PACO and
PPBA, as Affiliates....................................................................
10.23 PAULA Insurance Company Insurance Carrier and Affiliates Cost Allocation and
Reimbursement Agreement dated March 1, 1992 and last amended December 9, 1994 between
PICO, as Carrier, and PACO, PAU, PAUIAB and PPBA, as Affiliates........................
10.24 PAULA Financial Parent and Affiliates Cost Allocation and Reimbursement Agreement dated
January 1, 1993 and last amended December 9, 1994 between Registrant, as Parent, and
PICO, PACO, PAU, PAUIAB and PPBA, as Affiliates........................................
10.25 Managing Agreement dated January 1, 1993 and last amended April 28, 1995 between PACO and
PPBA, as Manager.......................................................................
10.26 Federal Income Tax Allocation Agreement dated April 10, 1997 between Registrant and its
subsidiaries...........................................................................
10.27 Agency Agreement dated March 1, 1992 and last amended April 1, 1997 between PAU and
PICO...................................................................................
10.28 Agency Agreement dated March 1, 1992 and last amended April 1, 1997 between PAUIAB and
PICO...................................................................................
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ----------- ----------------------------------------------------------------------------------------- -----------------
<C> <S> <C>
10.29 Agency Agreement dated December 8, 1994 and last amended April 1, 1997 among Agri-Comp
Insurance Agency, Inc. and PICO........................................................
10.30 Purchase Option dated March 11, 1997 between Registrant and CAPAX........................
11 Statement re Computation of per share earnings...........................................
19 1997 Proxy Statement of PAULA Financial..................................................
20 PAULA Financial and Subsidiaries Stockholder Report for the Twelve Months Ended December
31, 1996...............................................................................
21 List of subsidiaries of PAULA Financial..................................................
23.1 Consent of Gibson, Dunn & Crutcher LLP (included in Exhibit 5).*.........................
23.2 Consent of KPMG Peat Marwick LLP (included in S-1).......................................
24 Power of Attorney.**.....................................................................
27 Financial Data Schedule..................................................................
28.1 Schedule P to 1996 Annual Statement of PICO..............................................
28.2 Schedule O to 1996 Annual Statement of PACO..............................................
</TABLE>
- --------------
* To be filed by Amendment.
** Set forth on page II-6 of the Registration Statement.
<PAGE>
PAULA FINANCIAL
COMMON STOCK
(PAR VALUE $ .01 PER SHARE)
UNDERWRITING AGREEMENT
- , 1997
Goldman, Sachs & Co.,
Conning & Company,
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Goldman, Sachs & Co.,
85 Broad Street,
New York, New York 10004.
Ladies and Gentlemen:
PAULA Financial, a Delaware corporation (the "Company"), proposes, subject
to the terms and conditions stated herein, to issue and sell to the Underwriters
named in Schedule I hereto (the "Underwriters") an aggregate of - shares of
common stock, par value $.01 per share ("Stock"), of the Company and, at the
election of the Underwriters, up to - additional shares of Stock, and the
stockholder of the Company named in Schedule II hereto (the "Selling
Stockholder" proposes, subject to the terms and conditions stated herein, to
sell to the Underwriters an aggregate of 54,902 shares of Stock. The aggregate
of - shares to be sold by the Company and the Selling Stockholder is herein
called the "Firm Shares" and the aggregate of - additional shares to be sold by
the Company is herein called the "Optional Shares". The Firm Shares and the
Optional Shares that the Underwriters elect to purchase pursuant to Section 2
hereof are herein collectively called the "Shares". The merger of Paula
Financial, a California corporation and the predecessor corporation of the
Company, with and into the Company is herein referred to as the "Reincorporation
Merger".
1. (a) The Company represents and warrants to, and agrees with, each of
the Underwriters that:
(i) A registration statement on Form S-1 (File No. 333--) (the "Initial
Registration Statement") in respect of the Shares has been filed with the
Securities and Exchange Commission (the "Commission"); the Initial Registration
Statement and any post-effective amendment thereto, each in the form heretofore
delivered to you, and, excluding exhibits thereto, to you for each of the other
Underwriters, have been declared effective by the Commission in such form; other
than a registration statement, if any, increasing the size of the offering (a
"Rule 462(b) Registration Statement"), filed pursuant to Rule 462(b) under the
Securities Act of 1933, as amended (the "Act"), which became effective upon
filing, no other document with respect to the Initial Registration
<PAGE>
Statement has heretofore been filed with the Commission; and no stop order
suspending the effectiveness of the Initial Registration Statement, any
post-effective amendment thereto or the Rule 462(b) Registration Statement, if
any, has been issued and no proceeding for that purpose has been initiated or
threatened by the Commission (any preliminary prospectus included in the Initial
Registration Statement or filed with the Commission pursuant to Rule 424(a) of
the rules and regulations of the Commission under the Act is hereinafter called
a "Preliminary Prospectus"); the various parts of the Initial Registration
Statement and the Rule 462(b) Registration Statement, if any, including all
exhibits thereto and including the information contained in the form of final
prospectus filed with the Commission pursuant to Rule 424(b) under the Act in
accordance with Section 6(a) hereof and deemed by virtue of Rule 430A under the
Act to be part of the Initial Registration Statement at the time it was declared
effective or such part of the Rule 462(b) Registration Statement, if any, became
or hereafter becomes effective, each as amended at the time such part of the
registration statement became effective, is hereinafter collectively called the
"Registration Statement"; and such final prospectus, in the form first filed
pursuant to Rule 424(b) under the Act, is hereinafter called the "Prospectus";
(ii) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary Prospectus,
at the time of filing thereof, conformed in all material respects to the
requirements of the Act and the rules and regulations of the Commission
thereunder, and did not contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that this representation and warranty
shall not apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Company by an
Underwriter through Goldman, Sachs & Co. expressly for use therein;
(iii) The Registration Statement conforms, and the Prospectus and any
further amendments or supplements to the Registration Statement or the
Prospectus will conform, in all material respects to the requirements of the Act
and the rules and regulations of the Commission thereunder and do not and will
not, as of the applicable effective date as to the Registration Statement and
any amendment thereto, and as of the applicable filing date as to the Prospectus
and any amendment or supplement thereto, contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; PROVIDED, HOWEVER, that
this representation and warranty shall not apply to any statements or omissions
made in reliance upon and in conformity with information furnished in writing to
the Company by an Underwriter through Goldman, Sachs & Co. expressly for use
therein;
(iv) Neither the Company nor any of its subsidiaries has sustained since
the date of the latest audited financial statements included in the Prospectus
any material loss or interference with its business from fire, explosion, flood
or other calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise than as set
forth or contemplated in the Prospectus; and, since the respective dates as of
which information is given in the Registration Statement and the Prospectus,
there has not been (x) any material addition, or any development involving a
prospective material addition, to the Company's consolidated reserve for unpaid
losses and loss adjustment expenses, (y) any change in the capital stock of the
Company or any of its subsidiaries or any increase in the short-term or
long-term debt of the Company or any of its subsidiaries (except for the
retirement of 1,499 shares of Stock in July 1997)
2
<PAGE>
or (z) any material adverse change, or any development involving a prospective
material adverse change, in or affecting the general affairs, management,
financial position, stockholders' equity or results of operations (in the case
of financial position, stockholders' equity and results of operations considered
on either a statutory or generally accepted accounting principles ("GAAP")
basis) of the Company and its subsidiaries, otherwise than as set forth or
contemplated in the Prospectus;
(v) The Company and its subsidiaries have good and marketable title in
fee simple to all real property and good and marketable title to all personal
property owned by them, in each case free and clear of all liens, encumbrances
and defects except such as are described in the Prospectus or such as do not
materially affect the value of such property and do not interfere with the use
made and proposed to be made of such property by the Company and its
subsidiaries; and any real property and buildings held under lease by the
Company and its subsidiaries are held by them under valid, subsisting and
enforceable leases with such exceptions as are not material and do not interfere
with the use made and proposed to be made of such property and buildings by the
Company and its subsidiaries;
(vi) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware, with power
and authority (corporate and other) to own its properties and conduct its
business as described in the Prospectus, and has been duly qualified as a
foreign corporation for the transaction of business or licensed as an insurance
company and is in good standing under the laws of each other jurisdiction in
which it owns or leases properties or conducts any business so as to require
such qualification or license, or is subject to no material liability or
disability by reason of the failure to be so qualified or licensed in any such
jurisdiction; and each subsidiary of the Company has been duly incorporated and
is validly existing as a corporation in good standing under the laws of its
jurisdiction of incorporation, with power and authority (corporate and other) to
own its properties and conduct its business as described in the Prospectus, and
has been duly qualified for the transaction of business or licensed as an
insurance company under the laws of each other jurisdiction in which it owns or
leases properties, or conducts any business, so as to require such qualification
or license, or is subject to no material liability or disability by reason of
the failure to be so qualified or licensed in any such jurisdiction;
(vii) Each subsidiary of the Company is duly licensed or authorized as an
insurer or insurance agency or third-party administrator in each jurisdiction
where it is required to be so licensed or authorized to conduct its business as
described in the Prospectus, or is subject to no material liability or
disability by reason of the failure to be so licensed or authorized in any such
jurisdiction; the Company and each of its subsidiaries have made all required
filings under applicable insurance holding company statutes; the Company and
each of its subsidiaries have all other necessary authorizations, approvals,
orders, consents, certificates, permits, registrations or qualifications of and
from all insurance regulatory authorities to conduct its businesses as described
in the Prospectus, or is subject to no material liability or disability by
reason of the failure to have such authorizations, approvals, orders, consents,
licenses, certificates, permits, registrations or qualifications; and none of
the Company or any of its subsidiaries has received any notification from any
insurance regulatory authority to the effect that any additional authorization,
approval, order, consent, license, certificate, permit, registration or
qualification from such insurance regulatory authority is needed to be obtained
by any of the Company or its subsidiaries in any case where it could be
reasonably expected that (x) the Company or its subsidiaries would in fact be
required either to obtain any such additional authorization, approval, order,
consent, license, certificate, permit, registration or qualification, or cease
or otherwise limit writing certain business
3
<PAGE>
and (y) the failure to obtain such authorization, approval, order, consent,
license, certificate, permit, registration or qualification or the limiting of
such business would have a material adverse effect on the business, financial
position or results of operations of the Company and its subsidiaries;
(viii) Otherwise than as set forth in the Prospectus, each subsidiary of
the Company is in compliance with the requirements of the insurance laws and
regulations of its state of incorporation and the insurance laws and regulations
of other jurisdictions which are applicable to such subsidiary, and has filed
all notices, reports, documents or other information required to be filed
thereunder, except where the failure to so comply or file would not have a
material adverse effect on the Company and its subsidiaries;
(ix) Without limitation of the foregoing, the Company and its
subsidiaries, as applicable, have filed all notices, reports, documents or other
information required to be filed pursuant to, and have obtained all
authorizations, approvals, orders, consents, licenses, certificates, permits,
registrations or qualifications required to be obtained under, and have
otherwise complied with all requirements of, all insurance laws and regulations
applicable to the Company and its subsidiaries in connection with the
Reincorporation Merger and the issuance and sale by the Company of the Shares
and the other transactions herein contemplated, in each case other than such
filings, authorizations, approvals, orders, consents, licenses, certificates,
permits, registrations or qualifications which (individually or in the
aggregate) the failure to make, obtain or comply with (x) would not have a
material adverse effect on the Company and its subsidiaries and (y) would not
affect the validity, performance or consummation of the transactions
contemplated by this Agreement or the Reincorporation Merger;
(x) The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the Company have
been duly and validly authorized and issued, are fully paid and non-assessable
and conform to the description of the Stock contained in the Prospectus; and all
of the issued shares of capital stock of each subsidiary of the Company have
been duly and validly authorized and issued, are fully paid and non-assessable
and (except for directors' qualifying shares) are owned directly or indirectly
by the Company, free and clear of all liens, encumbrances, equities or claims;
(xi) The Shares have been duly and validly authorized and, when issued
and delivered against payment therefor as provided herein, will be duly and
validly issued and fully paid and non-assessable and will conform to the
description of the Stock contained in the Prospectus;
(xii) The Reincorporation Merger, the issue and sale of the Shares by the
Company and the compliance by the Company with all of the provisions of this
Agreement and the consummation of the transactions herein contemplated did not
or will not, as applicable, conflict with or result in a breach or violation of
any of the terms or provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, loan agreement or other agreement or instrument to
which the Company or any of its subsidiaries is a party or by which the Company
or any of its subsidiaries is bound or to which any of the property or assets of
the Company or any of its subsidiaries is subject, nor will such action result
in any violation of the provisions of the Certificate of Incorporation or
By-laws of the Company or any of its subsidiaries or any statute or any order,
rule or regulation of any court or insurance regulatory authority or other
governmental agency or body having jurisdiction over the Company or any of its
subsidiaries or any of their properties; and no consent, approval,
authorization, order, license, certificate, permit, registration or
qualification of or with any such court or insurance regulatory authority or
other governmental agency or body is or was required for the
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Reincorporation Merger, the issue and sale of the Shares or the consummation by
the Company of the transactions contemplated by this Agreement, except (w) those
which have been obtained; (x) the registration under the Act of the Shares and
such consents, approvals, authorizations, registrations or qualifications as may
be required under state securities or Blue Sky laws in connection with the
purchase and distribution of the Shares by the Underwriters; (y) those relating
to the acquisition of 10% or more of the aggregate number of shares of Stock to
be outstanding upon the consummation of the transactions contemplated by this
Agreement by any person or affiliated persons (other than the purchase and sale
of the shares of Stock by the Underwriters pursuant to this Agreement); or (z)
such consents, approvals, authorizations, orders, licenses, certificates,
permits, registrations or qualifications which (individually or in the
aggregate) the failure to make, obtain or comply with (A) would not have a
material adverse effect on the Company and its subsidiaries and (B) would not
affect the validity, performance or consummation of the transactions
contemplated by this Agreement or the Reincorporation Merger;
(xiii) Neither the Company nor any of its subsidiaries is in violation
of its Certificate or Articles of Incorporation or By-laws or in default in the
performance or observance of any material obligation, agreement, covenant or
condition contained in any indenture, mortgage, deed of trust, loan agreement,
lease or other agreement or instrument to which it is a party or by which it or
any of its properties may be bound;
(xiv) The statements set forth in the Prospectus under the caption
"Description of Capital Stock", insofar as they purport to constitute a summary
of the terms of the Stock, and under the caption "Underwriting", insofar as they
purport to describe the provisions of the laws and documents referred to
therein, are accurate, complete and fair; PROVIDED, HOWEVER, that this
representation and warranty shall not apply to any statements or omissions made
in reliance upon and in conformity with information furnished in writing to the
Company by an Underwriter through Goldman, Sachs & Co. expressly for use
therein;
(xv) Other than as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which the Company or any of its subsidiaries
is a party or of which any property of the Company or any of its subsidiaries is
the subject which, if determined adversely to the Company or any of its
subsidiaries, would individually or in the aggregate have a material adverse
effect on the current or future consolidated financial position, stockholders'
equity or results of operations of the Company and its subsidiaries; and, to the
best of the Company's knowledge, no such proceedings are threatened or
contemplated by governmental authorities or threatened by others;
(xvi) The Company is not and, after giving effect to the offering and sale
of the Shares, will not be an "investment company" or an entity "controlled" by
an "investment company", as such terms are defined in the Investment Company Act
of 1940, as amended (the "Investment Company Act"); and
(xvii) KPMG Peat Marwick LLP, who have certified certain financial
statements of the Company and its subsidiaries, are independent public
accountants as required by the Act and the rules and regulations of the
Commission thereunder.
(b) The Selling Stockholder represents and warrants to, and agrees with,
each of the Underwriters and the Company that:
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(i) All consents, approvals, authorizations and orders necessary
for the execution and delivery by the Selling Stockholder of this
Agreement, and the Election, the Power of Attorney and the Custody
Agreement hereinafter referred to, and for the sale and delivery of the
Shares to be sold by the Selling Stockholder hereunder, have been obtained;
and the Selling Stockholder has full right, power and authority to enter
into this Agreement, the Election, the Power-of-Attorney and the Custody
Agreement and to sell, assign, transfer and deliver the Shares to be sold
by the Selling Stockholder hereunder;
(ii) The sale of the Shares to be sold by the Selling Stockholder
hereunder and the compliance by the Selling Stockholder with all of the
provisions of this Agreement, the Election, the Power of Attorney and the
Custody Agreement and the consummation of the transactions herein and
therein contemplated will not conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute a default
under, any statute, indenture, mortgage, deed of trust, loan agreement or
other agreement or instrument to which the Selling Stockholder is a party
or by which the Selling Stockholder is bound or to which any of the
property or assets of the Selling Stockholder is subject, nor will such
action result in any violation of the provisions of the Certificate of
Incorporation or By-laws of the Selling Stockholder or any statute or any
order, rule or regulation of any court or governmental agency or body
having jurisdiction over the Selling Stockholder or the property of the
Selling Stockholder;
(iii) The Selling Stockholder has good and valid title to the Warrant
hereinafter referred to, free and clear of all liens, encumbrances,
equities or claims; immediately prior to the First Time of Delivery (as
defined in Section 5 hereof) the Selling Stockholder will have good and
valid title to the Shares to be sold by the Selling Stockholder hereunder,
free and clear of all liens, encumbrances, equities or claims; and, upon
delivery of such Shares and payment therefor pursuant hereto, good and
valid title to such Shares, free and clear of all liens, encumbrances,
equities or claims, will pass to the several Underwriters;
(iv) The Selling Stockholder has not taken and will not take,
directly or indirectly, any action which is designed to or which has
constituted or which might reasonably be expected to cause or result in
stabilization or manipulation of the price of any security of the Company
to facilitate the sale or resale of the Shares;
(v) To the extent that any statements or omissions made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto are made in reliance upon and in conformity
with written information furnished to the Company by the Selling
Stockholder expressly for use therein, such Preliminary Prospectus and the
Registration Statement did, and the Prospectus and any further amendments
or supplements to the Registration Statement and the Prospectus, when they
become effective or are filed with the Commission, as the case may be, will
conform in all material respects to the requirements of the Act and the
rules and regulations of the Commission thereunder and will not contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein
not misleading;
(vi) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Tax Equity and Fiscal
Responsibility Act of 1982 with respect to the transactions herein
contemplated, the Selling Stockholder will deliver to you prior to or at
the First Time of Delivery (as hereinafter defined) a properly completed
and executed United
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States Treasury Department Form W-9 (or other applicable form or statement
specified by Treasury Department regulations in lieu thereof);
(vii) A Warrant Certificate of the Company (the "Warrant")
exercisable for all of the Shares to be sold by the Selling Stockholder
hereunder and an Election to Purchase (the "Election") designating the
number of Shares as to which the Warrant is to be exercised duly executed
by the Selling Stockholder have been placed in custody under a Custody
Agreement, in the form heretofore furnished to you (the "Custody
Agreement"), duly executed and delivered by the Selling Stockholder to -,
as custodian (the "Custodian"), and the Selling Stockholder has duly
executed and delivered a Power of Attorney, in the form heretofore
furnished to you (the "Power of Attorney"), appointing the persons
indicated in Schedule II hereto, and each of them, as the Selling
Stockholder's attorneys-in-fact (the "Attorneys-in-Fact") with authority to
execute and deliver this Agreement on behalf of the Selling Stockholder, to
determine the purchase price to be paid by the Underwriters to the Selling
Stockholder as provided in Section 2 hereof, to authorize the delivery of
the Shares to be sold by the Selling Stockholder hereunder and otherwise to
act on behalf of the Selling Stockholder in connection with the
transactions contemplated by this Agreement and the Custody Agreement; and
(viii) The Warrant, the Election and the Shares to be issued upon
the exercise of the Warrant held in custody for the Selling Stockholder
under the Custody Agreement are subject to the interests of the
Underwriters hereunder; the arrangements made by the Selling Stockholder
for such custody, and the appointment by the Selling Stockholder of the
Attorneys-in-Fact by the Power of Attorney, are to that extent irrevocable;
the obligations of the Selling Stockholder hereunder shall not be
terminated by operation of law, whether by the dissolution of the Selling
Stockholder or by the occurrence of any other event; if the Selling
Stockholder should be dissolved, or if any other such event should occur,
before the delivery of the Shares hereunder, certificates representing the
Shares shall be delivered by or on behalf of the Selling Stockholder in
accordance with the terms and conditions of this Agreement and of the
Custody Agreement; and actions taken by the Attorneys-in-Fact pursuant to
the Power of Attorney shall be as valid as if such dissolution or other
event had not occurred, regardless of whether or not the Custodian, the
Attorneys-in-Fact, or any of them, shall have received notice of such
dissolution or other event.
2. Subject to the terms and conditions herein set forth, (a) the Company
and the Selling Stockholder agree, severally and not jointly, to sell to each of
the Underwriters, and each of the Underwriters agrees, severally and not
jointly, to purchase from the Company and the Selling Stockholder, at a purchase
price per share of $_______, the number of Firm Shares (to be adjusted by you so
as to eliminate fractional shares ) determined by multiplying the aggregate
number of Shares to be sold by the Company and the Selling Stockholder as set
forth opposite their respective names in Schedule II hereto by a fraction, the
number of which is the aggregate number of Firm Shares to be purchased by such
Underwriter as set forth opposite the name of such Underwriter in Schedule I
hereto and the denominator of which is the aggregate number of Firm Shares by
all of the Underwriters from the Company and the Selling Stockholder hereunder
and (b) in the event and to the extent that the Underwriters shall exercise the
election to purchase Optional Shares as provided below, the Company agrees to
issue and sell to each of the Underwriters, and each of the Underwriters agrees,
severally and not jointly, to purchase from the Company, at the purchase price
per share set forth in clause (a) of this Section 2, that portion of the number
of Optional
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Shares as to which such election shall have been exercised (to be adjusted by
you so as to eliminate fractional shares) determined by multiplying such number
of Optional Shares by a fraction, the numerator of which is the maximum number
of Optional Shares which such Underwriter is entitled to purchase as set forth
opposite the name of such Underwriter in Schedule I hereto and the denominator
of which is the maximum number of Optional Shares that all of the Underwriters
are entitled to purchase hereunder.
The Company hereby grants to the Underwriters the right to purchase at
their election up to - Optional Shares, at the purchase price per share set
forth in the paragraph above, for the sole purpose of covering overallotments in
the sale of the Firm Shares. Any such election to purchase Optional Shares may
be exercised only by written notice from you to the Company, given within a
period of 30 calendar days after the date of this Agreement, setting forth the
aggregate number of Optional Shares to be purchased and the date on which such
Optional Shares are to be delivered, as determined by you but in no event
earlier than the First Time of Delivery (as defined in Section 5 hereof) or,
unless you and the Company otherwise agree in writing, earlier than two or later
than ten business days after the date of such notice.
3. The Company hereby confirms its engagement of Goldman, Sachs & Co. as,
and Goldman, Sachs & Co. hereby confirms its agreement with the Company to
render services as, a "qualified independent underwriter" within the meaning of
Rule 2720 of the National Association of Securities Dealers, Inc. (the "NASD")
with respect to the offering and sale of the Shares. Goldman, Sachs & Co., in
its capacity as qualified independent underwriter and not otherwise, is referred
to herein as the "QIU". As compensation for the services of the QIU hereunder,
the Company agrees to pay the QIU $10,000 at the First Time of Delivery.
4. Upon the authorization by you of the release of the Firm Shares, the
several Underwriters propose to offer the Firm Shares for sale upon the terms
and conditions set forth in the Prospectus.
5. (a) The Shares to be purchased by each Underwriter hereunder, in
definitive form, and in such authorized denominations and registered in such
names as Goldman, Sachs & Co. may request upon at least forty-eight hours' prior
notice to the Company and the Selling Stockholder shall be delivered by or on
behalf of the Company and the Selling Stockholder to Goldman, Sachs & Co., for
the account of such Underwriter, against payment by or on behalf of such
Underwriter of the purchase price therefor by wire transfer of same day funds.
The Company will cause the certificates representing the Shares to be made
available for checking and packaging at least twenty-four hours prior to the
Time of Delivery (as defined below) with respect thereto at the office of
Goldman, Sachs & Co., 85 Broad Street, New York, New York 10004 (the "Designated
Office"). The time and date of such delivery and payment shall be, with respect
to the Firm Shares, 7:00 a.m., Los Angeles time, on ________, 1997 or such other
time and date as Goldman, Sachs & Co., the Company and the Selling Stockholder
may agree upon in writing, and, with respect to the Optional Shares, 7:00 a.m.,
Los Angeles time, on the date specified by Goldman, Sachs & Co. in the written
notice given by Goldman, Sachs & Co. of the Underwriters' election to purchase
such Optional Shares, or such other time and date as Goldman, Sachs & Co. and
the Company may agree upon in writing. Such time and date for delivery of the
Firm Shares is herein called the "First Time of Delivery", such time and date
for delivery of the Optional Shares, if not the First Time of Delivery, is
herein called the "Second Time of Delivery", and each such time and date for
delivery is herein called a "Time of Delivery".
(b) The documents to be delivered at each Time of Delivery by or on
behalf of the parties hereto pursuant to Section 8 hereof, including the
cross receipt for the Shares and any additional documents requested by the
Underwriters pursuant to Section 8(m) hereof, will be delivered at the
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offices of Sullivan & Cromwell, 444 South Flower Street, Los Angeles,
California, 90071 (the "Closing Location"), and the Shares will be
delivered at the Designated Office, all at such Time of Delivery. A
meeting will be held at the Closing Location at 4:00 p.m., Los Angeles
time, on the New York Business Day next preceding such Time of Delivery, at
which meeting the final drafts of the documents to be delivered pursuant to
the preceding sentence will be available for review by the parties hereto.
For the purposes of this Section 5, "New York Business Day" shall mean each
Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which
banking institutions in New York are generally authorized or obligated by
law or executive order to close.
6. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you and to file
such Prospectus pursuant to Rule 424(b) under the Act not later than the
Commission's close of business on the second business day following the
execution and delivery of this Agreement, or, if applicable, such earlier
time as may be required by Rule 430A(a)(3) under the Act; to make no
further amendment or any supplement to the Registration Statement or
Prospectus which shall be disapproved by you promptly after reasonable
notice thereof; to advise you, promptly after it receives notice thereof,
of the time when any amendment to the Registration Statement has been filed
or becomes effective or any supplement to the Prospectus or any amended
Prospectus has been filed and to furnish you with copies thereof; to advise
you, promptly after it receives notice thereof, of the issuance by the
Commission of any stop order or of any order preventing or suspending the
use of any Preliminary Prospectus or prospectus, of the suspension of the
qualification of the Shares for offering or sale in any jurisdiction, of
the initiation or threatening of any proceeding for any such purpose, or of
any request by the Commission for the amending or supplementing of the
Registration Statement or Prospectus or for additional information; and, in
the event of the issuance of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or prospectus or
suspending any such qualification, promptly to use its best efforts to
obtain the withdrawal of such order;
(b) Promptly from time to time to take such action as you may
reasonably request to qualify the Shares for offering and sale under the
securities laws of such jurisdictions as you may request and to comply with
such laws so as to permit the continuance of sales and dealings therein in
such jurisdictions for as long as may be necessary to complete the
distribution of the Shares, provided that in connection therewith the
Company shall not be required to qualify as a foreign corporation or to
file a general consent to service of process in any jurisdiction;
(c) Prior to 10:00 a.m. New York City time, on the New York
Business Day next succeeding the date of this Agreement and from time to
time, to furnish the Underwriters with copies of the Prospectus in New York
City in such quantities as you may from time to time reasonably request,
and, if the delivery of a prospectus is required at any time prior to the
expiration of nine months after the time of issue of the Prospectus in
connection with the offering or sale of the Shares and if at such time any
event shall have occurred as a result of which the Prospectus as then
amended or supplemented would include an untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made when such Prospectus is delivered, not misleading, or, if for any
other reason it shall be necessary during such period to amend or
supplement the Prospectus in order to comply with the Act, to notify you
and upon your request to prepare and furnish without charge to each
Underwriter and to any dealer in
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securities as many copies as you may reasonably request of an amended
Prospectus or a supplement to the Prospectus which will correct such
statement or omission or effect such compliance, and in case any
Underwriter is required to deliver a prospectus in connection with sales of
any of the Shares at any time nine months or more after the time of issue
of the Prospectus, upon your request but at the expense of such
Underwriter, to prepare and deliver to such Underwriter as many copies as
you may request of an amended or supplemented Prospectus complying with
Section 10(a)(3) of the Act;
(d) To make generally available to its securityholders as soon as
practicable, but in any event not later than eighteen months after the
effective date of the Registration Statement (as defined in Rule 158(c)
under the Act), an earning statement of the Company and its subsidiaries
(which need not be audited) complying with Section 11(a) of the Act and the
rules and regulations thereunder (including, at the option of the Company,
Rule 158);
(e) During the period beginning from the date hereof and continuing
to and including the date 180 days after the date of the Prospectus, not to
offer, sell, contract to sell or otherwise dispose of, or file or cause to
be filed with the Commission a registration statement (other than a
registration statement on Form S-8) with respect to, except as provided
hereunder any securities of the Company that are substantially similar to
the Shares, including but not limited to any securities that are
convertible into or exchangeable for, or that represent the right to
receive, Stock or any such substantially similar securities (other than
pursuant to employee stock option plans existing on, or upon the conversion
or exchange of convertible or exchangeable securities or exercise of
warrants outstanding as of, the date of this Agreement), without your prior
written consent;
(f) To furnish to its stockholders as soon as practicable after the
end of each fiscal year an annual report (including a balance sheet and
statements of income, stockholders' equity and cash flows of the Company
and its consolidated subsidiaries certified by independent public
accountants) and, as soon as practicable after the end of each of the first
three quarters of each fiscal year (beginning with the fiscal quarter
ending after the effective date of the Registration Statement),
consolidated summary financial information of the Company and its
subsidiaries for such quarter in reasonable detail;
(g) During a period of five years from the effective date of the
Registration Statement, to furnish to you copies of all reports or other
communications (financial or other) furnished to stockholders, and to
deliver to you (i) as soon as they are available, copies of any reports and
financial statements furnished to or filed with the Commission or any
national securities exchange on which any class of securities of the
Company is listed; and (ii) such additional information concerning the
business and financial condition of the Company as you may from time to
time reasonably request (such financial statements to be on a consolidated
basis to the extent the accounts of the Company and its subsidiaries are
consolidated in reports furnished to its stockholders generally or to the
Commission);
(h) To use the net proceeds received by it from the sale of the
Shares pursuant to this Agreement in the manner specified in the Prospectus
under the caption "Use of Proceeds";
(i) To use its best efforts to list for quotation the Shares on The
Nasdaq National Market ("Nasdaq");
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(j) To file with the Commission such reports on Form SR as may be
required by Rule 463 under the Act; and
(k) If the Company elects to rely upon Rule 462(b), the Company
shall file a Rule 462(b) Registration Statement with the Commission in
compliance with Rule 462(b) by 10:00 P.M., Washington, D.C. time, on the
date of this Agreement, and the Company shall at the time of filing either
pay to the Commission the filing fee for the Rule 462(b) Registration
Statement or give irrevocable instructions for the payment of such fee
pursuant to Rule 111(b) under the Act.
7. The Company and the Selling Stockholder covenant and agree with one
another and with the several Underwriters that (a) the Company will pay or cause
to be paid the following: (i) the fees, disbursements and expenses of the
Company's counsel and accountants in connection with the registration of the
Shares under the Act and all other expenses in connection with the preparation,
printing and filing of the Registration Statement, any Preliminary Prospectus
and the Prospectus and amendments and supplements thereto and the mailing and
delivering of copies thereof to the Underwriters and dealers; (ii) the cost of
printing or producing any Agreement among Underwriters, this Agreement, the Blue
Sky Memorandum, closing documents (including any compilations thereof) and any
other documents in connection with the offering, purchase, sale and delivery of
the Shares; (iii) all expenses in connection with the qualification of the
Shares for offering and sale under state securities laws as provided in Section
6(b) hereof, including the fees and disbursements of counsel for the
Underwriters in connection with such qualification and in connection with the
Blue Sky survey (iv) all fees and expenses in connection with listing the Shares
on the Nasdaq; (v) the filing fees incident to, and the fees and disbursements
of counsel for the Underwriters in connection with, securing any required review
by the National Association of Securities Dealers, Inc. of the terms of the sale
of the Shares; (vi) the cost of preparing stock certificates; (vii) the cost and
charges of any transfer agent or registrar; (viii) any fees and expenses of one
counsel for the Selling Stockholder, (ix) fees and expenses of the
Attorneys-in-Fact and the Custodian, and (x) all other costs and expenses
incident to the performance of its obligations hereunder which are not otherwise
specifically provided for in this Section; and (b) the Selling Stockholder will
pay or cause to be paid all costs and expenses incident to the performance of
the Selling Stockholder's obligations hereunder which are not otherwise
specifically provided for in this Section, including all expenses and taxes
incident to the sale and delivery of the Shares to be sold by the Selling
Stockholder to the Underwriters hereunder. In connection with the preceding
sentence, Goldman, Sachs & Co. agrees to pay New York State stock transfer tax,
and the Selling Stockholder agrees to reimburse Goldman, Sachs & Co. for
associated carrying costs if such tax payment is not rebated on the day of
payment and for any portion of such tax payment not rebated. It is understood,
however, that the Company shall bear, and the Selling Stockholder shall not be
required to pay or to reimburse the Company for, the cost of any other matters
not directly relating to the sale and purchase of the Shares pursuant to this
Agreement, and that, except as provided in this Section, and Sections 10 and 13
hereof, the Underwriters will pay all of their own costs and expenses, including
the fees of their counsel, stock transfer taxes on resale of any of the Shares
by them, and any advertising expenses connected with any offers they may make.
8. The obligations of the Underwriters hereunder, as to the Shares to be
delivered at each Time of Delivery, shall be subject, in their discretion, to
the condition that all representations and warranties and other statements of
the Company and of the Selling Stockholder herein are, at and as of such Time of
Delivery, true and correct, the condition that each of the Company, and the
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Selling Stockholder shall have performed all of its obligations hereunder
theretofore to be performed, and the following additional conditions:
(a) The Prospectus shall have been filed with the Commission
pursuant to Rule 424(b) within the applicable time period prescribed for
such filing by the rules and regulations under the Act and in accordance
with Section 6(a) hereof; if the Company has elected to rely upon Rule
462(b), the Rule 462(b) Registration Statement shall have become effective
by 10:00 P.M., Washington, D.C. time, on the date of this Agreement; no
stop order suspending the effectiveness of the Registration Statement or
any part thereof shall have been issued and no proceeding for that purpose
shall have been initiated or threatened by the Commission; and all requests
for additional information on the part of the Commission shall have been
complied with to your reasonable satisfaction;
(b) Sullivan & Cromwell, counsel for the Underwriters, shall have
furnished to you such opinion or opinions (a draft of each such opinion is
attached as Annex II(a) hereto), dated such Time of Delivery, with respect
to the incorporation of the Company, the validity of the Shares being
delivered at such Time of Delivery, the Registration Statement, the
Prospectus, and other related matters as you may reasonably request, and
such counsel shall have received such papers and information as they may
reasonably request to enable them to pass upon such matters;
(c) Gibson, Dunn & Crutcher LLP, counsel for the Company and the
Selling Stockholder, shall have furnished to you their written opinion (a
draft of each such opinion is attached as Annex II(b) hereto), dated such
Time of Delivery, in form and substance satisfactory to you, to the effect
that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of
the State of Delaware, with power and authority (corporate and
other) to own its properties and conduct its business as
described in the Prospectus;
(ii) The Company has an authorized capitalization as set
forth in the Prospectus, and all of the issued shares of
capital stock of the Company (including the Shares being
delivered at such Time of Delivery) have been duly and validly
authorized and issued and are fully paid and non-assessable;
and the Shares conform to the description of the Stock
contained in the Prospectus;
(iii) This Agreement has been duly authorized, executed and
delivered by the Company;
(iv) An Election, a Power-of-Attorney and a Custody
Agreement have been duly authorized, executed and delivered by
the Selling Stockholder and constitute valid and binding
agreements of the Selling Stockholder in accordance with their
terms;
(v) This Agreement has been duly authorized, executed and
delivered by or on behalf of the Selling Stockholder; and the
sale of the Shares to be sold by the Selling Stockholder
hereunder and the compliance by the Selling Stockholder with
all of the provisions of this Agreement, the Election, the
Power-of-Attorney and the Custody Agreement and the
consummation of the transactions herein and therein
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contemplated will not result in any violation of the provisions
of the Certificate of Incorporation or By-laws of the Selling
Stockholder;
(vi) The issue and sale of the Shares being delivered at
such Time of Delivery by the Company and the compliance by the
Company with all of the provisions of this Agreement and the
consummation of the transactions herein contemplated (including
consummation of the Reincorporation Merger) will not conflict
with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, loan agreement or other agreement or
instrument known to such counsel to which the Company or any of
its subsidiaries is a party or by which the Company or any of
its subsidiaries is bound or to which any of the property or
assets of the Company or any of its subsidiaries is subject,
nor will such action result in any violation of the provisions
of the Certificate of Incorporation or By-laws of the Company
or any statute or any order, rule or regulation known to such
counsel of any court or regulatory authority or other
governmental agency or body having jurisdiction over the
Company or any of its subsidiaries or any of their properties
(other than those made or established by any insurance official
or regulatory authority as to which no opinion need be given),
in each case other than such conflicts, breaches, violations or
defaults which, individually or in the aggregate, (x) would not
have a material adverse effect on the Company and its
subsidiaries and (y) would not affect the validity, performance
or consummation of the transactions contemplated by this
Agreement or the Reincorporation Merger, nor will such actions
result in any violation of the provisions of the Certificate of
Incorporation or By-laws of the Company (such counsel being
entitled to rely in respect of the opinion in this clause upon
a certificate of an officer of the Company in respect of
matters of fact, provided that such counsel shall state that
both you and they are justified in relying upon such
certificate);
(vii) No consent, approval, authorization, order,
registration or qualification of or with any such court or
governmental agency or body (other than any insurance
regulatory authority, as to which no opinion need be given) is
required for the issue and sale of the Shares or the
consummation by the Company or the Selling Stockholder of the
transactions contemplated by this Agreement, except the
registration under the Act of the Shares, and such consents,
approvals, authorizations, registrations or qualifications as
may be required under state securities or Blue Sky laws in
connection with the purchase and distribution of the Shares by
the Underwriters;
(viii) Neither the Company nor any of its subsidiaries is
in violation of its Certificate of Incorporation or By-laws or
in default in the performance or observance of any material
obligation, agreement, covenant or condition contained in any
indenture, mortgage, deed of trust, loan agreement, lease or
other agreement or instrument to which it is a party or by
which it or any of its properties may be bound, in each case
other than such violations or defaults which, individually or
in the aggregate, (x) would not have a material adverse effect
on the Company and its subsidiaries and (y) would not affect
the validity, performance or consummation of the transactions
contemplated by this Agreement or the Reincorporation Merger,
nor will such actions result in any violation of the provisions
of the Certificate of Incorporation or By-Laws of the Company;
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(ix) Immediately prior to the First Time of Delivery, the
Selling Stockholder had good and valid title to the Shares to
be sold at the First Time of Delivery by the Selling
Stockholder under this Agreement, free and clear of all liens,
encumbrances, equities or claims, and full right, power and
authority to sell, assign, transfer and deliver the Shares to
be sold by the Selling Stockholder hereunder (such counsel
being entitled to rely in respect of the opinion in this clause
without independent investigation upon a certificate of the
Selling Stockholder in respect of matters of fact as to the
ownership of, and liens, encumbrances, equities or claims on
the Shares sold by the Selling Stockholder);
(x) Good and valid title to such Shares, free and clear
of all liens, encumbrances, equities or claims, has been
transferred to each of the several Underwriters who have
purchased such Shares in good faith and without notice of any
such lien, encumbrance, equity or claim or any other adverse
claim within the meaning of the Uniform Commercial Code;
(xi) The statements set forth in the Prospectus under the
caption "Description of Capital Stock", insofar as they purport
to constitute a summary of the terms of the Stock, and under
the caption "Underwriting", insofar as they purport to describe
the provisions of the laws and documents referred to therein,
are accurate, complete and fair;
(xii) The Company is not an "investment company" or an
entity "controlled" by an "investment company", as such terms
are defined in the Investment Company Act;
(xiii) The Registration Statement and the Prospectus and
any further amendments and supplements thereto made by the
Company prior to such Time of Delivery (other than the
financial statements and related schedules therein, as to which
such counsel need not comment) comply as to form in all
material respects with the requirements of the Act and the
rules and regulations thereunder; and
Such counsel shall also state that although they do not assume any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement or the Prospectus, except for those
referred to in the opinion in subsection (xi) of this Section 8(c), they
have no reason to believe that, as of its effective date, the Registration
Statement or any further amendment thereto made by the Company prior to
such Time of Delivery (other than the financial statements and related
schedules therein, as to which such counsel need not comment) contained an
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading or that, as of its date, the Prospectus or any further
amendment or supplement thereto made by the Company prior to such Time of
Delivery (other than the financial statements and related schedules
therein, as to which such counsel need not comment) contained an untrue
statement of a material fact or omitted to state a material fact necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading or that, as of such Time of Delivery,
either the Registration Statement or the Prospectus or any further
amendment or supplement thereto made by the Company prior to such Time of
Delivery (other than the financial statements and related schedules
therein, as to which such counsel need not comment) contains an untrue
statement of a material fact or omits to state a material fact
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necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; and they do not know of any
amendment to the Registration Statement required to be filed or of any
contracts or other documents of a character required to be filed as an
exhibit to the Registration Statement or required to be described in the
Registration Statement or the Prospectus which are not filed or described
as required;
(d) Bradley K. Serwin, Senior Vice President and General Counsel of
the Company, shall have furnished to you his written opinion (a draft of
such opinion is attached as Annex II(c) hereto), dated such Time of
Delivery, in form and substance satisfactory to you, to the effect that:
(i) Each of Paula Insurance Company ("PICO"), Paula
Assurance Company, Pan American Underwriters, Inc., Pan
American Underwriters Insurance Agents & Brokers, Inc., Pan
Pacific Benefit Administrators, Inc. and Paula Trading Company
Insurance Agents & Brokers, Inc. has been duly incorporated and
is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation; and all of the
issued shares of capital stock of each such subsidiary of the
Company have been duly and validly authorized and issued, are
fully paid and non-assessable, and (except for directors'
qualifying shares) are owned directly or indirectly by the
Company, free and clear of all liens, encumbrances, equities or
claims (such counsel being entitled to advise you that his
opinion in this clause with respect to matters pertaining to
state laws other than those of California is based upon
examinations of applicable statutes and the published rules and
regulations, if any, of governmental authorities administering
such laws, as reported in the unofficial compilations thereof
available to him, and such counsel has not obtained any special
ruling with regard to such matters from any governmental
authority);
(ii) The Company has been duly qualified as a foreign
corporation for the transaction of business or is licensed as
an insurance company and is in good standing under the laws of
each jurisdiction in which it owns or leases properties or
conducts any business so as to require such qualification or
license or is subject to no material liability or disability by
reason of failure to be so qualified or licensed in any such
jurisdiction (such counsel being entitled to rely in respect of
the opinion in this clause upon opinions of local counsel and
in respect of matters of fact upon certificates of officers of
the Company, provided that such counsel shall state that he
believes that both you and he are justified in relying upon
such opinions and certificates);
(iii) The Company and its subsidiaries have good and
marketable title in fee simple to all real property owned by
them, in each case free and clear of all liens, encumbrances
and defects except such as are described in the Prospectus or
such as do not materially affect the value of such property and
do not interfere with the use made and proposed to be made of
such property by the Company and its subsidiaries; and any real
property and buildings held under lease by the Company and its
subsidiaries are held by them under valid, subsisting and
enforceable leases with such exceptions as are not material and
do not interfere with the use made and proposed to be made of
such property and buildings by the Company and its subsidiaries
(in giving the opinion in this clause, such counsel may state
that no examination of record titles for the purpose of such
opinion has been made, and that
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he is relying upon a general review of the titles of the
Company and its subsidiaries, upon opinions of local counsel
and abstracts, reports and policies of title companies rendered
or issued at or subsequent to the time of acquisition of such
property by the Company or its subsidiaries, upon opinions of
counsel to the lessors of such property and, in respect to
matters of fact, upon certificates of officers of the Company
or its subsidiaries, provided that such counsel shall state
that he believes that both you and he are justified in relying
upon such opinions, abstracts, reports, policies and
certificates);
(iv) Each subsidiary of the Company is duly licensed or
authorized as an insurer or insurance agent or third-party
administrator in each jurisdiction where it is required to be
so licensed or authorized to conduct its business as described
in the Prospectus, or is subject to no material liability or
disability by reason of the failure to be so licensed or
authorized in any such jurisdiction; the Company and each of
its subsidiaries have made all required filings under
applicable insurance holding company statutes; each of the
Company and each of its subsidiaries has all other necessary
authorizations, approvals, orders, consents, licenses,
certificates, permits, registrations or qualifications of and
from all insurance regulatory authorities to conduct their
respective businesses as described in the Prospectus, or is
subject to no material liability or disability by reason of the
failure to have such authorizations, approvals, orders,
consents, licenses, certificates, permits, registrations or
qualifications; and to the best of such counsel's knowledge,
none of the Company or any of its subsidiaries has received any
notification from any insurance regulatory authority to the
effect that any additional authorization, approval, order,
consent, license, certificate, permit, registration or
qualification from such insurance regulatory authority is
needed to be obtained by any of the Company or any of its
subsidiaries in any case where it could be reasonably expected
that (x) the Company or any of its subsidiaries would in fact
be required either to obtain any such additional authorization,
approval, order, consent, license, certificate, permit,
registration or qualification or cease or otherwise limit
writing certain business and (y) the failure to obtain such
authorization, approval, order, consent, license, certificate,
permit, registration or qualification or limiting such business
would have a material adverse effect on the business, financial
position or results of operations of the Company and its
subsidiaries;
(v) To the best of such counsel's knowledge, each
subsidiary of the Company is in compliance with the
requirements of the insurance laws and regulations of its state
of incorporation and the insurance laws and regulations of
other jurisdictions which are applicable to such subsidiary,
and has filed all notices, reports, documents or other
information required to be filed thereunder, or is subject to
no material liability or disability by reason of the failure to
so comply or file (such counsel being entitled to rely in
respect of the opinion in this clause upon opinions of local
counsel and in respect of matters of fact upon certificates of
officers of the Company, provided that such counsel shall state
that he believes that both you and he are justified in relying
upon such opinions and certificates);
(vi) All statements made in the Prospectus with respect to
existing and proposed federal and state statutes, regulations
and rules, and, to the best of such counsel's knowledge, with
respect to regulatory policies and practices, fairly and
accurately
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present the information set forth therein in all material
respects and the statements in the Prospectus under the caption
"Management -- Employee Stock Ownership Plan", insofar as they
purport to describe the provisions of the laws and documents
referred to therein and the PAULA Financial and Subsidiaries
Employee Stock Ownership Plan (the "ESOP") and the PAULA
Financial and Subsidiaries Employee Stock Ownership Trust,
fairly and accurately present the information set forth therein
in all material respects (such counsel being entitled to rely
in respect of the opinion in this clause upon opinions of
regulatory counsel, provided that such counsel shall state that
he believes that both you and he are justified in relying upon
such opinions);
(vii) To the best of such counsel's knowledge and other
than as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which the Company or any of
its subsidiaries is a party or of which any property of the
Company or any of its subsidiaries is the subject which, if
determined adversely to the Company or any of its subsidiaries,
would individually or in the aggregate have a material adverse
effect on the current or future consolidated financial
position, stockholders' equity or results of operations of the
Company and its subsidiaries; and, to the best of such
counsel's knowledge, no such proceedings are threatened or
contemplated by governmental authorities or threatened by
others;
(viii) The issue and sale of the Shares being delivered
at such Time of Delivery by the Company and the compliance by
the Company with all of the provisions of this Agreement and
the consummation of the Reincorporation Merger and the other
transactions herein contemplated did not or will not, as
applicable, conflict with or result in a breach or violation of
any of the terms or provisions of, or constitute a default
under, any indenture, mortgage, deed of trust, loan agreement
or other agreement or instrument known to such counsel to which
the Company or any of its subsidiaries is a party or by which
the Company or any of its subsidiaries is bound or to which any
of the property or assets of the Company or any of its
subsidiaries is subject, and such action did not or will not,
as applicable, result in any violation of the provisions of the
Certificate of Incorporation or By-laws of the Company or any
statute or any order, rule or regulation known to such counsel
of any court or insurance regulatory authority or other
governmental agency or body having jurisdiction over the
Company or any of its subsidiaries or any of their properties,
in each case other than such conflicts, breaches, violations or
defaults which, individually or in the aggregate, (x) would not
have a material adverse effect on the Company and its
subsidiaries and (y) would not affect the validity,
performance or consummation of the transactions contemplated by
this Agreement or the Reincorporation Merger, nor will such
actions result in any violation of the provisions of the
Certificate of Incorporation or By-laws of the Company; and
(ix) The Company and its subsidiaries, as applicable, have
filed all notices, reports, documents or other information
required to be filed pursuant to, and have obtained all
authorizations, approvals, orders, consents, licenses,
certificates, permits, registrations or qualifications required
to be obtained by the Company and its subsidiaries under, and
have otherwise complied with all requirements of, all insurance
laws and regulations applicable to the Company and its
subsidiaries in connection with the Reincorporation Merger and
the issuance and sale by the
17
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Company of the Shares; and, except as have been obtained
pursuant to the foregoing clause, no filing, authorization,
approval, order, consent, license, certificate, permit,
registration or qualification of or with any court, insurance
regulatory agency or other governmental agency or body having
jurisdiction over the Company or any of its subsidiaries or any
of their properties, is required for the issuance and sale by
the Company of the Shares, the Reincorporation Merger or the
consummation of the other transactions contemplated by this
Agreement, except (x) the registration under the Act of the
Shares, and such consents, approvals, authorizations,
registrations or qualifications as may be required under state
securities or Blue Sky laws (other than state insurance
securities laws of the state of California) in connection with
the purchase and distribution of the Shares by the
Underwriters; (y) those relating to the acquisition of 10% or
more of the aggregate number of shares of Stock to be
outstanding upon the consummation of the transactions
contemplated by this Agreement by any person or affiliated
persons (other than the purchase and sale of the shares of
Stock by the Underwriters pursuant to this Agreement) or (z)
such filings, authorizations, approvals, orders, consents,
licenses, certificates, permits, registrations or
qualifications which (individually or in the aggregate) the
failure to make, obtain or comply with (A) would not have a
material adverse effect on the Company and its subsidiaries and
(B) would not affect the validity, performance or consummation
of the transactions contemplated by this Agreement or the
Reincorporation Merger.
Such counsel shall also state that although he does not assume any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement or the Prospectus, except for those
referred to in the opinion in subsection (vi) of this Section 8(d), he has
no reason to believe that, as of its effective date, the Registration
Statement or any further amendment thereto made by the Company prior to
such Time of Delivery (other than the financial statements and related
schedules therein, as to which such counsel need not comment) contained an
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading or that, as of its date, the Prospectus or any further
amendment or supplement thereto made by the Company prior to such Time of
Delivery (other than the financial statements and related schedules
therein, as to which such counsel need not comment) contained an untrue
statement of a material fact or omitted to state a material fact necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading or that, as of such Time of Delivery,
either the Registration Statement or the Prospectus or any further
amendment or supplement thereto made by the Company prior to such Time of
Delivery (other than the financial statements and related schedules
therein, as to which such counsel need not comment) contains an untrue
statement of a material fact or omits to state a material fact necessary to
make the statements therein, in the light of the circumstances under which
they were made, not misleading; and he does not know of any amendment to
the Registration Statement required to be filed or of any contracts or
other documents of a character required to be filed as an exhibit to the
Registration Statement or required to be described in the Registration
Statement or the Prospectus which are not filed or described as required;
(e) On the date of the Prospectus at a time prior to the execution
of this Agreement, at 9:30 a.m., New York City time, on the effective date
of any post-effective amendment to the Registration Statement filed
subsequent to the date of this Agreement and also at each Time
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<PAGE>
of Delivery, KPMG Peat Marwick LLP shall have furnished to you a letter or
letters, dated the respective dates of delivery thereof, in form and
substance satisfactory to you, to the effect set forth in Annex I hereto
(the executed copy of the letter delivered prior to the execution of this
Agreement is attached as Annex I(a) hereto and a draft of the form of
letter to be delivered on the effective date of any post-effective
amendment to the Registration Statement and as of each Time of Delivery is
attached as Annex I(b) hereto);
(f)(i) Neither the Company nor any of its subsidiaries shall have
sustained since the date of the latest audited financial statements
included in the Prospectus any loss or interference with its business from
fire, explosion, flood or other calamity, whether or not covered by
insurance, or from any labor dispute or court or governmental action, order
or decree, otherwise than as set forth or contemplated in the Prospectus,
and (ii) since the respective dates as of which information is given in the
Prospectus there shall not have been (x) any addition, or any development
involving a prospective addition, to the Company's consolidated reserve for
unpaid losses and loss adjustment expenses, (y) any change in the capital
stock of the Company or any of its subsidiaries or any increase in
short-term or long-term debt of the Company or any of its subsidiaries or
(z) any change, or any development involving a prospective change, in or
affecting the general affairs, management, financial position,
stockholders' equity or results of operations (in the case of financial
position, stockholders' equity and results of operations considered on
either a statutory or GAAP basis) of the Company and its subsidiaries,
otherwise than as set forth or contemplated in the Prospectus, the effect
of which, in any such case described in Clause (i) or (ii), is in the
judgment of the Representatives so material and adverse as to make it
impracticable or inadvisable to proceed with the public offering or the
delivery of the Shares being delivered at such Time of Delivery on the
terms and in the manner contemplated in the Prospectus;
(g) On or after the date hereof (i) no downgrading shall have
occurred in the rating accorded PICO's financial strength or claims paying
ability by A.M. Best Company and (ii) A.M. Best Company shall not have
publicly announced that it has under surveillance or review, with possible
negative implications, its rating of PICO's financial strength or claims
paying ability;
(h) On or after the date hereof there shall not have occurred any
of the following: (i) a suspension or material limitation in trading in
securities generally on the New York Stock Exchange or on Nasdaq; (ii) a
suspension or material limitation in trading in the Company's securities on
Nasdaq; (iii) a general moratorium on commercial banking activities
declared by Federal or New York or California State authorities; or (iv)
the outbreak or escalation of hostilities involving the United States or
the declaration by the United States of a national emergency or war, if the
effect of any such event specified in this Clause (iv) in the judgment of
the Representatives makes it impracticable or inadvisable to proceed with
the public offering or the delivery of the Shares being delivered at such
Time of Delivery on the terms and in the manner contemplated in the
Prospectus;
(i) The Shares to be sold at such Time of Delivery shall have been
duly admitted for quotation on Nasdaq;
(j) On or prior to the date hereof, each executive officer and each
director of the Company, the ESOP and each person or entity set forth in
Schedule III hereto shall have furnished to you his or its executed written
agreement, in form and substance satisfactory to
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you, that, during the period beginning from the date hereof and continuing
to and including the date 180 days after the date of the Prospectus, not to
offer, sell, contract to sell or otherwise dispose of, or file or cause to
be filed with the Commission a registration statement (other than a
registration statement on Form S-8) with respect to, shares of Stock or any
securities of the Company that are substantially similar to the Shares,
including but not limited to any securities convertible into or
exchangeable for, or that represent the right to receive, Stock or any such
substantially similar securities, without your prior written consent,
except that the ESOP may distribute shares of Stock to participants in the
ESOP upon termination of such participants employment with the Company;
(k) The Company shall have complied with the provisions of Section
6(c) hereof with respect to the furnishing of Prospectuses on the New York
Business Day next succeeding the date of this Agreement; and
(l) The Company shall have furnished or caused to be furnished to
you at such Time of Delivery certificates of officers of the Company
satisfactory to you as to the accuracy of the representations and
warranties of the Company herein at and as of such Time of Delivery, as to
the performance by the Company of all of its obligations hereunder to be
performed at or prior to such Time of Delivery, as to the matters set forth
in subsections (a) and (f) of this Section and as to such other matters as
you may reasonably request.
9. (a) The Company will indemnify and hold harmless Goldman, Sachs &
Co., in its capacity as QIU, against any losses, claims, damages or liabilities,
joint or several, to which the QIU may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon an untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, and will reimburse the QIU for any legal
or other expenses reasonably incurred by the QIU in connection with
investigating or defending any such action or claim as such expenses are
incurred; PROVIDED, HOWEVER, that the Company shall not be liable in any such
case to the extent that any such loss, claim, damage or liability arises out of
or is based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in any Preliminary Prospectus, the Registration Statement
or the Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by any Underwriter
through Goldman, Sachs & Co. expressly for use therein;
(b) Promptly after receipt by the QIU under subsection (a) above of notice
of the commencement of any action, the QIU shall, if a claim in respect thereof
is to be made against the indemnifying party under such subsection, notify the
indemnifying party in writing of the commencement thereof; but the omission so
to notify the indemnifying party shall not relieve it from any liability which
it may have to the QIU otherwise than under such subjection. In case any such
action shall be brought against the QIU and it shall notify the indemnifying
party of the commencement thereof, the indemnifying party shall be entitled to
participate therein and, to the extent that it shall wish, jointly with any
other indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to the QIU (who shall not, except with the consent of the
QIU, be counsel to the indemnifying party), and, after notice from the
indemnifying party to the QIU of its election so to assume the defense thereof,
the indemnifying party shall not be liable to the
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QIU under such subsection for any legal expenses of other counsel or any other
expenses, in each case subsequently incurred by the QIU, in connection with the
defense thereof other than reasonable costs of investigation. The indemnifying
party shall not, without the written consent of the QIU, effect the settlement
or compromise of, or consent to the entry of any judgment with respect to, any
pending or threatened action or claim in respect of which indemnification or
contribution may be sought hereunder (whether or not the QIU is an actual or
potential party to such action or claim) unless such settlement, compromise or
judgment (i) includes an unconditional release of the QIU from all liability
arising out of such action or claim and (ii) does not include a statement as to
or an admission of fault, culpability or a failure to act, by or on behalf of
QIU.
(c) If the indemnification provided for in this Section 9 is unavailable
to or insufficient to hold harmless Goldman, Sachs & Co., in its capacity as
QIU, under subsection (a) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then the
indemnifying party shall contribute to the amount paid or payable by the QIU as
a result of such losses, claims, damages or liabilities (or actions in respect
thereof) in such proportion as is appropriate to reflect the relative benefits
received by the Company on the one hand and the QIU on the other from the
offering of the Shares. If, however, the allocation provided by the immediately
preceding sentence is not permitted by applicable law or if the QIU failed to
give the notice required under subsection (b) above, then the Company shall
contribute to such amount paid or payable by the QIU in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company on the one hand and the QIU on the other in connection with
the statements or omissions which resulted in such losses, claims, damages or
liabilities (or actions in respect thereof), as well as any other relevant
equitable considerations. The relative benefits received by the Company on the
one hand and the QIU on the other shall be deemed to be in the same proportion
as the total net proceeds from the offering (before deducting expenses) received
by the Company, as set forth in the table on the cover page of the Prospectus,
bear to the fee payable to the QIU pursuant to Section 3 hereof. The relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the Company
on the one hand or the QIU on the other and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company and the QIU agree that it would not be just
and equitable if contributions pursuant to this subsection (c) were determined
by PRO RATA allocation or by any other method of allocation which does not take
account of the equitable considerations referred to above in this subsection
(c). The amount paid or payable by the QIU as a result of the losses, claims,
damages or liabilities (or actions in respect thereof) referred to above in this
subsection (c) shall be deemed to include any legal or other expenses reasonably
incurred by such indemnified party in connection with investigating or defending
any such action or claim. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
(d) The obligations of the Company under this Section 9 shall be in
addition to any liability which the Company may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls the QIU
within the meaning of the Act.
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10. (a) The Company will indemnify and hold harmless each Underwriter
against any losses, claims, damages or liabilities, joint or several, to which
such Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse each Underwriter for any legal or
other expenses reasonably incurred by such Underwriter in connection with
investigating or defending any such action or claim as such expenses are
incurred; PROVIDED, HOWEVER, that the Company shall not be liable in any such
case to the extent that any such loss, claim, damage or liability arises out of
or is based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in any Preliminary Prospectus, the Registration Statement
or the Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by any Underwriter
through Goldman, Sachs & Co. expressly for use therein.
(b) The Selling Stockholder will indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon an untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in any Preliminary Prospectus, the Registration
Statement or the Prospectus or any such amendment or supplement in reliance upon
and in conformity with written information furnished to the Company by the
Selling Stockholder expressly for use therein; and will reimburse each
Underwriter for any legal or other expenses reasonably incurred by such
Underwriter in connection with investigating or defending any such action or
claim as such expenses are incurred.
(c) Each Underwriter will indemnify and hold harmless the Company and the
Selling Stockholder against any losses, claims, damages or liabilities to which
the Company or the Selling Stockholder may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon an untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in any Preliminary Prospectus, the Registration
Statement or the Prospectus or any such amendment or supplement in reliance upon
and in conformity with written information furnished to the Company by such
Underwriter through Goldman, Sachs & Co. expressly for use therein; and will
reimburse the Company and the Selling Stockholder for any legal or other
expenses reasonably incurred by the Company or the Selling Stockholder in
connection with investigating or defending any such action or claim as such
expenses are incurred.
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<PAGE>
(d) Promptly after receipt by an indemnified party under subsection (a),
(b) or (c) above of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under such subsection. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the indemnifying
party), and, after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying party shall
not be liable to such indemnified party under such subsection for any legal
expenses of other counsel or any other expenses, in each case subsequently
incurred by such indemnified party, in connection with the defense thereof other
than reasonable costs of investigation. No indemnifying party shall, without
the written consent of the indemnified party, effect the settlement or
compromise of, or consent to the entry of any judgment with respect to, any
pending or threatened action or claim in respect of which indemnification or
contribution may be sought hereunder (whether or not the indemnified party is an
actual or potential party to such action or claim) unless such settlement,
compromise or judgment (i) includes an unconditional release of the indemnified
party from all liability arising out of such action or claim and (ii) does not
include a statement as to or an admission of fault, culpability or a failure to
act, by or on behalf of any indemnified party.
(e) If the indemnification provided for in this Section 10 is unavailable
to or insufficient to hold harmless an indemnified party under subsection (a),
(b) or (c) above in respect of any losses, claims, damages or liabilities (or
actions in respect thereof) referred to therein, then each indemnifying party
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages or liabilities (or actions in respect
thereof) in such proportion as is appropriate to reflect the relative benefits
received by the Company, and the Selling Stockholder on the one hand and the
Underwriters on the other from the offering of the Shares. If, however, the
allocation provided by the immediately preceding sentence is not permitted by
applicable law or if the indemnified party failed to give the notice required
under subsection (d) above, then each indemnifying party shall contribute to
such amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company and the Selling Stockholder on the one hand and the
Underwriters on the other in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities (or actions in respect
thereof), as well as any other relevant equitable considerations. The relative
benefits received by the Company and the Selling Stockholder on the one hand and
the Underwriters on the other shall be deemed to be in the same proportion as
the total net proceeds from the offering (before deducting expenses) received by
the Company and the Selling Stockholder bear to the total underwriting discounts
and commissions received by the Underwriters, in each case as set forth in the
table on the cover page of the Prospectus. The relative fault shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company or the Selling
Stockholder on the one hand or the Underwriters on the other and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company the Selling Stockholder and the
Underwriters agree that it would not be just and equitable if contributions
pursuant to this subsection (e) were determined by PRO RATA allocation (even if
the
23
<PAGE>
Underwriters were treated as one entity for such purpose) or by any other method
of allocation which does not take account of the equitable considerations
referred to above in this subsection (e). The amount paid or payable by an
indemnified party as a result of the losses, claims, damages or liabilities (or
actions in respect thereof) referred to above in this subsection (e) shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this subsection (e), no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the Shares underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this subsection
(e) to contribute are several in proportion to their respective underwriting
obligations and not joint.
(f) The obligations of the Company and the Selling Stockholder under this
Section 10 shall be in addition to any liability which the Company and the
Selling Stockholder may otherwise have and shall extend, upon the same terms and
conditions, to each person, if any, who controls any Underwriter within the
meaning of the Act; and the obligations of the Underwriters under this Section
10 shall be in addition to any liability which the respective Underwriters may
otherwise have and shall extend, upon the same terms and conditions, to each
officer and director of the Company and to each person, if any, who controls the
Company or the Selling Stockholder within the meaning of the Act.
11. (a) If any Underwriter shall default in its obligation to purchase
the Shares which it has agreed to purchase hereunder at a Time of Delivery, you
may in your discretion arrange for you or another party or other parties to
purchase such Shares on the terms contained herein. If within thirty-six hours
after such default by any Underwriter you do not arrange for the purchase of
such Shares, then the Company and the Selling Stockholder shall be entitled to a
further period of thirty-six hours within which to procure another party or
other parties satisfactory to you to purchase such Shares on such terms. In the
event that, within the respective prescribed periods, you notify the Company and
the Selling Stockholder that you have so arranged for the purchase of such
Shares, or the Company and the Selling Stockholder notify you that they have so
arranged for the purchase of such Shares, you or the Company and the Selling
Stockholder shall have the right to postpone such Time of Delivery for a period
of not more than seven days, in order to effect whatever changes may thereby be
made necessary in the Registration Statement or the Prospectus, or in any other
documents or arrangements, and the Company agrees to file promptly any
amendments to the Registration Statement or the Prospectus which in your opinion
may thereby be made necessary. The term "Underwriter" as used in this Agreement
shall include any person substituted under this Section with like effect as if
such person had originally been a party to this Agreement with respect to such
Shares.
(b) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company and
the Selling Stockholder as provided in subsection (a) above, the aggregate
number of such Shares which remains unpurchased does not exceed one-eleventh of
the aggregate number of all the Shares to be purchased at such Time of Delivery,
then the Company and the Selling Stockholder shall have the right to require
each non-defaulting
24
<PAGE>
Underwriter to purchase the number of shares which such Underwriter agreed to
purchase hereunder at such Time of Delivery and, in addition, to require each
non-defaulting Underwriter to purchase its pro rata share (based on the number
of Shares which such Underwriter agreed to purchase hereunder) of the Shares of
such defaulting Underwriter or Underwriters for which such arrangements have not
been made; but nothing herein shall relieve a defaulting Underwriter from
liability for its default.
(c) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company and
the Selling Stockholder as provided in subsection (a) above, the aggregate
number of such Shares which remains unpurchased exceeds one-eleventh of the
aggregate number of all the Shares to be purchased at such Time of Delivery, or
if the Company and the Selling Stockholder shall not exercise the right
described in subsection (b) above to require non-defaulting Underwriters to
purchase Shares of a defaulting Underwriter or Underwriters, then this Agreement
(or, with respect to the Second Time of Delivery, the obligations of the
Underwriters to purchase and of the Company to sell the Optional Shares) shall
thereupon terminate, without liability on the part of any non-defaulting
Underwriter or the Company or the Selling Stockholder, except for the expenses
to be borne by the Company and the Selling Stockholder and the Underwriters as
provided in Section 7 hereof and the indemnity and contribution agreements in
Section 10 hereof; but nothing herein shall relieve a defaulting Underwriter
from liability for its default.
12. The respective indemnities, agreements, representations, warranties
and other statements of the Company, the Selling Stockholder and the several
Underwriters, as set forth in this Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement, shall remain in full force and effect,
regardless of any investigation (or any statement as to the results thereof)
made by or on behalf of any Underwriter or any controlling person of any
Underwriter, or the Company, or the Selling Stockholder, or any officer or
director or controlling person of the Company, or any controlling person of the
Selling Stockholder, and shall survive delivery of and payment for the Shares.
Anything herein to the contrary notwithstanding, the indemnity agreement of
the Company in subsection (a) of Section 10 hereof, the representations and
warranties in subsections (b) and (c) of Section 1 hereof and any
representation or warranty as to the accuracy of the Registration Statement or
the Prospectus contained in any certificate furnished by the Company pursuant to
Section 8 hereof, insofar as they may constitute a basis for indemnification for
liabilities (other than payment by the Company of expenses incurred or paid in
the successful defense of any action, suit or proceeding) arising under the Act,
shall not extend to the extent of any interest therein of a controlling person
or partner of an Underwriter who is a director, officer or controlling person of
the Company when the Registration Statement has become effective, except in each
case to the extent that an interest of such character shall have been determined
by a court of appropriate jurisdiction as not against public policy as expressed
in the Act. Unless in the opinion of counsel for the Company the matter has
been settled by controlling precedent, the Company will, if a claim for such
indemnification is asserted, submit to a court of appropriate jurisdiction the
question of whether such interest is against public policy as expressed in the
Act and will be governed by the final adjudication of such issue.
25
<PAGE>
13. If this Agreement shall be terminated pursuant to Section 11 hereof,
neither the Company nor the Selling Stockholder shall then be under any
liability to any Underwriter except as provided in Sections 7 and 10 hereof;
but, if for any other reason, any Shares are not delivered by or on behalf of
the Company and the Selling Stockholder as provided herein, the Company will
reimburse the Underwriters through you for all out-of-pocket expenses approved
in writing by you, including fees and disbursements of counsel, reasonably
incurred by the Underwriters in making preparations for the purchase, sale and
delivery of the Shares not so delivered, but the Company and the Selling
Stockholder shall then be under no further liability to any Underwriter in
respect of the Shares not so delivered except as provided in Sections 7 and 10
hereof.
14. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by Goldman, Sachs & Co. on behalf of you as the
representatives; and in all dealings with the Selling Stockholder hereunder, you
and the Company shall be entitled to rely upon any statement, request, notice or
agreement on behalf of such Selling Stockholder made or given by any or all of
the Attorneys-in-Fact for the Selling Stockholder.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to you as the representatives in care of Goldman, Sachs &
Co., 85 Broad Street, New York, New York 10004, Attention: Registration
Department; if to the Selling Stockholder shall be delivered or sent by mail,
telex or facsimile transmission to counsel for the Selling Stockholder at its
address set forth in Schedule II hereto; and if to the Company shall be
delivered or sent by mail to the address of the Company set forth in the
Registration Statement, Attention: Secretary; provided, however, that any notice
to an Underwriter pursuant to Section 10(c) hereof shall be delivered or sent by
mail, telex or facsimile transmission to such Underwriter at its address set
forth in its Underwriters' Questionnaire, or telex constituting such
Questionnaire, which address will be supplied to the Company or the Selling
Stockholder by you upon request. Any such statements, requests, notices or
agreements shall take effect upon receipt thereof.
15. This Agreement shall be binding upon, and inure solely to the benefit
of, the Underwriters, the Company and the Selling Stockholder and, to the extent
provided in Sections 10 and 12 hereof, the officers and directors of the Company
and each person who controls the Company, the Selling Stockholder or any
Underwriter, and their respective heirs, executors, administrators, successors
and assigns, and no other person shall acquire or have any right under or by
virtue of this Agreement. No purchaser of any of the Shares from any Underwriter
shall be deemed a successor or assign by reason merely of such purchase.
16. Time shall be of the essence of this Agreement. As used herein, the
term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
17. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK.
18. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.
26
<PAGE>
If the foregoing is in accordance with your understanding, please sign and
return to us eight counterparts hereof, and upon the acceptance hereof by you,
on behalf of each of the Underwriters, this letter and such acceptance hereof
shall constitute a binding agreement among each of the Underwriters, the Company
and the Selling Stockholder. It is understood that your acceptance of this
letter on behalf of each of the Underwriters is pursuant to the authority set
forth in a form of Agreement among Underwriters, the form of which shall be
submitted to the Company and the Selling Stockholder for examination upon
request, but without warranty on your part as to the authority of the signers
thereof.
Any person executing and delivering this Agreement as Attorney-in-Fact for
the Selling Stockholder represents by so doing that he has been duly appointed
as Attorney-in-Fact by the Selling Stockholder pursuant to a validly existing
and binding Power of Attorney which authorizes such Attorney-in-Fact to take
such action.
Very truly yours,
PAULA Financial
By:
---------------------------------
Name:
Title:
Prudential Securities Incorporated
By:
---------------------------------
Name:
As Attorney-in-Fact acting on behalf of
the Selling Stockholder
Accepted as of the date hereof:
Goldman, Sachs & Co.
Conning & Company
By:
-------------------------------
(Goldman, Sachs & Co.)
On behalf of each of the Underwriters
27
<PAGE>
SCHEDULE I
Number of Optional
Shares to be
Total Number of Purchased if
Firm Shares Maximum Option
Underwriter to be Purchased Exercised
----------- --------------- --------------------
Goldman, Sachs & Co. . . . . . . .
Conning & Company. . . . . . . . .
Total . . . . . . . . . . -------------- ---------------
-------------- ---------------
-------------- ---------------
28
<PAGE>
SCHEDULE II
Number of Optional
Total Number of Shares to be Sold if
Firm Shares Maximum Option
Underwriter to be Sold Exercised
----------- --------------- --------------------
The Company. . . . . . . . . . . . . .
The Selling Stockholder:
Prudential Securities Incorporated . 54,902 -----
-------------- ---------------
Total . . . . . . . . . . . .
-------------- ---------------
-------------- ---------------
- -------------------------
(a) The Snelling Stockholder is represented by Gibson, Dunn & Crutcher LLP, 333
South Grand Avenue, Los Angeles, California 90071, and has appointed * and
*, and each of them, as the Attorneys-in-Fact, for the Selling Stockholder.
29
<PAGE>
SCHEDULE III
Conning Insurance Capital Limited Partnership II
Conning Insurance Capital International Partners II
Conning Insurance Capital Limited Partnership III
Conning Insurance Capital International Partners III, L.P.
Conning Corporation
RFE Investment Partners IV, L.P.
Saugatuck Capital Company
30
<PAGE>
ANNEX I
Pursuant to Section 8(g) of the Underwriting Agreement, the accountants
shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with
respect to the Company and its subsidiaries within the meaning of the Act
and the applicable published rules and regulations thereunder;
(ii) In their opinion, the financial statements and any
supplementary financial information and schedules (and, if applicable,
financial forecasts and/or pro forma financial information) examined by
them and included in the Prospectus or the Registration Statement comply as
to form in all material respects with the applicable accounting
requirements of the Act and the related published rules and regulations
thereunder; and, if applicable, they have made a review in accordance with
standards established by the American Institute of Certified Public
Accountants of the unaudited consolidated interim financial statements,
selected financial data, pro forma financial information, financial
forecasts and/or condensed financial statements derived from audited
financial statements of the Company for the periods specified in such
letter, as indicated in their reports thereon, copies of which have been
furnished to the representatives of the Underwriters (the
"Representatives");
(iii) They have made a review in accordance with standards
established by the American Institute of Certified Public Accountants of
the unaudited condensed consolidated statements of income, consolidated
balance sheets and consolidated statements of cash flows included in the
Prospectus as indicated in their reports thereon copies of which have been
separately furnished to the Representatives and on the basis of specified
procedures including inquiries of officials of the Company who have
responsibility for financial and accounting matters regarding whether the
unaudited condensed consolidated financial statements referred to in
paragraph (vi)(A)(i) below comply as to form in all material respects with
the applicable accounting requirements of the Act and the related published
rules and regulations, nothing came to their attention that cause them to
believe that the unaudited condensed consolidated financial statements do
not comply as to form in all material respects with the applicable
accounting requirements of the Act and the related published rules and
regulations;
(iv) The unaudited selected financial information with respect to the
consolidated results of operations and financial position of the Company
for the five most recent fiscal years included in the Prospectus agrees
with the corresponding amounts (after restatements where applicable) in the
Company's audited consolidated financial statements for such five fiscal
years;
(v) They have compared the information in the Prospectus under
selected captions with the disclosure requirements of Regulation S-K and on
the basis of limited procedures specified in such letter nothing came to
their attention as a result of the foregoing procedures that caused them to
believe that this information does not conform in all material respects
with the disclosure requirements of Items 301, 302, 402 and 503(d),
respectively, of Regulation S-K;
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<PAGE>
(vi) On the basis of limited procedures, not constituting an
examination in accordance with generally accepted auditing standards,
consisting of a reading of the unaudited financial statements and other
information referred to below, a reading of the latest available interim
financial statements of the Company and its subsidiaries, inspection of the
minute books of the Company and its subsidiaries since the date of the
latest audited financial statements included in the Prospectus, inquiries
of officials of the Company and its subsidiaries responsible for financial
and accounting matters and such other inquiries and procedures as may be
specified in such letter, nothing came to their attention that caused them
to believe that:
(A) (i) the unaudited consolidated statements of income,
consolidated balance sheets and consolidated statements of cash flows
included in the Prospectus do not comply as to form in all material
respects with the applicable accounting requirements of the Act and
the related published rules and regulations, or (ii) any material
modifications should be made to the unaudited condensed consolidated
statements of income, consolidated balance sheets and consolidated
statements of cash flows included in the Prospectus for them to be in
conformity with generally accepted accounting principles;
(B) any other unaudited income statement data and balance sheet
items included in the Prospectus do not agree with the corresponding
items in the unaudited consolidated financial statements from which
such data and items were derived, and any such unaudited data and
items were not determined on a basis substantially consistent with the
basis for the corresponding amounts in the audited consolidated
financial statements included in the Prospectus;
(C) the unaudited financial statements which were not included
in the Prospectus but from which were derived any unaudited condensed
financial statements referred to in Clause (A) and any unaudited
income statement data and balance sheet items included in the
Prospectus and referred to in Clause (B) were not determined on a
basis substantially consistent with the basis for the audited
consolidated financial statements included in the Prospectus;
(D) any unaudited pro forma consolidated condensed financial
statements included in the Prospectus do not comply as to form in all
material respects with the applicable accounting requirements of the
Act and the published rules and regulations thereunder or the pro
forma adjustments have not been properly applied to the historical
amounts in the compilation of those statements;
(E) as of a specified date not more than five days prior to the
date of such letter, there have been any changes in the consolidated
capital stock (other than issuances of capital stock upon exercise of
options and stock appreciation rights, upon earn-outs of performance
shares and upon conversions of convertible securities, in each case
which were outstanding on the date of the latest financial statements
included in the Prospectus) or any increase in the consolidated
short-term or long-term debt or consolidated reserve for unpaid losses
and loss adjustment expenses, or any decreases in consolidated fixed
income securities available for sale, consolidated total investments
or stockholders' equity, or any decrease in the unassigned funds
(surplus) or statutory capital of Paula Insurance Company, or other
items specified by the Representatives, or any increases in any items
specified by the Representatives, in each case as compared with
amounts shown in the latest balance sheet included in the Prospectus,
32
<PAGE>
except in each case for changes, increases or decreases which the
Prospectus discloses have occurred or may occur or which are described
in such letter; and
(F) for the period from the date of the latest financial
statements included in the Prospectus to the specified date referred
to in Clause (E) there were any decreases in consolidated net revenues
or operating profit or the total or per share amounts of consolidated
net income or other items specified by the Representatives, or any
increases in any items specified by the Representatives, in each case
as compared with the comparable period of the preceding year and with
any other period of corresponding length specified by the
Representatives, except in each case for decreases or increases which
the Prospectus discloses have occurred or may occur or which are
described in such letter; and
(vii) In addition to the examination referred to in their report(s)
included in the Prospectus and the limited procedures, inspection of minute
books, inquiries and other procedures referred to in paragraphs (iii) and
(vi) above, they have carried out certain specified procedures, not
constituting an examination in accordance with generally accepted auditing
standards, with respect to certain amounts, percentages and financial
information specified by the Representatives, which are derived from the
general accounting records of the Company and its subsidiaries, which
appear in the Prospectus, or in Part II of, or in exhibits and schedules
to, the Registration Statement specified by the Representatives, and have
compared certain of such amounts, percentages and financial information
with the accounting records of the Company and its subsidiaries and have
found them to be in agreement.
33
<PAGE>
ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement (this "Agreement") is made and entered
into this 8th day of December, 1994 by and among Oregon Ag Insurance Services,
Inc., an Oregon corporation ("Purchaser"), Agri-Comp, Inc., an Oregon
corporation ("ACI"), Oregon-Comp, Inc. an Oregon corporation ("OCI") and Oregon
Risk Management, Inc., an Oregon corporation ("ORM" and collectively with ACI
and OCI, the "Companies") and the individuals executing this Agreement under the
heading "Shareholders" (collectively, the "Shareholders") and, with respect to
Sections 1.6 and 6.5 only, Paula Financial, a California corporation (the
"Guarantor").
RECITALS
WHEREAS, ACI is a workers' compensation insurance agent focusing on
agricultural clients in the State of Oregon, OCI is a non-agricultural workers'
compensation insurance agent in the State of Oregon and ORM is a commercial
insurance package placement agent for ACI's clients; and
WHEREAS, Purchaser desires to acquire substantially all of the non-
cash assets of the Companies, including the rights associated with the names
"Agri-Comp, Inc.," "Oregon-Comp, Inc." and "Oregon Risk Management, Inc." and to
assume certain selected liabilities of the Companies in exchange for the
consideration set forth herein, and the Companies desire that such assets be so
sold;
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals and the
representations, warranties and covenants herein set forth, and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I
PURCHASE AND SALE OF ASSETS
1.1 PURCHASE AND SALE OF PURCHASED ASSETS. On the terms and subject
to the conditions set forth in this Agreement, at the Closing, the Companies
shall sell, assign, transfer, convey and deliver to Purchase, and Purchaser
shall purchase and accept from the Companies, all of the right, title and
interest of each of the Companies in and to the Purchased Assets (as defined
below), free and clear of all
<PAGE>
Liens (as defined below) other than Permitted Liens (as defined below).
"Purchased Assets" shall mean all personal properties and assets,
tangible and intangible of ACI, OCI and ORM including without limitation the
names "Agri-Comp, Inc.," "Oregon-Comp, Inc." and "Oregon Risk Management, Inc."
but excluding the Excluded Assets (as defined in Section 1.2 below).
"Lien" shall mean any pledge, security interest, lien, charge,
encumbrance, equity or option of whatsoever nature.
"Permitted Liens" shall mean (i) Liens for taxes not yet due and
payable or being contested in good faith and for which adequate reserves have
been taken, and (ii) mechanics', carriers', workers', repairers', materialmens',
warehousemens' and other similar liens arising or incurred in the ordinary
course of business.
Without limiting the foregoing, the Purchased Assets shall include the
following:
(a) REGULATORY LICENSES. All of the Licenses to the extent
transferable, Filings and Rating Records of each of the Companies as defined in
Sections 2.25, 2.26, 2.28 and 2.30 below.
(b) TANGIBLE PERSONAL PROPERTY. All the Tangible Personal
property.
"Tangible Personal Property" shall mean all machinery,
equipment, electrical devices, vehicles, furniture, fixtures, office materials
and supplies, hardware, tools, spare parts, phone numbers and other tangible
personal property of every kind and description owned by any of the Companies,
including without limitation, those listed and described on SCHEDULE 2.8 hereto,
and any additions, improvements, replacements and alterations thereto made
between the date of this Agreement and the Closing Date in the ordinary course
of business.
(c) ASSUMED CONTRACTS. All the Assumed contracts.
"Assumed Contracts" shall mean all right, title and interest of
the Companies in and to the contracts and agreements listed or referred to on
SCHEDULE 1.1(c) hereto, together with the contracts and agreements entered into
between the date of this Agreement and the Closing Date in accordance with the
terms of this Agreement and contracts
2
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entered into in the ordinary course of business pursuant to which the Companies'
obligations do not exceed $5,000 per year and which are terminable on less than
ninety days' notice without penalty.
(d) INTANGIBLE RIGHTS. All the Intellectual Property.
"Intellectual Property" shall mean all intangible rights of the
Companies, including, without limitation, (i) all trademarks and service marks
and all applications therefor and registrations and recordings thereof, together
with the goodwill of the Companies symbolized by and associated with such
trademarks and service marks, (ii) all trade dress connected or used with such
trademarks and service marks and all applications, registrations and recordings
thereof, (iii) all trade secrets, proprietary information and know-how, (iv) all
franchises, patents, jingles, slogans, logotypes and other intangible rights,
(v) all customer lists, in each case including, without limitation, those listed
and described on SCHEDULES 2.29 AND 2.31 hereto (vi) all rights with respect to
the goodwill and renewal rights of ACI with respect to the Policyholders (as
defined in Section 2.29) and of the Companies with respect to the Other
Policyholders (as defined in Section 2.31), (vii) all rights of the Companies to
write Other Insurance (as defined in Section 2.31) and any additions or
modifications thereof made by the Companies in the ordinary course of business
between the date of this Agreement and the Closing Date to any items described
in clauses (i)-(vii) above.
(e) FILES AND RECORDS. All files and other records of the
Companies, wherever located, including without limitation, all available
schematics, blueprints, engineering data, customer lists, correspondence,
reports, specifications, projections, statistics, market research data,
marketing plans, sales records and histories, promotional graphics, original art
work, mats, plates, negatives and other advertising, marketing or related
materials, and all other technical and financial information, accounting and
personnel records concerning the Purchased Assets.
(f) CLAIMS. All of the Companies' warranty or other claims,
refunds, causes of action, chooses in action, rights to recovery (including
rights to insurance proceeds or other recoveries for damaged assets acquired by
Purchaser), rights of set-off and rights of recoupment.
(g) ACCOUNTS RECEIVABLE AND RUN-OFF COMMISSIONS. All accounts
receivable and run-off commissions of the Companies as of the Closing Date which
will be earned
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and paid by SAIF after the Closing Date pertaining to unexpired workers
compensation insurance policies. The mechanism for determining which run-off
commissions are earned after the Closing Date is set forth in SCHEDULE 2.18
hereof. Commissions due to, or from, the Companies as a result of any post-
Closing premium audits shall be apportioned by multiplying such commissions by a
fraction, the numerator of which is the number of full months of the term of the
policy relating to any particular commission after the Closing Date and the
denominator is the total number of months of such policy, with the result being
the amount of such commission transferred to Purchaser as a Purchased Asset, or,
if a negative number, assumed by Purchaser as an Assumed Liability (as defined
below). The remaining amount of such commission (a "Retained Commission
Adjustment") will be retained by the Companies or, if negative, paid by the
Companies as a Retained Liability (as defined below). Each Company shall
promptly remit to Purchaser the full amount of any accounts receivable received
by such Company or run-off commissions earned and paid after the Closing Date by
SAIF to such Company other than those which have been retained by the Companies
as described in Section 1.2(b) below and such Company will promptly endorse such
run-off commissions to Purchaser. Each Company agrees to use its best efforts
to collect all accounts receivable and run-off commissions sold to Purchaser
hereunder including, if necessary, the institution of litigation with the
applicable account debtor at the Companies' expense.
1.2 EXCLUDED ASSETS. Notwithstanding the foregoing, the Purchased
Assets shall not include the following assets of the Companies (collectively,
the "Excluded Assets"):
(a) CORPORATE RECORDS; TAX RETURNS. The stock books, stock
ledgers, shareholder lists, minute books, corporate seals and similar corporate
records of the Companies, as well as all tax returns of the Companies and any
and all records that the Companies are required to retain pursuant to applicable
law.
(b) ACCOUNTS RECEIVABLE. All accounts receivable of the
Companies as of the Closing Date which were earned prior to the Closing Date
plus all Retained Commission Adjustments less any unearned commissions received
by the Companies prior to the Closing Date.
(c) CASH AND INVESTMENTS. All cash, cash equivalents and
securities.
(d) OTHER EXCLUDED ASSETS. The assets of Sellers set forth on
SCHEDULE 1.2(b) hereto.
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1.3 ASSUMPTION OF CERTAIN LIABILITIES. Purchaser is not assuming any
debt, liability or obligations of any of the Companies, whether known or
unknown, fixed or contingent, except for the liabilities of the Companies to be
paid or performed after the Closing Date under the Assumed Contracts listed in
SCHEDULE 1.1(c) (the "Assumed Contracts") which are assigned by the Companies to
the Purchaser (the "Assumed Liabilities"). Except as and to the extent
otherwise expressly provided in this Agreement, Purchaser does not, and shall
not, assume or be deemed to assume, nor shall Purchaser discharge, be
responsible for or liable with respect to any other liabilities or obligations
of the Companies or any other person, whether arising prior to, on or after the
Closing Date (collectively, the "Retained Liabilities"), including without
limitation: (a) any liability or obligations of the Companies arising out of or
relating to any contract or agreement not fully and effectively assigned to and
specifically assumed by Purchaser pursuant to this Agreement; (b) any liability
or obligations of the Companies arising out of or relating to any employee
benefit (including health) plans, programs, policies or other arrangements or
agreements which provide the Companies' employees with benefits, including the
payment of severance pay or special bonuses, if any, to terminated employees
under agreements or policies not constituting Assumed Contracts, (c) any
liability or obligations of the Companies arising out of any litigation, claim,
arbitration or other similar proceeding relating to the Purchased Assets before
the Closing Date, regardless of whether or not such litigation, claim,
arbitration or other similar proceeding is pending, threatened or asserted
before, on or after the Closing Date, (d) any liabilities and obligations of the
Companies' relating to the Excluded Assets, (e) any and all liabilities and
obligations, direct or indirect, fixed or contingent, for Taxes, whether or not
such Taxes are assessed prior to, on or after the Closing date and (f) accounts
payable of the Companies as of the Closing Date.
"Tax" or "Taxes" means all federal, state, local and foreign taxes,
including without limitation, income, profits, franchise, license, employment,
estimated, transfer, premium, withholding, property, excise, sales, and use
taxes (including any interest, penalties, deposits or additions with respect
thereto).
1.4 PURCHASE PRICE FOR PURCHASED ASSETS. On the Closing Date,
Purchaser shall pay to the Companies, by wire transfer or delivery of a
certified or cashier's check the following payments: ACI--$756,000, OCI--
$24,000 and ORM--$120,000. Purchaser will thereafter pay ACI a second and third
aggregate installment of the purchase price for the ACI Purchased Assets on
April 1, 1996 and April 1, 1997, respectively (the "Installments"). The amount
of each such
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installment shall vary depending on the aggregate workers' compensation
insurance earned premiums placed with Paula Insurance Company by Purchaser or
its affiliates in calendar year 1995 to accounts serviced by Purchaser after the
Closing Date (the "Measurement Premiums"). The amount of each installment shall
equal 10% of the Measurement Premiums, with a minimum of $450,000 per
installment and a maximum of $750,000 per installment. It is Paula Insurance
Company's intent to write 100% of the renewals submitted by Purchaser, however,
nothing in this section shall require Paula Insurance Company or its affiliates
to write any insurance policy that does not meet its standard underwriting
criteria. The parties agree that one component of the foregoing pricing is
based upon ACI's January 1995 renewal workers' compensation insurance policies
being written by Paula Insurance Company. In the event David Zakarian is
terminated by Purchaser, without cause (where "cause" is defined as those events
described in Section 9 of SCHEDULE 3.7 which provide for automatic termination),
any unpaid installments will be paid as follows: (i) if Mr. Zakarian is
terminated prior to April 1, 1996, promptly following such termination, the
minimum amount of both installments will be paid to ACI and on April 1, 1996 all
remaining balances, if any, of both installments will be paid; and (ii) if Mr.
Zakarian is terminated after April 1, 1996, the entire second installment will
be promptly paid following termination. In the event the Purchaser fails to
make any payment to ACI with respect to the second installment within 10 days
following receipt of notice from ACI that such payment is due, the third
installment shall be accelerated and immediately due and payable. In the event
of a partial payment of the second installment due to a dispute over the actual
amount of the second installment, no acceleration shall occur. In the event of
a dispute over the amount due under the second or third installment which cannot
be resolved by the parties within 60 days of the due date of such installment,
the parties agree that either party may submit the dispute to binding
arbitration with such arbitrator and with such procedures which the parties
shall mutually agree upon.
The Companies have reviewed Paula Insurance Company's reinsurance
treaty's limitations and exclusions prior to the execution hereof and hereby
represent that approximately $150,000 of the Companies' combined calendar year
1994 written premiums fall within one or more of the limited or excluded
categories of such treaty. Notwithstanding the foregoing, even if Paula
Insurance Company declines to underwrite any of the Companies' submissions from
the Companies' expiration inventory as of the Closing Date, the Companies will
receive credit for the 1994 premiums relating to the rejected policies for the
purpose of computing
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the amount of the second and third installments due to ACI under this Section
1.4.
The parties agree to allocate the purchase price among the Purchased
Assets for all purposes in accordance with SCHEDULE 1.4 hereto.
1.5 POSSIBLE ADDITIONAL PAYMENT. In the event that Paula Insurance
Company's return on equity (as more fully defined below, "ROE") relating to
policies underwritten by Paula Insurance Company generated by Purchaser from
accounts serviced by Purchaser post-Closing ("Oregon Accounts") during the three
year period beginning January 1, 1995 exceeds 14% per year, ACI shall receive
50% of Paula Insurance Company's ROE from Oregon Accounts in excess of 14%, up
to a maximum amount equal to $780,000 plus the actual amount paid to ACI as the
second and third installments of the purchase price for the ACI Purchased
Assets, to be valued as of June 30, 1998 and payable on July 31, 1998. Nothing
in this section shall require Paula Insurance Company or its affiliates to write
any insurance policy that does not meet its standard underwriting criteria.
ROE is defined in SCHEDULE 1.5 hereof.
1.6 GUARANTY. The Guarantor hereby agrees to guarantee the prompt
payment of each of the Installments when, and to the extent, due pursuant to the
terms of Section 1.4 hereof. Further, the Guarantor agrees to use its best
efforts to maintain its ability to draw under its existing line of credit with
First Interstate Bank of California amounts equal to the maximum amount of all
unpaid Installments until such time as such Installments have been paid pursuant
to Section 1.4 hereof. The Guarantor will notify the Companies of any material
change to its existing line of credit. In the event the existing line of credit
is terminated, the Guarantor will use its best efforts to replace such line of
credit and to maintain its ability to draw under such line to the extent
required in this Section 1.6.
1.7 CLOSING. The Closing of the transactions contemplated by this
Agreement (the "Closing") shall occur at the offices of ACI located in Salem,
Oregon at 10:00 a.m., on the next business day following the satisfaction of the
last unsatisfied condition set forth in Article V hereof (the "Closing Date")
unless the parties hereto agree in writing upon a different time, date or place.
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ARTICLE II
REPRESENTATIONS AND WARRANTIES
Each of the Companies and each of the Shareholders jointly and
severally represent and warrant to Purchaser that:
2.1 MARKETABLE TITLE. Each Company has good and marketable title to
the Purchased Assets which are to be transferred to Purchaser by such Company
pursuant hereto, free and clear of any and all Liens except Permitted Liens.
2.2 POWER AND AUTHORITY. Each of the Companies and each of the
Shareholders has the full right, power and authority to enter into this
Agreement and, in the case of each Company, to transfer, convey and sell to
Purchaser at the Closing the Purchased Assets to be sold to Purchaser by such
Company hereunder.
2.3 LITIGATION. No Company or Shareholder is a party to, subject to
or bound by any agreement or judgment, order, writ, prohibition, injunction or
decree of any court, governmental body or arbitrator which would prevent the
execution or delivery of this Agreement by such Company or Shareholder or the
transfer, conveyance and sale of the Purchased Assets to be sold by any such
Company to Purchaser pursuant to the terms hereof.
2.4 NO BROKERAGE FEES. No broker or finder has acted for any Company
or Shareholder in connection with this Agreement or the transactions
contemplated hereby and no broker or finder is entitled to any brokerage or
finder's fees or other commissions in respect of such transactions based in any
way on agreements, arrangements or understandings made by or on behalf of any of
the Companies or the Shareholders.
2.5 AUTHORIZATION OF AGREEMENT. This Agreement and all other
agreements and instruments to be executed by the Shareholders and the Companies
in connection herewith have been (or upon execution will have been) duly
executed and delivered by the Shareholders and the Companies, have been
effectively authorized by all necessary action, corporate or otherwise, and
constitute (or upon execution will constitute) valid and binding obligations of
each Shareholder and each Company enforceable in accordance with their
respective terms, except as enforcement may be limited by law pertaining to
bankruptcy, insolvency or the enforcement of creditors' rights and by general
equitable principles.
2.6 FINANCIAL STATEMENTS. Included in SCHEDULE 2.6 are the balance
sheets of each Company as of December 31, 1991, 1992 and 1993 and as of
September 30, 1994 and the
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related statements of income, statements of stockholders' equity and statements
of cash flows for the years ended December 31, 1991, 1992 and 1993 and the
period ended September 30, 1994 (collectively, the "Financial Statements"). The
Financial Statements (i) were prepared in accordance with the books and records
of each Company; (ii) were prepared on a fully accrued basis; (iii) fairly
present each Company's financial condition and the results of its operations as
of the relevant dates thereof and for the periods covered thereby; (iv) contain
and reflect adequate provisions for all reasonably anticipated liabilities for
all taxes, whether federal, state, local or foreign, with respect to the periods
then ended and all prior periods; and (v) with respect to contracts and
commitments for the sale of goods or the provision of services by each Company,
contain and reflect adequate reserves for all reasonably anticipated material
losses and costs and expenses in excess of expected receipts.
2.7 ABSENCE OF CERTAIN CHANGES. Except as set forth on SCHEDULE 2.7
hereto, since September 30, 1994, there has not been (i) any declaration or
payment of non-cash dividends by any Company or any transfer of assets of any
kind whatsoever by any Company to any of the Shareholders or otherwise; (ii) any
transaction not in the ordinary course of business; (iii) any material adverse
change in the results of operations, condition (financial or otherwise), assets,
liabilities (whether absolute, accrued, contingent or otherwise), business or
prospects of any Company; (iv) any damage, destruction or loss, whether or not
covered by insurance, which has had or may have a material and adverse effect on
any of the properties, business or prospects of any Company other than relating
to the termination of ACI's agreement with SAIF (as defined below); (v) any sale
or transfer of any of the assets of any Company or any cancellation of any debts
or claims, except sales in the ordinary course of business of inventory or
immaterial amounts of other tangible personal property not required in the
Companies' businesses; (vi) any mortgage, pledge or subjection to lien, charge
or encumbrance of any kind, except liens for taxes not due, of any of the
Companies' assets; (vii) any amendment, modification or termination of any
Assumed Contract; (viii) any increase in, or commitment to increase, the
compensation payable or to become payable to any officer, employee or agent of
any of the Companies, or any bonus payment or similar arrangement made to or
with any of such officers, employees or agents; (ix) any adoption of a plan or
agreement or amendment to any plan or agreement providing any new or additional
"fringe benefits"; (x) any material alteration in the manner of keeping the
books, accounts or records of any Company, or in the accounting practices
therein reflected; or (xi) any other event or condition of any character which
has had or may have a material and adverse
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effect on the condition (financial or otherwise), assets, properties, business
or prospects of any Company.
2.8 TANGIBLE PERSONAL PROPERTY. There is listed on SCHEDULE 2.8 a
description of each item of Tangible Personal Property owned by or in the
possession of the Companies having on the date hereof either a depreciated book
value or estimated fair market value per unit in excess of $1,000; and (ii) a
description of the owner of, and any agreement relating to the use of, each such
item of Tangible Personal Property not owned by one of the Companies and the
circumstances under which such property is used. Except as indicated in
SCHEDULE 2.8:
(a) Each item of Personal Property not owned by the Companies is
in such condition that upon the return of such property to its owner in its
present condition at the end of the relevant lease term or as otherwise
contemplated by the applicable agreement between one of the Companies and the
owner or lessor thereof, the obligations of such Company to such owner or lessor
will be discharged;
(b) Each item of Tangible Personal Property is in operating
condition and repair and is currently in use in connection with the operation of
one of the Companies' businesses; and
(c) The Companies own or otherwise have the right to use,
subject to the validity and performance of lease or other contractual
obligations and provisions with respect to such Tangible Personal Property, all
of the Tangible Personal Property now used by them in the operation of their
respective businesses or the use of which is necessary for the performance of
any material contract, letter of intent or proposal to which such Company is a
party.
2.9 INTANGIBLE PERSONAL PROPERTY. There is listed on SCHEDULE 2.9
(i) a description of the items of Intellectual Property other than those
specific items of Intellectual Property described in Sections 2.29 and 2.31
below. Except as indicated in SCHEDULE 2.9:
(a) No actions or other judicial or adversary proceedings
concerning any Intellectual Property has been initiated, there is no known basis
for any such action or proceeding and, to the best knowledge of each Company and
each Shareholder, no such action or proceeding is threatened;
(b) The Companies have the unrestricted right and authority to
use the Intellectual Property and such use does not conflict with, infringe upon
or violate any rights of any other person, firm or corporation;
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(c) There are no outstanding, nor any threatened, disputes or
other disagreements with respect to any licenses or similar agreements or
arrangements described in SCHEDULE 2.9 except as described in such schedule;
(d) One of the Companies is the owner of all right, title and
interest in and to each item of Intellectual Property, free and clear of all
Liens; and
(e) Purchaser shall be permitted to do business under the names
"Agri-Comp, Inc.," "Oregon-Comp, Inc." and "Oregon Risk Management, Inc." or
derivations thereof following the Closing Date.
2.10 AGREEMENT NOT IN BREACH OF OTHER INSTRUMENTS. Neither the
execution and delivery of this Agreement, nor the consummation of the
transactions contemplated hereby or thereby will violate, or result in a breach
of, any of the terms and provisions of, or constitute a default under, or
conflict with (i) any agreement, indenture or other instrument to which any
Company or Shareholder is a party or by which it is bound; (ii) the Articles of
Incorporation or Bylaws of each Company; or (iii) any judgment, decree, order or
award of any court, governmental body or arbitrator applicable to any Company or
Shareholder, or any law, rule or regulation applicable to each Company or
Shareholder.
2.11 INSURANCE. SCHEDULE 2.11 sets forth a true and correct list of
all insurance policies of any nature whatsoever maintained by the Companies at
any time during the three (3) years prior to the date of this Agreement and the
annual or other premiums payable from time to time thereunder. Except for the
cancellation of a policy due to an insurer's election to discontinue the
insurance of a class of risks (which decision was applicable to all like
policyholders), no Company has received any notice or other communication from
any such insurance company within the three (3) years preceding the date hereof
cancelling or materially amending or materially increasing the annual or other
premiums payable under any of said insurance policies, and to the best knowledge
of the Companies and the Shareholders, no such cancellation, amendment or
increase of premiums is pending or threatened.
2.12 EMPLOYMENT AGREEMENTS. Except as set forth in SCHEDULE 2.12,
there is no (i) employment, commission, profit sharing, deferred compensation,
bonus, stock option, stock purchase, pension, retainer, consulting, retirement,
health, welfare, or incentive plan or contract to which any Company is a party,
or by which it is or may be bound; or (ii) plan and agreement under which
"fringe benefits" (including, but not limited to, vacation plans or programs,
sick leave plans or
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programs, dental or medical plans or programs, and related or similar benefits)
are afforded to employees of any Company. Each Company has complied in all
material respects with all applicable laws, rules and regulations relating to
the employment of labor, including without limitation, the Employee Retirement
Income Security Act of 1974, as amended ("ERISA") and those relating to wages,
hours and the payment and withholding of taxes and other sums as required by
appropriate governmental authorities. Further, in addition to the general
representations made herein, it is specifically represented that none of the
Companies nor any other corporation which is a member of a controlled group of
corporations, as defined at Internal Revenue Code Section 414(b) which includes
any of the Companies, either maintains a "defined benefit pension plan," as
defined in Section 3(35) of ERISA, or has any liability for unfunded pension
contributions to any defined benefit pension plan previously maintained by any
of said corporations, that none of said corporations has within the past three
years made any contributions to a "multi-employer plan," as defined at Section
3(37) of ERISA and that none of the Companies maintains any other plan or
arrangement under which former employees, or their beneficiaries, are entitled,
or current employees will be entitled following termination of employment, to
medical, health, life insurance or other benefits other than pursuant to benefit
continuation rights granted by either federal or state law.
2.13 TAX RETURNS. Except as disclosed in SCHEDULE 2.13:
(a) Each Company has duly and timely filed with the appropriate
federal, state, local and foreign taxing authorities all Tax returns required to
be filed through the date hereof, and each Company has paid all Taxes owed. No
Company has requested any extension of time within which to file any such
return;
(b) All Tax returns filed by the Companies are complete and
accurate in all material respects; and
(c) There are no material liens for Taxes upon the assets of
any Company, except for statutory liens for Taxes not yet due or delinquent.
2.14 LITIGATION. Except as listed in SCHEDULE 2.14:
(a) There is no action, suit or proceeding to which any Company
is a party (either as a plaintiff or defendant) pending before any court or
governmental agency, authority or body or arbitrator; there is no action, suit
or proceeding threatened against any Company; and to the best
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knowledge of each Shareholder, there is no basis for any such action, suit or
proceeding;
(b) No Company, nor any officer, director or employee of any Company,
has been permanently or temporarily enjoined by any order, judgment or decree
of any court or any governmental agency, authority or body from engaging in
or continuing any conduct or practice in connection with the business,
assets, or properties of the Companies; and
(c) There is not in existence on the date hereof any order, judgment or
decree of any court or other tribunal or other agency enjoining or requiring any
Company to take any action of any kind with respect to its business, assets or
properties.
2.15 RESERVED.
2.16 RESERVED.
2.17 ASSUMED CONTRACTS. SCHEDULE 1.1(c) sets forth the Assumed
Contracts which consist of a list of each contract, agreement, purchase order,
lease, license, indenture or commitment, written or oral, to which any Company
is a party and has ongoing rights or obligations or by which any of their
respective assets are bound, except agreements for the purchase or sale by the
Companies of goods, materials, supplies or services in the ordinary course of
business involving less than $5,000 in consideration in each such case and less
than $25,000 in the aggregate. True and complete copies of each of the Assumed
Contracts, or where they are oral, true and complete written summaries thereof,
have been delivered to Purchaser by the Companies. Except as set forth in
SCHEDULE 1.1(c):
(a) Each of the Assumed Contracts is a valid and binding
agreement of one of the Companies and all other parties thereto, subject to
cancellation upon payment of an appropriate cancellation fee as set forth in
such Assumed Contracts;
(b) Prior to date of the Closing there has not occurred any
material default under any of the Assumed Contracts on the part of any Company
or on the part of any other party thereto, nor has any event occurred which with
the giving of notice or the lapse of time, or both, would constitute any
material default on the part of any Company under any of the Assumed Contracts
nor has any event occurred which with the giving of notice or the lapse of time,
or both, would constitute any material default on the part of any other party to
any of the Assumed Contracts; and
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(c) No consent of any party to any of the Assumed Contracts is
required by the execution, delivery or performance of this Agreement or the
consummation of the transactions contemplated hereby.
2.18 ACCOUNTS RECEIVABLE AND RUN-OFF COMMISSIONS. Attached hereto as
SCHEDULE 2.18 is a complete listing of the accounts receivable and run-off
commissions of the Companies as of September 30, 1994, a statement regarding
whether such accounts receivable and run-off commissions were or will be earned
or received prior to the Closing Date, and a listing of the status of such
accounts receivable and runoff commissions as of December 7, 1994, including all
cash collections, credits or write-offs. Except as disclosed in SCHEDULE 2.18,
the accounts receivable and run-off commissions of the Companies arose out of
the ordinary course of business.
2.19 NO UNDISCLOSED LIABILITIES. To the Shareholders' knowledge,
except as disclosed on SCHEDULE 2.19 and except as and to the extent
specifically reflected or reserved against in the December 31, 1993 balance
sheets included in the Financial Statements, no Company has any liabilities or
obligations of any nature, whether absolute, accrued, contingent or otherwise,
and whether due or to become due (including, without limitation, any liability
for Taxes and interest, penalties and other charges payable with respect to any
such liability or obligation).
2.20 CONFLICTS OF INTEREST. Other than as disclosed on SCHEDULE
2.20, no officer, director or shareholder of any of the Companies or any
affiliate of any such person now has or within the last three (3) years had,
either directly or indirectly:
(a) An equity or debt interest in any corporation, partnership,
joint venture, association, organization or other person or entity which
furnishes or sells or during such period furnished or sold services or products
to any of the Companies, or purchases or during such period purchased from any
of the Companies any goods or services, or otherwise does or during such period
did business with any of the Companies; or
(b) A beneficial interest in any Assumed Contract.
2.21 REGULATORY APPROVALS. All consents, approvals, authorizations
and other requirements prescribed by any law, rule or regulation which must be
obtained or satisfied by each of the Companies and Shareholders and which are
necessary for (i) the execution and delivery by each of the Companies and
Shareholders of this Agreement and the documents to be
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executed and delivered by the Companies and Shareholders in connection herewith,
and (ii) Purchaser to continue the businesses of the Companies as presently
conducted (except writing policies with SAIF), have been obtained and satisfied.
2.22 RESERVED.
2.23 RESERVED.
2.24 RESERVED.
2.25 LICENSES. SCHEDULE 2.25 sets forth all licenses, permits or
authority (collectively, the "Licenses") issued to any of the Companies by any
state insurance department or other insurance regulatory body or agency
(collectively, a "State Insurance Department"). The Licenses set forth on
SCHEDULE 2.25 constitute each license, permit or authority that it is necessary
or appropriate for each of the Companies to obtain from a State Insurance
Department with respect to the transaction of its business. All of the Licenses
are currently in effect. None of the Licenses has at any time been suspended,
revoked, terminated or limited or expired. No notice of any violation has been
received at any time by any of the Companies with respect to any License, and
there is no proceeding or investigation, whether pending or threatened, or any
basis therefor, that could result in the suspension, revocation, termination or
limitation of any License.
2.26 EMPLOYEE LICENSES. SCHEDULE 2.26 sets forth all licenses,
permits or authority (the "Employee Licenses") issued to any employee or
independent contractor of the Companies by a State Insurance Department. All of
the Employee Licenses are currently in effect and constitute each license,
permit or authority that it is necessary or appropriate for the employees or
independent contractors of the Companies to obtain from a State Insurance
Department with respect to the performance of their respective job
responsibilities for the Companies and as contemplated by Purchaser. All of the
Employee Licenses will remain in effect and will not be subject to suspension,
revocation, termination or limitation in any manner as a result of the
consummation of the transactions contemplated by this Agreement. Except for the
notices required by each State Insurance Department regarding the commencement
of authority of such employee to act for Purchaser and the termination of
authority of such employee to act for any of the Companies, Purchaser, any of
the Companies or any employee holding an Employee License will not be required
to obtain any consent, approval or action of, or make any filing with or give
any notice to, any State Insurance Department with respect to any Employee
License as a
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result of the consummation of the transactions contemplated by this Agreement.
2.27 COMPLIANCE WITH LAWS: ABSENCE OF REGULATORY PROCEEDINGS. Each
of the Companies has complied with all applicable laws and regulations relating
to the conduct of its business. None of the Companies has received service or
other notice of any litigation, action, suit, proceeding or investigation by or
on behalf of any State Insurance Department that is presently pending or
threatened against any of the Companies or relates to the business of the
Companies, nor do the Companies have any knowledge of any basis therefor. Since
January 1, 1992, none of the Companies has been a party to or has been involved
in any litigation, action, suit, proceeding or investigation by or on behalf of
any State Insurance Department. None of the Companies has entered into or has
been subject to any consent decrees, settlements, orders, stipulations or other
agreements or understandings with any State Insurance Department with respect to
the conduct of the business of the Companies or otherwise.
2.28 RESERVED.
2.29 POLICYHOLDERS. SCHEDULE 2.29 sets forth all of the
policyholders (the "Policyholders") that have policies of workers' compensation
insurance for which any of the Companies is currently receiving a commission or
has received a commission on or after January 1, 1992. Except as disclosed to
Purchaser in writing, one of the Companies is currently the agent of record for
each of the Policyholders. After the Closing Date, Purchaser shall have an
unconditional right with respect to each Policyholder to engage in the
solicitation, quotation and sale of Paula Insurance Company's policies of
workers' compensation insurance (and ancillary services related thereto) without
any restriction or limitation of any kind. Neither the State Accident Insurance
Fund Corporation ("SAIF") nor any other person or entity has any right (whether
pursuant to any agreement or understanding or otherwise), pursuant to an
agreement between any of the Companies and such person or entity, to preclude
or limit the solicitation, quotation or sale of Paula Insurance Company's
policies of workers' compensation insurance (and ancillary services related
thereto) by Purchaser to any Policyholders after the Closing Date. After the
Closing Date, Purchaser will be entitled to the goodwill and renewal rights with
respect to each of the Policyholders, without any restriction or limitation of
any kind. Except as disclosed in writing to Purchaser, neither any of the
Companies nor any of the Shareholders has any actual knowledge that any of the
Policyholders will not purchase workers' compensation insurance issued by Paula
Insurance Company and sold by Purchaser.
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2.30 RATING RECORDS. As of the date hereof, to the extent Rating
Records (as defined below) are needed for compliance with the ratings for
Policyholders listed in Schedule 2.29, ACI will provide all records
(collectively, the "Rating Records") with respect to the loss experience of each
Policyholder under workers' compensation policies issued by SAIF and other
workers' compensation insurers for those periods after ACI became the agent of
record for such Policyholder. On the Closing Date, the Rating Records will be
transferred to Purchaser and Purchaser will have the unconditional right to
retain and use the Rating Records and to permit Paula Insurance Company to use
the Rating Records for any purpose. Neither SAIF nor any other person or entity
has any right (whether pursuant to any agreement or understanding or otherwise)
at any time (whether before or after the Closing Date) to preclude the transfer
of such records to Purchaser or the use of the Rating Records by Purchaser or
Paula Insurance Company for any purpose, including, but not limited to, the
establishment of workers' compensation premium rates and rating plans and
systems for Paula Insurance Company in the State of Oregon based on the loss
experience of the Policyholders that is set forth in the Rating Records. The
Rating Records are adequate in form and substance to permit Paula Insurance
Company to establish with the Oregon Department of Consumer and Business
Services workers' compensation premium rates and rating plans and systems for
the classifications set forth in SCHEDULE 2.30 based on the loss experience of
the Policyholders that is set forth in the Rating Records. True and complete
copies of summaries of the loss experience of the Policyholders, individually
and in the aggregate, have been provided to Purchaser. The Rating Records are
maintained by ACI in such manner that they can be accessed by Purchaser without
unreasonable expense or delay and are complete in all material respects. The
Companies and the Shareholders have no reason to believe that Paula Insurance
Company shall not be entitled to use the exemption from the fictitious grouping
regulations for "employers . . . who are primarily engaged in farming" under ORS
737.346(3)(c) with respect to workers' compensation insurance policies for a
grouping or combination of any or all of the Policyholders and other employers
who are primarily engaged in farming to establish preferred rates or forms for
such grouping or combination than those offered to the public generally and to
persons and entities not in such grouping or combination.
2.31 OTHER INSURANCE. The Companies may transfer to Purchaser, and
following the Closing Date the Purchaser shall have an unconditional right with
respect to solicitation, quotation and sale of insurance other than workers'
compensation insurance ("Other Insurance" such as ORM), whether or not issued by
Paula Insurance Company, to any
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person or entity to which any of the Companies has previously sold insurance (an
"Other Policyholder") without any restriction or limitation of any kind except
as set forth on SCHEDULE 2.31. SCHEDULE 2.31 sets forth all of the Other
Policyholders. There is no agreement or understanding or other restriction that
precludes or limits the solicitation, quotation or sale of insurance by
Purchaser to any Other Policyholder after the Closing Date except as set forth
on SCHEDULE 2.31. After the Closing Date, Purchaser will be entitled to the
goodwill and renewal rights with respect to each Other Policyholder, without any
restriction or limitation of any kind except as set forth on SCHEDULE 2.31.
2.32 APPOINTMENTS. The insurance companies that have appointed each
of the Companies and their employees as agents are set forth on SCHEDULE 2.32.
All of the appointments (the "Appointments") set forth on SCHEDULE 2.32 are
currently in effect, and the Companies have not received any notice that an
Appointment has been terminated or limited in any manner. True and complete
copies of the commission schedules for each insurance company that has appointed
any of the Companies have been provided to the Purchaser.
2.33 GRANDFATHERING. To the Shareholders' and the Companies'
knowledge, there will be no status, preferential treatment or advantage that
currently benefits any of the Companies with respect to regulation by any State
Insurance Department that will not apply to and benefit Purchasers as of the
Closing Date assuming that Purchaser has obtained the Licenses set forth in
Section 5.12 and there is no change in applicable laws and regulations. To the
Shareholders' and the Companies' knowledge, upon obtaining the Licenses set
forth in Section 5.12, Purchaser shall be authorized under applicable laws and
regulations to conduct the businesses conducted by the Companies in the same
manner as the Companies are authorized to conduct such businesses.
2.34 OTHER SERVICES; FILES. To the Shareholders' and the Companies'
knowledge, neither SAIF nor any other person or entity has any right (whether
pursuant to an agreement or understanding or otherwise) to preclude or limit the
performance of services by Purchaser that are ancillary to the sale of
insurance, including, but not limited to, loss prevention services and seminars.
Each of the Companies shall have the unconditional right to transfer to
Purchaser any file or documentation currently in the possession of such Company
relating to the Policyholders listed in SCHEDULE 2.29 and Other Policyholders
listed in SCHEDULE 2.31.
The Purchaser represents and warrants to the Companies that:
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2.35 POWER AND AUTHORITY. Each of the Purchaser and the Guarantor
has the full right, power and authority to enter into this Agreement and to
fulfill its respective obligations hereunder.
2.36 AUTHORIZATION OF AGREEMENT. This Agreement and all other
agreements and instruments to be executed by each of the Purchaser and the
Guarantor in connection herewith have been (or upon execution will have been)
duly executed and delivered by the Purchaser or the Guarantor, as the case may
be, and have been effectively authorized by all necessary action, corporate or
otherwise, and constitute (or upon execution will constitute) valid and binding
obligations of each of the Purchaser and the Guarantor enforceable in accordance
with their respective terms, except as enforcement may be limited by law
pertaining to bankruptcy, insolvency or the enforcement of creditors' rights and
by general equitable principles.
2.37 GOOD STANDING. Each of the Purchaser and the Guarantor has been
duly incorporated and is validly existing as a corporation in good standing
under the laws of the State of Oregon and California, respectively, with
corporate power and authority to own, lease and operate its respective
properties and to conduct its respective business.
ARTICLE III
CERTAIN UNDERSTANDINGS AND AGREEMENTS
3.1 CONDUCT OF BUSINESS. The business of the Companies shall be
conducted from the date hereof through the earlier of the termination of this
Agreement or the Closing Date in accordance with prior practice and in the
ordinary course of business, and without limiting the generality of the
foregoing, none of the Companies shall (except with the prior written consent of
Purchaser): (i) make any change in its Articles of Incorporation or Bylaws as in
force and effect on the date hereof (except as is necessary in connection with
Section 4.9); (ii) issue any capital stock or options, warrants or other rights
of any kind whatsoever to purchase any capital stock or any securities
convertible or exchangeable for shares of such stock or commit to do any of the
foregoing; (iii) declare or pay any non-cash dividend or distribution on any
securities of the Companies; (iv) purchase or commit to purchase or lease
capital or fixed assets for prices and rentals (throughout the term of such
leases) exceeding $5,000 in each case and $25,000 in the aggregate; (v) enter
into any commitments, except commitments entered into in the ordinary and usual
course of business which will obligate the Companies after the Closing in
amounts exceeding $5,000 in each case and $25,000 in the aggregate;
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(vi) terminate any executive employee except in the ordinary and usual course of
business; (vii) sell or transfer any of the assets of any Company, except in the
ordinary course of business; (viii) mortgage, pledge, or encumber any of the
assets of any Company; (ix) amend, modify or terminate any Assumed Contract
other than in the ordinary course of business; (x) make any increase in, or any
commitment to increase, the compensation payable to any Company's employees or
agents or pay any bonuses, other than routine annual increases made in the
ordinary course of business; (xi) materially alter the manner of keeping the
books, accounts or records of any Company or the accounting practices therein
reflected; or (xii) take any action to cause any of the representations and
warranties in Article II to become inaccurate.
3.2 PRESERVATION OF ORGANIZATION. The Shareholders will preserve
the Companies' respective business organizations (including the preservation of
their properties wherever located, including, but not limited to, any assets
which are material to the respective businesses of the Companies) and shall
conduct their businesses from the date hereof through the Closing Date in
accordance with prior practice and in the ordinary course of business.
3.3 ACCESS. Between the date hereof and the Closing Date, the
Companies will give to authorized representatives of Purchaser full access,
during normal business hours, in such manner as not to unduly disrupt normal
business activities, to any and all premises, properties, contracts,
commitments, books, records and affairs of the Companies, and will cause their
officers to furnish any and all financial, technical and operating data and
other information pertaining to the Companies' businesses as Purchaser shall
from time to time reasonably request. With the prior consent of the Companies,
the Purchaser may discuss the Companies and their products and services with the
Companies' customers and suppliers upon reasonable notice and during regular
business hours.
3.4 CONFIDENTIALITY. Until the Closing, the parties hereto and
their respective agents, accountants and attorneys shall keep confidential any
information (unless readily ascertainable from public or published information
or sources) obtained from any other party hereto. Each party hereto further
agrees that it will not otherwise disclose any such information to any third
party (other than to its agents, accountants and attorneys in connection with
the consummation of the transactions contemplated by this Agreement) except upon
the written consent of the furnishing party, or except as required by law. Such
obligation of confidentiality shall not extend to any information which is shown
to be or to have been
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generally known to others engaged in the same trade or business as the
furnishing party, or that is or shall be public knowledge through no act or
omission by the party to whom the information was furnished or any of its
directors, officers, employees, professional advisors or other representatives.
3.5 EXCLUSIVE DEALINGS. From the date hereof until the earlier of
the Closing Date or the termination of this Agreement in accordance with its
terms, Purchaser shall have the exclusive right to purchase the Purchased Assets
and no Shareholder nor any officer, director, affiliate or representative
(including any investment banker or financial advisor) of any of the Companies
shall, directly or indirectly, solicit, encourage or participate in any
discussions or negotiations with, or provide any non-public information to, any
person, entity or group concerning any potential competing offer to acquire all
or any material portion of the business, properties, or capital stock of any of
the Companies whether by merger, purchase of assets or stock, tender offer,
joint venture or other similar transaction.
3.6 CONDITION TO TRANSFER OF CERTAIN CONTRACTS. The Companies agree
that between the date hereof and the Closing Date they will use their best
efforts to obtain the necessary consents to the assignment of each Assumed
Contract. As provided in Section 5.7 hereof, it is a condition precedent to the
obligations of Purchaser to close the transactions contemplated hereby that all
required consents be obtained for each such Assumed Contract.
3.7 NON-COMPETITION AGREEMENTS. On or before the Closing Date, David
Zakarian shall have executed a non-competition agreement with the Purchaser
substantially in the form of SCHEDULE 3.7.
3.8 MONEY PURCHASE PLAN.
(a) ACI has adopted and currently maintains the Agri-Comp, Inc.
Money Purchase Plan, a prototype plan designed by State Farm Insurance Company
and State Farm Life and Accident Assurance Company (the "Money Purchase Plan" or
"Plan"). The Money Purchase Plan is in compliance with the requirements for
qualification under Section 401(a) of the Internal Revenue Code of 1986 and ACI
has received a favorable determination letter from the Internal Revenue Service
stating that the Plan conforms with the requirements for qualification under
said Section 401(a).
(b) ACI has made or will make prior to the Closing Date all
contributions required under the Money
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Purchase Plan for the plan year which will end on December 31, 1994. ACI agrees
that it will not take any action either prior to the Closing Date or thereafter
which will cause any reduction in the rate of contribution required to be made
to the Plan for the plan year ending on December 31, 1994.
(c) Administration of the Money Purchase Plan complies in all
material respects with the terms of the Plan and with ERISA, including the
reporting and disclosure requirements set forth in Part 1 thereof.
(d) ACI agrees that prior to the Closing Date it will take such
action as may be necessary to terminate the Money Purchase Plan, and its
companion Trust, effective as of January 1, 1995 and that it will, prior to the
Closing Date, notify the Trustee, the Plan Sponsor, the participants and any
beneficiary of a deceased participant, of such termination, as required at Plan
Section B1.02. ACI agrees to promptly take or cause to be taken such action as
may be necessary to submit the Plan to the Internal Revenue Service with a
request that a favorable determination letter be issued stating that the
termination of the Plan does not adversely affect the qualified status of the
Plan under Section 401(a) of the Internal Revenue Code of 1986 and to submit
such additional information and documents, including remedial amendments under
Internal Revenue Code Section 401(b), and to take such other action as may be
required by the Internal Revenue Service as a condition to the issuance of a
favorable determination letter concerning the termination of the Plan. Upon
receipt of said favorable determination letter, ACI shall take or cause to be
taken such action as may be necessary to direct the Trustee of said Plan to
distribute to each participant, or beneficiary, his or her benefits under the
Plan, and, in doing so, to allow each participant and beneficiary the right to
elect to have his or her benefits directly rolled over into an individual
retirement account or another qualified plan, including a qualified plan of the
Purchaser or its affiliate, Paula Financial.
3.9 PROFIT SHARING TERMINATION. Each Company agrees to give notice
of termination of the profit sharing arrangements between such Company and
Messrs. Doug Smith and Kirk Lloyd immediately prior to the Closing Date
effective for the 1995 calendar year.
3.10 ENDORSEMENT OF PAULA INSURANCE COMPANY. Effective upon the
Closing, ACI will endorse Paula Insurance Company as a workers' compensation
insurer for the Policyholders.
3.11 MAINTENANCE OF EXISTENCE. ACI agrees to maintain its corporate
existence and maintain at least one
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part-time licensed employee until at least October 1, 1995 in order to
facilitate the collection by ACI of run-off commissions due to ACI from SAIF
which are to be paid over to Purchaser pursuant to this Agreement.
ARTICLE IV
CONDITIONS TO OBLIGATIONS OF EACH PARTY
The obligations of each party to effect the transactions contemplated
hereby shall be subject to the fulfillment, at or prior to the Closing Date, of
the following conditions:
4.1 NO ACTION OR PROCEEDING. No claim, action, suit, investigation
or other proceeding shall be pending or threatened before any court or
governmental agency which presents a substantial risk of the restraint or
prohibition of the transactions contemplated by this Agreement or the obtaining
of material damages or other relief in connection therewith.
4.2 COMPLIANCE WITH LAW. There shall have been obtained all permits,
approvals, and consents of all governmental bodies or agencies which counsel for
Purchaser or the Companies may reasonably deem necessary or appropriate so that
consummation of the transactions contemplated by this Agreement will be in
compliance with applicable laws.
ARTICLE V
CONDITIONS TO OBLIGATIONS OF PURCHASER
The obligations of Purchaser to effect the transactions contemplated
hereby shall be, at the option of Purchaser, subject to the fulfillment, at or
prior to the Closing Date, of the following additional conditions:
5.1 REPRESENTATIONS AND WARRANTIES TRUE. The representations and
warranties of the Companies and Shareholders contained in this Agreement and the
Schedules hereto shall be true and correct on the date such representations and
warranties were made and remain true and correct on the Closing Date. At the
Closing, the Companies and Shareholders shall have delivered to Purchaser a
certificate to such effect signed by each Company and each Shareholder.
5.2 SHAREHOLDERS' AND COMPANIES' PERFORMANCE. Each of the
obligations of each Shareholder and each Company to be performed on or before
the Closing Date pursuant to the terms of this Agreement shall have been duly
performed on or before
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the Closing Date, and at the Closing, each Shareholder and each Company shall
have delivered to Purchaser a certificate to such effect.
5.3 NAME CHANGE. On or before the Closing Date, ACI, OCI and ORM
shall have amended their respective articles of incorporation with the Secretary
of State of the State of Oregon to change their respective corporate names to
names other than "Agri-Comp, Inc.", "Oregon-Comp, Inc." and "Oregon Risk
Management, Inc.", respectively and executed such other documents and
certificates as Purchaser shall reasonably require to permit Purchaser to change
its name, effective on the Closing Date, to "Agri-Comp, Inc." and/or to file a
fictitious business name statement that will allow it and/or Paula Insurance
Company to do business in Oregon under the names "Agri-Comp, Inc.," "Oregon-
Comp, Inc." and "Oregon Risk Management, Inc." or derivatives thereof.
5.4 NO ADVERSE CHANGE. There shall not have occurred between the
date hereof and the Closing Date any material adverse changes in the results of
operations, condition (financial or otherwise), assets, liabilities (whether
absolute, accrued, contingent or otherwise), business or prospects of the
Companies.
5.5 COMPLIANCE WITH LAW. There shall have been obtained any and all
permits, approvals and consents of and there shall have been made any and all
filings with all governmental bodies or agencies which counsel for Purchaser may
reasonably deem necessary or appropriate so that consummation of the
transactions contemplated by this Agreement will be in compliance with
applicable laws.
5.6 DUE DILIGENCE EXAMINATION. The Purchaser shall have completed to
its satisfaction an extensive examination of, and shall have obtained full and
complete disclosure regarding, the assets, properties, business and financial
condition of the companies and such examination shall not have revealed any
fact, or facts, which, individually or in the aggregate, could be expected to
have a material adverse effect on the results of operations, condition
(financial or otherwise), assets, liabilities (whether absolute, accrued,
contingent or otherwise), business or prospects of the Companies; PROVIDED,
HOWEVER, such examination, or any activities undertaken by the Purchaser to
assist the Companies to prepare the schedules to this Agreement, shall not in
any way relieve any of the Shareholders of any liability for any breach of or
misrepresentation in this Agreement.
5.7 CONSENTS TO ASSIGNMENT OF CERTAIN CONTRACTS. All necessary
consents to the assignment of all Assumed
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Contracts shall have been obtained in writing and delivered at the Closing to
Purchaser.
5.8 ADDITIONAL CLOSING DOCUMENTS OF COMPANY. Purchaser shall have
received at the Closing the following documents, dated the Closing Date:
(a) Copies, certified by the Secretary or an Assistant
Secretary of each Company, of resolutions of the Board of Directors and
shareholders of each Company authorizing the execution, delivery and performance
of this Agreement and all other agreements, documents and instruments relating
hereto and the consummation of the transactions contemplated hereby; and
(b) Such other documents as Purchaser may reasonably request.
5.9 APPROVALS BY OREGON INSURANCE REGULATORS. On or prior to the
Closing Date, the Purchaser shall have received evidence reasonably satisfactory
to the Purchaser that the insurance regulators of the State of Oregon have
approved premium rates and a rating plan for Purchaser/Paula Insurance Company,
doing business as Agri-Comp, Inc. or a derivative thereof, that gives effect to
SAIF's historical workers' compensation loss experience and that the farming
exemption to the fictitious grouping rules under the Oregon Insurance Code shall
be available to Purchaser/Paula Insurance Company, doing business as Agri-Comp,
Inc. or a derivative thereof, on and after the Closing Date.
5.10 UNDERSTANDING REGARDING RUN-OFF OF COMMISSIONS AND SERVICING.
On or prior to the Closing Date Purchaser shall become satisfied with respect to
(i) Purchaser's entitlement to commissions from policies written or renewed with
SAIF prior to the Closing Date, (ii) Purchaser's obligations to service such
policies following the Closing Date, if any, (iii) Purchaser's use of SAIF
records and other information relating to historical loss experience following
the Closing Date and (iv) any other aspects of ACI's relationship with SAIF
prior to the Closing Date and Purchaser's relationship with SAIF following the
Closing Date which Purchaser believes should be clarified prior to closing.
5.11 RECEIPT OF LICENSES AND APPOINTMENTS. On or prior to the
Closing Date, Purchaser shall have received all types of Licenses held by the
Companies as well as any other licenses that Purchaser believes are necessary or
appropriate and shall have received such appointments other than SAIF that
Purchaser believes are necessary or appropriate.
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5.12 SCHEDULES. On or prior to the Closing Date the Companies shall
have delivered to the Purchaser all schedules to this Agreement theretofore
undelivered and the information contained in such schedules shall be reasonably
acceptable to the Purchaser.
ARTICLE VI
INDEMNIFICATION
6.1 GENERAL. The Companies and the Shareholders, jointly and
severally, shall, subject to the last sentence of this Section 6.1, indemnify
and hold harmless Purchaser, in respect of any and all claims, losses, damages,
liabilities (absolute, contingent, matured, unmatured or otherwise) and
expenses, contingent or otherwise, matured or unmatured, of any nature
whatsoever (including, without limitation, settlement costs and any legal or
other expenses for investigating or defending any actions or threatened actions)
(collectively, a "Loss"), reasonably incurred by the indemnified party in
connection with or as a result of each and all of the following (a "Breach"):
(a) Any misrepresentation or breach of any representation or
warranty in this Agreement made by any Company or Shareholder;
(b) The breach of any covenant, agreement or obligation
contained in this Agreement or any other instrument contemplated by this
Agreement of any Company or Shareholder;
(c) Any misrepresentation contained in any statement or
certificate furnished by any Company or Shareholder pursuant to this Agreement
or in connection with the transactions contemplated by this Agreement; and
(d) Any action, liability or Loss relating to any contract or
arrangement to which any Company is a party other than the Assumed Liabilities
or relating to the conduct of business by any of the Companies before, on or
after the Closing Date.
Any such liability, deficiency or indemnity shall be paid by the
indemnifying party within thirty (30) days from the date the indemnified party
notifies the indemnifying party that it has incurred or has become subject to
the referenced liability or deficiency and provides the indemnifying party with
documentation demonstrating that the indemnified party has incurred such
liability or deficiency. Under no circumstances will the maximum liability of
the indemnifying party under this Article VI exceed the aggregate payments made
and due to be made by Purchaser to the Companies under
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Section 1.4 hereof except in the event of fraudulent misrepresentation. The
respective Shareholders of each individual Company shall not be obligated to
jointly or severally indemnify Purchaser for Losses relating to any Company
other than those in which such Shareholder is a shareholder; e.g., Mr. Smith
will have no indemnification obligation for Breaches relating to ACI and Ms.
Zakarian shall have none for Breaches relating to ORM.
6.2 NOTICE OF CLAIM FOR INDEMNIFICATION. Whenever any claim shall
arise for indemnification under this Article VI, the indemnified party shall
promptly notify the indemnifying party of the claim and, when known, the facts
constituting the basis for such claim.
6.3. THIRD PARTY CLAIMS. If a claim by a third party is made against
an indemnified party, and if such indemnified party intends to seek indemnity
with respect thereto hereunder, the indemnified party shall promptly (and in any
case within thirty days of such claim being made and within the period provided
in Section 6.5, if applicable) notify the indemnifying party of such claim. The
indemnifying party shall have thirty (30) days after receipt of such notice to
undertake, conduct and control, through counsel of its own choosing and at its
own expense, the settlement or defense thereof, and the indemnified party shall
cooperate with it in connection therewith; PROVIDED that (a) the indemnifying
party shall permit the indemnified party to participate in such settlement or
defense through counsel chosen by the indemnified party, provided the fees and
expenses of such counsel shall be borne by the indemnified party and (b) the
indemnifying party shall promptly reimburse the indemnified party for the full
amount of any Loss resulting from such claim and all related expenses incurred
by the indemnified party within the limits of this Article VI (except for
expenses contemplated by clause (a) preceding). So long as the indemnifying
party is reasonably contesting any such claim in good faith, the indemnified
party shall not pay or settle any such claim. Notwithstanding any of the
foregoing, the indemnified party shall have the right to pay or settle any such
claim, provided that in such event it shall waive any right to indemnity
therefor by the indemnifying party. If the indemnifying party does not notify
the indemnified party within thirty (30) days after the receipt of the
indemnified party's notice of claim of indemnity hereunder that it elects to
undertake the defense thereof, the indemnified party shall have the right to
contest, settle or compromise the claim in the exercise of its reasonable
judgment (but with due regard for obtaining the most favorable outcome
reasonably likely under the circumstances, taking account of costs and
expenditures) at the expense of the indemnifying party.
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6.4 MANNER OF INDEMNIFICATION. All indemnification hereunder shall
be effected by payment of cash or delivery of a certified or cashier's check in
the amount of the indemnification liability; PROVIDED, HOWEVER, that the
indemnified party shall have the right to offset any matured, unmatured,
absolute or contingent liability for which the indemnified party shall seek
indemnification from the indemnifying party pursuant to this Article VI against
any payments due to the indemnifying party, including, if applicable, payments
due from the Purchaser to ACI for the second and third installment payments of
the purchase price for the ACI Purchased Assets, on a PRO RATA basis; PROVIDED
that any offset with respect to an unmatured or contingent liability must be
reasonable under the circumstances both in terms of the amount of the offset and
when the offset is made.
6.5 PURCHASER INDEMNIFICATION. The Purchaser and the Guarantor
shall, jointly and severally, indemnify and hold harmless the Companies in
respect of all Losses reasonably incurred by the Companies in connection with or
as a result of any misrepresentation or breach of representation or warranty in
this Agreement made by the Purchaser or any failure by the Purchaser to comply
with all of the obligations assumed by the Purchaser under the Assumed
Contracts. The procedures relating to the foregoing indemnification shall be
the same as those set forth in Sections 6.2-6.4 above.
6.6 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations
and warranties made in Article II hereof shall survive the Closing for a period
of three years from the Closing Date.
ARTICLE VII
TERMINATION
7.1 TERMINATION. This Agreement may be terminated:
(a) By written consent of the parties hereto;
(b) By Purchaser or by any Company if the terminating party or
parties is/are not in default hereunder, and if the Closing shall not have
occurred on or before January 2, 1995 or such later date, if any, to which
Purchaser and the Companies shall agree in writing; or
(c) By Purchaser if, in the course of its due diligence review,
it discovers material information not previously disclosed to Purchaser which
Purchaser reasonably believes has a material adverse effect on the value of the
Purchased Assets. In such event, the notice of termination
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delivered by Purchaser to the Companies shall specify in reasonable detail such
information.
ARTICLE VIII
MISCELLANEOUS
8.1 NOTICES. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed given if delivered personally
or mailed by certified or registered mail, postage prepaid, return receipt
requested, addressed as follows:
To Purchaser: Paula Financial
300 North Lake Avenue
Suite 300
Pasadena, California 91101
Attention: Mr. James A. Nicholson
With a copy to: Bradley K. Serwin, Esq.
Gibson, Dunn & Crutcher
2029 Century Park East, Suite 4000
Los Angeles, California 90067
If to the c/o: Ms. Carolyn H. Zakarian
Shareholders or 665 Winding Way S.E.
the Companies: Salem, Oregon 97302
With a copy to: Douglas M. Smith
6864 Witzel Road S.E.
Salem, Oregon 97301
and
Howard Collins, Esq.
358 Superior Street S.E.
Suite 200
Salem, Oregon 97302
8.2 ASSIGNABILITY AND PARTIES IN INTEREST. This Agreement shall not
be assignable by any of the parties hereto without the prior written consent of:
(i) in the case of any Shareholder or Company, Purchaser and (ii) in the case of
Purchaser, each Company. Notwithstanding the foregoing, Purchaser acknowledges
that prior to the date of this Agreement, ACI has adopted a plan of complete
liquidation, and such plan of liquidation calls for the distribution of the
assets of ACI to its sole shareholder, Carolyn Zakarian ("Assignee"). The
assets to be distributed include without limitation this Agreement and all
rights arising hereunder, as well as any and all other agreements between ACI
and Purchaser. Notwithstanding any other provision contained
29
<PAGE>
herein to the contrary, Purchaser does hereby irrevocably consent to the
assignment and transfer of this Agreement and all rights arising hereunder,
together with any other agreements ancillary hereto and entered into by
Purchaser with ACI in connection with this Agreement and all rights arising
thereunder, to Assignee. To evidence any such assignment, Assignee shall submit
to Purchaser written notice of her mailing address and a copy of a written
assignment executed by ACI in favor of Assignee, and thereafter Purchaser shall
make all payments at such address and to the order of Assignee. The foregoing
shall in no way discharge any of the Companies or the Shareholders from their
respective indemnification or other obligations hereunder. This Agreement shall
inure to the benefit of and be binding upon the parties hereto and their
respective successors.
8.3 GOVERNING LAW. This Agreement shall be governed by, and
construed and enforced in accordance with, the laws of the State of Oregon.
8.4 COUNTERPARTS. This Agreement may be executed simultaneously in
one or more counterparts, each of which shall be deemed an original, but all of
which shall constitute but one and the same instrument.
8.5 BEST EFFORTS. The Companies, Shareholders and Purchaser each
agree to use its best efforts to bring about the transactions contemplated by
this Agreement.
8.6 PUBLIC ANNOUNCEMENTS. The parties hereto agree that they will
not make any disclosures about the existence or contents of this Agreement or
the transactions contemplated herein or cause to be publicized in any manner
whatsoever by way of interviews, responses to questions or inquiries, press
releases or otherwise any aspect or proposed aspect of this transaction without
prior written notice to and approval of the other parties, except as may be
otherwise necessary to comply with applicable law; provided, however, that the
parties hereto may, on a confidential basis, advise their respective agents,
accountants, attorneys and prospective lenders.
8.7 COMPLETE AGREEMENT. This Agreement, the exhibits hereto and the
Schedules hereto delivered pursuant to this Agreement and all other documents
between the parties dated the date of the Closing to be delivered at the Closing
contain the entire agreement between the parties hereto with respect to the
transactions contemplated herein and, except as provided herein, supersede all
previous oral and written and all contemporaneous oral negotiations,
commitments, writings and understandings. The Shareholders are not relying on
any
30
<PAGE>
inducement whatsoever other than that represented by such agreements in
executing and delivering this Agreement.
8.8 MODIFICATIONS AMENDMENTS AND WAIVERS. This Agreement may not be
modified or amended, and no provision or benefit hereof may be waived, except in
a written document executed by the party against whom enforcement is sought.
8.9 SEVERABILITY. Any provision of this Agreement which is invalid,
illegal or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity, illegality or unenforceability,
without affecting in any way the remaining provisions hereof in such
jurisdiction or rendering that or any other provision of this Agreement invalid,
illegal or unenforceable in any other jurisdiction.
8.10 PAYMENT OF EXPENSES. Each party shall bear its own expenses in
connection with the preparation of this Agreement and the consummation of the
transactions contemplated herein. Except as specifically approved by Purchaser
in writing, no fees and expenses incurred in connection with the preparation of
this Agreement or the exhibits, schedules or closing documents relating thereto
and the consummation of the transactions contemplated herein or therein shall be
paid by the Companies out of the Purchased Assets.
8.11 FURTHER ASSURANCES. Each party hereto shall do and perform or
cause to be done and performed all such further acts and things and shall
execute and deliver all such other agreements, certificates, instruments and
documents as any other party hereto reasonably may request in order to carry out
the intent and accomplish the purposes of this Agreement.
8.12 ATTORNEYS' FEES. In the event of any action or proceeding
brought by either party against the other arising out of this Agreement, the
prevailing party, if any, shall be entitled to recover its reasonable attorneys
fees incurred in such action or proceeding, including any appeal, with the
amount of such fees, as well as a determination of prevailing party status, if
any, to be determined by a judge of the court sitting without a jury.
8.13 DEFINITION OF KNOWLEDGE. Unless expressly indicated herein to
the contrary, whenever the phrase "knowledge," "best knowledge" or to a parties
"knowledge" is used herein, "knowledge" shall mean the party actually knew, or
should have known after reasonable investigation, the fact at issue.
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<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be signed as of the date first above written.
OREGON AG INSURANCE SERVICES, INC.
By /s/ Jeffrey A. Snider
---------------------------------
Jeffrey A. Snider
Senior Vice President
AGRI-COMP, INC.
By /s/ John T. Hayward
---------------------------------
John T. Hayward, President
OREGON-CORP, INC.
By /s/ John T. Hayward
---------------------------------
John T. Hayward, President
OREGON RISK MANAGEMENT, INC.
By /s/ David Zakarian
---------------------------------
David Zakarian, President
32
<PAGE>
SHAREHOLDERS
ACI:
/s/ Carolyn H. Zakarian
-----------------------------------
Carolyn H. Zakarian
OCI:
/s/ Carolyn H. Zakarian
----------------------------------
Carolyn H. Zakarian
/s/ David Zakarian
-----------------------------------
David Zakarian
ORM:
/s/ David Zakarian
-----------------------------------
David Zakarian
/s/ Douglas M. Smith
-----------------------------------
Douglas M. Smith
WITH RESPECT TO SECTIONS 1.6 AND 6.5
ONLY:
PAULA FINANCIAL
By /s/ Jeffrey A. Snider
---------------------------------
Jeffrey A. Snider
Senior Vice President
33
<PAGE>
ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement (this "Agreement") is made and entered
into as of this 10th day of November, 1995 by and among Desert Benefits, Inc.
Employee Benefits & Insurance Services, a California corporation (the
"Company"), Frederic J. Klicka ("Klicka"), Frederic J. Klicka II ("Rick Klicka"
and with Klicka, the "Shareholders"), the individuals selling assets and
executing this Agreement on the signature page below in such capacity (the
"Individual Sellers") and Pan American Underwriters, Inc., a Nevada corporation
("Purchaser").
RECITALS
WHEREAS, the Company is an insurance agency focusing on individual and
group medical benefits (the "Core Business"), with divisions focusing on
prevailing wage administration, fire and casualty insurance and life insurance
(collectively, the "Divisions" and, collectively with the Core Business, the
"Business"), licensed to sell insurance in the State of California and
elsewhere;
WHEREAS, Purchaser desires to acquire substantially all of the
non-cash assets of the Company, including the rights associated with the name
"Desert Benefits" and the rights to all policies and policy holder information
placed by the Company with various insurance carriers (collectively, the "Book
of Business") and to assume certain selected liabilities of the Company in
exchange for the consideration set forth herein, and the Company desires that
such assets be sold; and
<PAGE>
WHEREAS, Purchaser desires to acquire selected assets held by
shareholders and employees of the Company which relate to the Business but are
held personally by such individuals in exchange for the consideration set forth
herein, and the individuals executing this Agreement in such capacity (the
"Individual Sellers") desire that such assets be sold;
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals and the
representations, warranties and covenants herein set forth, and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I
PURCHASE AND SALE OF ASSETS
1.1 PURCHASE AND SALE OF PURCHASED ASSETS. On the terms and subject
to the conditions set forth in this Agreement, at the Closing, the Company shall
sell, assign, transfer, convey and deliver to Purchaser, and Purchaser shall
purchase and accept from the Company, all of the right, title and interest of
the Company in and to the Purchased Assets (as defined below), free and clear of
all Liens (as defined below) other than Permitted Liens (as defined below).
"Purchased Assets" shall mean all personal properties and assets,
tangible and intangible of the Company, the Company's interest in that certain
working relationship known as Desert Benefits Fire & Casualty and the Company's
interest in that certain working relationship between the
2
<PAGE>
Company and David Molitz relating to the sale of life insurance products on
behalf of the Company, including without limitation the names "Desert Benefits"
and "Desert Benefits Fire & Casualty," but excluding the Excluded Assets (as
defined in Section 1.2 below).
"Lien" shall mean any pledge, security interest, lien, charge,
encumbrance, equity or option of whatsoever nature.
"Permitted Liens" shall mean (i) Liens for taxes not yet due and
payable or being contested in good faith and for which adequate reserves have
been taken, and (ii) mechanics', carriers', workers', repairers', materialmens',
warehousemens' and other similar liens arising or incurred in the ordinary
course of business.
Without limiting the foregoing, the Purchased Assets shall include the
following:
(a) REGULATORY LICENSES. All of the Licenses and Employee Licenses
of the Company, to the extent transferable, as defined in Sections 3.19 and 3.20
below.
(b) TANGIBLE PERSONAL PROPERTY. All the Tangible Personal property.
"Tangible Personal Property" shall mean all machinery, equipment,
electrical devices, vehicles, furniture, office materials and supplies,
hardware, tools, spare parts, phone numbers and other tangible personal property
of every kind and description owned by the Company, including without
limitation, those listed and described on SCHEDULE 3.8 hereto, and any
additions, improvements, replacements and alterations thereto made between the
date of this Agreement and the
3
<PAGE>
Closing Date in the ordinary course of business. The Purchased Assets do not
include any fixtures association with the Company's office location.
(c) ASSUMED CONTRACTS. All the Assumed contracts.
"Assumed Contracts" shall mean all right, title and interest of the
Company in and to the contracts and agreements listed or referred to on SCHEDULE
1.1(c) hereto, together with the contracts and agreements entered into between
the date of this Agreement and the Closing Date in accordance with the terms of
this Agreement and contracts entered into in the ordinary course of business
pursuant to which the Company's obligations do not exceed $1,000 per year and
which are terminable on less than ninety days' notice without penalty. The list
of Assumed Contracts will include, without limitation, the Company's building
lease with Klisto and its equipment lease with Applied Systems.
(d) INTANGIBLE RIGHTS. All the Intellectual Property of the Company.
"Intellectual Property" shall mean all intangible rights, including,
without limitation, (i) all trademarks and service marks and all applications
therefor and registrations and recordings thereof, together with the goodwill
symbolized by and associated with such trademarks and service marks, (ii) all
trade dress connected or used with such trademarks and service marks and all
applications, registrations and recordings thereof, (iii) all trade secrets,
proprietary information and know-how, (iv) all franchises, patents, jingles,
slogans, logotypes and other intangible rights, (v) all customer lists, in each
case including, without limitation, those listed and described on SCHEDULES 3.22
4
<PAGE>
hereto (vi) all rights with respect to the goodwill and renewal rights with
respect to the Policyholders (as defined in Section 3.22), including without
limitation the right and authority to issue bills for existing and renewal
policies, the right to issue renewal policies and process changes and claims on
existing policies and the right to communicate with the Policyholders under
color of the agency with whom the previous relationship existed and (vii) all
rights embodied by the Appointments (as defined in Section 3.23) to the extent
transferable and any additions or modifications thereof made by the Company in
the ordinary course of business between the date of this Agreement and the
Closing Date to any items described in clauses (i)-(vii) above.
(e) FILES AND RECORDS. All files and other records of the Company,
wherever located, including without limitation, all available schematics,
blueprints, engineering data, customer lists, correspondence, reports,
specifications, projections, statistics, market research data, marketing plans,
sales records and histories, promotional graphics, original art work, mats,
plates, negatives and other advertising, marketing or related materials, and all
other technical and financial information, accounting and personnel records
concerning the Purchased Assets.
(f) CLAIMS. All of the Company's warranty or other claims, refunds,
causes of action, chooses in action, rights to recovery (including rights to
insurance proceeds or other recoveries for damaged assets acquired by
Purchaser), rights of set-off and rights of recoupment.
(g) Prepaid Commissions; Accounts Receivable and Run-Off
Commissions. All prepaid commissions, accounts receivable and run-off
commissions of the Company as of the
5
<PAGE>
Closing Date which will be earned after the Closing Date pertaining to Policies
in place on or prior to the Closing Date whether or not paid by any insurance
carrier prior to the Closing Date. The Company shall promptly remit to
Purchaser the full amount of (i) any unearned prepaid commission as of the
Closing Date,(ii) any accounts receivable received by the Company which were
received and earned after the Closing and (iii) any run-off commissions paid
after the Closing Date by carriers to the Company which were earned after the
Closing. The Company will promptly endorse such to Purchaser. The Company
agrees to use its best efforts to collect all accounts receivable and run-off
commissions sold to Purchaser hereunder including, if necessary, the institution
of litigation with the applicable account debtor at the Company's expense.
Commission adjustments to commissions earned prior to the Closing Date shall be
for the Company's account regardless of when such adjustment is made. The
parties consider commissions as earned as the premiums to which they relate are
earned. The parties intend that bonus commissions which relate to time periods
as opposed to policy periods are earned daily on a straight line basis and will
be allocated to the Company and Purchaser based on the amount of the applicable
period during which the Company was independent and the period during which it
was owned by Purchaser.
1.2 EXCLUDED ASSETS. Notwithstanding the foregoing, the Purchased
Assets shall not include the following assets of the Companies (collectively,
the "Excluded Assets"):
(a) CORPORATE RECORDS; TAX RETURNS. The stock books, stock ledgers,
shareholder lists, minute books, corporate seals and similar corporate records
of the Company, as well as all tax returns of the Company and any and all
6
<PAGE>
records that the Company is required to retain pursuant to applicable law.
(b) ACCOUNTS RECEIVABLE. All accounts receivable of the Company as
of the Closing Date which were earned prior to the Closing Date less any
unearned commissions received by the Company prior to the Closing Date.
(c) CASH AND INVESTMENTS. All cash, cash equivalents and securities,
including cash deposited in the Company's trust account(s).
(d) OTHER EXCLUDED ASSETS. All automobiles owned by the Company as
of the Closing Date and the other assets, if any, set forth on SCHEDULE 1.2(d)
hereto.
1.3 ASSUMPTION OF CERTAIN LIABILITIES. Purchaser is not assuming any
debt, liability or obligations of the Company, any Shareholder or any Individual
Seller, whether known or unknown, fixed or contingent, except for the
liabilities of the Company to be paid or performed after the Closing Date under
the Assumed Contracts listed in SCHEDULE 1.1(c) (the "Assumed Contracts") which
are assigned by the Company to the Purchaser (the "Assumed Liabilities").
Except as and to the extent otherwise expressly provided in this
Agreement, Purchaser does not, and shall not, assume or be deemed to assume, nor
shall Purchaser discharge, be responsible for or liable with respect to any
other liabilities or obligations of the Company or any other person, whether
arising prior to, on or after the Closing Date (collectively, the "Retained
Liabilities"), including without limitation:
7
<PAGE>
(a) any liability or obligations of the Company arising out of or
relating to any contract or agreement not fully and effectively assigned to and
specifically assumed by Purchaser pursuant to this Agreement, including without
limitation any obligations of the Shareholders or the Company to David Molitz or
Anthony Koons arising out of the working relationship between the Company and
each such individual;
(b) any liability or obligations of the Company arising out of or
relating to any employee benefit (including health) plans, programs, policies
or other arrangements or agreements which provided the Company's employees with
benefits, including the payment of severance pay or special bonuses, if any, to
terminated employees under agreements or policies not constituting Assumed
Contracts;
(c) any liability or obligations of the Company arising out of any
litigation, claim, arbitration or other similar proceeding relating to the
Purchased Assets before the Closing Date, regardless of whether or not such
litigation, claim, arbitration or other similar proceeding is pending,
threatened or asserted before, on or after the Closing Date;
(d) any liabilities and obligations of the Company relating to the
Excluded Assets, including without limitation all automobile leases and
automobile loans;
(e) any and all liabilities and obligations, direct or indirect, fixed
or contingent, for Taxes, whether or not such Taxes are assessed prior to, on or
after the Closing Date;
(f) accounts payable of the Company and credit balances of accounts
receivable of the Company as of the Closing Date, including without limitation,
all Company,
8
<PAGE>
Shareholder and Individual Seller credit card balances, any amounts due Valley
Independent Bank, and miscellaneous payables other than a pro rata share of the
rent and utilities for the Company's building for the month in which the Closing
Date occurs; and
(g) any obligation of the Company to any of its trust account(s) or
any obligaitons of any such trust account(s) to any beneficiary thereof.
"Tax" or "Taxes" means all federal, state, local and foreign taxes,
including without limitation, income, profits, franchise, license, employment,
estimated, transfer, premium, withholding, property, excise, sales, and use
taxes (including any interest, penalties, deposits or additions with respect
thereto).
1.4 PURCHASE PRICE FOR PURCHASED ASSETS. On the Closing Date,
Purchaser shall pay to the Company, by wire transfer or delivery of a certified
or cashier's check the sum of $140,000 and shall deliver to the Company a
certificate or certificates representing Paula Financial Common Stock, no par
value, valued at $560,000 in the aggregate (the "Shares"). It is the intent of
the parties that the number of Shares be calculated based on the value of each
share of Paula Financial Common Stock as of December 31, 1995. It is the
present intent of Paula Financial to have its shares independently valued as of
December 31, 1995 by the firm of Houlihan, Lokey, Howard and Zukin and the
parties agree that such valuation shall be final and binding upon the parties in
determining the actual number of Shares due to the Company. Pending the
completion of that valuation, the parties have agreed that Paula Financial will
issue Shares based on the December 31, 1994 valuation performed by HLH&Z of
$18.06 per share.
9
<PAGE>
Accordingly, the certificates to be delivered on the Closing Date will represent
31,008 Shares. Upon the completion of the December 31, 1995 valuation (expected
in April 1996) Paula Financial will promptly issue additional Shares if the
valuation is less than $18.06 and the Company will promptly return Shares to
Paula Financial if the valuation is more than $18.06.
The parties agree to allocate the purchase price among the Purchased
Assets for all purposes in accordance with SCHEDULE 1.4 hereto.
1.5 PURCHASE AND SALE OF INDIVIDUAL ASSETS FROM INDIVIDUAL SELLERS.
On the terms and subject to the conditions set forth in this Agreement, at the
Closing, the Individual Sellers shall sell, assign, transfer, convey and deliver
to Purchaser, and Purchaser shall purchase and accept from the Individual
Sellers, all of the right, title and interest of the Individual Sellers in and
to the Individual Assets (as defined below), free and clear of all Liens other
than Permitted Liens.
"Individual Assets" shall mean all business properties and assets,
tangible and intangible of the Individual Sellers which were developed,
generated or purchased by the Company that certain working relationship known as
Desert Benefits Fire & Casualty including without limitation the right to
commissions from the sale of life insurance policies (excluding all "management"
overrides which are the property of David Molitz), the related expirations and
rights to "training allowances" and the assets set forth on SCHEDULE 1.5 hereof.
10
<PAGE>
In exchange for the sale of the Individual Assets to the Purchaser,
the Purchaser agrees to enter into the employment arrangements with the
Individual Sellers set forth on SCHEDULE 2.5 hereof.
1.6 CLOSING. The Closing of the transactions contemplated by this
Agreement (the "Closing") shall occur at the offices of Purchaser located in
Pasadena, California at 10:00 a.m., on the next business day following the
satisfaction of the last unsatisfied condition set forth in Article V hereof
(the "Closing Date") unless the parties hereto agree in writing upon a different
time, date or place.
1.7 HOLD-BACK RESTRICTIONS ON STOCK CONSIDERATION. The Purchaser
acknowledges that the Company will not be able to deliver prior to the Closing
an executed agreement among the Imperial Valley School District Consortium
members renewing their commitment to the Consortium for three years. The Company
acknowledges that this delivery is required by Section 5.7(b) of this Agreement.
The document to be delivered must evidence the renewed commitment of at least
90% of the members of the Consortium to purchase group health insurance through
the Consortium during the period from October 1, 1996 through September 30,
1999. In consideration for the Purchaser's agreement to close the transaction
prior to the renewal by the Consortium members, the Company agrees that 35% of
the Shares shall be issued to the Company subject to the following restriction:
(i) In the event that the Company does not deliver to the Purchaser by
October 1, 1996 the document discussed in Section 5.7 (b) of this Agreement, the
issuance of 35% of the Shares shall be considered null and void, except that if
90% of the members of the Consortium renew their group health
11
<PAGE>
insurance through the Consortium until September 30, 1997, the Shares will not
be considered null and void and these restrictions will lapse on 1/3 of the
restricted Shares (11.66% of the total Shares);
(ii) In the event that the Company does not deliver to the Purchaser
by October 1, 1997 the document discussed in Section 5.7 (b) of this Agreement,
the issuance of the remaining portion of the Shares subject to these
restrictions (23.33% of the total Shares) shall be considered null and void,
except that if 90% of the members of the Consortium renew their group health
insurance through the Consortium until September 30, 1998, the Shares will not
be considered null and void and these restrictions will lapse on another 1/3 of
the restricted Shares (11.66% of the total Shares); and
(iii) In the event that the Company does not deliver to the Purchaser
by October 1, 1998 the document discussed in Section 5.7 (b) of this Agreement,
the issuance of the remaining portion of the Shares subject to these
restrictions (11.66% of the total Shares) shall be considered null and void,
except that if 90% of the members of the Consortium renew their group health
insurance through the Consortium until September 30, 1999, the Shares will not
be considered null and void and these restrictions will lapse on the remaining
portion of the restricted Shares (11.66% of the total Shares).
The parties agree that the Shares subject to the foregoing restriction
represent the fair value of the renewal of the Consortium to the Purchaser and
that, as such, the forfeiture of such Shares represent liquidated damages and
not a penalty. All of the foregoing restrictions shall lapse upon
12
<PAGE>
the delivery of the document called for by Section 5.7(b) to the Purchaser.
In order to preserve the Purchaser's rights under this hold-back, no
portion of the Shares subject to the restrictions may be sold, assigned,
transferred, pledged or hypothecated in any manner prior to the lapse of the
restrictions. Notwithstanding the foregoing, the affected Shares may be
transferred to the current shareholders of the Company pursuant to a
dividend-in-kind, but, once so transferred, will again be bound by the hold-back
and transfer restrictions.
To evidence the foregoing restrictions, the Certificates evidencing
the affected Shares shall bear the following restrictive legends:
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE THE SUBJECT OF
RESTRICTIONS SET FORTH IN THE ASSET PURCHASE AGREEMENT BETWEEN PAN
AMERICAN UNDERWRITERS, INC., DESERT BENEFITS, INC. EMPLOYEE BENEFITS &
INSURANCE SERVICES AND THE OTHER PARTIES NAMED THEREIN DATED AS OF
NOVEMBER 10, 1995. IN THE EVENT THAT CERTAIN EVENTS DO NOT OCCUR AS
SET FORTH IN SECTION 1.7 OF THAT AGREEMENT, THE ISSUANCE OF ALL OR A
PORTION OF THE SHARES REPRESENTED BY THIS CERTIFICATE SHALL BE NULL
AND VOID AND THE HOLDER HEREOF SHALL BE REQUIRED TO RETURN THIS
CERTIFICATE TO THE ISSUER. UNTIL THE LAPSE OF THE FOREGOING
RESTRICTIONS, THE SHARES REPRESENTED HEREBY MAY NOT BE SOLD, ASSIGNED,
TRANSFERRED, PLEDGED OR HYPOTHECATED, SUBJECT TO ONE EXCEPTION AS SET
FORTH IN THE AGREEMENT.
13
<PAGE>
In the event the Consortium business is sold by the Purchaser to a
third party and the Purchaser reasonably determines that the lack of renewal of
the Consortium by its members decreased the value of the Consortium business,
then the issuance of a portion of the restricted Shares will be considered null
and void and the restrictions on the remaining restricted Shares will lapse.
The portion of the restricted Shares forfeited will be based on the
difference between the price received by the Purchaser for the Consortium
business absent the renewal compared to the price the Purchaser reasonably
determines the business would have commanded with the renewal in place on the
date of sale. For example if the price without the renewal is determined to
equal 75% of the price with the renewal, then 25% of the restricted Shares will
be forfeited. If the price without is 90% of the price with, then 10% of the
restricted Shares will be forfeited etc.
ARTICLE II
CERTAIN UNDERSTANDINGS AND AGREEMENTS
2.1 EMPLOYMENT AND NON-COMPETITION AGREEMENTS. On or before the
Closing Date, Klicka and Rick Klicka shall have executed employment agreements
with the Purchaser substantially in the form of SCHEDULE 2.1(a) and all
Individual Sellers shall have executed a non-competition agreement with the
Purchaser substantially in the form of SCHEDULE 2.1(b).
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<PAGE>
2.2 PROFIT SHARING TERMINATION. The Company agrees to give notice of
termination of the profit sharing arrangements between the Company and its
employees immediately prior to the Closing Date.
2.3 401(k) PLAN. The Company agrees to maintain the Company's 401(k)
plan in compliance with ERISA. Purchaser agrees to permit Company employees
hired by Purchaser to roll their Company 401(k) funds into the Purchaser's
401(k) plan following the Closing Date. The Purchaser will give Company
employees credit for service with the Company toward the Purchaser's 401(k)
participation requirements.
2.4 MAINTENANCE OF EXISTENCE. The Company agrees to maintain its
corporate existence and maintain at least one part-time licensed employee until
at least December 1, 1996 in order to facilitate the collection by the Company
of run-off commissions which are to be paid over to Purchaser pursuant to this
Agreement. Such employee may also be a full-time employee of the Purchaser.
2.5 EMPLOYMENT OF COMPANY EMPLOYEES BY PURCHASER. Purchaser agrees to
employ all of the current employees of Purchaser, other than David Molitz, at
the base salaries and with the benefits set forth on SCHEDULE 2.5 hereof
commencing on the day following the Closing Date. Except as set forth in such
schedule, all such employment is considered employment "at will."
2.6 NO INDIVIDUAL BANKRUPTCY FILING. Klicka agrees that during the
three year period following the Closing Date he will not file a voluntary
petition for individual bankruptcy under the Federal Bankruptcy Code or permit
an involuntary filing to stand or make an assignment for the benefit of his
creditors or avail himself of any other similar
15
<PAGE>
debtor's remedies without the prior written consent of the Purchaser.
2.7 VALLEY INDEPENDENT BANK REPAYMENT. All amounts due to Valley
Independent Bank by the Company will be repaid directly by Purchaser out of the
cash proceeds due to the Company on the Closing Date in order to assure
Purchaser of the bank's release of its lien on such assets.
2.8 TRUST ACCOUNT. As soon as practicable following the Closing Date,
the Company shall cease depositing client's funds into its existing trust
account(s) and shall commence depositing such funds into Purchaser's trust
account(s). The Company shall be responsible for all payments due to third
parties which are required to be made from funds in the Company's trust
account(s) based on Business conducted prior to the Closing Date. In the event
that funds available from the Company's trust account(s) are insufficient for
this purpose, the Company and/or the Shareholders, and not the Purchaser or the
Purchased Assets, will be solely responsible for contributing additional funds
to the Company's trust account(s) to fund such obligations.
2.9 ACCOUNTING FUNCTIONS. All Company accounting functions and cash
flow activities will be promptly integrated with Purchaser's Pasadena accounting
office following the Closing Date. Upon notice from Purchaser, the Company will
direct all insurance carriers and other payors, and all vendors and other
payees, to direct all payments and invoices to Pasadena. Any payments received
in Brawley pending the change of address will be promptly redirected to
Pasadena. The Purchaser and the Company shall weekly reconcile collections and
payments until all transition issues have been mutually satisfied.
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2.10 CONDUCT OF BUSINESS. The Business shall be conducted from the
date hereof through the earlier of the termination of this Agreement or the
Closing Date in accordance with prior practice and in the ordinary course of
business, and without limiting the generality of the foregoing, the Company
shall not (except with the prior written consent of Purchaser): (i) declare or
pay any non-cash dividend or distribution on any securities of the Company; (ii)
purchase or commit to purchase or lease capital or fixed assets for prices and
rentals (throughout the term of such leases) exceeding $1,000 in each case;
(iii) sell or transfer any of the assets of the Company, except in the ordinary
course of business; (iv) mortgage, pledge, or encumber any of the assets of the
Company; (v) amend, modify or terminate any Assumed Contract other than in the
ordinary course of business; (vi) make any increase in, or any commitment to
increase, the compensation payable to the Company's employees or agents or pay
any bonuses, other than routine annual increases made in the ordinary course of
business; (vii) materially alter the manner of keeping the books, accounts or
records of the Company or the accounting practices therein reflected; or (viii)
take any action to cause any of the representations and warranties in Article II
to become inaccurate. Purchaser specifically consents to the post-closing
dividend of any consideration paid to the Company hereunder to the Company's
shareholders.
2.11 PRESERVATION OF ORGANIZATION. The Shareholders will preserve the
Company's business organization intact (including the preservation of their
properties wherever located, including, but not limited to, any assets which are
material to the Business) and shall conduct its business from
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the date hereof through the Closing Date in accordance with prior practice and
in the ordinary course of business.
2.12 ACCESS. Between the date hereof and the Closing Date, the
Company will give to authorized representatives of Purchaser full access, during
normal business hours, in such manner as not to unduly disrupt normal business
activities, to any and all premises, properties, contracts, commitments, books,
records and affairs of the Company, and will cause their officers to furnish any
and all financial, technical and operating data and other information pertaining
to the Business as Purchaser shall from time to time reasonably request. The
Purchaser may discuss the Company and its services with the Company's customers
and suppliers upon reasonable notice and during regular business hours and, if
requested by the Company, in the presence of a Company representative.
2.13 CONFIDENTIALITY. Until the Closing, the parties hereto and their
respective agents, accountants and attorneys shall keep confidential any
information (unless readily ascertainable from public or published information
or sources) obtained from any other party hereto. Each party hereto further
agrees that it will not otherwise disclose any such information to any third
party (other than to its agents, accountants and attorneys in connection with
the consummation of the transactions contemplated by this Agreement) except upon
the written consent of the furnishing party, or except as required by law. Such
obligation of confidentiality shall not extend to any information which is shown
to be or to have been generally known to others engaged in the same trade or
business as the furnishing party, or that is or shall be public knowledge
through no act or omission by the party to
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whom the information was furnished or any of its directors, officers, employees,
professional advisors or other representatives.
2.14 EXCLUSIVE DEALINGS. From the date hereof until the earlier of
the Closing Date or the termination of this Agreement in accordance with its
terms, Purchaser shall have the exclusive right to purchase the Purchased Assets
and the Individual Assets and no Shareholder, Individual Seller nor any officer,
director, affiliate or representative (including any investment banker or
financial advisor) of the Company shall, directly or indirectly, solicit,
encourage or participate in any discussions or negotiations with, or provide any
non-public information to, any person, entity or group concerning any potential
competing offer to acquire all or any material portion of the business,
properties, or capital stock of the Company whether by merger, purchase of
assets or stock, tender offer, joint venture or other similar transaction.
2.15 CONDITION TO TRANSFER OF CERTAIN CONTRACTS. The Company and the
Individual Sellers agree that between the date hereof and the Closing Date they
will use their best efforts to obtain the necessary consents to the assignment
of each Assumed Contract. As provided in Section 5.6 hereof, it is a condition
precedent to the obligations of Purchaser to close the transactions contemplated
hereby that all required consents be obtained for each such Assumed Contract.
2.16 NOTIFICATION OF MARKETS. Purchaser and the Company agree to
jointly notify all markets which have appointed the Company of the consummation
of the transactions contemplated hereby promptly after the Closing Date. Such
notification shall seek such markets' consent to such
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transactions and all parties agree to use best efforts to obtain such consents.
2.17 TAX MATTERS.
(a) TAX PAYMENTS. If either the Company or Purchaser is required by law
to file a Tax Return attributable to the ownership of the Purchased Assets for a
taxable year or period which begins before and ends after the Closing Date, then
(i) Purchaser shall be responsible for all Taxes shown on such Tax Return
allocable to the period after the Closing Date, and (ii) the Company shall be
responsible for all Taxes allocable to the period ended on or prior to the
Closing Date. Taxes allocable to such taxable year or period shall be determined
using an interim closing of the books method assuming that such taxable year or
period ended on the Closing Date. If Purchaser is responsible for a Tax shown
on a Tax Return required to be filed by the Company, or the Company is
responsible for a Tax shown on a return required to be filed by Purchaser (or
any of its affiliates), then Purchaser shall pay the Company, or the Company
shall pay Purchaser, as appropriate, the amount of tax for which it is
responsible at the written request of the other party but not more than five
days prior to the due date for the payment of the relevant Tax. The parties
shall cooperate in the preparation and filing of such Tax Return.
(b) SALES AND TRANSFER TAXES. All Taxes incurred in connection with the
consummation of the transactions contemplated by this Agreement shall be borne
by the Company, including, without limitation, all sales, bulk sales, transfer,
gains and recording and registration Taxes, and the Company will, at its own
expense, file all necessary Tax Returns and other documentation with respect to
all such
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sales, transfer, gains and recording Taxes, PROVIDED, however, to the extent any
such Tax is imposed by law upon Purchaser and is refundable to Purchaser,
Purchaser shall make reasonable efforts to obtain the refund, and shall pay any
such refund received to the Company. The Company shall provide to Purchaser
copies of such sales, transfer, gains and recording Tax Returns and
documentation as soon as practicable before filing such Tax Returns and
documentation, provided that all such copies shall be provided to Purchaser no
later than the day such Tax Returns and documentation are filed.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
The Company and each of the Shareholders jointly and severally
represent and warrant to Purchaser that:
3.1 MARKETABLE TITLE. The Company has good and marketable title to
the Purchased Assets, free and clear of any and all Liens except Permitted
Liens.
3.2 POWER AND AUTHORITY. The Company and each of the Shareholders
has the full right, power and authority to enter into this Agreement and, in the
case of the Company, to transfer, convey and sell to Purchaser at the Closing
the Purchased Assets.
3.3 LITIGATION. Neither the Company nor any Shareholder is a party
to, subject to or bound by any agreement, judgment or order of any court,
governmental body or arbitrator which would prevent the execution or delivery of
this Agreement by the Company or any Shareholder or the sale
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of the Purchased Assets to Purchaser pursuant to the terms hereof.
3.4 NO BROKERAGE FEES. No broker or finder has acted for the Company
or any Shareholder in connection with this Agreement or the transactions
contemplated hereby.
3.5 AUTHORIZATION OF AGREEMENT. This Agreement and all other
agreements and instruments to be executed by the Shareholders and the Company in
connection herewith have been (or upon execution will have been) duly executed
and delivered by the Shareholders and the Company, have been effectively
authorized by all necessary action, corporate or otherwise, and constitute (or
upon execution will constitute) valid and binding obligations of each
Shareholder and the Company enforceable in accordance with their respective
terms.
3.6 FINANCIAL STATEMENTS. Included in SCHEDULE 3.6 are the balance
sheets of each Company as of December 31, 1992, 1993, 1994 and as of September
30, 1995 and the related statement of income for the years ended December 31,
1992, 1993, 1994 and the period ended September 30, 1995 (collectively, the
"Financial Statements"). The Financial Statements (i) were prepared in
accordance with the books and records of the Company; and (ii) fairly present
the Company's financial condition and the results of its operations as of the
relevant dates thereof and for the periods covered thereby;
3.7 ABSENCE OF CERTAIN CHANGES. Except as set forth on SCHEDULE 3.7
hereto or for transactions in the ordinary course of business, since September
30, 1995, there has not been (i) any transfer of assets of any kind whatsoever
by any Company to any of the Shareholders or otherwise;
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(ii) any transaction not in the ordinary course of business; (iii) any material
adverse change in the results of operations, assets, liabilities, business or
prospects of the Company; (iv) any sale or transfer of any of the assets of the
Company or any cancellation of any debts or claims other than loans to
Shareholders or employees of the Company made prior to September 30, 1995; (vi)
any mortgage, pledge or subjection to lien, charge or encumbrance of any kind,
except liens for Taxes not due, of any of the Company's assets; (vii) any
material alteration in the manner of keeping the books, accounts or records of
the Company, or in the accounting practices therein reflected; or (viii) any
other event or condition of any character which has had or may have a material
and adverse effect on the assets, properties, business or prospects of the
Company.
3.8 TANGIBLE PERSONAL PROPERTY. There is listed on SCHEDULE 3.8 a
description of each item of Tangible Personal Property owned by or in the
possession of the Company having on the date hereof either a depreciated book
value or estimated fair market value per unit in excess of $1,000; and (ii) a
description of the owner of, and any agreement relating to the use of, each such
item of Tangible Personal Property not owned by the Company and the
circumstances under which such property is used. Except as indicated in
SCHEDULE 3.8:
(a) Each item of Personal Property not owned by the Company is in
such condition that upon the return of such property to its owner the
obligations of the Company to such owner or lessor will be discharged;
(b) Each item of Tangible Personal Property is in operating condition
and repair and is currently in use in connection with the operation of the
Business; and
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(c) The Company owns or otherwise has the right to use all of the
Tangible Personal Property now used by the Company in the operation of the
Business.
3.9 INTANGIBLE PERSONAL PROPERTY. There is listed on SCHEDULE 3.9
(i) a description of the items of Intellectual Property other than those
specific items of Intellectual Property described in Sections 3.19, 3.20, 3.22
and 3.23 below. Except as indicated in SCHEDULE 3.9:
(a) No actions or other judicial or adversary proceedings concerning
any Intellectual Property has been initiated, there is no known basis for any
such action or proceeding and, to the best knowledge of the Company and each
Shareholder, no such action or proceeding is threatened;
(b) The Company has the unrestricted right and authority to use the
Intellectual Property and such use does not conflict with, infringe upon or
violate any rights of any other person, firm or corporation;
(c) There are no outstanding, nor any threatened, disputes or other
disagreements with respect to any licenses or similar agreements or arrangements
described in SCHEDULE 3.9 except as described in such schedule;
(d) The Company is the owner of all right, title and interest in and
to each item of Intellectual Property, free and clear of all Liens; and
(e) Purchaser shall be permitted to do business under the names
"Desert Benefits" and "Desert Benefits Fire & Casualty" or derivations thereof
following the Closing Date.
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3.10 AGREEMENT NOT IN BREACH OF OTHER INSTRUMENTS. Neither the
execution and delivery of this Agreement, nor the consummation of the
transactions contemplated hereby will violate, or result in a breach of, any of
the terms and provisions of, or constitute a default under, or conflict with (i)
any agreement to which the Company or any Shareholder is a party or by which it
is bound; (ii) the Articles of Incorporation or Bylaws of the Company; or (iii)
any applicable judgment, order or award of any court, governmental body or
arbitrator, or any law, rule or regulation applicable to the Company or any
Shareholder.
3.11 INSURANCE. SCHEDULE 3.11 sets forth a true and correct list of
all insurance policies of any nature whatsoever maintained by the Company at any
time during the three (3) years prior to the date of this Agreement. Except for
the cancellation of a policy due to an insurer's election to discontinue the
insurance of a class of risks (which decision was applicable to all like
policyholders), the Company has not received any notice or other communication
from any such insurance company within the three (3) years preceding the date
hereof canceling or materially amending or materially increasing the annual or
other premiums payable under any of said insurance policies. To the best
knowledge of the Company and the Shareholders, no such cancellation, amendment
or increase of premiums is pending or threatened.
3.12 EMPLOYMENT AGREEMENTS. Except as set forth in SCHEDULE 3.12,
there is no (i) employment, commission, profit sharing, deferred compensation,
bonus, stock option, stock purchase, pension, retainer, consulting, retirement,
health, welfare, or incentive plan or contract to which the Company is a party,
or by which it is or may be bound; or (ii) plan and
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agreement under which "fringe benefits" (including, but not limited to, vacation
plans or programs, sick leave plans or programs, dental or medical plans or
programs, and related or similar benefits) are afforded to employees of the
Company.
3.13 TAX RETURNS. Except as disclosed in SCHEDULE 3.13:
(a) The Company has duly and timely filed with the appropriate
federal, state, local and foreign taxing authorities all Tax returns required to
be filed through the date hereof, and the Company has paid all Taxes owed. The
Company has not requested any extension of time within which to file any such
return; and
(b) There are no material liens for Taxes upon the assets of the
Company, except for statutory liens for Taxes not yet due or delinquent.
3.14 LITIGATION. Except as listed in SCHEDULE 3.14:
(a) There is no action, suit or proceeding to which the Company is a
party (either as a plaintiff or defendant) pending before any court or
governmental agency, authority or body or arbitrator; there is no action, suit
or proceeding threatened against the Company; and to the best knowledge of each
Shareholder, there is no basis for any such action, suit or proceeding; and
(b) There is not in existence on the date hereof any order, judgment
or decree of any court or other tribunal or other agency enjoining or requiring
the Company or any Shareholder to take any action of any kind with respect to
the Business or the Company's assets or properties.
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3.15 ASSUMED CONTRACTS. SCHEDULE 1.1(c) sets forth the Assumed
Contracts which consists of a list of each contract, agreement, purchase order,
lease, license, or commitment, written or oral, to which any Company is a party
and has ongoing rights or obligations or by which any of their respective assets
are bound, except agreements for the purchase or sale by the Company of goods,
materials, supplies or services in the ordinary course of business involving
less than $1,000 in consideration. SCHEDULE 1.1(c) includes all agency
appointment agreements which will be transferred to Purchaser at the Closing
Date. True and complete copies of each of the Assumed Contracts, or where they
are oral, true and complete written summaries thereof, have been delivered to
Purchaser by the Company. Except as set forth in SCHEDULE 1.1(c):
(a) Each of the Assumed Contracts is a valid and binding agreement of
the Company and all other parties thereto, subject to cancellation upon payment
of an appropriate cancellation fee as set forth in such Assumed Contracts; and
(b) No consent of any party to any of the Assumed Contracts is
required by the execution, delivery or performance of this Agreement or the
consummation of the transactions contemplated hereby, except those which are set
forth in SCHEDULE 1.1(c).
3.16 PREPAID COMMISSIONS; ACCOUNTS RECEIVABLE AND RUN-OFF COMMISSIONS.
Attached hereto as SCHEDULE 3.16 is a complete listing of the prepaid
commissions, accounts receivable and run-off commissions of the Company as of
September 30, 1995, a statement regarding whether such prepaid commissions,
accounts receivable and run-off commissions were
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or will be earned or received prior to the Closing Date, and a listing of the
status of such accounts receivable and run-off commissions as of October 31,
1995, including all cash collections, credits or write-offs. Except as
disclosed in SCHEDULE 3.16, the prepaid commissions, accounts receivable and
run-off commissions of the Company arose out of the ordinary course of business.
3.17 NO UNDISCLOSED LIABILITIES. As of the Closing Date, except as
disclosed on SCHEDULE 3.17 the Company has no liabilities or obligations of any
nature, whether absolute, accrued, contingent or otherwise, and whether due or
to become due (including, without limitation, any liability for Taxes and
interest, penalties and other charges payable with respect to any such liability
or obligation).
3.18 REGULATORY APPROVALS. All consents, approvals, authorizations
and other requirements prescribed by any law, rule or regulation which must be
obtained or satisfied by the Company and the Shareholders and which are
necessary for (i) the execution and delivery by the Company and the Shareholders
of this Agreement and the related documents and (ii) Purchaser to continue the
Business as presently conducted, have been obtained and satisfied.
3.19 LICENSES. SCHEDULE 3.19 sets forth all licenses, permits or
authority (collectively, the "Licenses") issued to the Company by any state
insurance department or other insurance regulatory body or agency (collectively,
a "State Insurance Department"). The Licenses set forth on SCHEDULE 3.19
constitute each license, permit or authority that it is necessary or appropriate
for the Company to obtain from a State Insurance Department with respect to the
transaction of its business. All of the Licenses are
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currently in effect. None of the Licenses has at any time been suspended,
revoked, terminated or limited or expired. No notice of any violation has been
received at any time by the Company with respect to any License, and there is no
proceeding or investigation, whether pending or threatened, or any basis
therefor, that could result in the suspension, revocation, termination or
limitation of any License.
3.20 EMPLOYEE LICENSES. SCHEDULE 3.20 sets forth all licenses,
permits or authority (the "Employee Licenses") issued to any employee or
independent contractor of the Company by a State Insurance Department. All of
the Employee Licenses are currently in effect and constitute each license,
permit or authority that it is necessary or appropriate for the employees or
independent contractors of the Company to obtain from a State Insurance
Department with respect to the performance of their respective job
responsibilities for the Company and as contemplated by Purchaser. All of the
Employee Licenses will remain in effect and will not be subject to suspension,
revocation, termination or limitation in any manner as a result of the
consummation of the transactions contemplated by this Agreement. Except for the
notices required by each State Insurance Department regarding the commencement
of authority of such employee to act for Purchaser and the termination of
authority of such employee to act for the Company, none of Purchaser, the
Company or any employee holding an Employee License will be required to obtain
any consent, approval or action of, or make any filing with or give any notice
to, any State Insurance Department with respect to any Employee License as a
result of the consummation of the transactions contemplated by this Agreement.
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3.21 COMPLIANCE WITH LAWS; ABSENCE OF REGULATORY PROCEEDINGS. The
Company has complied with all applicable laws and regulations relating to the
conduct of its business. The Company has not received service or other notice of
any litigation, action, suit, proceeding or investigation by or on behalf of any
State Insurance Department that is presently pending or threatened against the
Company or its Business, nor does any Shareholder have any knowledge of any
basis therefor. Since January 1, 1992, the Company has not been a party to or
has been involved in any litigation, action, suit, proceeding or investigation
by or on behalf of any State Insurance Department. The Company has not entered
into or has been subject to any consent decrees, settlements, orders,
stipulations or other agreements or understandings with any State Insurance
Department with respect to the conduct of the Business.
3.22 POLICYHOLDERS. SCHEDULE 3.22 sets forth all of the policyholders
(the "Policyholders") that have policies of insurance for which the Company is
currently receiving a commission or has received a commission on or after
January 1, 1994. Except as disclosed to Purchaser in writing, the Company is
currently the agent of record for each of the Policyholders.
After the Closing Date, Purchaser shall have an unconditional right
with respect to each Policyholder to engage in the solicitation, quotation and
sale of Paula Insurance Company's policies of workers' compensation insurance
(and ancillary services related thereto) and Paula Assurance Company's policies
of accident and health and life insurance (and ancillary services related
thereto) without any restriction or limitation of any kind.
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No person or entity has any right (whether pursuant to any agreement
or understanding or otherwise), pursuant to an agreement between the Company and
such person or entity, to preclude or limit the solicitation, quotation or sale
of Paula Insurance Company's policies of workers' compensation insurance (and
ancillary services related thereto) and Paula Assurance Company's policies of
accident and health and life insurance (and ancillary services related thereto)
by Purchaser to any Policyholders after the Closing Date.
After the Closing Date, Purchaser will be entitled to the goodwill and
renewal rights with respect to each of the Policyholders, without any
restriction or limitation of any kind. Except as disclosed in writing to
Purchaser, none of the Company nor any of the Shareholders has any actual
knowledge that any of the Policyholders will not purchase insurance issued by
Paula Insurance Company or Paula Assurance Company and sold by Purchaser.
3.23 APPOINTMENTS. The insurance companies that have appointed the
Company and its employees as agents are set forth on SCHEDULE 3.23. All of the
appointments (the "Appointments") set forth on SCHEDULE 3.23 are currently in
effect, and the Company has not received any notice that an Appointment has been
terminated or limited in any manner.
3.24 ASSIGNMENT OF APPOINTMENTS. To the Shareholders' and the
Company's knowledge, no insurance carrier which had appointed the Company or its
employees will refuse to transfer such Appointment to the Purchaser, or its
employees, as the case may be. To the Shareholders' and the Company's
knowledge, there will be no status, preferential treatment or advantage that
currently benefits the Company or
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any employee of the Company which will not apply to and benefit Purchaser as of
the Closing Date.
3.25 INVESTMENT REPRESENTATIONS.
(a) The Company acknowledges that: (i) the Shares will be issued
without registration under the Securities Act of 1933, as amended (the "Act"),
or qualification under the California Corporate Securities Law of 1968, as
amended (the "Law"), pursuant to exemptions from the registration requirements
of the Act and the qualification requirements of the Law, (ii) such exemptions
only exempt the issuance of the Shares to the Company and not any sale or other
disposition of the Shares or any interest therein by the Company; (iii) there
can be no assurance that the Company will be able to sell, transfer or otherwise
dispose of any of the Shares or any interest therein without registration under
the Act or qualification under the Law (which the Company has no right to
compel). The Company further understands that, for these reasons, the Shares
will probably not be usable as collateral for a loan and it may be impossible
for the Company to liquidate its investment in the Shares in case of an
emergency.
(b) The Company represents to the Purchaser and agrees as follows:
(i) The Shares are being acquired and will be taken and received for its
private personal investment for its own account with no intention of selling,
transferring or otherwise disposing of the Shares or any interest therein to
others except for the possible pro rata dividend of the Shares to the Company's
two existing shareholders; (ii) The Company has no contract, undertaking,
agreement, or arrangement with any person to sell, transfer or otherwise dispose
of to any person or to have any person sell, transfer
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or otherwise dispose of for the Company any of the Shares of any interest
therein and the Company is presently not engaged, nor does it plan to engage
within the presently foreseeable future, in any discussion with any person
relative to such sale, transfer, or other distribution of any of the Shares or
any interest therein; and (iii) The Company fully comprehends that the
Purchaser is relying to a material degree on the representations and agreements
contained herein and with such realization authorizes the Purchaser to act as it
may see fit in full reliance hereon including the placement of the legend in
substantially the form below on, and notations in the appropriate records of the
Purchaser with respect to, the certificate representing the Shares:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ISSUED WITHOUT
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, NOR ANY
STATE SECURITIES LAWS, AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF UNLESS SO REGISTERED OR AN EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE ACT AND SUCH LAWS IS AVAILABLE."
(c) A copy of the Notice of Transaction to be filed with the
California Commissioner of Corporations is attached hereto as SCHEDULE 3.25 and
the Company hereby confirms that each of the representations by the Purchaser
contained therein is, to the best of the Company's and the Shareholders'
knowledge, true, correct and complete. The Purchaser has given to the Company
and the Company has reviewed copies of the Securities Act Release 33-5226,
Section 25102(f) of the California Corporations Code and Title 10 of the
California Administrative Code Sections 260.102.12 and 260.102.13.
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(d) The Company further represents to the Purchaser that, as
described in section 25102(f)(2) and Sections 260.102.12(d),(g) and (h), the
Company has a preexisting personal or business relationship with the Purchaser
or its officers, directors or controlling persons.
Each Individual Seller severally represent and warrants to the
Purchaser that:
3.26 MARKETABLE TITLE. The Individual Seller has good and marketable
title to the Individual Assets being sold to the Purchaser, free and clear of
any and all Liens except Permitted Liens.
3.27 POWER AND AUTHORITY. The Individual Seller has the full right,
power and authority to enter into this Agreement and to transfer, convey and
sell to Purchaser at the Closing the applicable Individual Assets. This
Agreement is enforceable against the Individual Seller in accordance with its
terms.
3.28 INTANGIBLE PERSONAL PROPERTY. Included in Schedule 1.5 is (i) a
description of the items of Intellectual Property constituting part of the
Individual Assets. Except as indicated in that Schedule:
(a) No actions or other judicial or adversary proceedings concerning
any Intellectual Property has been initiated, there is no known basis for any
such action or proceeding and, to the best knowledge of the Individual Seller,
no such action or proceeding is threatened;
(b) The Individual Seller has the unrestricted right and authority to
use the Intellectual Property and such
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use does not conflict with, infringe upon or violate any rights of any other
person, firm or corporation;
(c) There are no outstanding, nor any threatened, disputes or other
disagreements with respect to any licenses or similar agreements or
arrangements, except as described in such schedule;
(d) The Individual Seller is the owner of all right, title and
interest in and to each applicable item of Intellectual Property, free and clear
of all Liens; and
3.29 AGREEMENT NOT IN BREACH OF OTHER INSTRUMENTS. Neither the
execution and delivery of this Agreement, nor the consummation of the
transactions contemplated hereby will violate, or result in a breach of, any of
the terms and provisions of, or constitute a default under, or conflict with (i)
any agreement to which the Individual Seller is a party or by which it is bound;
or (ii) any applicable judgment, order or award of any court, governmental body
or arbitrator, or any law, rule or regulation applicable to the Individual
Seller.
3.30 PREPAID COMMISSIONS, ACCOUNTS RECEIVABLE AND RUN-OFF COMMISSIONS.
Set forth as part of SCHEDULE 1.5 is a complete listing of the prepaid
commissions, accounts receivable and run-off commissions of the Individual
Seller as of September 30, 1995, a statement regarding whether such prepaid
commissions, accounts receivable and run-off commissions were or will be earned
or received prior to the Closing Date, and a listing of the status of such
prepaid commissions, accounts receivable and run-off commissions as of October
31, 1995, including all cash collections, credits or write-offs. Except as
disclosed in SCHEDULE 1.5, the prepaid commissions, accounts receivable and run-
off commissions of
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the Individual Seller arose out of the ordinary course of business.
3.31 POLICYHOLDERS. SCHEDULE 3.31 sets forth all of the policyholders
(the "Individual Policyholders") that have policies of insurance for which the
Individual Sellers is currently receiving a commission or has received a
commission on or after January 1, 1994. Except as disclosed to Purchaser in
writing, the applicable Individual Seller is currently the agent of record for
each of the applicable Individual Policyholders.
After the Closing Date, Purchaser shall have an unconditional right
with respect to each Individual Policyholder to engage in the solicitation,
quotation and sale of Paula Insurance Company's policies of workers'
compensation insurance (and ancillary services related thereto) and Paula
Assurance Company's policies of accident and health and life insurance (and
ancillary services related thereto) without any restriction or limitation of any
kind.
No person or entity has any right (whether pursuant to any agreement
or understanding or otherwise), pursuant to an agreement between the Individual
Seller and such person or entity, to exclude or limit the solicitation,
quotation or sale of Paula Insurance Company's policies of workers' compensation
insurance (and ancillary services related thereto) and Paula Assurance Company's
policies of accident and health and life insurance (and ancillary services
related thereto) by Purchaser to any Individual Policyholders after the Closing
Date.
After the Closing Date, Purchaser will be entitled to the goodwill and
renewal rights with respect to each of the
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Individual Policyholders, without any restriction or limitation of any kind.
Except as disclosed in writing to Purchaser, the Individual Seller has no
knowledge that any of the Individual Policyholders will not purchase insurance
issued by Paula Insurance Company or Paula Assurance Company and sold by
Purchaser.
3.32 APPOINTMENTS. The insurance companies that have appointed the
Individual Seller as agent are set forth on Schedule 1.5. All of the
appointments (the "Individual Appointments") set forth on SCHEDULE 1.5 are
currently in effect, and the Individual Seller has not received any notice that
an Appointment has been terminated or limited in any manner.
3.33 ASSIGNMENT OF APPOINTMENTS. To the Individual Seller's
knowledge, no insurance carrier which had appointed the Individual Seller will
refuse to transfer such Individual Appointment to the Purchaser, or its
employees, as the case may be. To the Individual Seller's knowledge, there will
be no status, preferential treatment or advantage that currently benefits the
Individual Seller which will not apply to and benefit Purchaser as of the
Closing Date.
The Purchaser represents and warrants to the Company, the Shareholders
and the Individual Sellers that:
3.34 POWER AND AUTHORITY. The Purchaser has the full right, power and
authority to enter into this Agreement and to fulfill its respective obligations
hereunder.
3.35 AUTHORIZATION OF AGREEMENT. This Agreement and all other
agreements and instruments to be executed by each of the Purchaser in connection
herewith have been (or upon execution will have been) duly executed and
delivered by the
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Purchaser, as the case may be, and have been effectively authorized by all
necessary action, corporate or otherwise, and constitute (or upon execution will
constitute) valid and binding obligations of the Purchaser, enforceable in
accordance with their respective terms, except as enforcement may be limited by
law pertaining to bankruptcy, insolvency or the enforcement of creditors' rights
and by general equitable principles.
ARTICLE IV
CONDITIONS TO OBLIGATIONS OF EACH PARTY
The obligations of each party to effect the transactions contemplated
hereby shall be subject to the fulfillment, at or prior to the Closing Date, of
the following conditions:
4.1 NO ACTION OR PROCEEDING. No claim, action, suit, investigation
or other proceeding shall be pending or threatened before any court or
governmental agency which presents a substantial risk of the restraint or
prohibition of the transactions contemplated by this Agreement or the obtaining
of material damages or other relief in connection therewith.
4.2 COMPLIANCE WITH LAW. There shall have been obtained all permits,
approvals, and consents of all governmental bodies or agencies which counsel for
Purchaser or the Company may reasonably deem necessary or appropriate so that
consummation of the transactions contemplated by this Agreement will be in
compliance with applicable laws.
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ARTICLE V
CONDITIONS TO OBLIGATIONS OF PURCHASER
The obligations of Purchaser to effect the transactions contemplated
hereby shall be, at the option of Purchaser, subject to the fulfillment, at or
prior to the Closing Date, of the following additional conditions:
5.1 REPRESENTATIONS AND WARRANTIES TRUE. The representations and
warranties of the Company, the Shareholders and the Individual Sellers contained
in this Agreement and the Schedules hereto shall be true and correct on the date
such representations and warranties were made and remain true and correct on the
Closing Date. At the Closing, the Company, the Shareholders and the Individual
Sellers shall have delivered to Purchaser certificates to such effect signed by
each party.
5.2 COMPANY'S SHAREHOLDERS' AND INDIVIDUAL SELLERS' PERFORMANCE.
Each of the obligations of the Company, each Shareholder and each Individual
Seller to be performed on or before the Closing Date pursuant to the terms of
this Agreement shall have been duly performed on or before the Closing Date, and
at the Closing, the Company, each Shareholder and each Individual Seller shall
have delivered to Purchaser a certificate to such effect.
5.3 NAME CHANGE. On or before the Closing Date, the Company shall
have amended its Articles of Incorporation with the Secretary of State of the
State of California to change its corporate name to a name other than "Desert
Benefits, Inc. Employee Benefits and Insurance Services" or deviations thereof
and executed such other documents and
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certificates as Purchaser shall reasonably require to permit Purchaser to file a
fictitious business name statement to do business under the name Desert
Benefits, Inc. or deviations thereof, effective on the Closing Date.
5.4 NO ADVERSE CHANGE. There shall not have occurred between the
date hereof and the Closing Date any material adverse changes in the results of
operations, condition (financial or otherwise), assets, liabilities (whether
absolute, accrued, contingent or otherwise), business or prospects of the
Company.
5.5 DUE DILIGENCE EXAMINATION. The Purchaser shall have completed to
its satisfaction an extensive examination of, and shall have obtained full and
complete disclosure regarding, the assets, properties, business and financial
condition of the Company and such examination shall not have revealed any fact,
or facts, which, individually or in the aggregate, could be expected to have a
material adverse effect on the results of operations, condition (financial or
otherwise), assets, liabilities (whether absolute, accrued, contingent or
otherwise), business or prospects of the Company; PROVIDED, HOWEVER, such
examination, or any activities undertaken by the Purchaser to assist the Company
to prepare the schedules to this Agreement, shall not in any way relieve the
Company or any Shareholders of any liability for any breach of or
misrepresentation in this Agreement.
5.6 CONSENTS TO ASSIGNMENT OF CERTAIN CONTRACTS. All necessary
consents to the assignment of all Assumed Contracts shall have been obtained in
writing and delivered at the Closing to Purchaser.
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5.7 ADDITIONAL CLOSING DOCUMENTS OF COMPANY. Purchaser shall have
received at the Closing the following documents, dated the Closing Date:
(a) Copies, certified by the Secretary or an Assistant Secretary of
the Company, of resolutions of the Board of Directors and shareholders of the
Company authorizing the execution, delivery and performance of this Agreement
and all other agreements, documents and instruments relating hereto and the
consummation of the transactions contemplated hereby;
(b) A copy of the executed agreement among the Imperial Valley School
District Consortium to renew its agreement to act as a consortium for the
purpose of purchasing group medical benefits for a period of three years;
(c) A copy of the UCC-2 executed by Valley Independent Bank
terminating its security interest in the Purchased Assets;
(d) Copies of consents of The Principle, Pacific Mutual and Union
Central insurance companies to the sale of the Business to the Purchaser stating
that such transaction will not adversely effect such companies dealings with the
Purchaser as successor to the Company after the Closing Date;
(e) Copy of consent of Klisto to the assignment of the building lease
to Purchaser;
(f) Such other documents as Purchaser may reasonably request.
5.8 RECEIPT OF APPOINTMENTS. On or prior to the Closing Date,
Purchaser shall have received such appointments
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from The Principle, Pacific Mutual and other carriers which have appointed the
Company and/or the Individual Sellers and which Appointments are not
transferable to the Purchaser, which Purchaser believes are necessary or
appropriate.
5.9 SCHEDULES. On or prior to the Closing Date the Company and the
Individual Sellers shall have delivered to the Purchaser all schedules to this
Agreement theretofore undelivered and the information contained in such
schedules shall be reasonably acceptable to the Purchaser.
5.10 SPOUSAL CONSENTS OF INDIVIDUAL SELLERS. On or prior to the
Closing Date, the Individual Sellers shall have caused the spousal consents set
forth at the end of this Agreement to be executed and delivered to the
Purchaser.
5.11 BOARD APPROVAL. On or prior to the Closing Date, the Purchaser's
Board of Directors shall have approved the terms of this Agreement.
ARTICLE VI
INDEMNIFICATION
6.1 GENERAL. The Company and the Shareholders, jointly and
severally, shall indemnify and hold harmless Purchaser, in respect of any and
all claims, losses, damages, liabilities (absolute, contingent, matured,
unmatured or otherwise) and expenses, contingent or otherwise, matured or
unmatured, of any nature whatsoever (including, without limitation, settlement
costs and any legal or other expenses for investigating or defending any actions
or threatened actions) (collectively, a "Loss"), reasonably incurred by the
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indemnified party in connection with or as a result of each and all of the
following (a "Breach"):
(a) Any misrepresentation or breach of any representation or warranty
in this Agreement made by the Company, any Shareholder or any Individual Seller;
(b) The breach of any covenant, agreement or obligation contained in
this Agreement or any other instrument contemplated by this Agreement of the
Company, any Shareholder or any Individual Seller;
(c) Any misrepresentation contained in any statement or certificate
furnished by the Company, any Shareholder or any Individual Seller pursuant to
this Agreement or in connection with the transactions contemplated by this
Agreement; and
(d) Any action, liability or Loss relating to any contract or
arrangement to which the Company is a party other than the Assumed Liabilities
or relating to the conduct of business by the Company before, on or after the
Closing Date, including without limitation any and all arrangements and
understandings between the Company and David Molitz or Anthony Koon and any
arrangements between the Company, David Molitz and Union Central Life Insurance
Company.
Any such liability, deficiency or indemnity shall be paid by the
indemnifying party within thirty (30) days from the date the indemnified party
notifies the indemnifying party that it has incurred or has become subject to
the referenced liability or deficiency and provides the indemnifying party with
documentation demonstrating that the indemnified party has incurred such
liability or deficiency.
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6.2 NOTICE OF CLAIM FOR INDEMNIFICATION. Whenever any claim shall
arise for indemnification under this Article VI, the indemnified party shall
promptly notify the indemnifying party of the claim and, when known, the facts
constituting the basis for such claim.
6.3. THIRD PARTY CLAIMS. If a claim by a third party is made against
an indemnified party, and if such indemnified party intends to seek indemnity
with respect thereto hereunder, the indemnified party shall promptly (and in any
case within thirty days of such claim being made and within the period provided
in Section 6.5, if applicable) notify the indemnifying party of such claim. The
indemnifying party shall have thirty (30) days after receipt of such notice to
undertake, conduct and control, through counsel of its own choosing and at its
own expense, the settlement or defense thereof, and the indemnified party shall
cooperate with it in connection therewith; PROVIDED that (a) the indemnifying
party shall permit the indemnified party to participate in such settlement or
defense through counsel chosen by the indemnified party, provided the fees and
expenses of such counsel shall be borne by the indemnified party and (b) the
indemnifying party shall promptly reimburse the indemnified party for the full
amount of any Loss resulting from such claim and all related expenses incurred
by the indemnified party within the limits of this Article VI (except for
expenses contemplated by clause (a) preceding).
So long as the indemnifying party is reasonably contesting any such
claim in good faith, the indemnified party shall not pay or settle any such
claim. Notwithstanding any of the foregoing, the indemnified party shall have
the right to pay or settle any such claim, provided that in such event
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it shall waive any right to indemnity therefor by the indemnifying party. If
the indemnifying party does not notify the indemnified party within thirty (30)
days after the receipt of the indemnified party's notice of claim of indemnity
hereunder that it elects to undertake the defense thereof, the indemnified party
shall have the right to contest, settle or compromise the claim in the exercise
of its reasonable judgment (but with due regard for obtaining the most favorable
outcome reasonably likely under the circumstances, taking account of costs and
expenditures) at the expense of the indemnifying party.
6.4 MANNER OF INDEMNIFICATION. All indemnification hereunder shall
be effected by payment of cash or delivery of a certified or cashier's check in
the amount of the indemnification liability; PROVIDED, HOWEVER, that the
indemnified party shall have the right to offset any matured, unmatured,
absolute or contingent liability for which the indemnified party shall seek
indemnification from the indemnifying party pursuant to this Article VI against
any payments due to the indemnifying party, including, if applicable, payments
due from the Purchaser to any Shareholder in the nature of salary or bonus
compensation, on a PRO RATA basis; PROVIDED that any offset with respect to an
unmatured or contingent liability must be reasonable under the circumstances
both in terms of the amount of the offset and when the offset is made. In
addition, at the Purchaser's option, amounts due to the Purchaser for
indemnification hereunder may be paid by the Purchaser canceling Shares valued
at the amount of the offset based on the lower of the valuation of the Shares as
of December 31, 1995 and the valuation of the Shares as of the December 31 next
preceding the date of the offset; PROVIDED that any offset with respect
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to an unmatured or contingent liability must be reasonable under the
circumstances both in terms of the amount of the offset and when the offset is
made
6.5 PURCHASER INDEMNIFICATION. The Purchaser shall indemnify and
hold harmless the Company in respect of all Losses reasonably incurred by the
Company in connection with or as a result of any misrepresentation or breach of
representation or warranty in this Agreement made by the Purchaser or any
failure by the Purchaser to comply with all of the obligations assumed by the
Purchaser under the Assumed Contracts. The procedures relating to the foregoing
indemnification shall be the same as those set forth in Sections 6.2 - 6.4
above.
6.6 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations
and warranties made in Article II hereof shall survive the Closing for a period
of five years from the Closing Date.
ARTICLE VII
TERMINATION
7.1 TERMINATION. This Agreement may be terminated:
(a) By written consent of the parties hereto;
(b) By Purchaser or by the Company if the terminating party is not
in default hereunder, and if the Closing shall not have occurred on or before
December 31, 1995 or such later date, if any, to which Purchaser and the Company
shall agree in writing; or
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(c) By Purchaser if, in the course of its due diligence review, it
discovers material information not previously disclosed to Purchaser which
Purchaser reasonably believes has a material adverse effect on the value of the
Purchased Assets. In such event, the notice of termination delivered by
Purchaser to the Company shall specify in reasonable detail such information.
ARTICLE VIII
MISCELLANEOUS
8.1 NOTICES. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed given if delivered personally
or mailed by certified or registered mail, postage prepaid, return receipt
requested, addressed as follows:
To Purchaser: Pan American Underwriters, Inc.
300 North Lake Avenue
Suite 300
Pasadena, California 91101
Attention: Bradley K. Serwin
If to the c/o: Fred Klicka
Company, any 350 G. Street
Shareholder or Brawley, California 92227
any Individual
Seller:
8.2 ASSIGNABILITY AND PARTIES IN INTEREST. This Agreement shall not
be assignable by any of the parties hereto without the prior written consent of:
(i) in the case of any Shareholder or Individual Seller or the Company,
Purchaser and
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(ii) in the case of Purchaser, the Company. This Agreement shall inure to the
benefit of and be binding upon the parties hereto and their respective
successors.
8.3 GOVERNING LAW. This Agreement shall be governed by, and
construed and enforced in accordance with, the laws of the State of California.
8.4 COUNTERPARTS. This Agreement may be executed simultaneously in
one or more counterparts, each of which shall be deemed an original, but all of
which shall constitute but one and the same instrument.
8.5 BEST EFFORTS. The Company, Shareholders, Individual Sellers and
Purchaser each agree to use their best efforts to bring about the transactions
contemplated by this Agreement.
8.6 PUBLIC ANNOUNCEMENTS. The parties hereto agree that they will
not make any disclosures about the existence or contents of this Agreement or
the transactions contemplated herein or cause to be publicized in any manner
whatsoever by way of interviews, responses to questions or inquiries, press
releases or otherwise any aspect or proposed aspect of this transaction without
prior written notice to and approval of the other parties, except as may be
otherwise necessary to comply with applicable law; provided, however, that the
parties hereto may, on a confidential basis, advise their respective agents,
accountants, attorneys and prospective lenders.
8.7 COMPLETE AGREEMENT. This Agreement, the exhibits hereto and the
Schedules hereto delivered pursuant to this Agreement and all other documents
between the parties dated the date of the Closing to be delivered at the Closing
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contain the entire agreement between the parties hereto with respect to the
transactions contemplated herein and, except as provided herein, supersede all
previous oral and written and all contemporaneous oral negotiations,
commitments, writings and understandings. The Shareholders and the Individual
Sellers are not relying on any inducement whatsoever other than that represented
by such agreements in executing and delivering this Agreement.
8.8 MODIFICATIONS AMENDMENTS AND WAIVERS. This Agreement may not be
modified or amended, and no provision or benefit hereof may be waived, except in
a written document executed by the party against whom enforcement is sought.
8.9 SEVERABILITY. Any provision of this Agreement which is invalid,
illegal or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity, illegality or unenforceability,
without affecting in any way the remaining provisions hereof in such
jurisdiction or rendering that or any other provision of this Agreement invalid,
illegal or unenforceable in any other jurisdiction.
8.10 PAYMENT OF EXPENSES. Each party shall bear its own expenses in
connection with the preparation of this Agreement and the consummation of the
transactions contemplated herein. EXCEPT AS SPECIFICALLY APPROVED BY PURCHASER
IN WRITING, NO FEES AND EXPENSES INCURRED IN CONNECTION WITH THE PREPARATION OF
THIS AGREEMENT OR THE EXHIBITS, SCHEDULES OR CLOSING DOCUMENTS RELATING THERETO
AND THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED HEREIN OR THEREIN SHALL BE
PAID BY THE COMPANY OUT OF THE PURCHASED ASSETS.
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8.11 FURTHER ASSURANCES. Each party hereto shall do and perform or
cause to be done and performed all such further acts and things and shall
execute and deliver all such other agreements, certificates, instruments and
documents as any other party hereto reasonably may request in order to carry out
the intent and accomplish the purposes of this Agreement.
8.12 ATTORNEYS' FEES. In the event of any action or proceeding
brought by either party against the other arising out of this Agreement, the
prevailing party, if any, shall be entitled to recover its reasonable attorneys
fees incurred in such action or proceeding, including any appeal, with the
amount of such fees, as well as a determination of prevailing party status, if
any, to be determined by a judge of the court sitting without a jury.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be signed as of the date first above written.
DESERT BENEFITS, INC. EMPLOYEE BENEFITS
AND INSURANCE SERVICES
By: /s/ Frederic J. Klicka
--------------------------------
Frederic J. Klicka, President
PAN AMERICAN UNDERWRITERS, INC.
By: /s/ Jeffrey A. Snider
--------------------------------
Jeffrey A. Snider, President
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SHAREHOLDERS:
/s/ Frederic J. Klicka
- --------------------------------
Frederic J. Klicka
/s/ Frederic J. Klicka II
- --------------------------------
Frederic J. Klicka II
INDIVIDUAL SELLERS:
/s/ Frederic J. Klicka
- --------------------------------
Frederic J. Klicka
/s/ Frederic J. Klicka II
- --------------------------------
Frederic J. Klicka II
/s/ Anthony Koon
- --------------------------------
Anthony Koon
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SPOUSAL CONSENTS
The undersigned spouses of the Individual Sellers hereby acknowledge
and agree to the transactions contemplated herein, including without limitation,
the sale of the Individual Assets free and clear of any and all
marital/community property rights. The undersigned also agree to any and all
amendments to this Agreement which may be entered into by the Individual Sellers
after the date hereof.
/s/ Terri Klicka
- --------------------------------
Terri Klicka
/s/ Denise Klicka
- --------------------------------
Denise Klicka
/s/ Donna Koon
- --------------------------------
Donna Koon
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EMPLOYMENT AND NON-COMPETITION AGREEMENT
THIS AGREEMENT is made and entered into as of the 10th day November, 1995,
by and between Pan American Underwriters, Inc., a Nevada corporation
(hereinafter called the "Company"), and Frederic J. Klicka, (hereinafter called
the "Employee").
The Company agrees to and does hereby employ Employee and Employee agrees
to and does hereby accept employment by the Company upon the terms and
conditions hereinafter set forth:
1. JOB DUTIES. Employee shall serve the Company full-time in the capacity
of Senior Vice President - Benefits, subject to policies of the Board of
Directors of the Company and applicable labor laws, rules and regulations.
Employee will initially report to the President of the Company. Employee agrees
that he will use his best efforts to promote the business and interests of the
Company during the time of his employment. Employee further agrees that, except
during vacation periods or executive leaves and reasonable periods of illness or
other incapacitation, Employee shall devote all of his business time and
services to the business and interest of the Company, except that Employee will
be free to continue to serve on the Boards of Directors of non-profit entities,
and to join new non-profit Boards, both with advance notice to the Company. All
related director fees shall be paid to, or paid over to, the Company. This
provision shall not be construed to prevent Employee, for his own account and
benefit, from trading in stocks, bonds, securities, real estate, commodities or
other forms of investments, so long as such activities do not interfere or
conflict with his duties as an employee of the Company.
2. PERFORMANCE FOR CONTROLLED ENTITIES. It is specifically understood and
agreed that Employee, for no other or additional compensation than that set
forth herein, shall perform services in furtherance of the Company's primary
business for any firm controlled by, or under common control with, the Company.
It is further agreed, however, that
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Employee shall not be required to perform services for any person, firm or
entity other than the Company or such controlled firms.
3. COMPENSATION.
(a) The Company agrees to pay to Employee a monthly salary of $10,000,
from which shall be deducted state and federal income taxes, social security
taxes, and such other and similar payroll deductions as laws now or hereafter in
force may require to be deducted from compensation. Such salary shall be paid in
accordance with the Company's normal payroll cycle (twice monthly). It is
understood, however, that at any time, or from time to time during the term of
this Agreement, the management of the Company may, in its sole discretion,
increase or reduce the salary of employee, or change the terms on which it is
payable.
(b) Employee shall also be entitled to a Company vehicle for business use,
such provision to be pursuant to the Company's standard automobile policy, as it
may be amended from time to time. Notwithstanding the foregoing, the Company
will reimburse Employee for his actual monthly car payments for his 1993
Suburban so long as Employee is required to make payments on the EXISTING loan
for such vehicle. All other terms of the Company's car policy (other than the
payment of the monthly car allowance) will apply.
(c) Employee will be entitled to all benefits generally available to
management personnel of the Company, including, without limitation,
participation in the Company's 401(k) plan, ESOP, group medical, dental and life
insurance plans etc., as such may be amended from time to time. Employee shall
be entitled to such vacation, family and bereavement leaves and sick days as are
generally available to management personnel, as such availability may be amended
from time to time. Nothing herein shall obligate the Company to continue to
provide any of the benefits presently provided to its management employees.
(d) Employee shall be entitled to a $30,000 cash signing bonus, payable
upon his execution of this Agreement. Such bonus shall be subject to all
applicable withholding obligations.
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(e) Employee shall be entitled to an infrastructure improvement bonus
equal to $30,000 per year, payable monthly, for four years, so long as Employee
is making regular and adequate progress toward the following objectives:
- Development and implementation of a professional marketing plan for
turnkey cross-border (Mexico) benefit products;
- Centralization of the Company's marketing proposal systems for benefits
products;
- Development and release of Seven Day A Week group medical/workers'
compensation products;
- Definition of a managed care strategy for the Company's affiliates Paula
Insurance Company and Paula Assurance Company ("PACO");
- Management and growth of the Company's existing $40 million benefits
sales efforts;
- Refinement of the Company's producer compensation plan to achieve maximum
profitable benefits product sales;
-- Development of a marketing format for non-direct sources;
- Support for the Company's Mexico business development, including
assisting Mr. Eric Duell's efforts in this regard;
- Rehabilitation of the Company's benefits products claims reporting
formats and data flow patterns; and
- Development and implementation of an underwriting plan for fieldworker
(low limit) benefits products for PACO.
Employee and the President of the Company will meet regularly to decide
whether or not adequate progress is being made on these matters. The payment of
this bonus will continue so long as the President reasonably believes that such
progress is being made. The payment of this bonus will terminate on the fourth
anniversary of this Agreement regardless of whether or not additional work
remains to be done with respect to these matters.
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(f) Employee will be entitled to a year-end bonus in an amount to be
determined by the Executive Compensation Committee of the Paula Financial Board
of Directors. Employee's first year target bonus is $0 and his maximum first
year bonus is $30,000.
4. EMPLOYEE LOANS. Employee shall be eligible to borrow up to $150,000
from the Company or Paula Financial at any time, or from time to time, during
the first year of his employment with the Company. This is not intended as a
line of credit. Once funds are borrowed and repaid, such funds may be reborrowed
once and may not be reborrowed a second or further time.
The principal amount of such loan, if any, shall bear interest at the prime
rate of interest announced by First Interstate Bank of California, N.A. ("FIB")
as of the first business day of each calendar year and shall adjust annually.
Interest shall be payable monthly. The prime rate in effect on the date of the
first borrowing will be the initial interest rate. The loan shall be repayable
interest only for the first year of this Agreement and thereafter shall be
repayable over five years in five equal annual installments payable on the first
anniversary of this Agreement.
All outstanding principal and unpaid interest will be immediately due upon
the termination of Employee's employment for any reason, including without
limitation, cause, voluntary resignation, termination without cause, death,
disability or retirement.
The loan shall be secured by Employee's grant of a first priority perfected
security interest in a number of shares of Paula Financial Common Stock held by
Employee personally, or by another party with that party's consent, with a value
equal to $225,000. Upon a default in payment of principal or interest on the
loan, the Company shall have the right to foreclose on such security. In the
event the fair value of the stock pledged by Employee shall become less than
$225,000, Employee shall be obligated to provide the Company with additional
security to cause the collateral securing the loan to have a fair market value
of at least $225,000. Notwithstanding the foregoing, if the amount still
available to be borrowed plus the amount outstanding is less than $150,000 then
the value of the collateral need only be increased to equal one and one-half
times such total. In the event Employee does not provide such security within 30
days after written notice from
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the Company, all outstanding principal and interest shall immediately become due
and payable.
The loan shall be evidenced by a promissory note and security agreement to
be agreed upon by the parties which evidences the above terms.
5. Transition Expense Arrangement. The Company agrees to provide to
Employee's former employer, Desert Benefits, Inc. ("DBF'), with $2,500 cash per
month during the 1996 calendar year to permit DBI to reimburse its former
employees for miscellaneous expenses relating to the transition of employment
from DBI to the Company and other miscellaneous transactions costs.
6. PACO BOARD OF DIRECTORS. The Company's parent, PAULA Financial,
intends to nominate Employee as a director of the Company's affiliate PACO. If
so elected, Employee agrees to serve as an employee director of PACO.
7. TERM. The relationship between the Company and its employees is for an
unspecified term and is considered employment at will. Consequently, the
employment relationship with any employee can be terminated at will either by
the employee or the employer with or without cause or advance notice.
Notwithstanding the foregoing, Employee will be entitled to compensation upon
separation from the Company to the extent set forth below:
In the event the Company terminates Employee's employment for any reason,
other than for "Cause" at any time prior to the earlier of the consummation of
the initial public offering of the Common Stock of the Company's parent, Paula
Financial, or the third anniversary of the date hereof, the Company shall (i)
pay to Employee the sum of $100,000, and (ii) upon Employee's request cause
Paula Financial to purchase from Employee up to 25% of the shares of Paula
Financial Common Stock issued to DBI upon its acquisition by the Company, if
such shares are then held by employee, for cash. The term "Cause" shall include,
among other things, the existence or discovery of a material misrepresentation
or omission in any of the representations set forth in that certain Asset
Purchase Agreement of even date herewith among the Company, Employee and others.
The price at which Employee can cause the Company to purchase his
outstanding shares of Common Stock will be the independent per share valuation
of the Common
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Stock as of December 31, 1995 or the independent per share valuation of the
Common Stock as of the December 31 next preceding the purchase date. The Company
shall be entitled to purchase such shares by paying 50% of the purchase price at
closing in cash with the balance payable over five years in five equal annual
payments with the outstanding principal amount bearing interest at the prime
rate announced by FIB on the first business day of each calendar year. Such
interest rate will be reset annually on such date. Principal and accrued but
unpaid interest will be payable annually on the first business day of the year.
The prime rate in effect on the date of purchase will be the initial interest
rate. The obligation shall be evidenced by a promissory note and security
agreement which evidences the above terms.
In the event that Mr. Jeffrey A. Snider ceases to be President and/or Chief
Executive Officer of Paula Financial anytime prior to the second anniversary of
the date of this Agreement and Employee reasonably believes that his ability to
function in his role as Senior Vice President Benefits is materially impaired by
Mr. Snider's absence, Employee may, upon his resignation from his employment
with the Company during such two year period, receive all of the benefits set
forth above as if he had been terminated by the Company without cause.
8. EMPLOYEE ACKNOWLEDGMENTS. REPRESENTATIONS AND STIPULATIONS. By signing
this Agreement, Employee acknowledges, represents and stipulates as follows:
(a) The Company is a licensed insurance agent and broker engaged in the
business of selling a full line of insurance throughout the State of California,
with offices throughout California. The majority of the Company's business is
written in agricultural areas for agricultural accounts. Most of its offices
are, accordingly, located in such areas and service a wide geographic territory.
(b) Employee is a licensed sales representative employed by the Company.
The nature of the Company's business is such that the primary direct contact
with its customers or policyholders is through its licensed sales
representatives who work out of its various regional offices. The sales agents
of the Company, including its managers and producers, are employees, not
independent salesmen or brokers.
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(c) (i) As used herein, "Customers" mean existing customers or
"Prospective Customers" of the Company and the California corporation formerly
known as Desert Benefits, Inc. Employee Benefits and Insurance Services (the
"Former Company"), holders of insurance policies sold by the Company and the
Former Company, and accounts served by or through the Company and the Former
Company. "Prospective Customers" includes those potential customers of the
Company for whom a program, proposal or quotation has been made or is in the
process of being made or quoted.
(ii) As used herein, the term "Confidential Information" means (A)
proprietary information of the Company; (B) information marked or designated by
the Company as confidential; (C) information, whether or not in written form and
whether or not designated as confidential, which is known to Employee as being
treated by the Company as confidential; and (D) information provided to the
Company by third parties which the Company is obligated to keep confidential.
Confidential Information includes, but is not limited to, ideas, trade secrets,
processes, data, computer software, know-how, marketing plans and strategies,
marketing techniques and materials, market research, new and existing products
and services, product and service strategies, pricing policies and strategies,
financial information, Customer lists, prospect lists and all information
relating or pertaining in any way to existing and prospective Customers
(including, but not limited to, premium rates, insurance coverages, future needs
for insurance, renewal dates, payroll and financial data, employment data, risk
exposures, loss prevention, loss experience, employment classifications,
management, union representation, collective bargaining agreements, affiliates,
methods of solicitation and sales of insurance and contact persons).
Confidential Information includes, but is not limited to, information conceived
or developed, in part, by Employee.
(iii) As used herein, "Documents" means all papers, letters, books,
records, lists and written or computerized materials of any sort containing
Confidential Information, whether prepared by the Company, the Employee, or
others, and all copies, reproductions, summaries or recapitulations thereof.
(d) Each of its licensed sales representatives is provided by the Company
with Customers, Confidential Information and Documents to assist them in
obtaining,
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maintaining and servicing Customers for the benefit of the Company. All
Customers, including, without limitation, Customers of the Former Company, are
those of the Company, and not of the Employee. All Confidential Information and
Documents coming into the possession, or subject to the custody or control of
Employee during his employment shall belong to and be the exclusive property of
the Company.
(e) All such Confidential Information and Documents, whether provided by
the Company to Employee, or developed by Employee in the course and scope of his
employment hereunder, constitute confidential, proprietary information of the
Company that derive independent economic value, both actual and potential, from
not being generally known to the public, to its competitors, or to other persons
who can obtain economic value from its disclosure or use.
(f) The success of the Company, and the over-all compensation of all of
its employees, is greatly dependent upon obtaining, and then servicing and
retaining, Customers on a continuing basis.
(g) Employee has been advised and understands that he has been asked by
the Company to sign this Agreement as part of the Company's efforts to maintain
the secrecy of its confidential, proprietary Confidential Information and
Documents, which efforts Employee acknowledges are reasonable, in order to
protect its present and future business, and that this Agreement imposes
substantial limitations on what Employee can and cannot do, both during and
after his employment.
(h) Employee acknowledges that he is executing this Agreement in
connection with, and as a condition to, the Company's purchase of the assets of
the Former Company and that Employee is a significant shareholder in the Former
Company.
9. DISCLOSURE TO THE COMPANY DURING EMPLOYMENT. Employee agrees that
during the time of his employment, he will fully and promptly disclose to his
appropriate superior in the Company, with or without a request by the Company,
any and all Confidential Information.
10. NON-DISCLOSURE TO OTHERS DURING AND AFTER EMPLOYMENT. All Confidential
Information and Documents shall be treated as confidential by Employee, and not
8
<PAGE>
disclosed or provided to anyone other than persons employed by the Company
during the term of his employment and for a period of three years thereafter.
11. EMPLOYEES DUTIES ON TERMINATION. On termination of his employment
hereunder, Employee agrees as follows:
(a) Employee shall make a full and complete disclosure to the Company of
all Confidential Information in his possession or under his control and provide
to the Company all Documents in his possession or under his control immediately
after giving or receiving notice of termination of his employment;
(b) Unless specifically consented to in writing by the Company, Employee
shall not either directly or indirectly use or divulge, disclose or communicate
to any person, firm, or corporation, in any manner whatsoever, any Confidential
Information or Documents;
(c) Employee further agrees that, during the time of his employment, and
for a period of three years thereafter, he, for the benefit of Employee or any
other person, will not induce or seek to induce any person who is an employee of
the Company to leave its employment;
12. NON-COMPETITION COVENANT. Employee agrees that for three years
following termination of his employment with the Company for any reason, he will
not directly solicit, attempt to obtain, accept, or in any way transact business
from any Customers of the Company (including without limitation those purchased
by the Company from the Former Company) nor shall Employee directly or
indirectly aid or assist any other party in the solicitation of such Customers,
nor shall Employee serve as an employee, director, insurance advisor,
consultant, or risk manager for any Customers representing 10% or more of the
Company's Brawley office's then existing book of business and will not engage
directly or indirectly for the benefit of Employee or any other person, in or
carry on any business enterprise which is in competition with the Company within
the County(ies) in the States of California, Arizona, Oregon, Idaho, Alaska and
Texas in which the Company or its affiliates are then doing business. If the
loyal and complete fulfillment of duties of the competitive employment would
require, inherently or otherwise, that the Employee reveal or utilize
Confidential Information or Documents of
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<PAGE>
the Company to which he had access during his employment with the Company,
Employee shall not accept such competitive employment even beyond said
geographic limits for three years following the termination of employment with
the Company.
13. SEVERABILITY. If any term or provision of this Agreement or the
application of such term or provision to any person or circumstance shall to any
extent be invalid or unenforceable, the remainder of this Agreement and the
application of such term or provision to persons or circumstances other than
those to which it is held invalid or unenforceable shall not be affected
thereby, and each term or provision of this Agreement shall be valid and
enforceable to the fullest extent permitted by law. In the event that a court of
competent jurisdiction finds that the restrictions set forth in Sections 10, 11
and 12 are unfair or unreasonable because of the scope of the covenant, the
length of time, or the size of the geographic area involved, such findings shall
not render such restrictions unenforceable, but such court shall reduce the
scope of the covenant, the length of time and/or the size of the geographic area
set forth in such restrictions so as to render such restrictions valid and
enforceable.
14. INJUNCTION. Employee agrees that the breach by him of this Agreement,
including its covenants, could not reasonably or adequately be compensated in
damages in an action at law and that the Company shall be entitled to injunctive
relief, which may include, but shall not be limited to, restraining Employee
from rendering any service that would breach this Agreement.
15. ATTORNEY'S FEES. If any legal action arises under this Agreement or by
reason of any asserted breach of it, the prevailing party shall be entitled to
recover all costs and expenses, including reasonable attorney's fees, incurred
in enforcing or attempting to enforce any of the terms, covenants, or conditions
of this Agreement, including costs incurred prior to commencement of legal
action, and all costs and expenses, including reasonable attorney's fees
incurred in any appeal from an action brought to enforce any of the terms,
covenants or conditions of this Agreement.
16. ASSIGNMENT. Employment obligations under this Agreement are personal
in nature and the Employee shall not assign or transfer this Agreement or any
rights or obligations hereunder without the express written consent of the
Company.
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17. ENTIRE AGREEMENT; INTERPRETATION; CHANGES. This Agreement comprises
the entire agreement between the parties hereto pertaining to the subject matter
hereof. No provision of this Agreement is to be interpreted for or against
either party because that party or its legal representative drafted such
provision. This Agreement may be changed only by written agreement, signed by
the parties hereto, except that benefits provided pursuant to Section 3(c)
hereof are matters of Company policy which may be changed in any manner, and
utilizing any procedure, determined by the Company's Board of Directors to be in
the best interest of the Company, except as otherwise specifically provided by
the governing document of a particular benefit.
18. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
PAN AMERICAN UNDERWRITERS,
INC.
By: /s/ Jeffrey A. Snider
---------------------------
Jeffrey A. Snider, President
/s/ Frederic J. Klicka
- ------------------------------
Frederic J. Klicka
11
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EXECUTION COPY
AGREEMENT
This Agreement (this "Agreement") is made and entered into as of this 25th
day of July, 1996 by and among James G. Parker Insurance Associates, a
California corporation (the "Company"), Paula Insurance Company, a California
corporation ("Purchaser"), Paula Financial, a California corporation ("Paula")
and the individual shareholders of the Company who are named in SCHEDULE 1.1
hereof (individually a "Shareholder" and collectively, the "Shareholders").
RECITALS
WHEREAS, the Company is an insurance agency focusing on individual and
commercial accounts in the State of California (the "Business"), and is licensed
to sell insurance in the State of California and elsewhere and the Shareholders
own common stock of the Company;
WHEREAS, Purchaser desires to acquire an equity position in the Company by
purchasing an aggregate of 2,997 shares of common stock, no par value, of the
Company (the "Shares") from the Shareholders and the Shareholders desire to sell
such Shares to the Company. The amount of Shares that the Shareholders are
willing to sell to Purchaser are identified on SCHEDULE 1.1 next to each
Shareholder's name; and
WHEREAS, Paula and the Company wish to provide for an on-going.business
relationship with regards to certain business opportunities;
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals and the
representations, warranties and covenants herein set forth, and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I
PURCHASE AND SALE OF SHARES
1.1 PURCHASE AND SALE OF SHARES. On the terms and subject to the
conditions set forth in this Agreement, at the Closing, each of the Shareholders
shall sell, transfer, convey and deliver to Purchaser, and Purchaser shall
purchase and accept from each Shareholder, the portion of the Shares identified
on SCHEDULE 1.1 hereof as being sold by each Shareholder. At the Closing a
certificate or certificates representing the shares to be sold by each
Shareholder, registered in the name of the Shareholder, duly endorsed by the
Shareholder for transfer to the Purchaser, shall be delivered to Purchaser. On
submission of the certificate or certificates to Company for transfer, the
Company will issue to Purchaser, a certificate representing the Shares,
registered in the
<PAGE>
Purchaser's name. The Certificate issued to Purchaser shall have the legend
required by Corporations section 25102(h) removed.
1.2 PURCHASE PRICE FOR SHARES AND PAYMENT TERMS. On the Closing Date (as
that term is described in Section 1.3), Purchaser shall pay to each Shareholder,
by delivery of certified or cashier's checks, the amounts set forth on SCHEDULE
1.1 which represent each Shareholders portion of an aggregate $400,000
(representing $133.465 per share) down payment on the total purchase price of
$702,975 for the Shares (representing $234.56 per share). The remaining portion
of the purchase price will be paid over 36 months in equal aggregate monthly
payments of $8,415.97, which will be made by company check and which will be due
by the first of each calendar month. The monthly payments for all of the Shares
will be made separately to each of the Shareholders ($2,103.99 each/month). The
Purchaser shall not owe any interest on the portion of the purchase price paid
over time. The deferred payment obligations will be evidenced by a promissory
note in the form of SCHEDULE 1.2 hereof.
1.3 CLOSING. The Closing of the transactions contemplated by this
Agreement (the "Closing") shall occur at the offices of Purchaser located in
Pasadena, California at 10:00 a.m., on the next business day following the
satisfaction of the last unsatisfied condition set forth in Article V hereof
(the "Closing Date") unless the parties hereto agree in writing upon a different
time, date or place.
ARTICLE II
CERTAIN UNDERSTANDINGS AND AGREEMENTS
2.1 PAULA INVESTMENT MANAGEMENT COMPANY ("PIMCO"). Paula and the Company
have agreed to cooperate with each other in the development of certain business
opportunities within the insurance industry. These opportunities will include by
way of example (i) developing additional insurance premium flows to Purchaser,
(ii) expense consolidation and product development opportunities for Paula's
non-insurance company affiliates, and (iii) merger and acquisition opportunities
for both Purchaser and Paula. In order to implement this arrangement, Paula and
the Company have agreed to designate their arrangement by name and the name
chosen is Paula Investment Management Company ("PIMCO"). Paula will establish in
its accounting books a separate account to be known as PIMCO. Paula will pay all
direct PIMCO expenses (travel, lodging, meals) as an advance against any
revenues that are credited in a like manner. Paula will file a fictitious
business name in all necessary jurisdictions identified as "Paula Financial dba
PIMCO" and "dba Paula Investment Management Company."
Initially, the PIMCO representatives will be Jeffrey A. Snider for Paula
and James G. Parker III for the Company. Paula will not enter into any
additional PIMCO agreements with California based entities except CAPAX
Management and Insurance Services, Inc. ("CAPAX"). The parties agree that
whenever a PIMCO agreement with CAPAX is executed by Paula, then all three
parties will enter into a group memo of understanding not inconsistent with the
prior existing PIMCO arrangements. The representatives of the parties identified
from time to time to participate in PIMCO shall be designated as Managing
Directors of PIMCO for the limited purpose of effectuating the goals of PIMCO.
In making this designation, nothing shall be deemed
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to have created a partnership, joint venture, or any other relationship between
Paula and its subsidiaries and the Company and its subsidiaries other than that
summarized herein or as may be indicated from time to time in a Memorandum of
Understanding which is executed concurrently herewith or subsequent to the
execution of this Agreement. No PIMCO party or representative shall have
authority, acting individually, to bind either PIMCO, or any PIMCO participant.
None of the parties to the PIMCO arrangement shall be liable for the acts of the
other parties which are beyond the scope of the understandings about PIMCO
expressed in this Agreement or in any related Memoranda of Understanding.
It is understood and agreed that each of the participants in PIMCO are
engaged in other enterprises, including enterprises in competition with each
other, and that the participants need not offer business opportunities to the
other participants of PIMCO but may take advantage of those opportunities for
their own accounts or for the accounts of other enterprises with which they are
associated. None of the other participants shall have any right to any income or
profit derived by a party from any enterprise or opportunity permitted under
this section. Notwithstanding the foregoing, each PIMCO party shall be obligated
to disclose to each other all opportunities to invest in, acquire, or
consolidate with, any commercial brokerage entities which come to such party's
attention.
All of the foregoing arrangements relate to PIMCO arrangements for the
State of California only ("California PIMCO"). Nothing herein will prevent Paula
from entering into PIMCO type arrangements with entities outside of California
(including using the name PIMCO); PROVIDED that such entities will not share in
PIMCO revenues or expenses from California PIMCO operations and Parker will not
share in non-California PIMCO revenue or expenses. To this end, non-California
PIMCO accounting records will be kept separate from those of the California
PIMCO accounts.
2.2 OVERRIDE PAYMENT. The Purchaser hereby agrees that the Company shall
be entitled to an override equal to 1% of all workers' compensation premiums
billed and collected by the Purchaser from business submitted by the Company or
any of its affiliates. This override shall be payable pursuant to the terms of
the existing Agency-Company Agreement between the Company and the Purchaser and
will continue to be paid so long as the PIMCO arrangement discussed in SCHEDULE
2.4 hereof continues in effect.
2.3 CENTRALIZED COMMERCIAL PACKAGE BUSINESS ADMINISTRATION. Attached to
this Agreement as SCHEDULE 2.3 is a Memorandum of Understanding regarding the
Centralized Commercial/Personal Package Business Administration. This Memorandum
of Understanding is in furtherance of an idea developed by PIMCO and is between
the Company and Paula. The terms of the Memorandum of Understanding are
incorporated herein by reference. The execution of the Memorandum of
Understanding in the form attached as SCHEDULE 2.3 is a condition precedent to
the obligation of the Shareholders to sell their Shares to Purchaser and to the
obligations of any of the parties hereunder.
2.4 MERGERS AND ACQUISITION ACTIVITIES. Attached to this Agreement as
SCHEDULE 2.4 is a Memorandum of Understanding regarding the identification and
pursuit of merger and
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<PAGE>
acquisition opportunities for Paula and Purchaser. This Memorandum of
Understanding is in furtherance of an idea developed by PIMCO and is between the
Company and Paula. The terms of the Memorandum of Understanding are incorporated
herein by reference. The execution of the Memorandum of Understanding in the
form attached as SCHEDULE 2.4 is a condition precedent to the obligation of the
Shareholders to sell their Shares to Purchaser and to the obligations of any of
the parties hereunder.
2.5 RIGHT TO PURCHASE SHARES. The Shareholders, or their designee(s) (who
are either the Company or other Company shareholders), shall have the right to
purchase the Shares, in whole, but not in part, from the Purchaser at any time
following the third anniversary of the Closing by giving written notice to the
Purchaser of the Shareholders', or their designee's, election to take such
action.
In the event any permitted party exercises this right, the Purchaser will
deliver to the buyer, within 15 days of receipt of the exercise notice, the
Shares, duly endorsed for transfer to the buyer. Upon delivery of the Shares,
the buyer shall be obligated to pay the Purchaser (I) 2.0 times (II) 6.25% of
the Company's gross commissions, excluding contingent commissions, (net of
business in which the Company does not have an economic interest determined on a
basis consistent with SCHEDULE 3.7 hereto, "Uncontrolled Business") for the 12
month period ending with the calendar month preceding the date of the exercise
notice. The purchase price will be paid in four installments, the first,
constituting 57% of the total, will be due upon delivery of the certificates.
The remainder will be due in three equal annual installments payable on the
first, second and third anniversaries of the delivery of the certificates. The
remaining payment obligation will be evidenced by a promissory note in the form
of SCHEDULE 1.2 hereof.
The Company's gross commission (net of Uncontrolled Business and
contingent commissions) will be calculated on the same basis which was used to
determine the initial purchase price paid for the Shares. Namely, it will
include all commissions, except contingent commissions, of each of the
Partnerships (as defined below) and AgPro (as defined below) and any other
similarly situated affiliates of the Company. It will exclude the revenue
attributed to the portion of the books of business of the Company and its
affiliates which would be owned by producers, partners or third parties in the
event of a sale of substantially all of the Company's and its affiliates' books
of business to a third party.
2.6 Purchaser Put Option. The Purchaser shall have the right to sell the
Shares to the Shareholders, or their designee(s) (who are limited to the Company
and other Company Shareholders), at any time following the third anniversary of
the Closing by giving written notice to the Company of the Purchaser's election
to take such action. In the event the Purchaser exercises this right, (i) all of
the provisions of Section 2,5 above will apply except that the consideration for
the purchase of the Shares shall be calculated using a factor of 1.825, instead
of 2,0, in the formula described in Section 2.5 above; and (ii) the payment of
the purchase consideration shall be made with a 10% down payment at closing and
the remainder paid in 120 equal monthly installments, with the first installment
due on the first of the month after the date the Shares are delivered to the
Company, and subsequent installments due on the first of each
Page 4 of 20
<PAGE>
month after that date. In the event an amendment is made to the Buy-Sell
Agreement or any other document to change the price or the terms of a Company or
Company shareholder transfer as compared to the price and terms of this Section
2.6, the price and terms of this Section 2.6 will be amended to the same extent.
Notwithstanding any of the foregoing, an agreement between the Company or one of
its shareholders and another Company shareholder to repurchase such
shareholder's shares as an isolated event and which does not have general
application to all parties to the Buy-Sell Agreement will not require that the
price or terms of this Section 2.6 be amended.
2.7 RESERVATION OF RIGHTS. Nothing in this Agreement shall in any way
impair the rights of the Shareholders or the Purchaser to enter into an
agreement with respect to the ownership of the Shares which is not based on the
foregoing terms.
2.8 RIGHT OF FIRST REFUSAL. Any transfer, sale, assignment, hypothecation,
encumbrance, or alienation of any of the Shares other than according to the
terms of this Agreement, shall be void and shall not transfer any right, title,
or interest in or to the Shares, or any of them, to the purported transferee,
buyer, assignee, pledgee, or encumbrancer.
Purchaser shall be permitted to treat the Shares as an admitted asset for
insurance regulatory purposes, giving certain rights of encumbrance to the
California Commissioner of Insurance on behalf of the Purchasers' policyholders.
In the event the Purchaser receives a BONA FIDE offer to purchase the
Shares from an unaffiliated third party, the Purchaser shall be free to sell to
such third party so long as the Purchaser first offers the Shareholders or their
designees (who shall be limited to the Company and other Company shareholders),
the right to match such offer. The Purchaser shall provide the Shareholders with
written notice of any such offer and the terms of the offer. The Shareholders
shall have 15 days from receipt of such notice to notify the Purchaser that the
Shareholders, or their designees, will match the price and payment terms of the
offer. Each Shareholder shall have the right to purchase that portion of the
Shares offered for sale that the number of shares owned by him or her at that
time (including any shares held in a voting trust) shall bear to the total
number of shares owned by all the Shareholders. Provided, however, that if any
Shareholder does not purchase his or her full proportionate allotment of the
Shares and no other individual or entity is designated by all of the
Shareholders, the unaccepted Shares may be purchased by the other Shareholders
or their designees. If the Purchaser does not receive an exercise notice(s) that
covers all of the Shares from any of the Shareholders within the 15 day period,
it will be free to sell all the Shares to the third party. Once so sold, the
Shares will not be subject to Section 2.5 or 2.6 hereof. However, any subsequent
sales of the Shares contemplated by a buyer who acquired the Shares pursuant to
this Section 2.8 shall be subject to the Shareholders' right of first refusal
and the procedures contained in this Section 2.8. Further, neither the Purchaser
nor any subsequent buyer of the Shares shall have any right to sell the Shares
to any party (i) licensed to sell insurance in any state, or (ii) affiliated
with any entity so licensed. Concurrently with the issuance of the Shares by the
Corporation, the secretary of the Corporation shall stamp the Shares in a
prominent manner with the following legend:
Page 5 of 20
<PAGE>
The transfer, sale, assignment, hypothecation, encumbrance,
or alienation of the shares represented by this certificate is
restricted by an Agreement dated July 25, 1996. A copy of the
Agreement is available for inspection during normal business
hours at the principal executive office of the Corporation,
5377 N. Fresno Street, Fresno, California 93710. All the terms
and provisions of the Agreement are hereby incorporated by
reference and made a part of this certificate.
Upon any repurchase of the Shares by the Shareholders or any designee(s),
the Shares shall no longer be subject to this Section 2.8, the Secretary of the
Corporation shall remove the legend, and the Shares shall instead be subject to
the Stock Restriction and Buy-Sell Agreement for James G. Parker Insurance
Associates dated October 15, 1990, as amended (the Buy-Sell Agreement").
2.9 CONFIDENTIALITY. The parties hereto and their respective agents,
accountants and attorneys shall keep confidential any information (unless
readily ascertainable from public or published information or sources) obtained
from any other party hereto. Confidential Information shall mean any and all
information not generally available to the public, the disclosure of which could
be detrimental to the party to which it pertains and includes all information
provided by any party hereto to another party except information which (i)
becomes generally available to the public other than as a result of disclosure
by the receiving party or its representatives, or (ii) was available to the
receiving party on a non-confidential basis prior to its disclosure to the
receiving party by the providing party or its representatives.
Each party hereto further agrees that it will not otherwise disclose any
such information to any third party (other than to its agents, accountants and
attorneys in connection with the consummation of the transactions contemplated
by this Agreement) except upon the written consent of the furnishing party, or
except as required by law. Such obligation of confidentiality shall not extend
to any information which is shown to be or to have been generally known to
others engaged in the same trade or business as the furnishing party, or that is
or shall be public knowledge through no act or omission by the party to whom the
information was furnished or any of its directors, officers, employees,
professional advisors or other representatives.
None of the parties shall use the Confidential Information except for the
express purposes of this Agreement and the related understandings. Specifically,
but not by way of limitation, no party shall use any Confidential Information
obtained from any party to engage in unfair competition against said party. Each
of the parties' obligations to maintain the confidentiality of the Confidential
Information and not to use it to compete unfairly against the other parties
hereto are of a special and unique character which gives them a particular
value.
Further, it is agreed that the parties cannot be reasonably or adequately
compensated in damages in an action at law in the event of a breach of the
obligations contained in this paragraph. Therefore, each of the parties agrees
that injunctive and other equitable relief shall be appropriate in the event of
a breach. The obligations and remedies provided in this paragraph are cumulative
and in addition to, and not in lieu of, any obligations, rights, or remedies
created by applicable law
Page 6 of 20
<PAGE>
relating to unfair competition, or misappropriation or threat of disclosure
of trade secrets or confidential information and survives the termination of the
Agreement.
Each party hereto agrees not to hire, or solicit to hire, any employee
of any other party hereto during the term of the PIMCO arrangements or for a
period of two years thereafter except as expressly set forth herein or in the
Memoranda of Understanding attached hereto as SCHEDULE 2.3 and SCHEDULE 2.4.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
The Company represents and warrants to Purchaser that:
3.1 POWER AND AUTHORITY. The Company has the full right, power and
authority to enter into this Agreement.
3.2 CAPITALIZATION. The authorized capitalization of the Company
consists of 100,000 authorized shares of Common Stock, no par value, 47,945 of
which are issued and outstanding on the date hereof. All such issued and
outstanding shares have been validly authorized and issued and are validly
outstanding, fully paid and nonassessable. There are not, and on the Closing
Date there will not be, outstanding (i) any options, warrants or other rights of
any kind whatsoever to purchase from the Company any capital stock of the
Company; (ii) any securities convertible into or exchangeable for shares of such
stock; or (iii) any other commitments of any kind for the issuance of additional
shares of capital stock or options, warrants or other securities of the Company.
3.3 LITIGATION. The Company is not a party to, subject to or bound by any
agreement, judgment or order of any court, governmental body or arbitrator
which would prevent the execution or delivery of this Agreement by the
Company or the sale of the Shares pursuant to the terms hereof after the
Company and others have obtained the consents to this transaction
contemplated herein.
3.4 NO BROKERAGE FEES. No broker or finder has acted for the Company
in connection with this Agreement or the transactions contemplated hereby.
3.5 AUTHORIZATION OF AGREEMENT. This Agreement and all other agreements
and instruments to be executed by the Company in connection herewith have
been (or upon execution will have been) duly executed and delivered by the
Company, have been effectively authorized by all necessary action, corporate
or otherwise, and constitute (or upon execution will constitute) valid and
binding obligations of the Company enforceable in accordance with their
respective terms.
3.6 FINANCIAL STATEMENTS. Included in SCHEDULE 3.6 is the Statement of
Income for the Company's fiscal year ending May 31, 1996 and Statements
of Income for the Norton-Parker Insurance Associates, Dow-Parker
Insurance Agency, Whitehead-Parker and Andreini-Parker
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partnerships (the "Partnerships") and AgPro Insurance Services ("AgPro")
all for the 12 months ending May 31, 1996 (collectively, the "Financial
Statements"). The Financial Statements (i) were prepared in accordance with the
books and records of the Company, the Partnerships or AgPro, respectively; and
(ii) fairly present the Company's, the Partnerships' or AgPro's results of
operations for the periods covered thereby;
3.7 ECONOMIC INTERESTS. Except as set forth on SCHEDULE 3.7 hereto, the
Company has 100% economic interest in all of the insurance business included in
the Financial Statements for the Company. The Company has an economic interest
in the insurance business of each of the Partnerships and AgPro to the extent
set forth in SCHEDULE 3.7. The business amounts set forth in SCHEDULE 3.7 do not
include any contingent commission amounts.
3.8 AGREEMENT NOT IN BREACH OF OTHER INSTRUMENTS. Following receipt of the
consents to this transaction contemplated herein, neither the execution and
delivery of this Agreement, nor the consummation of the transactions
contemplated hereby will violate, or result in a breach of, any of the terms and
provisions of, or constitute a default under, or conflict with (i) any agreement
to which the Company is a party or by which it is bound; (ii) the Articles of
Incorporation or Bylaws of the Company; or (iii) any applicable judgment, order
or award of any court, governmental body or arbitrator, or any law, rule or
regulation applicable to the Company.
3.9 REGULATORY APPROVALS. All consents, approvals, authorizations and
other requirements prescribed by any law, rule or regulation which must be
obtained or satisfied by the Company and which are necessary for the execution
and delivery by the Company of this Agreement and the related documents have
been obtained and satisfied or will be obtained and satisfied prior to closing.
3.10 OTHER INFORMATION. To the best knowledge of the Company, the
information concerning the Company set forth in this Agreement, the Financial
Statements, the Schedules attached hereto and any document, statement or
certificate furnished to the Purchaser in connection with the Purchaser's due
diligence review of the Company does not contain any untrue statement of a
material fact or omit to state a material fact required to be stated herein or
therein or necessary to make the statements and facts contained herein or
therein, in light of the circumstances in which they were made, not false or
misleading as of the date hereof or as of the Closing Date.
The Shareholders jointly and severally make the following representations
and warranties to the Company with respect to each Shareholder:
3.11 POWER AND AUTHORITY. Each Shareholder is the beneficial owner of the
Shares to be sold by such Shareholder, has the full right, power and authority
to enter into this Agreement and to sell to Purchaser at the Closing the Shares
to be sold by such Shareholder and, upon consummation of the purchase, the
Purchaser will acquire good and marketable title to such Shares, free and clear
of all covenants, conditions, restrictions, voting trust arrangements, liens,
security interests, charges, encumbrances, options and adverse claims or rights
whatsoever, except those restrictions created herein.
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3.12 LITIGATION. The Shareholder is not a party to, subject to or bound by
any agreement, judgment or order of any court, governmental body or arbitrator
which would prevent the execution or delivery of this Agreement by the
Shareholder or the sale of the Shares to be sold by such Shareholder pursuant to
the terms hereof after the Company and others have obtained the consents to this
transaction contemplated herein.
3.13 NO BROKERAGE FEES. No broker or finder has acted for the Shareholder
in connection with this Agreement or the transactions contemplated hereby.
3.14 AUTHORIZATION OF AGREEMENT. This Agreement and all other agreements
and instruments to be executed by the Shareholder in connection herewith have
been (or upon execution will have been) duly executed and delivered by the
Shareholder and constitute (or upon execution will constitute) valid and binding
obligations of the Shareholder enforceable in accordance with their respective
terms.
3.15 AGREEMENT NOT IN BREACH OF OTHER INSTRUMENTS. Following receipt of
the consents to this transaction contemplated herein, neither the execution and
delivery of this Agreement, nor the consummation of the transactions
contemplated hereby will violate, or result in a breach of, any of the terms and
provisions of, or constitute a default under, or conflict with (i) any agreement
to which the Shareholder is a party or by which it is bound; or (ii) any
applicable judgment, order or award of any court, governmental body or
arbitrator, or any law, rule or regulation applicable to the Shareholder.
3.16 REGULATORY APPROVALS. All consents, approvals, authorizations and
other requirements prescribed by any law, rule or regulation which must be
obtained or satisfied by the Shareholder and which are necessary for the
execution and delivery by the Shareholder of this Agreement and the related
documents have been obtained and satisfied.
The Purchaser and Paula represent and warrant to the Company and the
Shareholders that:
3.17 POWER AND AUTHORITY. The Purchaser and Paula have the full right,
power and authority to enter into this Agreement and to fulfill their respective
obligations hereunder.
3.18 AUTHORIZATION OF AGREEMENT. This Agreement and all other agreements
and instruments to be executed by the Purchaser and Paula in connection herewith
have been (or upon execution will have been) duly executed and delivered by the
Purchaser and Paula, and have been effectively authorized by all necessary
action, corporate or otherwise, and constitute (or upon execution will
constitute) valid and binding obligations of the Purchaser and Paula,
enforceable in accordance with their respective terms.
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ARTICLE IV
CONDITIONS TO OBLIGATIONS OF EACH PARTY
The obligations of each party to effect the transactions contemplated
hereby shall be subject to the fulfillment, at or prior to the Closing Date, of
the following conditions:
4.1 NO ACTION OR PROCEEDING. No claim, action, suit, investigation or
other proceeding shall be pending or threatened before any court or governmental
agency which presents a substantial risk of the restraint or prohibition of the
transactions contemplated by this Agreement or the obtaining of material damages
or other relief in connection therewith.
4.2 COMPLIANCE WITH LAW. There shall have been obtained all permits,
approvals, and consents of all governmental bodies or agencies which counsel for
Purchaser, the Company or the Shareholders may reasonably deem necessary or
appropriate so that consummation of the transactions contemplated by this
Agreement will be in compliance with applicable laws.
4.3 MEMORANDUM OF UNDERSTANDING. The Memoranda of Understanding in the
forms attached hereto as SCHEDULE 2.3 AND SCHEDULE 2.4 shall have been executed
by all signatory parties and an original of each Memorandum of Understanding
shall have been delivered to each of the parties hereto.
ARTICLE V
CONDITIONS TO OBLIGATIONS OF PURCHASER
The obligations of Purchaser to effect the transactions contemplated
hereby shall be, at the option of Purchaser, subject to the fulfillment, at or
prior to the Closing Date, of the following additional conditions:
5.1 REPRESENTATIONS AND WARRANTIES TRUE. The representations and
warranties of the Company and the Shareholders, contained in this Agreement and
the Schedules hereto shall be true and correct on the date such representations
and warranties were made and remain true and correct on the Closing Date. At the
Closing, the Company and each Shareholder shall have delivered to Purchaser
certificates to such effect signed by each party.
5.2 NO ADVERSE CHANGE. There shall not have occurred between the date
hereof and the Closing Date any material adverse changes in the results of
operations, condition (financial or otherwise), assets, liabilities (whether
absolute, accrued, contingent or otherwise), business or prospects of the
Company.
5.3 DUE DILIGENCE EXAMINATION. The Purchaser shall have completed to its
satisfaction an extensive examination of, and shall have obtained full and
complete disclosure regarding, the assets, properties, business and financial
condition of the Company and such examination shall not have revealed any fact,
or facts, which, individually or in the aggregate, could be expected to have a
material adverse effect on the results of operations, condition (financial or
otherwise), assets, liabilities (whether absolute, accrued, contingent or
otherwise), business or prospects of the
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Company; PROVIDED, HOWEVER, such examination shall not in any way relieve
the Company or any Shareholders of any liability for any misrepresentation in
this Agreement.
5.4 ADDITIONAL CLOSING DOCUMENTS OF COMPANY. Purchaser shall have
received at the Closing the following documents, dated the Closing Date:
A. Copies, certified by the Secretary or an Assistant
Secretary of the Company, of resolutions of the Board of Directors
of the Company authorizing the execution, delivery and performance of
this Agreement and all other agreements, documents and instruments
relating hereto and the consummation of the transactions contemplated
hereby. Such resolutions shall also acknowledge the Board of Directors
agreement to the matters discussed in paragraphs (B) and (C) below;
B. Copies of documents reasonably satisfactory to Purchaser's
counsel evidencing that:
(i) the Purchaser and the Shares will not be subject to any of
the provisions of the Buy-Sell Agreement or entitled to the rights
of any of the provisions of the Buy-Sell Agreement unless
repurchased by the Company or another party otherwise subject to the
Buy-Sell Agreement, and
(ii) the price to be paid by the Company or by shareholders of
the Company for shares of the Company's common stock subject to the
Buy-Sell Agreement upon transfer of such shares shall be equal to (I)
1.825, times (II) the percentage of the outstanding equity securities of
the Company being transferred, times (III) the Company's gross
commissions (excluding contingent commissions) net of business in which
the Company does not have an economic interest determined on a basis
consistent with SCHEDULE 3.7 hereto for the 12 month period ending with
the calendar month preceding the date of the notice of intent to
transfer such shares. Further, the payment of the purchase consideration
shall be made with a 10% down payment at closing and the remainder paid
in 120 equal monthly installments, but without interest.
C. A copy of the Bylaws of the Company which have been amended
(i) so that Article X thereof no longer refers to the Company's 1978
Shareholders Agreement and (ii) to state that the Purchaser and the
Shares are not subject to the provisions of Article X, as amended; and
D. Copies of waivers signed by each party to the Buy-Sell
Agreement waiving such parties rights to cause the Shares to be offered
to the Company or its shareholders under the terms of the Buy-Sell
Agreement prior to the sale of the Shares by the Shareholders to the
Purchaser.
E. Evidence reasonably satisfactory to the counsel for the
Purchaser that the Shares have been released from all provisions of the
Voting Trust Agreement to which the
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Shares are subject prior to their sale to the Purchaser such other
documents as Purchaser may reasonably request.
5.5 SCHEDULES. On or prior to the Closing Date the Company shall have
delivered to the Purchaser all schedules to this Agreement theretofore
undelivered and the information contained in such schedules shall be reasonably
acceptable to the Purchaser.
5.6 APPROVALS. On or prior to the Closing Date the Purchaser and Paula
shall have received the approval of their respective Boards of Directors and
Paula's Preferred Shareholders to the transactions contemplated by this
Agreement. The Purchaser and Paula shall notify the Company of such approvals in
writing within 48 hours of the receipt of approval. At Closing, Paula and the
Purchaser will provide certified copies of the approving resolutions of each
parties' Board of Directors.
ARTICLE VI
INDEMNIFICATION
6.1 GENERAL. The Company shall indemnify and hold harmless Purchaser, in
respect of any and all claims, losses, damages, liabilities (absolute,
contingent, matured, unmatured or otherwise) and expenses, contingent or
otherwise, matured or unmatured, of any nature whatsoever (including, without
limitation, settlement costs and any legal or other expenses for investigating
or defending any actions or threatened actions) (collectively, a "Loss"),
reasonably incurred by the indemnified party in connection with or as a result
of each and all of the following (a "Breach"):
A. Any misrepresentation or breach of any representation or
warranty in this Agreement made by the Company;
B. The breach of any covenant, agreement or obligation
contained in this Agreement or any other instrument contemplated by this
Agreement of the Company; and
C. Any misrepresentation contained in any statement or
certificate furnished by the Company pursuant to this Agreement or in
connection with the transactions contemplated by this Agreement.
The Shareholders shall jointly and severally indemnify and hold harmless
Purchaser, in respect of any Loss reasonably incurred by the indemnified party
in connection with or as a result of each and all of the following (a "Breach"):
A. Any misrepresentation or breach of any representation or
warranty in this Agreement made by a Shareholder;
B. The breach of any covenant, agreement or obligation
contained in this Agreement or any other instrument contemplated by this
Agreement of a Shareholder; and
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C. Any misrepresentation contained in any statement or
certificate furnished by a Shareholder pursuant to this Agreement or in
connection with the transactions contemplated by this Agreement.
6.2 NOTICE OF CLAIM FOR INDEMNIFICATION. Whenever any claim shall arise
for indemnification under this Article VI, the indemnified party shall promptly
notify the indemnifying party of the claim and, when known, the facts
constituting the basis for such claim.
6.3 MANNER OF INDEMNIFICATION. All indemnification hereunder shall be
effected by payment of cash or delivery of a certified or cashier's check in the
amount of the indemnification liability; PROVIDED. HOWEVER, that the indemnified
party shall have the right to offset any matured, unmatured, absolute or
contingent liability for which the indemnified party shall seek indemnification
from the indemnifying party pursuant to this Article VI against any payments due
to the indemnifying party, including, if applicable, payments due from the
Purchaser to the Company in the nature of commissions and due to the
Shareholders for deferred purchase price payments hereunder; PROVIDED that any
offset with respect to an unmatured or contingent liability must be reasonable
under the circumstances both in terms of the amount of the offset and when the
offset is made.
Any such liability, deficiency or indemnity shall be paid by the
indemnifying party within thirty (30) days from the date the indemnified party
notifies the indemnifying party that it has incurred or has become subject to
the referenced liability or deficiency and provides the indemnifying party with
documentation demonstrating that the indemnified party has incurred such
liability or deficiency.
6.4 PURCHASER/PAULA INDEMNIFICATION. The Purchaser and Paula shall jointly
and severally indemnify and hold harmless the Company and the Shareholders, in
respect of any and all claims, losses, damages, liabilities (absolute,
contingent, matured, unmatured or otherwise) and expenses, contingent or
otherwise, matured or unmatured, of any nature whatsoever (including, without
limitation, settlement costs and any legal or other expenses for investigating
or defending any actions or threatened actions) (collectively, a "Loss"),
reasonably incurred by the indemnified party in connection with or as a result
of each and all of the following (a "Breach"):
A. Any misrepresentation or breach of any representation or
warranty in this Agreement made by the Purchaser or Paula;
B. The breach of any covenant, agreement or obligation
contained in this Agreement or any other instrument contemplated by this
Agreement of the Purchaser or Paula; and
C. Any misrepresentation contained in any statement or
certificate furnished by the Purchaser or Paula pursuant to this
Agreement or in connection with the transactions contemplated by this
Agreement.
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The procedures relating to the foregoing indemnification shall be the same
as those set forth in Sections 6.2-6.3 above.
6.5 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties made in Article III hereof shall survive the Closing for a period of
four years from the Closing Date, or until the date the Shares are repurchased
by the Shareholders or the Company, if earlier.
6.6 E&O INDEMNIFICATION. The Company agrees to indemnify and hold
harmless Pan American Underwriters, Inc. ("PAU") from any and all Losses
incurred by such party in connection with, or as a result of, the Company's
negligence, or alleged negligence, or willful or grossly negligent, or alleged
willful or grossly negligent, actions in carrying out its obligations under the
Memorandum of Understanding in the form of SCHEDULE 2.3. Paula agrees to cause
PAU to indemnify and hold harmless the Company from any and all Losses incurred
by such party in connection with, or as a result of, PAU's negligence, or
alleged negligence, or willful or grossly negligent, or alleged willful or
grossly negligent, actions in carrying out its obligations under the Memorandum
of Understanding in the form of SCHEDULE 2.3. The Company agrees, and Paula
agrees to cause PAU to agree, to name the other party as an "additional named
insured" on each party's respective professional errors and omissions insurance
policy. The parties will exchange certificates of insurance evidencing such
actions.
ARTICLE VII
TERMINATION
7.1 TERMINATION. This Agreement may be terminated:
A. By written consent of the parties hereto;
B. By Purchaser or by the Company if the terminating party is
not in default hereunder, and if the Closing shall not have occurred on
or before August 30, 1996 or such later date, if any, to which Purchaser
and the Company shall agree in writing; or
C. By Purchaser if, in the course of its due diligence review,
it discovers material information not previously disclosed to Purchaser
which Purchaser reasonably believes has a material adverse effect on the
value of the Shares. In such event, the notice of termination delivered
by Purchaser to the Company shall specify in reasonable detail such
information.
7.2 TERMINATION OF PROVISIONS OF MEMORANDA OF UNDERSTANDING. The
continuation or termination of the arrangements to be put into place between the
Company and Paula or its affiliates pursuant to the Memoranda of Understanding
executed in connection with this Agreement, as they may be modified from time to
time, will be governed by the terms of such Memoranda and changes in the
ownership of the Shares will not necessarily cause any changes in such
arrangements.
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ARTICLE VIII
MISCELLANEOUS
8.1 NOTICES. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed given if delivered personally
or mailed by certified or registered mail, postage prepaid, return receipt
requested, addressed as follows:
To Purchaser or Paula:
Paula Insurance Company
300 North Lake Avenue, Suite 300
Pasadena, California 91101
Attention: Bradley K. Serwin
If to the Company or the Shareholders:
c/o James G. Parker Insurance Associates
5377 North Fresno, Suite 101
Fresno, California 93650
Attention: James G. Parker III
8.2 ASSIGNABILITY AND PARTIES IN INTEREST. This Agreement shall not be
assignable by any of the parties hereto without the prior written consent of the
other parties. This Agreement shall inure to the benefit of and be binding upon
the parties hereto and their respective successors.
8.3 GOVERNING LAW. This Agreement shall be governed by, and construed and
enforced in accordance with, the laws of the State of California.
8.4 COUNTERPARTS. This Agreement may be executed simultaneously in one or
more counterparts, each of which shall be deemed an original, but all of which
shall constitute but one and the same instrument.
8.5 BEST EFFORTS. The Company, the Shareholders, the Purchaser and Paula
will each agree to use their best efforts to bring about the transactions
contemplated by this Agreement.
8.6 PUBLIC ANNOUNCEMENTS. The parties hereto agree that they will not make
any disclosures about the existence or contents of this Agreement or the
transactions contemplated herein or cause to be publicized in any manner
whatsoever by way of interviews, responses to questions or inquiries, press
releases or otherwise any aspect or proposed aspect of this transaction without
prior written notice to and approval of the other parties, except as may be
otherwise necessary to comply with applicable law; provided, however, that the
parties hereto
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may, on a confidential basis, advise their respective agents, accountants,
attorneys and prospective lenders.
8.7 COMPLETE AGREEMENT. This Agreement, the exhibits hereto and the
Schedules hereto delivered pursuant to this Agreement and all other documents
between the parties dated the date of the Closing to be delivered at the Closing
contain the entire agreement between the parties hereto with respect to the
transactions contemplated herein and, except as provided herein, supersede all
previous oral and written and all contemporaneous oral negotiations,
commitments, writings and understandings.
8.8 MODIFICATIONS AMENDMENTS AND WAIVERS. This Agreement may not be
modified or amended, and no provision or benefit hereof may be waived, except in
a written document executed by the party against whom enforcement is sought.
8.9 SEVERABILITY. Any provision of this Agreement which is invalid,
illegal or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity, illegality or unenforceability,
without affecting in any way the remaining provisions hereof in such
jurisdiction or rendering that or any other provision of this Agreement invalid,
illegal or unenforceable in any other jurisdiction.
8.10 PAYMENT OF EXPENSES. Each party shall bear its own expenses in
connection with the preparation of this Agreement and the consummation of the
transactions contemplated herein.
8.11 FURTHER ASSURANCES. Each party hereto shall do and perform or cause
to be done and performed all such further acts and things and shall execute and
deliver all such other agreements, certificates, instruments and documents as
any other party hereto reasonably may request in order to carry out the intent
and accomplish the purposes of this Agreement.
8.12 ATTORNEYS' FEES. In the event of any action or proceeding brought by
either party against the other arising out of this Agreement, or any Memoranda
of Understanding executed pursuant to the Agreement, the prevailing party, if
any, shall be entitled to recover its reasonable attorneys fees incurred in such
action or proceeding, including any appeal, with the amount of such fees, as
well as a determination of prevailing party status, if any, to be determined by
a judge of the court sitting without a jury.
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IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
to be signed as of the date first above written.
JAMES G. PARKER INSURANCE PAULA INSURANCE COMPANY
ASSOCIATES
By: /s/ James G. Parker III By: /s/ Jeffrey A. Snider
----------------------- --------------------------
James G. Parker III Jeffrey A. Snider
President President
PAULA FINANCIAL
By: /s/ Jeffrey A. Snider
-------------------------
Jeffrey A. Snider
President
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<PAGE>
SHAREHOLDERS
James G. Parker III
Family Living Trust
U/T/D October 14, 1987
By: /s/ James G. Parker III /s/ Gary Feemster
--------------------------- ----------------------------
Trustee Gary Feemster
/s/ Jon Parker /s/ Todd Parker
--------------------------- ----------------------------
Jon Parker Todd Parker
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SPOUSAL CONSENTS
The undersigned spouses of the Shareholders hereby acknowledge and agree to
the transactions contemplated herein, including without limitation, the sale of
the Shares free and clear of any and all marital/community property rights. The
undersigned also agree to any and all amendments to this Agreement which may be
entered into by the Shareholders after the date hereof.
/s/ Tamela Parker /s/ Kathleen Feemster
---------------------------- -------------------------------
Tamela Parker Kathleen Feemster
/s/ Jenny Parker
----------------------------
Jenny Parker
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EXECUTION COPY
ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement (this "Agreement") is made and entered
into as of this 23rd day of August, 1996 by and among Guinn Sinclair
Insurance Services, a California corporation (the "Company"), Margaret
Funnell and Yolanda Ibanez (collectively, the "Shareholders") and Pan
American Underwriters, Inc., a Nevada corporation ("Purchaser"). The parties
agree that for purposes of determining prorations of expenses and revenues
hereunder, the transaction shall be deemed to have closed at midnight August
31, 1996.
RECITALS
WHEREAS, the Company is an insurance agency focusing on commercial
workers' compensation business (the "Business"), licensed to sell insurance
in the State of California and elsewhere;
WHEREAS, Purchaser desires to acquire substantially all of the non-cash
assets of the Company, including the rights associated with the name "The
Sinclair Company" and "Guinn Sinclair Insurance Services, Inc." and the
rights to all policies and policy holder information placed by the Company
with various insurance carriers (collectively, the "Book of Business") and to
assume certain selected liabilities of the Company in exchange for the
consideration set forth herein, and the Company desires that such assets be
sold; and
WHEREAS, the parties adopt this Agreement as a plan of reorganization
under Section 368(a)(1)(C) of the Internal Revenue Code of 1986, as amended;
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals and the
representations, warranties and covenants herein set forth, and other good
and valuable
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EXECUTION COPY
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties hereto agree as follows:
ARTICLE I
PURCHASE AND SALE OF ASSETS
1.1 PURCHASE AND SALE OF PURCHASED ASSETS. On the terms and subject to
the conditions set forth in this Agreement, at the Closing, the Company shall
sell, assign, transfer, convey and deliver to Purchaser, and Purchaser shall
purchase and accept from the Company, all of the right, title and interest of
the Company in and to the Purchased Assets (as defined below), free and clear
of all Liens (as defined below) other than Permitted Liens (as defined below).
"Purchased Assets" shall mean all personal properties and assets,
tangible and intangible of the Company, including without limitation the
names "Guinn Sinclair Insurance Services" and "The Sinclair Company," but
excluding the Excluded Assets (as defined in Section 1.2 below).
"Lien" shall mean any pledge, security interest, lien, charge,
encumbrance, equity or option of whatsoever nature.
"Permitted Liens" shall mean (i) Liens for taxes not yet due and payable
or being contested in good faith and for which adequate reserves have been
taken, and (ii) mechanics', carriers', workers', repairers', materialmens',
warehousemens' and other similar liens arising or incurred in the ordinary
course of business.
Without limiting the foregoing, the Purchased Assets shall include the
following:
(a) REGULATORY LICENSES. All of the Licenses and Employee Licenses of
the Company, to the extent transferable, as defined in Sections 3.19 and 3.20
below.
(b) TANGIBLE PERSONAL PROPERTY. All the Tangible Personal Property.
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"Tangible Personal Property" shall mean all machinery, equipment,
electrical devices, vehicles, furniture, fixtures, office materials and
supplies, hardware, tools, spare parts, phone numbers and other tangible
personal property of every kind and description owned by the Company,
including without limitation, those listed and described on SCHEDULE 3.8
hereto, and any additions, improvements, replacements and alterations thereto
made between the date of this Agreement and the Closing Date in the ordinary
course of business.
(c) ASSUMED CONTRACTS. All the Assumed contracts.
"Assumed Contracts" shall mean all right, title and interest of the
Company in and to the contracts and agreements listed or referred to on
SCHEDULE 1.1(c) hereto, together with the contracts and agreements entered
into between the date of this Agreement and the Closing Date in accordance
with the terms of this Agreement and contracts entered into in the ordinary
course of business pursuant to which the Company's obligations do not exceed
$1,000 per year and which are terminable on less than ninety days' notice
without penalty.
(d) INTANGIBLE RIGHTS. All the Intellectual Property of the Company.
"Intellectual Property" shall mean all intangible rights, including,
without limitation, (i) all trademarks and service marks and all applications
therefor and registrations and recordings thereof, together with the goodwill
symbolized by and associated with such trademarks and service marks, (ii) all
trade dress connected or used with such trademarks and service marks and all
applications, registrations and recordings thereof, (iii) all trade secrets,
proprietary information and know-how, (iv) all franchises, patents, jingles,
slogans, logotypes and other intangible rights, (v) all customer lists, in
each case including, without limitation, those listed and described on
SCHEDULES 3.22 hereto (vi) all rights with respect to the goodwill and
renewal rights with respect to the Policyholders (as defined in Section
3.22), including without limitation the right and authority to issue bills
for existing and renewal policies, the right to issue renewal policies and
process changes and claims on existing policies and the right to communicate
with the Policyholders under color of the agency with whom the
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1.2 EXCLUDED ASSETS. Notwithstanding the foregoing, the Purchased Assets
shall not include the following assets of the Company (collectively, the
"Excluded Assets"):
(a) CORPORATE RECORDS; TAX RETURNS. The stock books, stock ledgers,
shareholder lists, minute books, corporate seals and similar corporate
records of the Company, as well as all tax returns of the Company and any and
all records that the Company is required to retain pursuant to applicable
law.
(b) ACCOUNTS RECEIVABLE. All accounts receivable of the Company as of
the Closing Date which were earned prior to the Closing Date less any
unearned commissions received by the Company prior to the Closing Date.
(c) CASH AND INVESTMENTS. All cash, cash equivalents and securities,
including cash deposited in the Company's trust account(s).
(d) OTHER EXCLUDED ASSETS. The other assets, if any, set forth on
SCHEDULE 1.2(d) hereto.
1.3 ASSUMPTION OF CERTAIN LIABILITIES. Purchaser is not assuming any
debt, liability or obligations of the Company or any Shareholder, whether
known or unknown, fixed or contingent, except for the liabilities of the
Company to be paid or performed after the Closing Date under the Assumed
Contracts listed in SCHEDULE 1.1(c) (the "Assumed Contracts") which are
assigned by the Company to the Purchaser (the "Assumed Liabilities").
Except as and to the extent otherwise expressly provided in this
Agreement, Purchaser does not, and shall not, assume or be deemed to assume,
nor shall Purchaser discharge, be responsible for or liable with respect to
any other liabilities or obligations of the Company or any other person,
whether arising prior to, on or after the Closing Date (collectively, the
"Retained Liabilities"), including without limitation:
(a) any liability or obligations of the Company arising out of or
relating to any contract or agreement not fully and effectively assigned to
and specifically assumed by
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"Tax" or "Taxes" means all federal, state, local and foreign taxes,
including without limitation, income, profits, franchise, license,
employment, estimated, transfer, premium, withholding, property, excise,
sales, and use taxes (including any interest, penalties, deposits or
additions with respect thereto).
1.4 PURCHASE PRICE FOR PURCHASED ASSETS. On the Closing Date, Purchaser
shall pay to the Company consideration with a value of $220,576.42. Such
consideration will be paid 20% in cash, by wire transfer or delivery of a
certified or cashier's check in the sum of $44,115.28 and 80% by delivery to
the Company of a certificate or certificates representing 5,882 shares of
Paula Financial Common Stock, no par value, (the "Shares").
The parties agree to allocate the purchase price among the Purchased
Assets for all purposes in accordance with SCHEDULE 1.4 hereto.
1.5 CLOSING. The Closing of the transactions contemplated by this
Agreement (the "Closing") shall occur at the offices of Purchaser located in
Pasadena, California at 10:00 a.m., on the next business day following the
satisfaction of the last unsatisfied condition set forth in Article V hereof
(the "Closing Date") unless the parties hereto agree in writing upon a
different time, date or place.
Article II
CERTAIN UNDERSTANDINGS AND AGREEMENTS
2.1 EMPLOYMENT AND NON-COMPETITION AGREEMENTS. On or before the Closing
Date, each Shareholder and Mr. Robert Funnell shall have executed an
employment agreement with the Purchaser substantially in the form of SCHEDULE
2.1(a) and all employees of the Company which choose to be hired by Purchaser
shall have executed a non-competition agreement with the Purchaser
substantially in the form of SCHEDULE 2.1(b).
2.2 PROFIT SHARING TERMINATION. The Company agrees to give notice of
termination of the profit sharing arrangements between the Company and its
employees immediately prior to the Closing Date.
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2.3 401(k) PLAN AND OTHER PURCHASER BENEFITS. The Purchaser agrees to
give credit to each employee of the Company for time served with the Company
for purposes of determining eligibility, but not vesting, under the
Purchaser's standard employee benefits, including, without limitation, the
Company's 401(k) and Employee Stock Ownership Plan.
2.4 MAINTENANCE OF EXISTENCE. The Company agrees to maintain its
corporate existence and maintain at least one part-time licensed employee
until at least June 30, 1997 in order to facilitate the collection by the
Company of run-off commissions which are to be paid over to Purchaser
pursuant to this Agreement.
2.5 EMPLOYMENT OF COMPANY EMPLOYEES BY PURCHASER. Purchaser agrees to
employ all of the current employees of the Company at the base salaries and
with the benefits set forth on SCHEDULE 2.5 hereof commencing on the day
following the Closing Date. All such employment is considered employment "at
will."
2.6 TRUST ACCOUNT. Effective on the Closing Date, the Company shall
cease depositing client's funds into its existing trust account(s) and shall
commence depositing such funds into Purchaser's trust account(s). The Company
shall be responsible for all payments due to third parties which are required
to be made from funds in the Company's trust account(s) based on Business
conducted prior to the Closing Date. In the event that funds available from
the Company's trust account are insufficient for this purpose, the Company
and/or the Shareholders, and not the Purchaser or the Purchased Assets, will
be solely responsible for contributing additional funds to the Company's
trust account(s) to fund such obligations.
2.7 ACCOUNTING FUNCTIONS. All accounting functions and cash flow
activities will be moved from the Company to Purchaser's Pasadena or Fresno
accounting office effective on the Closing Date. The Company will direct all
insurance carriers and other payors to direct all payments to Pasadena or
Fresno commencing immediately after the Closing Date. Any payments received
at the Company's existing facility in Fresno pending the change of address
will be promptly redirected to Pasadena.
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2.8 CONFIDENTIALITY. Until the Closing, the parties hereto and their
respective agents, accountants and attorneys shall keep confidential any
information (unless readily ascertainable from public or published
information or sources) obtained from any other party hereto. Each party
hereto further agrees that it will not otherwise disclose any such
information to any third party (other than to its agents, accountants and
attorneys in connection with the consummation of the transactions
contemplated by this Agreement) except upon the written consent of the
furnishing party, or except as required by law. Such obligation of
confidentiality shall not extend to any information which is shown to be or
to have been generally known to others engaged in the same trade or business
as the furnishing party, or that is or shall be public knowledge through no
act or omission by the party to whom the information was furnished or any of
its directors, officers, employees, professional advisors or other
representatives.
2.9 CONDITION TO TRANSFER OF CERTAIN CONTRACTS. The Company agrees that
between the date hereof and the Closing Date they will use their best efforts
to obtain the necessary consents to the assignment of each Assumed Contract.
As provided in Section 5.6 hereof, it is a condition precedent to the
obligations of Purchaser to close the transactions contemplated hereby that
all required consents be obtained for each such Assumed Contract.
2.10 NOTIFICATION OF MARKETS. Purchaser and the Company agree to jointly
notify all markets which have appointed the Company of the consummation of
the transactions contemplated hereby promptly after the Closing Date. Such
notification shall seek such markets' consent to such transactions and all
parties agree to use best efforts to obtain such consents.
2.11 TAX MATTERS.
(a) TAX PAYMENTS. If either the Company or Purchaser is required by law
to file a Tax Return attributable to the ownership of the Purchased Assets
for a taxable year or period which begins before and ends after the Closing
Date, then (i) Purchaser shall be responsible for all Taxes shown on such Tax
Return allocable to the period after the Closing
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Date, and (ii) the Company shall be responsible for all Taxes allocable to
the period ended on or prior to the Closing Date. Taxes allocable to such
taxable year or period shall be determined using an interim closing of the
books method assuming that such taxable year or period ended on the Closing
Date. The parties shall cooperate in the preparation and filing of any such
Tax Returns.
(b) SALES AND TRANSFER TAXES. All Taxes incurred in connection with the
consummation of the transactions contemplated by this Agreement shall be
borne by the Company, including, without limitation, all sales, bulk sales,
transfer, gains and recording and registration Taxes, and the Company will,
at its own expense, file all necessary Tax Returns and other documentation
with respect to all such sales, transfer, gains and recording Taxes.
2.12 NFLCA ENDORSEMENT. The Company and the Shareholders will use their
best efforts to cause the National Farm Labor Contractors Association to
endorse the Purchaser as the agent of record on the Association's group
workers' compensation insurance polices and to endorse Paula Insurance
Company as the preferred workers' compensation insurance carrier for the
Association.
2.13 BUILDING LEASE. The Purchaser shall not assume the Company's
obligations under its existing building lease, but the Purchaser will
reimburse the Company for a portion of its rental payments under that lease
on the following terms. The Purchaser shall pay the Company $1,800 per month
(the current rent) beginning on the Closing Date and continuing through the
earlier of (i) the end of the third month after the Company's personnel
relocate to the Purchaser's Fresno, CA office and (ii) the date a subtenant
takes possession of the space currently leased by the Company.
2.14 AGENA LICENSE AGREEMENT. The Purchaser shall not assume the
Company's obligations under its existing licensing agreement for its Agena
software, but the Purchaser will reimburse the Company for a portion of its
licensing payments under the licensing agreement on the following terms. The
Purchaser shall pay the Company $250 per
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month (the current maintenance fee) beginning on the Closing Date and
continuing through the end of the sixth month after the Closing Date.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
The Company and each of the Shareholders jointly and severally represent
and warrant to Purchaser that:
3.1 MARKETABLE TITLE. The Company has good and marketable title to the
Purchased Assets, free and clear of any and all Liens except Permitted Liens.
3.2 POWER AND AUTHORITY. The Company and each of the Shareholders has
the full right, power and authority to enter into this Agreement and, in the
case of the Company, to transfer, convey and sell to Purchaser at the Closing
the Purchased Assets.
3.3 LITIGATION. Neither the Company nor any Shareholder is a party to,
subject to or bound by any agreement, judgment or order of any court,
governmental body or arbitrator which would prevent the execution or delivery
of this Agreement by the Company or any Shareholder or the sale of the
Purchased Assets to Purchaser pursuant to the terms hereof.
3.4 NO BROKERAGE FEES. No broker or finder has acted for the Company or
any Shareholder in connection with this Agreement or the transactions
contemplated hereby.
3.5 AUTHORIZATION OF AGREEMENT. This Agreement and all other agreements
and instruments to be executed by the Shareholders and the Company in
connection herewith have been (or upon execution will have been) duly
executed and delivered by the Shareholders and the Company, have been
effectively authorized by all necessary action, corporate or otherwise, and
constitute (or upon execution will constitute) valid and binding obligations
of each Shareholder and the Company enforceable in accordance with their
respective terms.
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3.6 FINANCIAL STATEMENTS. Included in SCHEDULE 3.6 are the balance
sheets of the Company as of June 30, 1994, 1995 and 1996 and the related
statement of income for the years ended June 30, 1994, 1995 and 1996
(collectively, the "Financial Statements"). The Financial Statements (i) were
prepared in accordance with the books and records of the Company; and (ii)
fairly present the Company's financial condition and the results of its
operations as of the relevant dates thereof and for the periods covered
thereby;
3.7 TANGIBLE PERSONAL PROPERTY. There is listed on SCHEDULE 3.8 a
description of each item of Tangible Personal Property owned by or in the
possession of the Company having on the date hereof either a depreciated book
value or estimated fair market value per unit in excess of $1,000; and (ii) a
description of the owner of, and any agreement relating to the use of, each
such item of Tangible Personal Property not owned by the Company and the
circumstances under which such property is used. Except as indicated in
SCHEDULE 3.8:
(a) Each item of Personal Property not owned by the Company is in such
condition that upon the return of such property to its owner the obligations
of the Company to such owner or lessor will be discharged;
(b) Each item of Tangible Personal Property is in operating condition
and repair and is currently in use in connection with the operation of the
Business; and
(c) The Company owns or otherwise has the right to use all of the
Tangible Personal Property now used by the Company in the operation of the
Business.
3.9 INTANGIBLE PERSONAL PROPERTY.
(a) No actions or other judicial or adversary proceedings concerning any
Intellectual Property has been initiated, there is no known basis for any
such action or proceeding and, to the best knowledge of the Company and each
Shareholder, no such action or proceeding is threatened;
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(b) The Company has the unrestricted right and authority to use the
Intellectual Property and such use does not conflict with, infringe upon or
violate any rights of any other person, firm or corporation;
(c) There are no outstanding, nor any threatened, disputes or other
disagreements with respect to any licenses or similar agreements or
arrangements;
(d) The Company is the owner of all right, title and interest in and to
each item of Intellectual Property, free and clear of all Liens; and
(e) Purchaser shall be permitted to do business under the names "Guinn
Sinclair Insurance Services" and "The Sinclair Company" or derivations
thereof following the Closing Date.
3.10 AGREEMENT NOT IN BREACH OF OTHER INSTRUMENTS. Neither the execution
and delivery of this Agreement, nor the consummation of the transactions
contemplated hereby will violate, or result in a breach of, any of the terms
and provisions of, or constitute a default under, or conflict with (i) any
agreement to which the Company or any Shareholder is a party or by which it
is bound; (ii) the Articles of Incorporation or Bylaws of the Company; or
(iii) any applicable judgment, order or award of any court, governmental body
or arbitrator, or any law, rule or regulation applicable to the Company or
any Shareholder.
3.11 INSURANCE. SCHEDULE 3.11 sets forth a true and correct list of all
insurance policies of any nature whatsoever maintained by the Company at any
time during the three (3) years prior to the date of this Agreement. To the
best knowledge of the Company and the Shareholders, no cancellation,
amendment or increase of premiums with respect to the such insurance is
pending or threatened.
3.12 EMPLOYMENT AGREEMENTS. There are no (i) employment, commission,
profit sharing, deferred compensation, bonus, stock option, stock purchase,
pension, retainer, consulting, retirement, health, welfare, or incentive plan
or contract to which the Company is a party, or by which it is or may be
bound; or (ii) plan and agreement under which "fringe
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benefits" (including, but not limited to, vacation plans or programs, sick
leave plans or programs, dental or medical plans or programs, and related or
similar benefits) are afforded to employees of the Company to which the
Purchaser will be bound.
3.13 TAX RETURNS.
(a) The Company has duly and timely filed with the appropriate federal,
state, local and foreign taxing authorities all Tax returns required to be
filed through the date hereof, and the Company has paid all Taxes owed. The
Company has not requested any extension of time within which to file any such
return;
(b) All Tax returns filed by the Company are complete and accurate in
all material respects; and
(c) There are no material liens for Taxes upon the assets of the
Company, except for statutory liens for Taxes not yet due or delinquent.
3.14 LITIGATION. Except for the on-going litigation between the Company
and The Pacific Rim Assurance Company:
(a) There is no action, suit or proceeding to which the Company is a
party (either as a plaintiff or defendant) pending before any court or
governmental agency, authority or body or arbitrator; there is no action,
suit or proceeding threatened against the Company; and to the best knowledge
of each Shareholder, there is no basis for any such action, suit or
proceeding; and
(b) There is not in existence on the date hereof any order, judgment or
decree of any court or other tribunal or other agency enjoining or requiring
the Company or any Shareholder to take any action of any kind with respect to
the Business or the Company's assets or properties.
3.15 ASSUMED CONTRACTS. SCHEDULE 1.1(c) sets forth the Assumed Contracts
which consists of a list of each contract, agreement, purchase order, lease,
license, or
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commitment, written or oral, to which the Company is a party and has ongoing
rights or obligations or by which any of their respective assets are bound
which the Company expects the Purchaser to assume after the Closing Date.
SCHEDULE 1.1(c) includes all agency appointment agreements which will be
transferred to Purchaser at the Closing Date. True and complete copies of
each of the Assumed Contracts, or where they are oral, true and complete
written summaries thereof, have been delivered to Purchaser by the Company.
Except as set forth in SCHEDULE 1.1(c):
(a) Each of the Assumed Contracts is a valid and binding agreement of
the Company and all other parties thereto, subject to cancellation upon
payment of an appropriate cancellation fee as set forth in such Assumed
Contracts; and
(b) No consent of any party to any of the Assumed Contracts is required
by the execution, delivery or performance of this Agreement or the
consummation of the transactions contemplated hereby.
3.16 ACCOUNTS RECEIVABLE AND RUN-OFF COMMISSIONS. Attached hereto as
SCHEDULE 3.16 is a complete listing of the accounts receivable and run-off
commissions of the Company as of July 31, 1995, a statement regarding whether
such accounts receivable and run-off commissions were or will be earned or
received prior to the Closing Date, and a listing of the status of such
accounts receivable and run-off commissions as of August 22, 1996, including
all cash collections, credits or write-offs. Except as disclosed in SCHEDULE
3.16, the accounts receivable and run-off commissions of the Company arose
out of the ordinary course of business.
3.17 NO UNDISCLOSED LIABILITIES. The Company has no liabilities or
obligations of any nature, whether absolute, accrued, contingent or
otherwise, and whether due or to become due (including, without limitation,
any liability for Taxes and interest, penalties and other charges payable
with respect to any such liability or obligation) except those disclosed in
one of the Schedules to this Agreement.
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3.18 REGULATORY APPROVALS. All consents, approvals, authorizations and
other requirements prescribed by any law, rule or regulation which must be
obtained or satisfied by the Company and the Shareholders and which are
necessary for (i) the execution and delivery by the Company and the
Shareholders of this Agreement and the related documents and (ii) Purchaser
to continue the Business as presently conducted, have been obtained and
satisfied.
3.19 LICENSES. SCHEDULE 3.19 sets forth all licenses, permits or
authority (collectively, the "Licenses") issued to the Company by any state
insurance department or other insurance regulatory body or agency
(collectively, a "State Insurance Department"). The Licenses set forth on
SCHEDULE 3.19 constitute each license, permit or authority that it is
necessary or appropriate for the Company to obtain from a State Insurance
Department with respect to the transaction of its business. All of the
Licenses are currently in effect. None of the Licenses has at any time been
suspended, revoked, terminated or limited or expired. No notice of any
violation has been received at any time by the Company with respect to any
License, and there is no proceeding or investigation, whether pending or
threatened, or any basis therefor, that could result in the
suspension, revocation, termination or limitation of any License.
3.20 EMPLOYEE LICENSES. SCHEDULE 3.20 sets forth all licenses, permits
or authority (the "Employee Licenses") issued to any employee or independent
contractor of the Company by a State Insurance Department. All of the
Employee Licenses are currently in effect and constitute each license, permit
or authority that it is necessary or appropriate for the employees or
independent contractors of the Company to obtain from a State Insurance
Department with respect to the performance of their respective job
responsibilities for the Company and as contemplated by Purchaser. All of the
Employee Licenses will remain in effect and will not be subject to
suspension, revocation, termination or limitation in any manner as a result
of the consummation of the transactions contemplated by this Agreement.
Except for the notices required by each State Insurance Department regarding
the commencement of authority of such employee to act for Purchaser and the
termination of
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authority of such employee to act for the Company, none of Purchaser, the
Company or any employee holding an Employee License will be required to
obtain any consent, approval or action of, or make any filing with or give
any notice to, any State Insurance Department with respect to any Employee
License as a result of the consummation of the transactions contemplated by
this Agreement.
3.21 COMPLIANCE WITH LAWS; ABSENCE OF REGULATORY PROCEEDINGS. The
Company has complied with all applicable laws and regulations relating to the
conduct of its business. The Company has not received service or other notice
of any litigation, action, suit, proceeding or investigation by or on behalf
of any State Insurance Department that is presently pending or threatened
against the Company or its Business, nor does any Shareholder have any
knowledge of any basis therefor. Since January 1, 1992, the Company has not
been a party to or has been involved in any litigation, action, suit,
proceeding or investigation by or on behalf of any State Insurance
Department. The Company has not entered into or has been subject to any
consent decrees, settlements, orders, stipulations or other agreements or
understandings with any State Insurance Department with respect to the
conduct of the Business.
3.22 POLICYHOLDERS. SCHEDULE 3.22 sets forth all of the policyholders
(the "Policyholders") that have policies of insurance for which the Company
is currently receiving a commission or has received a commission on or after
July 1, 1995. Except as disclosed to Purchaser in writing, the Company is
currently the agent of record for each of the Policyholders.
After the Closing Date, Purchaser shall have an unconditional right with
respect to each Policyholder to engage in the solicitation, quotation and
sale of Paula Insurance Company's policies of workers' compensation insurance
(and ancillary services related thereto) and Paula Assurance Company's
policies of accident and health and life insurance (and ancillary services
related thereto) without any restriction or limitation of any kind.
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No person or entity has any right (whether pursuant to any agreement or
understanding or otherwise), pursuant to an agreement between the Company and
such person or entity, to preclude or limit the solicitation, quotation or
sale of Paula Insurance Company's policies of workers' compensation insurance
(and ancillary services related thereto) and Paula Assurance Company's
policies of accident and health and life insurance (and ancillary services
related thereto) by Purchaser to any Policyholders after the Closing Date.
After the Closing Date, Purchaser will be entitled to the goodwill and
renewal rights with respect to each of the Policyholders, without any
restriction or limitation of any kind. Except as disclosed in writing to
Purchaser, none of the Company nor any of the Shareholders has any actual
knowledge that any of the Policyholders will not purchase insurance issued by
Paula Insurance Company or Paula Assurance Company and sold by Purchaser.
3.23 APPOINTMENTS. The insurance companies that have appointed the
Company and its employees as agents are set forth on SCHEDULE 3.23. All of
the appointments (the "Appointments") set forth on SCHEDULE 3.23 are
currently in effect, and the Company has not received any notice that an
Appointment has been terminated or limited in any manner.
3.24 ASSIGNMENT OF APPOINTMENTS. To the Shareholders' and the Company's
knowledge, no insurance carrier which had appointed the Company or its
employees will refuse to transfer such Appointment to the Purchaser, or its
employees, as the case may be. To the Shareholders' and the Company's
knowledge, there will be no status, preferential treatment or advantage that
currently benefits the Company or any employee of the Company which will not
apply to and benefit Purchaser as of the Closing Date.
3.25 INVESTMENT REPRESENTATIONS.
(a) The Company acknowledges that: (i) the Shares will be issued without
registration under the Securities Act of 1933, as amended (the "Act"), or
qualification under
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the California Corporate Securities Law of 1968, as amended (the "Law"),
pursuant to exemptions from the registration requirements of the Act and the
qualification requirements of the Law, (ii) such exemptions only exempt the
issuance of the Shares to the Company and not any sale or other disposition
of the Shares or any interest therein by the Company; (iii) there can be no
assurance that the Company will be able to sell, transfer or otherwise
dispose of any of the Shares or any interest therein without registration
under the Act or qualification under the Law (which the Company has no right
to compel). The Company further understands that, for these reasons, the
Shares will probably not be usable as collateral for a loan and it may be
impossible for the Company to liquidate its investment in the Shares in case
of an emergency.
(b) The Company represents to the Purchaser and agrees as follows: (i)
The Shares are being acquired and will be taken and received for its private
personal investment for its own account with no intention of selling,
transferring or otherwise disposing of the Shares or any interest therein to
others except for the possible pro rata dividend of the Shares to the
Company's two existing shareholders; (ii) The Company has no contract,
undertaking, agreement, or arrangement with any person to sell, transfer or
otherwise dispose of to any person or to have any person sell, transfer or
otherwise dispose of for the Company any of the Shares or any interest
therein and the Company is presently not engaged, nor does it plan to engage
within the presently foreseeable future, in any discussion with any person
relative to such sale, transfer, or other distribution of any of the Shares
or any interest therein; and (iii) The Company fully comprehends that the
Purchaser is relying to a material degree on the representations and
agreements contained herein and with such realization authorizes the
Purchaser to act as it may see fit in full reliance hereon including the
placement of the legend in substantially the form below on, and notations in
the appropriate records of the Purchaser with respect to, the certificate
representing the Shares:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE
ISSUED WITHOUT REGISTRATION UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, NOR ANY STATE SECURITIES LAWS, AND
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MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF
UNLESS SO REGISTERED OR AN EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE ACT AND SUCH LAWS IS
AVAILABLE."
(c) A copy of the Notice of Transaction to be filed with the California
Commissioner of Corporations is attached hereto as SCHEDULE 3.25 and the
Company hereby confirms that each of the representations by the Purchaser
contained therein is, to the best of the Company's and the Shareholders'
knowledge, true, correct and complete. The Purchaser had given to the Company
and the Company has reviewed copies of the Securities Act Release 33-5226,
Section 25102(f) of the California Corporations Code and Title 10 of the
California Administrative Code Sections 260.102.12 and 260.102.13.
(d) The Company further represents to the Purchaser that, as described
in section 25102(f)(2) and Sections 260.102.12(d),(g) and (h), the Company
has a preexisting personal or business relationship with the Purchaser or its
officers, directors or controlling persons.
The Purchaser represents and warrants to the Company and the
Shareholders that:
3.26 POWER;AUTHORITY; AND GOOD STANDING. The Purchaser has the full
right, power and authority to enter into this Agreement and to fulfill its
respective obligations hereunder. The Purchaser is duly incorporated and in
good standing in the State of Nevada, the State of its domicile, and is duly
qualified and in good standing as a foreign corporation in the State of
California.
3.27 AUTHORIZATION OF AGREEMENT. This Agreement and all other agreements
and instruments to be executed by each of the Purchaser in connection
herewith have been (or upon execution will have been) duly executed and
delivered by the Purchaser, as the case may be, and have been effectively
authorized by all necessary action, corporate or otherwise, and constitute
(or upon execution will constitute) valid and binding obligations of
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the Purchaser, enforceable in accordance with their respective terms, except
as enforcement may be limited by law pertaining to bankruptcy, insolvency or
the enforcement of creditors' rights and by general equitable principles.
ARTICLE IV
CONDITIONS TO OBLIGATIONS OF EACH PARTY
The obligations of each party to effect the transactions contemplated
hereby shall be subject to the fulfillment, at or prior to the Closing Date,
of the following conditions:
4.1 NO ACTION OR PROCEEDING. No claim, action, suit, investigation or
other proceeding shall be pending or threatened before any court or
governmental agency which presents a substantial risk of the restraint or
prohibition of the transactions contemplated by this Agreement or the
obtaining of material damages or other relief in connection therewith.
4.2 COMPLIANCE WITH LAW. There shall have been obtained all permits,
approvals, and consents of all governmental bodies or agencies which counsel
for Purchaser or the Company may reasonably deem necessary or appropriate so
that consummation of the transactions contemplated by this Agreement will be
in compliance with applicable laws.
ARTICLE V
CONDITIONS TO OBLIGATIONS OF PURCHASER
The obligations of Purchaser to effect the transactions contemplated
hereby shall be, at the option of Purchaser, subject to the fulfillment, at
or prior to the Closing Date, of the following additional conditions:
5.1 REPRESENTATIONS AND WARRANTIES TRUE. The representations and
warranties of the Company and the Shareholders contained in this Agreement
and the Schedules hereto shall be true and correct on the date such
representations and warranties were made and remain true and correct on the
Closing Date. At the Closing, the Company and the Shareholders shall have
delivered to Purchaser certificates to such effect signed by each party.
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5.2 COMPANY'S AND SHAREHOLDERS' PERFORMANCE. Each of the obligations of
the Company and each Shareholder to be performed on or before the Closing
Date pursuant to the terms of this Agreement shall have been duly performed
on or before the Closing Date, and at the Closing, the Company and each
Shareholder Seller shall have delivered to Purchaser a certificate to such
effect.
5.3 NAME CHANGE. On or before the Closing Date, the Company shall have
prepared and executed documentation sufficient to amend its Articles of
Incorporation with the Secretary of State of the State of California to
change its corporate name to a name other than "Guinn Sinclair Insurance
Services, Inc." or deviations thereof and executed such other documents and
certificates as Purchaser shall reasonably require to permit Purchaser to
file a fictitious business name statement to do business under the name The
Sinclair Company or deviations thereof, effective on the Closing Date.
5.4 NO ADVERSE CHANGE. There shall not have occurred between the date
hereof and the Closing Date any material adverse changes in the results of
operations, condition (financial or otherwise), assets, liabilities (whether
absolute, accrued, contingent or otherwise), business or prospects of the
Company.
5.5 DUE DILIGENCE EXAMINATION. The Purchaser shall have completed to its
satisfaction an extensive examination of, and shall have obtained full and
complete disclosure regarding, the assets, properties, business and financial
condition of the Company and such examination shall not have revealed any
fact, or facts, which, individually or in the aggregate, could be expected to
have a material adverse effect on the results of operations, condition
(financial or otherwise), assets, liabilities (whether absolute, accrued,
contingent or otherwise), business or prospects of the Company; PROVIDED,
HOWEVER, such examination, or any activities undertaken by the Purchaser to
assist the Company to prepare the schedules to this Agreement, shall not in
any way relieve the Company or any Shareholders of any liability for any
breach of or misrepresentation in this Agreement.
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5.6 CONSENTS TO ASSIGNMENT OF CERTAIN CONTRACTS. All necessary consents
to the assignment of all Assumed Contracts, including without limitation the
Brokerage Agreement with CalComp Insurance Company, shall have been obtained
in writing and delivered at the Closing to Purchaser.
5.7 ENDORSEMENT OF NFLCA. The Company shall have delivered to the
Purchaser a written endorsement of the Purchaser as agent of record for the
Association's group workers' compensation insurance policy and of Paula
Insurance Company as the group's preferred workers' compensation insurance
carrier.
5.8 ADDITIONAL CLOSING DOCUMENTS OF COMPANY. Purchaser shall have
received at the Closing the following documents, dated the Closing Date:
(a) Copies, certified by the Secretary of the Company, of resolutions of
the Board of Directors and shareholders of the Company authorizing the
execution, delivery and performance of this Agreement and all other
agreements, documents and instruments relating hereto and the consummation of
the transactions contemplated hereby;
(b) Copies of consent of CalComp Insurance Company to the sale of the
Business to the Purchaser stating that such transaction will not adversely
effect such company's dealings with the Purchaser as successor to the Company
after the Closing Date;
(c) Such other documents as Purchaser may reasonably request.
5.9 SCHEDULES. On or prior to the Closing Date the Company shall have
delivered to the Purchaser all schedules to this Agreement theretofore
undelivered and the information contained in such schedules shall be
reasonably acceptable to the Purchaser.
ARTICLE VI
INDEMNIFICATION
6.1 GENERAL. The Company and the Shareholders, jointly and severally,
shall indemnify and hold harmless Purchaser, in respect of any and all
claims, losses,
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damages, liabilities (absolute, contingent, matured, unmatured or otherwise)
and expenses, contingent or otherwise, matured or unmatured, of any nature
whatsoever (including, without limitation, settlement costs and any legal or
other expenses for investigating or defending any actions or threatened
actions) (collectively, a "Loss"), reasonably incurred by the indemnified
party in connection with or as a result of each and all of the following (a
"Breach"):
(a) Any misrepresentation or breach of any representation or warranty in
this Agreement made by the Company or any Shareholder;
(b) The breach of any covenant, agreement or obligation contained in
this Agreement or any other instrument contemplated by this Agreement of the
Company or any Shareholder;
(c) Any misrepresentation contained in any statement or certificate
furnished by the Company or any Shareholder pursuant to this Agreement or in
connection with the transactions contemplated by this Agreement; and
(d) Any action, liability or Loss relating to any contract or
arrangement to which any Company is a party other than the Assumed
Liabilities or relating to the conduct of business by the Company before, on
or after the Closing Date, including without limitation any and all liability
related to the lawsuit with The Pacific Rim Assurance Company or any errors
and omissions claims against the Company for actions taken, or omissions
made, during the period prior to the Closing Date.
Any such liability, deficiency or indemnity shall be paid by the
indemnifying party within thirty (30) days from the date the indemnified
party notifies the indemnifying party that it has incurred or has become
subject to the referenced liability or deficiency and provides the
indemnifying party with documentation demonstrating that the indemnified
party has incurred such liability or deficiency.
6.2 NOTICE OF CLAIM FOR INDEMNIFICATION. Whenever any claim shall arise
for indemnification under this Article VI, the indemnified party shall
promptly notify the
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indemnifying party of the claim and, when known, the facts constituting the
basis for such claim.
6.3. THIRD PARTY CLAIMS. If a claim by a third party is made against an
indemnified party, and if such indemnified party intends to seek indemnity
with respect thereto hereunder, the indemnified party shall promptly (and in
any case within thirty days of such claim being made and within the period
provided in Section 6.5, if applicable) notify the indemnifying party of such
claim. The indemnifying party shall have thirty (30) days after receipt of
such notice to undertake, conduct and control, through counsel of its own
choosing and at its own expense, the settlement or defense thereof, and the
indemnified party shall cooperate with it in connection therewith; PROVIDED
that (a) the indemnifying party shall permit the indemnified party to
participate in such settlement or defense through counsel chosen by the
indemnified party, provided the fees and expenses of such counsel shall be
borne by the indemnified party and (b) the indemnifying party shall promptly
reimburse the indemnified party for the full amount of any Loss resulting
from such claim and all related expenses incurred by the indemnified party
within the limits of this Article VI (except for expenses contemplated by
clause (a) preceding).
So long as the indemnifying party is reasonably contesting any such
claim in good faith, the indemnified party shall not pay or settle any such
claim. Notwithstanding any of the foregoing, the indemnified party shall have
the right to pay or settle any such claim, provided that in such event it
shall waive any right to indemnity therefor by the indemnifying party. If the
indemnifying party does not notify the indemnified party within thirty (30)
days after the receipt of the indemnified party's notice of claim of
indemnity hereunder that it elects to undertake the defense thereof, the
indemnified party shall have the right to contest, settle or compromise the
claim in the exercise of its reasonable judgment (but with due regard for
obtaining the most favorable outcome reasonably likely under the
circumstances, taking account of costs and expenditures) at the expense of
the indemnifying party.
6.4 MANNER OF INDEMNIFICATION. All indemnification hereunder shall be
effected by payment of cash or delivery of a certified or cashier's check in
the amount of the
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indemnification liability in the case of the Purchaser indemnifying the
Company and in the case of the Company and/or the Shareholders indemnifying
the Purchaser, by the Company or the Shareholders surrendering Shares valued
at the higher of $30 per Share or the then current fair market value thereof;
PROVIDED, HOWEVER, that if neither the Company nor the Shareholders can
deliver adequate Shares, such parties shall be required to deliver cash in
the amount of any remaining indemnification obligation. The indemnified party
shall have the right to offset any matured, unmatured, absolute or contingent
liability for which the indemnified party shall seek indemnification from the
indemnifying party pursuant to this Article VI against any payments due to
the indemnifying party, including, if applicable, payments due from the
Purchaser to any Shareholder in the nature of salary or bonus compensation,
on a PRO RATA basis; PROVIDED that any offset with respect to an unmatured or
contingent liability must be reasonable under the circumstances both in terms
of the amount of the offset and when the offset is made. In addition, at the
Purchaser's option, amounts due to the Purchaser for indemnification
hereunder may be paid by the Purchaser canceling Shares valued at $30 per
share; PROVIDED that any offset with respect to an unmatured or contingent
liability must be reasonable under the circumstances both in terms of the
amount of the offset and when the offset is made.
6.5 LIMITATIONS ON COMPANY/SHAREHOLDER INDEMNIFICATION. None of the
Company or the Shareholders shall be liable to the Company under this Article
VI for any claims which, in the aggregate, amount to less than $1,000, but if
such parties become liable hereunder to the Purchaser for claims in excess of
$1,000, such parties will be liable for all claims hereunder, including the
first $1,000 of claims. In no event will the Company's and the Shareholders'
liability under this Article VI exceed $220,000 in the aggregate.
6.6 PURCHASER INDEMNIFICATION. The Purchaser shall indemnify and hold
harmless the Company and the Shareholders in respect of all Losses reasonably
incurred by the Company in connection with or as a result of any
misrepresentation or breach of representation or warranty in this Agreement
made by the Purchaser or any failure by the Purchaser to comply with all of
the obligations assumed by the Purchaser under the Assumed
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Contracts. The procedures relating to the foregoing indemnification shall be
the same as those set forth in Sections 6.2-6.4 above.
6.7 SURVIVAL. The representations and warranties made in Article II
hereof, and the indemnification obligations set forth in this Article VI,
shall survive the Closing for a period of five years from the Closing Date.
ARTICLE VII
TERMINATION
7.1 TERMINATION. This Agreement may be terminated:
(a) By written consent of the parties hereto;
(b) By Purchaser or by the Company if the terminating party is not in
default hereunder, and if the Closing shall not have occurred on or before
October 31, 1996 or such later date, if any, to which Purchaser and the
Company shall agree in writing; or
(c) By Purchaser if, in the course of its due diligence review, it
discovers material information not previously disclosed to Purchaser which
Purchaser reasonably believes has a material adverse effect on the value of
the Purchased Assets. In such event, the notice of termination delivered by
Purchaser to the Company shall specify in reasonable detail such information.
ARTICLE VIII
MISCELLANEOUS
8.1 NOTICES. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed given if delivered
personally or mailed by certified or registered mail, postage prepaid, return
receipt requested, addressed as follows:
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To Purchaser: Pan American Underwriters, Inc.
300 North Lake Avenue
Suite 300
Pasadena, California 91101
Attention: Bradley K. Serwin
If to the Company or c/o: Robert Funnell
any Shareholder: 8526 N. Chance Ave.
Fresno, California 93720
8.2 ASSIGNABILITY AND PITIES IN INTEREST. This Agreement shall not be
assignable by any of the parties hereto without the prior written consent of:
(i) in the case of any Shareholder or the Company, Purchaser and (ii) in the
case of Purchaser, the Company. This Agreement shall inure to the benefit of
and be binding upon the parties hereto and their respective successors.
8.3 GOVERNING LAW. This Agreement shall be governed by, and construed
and enforced in accordance with, the laws of the State of California.
8.4 COUNTERPARTS. This Agreement may be executed simultaneously in one .
or more counterparts, each of which shall be deemed an original, but all of
which shall constitute but one and the same instrument.
8.5 BEST EFFORTS. The Company, Shareholders and Purchaser each agree to
use their best efforts to bring about the transactions contemplated by this
Agreement.
8.6 PUBLIC ANNOUNCEMENTS. The parties hereto agree that they will not
make any disclosures about the existence or contents of this Agreement or the
transactions contemplated herein or cause to be publicized in any manner
whatsoever by way of interviews, responses to questions or inquiries, press
releases or otherwise any aspect or proposed aspect of this transaction
without prior written notice to and approval of the other
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parties, except as may be otherwise necessary to comply with applicable law;
provided, however, that the parties hereto may, on a confidential basis,
advise their respective agents, accountants, attorneys and prospective
lenders.
8.7 COMPLETE AGREEMENT. This Agreement, the exhibits hereto and the
Schedules hereto delivered pursuant to this Agreement and all other documents
between the parties dated the date of the Closing to be delivered at the
Closing contain the entire agreement between the parties hereto with respect
to the transactions contemplated herein and, except as provided herein,
supersede all previous oral and written and all contemporaneous oral
negotiations, commitments, writings and understandings. The Shareholders are
not relying on any inducement whatsoever other than that represented by such
agreements in executing and delivering this Agreement.
8.8 MODIFICATIONS AMENDMENTS AND WAIVERS. This Agreement may not be
modified or amended, and no provision or benefit hereof may be waived, except
in a written document executed by the party against whom enforcement is
sought.
8.9 SEVERABILITY. Any provision of this Agreement which is invalid,
illegal or unenforceable in any jurisdiction shall, as to that jurisdiction,
be ineffective to the extent of such invalidity, illegality or
unenforceability, without affecting in any way the remaining provisions
hereof in such jurisdiction or rendering that or any other provision of this
Agreement invalid, illegal or unenforceable in any other jurisdiction.
8.10 PAYMENT OF EXPENSES. Each party shall bear its own expenses in
connection with the preparation of this Agreement and the consummation of the
transactions contemplated herein. EXCEPT AS SPECIFICALLY APPROVED BY
PURCHASER IN WRITING, NO FEES AND EXPENSES INCURRED IN CONNECTION WITH THE
PREPARATION OF THIS AGREEMENT OR THE EXHIBITS, SCHEDULES OR CLOSING DOCUMENTS
RELATING THERETO AND THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED HEREIN
OR THEREIN SHALL BE PAID BY THE COMPANY OUT OF THE PURCHASED ASSETS.
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8.11 FURTHER ASSURANCES. Each party hereto shall do and perform or cause
to be done and performed all such further acts and things and shall execute
and deliver all such other agreements, certificates, instruments and
documents as any other party hereto reasonably may request in order to carry
out the intent and accomplish the purposes of this Agreement.
8.12 ATTORNEYS' FEES. In the event of any action or proceeding brought
by either party against the other arising out of this Agreement, the
prevailing party, if any, shall be entitled to recover its reasonable
attorneys fees incurred in such action or proceeding, including any appeal,
with the amount of such fees, as well as a determination of prevailing party
status, if any, to be determined by a judge of the court sitting without a
jury.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
to be signed as of the date first above written.
GUINN SINCLAIR INSURANCE
SERVICES SHAREHOLDERS:
By: /s/ Guinn Sinclair /s/ Margaret Funnell
------------------------- ----------------------
Guinn Sinclair Margaret Funnell
President
PAN AMERICAN UNDERWRITERS, /s/ Yolanda Ibanez
INC. ----------------------
Yolanda Ibanez
By: /s/ Jeffrey A. Snider
------------------------
Jeffrey A. Snider
President
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SERIES A PREFERRED STOCK PURCHASE AGREEMENT
dated as of March 11, 1997
among
PAULA INSURANCE COMPANY
and
CAPAX MANAGEMENT & INSURANCE SERVICES
<PAGE>
TABLE OF CONTENTS
1.PURCHASE, SALE AND TERMS OF SHARES.......................................... 1
1.1 THE PREFERRED SHARES...................................................... 1
1.1 THE CONVERSION SHARES..................................................... 1
1.3 PURCHASE PRICE AND CLOSING................................................ 1
1.4 POST-CLOSING ADJUSTMENT................................................... 2
1.5 POST-CLOSING PAYMENTS..................................................... 2
1.6 USE OF PROCEEDS........................................................... 3
1.7 POST-CLOSING SHARE ADJUSTMENTS............................................ 3
1.8 BUY-SELL AGREEMENT........................................................ 5
1.9 RIGHT OF FIRST REFUSAL.................................................... 5
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.............................. 6
2.1 ORGANIZATION, STANDING AND POWER OF THE COMPANY........................... 6
2.2 AUTHORITY; ENFORCEABILITY; NO CONFLICT.................................... 6
2.3 CAPITALIZATION............................................................ 7
2.4 SUBSIDIARIES.............................................................. 8
2.5 STATUS OF SHARES.......................................................... 8
2.6 FINANCIAL STATEMENTS...................................................... 8
2.7 LIABILITIES............................................................... 9
2.8 INDEBTEDNESS.............................................................. 9
2.9 TITLE TO ASSETS........................................................... 9
2.10 ACTIONS PENDING.......................................................... 9
2.11 COMPLIANCE WITH LAW......................................................10
2.12 TAXES,...................................................................10
2.13 NO MATERIAL ADVERSE CHANGE...............................................10
2.14 CERTAIN FEES.............................................................10
2.15 DISCLOSURE...............................................................11
2.16 BOOKS AND RECORDS........................................................11
2.17 TRANSACTIONS WITH AFFILIATES.............................................11
2.18 ABSENCE OF CERTAIN DEVELOPMENTS..........................................11
2.19 ABSENCE OF OWNERSHIP RIGHTS IN BOOK OF BUSINESS..........................13
3. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER............................13
3.1 ORGANIZATION AND STANDING OF THE PURCHASER................................13
3.2 AUTHORITY; ENFORCEABILITY; NO CONFLICT....................................13
3.3 ACQUISITION FOR INVESTMENT................................................14
3.4 GOVERNMENTAL APPROVALS....................................................14
4. CONDITIONS TO PURCHASER'S OBLIGATIONS......................................14
4.1 REPRESENTATIONS AND WARRANTIES............................................14
4.2 CORPORATE AND SHAREHOLDER PROCEEDINGS.....................................15
4.3 OFFICER'S CERTIFICATE.....................................................15
4.4 NO PROCEEDINGS OR LITIGATION..............................................15
4.5 CERTIFICATE OF DETERMINATION..............................................15
4.6 PAULA TRADING COMPANY AGREEMENT...........................................15
4.7 MANAGEMENT CONSULTANT AGREEMENT...........................................16
4.8 COMPLIANCE WITH THIS AGREEMENT AND RELATED AGREEMENTS.....................16
4.9 PROCEEDINGS SATISFACTORY..................................................16
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4.10 OPTION...................................................................16
4.11 NON-COMPETITION AGREEMENT................................................16
4.12 MINISTERIAL ITEMS........................................................16
5. AFFIRMATIVE COVENANTS OF THE COMPANY.....................................17
5.1 INSPECTION RIGHTS.........................................................17
5.2 BUDGETS APPROVAL..........................................................17
5.3 FINANCINGS................................................................17
5.4 BY-LAWS AND INDEMNIFICATION...............................................18
5.5 CORPORATE EXISTENCE.......................................................18
5.6 EX-OFFICIO NON-VOTING BOARD MEMBER: EXPENSES OF DIRECTORS.................18
5.7 COMPLIANCE WITH LAWS......................................................18
5.8 KEEPING OF RECORDS AND BOOKS OF ACCOUNT...................................18
5.9 REPORTING REQUIREMENTS....................................................19
5.10 REPORTS TO DIRECTORS.....................................................19
5.11 MAINTENANCE OF FINANCIAL STRENGTH........................................20
5.12 MAINTENANCE OF ADEQUATE ERRORS & OMISSIONS/DIRECTORS &
OFFICERS INSURANCE......................................................20
5.13 CREATION AND MAINTENANCE OF COMPENSATION COMMITTEE.......................20
5.14 SUBMISSION OF OPTION TO SHAREHOLDERS FOR APPROVAL........................20
6. NEGATIVE COVENANTS OF THE COMPANY..........................................21
6.1 DEALINGS WITH AFFILIATES..................................................21
6.2 COMPENSATION TO OFFICERS..................................................21
6.3 MAINTENANCE OF OWNERSHIP OF SUBSIDIARIES..................................21
6.4 CONDUCT OF BUSINESS.......................................................21
6.5 RESTRICTIONS ON INDEBTEDNESS..............................................21
6.6 ASSUMPTIONS OR GUARANTIES OF INDEBTEDNESS OF OTHER PERSONS................22
6.7 INVESTMENTS IN OTHER CORPORATIONS OR ENTITIES (LESS THAN 100% OWNED)......22
6.8 ACQUISITION OF OTHER CORPORATIONS OR ENTITIES (100% OWNED)................23
6.9 AMENDMENTS................................................................23
6.10 OTHER AGREEMENTS.........................................................23
6.11 USE OF FIDUCIARY FUNDS...................................................23
7. RIGHT OF FIRST REFUSAL.....................................................23
7.1 RIGHT OF FIRST REFUSAL....................................................23
7.2 NOTICE OF ACCEPTANCE......................................................24
7.3 CONDITIONS TO ACCEPTANCES AND PURCHASE....................................24
7.4 FURTHER SALE..............................................................25
7 5 EXCEPTION.................................................................25
7.6 SALE OF COMPANY AS A WHOLE................................................25
7.7 RIGHTS UNDER BUY-SELL AGREEMENT...........................................26
8. DEFINITIONS AND ACCOUNTING TERMS...........................................26
8.1 CERTAIN DEFINED TERMS.....................................................26
8.2 ACCOUNTING TERMS..........................................................30
9. INDEMNIFICATION ...........................................................30
9.1 GENERAL INDEMNITY.........................................................30
9.2 INDEMNIFICATION PROCEDURE.................................................31
10. MISCELLANEOUS.............................................................32
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10.1 NO WAIVER: CUMULATIVE REMEDIES...........................................32
10.2 AMENDMENTS, WAIVERS AND CONSENTS.........................................32
10.3 ADDRESSES FOR NOTICES....................................................32
10.4 COSTS, EXPENSES AND TAXES................................................33
10.5 BINDING EFFECT: ASSIGNMENT...............................................33
10.6 SURVIVAL OF REPRESENTATIONS AND WARRANTIES...............................33
10.7 PRIOR AGREEMENTS.........................................................34
10.8 SEVERABILITY.............................................................34
10.9 CONFIDENTIALITY..........................................................34
10.10 GOVERNING LAW...........................................................34
10.11 HEADINGS................................................................35
10.12 COUNTERPARTS............................................................35
10.13 FURTHER ASSURANCES......................................................35
10.14 WAIVER..................................................................35
10.15 SPECIFIC ENFORCEMENT....................................................35
10.16 CUMULATIVE VOTING.......................................................36
EXHIBITS
Exhibit A: Certificate of Determination of Preferences of Series A Preferred
Stock
Exhibit B: PAULA Trading Company (PTC) Agreement
Exhibit C: Management Agreement
Exhibit D: Purchase Option and Pre-Initial Public Offering Option
Exhibit E: Non-Competition Agreement
SCHEDULES
Schedule 1.5
Schedule 2.2
Schedule 2.3
Schedule 2.4
Schedule 2.6
Schedule 2.8
Schedule 2.9
Schedule 2.10
Schedule 2.12
Schedule 2.17
Schedule 2.18
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SERIES A PREFERRED STOCK PURCHASE AGREEMENT
Dated as of March 11, 1997
PAULA Insurance Company
Ladies and Gentlemen:
CAPAX MANAGEMENT & INSURANCE SERVICES, a California corporation
(the "Company"), hereby agrees with you as follows:
1. PURCHASE, SALE AND TERMS OF SHARES
1.1 THE PREFERRED SHARES.
The Company has authorized the issuance and sale of 44,252 shares of its
authorized but unissued shares of Series A Preferred Stock, no par value (the
"Preferred Shares" or the "Series A Preferred Stock"), at a purchase price of
$26.87 per share to PAULA Insurance Company (the "Purchaser"). The
designation, rights, preferences and other terms and provisions of the Series
A Preferred Stock are set forth in the Certificate of Determination attached
as EXHIBIT A hereto (the "Certificate of Determination").
1.2 THE CONVERSION SHARES.
The Company has authorized and has reserved and covenants to continue to
reserve, free of preemptive rights and other similar contractual rights of
stockholders, a sufficient number of its authorized but unissued shares of
its Class A Common Stock, no par value (the "Class A Common Stock") and the
Company's Class B Common Stock, no par value (the "Class B Common Stock" and
together with the Class A Common Stock, the "Common Stock"), to satisfy the
rights of conversion of the holders of the Preferred Shares. Any shares of
Common Stock issuable upon conversion of the Preferred Shares (and such
shares when issued) are herein referred to as the "Conversion Shares." The
Preferred Shares and the Conversion Shares are sometimes collectively
referred to as the "Shares."
1.3 PURCHASE PRICE AND CLOSING.
The Company agrees to issue and sell to the Purchaser and, in
consideration of and in express reliance upon the representations,
warranties, covenants, terms and conditions of this Agreement, the Purchaser
agrees to purchase the Preferred Shares.
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The aggregate purchase price of the Preferred Shares is $1,189,050 in
cash. The purchase price will be paid 80% at the Closing and the remaining
20%, as adjusted, following the calculation of the post-closing adjustment
described in Section 1.4 below.
The closing of the purchase and sale of the Preferred Shares to be
acquired by the Purchaser from the Company under this Agreement (the
"Closing") shall take place at the offices of the Purchaser at 10:00 a.m. on
March 11, 1997, or at such time and date thereafter as the Purchaser and the
Company may agree (the "Closing Date"). At the Closing, the Company will
deliver to the Purchaser certificates for the Preferred Shares registered in
the Purchaser's name, against delivery of a check or checks payable to the
order of the Company, or a transfer of funds to the account of the Company by
wire transfer. Notwithstanding the foregoing, the Purchaser shall be entitled
to cancel interest due on any indebtedness of the Company or its subsidiaries
to the Purchaser, but not principal thereof, in satisfaction of the portion
of the purchase price due at the Closing, to the extent of such canceled
interest.
1.4 POST-CLOSING ADJUSTMENT.
The parties agree that the aggregate purchase price to be paid by the
Purchaser set forth in Section 1.3 is an estimate of the true price agreed
upon by the parties. It is the intent of the parties that the true price be
determined by utilizing the following formula, which is based on the
Company's audited calendar year 1997 financial statements which are not
available at the time of closing:
(i) $1,189,050, minus the result of clauses (ii) - (iv) below;
(ii) $792,700; less
(iii) the actual, audited pre-tax income of the Company for calendar year
1997 according to GAAP consistently applied (if the results are a
loss, the loss will be added to, not subtracted from, $792,000);
(iv) multiplied by 0.30.
Notwithstanding the foregoing, if the actual, audited pre-tax income of
the Company for calendar year 1997 exceeds $792,000, there will be no
post-closing adjustment.
This adjustment shall be separate from, and in addition to, any adjustment
called for by Section 1.7 below.
1.5 POST-CLOSING PAYMENTS.
The final portion of the aggregate purchase price is calculated by the
following formula: (i) $237,810 minus (ii) the amount of the post-closing
adjustment plus (iii) interest on the result of (i) - (ii) from the date of
closing to the date of payment at the same interest rate as the
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indebtedness of the Company or its subsidiaries to the Purchaser. The final
portion of the aggregate purchase price will be paid following the calculation
of the post-closing adjustment first by canceling by the Purchaser of any
accrued but unpaid interest and principal of any indebtedness of the Company or
its subsidiaries to the Purchaser. Any remaining payment due will be paid by the
Purchaser's company check made payable to the Company.
In the event the post-closing adjustment exceeds $237,810, then the
Purchaser will not make any payments to the Company nor cancel any
indebtedness or interest. Rather, the Company will agree to make and issue to
the Purchaser a new note in the form attached hereto as SCHEDULE 1.5 in the
principal amount of (i) the post-closing adjustment minus (ii) $237,810.
1.6 USE OF PROCEEDS.
The Company shall use a portion of the proceeds from the sale of the
Preferred Shares to assure compliance with regulatory monetary obligations
outstanding at Closing, if any. The remainder of the proceeds shall be used
for working capital, the acquisition of insurance books of business or
insurance agencies or for investment in the Company's insurance agency
subsidiaries. No portion of the purchase price shall be directly or
indirectly paid to the Company's shareholders or bank creditors, except that
up to $300,000 of such proceeds may be used to bring the balance of the
Company's revolving credit line with Modesto Banking Company to zero for 30
days each year. Thereafter the Modesto Banking Company revolving credit line
shall not be accessed unless the Company Board of Directors approves a plan
to reduce the balance to zero when required by the Bank.
1.7 POST-CLOSING SHARE ADJUSTMENTS.
1.7.1 The parties acknowledge that the number of Shares delivered to the
Purchaser at the Closing is an estimate of the actual number of shares to
which the Purchaser is entitled. Further, the parties agree that the
Purchaser has bargained for a particular percentage of the fully-diluted
equity of the Company as of the Closing Date. Due to a number of outstanding
obligations of the Company to issue additional equity securities to parties
other than the Purchaser, as of the Closing Date, the parties agree that the
following adjustments to the number of outstanding Company Common Stock as of
the Closing Date were made prior to this calculation of the estimated number
of Preferred Shares to be delivered at closing:
1. An aggregate of 1,983 shares of Class B Common Stock are assumed to
be issued to Howard Maxwell in three annual installments; and
2. An aggregate of 655.5 shares of Class B Common Stock are assumed to be
issued to Gerald K. Takehara in five annual installments; (these shares can
be expected to be issued to parties from whom the Company acquired books of
business partially in exchange for stock on a deferred basis (1 and 2
collectively, the "Acquisition Shares");
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3. An aggregate of 4,152.5 shares of Class B Common Stock are assumed
to be issued to the following producers employed by the Company pursuant to a
grant given in 1995: Wade O. Osborne; Shayna Osborne; Pam Nelson; Richard D.
Haile; Tim N. Buzzini; Janice D. Thompson; Estell A. Jones; Carole T. Adell;
Don Barbe; Sonia Casares; Ezequiel Bondy-Villa; and Diane Jones in various
installments;
4. An aggregate of 4,647 shares of Class B Common Stock are assumed to
be issued to Howard Maxwell as incentive compensation for services rendered
to the Company in 1995, 1996, and 1997 (3 and 4 collectively, the "Bonus
Shares").
1.7.2 The number of Preferred Shares delivered at the Closing assumed
that no equity of the Company would be issued as a result of the exercise of
any other rights to purchase equity of the Company outstanding at the Closing
("Other Shares").
1.7.3 In the event that more than the number of Acquisition Shares or the
Bonus Shares are issued by the Company at the time that any portion of such
shares are due to be issued, or the Company issues any Other Shares, the
Company will be obligated to issue to the Purchaser that number of Preferred
Shares which is determined by the following formula: (i) the number of
Preferred Shares issued as Acquisition Shares and/or Bonus Shares at the time
that any portion of such shares are due to be issued which exceeds the
estimations used in Section 1.7.1 above, plus the number of Other Shares
issued, divided by (ii) 6.667. The Company agrees to amend the Certificate of
Determination, if necessary, to increase the authorized number of shares of
its Series A Preferred Stock to include the additional shares to be issued
under this Section.
1.7.4 In the event that all or any portion of the Acquisition Shares or
Bonus Shares are not issued to the parties to whom they are due on the dates
that they are due to be issued, the Purchaser will be obligated to return to
the Company that number of Preferred Shares which is determined by the
following formula: (i) the number of Acquisition Shares or Bonus Shares not
issued by the Company as planned divided by (ii) 6.667. In the event that
Acquisition Shares or Bonus Shares which were not issued when due are
ultimately issued, the adjustment made under this Section 1.7.4 will be
reversed.
1.7.5 No adjustment need be made under this Section 1.7 more often than
once per year (effective as of the 1st day of January of each year) and all
adjustments which should have otherwise been made during the pendency of such
one year period will be delayed until the end of such period.
1.7.6 In the event Other Shares are issued upon the exercise of options
to buy such securities held by Joel W. Geddes, Jr. as of the Closing Date,
the Purchaser shall be obligated to pay the Company an amount per each Share
issued to the Purchaser as an adjustment based on the Other Shares issued to
Mr. Geddes. The Purchaser's payment per each Share issued to the Purchaser
will equal the exercise price paid by Mr. Geddes per Other Share. In lieu of
paying such amount, the Purchaser may, in its sole discretion, forfeit the
Shares to be issued to the
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Purchaser as a result of the adjustment set forth in this Section 1.7 resulting
from the issuance of Other Shares to Mr. Geddes upon exercise of his options.
1.7.7 This adjustment shall be separate from, and in addition to, any
adjustment called for by Section 1.4 above.
1.7.8 The parties agree that the amount of Shares to be issued to the
Purchaser shall be adjusted post-closing in the event certain contingent
liabilities are actually incurred by the Company. If the Company or its
subsidiaries makes payments to any third party as a result of the following:
A. Payment to the Internal Revenue Service or any past or present
participant in the CAPAX Employee Stock Ownership Plan (or its predecessors)
arising out of the audit of that Plan's 1994 activities;
B. Payments to Nordstrom & Tanner Insurance Services, or its
shareholders, in amounts in excess of those set forth in SCHEDULE 2.6 hereof;
then
the Company shall issue additional Shares to the Purchaser in an amount
equal to the amount of such payments, multiplied by 0.15, divided by $26.87.
This adjustment will be separate from, and in addition to, any adjustment
called for by Sections 1.4 and 1.7 above. The Company agrees to amend the
Certificate of Determination, if necessary, to increase the authorized number
of shares of its Series A Preferred Stock to include the additional shares to
be issued under this Section.
1.8 BUY-SELL AGREEMENT.
The Shares, and the Purchaser, shall be subject to all of the obligations
of a holder of Common Stock under the Buy-Sell Agreement except the
provisions of Section 10. Without admitting that the Purchaser is bound by
any prior version of the Buy-Sell Agreement, the parties specifically agree
that the Purchaser is not subject to Sections 2(g)(5), 2(g)(6), 2(h)(5),
2(h)(6), 2(i)(4) or 2(i)(5) of the June 23, 1998 restatement of the Buy-Sell
Agreement.
1.9 RIGHT OF FIRST REFUSAL.
Any transfer, sale, assignment, hypothecation, encumbrance, or alienation
of any of the Shares other than according to the terms of this Agreement or
the Related Agreements, shall be void and shall not transfer any right,
title, or interest in or to the Shares, or any of them, to the purported
transferee, buyer, assignee, pledgee, or encumbrancer.
Purchaser shall be permitted to treat the Shares as an admitted asset for
insurance regulatory purposes, giving certain rights of encumbrance to the
California Commissioner of Insurance on behalf of the Purchasers'
policyholders.
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In the event the Purchaser receives a BONA FIDE offer to purchase the
Shares from an unaffiliated third party, the Purchaser shall be free to sell
to such third party so long as the Purchaser first offers the Company or its
designees (who shall be limited to the Company and other Company
shareholders), the right to match such offer. The Purchaser shall provide the
Company with written notice of any such offer and the terms of the offer
including the identity of the third party. The Company and its designees
shall have 60 days from receipt of such notice to notify the Purchaser that
the Company, or its designees, will match the price and payment terms of the
offer. If the Purchaser does not receive an exercise notice(s) that covers
ALL of the Shares so offered for sale within the 60 day period, it will be
free to sell all the Shares so offered for sale to the third party. Once so
sold, the Shares will automatically convert into Common Stock. No subsequent
sales of the Shares contemplated by a buyer who acquired the Shares pursuant
to this Section 1.9 shall be subject to this right of first refusal or the
procedures contained in this Section 1.9. The Purchaser shall have no right
to sell the Shares to any party (i) licensed to sell insurance in the State
of California, or (ii) affiliated with any entity so licensed.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to the Purchaser as of the
Closing Date as follows:
2.1 ORGANIZATION. STANDING AND POWER OF THE COMPANY.
Each of the Company and the Subsidiaries is a corporation duly organized,
validly existing and in good standing under the laws of its jurisdiction of
incorporation. Each of the Company and the Subsidiaries has all requisite
power and authority to own, lease and operate its properties and assets and
to conduct its business as now being conducted and is duly qualified to do
business in good standing in those foreign jurisdictions in which such
qualification is required.
2.2 AUTHORITY; ENFORCEABILITY; NO CONFLICT.
The Company has all requisite corporate power and authority to enter into
this Agreement and each Related Agreement to which it is a party, to issue
and sell the Shares, and to carry out its obligations hereunder and under
each Related Agreement to which it is a party.
The execution, delivery and performance of this Agreement and each
Related Agreement to which it is a party by the Company and the issuance and
sale of.the Shares by the Company, and the contingent sale of the Company
pursuant to the execution and delivery of the Option (as defined), have been
duly and validly authorized by all requisite corporate and Shareholder
proceedings on the part of the Company. This Agreement and each Related
Agreement to which it is a party when executed and delivered by the Company
is a valid and binding obligation of the Company, enforceable against the
Company in accordance with its terms, except that (i) such enforcement may be
subject to bankruptcy, insolvency, reorganization, moratorium,
rehabilitation, liquidation, conservatorship, receivership or other similar
laws now or hereafter in effect relating to creditors' rights generally and
(ii) the remedy of specific performance and
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injunctive and other forms of equitable relief may be subject to equitable
defenses and to the discretion of the court before which any proceeding
therefor may be brought.
Except as set forth on SCHEDULE 2.2, the execution and delivery of this
Agreement and each Related Agreement to which it is a party by the Company
does not, and the consummation by the Company of the transactions
contemplated hereby and thereby will not result in or constitute: (a) a
default, breach or violation of or under the Articles of Incorporation or the
By-Laws, (b) a default, breach or violation of or under any mortgage, deed of
trust, indenture, note, bond, license, lease agreement or other instrument or
obligation to which the Company or any Subsidiary is a party or by which any
of their respective properties or assets are bound, (c) a violation of any
statute, rule, regulation, order, judgment or decree of any court, public
body or authority by which the Company, any Subsidiary or any of their
respective properties or assets are bound, (d) an event which (with notice or
lapse of time or both) would permit any Person to terminate, accelerate the
performance required by, or accelerate the maturity of any indebtedness or
obligation of the Company or any Subsidiary under any agreement or commitment
to which the Company or any Subsidiary is a party or by which the Company or
any Subsidiary is bound or by which any of their respective properties or
assets are bound, (e) the creation or imposition of any lien, charge or
encumbrance on any property of the Company or any Subsidiary under any
agreement or commitment to which the Company or any Subsidiary is a party or
by which the Company or any Subsidiary is bound or by which any of their
respective properties or assets are bound, or (f) an event which would
require any consent under any agreement to which the Company or any
Subsidiary is a party or by which the Company or any Subsidiary is bound or
by which any of their respective properties or assets are bound.
2.3 CAPITALIZATION.
The authorized capital stock of the Company consists of (a) 1,000,000
shares of Class A Common Stock, of which 174,408 shares are outstanding,
44,252 are reserved for issuance upon conversion of the Series A Preferred
Stock, (b) 1,000,000 shares of Class B Common Stock, of which 64,913 shares
are outstanding and (c) 200,000 shares of Preferred Stock, no par value, of
which 44,252 have been designated as Series A Preferred Stock, none of which
are outstanding. All of the outstanding shares of the Common Stock have been
duly authorized and validly issued, and are fully paid and non-assessable.
Except for the options issued or to be issued under the Stock Option Plan or
as provided herein or in any of the Related Agreements, the obligations of
the Company pursuant to the Asset Purchase Agreement dated March 16, 1994
with Takehara & Associates and the obligations of the Company pursuant to the
letter of agreement between the Company and Nordstrom & Tanner Insurance
Brokers of Northern California dated March 29, 1994 and the rights of Howard
Maxwell to obtain up to $150,000 of Class B Common Stock, as incentive
compensation, there are no outstanding preemptive, conversion or other
rights, options or warrants granted or issued by or binding upon the Company
for the purchase or acquisition by any other Person of any shares of capital
stock of the Company or any other securities convertible into, exchangeable
for or evidencing the right to subscribe for any shares of such capital
stock. Except for the Company's obligations under the ESOP, the June 23, 1988
Restatement of CAPAX Management 8C Insurance Services Stock Purchase
Agreement of August 21, 1986 (the "Buy-Sell Agreement") and the Certificate
of Determination, the Company
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is not subject to any obligation (contingent or otherwise) to repurchase or
otherwise acquire or retire any shares of its capital stock or any
convertible securities, rights or options of the type described in the
preceding sentence.
Except as set forth in the Buy-Sell Agreement, the Company is not a party
to, and it has no Knowledge of, any agreement restricting the voting or
transfer of any shares of the capital stock of the Company.
Except as set forth on SCHEDULE 2.3, the offer and sale of all capital
stock, convertible securities, rights or options of the Company issued prior
to the Closing Date complied with or were exempt from all applicable federal
and state securities laws and no stockholder has a right of rescission or
damages with respect thereto.
2.4 SUBSIDIARIES.
SCHEDULE 2.4 sets forth each Subsidiary showing the jurisdiction of its
incorporation or organization and showing the percentage of each Person's
ownership of the outstanding stock or other interests of such Subsidiary. All
of the outstanding shares of capital stock of each Subsidiary have been duly
authorized and validly issued, and are fully paid and non-assessable. There
are no outstanding preemptive, conversion or other rights, options, warrants
or agreements granted or issued by or binding upon any Subsidiary for the
purchase or acquisition of any shares of capital stock of any Subsidiary or
any other securities convertible into, exchangeable for or evidencing the
right to subscribe for any shares of such capital stock. Neither the Company
nor any Subsidiary is subject to any obligation (contingent or otherwise) to
repurchase or otherwise acquire or retire any shares of the capital stock of
any Subsidiary or any convertible securities, rights or options of the type
described in the preceding sentence. Neither the Company nor any Subsidiary
is a party to, nor has any Knowledge of, any agreement restricting the voting
or transfer of any shares of the capital stock of any Subsidiary.
2.5 STATUS OF SHARES.
The Preferred Shares to be issued at the Closing have been duly
authorized by all necessary corporate and shareholder action on the part of
the Company. When issued and paid for as provided in this Agreement, the
Preferred Shares will be validly issued and outstanding, fully paid and
nonassessable, and the issuance of such Preferred Shares is not and will not
be subject to preemptive or other similar contractual rights of any other
stockholder of the Company. The Conversion Shares have been duly authorized
by all necessary corporate action on the part of the Company and have been
duly reserved for issuance. When the Conversion Shares are issued such shares
will be validly issued and outstanding, fully paid and nonassessable and the
issuance of such shares will not be subject to preemptive or other similar
contractual rights of any other stockholder of the Company.
2.6 FINANCIAL STATEMENTS.
Attached here as SCHEDULE 2.6 are the consolidated and consolidating
balance sheets of the Company and the Subsidiaries as at December 31, 1996
and 1995 and the related
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consolidated and consolidating income statements and statements of cash flows
and changes in stockholders' equity of the Company and the Subsidiaries for
the fiscal years then ended. All such financial statements are complete and
correct and fairly present the financial condition of the Company and the
Subsidiaries at such dates and the results of the operations of the Company
and the Subsidiaries for the periods covered by such statements, all in
accordance with GAAP consistently applied. In the event that at any time
after the Closing Date the Company shall be informed by its accountants that
it is necessary or appropriate to adjust its financial statements to change
the manner in which it amortizes its goodwill and/or expirations assets
relating to mergers and acquisitions activities closing prior to the Closing
Date, the Company represents that it will adjust such financial statements by
restating them as of December 31, 1996 and will not recognize the adjustment
in any period following the Closing Date. No such adjustment will cause any
change in the purchase price or post-closing adjustments herein or constitute
a breach of any representation and/or warranty under this Agreement.
2.7 LIABILITIES.
Except as set forth in SCHEDULE 2.6, neither the Company nor any
Subsidiary has any material liabilities, obligations, claims or losses
(whether liquidated or unliquidated, secured or unsecured, absolute, accrued,
contingent or otherwise) that would be required to be disclosed on a balance
sheet of the Company or any Subsidiary (including the notes thereto) in
conformity with GAAP.
2.8 INDEBTEDNESS.
SCHEDULE 2.8 sets forth all outstanding secured and unsecured
Indebtedness of the Company or any Subsidiary, or for which the Company or
any Subsidiary has commitments, immediately after the Closing Date. Neither
the Company nor any Subsidiary is in default with respect to any
Indebtedness, except as set forth on SCHEDULE 2.8.
2.9 TITLE TO ASSETS.
Each of the Company and the Subsidiaries has good and marketable title to
all of its real and personal property reflected in SCHEDULE 2.6, free of any
mortgages, pledges, charges, liens, security interests or other encumbrances,
except for Permitted Liens and those indicated on SCHEDULE 2.9. Each of the
Company and the Subsidiaries enjoys peaceful and undisturbed possession under
all leases under which it is operating, and all said leases are valid and
subsisting and in full force and effect.
2.10 ACTIONS PENDING.
Except as set forth in SCHEDULE 2.10, there is no action, suit, claim,
investigation or proceeding pending or, to the Knowledge of the Company,
threatened against the Company or any Subsidiary which questions the validity
of this Agreement or any of the Related Agreements or any action taken or to
be taken pursuant hereto or thereto. There is no action, suit, claim,
investigation or proceeding pending or, to the Knowledge of the Company,
threatened, against or involving the Company, any Subsidiary or any of their
respective properties or assets. There are
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no outstanding orders, judgments, injunctions, awards or decrees of any
court, arbitrator or governmental or regulatory body against the Company or
any Subsidiary.
2.11 COMPLIANCE WITH LAW.
In the Company's Knowledge, the business of the Company and the
Subsidiaries has been and is presently being conducted so as to comply with
all applicable federal, state, and local governmental laws, rules,
regulations and ordinances. Each of the Company and the Subsidiaries has all
franchises, permits, licenses, consents and other governmental or regulatory
authorizations and approvals necessary for the conduct of its business as now
being conducted by it.
2.12 TAXES.
Except as set forth in SCHEDULE 2.12, each of the Company and the
Subsidiaries has accurately prepared and timely filed all federal, state and
other tax returns required by law to be filed by it, has paid or made
provisions for the payment of all taxes shown to be due and all additional
assessments, and adequate provisions have been and are reflected in the
financial statements of the Company and the Subsidiaries for all current
taxes and other charges to which the Company or any Subsidiary is subject and
which are not currently due and payable. None of the federal income tax
returns of the Company or any Subsidiary for the years subsequent to December
31, 1993 have been audited by the Internal Revenue Service. The Company has
no Knowledge of any additional assessments, adjustments or contingent tax
liability (whether federal or state) pending or threatened against the
Company or any Subsidiary for any period, nor of any basis for any such
assessment, adjustment or contingency.
2.13 NO MATERIAL ADVERSE CHANGE.
Since December 31, 1996, (a) there has been no material adverse change in
the business, assets, operations, affairs, financial projections or financial
condition of the Company or any Subsidiary; and (b) to the Company's
Knowledge neither the business, financial condition, operation, financial
projections or affairs of the Company, any Subsidiary nor any of their
respective properties or assets have been adversely affected in any material
respect as the result of any legislative or regulatory change, any revocation
or change in any franchise, permit, license or right to do business, or any
other event or occurrence, whether or not insured against.
2.14 CERTAIN FEES.
No broker's, finder's or financial advisory fees or commissions will be
payable by the Company or any Subsidiary with respect to the transactions
contemplated by this Agreement and the Related Agreements.
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2.15 DISCLOSURE.
Neither this Agreement or the Schedules hereto nor any of the Related
Agreements or any other document, certificate or instrument furnished to the
Purchaser by or on behalf of the Company or any Subsidiary in connection with
the transactions contemplated by this Agreement or any of the Related
Agreements, contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements contained
herein or therein not misleading.
2.16 BOOKS AND RECORDS.
The records and documents of the Company and the Subsidiaries accurately
reflect in all material respects information relating to the business of the
Company and the Subsidiaries, the location and collection of its assets, and
the nature of all material transactions giving rise to the obligations or
accounts receivable of the Company or any Subsidiary.
2.17 TRANSACTIONS WITH AFFILIATES.
Except as set forth on SCHEDULE 2,17, there are no loans, leases,
agreements, contracts, royalty agreements, management contracts or
arrangements or other continuing transactions which exceed $15,000 per year
in payments between the parties between (a) the Company, any Subsidiary or
any of their respective customers or suppliers on the one hand, and (b) any
officer, consultant or director of the Company, any Subsidiary or any Person
owning any capital stock of the Company or any Subsidiary or any member of
the immediate family of such officer, consultant director or stockholder or
any corporation or other entity controlled by such officer, consultant,
director or stockholder, or a member of the immediate family of such officer,
consultant, director or stockholder on the other hand.
2.18 ABSENCE OF CERTAIN DEVELOPMENTS.
Except as provided in SCHEDULE 2.18, since December 31, 1996, neither the
Company nor any Subsidiary has:
A. issued any stock, bonds or other corporate securities or any
rights, options or warrants with respect thereto;
B. borrowed any amount or incurred or become subject to any
liabilities (absolute or contingent) except current liabilities incurred in
the ordinary course of business which are comparable in nature and amount to
the current liabilities incurred in the ordinary course of business during
the comparable portion of its prior fiscal year, as adjusted to reflect the
current nature and volume of the Company's or such Subsidiary's business;
C. discharged or satisfied any lien or encumbrance or paid any
obligation or liability (absolute or contingent), other than current
liabilities paid in the ordinary course of business;
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D. declared or made any payment or distribution of cash or other
property to stockholders with respect to its stock, or purchased or redeemed,
or made any agreements so to purchase or redeem, any shares of its capital
stock;
E. mortgaged or pledged any of its assets, tangible or intangible, or
subjected them to any liens, charge or other encumbrance, except Permitted
Liens;
F. sold, assigned or transferred any other material tangible assets,
or canceled any material debts or claims, except in the ordinary course of
business;
G. sold, assigned or transferred any patents, patent rights,
trademarks, trade names, copyrights, trade secrets or other intangible assets
or intellectual property rights, or disclosed any proprietary confidential
information to any person except to customers in the ordinary course of
business or to the Purchaser or their representatives;
H. suffered any substantial losses or waived any rights of material
value, whether or not in the ordinary course of business, or suffered the
loss of any material amount of prospective business;
I. made any changes in employee compensation except in the ordinary
course of business and consistent with past practices;
J. made capital expenditures or commitments therefor that aggregate in
excess of $50,000;
K. entered into any other transaction other than in the ordinary
course of business, or entered into any other material transaction, whether
or not in the ordinary course of business;
L. made charitable contributions or pledges in excess of $25,000;
M. suffered any material damage, destruction or casualty loss, whether
or not covered by insurance;
N. experienced any material problems with labor or management in
connection with the terms and conditions of their employment; or
O. effected any two or more events of the foregoing kind which in the
aggregate would be material to the Company or such Subsidiary.
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2.19 ABSENCE OF OWNERSHIP RIGHTS IN BOOK OF BUSINESS.
Other than the rights held by the shareholders of Gaddy, Ward & Company
Insurance Brokers in its book of business and the rights of John Ertell and
Cam Buck in their books of business, (i) no person has any right in or to
commissions or fees due to the Company or any of its subsidiaries from the
sale of insurance or management services recorded by the Company during the
year ended December 31, 1996 and (ii) no person has any right to any payments
in the event of the sale of any insurance or management services book of
business owned by the Company or its subsidiaries due to an ownership
interest in such books of business.
3. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser hereby represents and warrants to the Company as of the
Closing Date as follows:
3.1 ORGANIZATION AND STANDING OF THE PURCHASER.
The Purchaser is a corporation duly incorporated, validly existing and in
good standing under the laws of the jurisdiction of its incorporation.
3.2 AUTHORITY; ENFORCEABILITY; NO CONFLICT.
The Purchaser has all requisite corporate power and authority to enter
into this Agreement and each Related Agreement to which it is a party and to
carry out its obligations hereunder and thereunder. The execution, delivery
and performance of this Agreement and each Related Agreement to which it is a
party by the Purchaser have been duly and validly authorized by all requisite
corporate or partnership proceedings on the part of the Purchaser.
This Agreement and each Related Agreement to which it is a party when
executed and delivered by the Purchaser is a valid and binding obligation of
the Purchaser, enforceable against it in accordance with its terms, except
that (i) such enforcement may be subject to bankruptcy, insolvency,
reorganization, moratorium, rehabilitation, liquidation, conservatorship,
receivership or other similar laws now or hereafter in effect relating to
creditors' rights generally and (ii) the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to equitable
defenses and to the discretion of the court before which any proceeding
therefore may be brought.
The execution and delivery of this Agreement and each Related Agreement
to which it is a party by the Purchaser does not, and consummation by the
Purchaser of the transactions contemplated hereby will not, result in or
constitute (a) a default, breach or violation of or under the organizational
documents of the Purchaser, (b) a default, breach or violation of or under
any mortgage, deed of trust, indenture, note, bond, license, lease agreement
or other instrument or obligation to which the Purchaser is a party or by
which any of its properties or assets are bound,
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except for any defaults, breaches or violations which would not, individually
or in the aggregate, have a material adverse effect on the Purchaser or
prevent or materially delay the consummation by the Purchaser of the
transactions contemplated hereby, or (c) a violation of any statute, rule,
regulation, order, judgment or decree of any court, public body or authority,
except for any violations which would not, individually or in the aggregate,
have a material adverse effect on the Purchaser or prevent or materially
delay the consummation by the Purchaser of the transactions contemplated
hereby.
3.3 ACQUISITION FOR INVESTMENT.
The Purchaser is an "accredited investor" as defined in Regulation D
under the Securities Act, and is acquiring the Preferred Shares solely for
its own account for the purpose of investment and not with a view to or for
sale in connection with any distribution thereof, and it has no present
intention or plan to effect any distribution of the Preferred Shares. The
Purchaser acknowledges that it is able to bear the financial risks associated
with an investment in the Preferred Shares and that it has been given full
access to such records of the Company and the Subsidiaries and to the
officers of the Company and the Subsidiaries as it has deemed necessary and
appropriate to conducting its due diligence investigation. The Preferred
Shares will bear a legend to the following effect:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended, or the laws of the
State of California or elsewhere, and may not be sold or transferred except
in compliance with that Act and such laws."
3.4 GOVERNMENTAL APPROVALS.
No authorization, consent, approval, license or exemption of or
registration with any court or governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, is or will be
necessary for, or in connection with, the execution, delivery and performance
by the Purchaser of this Agreement and each Related Agreement to which it is
a party.
4. CONDITIONS TO PURCHASER'S OBLIGATIONS
The obligation of the Purchaser to purchase and pay for the Preferred
Shares to be purchased by it at the Closing is subject to the following
conditions:
4.1 REPRESENTATIONS AND WARRANTIES.
Each of the representations and warranties set forth in Section 2 hereof
shall be true, accurate and correct at the Closing Date with the same effect
as though made at and as of such time.
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4.2 CORPORATE AND SHAREHOLDER PROCEEDINGS.
The Purchaser shall have received a copy of the resolutions of the Board
of Directors and the Shareholders of the Company authorizing (a) the approval
of the Certificate of Determination, (b) the election to the Board of
Directors of Jeffrey A. Snider, (c) the execution, delivery and performance
by the Company of this Agreement and each Related Agreement (including, if
exercised by PAULA, the Option) to which it is a party, (d) the issuance of
the Preferred Shares and (e) the execution, delivery and performance by the
Company of all other agreements or matters contemplated hereby or executed in
connection herewith, certified by the Secretary or an Assistant Secretary of
the Company on the Closing Date.
4.3 OFFICER'S CERTIFICATE.
The Purchaser shall have received a certificate of the President and
Treasurer of the Company, dated the Closing Date, which shall certify that
the representations and warranties contained in Section 2 hereof are true and
correct as of the Closing Date and that all actions required to be taken by
the Company prior to or at the Closing have been taken by the Company as of
the Closing Date.
4.4 NO PROCEEDINGS OR LITIGATION.
No action, suit or proceeding before any arbitrator or any governmental
authority shall have been commenced, no investigation by any governmental
authority shall have been threatened, against the Company or any Subsidiary,
or any of the officers or directors of the Company or any Subsidiary seeking
to restrain, prevent or change the transactions contemplated by this
Agreement, and each Related Agreement, or seeking damages in connection with
such transactions.
4.5 CERTIFICATE OF DETERMINATION.
The Certificate of Determination of the Series A Preferred Stock of the
Company, setting forth, without limitation, the designations, preferences,
powers, qualifications, special or relative rights and privileges of the
Series A Preferred Stock (the "Certificate of Determination"), in the form of
EXHIBIT A, shall have been filed with the Secretary of State of California.
4.6 PAULA TRADING COMPANY AGREEMENT.
The Purchaser's parent, PAULA, and the Company shall have entered into
the PAULA Trading Company Agreement (as amended from time to time, the "PTC
Agreement"), substantially in the form of EXHIBIT B. The PTC Agreement will
include, among other things, compensation to the Company for mergers and
acquisition referrals and new product development to be provided to PAULA and
its affiliates.
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4.7 MANAGEMENT CONSULTANT AGREEMENT.
The Purchaser's parent, PAULA, and the Company shall have entered into
the Management Agreement, substantially in the form of EXHIBIT C.
4.8 COMPLIANCE WITH THIS AGREEMENT AND RELATED AGREEMENTS.
The Company shall have performed, satisfied and complied in all material
respects with all covenants, agreements and conditions required by this
Agreement or any Related Agreement to be performed, satisfied or complied
with by the Company at or prior to the Closing.
4.9 PROCEEDINGS SATISFACTORY.
All proceedings taken in connection with the issuance and sale of the
Preferred Shares and all documents and papers relating thereto shall be
satisfactory in form and substance to the Purchaser. The Purchaser shall have
received copies of such documents and papers as the Purchaser may reasonably
request in connection with this Agreement and the Related Agreements.
4.10 OPTION.
Each of the Company and PAULA shall have executed and delivered the
Purchase Option (the "Option") substantially in the form of EXHIBIT D hereto.
4.11 NON-COMPETITION AGREEMENT.
Each of the Company and its Subsidiaries and PAULA and its subsidiary Pan
American Underwriters, Inc. shall have executed and delivered the
Non-Competition Agreement substantially in the form of EXHIBIT E hereto.
4.12 MINISTERIAL ITEMS.
The Company shall have delivered to the Purchaser evidence reasonable
satisfactory to the Purchaser's counsel of the Company's completion of the
following items:
A. cancellation of 8,140 shares of the Company's Common Stock in
satisfaction of all indebtedness owed by Thomas Hobday to the Company;
B. execution of settlement documents and delivery by Nordstrom &
Tanner Insurance Brokers of Northern California ("Nordstrom") of a release in
favor of the Company with respect to outstanding claims arising from the
Nordstrom acquisition;
C. termination of the UCC Security Interest filing in favor of the
Aetna Insurance Company;
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D. waiver executed by the requisite parties to the Buy-Sell Agreement
to the issuance of the Preferred Shares, and if necessary, the Conversion
Shares and to the rights granted to the Purchaser under the Buy-Sell
Agreement by the terms of Article 7 hereof;
E. copies of the executed documentation of the renewal of the
Company's $300,000 line of credit with the Bank; and
F. No shares of Common Stock offered to the Company by holders thereof
pursuant to the Buy-Sell Agreement or otherwise have been repurchased by the
Company since December 31, 1995 (except for 6,000 shares of Class A Common
Stock and 2,140 shares of Class B Common Stock repurchased from Thomas Hobday
in exchange for cancellation of indebtedness) and no agreements to repurchase
such shares have been entered into by the Company or any of its subsidiaries.
5. AFFIRMATIVE COVENANTS OF THE COMPANY
The Company covenants and agrees that on and after the Closing Date it
will:
5.1 INSPECTION RIGHTS.
Permit during normal business hours, upon reasonable request and
reasonable notice, the Purchaser or any employees, agents or representatives
thereof, to examine and make reasonable copies of and extracts from the
records and books of account of, and visit and inspect the properties,
assets, operations and business of the Company and any Subsidiary, and to
discuss the affairs, finances and accounts of the Company and any Subsidiary
with any of its officers, consultants, directors or Key Employees.
5.2 BUDGETS APPROVAL.
Prior to the commencement of each fiscal year, prepare and submit to, and
obtain in respect thereof the approval of the Company's Board of Directors, a
business plan and quarterly operating budget in detail for each fiscal year,
quarterly operating expenses and profit and loss projections, quarterly
balance sheet projections, quarterly cash flow projections and a capital
expenditure budget for the fiscal year.
5.3 FINANCINGS.
Promptly, fully and in detail, inform all of the members of the Board of
Directors of any discussions, offers or contracts relating to possible
financings of any material nature for the Company or any Subsidiary, whether
initiated by the Company, any Subsidiary or any other Person and cause any
such financing to be approved by at least two-thirds of the members of the
Board of Directors.
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5.4 BY-LAWS AND INDEMNIFICATION.
The Company shall at all times maintain provisions in its By-laws or
Articles of Incorporation indemnifying all officers and directors against
liability to the maximum extent permitted under the laws of the state of its
incorporation.
5.5 CORPORATE EXISTENCE.
Maintain, and cause each of its Subsidiaries, to maintain their
respective corporate existence, intellectual property rights, other rights
and franchises in full force and effect to the extent appropriate in
accordance with good business practice.
5.6 EX-OFFICIO NON-VOTING BOARD MEMBER; EXPENSES OF DIRECTORS.
In addition to any Board member that the holders of the Shares may be
entitled to elect voting separately as a class, the Purchaser shall be
entitled to nominate and cause to be admitted to the Company's Board of
Directors one "ex-officio" non-voting member of the Board of Directors. Such
non-voting member shall be entitled to all rights and privileges of a full
voting member of the Board, excepting the right to vote. Notwithstanding the
foregoing, in the absence of the voting member of the Board elected by the
holders of the Shares voting separately as a class, the ex-officio member
shall be entitled to exercise the voting proxy of such absent voting member
to the full extent permitted under applicable law.
Promptly reimburse in full each director and ex-officio non-voting
director of the Company who is not an officer or employee of the Company for
all of his reasonable out-of-pocket expenses incurred in attending each
meeting of the Board of Directors or any committee thereof within a
reasonable time following presentment of customary documentation evidencing
such expenditures.
5.7 COMPLIANCE WITH LAWS.
Comply, and cause each Subsidiary to comply, with all applicable laws,
rules, regulations and orders, noncompliance with which could have a material
adverse effect on its business, assets, operations or condition, financial or
otherwise.
5.8 KEEPING OF RECORDS AND BOOKS OF ACCOUNT.
Keep, and cause each Subsidiary to keep, adequate records and books of
account, in which complete entries will be made in accordance with GAAP
consistently applied, reflecting all financial transactions of the Company
and such Subsidiary, and in which, for each fiscal year, all proper reserves
for depreciation, depletion, obsolescence, amortization, taxes, bad debts and
other purposes in connection with its business shall be made.
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5.9 REPORTING REQUIREMENTS.
Furnish the following to the Purchaser:
A. QUARTERLY REPORTS: as soon as available and in any event within 45
days after the end of each of the first three fiscal quarters of the Company,
consolidated and consolidating balance sheets of the Company and the
Subsidiaries as of the end of such period and consolidated and consolidating
statements of income and statements of cash flows and changes in
stockholders' equity of the Company and the Subsidiaries for such period and
for the period commencing at the end of the previous fiscal year and ending
with the end of such period, setting forth in each case in comparative form
the corresponding figures for the corresponding period of the preceding
fiscal year, and including comparisons to the budget or business plan and an
analysis of the variances from the budget or plan, prepared in accordance
with GAAP consistently applied;
B. ANNUAL REPORTS: as soon as available and in any event within 90
days after the end of each fiscal year of the Company, a copy of the annual
audit report (including all notes thereto) for such year for the Company and
the Subsidiaries, including therein consolidated and consolidating balance
sheets of the Company and the Subsidiaries as of the end of such fiscal year
and consolidated and consolidating statements of income and statements of
cash flows and changes in stockholders' equity of the Company and the
Subsidiaries for such fiscal year, setting forth in each case in comparative
form the corresponding figures for the preceding fiscal year, all such
consolidated statements to be duly certified by the Chief Financial Officer
of the Company-and an independent public accountant of recognized national
standing approved by the Audit Committee;
C. REPORTS AND OTHER INFORMATION: within 10 days after receipt,
publication, commencement or occurrence, copies of all consulting reports,
management reports and notices of all material actions made available to any
director of the Company, in his capacity as a director, such information as
the Company shall make available to any of its stockholders, and such other
information as the Purchaser shall reasonably request; and
D. OFFICER'S CERTIFICATE: as soon as possible, and in any event within
30 days, after the end of a fiscal quarter, a certificate executed by a duly
authorized officer of the Company representing as to the compliance of the
Company with the provisions of Section 6.
E. COMPLIANCE. The requirements of this Section 5.9 shall be fulfilled
by delivery of the subject items to the Series A Director and/or otherwise
directly to the Purchaser.
5.10 REPORTS TO DIRECTORS.
Furnish the following to all directors of the Company:
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A. ACCOUNTANT'S LETTERS: within 10 days after receipt, copies of all
accountant's letters, reviews and reports to management; and
B. NOTICE OF ADVERSE CHANGES: promptly after the occurrence thereof
and in any event within 10 days after each occurrence, notice of any default
under any bank credit agreement or any other material agreement; or any
material litigation, proceedings, suits or investigations affecting the
Company or any Subsidiary; or any material adverse change in the business,
assets, operations or condition of the Company or any Subsidiary.
5.11 MAINTENANCE OF FINANCIAL STRENGTH.
At all times maintain such financial strength and liquidity so as to
permit the Company and each of its Subsidiaries to maintain adequate levels
of professional errors and omissions insurance for its operations and to
continue to pay their respective debts as they become due.
5.12 MAINTENANCE OF ADEQUATE ERRORS K. OMISSIONS / DIRECTORS & OFFICERS
INSURANCE.
Maintain generally acceptable levels of professional errors & omissions
insurance with nationally recognized carriers specializing in such coverage
with A.M. Best ratings of B+ or better for each operating Subsidiary of the
Company. Maintain generally acceptable levels of directors and officers
insurance for the Company with nationally recognized carriers specializing in
such coverage with A.M. Best ratings of B+ or better. The Company shall
maintain no less than $1,000,000 of DAO cover with a retention or a
deductible not to exceed $100,000. E
5.13 CREATION AND MAINTENANCE OF COMPENSATION COMMITTEE.
So long as any of the Preferred Shares remain outstanding, the Board of
Directors of the Company will maintain a committee, to be known as the
Compensation Committee, to which it will delegate the approval of all
compensation arrangements among the Company and the Subsidiaries on the one
hand, and Key Employees on the other hand. The Compensation Committee will
consist of three members, two of which will be non-employee members of the
Board of Directors and the other member will be the Chief Executive Officer
of the Company. For at least the first two years following the Closing Date,
one of the two independent director members of the Committee will be Mr.
Jeffrey A. Snider. A majority of the Committee must approve all compensation
arrangements, including year-end and starting bonuses. The non-employee
director members of the Committee will be solely responsible for approving
compensation arrangements involving the Chief Executive Officer, including
year-end and starting bonuses.
5.14 SUBMISSION OF OPTION TO SHAREHOLDERS FOR APPROVAL.
Within 60 days of the Closing, the Company will submit the Option to the
Company's shareholders for their approval. Such submission will be done in
accordance with applicable California law, and with respect to the approval
of the Option by the Company's ESOP,
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applicable Federal law. The Company will fully support the approval of the
Option by its shareholders.
6. NEGATIVE COVENANTS OF THE COMPANY
The Company covenants and agrees that on and after the Closing Date it
will not, without the prior written approval of the Purchaser (which will not
be unreasonably withheld or delayed):
6.1 DEALINGS WITH AFFILIATES.
Enter into any material transaction (other than the repurchase of shares
of Common Stock in compliance with the Company's obligations under the ESOP),
including, without limitation, any real property leases, any loans or
extensions of credit, release of guarantee or consulting agreement with any
Affiliate.
6.2 COMPENSATION TO OFFICERS.
Enter into, amend, modify or waive in any material respect any
employment, benefit or compensation arrangement with any Key Employee, or pay
to any Key Employee or officer compensation (including salary and bonus) in
excess of that provided in any employment agreement as in effect in the
Closing Date. Except as approved by the Purchaser, pay a bonus to any of the
foregoing persons (in cash or in Common Stock) who are also shareholders of
the Company or any Subsidiary which is not approved by the Compensation
Committee of the Company's Board of Directors.
6.3 MAINTENANCE OF OWNERSHIP OF SUBSIDIARIES.
Sell or otherwise dispose of any shares of capital stock of any
Subsidiary, except to a wholly-owned Subsidiary, or permit any Subsidiary to
issue, sell or otherwise dispose of any shares or rights to acquire any of
its capital stock or the capital stock of any Subsidiary, except to the
Company or a wholly-owned Subsidiary; provided, however, that the Company may
liquidate, merge or consolidate any Subsidiary into or with itself, provided
that the Company is the surviving entity, or into or with a wholly-owned
Subsidiary, or the Company may sell all or a portion of any Subsidiary to the
Company or a wholly-owned Subsidiary.
6.4 CONDUCT OF BUSINESS.
Engage, or permit any Subsidiary to engage, in any business other than
the business engaged in by the Company or any Subsidiary on the date hereof
and any businesses or activities similar or related thereto.
6.5 RESTRICTIONS ON INDEBTEDNESS.
Create, incur or assume, or permit any of its Subsidiaries to create,
incur or assume, any Indebtedness if, after giving effect to such creation,
incurrence or assumption, the Leverage Ratio would exceed .50 to 1.00.
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6.6 ASSUMPTIONS OR GUARANTIES OF INDEBTEDNESS OF OTHER PERSONS.
Assume, guarantee, endorse or otherwise become directly or contingently
liable on, or permit any Subsidiary to assume, guarantee, endorse or
otherwise become directly or contingently liable on (including, without
limitation, liability by way of agreement, contingent or otherwise, to
purchase, to provide funds for payment, to supply funds to or otherwise
invest in the debtor or otherwise to assure the creditor against loss) any
Indebtedness of any Person other than the Company, any Subsidiary or the
ESOP, except for guaranties by endorsement of negotiable instruments for
deposit or collection in the ordinary course of business, if, after giving
effect thereto, the Leverage Ratio would exceed .50 to 1.00 assuming that the
Company is primarily liable for the obligation guaranteed.
6.7 INVESTMENTS IN OTHER CORPORATIONS OR ENTITIES (LESS THAN 100% OWNED).
Make or permit any Subsidiary to make, any loan or advance to any Person,
or purchase, otherwise acquire, or permit any Subsidiary to purchase or
otherwise acquire, the capital stock, assets comprising the business of,
obligations of, or any interest in, any other corporation or entity which
will not be operated as a wholly-owned Subsidiary, except:
A. investments by the Company or a Subsidiary in evidences of
indebtedness issued or fully guaranteed by the United States of America or
any state or public subdivision thereof;
B. investments by the Company or a Subsidiary in certificates of
deposit, -notes, acceptances and repurchase agreements having a maturity of
not more than one year from the date of acquisition issued by a fiscally
sound and reputable bank organized in the United States having capital,
surplus and undivided profits of at least $100,000,000;
C. investments by the Company or a Subsidiary in the highest-rated
commercial paper;
D. investments by the Company or a Subsidiary in "Money Market" fund
shares, or in money market accounts fully insured by the Federal Deposit
Insurance Corporation and sponsored by banks and other financial
institutions, provided that the investments consist principally of the types
of investments described in clauses (a), (b) or (c) of this Section 6.07;
E. loans or advances from a Subsidiary to the Company or from the
Company to a wholly-owned Subsidiary.
F. loans up to an aggregate of $200,000 to Gaddy, Ward and Company
Insurance Brokers.
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6.8 ACQUISITION OF OTHER CORPORATIONS OR ENTITIES (100% OWNED).
Acquire, or permit any Subsidiary to acquire, all of the equity
securities or all or substantially all of the assets of another Person,
whether by purchase, merger or consolidation, if the annual revenue of such
Person exceeds 10% of the annual revenue of the Company for the preceding
year.
6.9 AMENDMENTS.
Amend or waive any provision of the Articles of Incorporation or By-laws
of the Company in any way that would adversely affect the liquidation
preferences, dividend rights, voting rights or redemption rights of the
holders of the Series A Preferred Stock.
6.10 OTHER AGREEMENTS.
Enter into any agreement in which the terms of such agreement would
materially restrict or materially impair the right to perform of the Company
or any Subsidiary under this Agreement, any Related Agreement or the Articles
of Incorporation of the Company.
6.11 USE OF FIDUCIARY FUNDS.
Utilize, or permit any Subsidiary to utilize, in any way, any funds held
by the Company or any Subsidiary in a fiduciary capacity, whether such funds
are held in a trust account or otherwise for any purpose other than to timely
pay over such funds to the rightful owner thereof.
7. RIGHT OF FIRST REFUSAL
7.1 RIGHT OF FIRST REFUSAL.
Before the Company shall issue, sell or exchange, agree or obligate
itself to issue, sell or exchange (a) any shares of Common Stock, (b) any
other equity security of the Company, including without limitation, shares of
preferred stock, (c) any convertible debt security of the Company including
without limitation, any debt security which by its terms is convertible into
or exchangeable for any equity security of the Company, (d) any security of
the Company that is a combination of debt and equity, or (e) any option,
warrant or other right to subscribe for, purchase or otherwise acquire any
such equity security or any such convertible debt security of the Company,
the Company shall, in each case, first offer to sell such securities (the
"Offered Securities") to the Purchaser (the "Offeree") as follows: the
Company shall offer to sell to the Offeree an amount of the Offered
Securities (the "Basic Amount") sufficient to allow the Offeree to maintain a
proportional interest in the Company equal to the number of shares of Common
Stock (including for the purposes of such calculation the number of shares of
Common Stock issuable upon conversion of the Series A Preferred Stock or
conversion or exercise of other securities or options of the Company) then
held by the Offeree over the total number of shares of
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Common Stock issued and outstanding and the number of shares of Common Stock
issuable upon conversion of the Preferred Stock or conversion or exercise of
other securities or options of the Company, determined immediately prior to
the issue, sale or exchange of the Offered Securities, at a price and on such
other terms as applicable to such issuance, sale or exchange of Offered
Securities. Such terms and price, and the Offeree's Basic Amount, shall be
specified by the Company in writing delivered to the Offeree (the "Offer"),
which Offer by its terms shall remain open and irrevocable for a period of
thirty (30) days from receipt of the Offer.
7.2 NOTICE OF ACCEPTANCE.
Notice of the Offeree's intention to accept, in whole or in part, any
Offer made pursuant to Section 7.1 shall be evidenced by a writing signed by
the Offeree and delivered to the Company prior to the end of the 30-day
period of such offer, setting forth such of the Offeree's Basic Amount as the
Offeree elects to purchase (the "Notice of Acceptance").
7.3 CONDITIONS TO ACCEPTANCES AND PURCHASE.
A. PERMITTED SALES OF REFUSED SECURITIES. In the event that a Notice of
Acceptance is not given by the Offeree in respect of all the Offered
Securities, the Company shall have ninety (90) days from the expiration of
the 30-day period set forth in Section 7.1 to sell all or any part of such
Offered Securities as to which a Notice of Acceptance has not been given by
the Offeree (the "Refused Securities") to the Person or Persons, for the
stated consideration and otherwise in all respects upon terms and conditions,
including, without limitation, unit price and interest rates, which are no
more favorable, in the aggregate, to such other Person or Persons or less
favorable to the Company than those set forth in the Offer.
B. REDUCTION IN AMOUNT OF OFFERED SECURITIES. In the event the Company
shall propose to sell less than all the Offered Securities (any such sale to
be in the manner and on the terms specified in Section 7.3(A) above), then
the Offeree shall be obligated to reduce the number of shares or other units
of the Offered Securities specified in its respective Notice of Acceptance to
an amount which shall be not less than the amount of the Offered Securities
which the Offeree elected to purchase pursuant to Section 7.2 multiplied by a
fraction, (i) the numerator of which shall be the amount of Offered
Securities which the Company actually proposes to sell, and (ii) the
denominator of which shall be the amount of all Offered Securities. In the
event that the Offeree reduces the number or amount of Offered Securities
specified in its respective Notice of Acceptance, the Company may not sell or
otherwise dispose of more than the reduced amount of the Offered Securities
until such securities have again been offered to the Offeree in accordance
with Section 7.1.
C. CLOSING. Upon the closing, which shall include full payment to the
Company, of the sale to such other Person or Persons of all or less than all
the Refused Securities, the Offeree shall purchase from the Company, and the
Company shall sell to the Offeree, the number of Offered Securities specified
in the Notices of Acceptance, as reduced pursuant to Section 7.3(B) if the
Offeree has so elected, upon the terms and conditions specified in the Offer.
The purchase by the Offeree of any Offered Securities is subject in all cases
to the preparation, execution and delivery by the Company and the Offeree of
a purchase agreement relating to such
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Offered Securities reasonably satisfactory in form and substance to the
Offeree and its counsel; provided that if the purchasers of Refused
Securities agree to close on terms offered to Offeree, the refusal of the
Offeree to close shall not prevent the sale of Refused Securities or any
portion of the Offered Securities to such purchaser.
7.4 FURTHER SALE.
Subject to the proviso contained at the end of Section 7.3(C), in each
case, any Offered Securities not purchased by the Offeree or other Person or
Persons in accordance with Section 7.3 may not be sold or otherwise disposed
of until they are again offered to the Offeree under the procedures specified
in Sections 7.1, 7.2 and 7.3.
7.5 EXCEPTION.
The rights of the Offeree under this Section 7 shall not apply to the
following: (a) Common Stock issued as a stock dividend to holders of Common
Stock or upon any subdivision or combination of shares of Common Stock; (b)
Series A Preferred Stock issued as a dividend to holders of Series A
Preferred Stock upon any subdivision or combination of shares of Series A
Preferred Stock; (c) the Conversion Shares; (d) shares of Common Stock, or
options exercisable therefor, issued after the date hereof to directors,
officers or employees of or consultants to the Company or any Subsidiary
pursuant to any qualified or non-qualified stock option plan or agreement,
employee stock ownership plan, stock purchase agreement, stock plan, stock
restriction agreement, or consulting agreement or such other options,
arrangements, agreements or plans approved by the Board of Directors so long
as the aggregate number of such shares does not exceed 10% of the number of
Fully Diluted Outstanding Common Stock at the time of proposed issuance; (e)
securities issued solely in consideration for the acquisition (whether by
merger or otherwise) by the Company of all or substantially all of the
capital stock or assets of any other entity; (f) securities issued in a
transaction in which the entire proceeds (net of expenses) of issuance are
used to pay, satisfy and discharge obligations of the Company to the
Purchaser and (g) securities issued in a transaction in which the entire
proceeds (net of expenses) of issuance are used to pay, satisfy and discharge
Indebtedness owed by the Company to any Person other than a Subsidiary.
7.6 SALE OF COMPANY AS A WHOLE.
The Purchaser shall have the same first refusal rights, on the same terms
as set forth in Sections 7.1-7.5 above, in the case of the sale of the
Company as a whole, whether such sale takes the form of a cash sale, merger
or purchase of all or substantially all assets of the Company. In the event
the offered consideration for such a sale is, in whole or in part, equity or
debt securities of the offeror, the Purchaser shall be permitted to
substitute its equity or debt securities for the offeror's in matching such
offer. Such matching securities will be valued in the same manner as the
offeror's securities are valued.
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7.7 RIGHTS UNDER BUY-SELL AGREEMENT.
The Purchaser shall have the same rights to purchase Common Stock offered
for sale by Affiliates under the Buy-Sell Agreement as if the Preferred
Shares were converted into Common Stock immediately prior to the offer of
stock under the Buy-Sell Agreement
8. DEFINITIONS AND ACCOUNTING TERMS
8.1 CERTAIN DEFINED TERMS.
As used in this Agreement, the following terms shall have the following
meanings:
"Acquisition Shares" shall have the meaning assigned to such term in
Section 1.7.1.
"Affiliate" shall mean any officer or director of the Company or any
Subsidiary or holder of five percent (5%) or more of any class of capital
stock of the Company or any Subsidiary, or any member of their respective
immediate families or any corporation or other entity directly or indirectly
controlled by one or more of such officers, directors or 5% stockholders or
members of their immediate families.
"Agreement" shall mean this Series A Preferred Stock Purchase
Agreement, including all amendments, modifications or supplements thereto.
"Applicable Conversion Value" shall have the meaning assigned to such
term in the Certificate of Determination.
"Articles of Incorporation" shall mean the Articles of Incorporation
of the Company, including all amendments, modifications or supplements
thereto.
"Bank" shall have the meaning assigned to such term in Section 4.7.
7.1. "Basic Amount" shall have the meaning assigned to such term in Section
"Board of Directors" shall mean the board of directors of the Company
as constituted from time to time.
1.7.1. "Bonus Shares shall have the meaning assigned to such term in Section
"Business Day" shall mean any day except a Saturday, Sunday or other
day on which commercial banks in the State of California are authorized by
law or executive order to close.
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"Buy-Sell Agreement" shall have the meaning assigned to such term in
Section 2.3.
"By-Laws" means the By-Laws of the Company as amended from time to
time.
"Certificate of Determination" shall have the meaning assigned to such
term in Section 4.5.
"Closing" shall have the meaning assigned to such term in Section 1.3.
"Closing Date" shall have the meaning assigned to such term in Section
1.3.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Common Stock" shall have the meaning assigned to such term in Section
1.2.
"Company" shall have the meaning assigned to such term in the
introductory sentence hereof.
"Consolidated Capitalization" means, at any date of determination
thereof, the sum of (a) Consolidated Indebtedness plus (b) Consolidated Net
Worth.
"Consolidated Indebtedness" means, at any date of determination
thereof, all Indebtedness of the Company and the Subsidiaries, as determined
on a consolidated basis in accordance with GAAP.
"Consolidated Net Worth" means, at any date of determination thereof,
all amounts that would be included under stockholders' equity on a
consolidated balance sheet of the Company and the Subsidiaries, as determined
on a consolidated basis in accordance with GAAP.
"Conversion Shares" shall have the meaning assigned to such term in
Section 1.02.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended.
"ESOP" shall mean the CAPAX Management & Insurance Services Employee
Stock Ownership Plan dated December 28, 1994, including all amendments,
supplements or modifications thereto.
"Fully Diluted Outstanding Common Stock" shall mean at the time of the
proposed issuance the number of issued shares actually outstanding (excluding
any shares of the Company held by the Company as "treasury stock") at such
time together with the number of shares of Common Stock which could be
acquired at such time pursuant to all rights, options, warrants or
convertible or exchangeable securities entitling the holders thereof to
subscribe for or
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purchase or otherwise acquire shares of Common Stock as if such rights,
options, warrants or convertible or exchangeable securities have been fully
exercised or converted and the full amount of all Common Stock obtained in
connection therewith has been obtained.
"GAAP" shall mean generally accepted accounting principles in the
United States of America as in effect from time to time, applied on a basis
consistent with those used in the preparation of the financial statements
referred to in Section 2.6 (except for changes concurred in by the
independent public accountants to the Company and the Subsidiaries).
"Indebtedness" shall mean (a) any liability for borrowed money or
evidenced by a note or similar obligation given in connection with the
acquisition of any property or other assets (other than trade accounts
payable incurred in the ordinary course of business); (b) all guaranties,
endorsements and other contingent obligations, in respect of Indebtedness of
others, whether or not the same are or should be reflected in the Company's
balance sheet (or the notes thereto), except guaranties by endorsement of
negotiable instruments for deposit or collection or similar transactions in
the ordinary course of business, and (c) the present value of any lease
payments due under leases required to be capitalized in accordance with GAAP.
"indemnified party" shall have the meaning given such term in Section
9.2.
"Key Employee" shall mean and includes the Chairman, President, Chief
Executive Officer, Chief Operating Officer, Chief Financial Officer, any
executive officer of the Company or any Subsidiary with policy-making
functions including, without limitation, the head of each Subsidiary, or any
other individual so designated by the Board of Directors.
"Knowledge" shall mean, after reasonable inquiry which would be
undertaken by a similarly situated prudent man, no information has come to
the attention of any Key Employee, giving any such Key Employee actual
knowledge of facts contrary to the existence or absence of such facts
indicated.
"Leverage Ratio" means, at any date of determination thereof, the
ratio of (a) Consolidated Indebtedness to (b) Consolidated Capitalization.
"Management Agreement" shall have the meaning as defined in Exhibit C
hereto.
"Material Adverse Effect" means any material adverse effect on (a) the
business, profits, properties or condition of the Company and the
Subsidiaries, taken as a whole, (b) the ability of the Company to perform its
obligations under the Agreement or any Related Agreement and (c) the binding
nature, validity or enforceability of this Agreement or any Related
Agreement, which, in each case, arises from, or reasonably could be expected
to arise from, any action or omission of action on the part of the Company or
any Subsidiary or the occurrence of any event or the existence of any fact or
condition in respect of the Company or any Subsidiary or any of their
respective properties.
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"Non-Competition Agreement" shall have the meaning as defined in
Exhibit E. hereto.
"Notice of Acceptance" shall have the meaning assigned to such term in
Section 7.2
"Offer" shall have the meaning assigned to such term in Section 7.1.
"Offeree" shall have the meaning assigned to such term in Section 7.1.
"Offered Securities" shall have the meaning assigned to such term in
Section 7.1.
"Option" shall have the meaning as defined in Exhibit D hereto.
"Other Shares" shall have the meaning assigned to such term in Section
1.7.2.
"PAULA" shall mean PAULA Financial, a California corporation and
parent of the Purchaser.
"PAULA Shares" shall have the meaning assigned to such term in Section
1.3.
"Permitted Liens" shall mean (a) liens or charges for current taxes,
assessments or other governmental charges which are not delinquent or which
remain payable without penalty, or the validity of which is contested in good
faith by appropriate proceedings upon stay of execution of the enforcement
thereof, provided the Company shall have set aside on its books and shall
maintain adequate reserves for their payment in conformity with GAAP, (b)
liens, deposits or pledges made to secure statutory obligations surety or
appeal bonds, or bonds for the release of attachments or for stay of
execution, or to secure the performance of bids, tenders, contracts (other
than for the payment of borrowed money), leases or for purposes of like
general nature in the ordinary course of its business and (c) purchase money
security interests for equipment hereafter acquired, conditional sale
agreements, or other title retention agreements, with respect to equipment
hereafter acquired, provided, however, that no such security interest or
agreements shall extend to any property other than the after-acquired
equipment then being purchased.
"Person" shall mean an individual, corporation, partnership, joint
venture, trust, university, or unincorporated organization, or a government
or any agency or political subdivision thereof.
"Plans" shall have the meaning assigned to such term in Section 2.13.
"Preferred Shares" shall have the meaning assigned to such term in
Section 1.1.
"PTC Agreement" shall have the meaning as defined in Exhibit B hereto.
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"Purchaser" shall have the meaning assigned to such term in Section 1.1.
"Purchaser Director" mean that director of the Company who is a
representative of the Purchaser. During the first two years after the
Closing, such representative shall be Jeffrey A. Snider.
"Refused Securities" shall have the meaning assigned to that term in
Section 7.3.
"Related Agreements" shall mean the PTC Agreement, the Non-Competition
Agreement, the Option Agreement, the Management Agreement and the Buy-Sell
Agreement, including all amendments, modifications or supplements thereto.
"Series A Preferred Stock" shall have the meaning assigned to such
term in Section 1.1.
"Shares" shall have the meaning assigned to such term in Section 1.2.
"Stock Option Plan" shall mean the 1995 Stock Bonus Program of the
Company, including all amendments, supplements or modifications thereto.
"Subsidiary" shall mean any corporation or other entity of which at
least a majority of the securities or other ownership interest having
ordinary voting power (absolutely or contingently) for the election of
directors or other persons performing similar functions are at the time owned
directly or indirectly by the Company and/or any of its other Subsidiaries.
8.2 ACCOUNTING TERMS.
All accounting terms not specifically defined herein shall be construed
in accordance with GAAP consistently applied, and all financial data
submitted pursuant to this Agreement, unless otherwise specified, shall be
prepared in accordance with GAAP.
9. INDEMNIFICATION
9.1 GENERAL INDEMNITY.
The Company agrees to indemnify and save harmless the Purchaser (and its
respective directors, officers, affiliates, agents, successors and assigns)
from and against any and all losses, liabilities, deficiencies, costs,
damages and expenses (including, without limitation, reasonable attorneys'
fees, charges and disbursements) necessarily incurred by the Purchaser as a
result of any inaccuracy in or breach of the representations and warranties
(as of the closing date) or covenants (as of and after the closing date) made
by the Company herein or in any of the Related Agreements. The Purchaser
agrees to indemnify and save harmless the Company and its directors,
officers, affiliates, agents, successors and assigns from and against any and
all losses,
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liabilities, deficiencies, costs, damages and expenses (including, without
limitation, reasonable attorneys' fees, charges and disbursements) incurred by
any of the Company as a result of any inaccuracy in or breach of the
representations, warranties or covenants made by the Purchaser herein. Neither
party shall be liable for indemnification hereunder unless the other party's
damages from a breach of representations and warranties exceeds $50,000 in the
aggregate or the other party's damages from a breach of a covenant or other term
hereof exceeds $10,000 per year.
9.2 INDEMNIFICATION PROCEDURE.
Any party entitled to indemnification under this Section 9 (an
"indemnified party") will give written notice to the indemnifying party of
any claim with respect to which it seeks indemnification promptly after the
discovery by such party of any matters giving rise to a claim for
indemnification; provided that the failure of any party entitled to
indemnification hereunder to give notice as provided herein shall not relieve
the indemnifying party of its obligations under this Section 9 except to the
extent that the indemnifying party is actually prejudiced by such failure to
give notice. In case any action, proceeding or claim is brought against an
indemnified party in respect of which indemnification is sought hereunder,
the indemnifying party shall be entitled to participate in and, unless in the
reasonable judgment of the indemnified party a conflict of interest between
it and the indemnifying party may exist in respect of such action, proceeding
or claim, to assume the defense thereof, with counsel reasonably satisfactory
to the indemnified party. In the event that the indemnifying party advises an
indemnified party that it will contest such a claim for indemnification
hereunder, or fails, within thirty (30) days of receipt of any
indemnification notice to notify, in writing, such person of its election to
defend, settle or compromise, at its sole cost and expense, any action,
proceeding or claim (or discontinues its defense at any time after it
commences such defense), then the indemnified party may, at its option,
defend, settle or otherwise compromise or pay such action or claim. In any
event, unless and until the indemnifying party elects in writing to assume
and does so assume the defense of any such claim, proceeding or action, the
indemnified party's costs and expenses arising out of the defense, settlement
or compromise of any such action, claim or proceeding shall be losses subject
to indemnification hereunder. The indemnified party shall cooperate fully
with the indemnifying party in connection with any negotiation or defense of
any such action or claim by the indemnifymg party and shall furnish to the
indemnifying party all information reasonably available to the indemnified
party which relates to such action or claim. The indemnifying party shall
keep the indemnified party fully apprised at all times as to the status of
the defense or any settlement negotiations with respect thereto. If the
indemnifying party elects to defend any such action or claim, then the
indemnified party shall be entitled to participate in such defense with
counsel of its choice at its sole cost and expense. The indemnifying party
shall not be liable for any settlement of any action, claim or proceeding
effected without its written consent, provided, however, that the
indemnifying party shall not unreasonably withhold, delay or condition its
consent. Anything in this Section 9 to the contrary notwithstanding, the
indemnifying party shall not, without the indemnified party's prior written
consent, settle or compromise any claim or consent to entry of any judgment
in respect thereof which imposes any future obligation on the indemnified
party or which does not include, as an unconditional term thereof, the giving
by the claimant or the plaintiff to the indemnified party, a release from all
liability in respect of such
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claim. The indemnification required by this Section 9 shall be made by
periodic payments of the amount thereof during the course of the
investigation or defense, as and when bills are received or expense, loss,
damage or liability is incurred so long as the indemnified party irrevocably
agrees to refund such moneys if it is ultimately determined by a court of
competent jurisdiction that such party was not entitled to indemnification.
The indemnity agreements contained herein shall be in addition to (a) any
cause of action or similar right of the indemnified party against the
indemnifying party or others, and (b) any liabilities the indemnifying party
may be subject to pursuant to the law.
10. MISCELLANEOUS
10.1 NO WAIVER; CUMULATIVE REMEDIES.
No failure or delay on the part of any party to this Agreement in
exercising any right, power or remedy hereunder shall operate as a waiver
thereof; nor shall any single or partial exercise of any such right, power or
remedy preclude any other or further exercise thereof or the exercise of any
other right, power or remedy hereunder. The remedies herein provided are
cumulative and not exclusive of any remedies provided by law.
10.2 AMENDMENTS, WAIVERS AND CONSENTS.
Any provision in the Agreement to the contrary notwithstanding, and
except as hereinafter provided, changes in, termination or amendments of or
additions to this Agreement or any Related Agreement may be made, and
compliance with any covenant or provision set forth herein may be omitted or
waived, if the Company (a) shall obtain consent thereto in writing from the
Purchaser. Any waiver or consent may be given subject to satisfaction of
conditions stated therein and any waiver or consent shall be effective only
in the specific instance and for the specific purpose for which given.
10.3 ADDRESSES FOR NOTICES.
Any notice, demand, request, waiver or other communication under this
Agreement or any Related Agreement shall be in writing and shall be deemed to
have been duly given on the date of service if personally served, on the date
of transmission if sent by telecopier or on the third day after mailing if
mailed to the party to whom notice is to be given, by first class mail,
registered, return receipt requested, postage prepaid and addressed as
follows:
To the Purchaser: PAULA Financial
300 North Lake Avenue
Suite 300
Pasadena, California 91101
Attention: President
Telecopier No.: (818) 304-1056
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To the Company: CAPAX Management & Insurance Services
1150 Ninth Street, 14th Floor
Modesto, CA 95353
Attn: President
Telecopier No: (209) 521-1620
With a copy to: Robert W. Crabtree, Esq.
Crabtree, Schmidt, Zeff, Jacobs and Farrar
1100 14th Street, Second Floor
Modesto, CA 95354
Telecopier No: (209) 526-0632
10.4 COSTS, EXPENSES AND TAXES.
The prevailing party shall be entitled to the reasonable fees and
out-of-pocket expenses of legal counsel, independent public accountants,
consultants and other outside experts retained by such party in connection
with the successful enforcement of this Agreement or any Related Agreement.
In addition, the Company shall pay any and all stamp, or other similar taxes
payable or determined to be payable in connection with the execution and
delivery of this Agreement, the issuance of the Preferred Shares and the
other instruments and documents to be delivered hereunder or thereunder, and
agrees to save the Purchaser harmless from and against any and all
liabilities with respect to or resulting from any delay in paying or omission
to pay such taxes.
10.5 BINDING EFFECT: ASSIGNMENT.
This Agreement and each Related Agreement to which it is a party shall be
binding upon and inure to the benefit of each of the Company and the
Purchaser and their respective heirs, successors and assigns, except that the
Company shall not have the right to delegate its obligations hereunder or to
assign its rights hereunder or any interest herein without the prior written
consent of the Purchaser and the Purchaser shall not have the right to assign
their rights hereunder or any interest herein (including, without limitation,
by the sale of their Shares) without the prior written consent of the
Company; provided that the Purchaser may assign their rights, without such
prior written consent, to any Person which purchases all of the Preferred
Shares from the Purchaser as permitted hereunder or under a Related
Agreement, or to any entity controlling, controlled by or under common
control with the Purchaser. For the purposes of this Section 10.5, "control"
shall mean any Purchaser beneficially owns more than 50% of the voting
securities of such entity or more than 50% of the voting securities of such
Purchaser is directly or indirectly beneficially owned or held by such entity
or such Purchaser is a partnership in which such entity is a general partner.
10.6 SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
All representations and warranties made in this Agreement, each Related
Agreement, the Shares, or any other instrument or document delivered in
connection herewith or therewith, shall remain enforceable until December 31,
1999; provided that the representations and warranties
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<PAGE>
shall remain enforceable for two years after such date to the extent written
notice of any breach thereof is given on or prior to such date and the
representations and warranties relating to taxes shall survive for the
applicable statute of limitation.
10.7 PRIOR AGREEMENTS.
This Agreement, each Related Agreement, the terms of the Series A
Preferred Stock, and the other agreements executed and delivered herewith
constitute the entire agreement between the parties and supersedes any prior
understandings or agreements concerning the subject matter hereof.
10.8 SEVERABILITY.
The provisions of this Agreement, each Related Agreement and the terms of
the Series A Preferred Stock are severable and, in the event that any court
of competent jurisdiction shall determine that any one or more of the
provisions or part of a provision contained in this Agreement, any Related
Agreement or the terms of the Series A Preferred Stock shall, for any reason,
be held to be invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other
provision or part of a provision of this Agreement, any Related Agreement or
the terms of the Series A Preferred Stock; but this Agreement, each Related
Agreement and the terms of the Series A Preferred Stock shall be reformed and
construed as if such invalid or illegal or unenforceable provision, or part
of a provision, had never been contained herein, and such provisions or part
reformed so that it would be valid, legal .and enforceable to the maximum
extent possible.
10.9 CONFIDENTIALITY.
The Purchaser agrees that it will keep confidential and will not disclose
or divulge any confidential, proprietary or secret information which the
Purchaser may obtain from the Company pursuant to financial statements,
reports and other materials submitted by the Company to the Purchaser
pursuant to this Agreement, or pursuant to visitation or inspection rights
granted hereunder, unless such information is known, or until such
information becomes known other than through a breach of this Section 10.9,
to the public; PROVIDED, HOWEVER, that the Purchaser may disclose such
information (a) on a confidential basis to its attorneys, accountants,
consultants and other professionals to the extent necessary to obtain their
services in connection with its investment in the Company, (b) to any
prospective purchaser of any Preferred Shares or Conversion Shares from the
Purchaser as long as such prospective purchaser agrees in writing to be bound
by the provisions of this Section 10.9, (c) to any entity controlling,
controlled by or under common control with the Purchaser or (d) as required
by applicable law.
10.10 GOVERNING LAW.
THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH,
THE INTERNAL LAWS OF THE STATE OF CALIFORNIA, AND WITHOUT GIVING EFFECT TO
CHOICE OF LAW PROVISIONS.
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10.11 HEADINGS.
Article, section and subsection headings in this Agreement are included
herein for convenience of reference only and shall not constitute a part of
this Agreement for any other purpose.
10.12 COUNTERPARTS.
This Agreement may be executed in any number of counterparts, all of
which taken together shall constitute one and the same instrument, and any of
the parties hereto may execute this Agreement by signing any such counterpart.
10.13 FURTHER ASSURANCES.
From and after the date of this Agreement, upon the request of the
Purchaser or the Company, each of the Company and the Purchaser shall execute
and deliver such instruments, documents and other writings as may be
reasonably necessary or desirable to confirm and carry out and to effectuate
fully the intent and purposes of this Agreement, each Related Agreement and
the Shares.
10.14 WAIVER.
At any time prior to the Closing Date, any party hereto may (a) extend
the time for the performance of any of the obligations or other acts of any
other party hereto, (b) waive any inaccuracies in the representations and
warranties contained herein or in any document delivered pursuant hereto, and
(c) waive compliance with any of the agreements or conditions contained
herein. Any agreement on the part of a party hereto to any such extension or
waiver shall be valid only if set forth in an instrument in writing signed by
the party granting such waiver but such waiver or failure to insist upon
strict compliance with such obligation, covenant, agreement or condition
shall not operate as a waiver of, or estoppel with respect to, any subsequent
or future failure.
10.15 SPECIFIC ENFORCEMENT.
Each of the Purchaser and the Company acknowledge and agree that
irreparable damage would occur in the event that any of the provisions of
this Agreement and each Related Agreement were not performed in accordance
with their specific terms or were otherwise breached. It is accordingly
agreed that the parties shall be entitled to an injunction or injunctions to
prevent breaches of the provisions of this Agreement, each Related Agreement
and to enforce specifically the terms and provisions hereof in any court of
the United States or any state thereof having jurisdiction, this being in
addition to any other remedy to which they may be entitled at law or equity.
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10.16 CUMULATIVE VOTING.
Notwithstanding anything herein or in the Certificate of Determination to
the contrary, the Purchaser agrees not to exercise its rights to cumulate its
votes in the election of directors of the Company. In the event the Purchaser
is required to exercise its cumulative voting rights notwithstanding this
Section 10.16, the Purchaser agrees to exercise all of its cumulative votes
for the election of the Purchaser Director.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the date and year first above written.
COMPANY:
CAPAX MANAGEMENT & INSURANCE
SERVICES
BY: /s/ Jaru Giddis Jr.
----------------------------
PURCHASER:
PAULA INSURANCE COMPANY
By: /s/ [ILLEGIBLE]
----------------------------
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CERTIFICATE OF INCORPORATION
OF
PAULA FINANCIAL
ARTICLE I
NAME OF CORPORATION
The name of this Corporation is PAULA Financial.
ARTICLE II
REGISTERED OFFICE
The address of the registered office of the Corporation in the State of
Delaware is 9 East Loockerman Street, Dover, County of Kent, and the name of
its registered agent at that address is National Corporate Research, Ltd.
ARTICLE III
PURPOSE
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of
Delaware.
ARTICLE IV
AUTHORIZED CAPITAL STOCK
(a) The Corporation shall be authorized to issue two classes of shares
of stock to be designated, respectively, "Preferred Stock" and "Common
Stock"; the total number of shares which the Corporation shall have authority
to issue is Twenty Million (20,000,000); the total number of shares of
Preferred Stock shall be Five Million (5,000,000) and each such share shall
have a par value of $.01; and the total number of shares of Common Stock
shall be Fifteen Million (15,000,000) and each such share shall have a par
value of $.01.
(b) The shares of Preferred Stock may be issued from time to time in one
or more series. The board of directors is hereby vested with authority to fix
by resolution or resolutions the designations and the powers, preferences and
relative, participating, optional or other special rights, and
qualifications, limitations or restrictions thereof, including without
limitation the dividend rate, conversion or exchange rights, redemption price
and liquidation preference, of any series of shares of Preferred Stock, and
to fix the number of shares constituting any such series, and to increase or
decrease the number of shares of any such series (but not below the number of
shares thereof then outstanding). In case the number of shares of any such
series shall be so decreased, the shares constituting such decrease shall
resume the status which they had prior to the adoption of the resolution or
resolutions originally fixing the number of shares of such series.
<PAGE>
(c) During any period when the holders of any Preferred Stock or any one
or more series thereof, voting as a class, shall be entitled to elect a
specified number of directors, by reason of dividend arrearages or other
provisions giving them the right to do so, then and during such time as such
right continues, and notwithstanding anything in the Corporation's By-Laws to
the contrary, (1) the then otherwise authorized number of directors shall be
increased by such specified number of directors, and the holders of such
Preferred Stock or such series thereof, voting as a class, shall be entitled
to elect the additional directors so provided for, pursuant to the provisions
of such Preferred Stock or series; (2) each such additional director shall
serve for such term, and have such voting powers, as shall be stated in the
provisions pertaining to such Preferred Stock or series; and (3) whenever the
holders of any such Preferred Stock or series thereof are divested of such
rights to elect a specified number of directors, voting as a class, pursuant
to the provisions of such Preferred Stock or series, the terms of office of
all directors elected by the holders of such Preferred Stock or series,
voting as a class pursuant to such provisions, or elected to fill any
vacancies resulting from the death,resignation or removal of directors so
elected by the holders of such Preferred Stock or series, shall forthwith
terminate and the authorized number of directors shall be reduced accordingly.
(d) The Common Stock of the Corporation shall be issued in one class.
Each share of the Common Stock shall be entitled to one vote on all matters
presented to the stockholders of the Corporation, except when the holders of
any Preferred Stock or any one or more series thereof, voting as a class, are
entitled to elect a specified number of directors, by reason of dividend
arrearages or other provisions giving them the right to do so.
ARTICLE V
INCORPORATOR
The name and mailing address of the incorporator of the Corporation is:
Jeanne Carnahan
Corporate Research, Ltd.
9 East Loockerman Street
Dover, Delaware 19901
ARTICLE VI
BOARD POWER REGARDING BYLAWS
In furtherance and not in limitation of the powers conferred by statute,
the board of directors is expressly authorized to make, repeal, alter, amend
and rescind the bylaws of the Corporation.
ARTICLE VII
DIRECTORS
(a) The number of directors of the Corporation shall be exclusively
fixed from time to time by the Board of Directors, except that in the absence
of such designation, such number shall be nine.
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(b) Elections of directors need not be by written ballot unless the
bylaws of the Corporation shall so provide.
(c) The procedures for the nomination and election of directors, other
than as set forth in Section (b) above, shall be governed by Article III of
the Bylaws of the Corporation.
ARTICLE VIII
LIMITATION OF DIRECTOR LIABILITY AND INDEMNIFICATION
To the fullest extent permitted by the Delaware General Corporation Law,
as the same exists or may hereafter be amended (the "Delaware Law"), a
director of the Corporation shall not be liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as director.
If the Delaware Law is amended after the date of the filing of this
Certificate of Incorporation to authorize corporate action further
eliminating or limiting the personal liability of directors, then the
liability of a director of the Corporation shall be-eliminated or limited to
the fullest extent permitted by the Delaware Law, as so amended from time to
time. The Corporation shall indemnify, in the manner and to the fullest
extent permitted by the Delaware Law (but in the case of any amendment
thereto, only to the extent that such amendment permits the Corporation to
provide broader indemnification rights than permitted prior thereto), any
person (or the estate of any person) who is or was a party to, or is
threatened to be made a party to, any threatened, pending or completed
action, suit or proceeding, whether or not by or in the right of the
Corporation, and whether civil, criminal, administrative, investigative or
otherwise, by reason of the fact that such person is or was a director,
officer, employee or agent of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise.
The Corporation may, to the fullest extent permitted by the Delaware Law,
purchase and maintain insurance on behalf of any such person against any
liability which may be asserted against such person. The Corporation may
create a trust fund, grant a security interest or use other means (including
without limitation a letter of credit) to ensure the payment of such sums as
may become necessary to effect the indemnification as provided herein. To the
fullest extent permitted by the Delaware Law, the indemnification provided
herein shall include expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement and any such expenses shall be paid by the
Corporation in advance of the final disposition of such action, suit or
proceeding. The indemnification provided herein shall not be deemed to limit
the right of the Corporation to indemnify any other person for any such
expenses to the fullest extent permitted by the Delaware Law, nor shall it be
deemed exclusive of any other rights to which any person seeking
indemnification from the Corporation may be entitled under and agreement, vote
of stockholders or disinterested directors, or otherwise, both as to action
in such person's official capacity and as to action in another capacity while
holding such office. No repeal or modification of this Article VIII by the
stockholders shall adversely affect any right or protection of a director of
the Corporation existing by virtue of this Article VIII at the time of such
repeal or modification.
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ARTICLE IX
CORPORATE POWER
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, and all rights conferred on stockholders
herein are granted subject to this reservation.
ARTICLE X
CREDITOR COMPROMISE OR ARRANGEMENT
Whenever a compromise or arrangement is proposed between this Corporation
and its creditors or any class of them and/or between this Corporation and
its stockholders or any class of them, any court of equitable jurisdiction
within the State of Delaware may, on the application in a summary way of this
Corporation or of any creditor or stockholder thereof or on the application
of any receiver or receivers appointed for this Corporation under the
provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers
appointed for this Corporation under the provisions of Section 279 of Title 8
of the Delaware Code order a meeting of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of this Corporation, as
the case may be, to be summoned in such manner as the said court directs. If
a majority in number representing three-fourths in value of the creditors or
class of creditors, and/or of the stockholders or class of stockholders of
this Corporation, as the case may be, agree to any compromise or arrangement
and to any reorganization of this Corporation as a consequence of such
compromise or arrangement, the said compromise or arrangement and the said
reorganization shall, if sanctioned by the court to which the said
application has been made, be binding on all the creditors or class of
creditors, and/or on all the stockholders or class of stockholders, of this
Corporation, as the case may be, and also on this Corporation.
ARTICLE XI
STOCKHOLDER ACTION
Subject to the rights of holders of any series of Preferred Stock
relating to the ability of such holders of such Preferred Stock to take
action by a consent or consents in writing, no action required to be taken or
which may be taken at any meeting of the stockholders of the Corporation may
be taken without a meeting and the power of stockholders to consent in
writing without a meeting to the taking of any action is denied; PROVIDED,
that any such action may be taken without a meeting, without prior notice and
without a vote, if a consent or consents in writing, setting forth the action
so taken, shall be signed by all of the members of the Board of Directors
entitled to vote with respect to the subject matter thereof and delivered to
the Corporation in the manner set forth in the bylaws of the Corporation.
ARTICLE XII
AMENDMENT OF CORPORATE DOCUMENTS
(a) CERTIFICATE OF INCORPORATION. In addition to any affirmative vote
required by applicable law or any other provision of this Certificate of
Incorporation or specified in any
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agreement, and in addition to any voting rights granted to or held by the
holders of any series of Common Stock or Preferred Stock, any alteration,
amendment, repeal or rescission (any "Change") of any provision of this
Certificate of Incorporation (other than any Change that relates solely to
Articles I, II or V hereof) must be approved by a majority of the directors
of the Corporation then in office and by the affirmative vote of at least
66-2/3% of the outstanding shares of voting stock of the Corporation entitled
to vote generally in the election of directors, considered for the purpose of
this Article XII as one class ("Voting Shares"). Subject to the foregoing,
the Corporation reserves the right to alter, amend, repeal or rescind any
provision contained in this Certificate of Incorporation in any manner now or
hereafter prescribed by law.
(b) BYLAWS. In addition to any affirmative vote required by applicable
law and any voting rights granted to or held by the holders of any series of
Preferred Stock, any Change to Section 2.03, 2.08, 2.09, 3.01, 3.02, 3.03,
3.04, 3.06, 3.10, 4.04, 7.01, 7.02, 7.03 or 8.05 of the Bylaws of the
Corporation which Change is not unanimously approved by the directors of the
Corporation then in office must be approved by the affirmative vote of at
least 66-213% of the Voting Shares. Subject to the foregoing, the Board
shall have the power to make, alter, amend, repeal or rescind the Bylaws of
the Corporation.
THE UNDERSIGNED, being the incorporator hereinbefore named, for the
purpose of forming a corporation to do business both within and without the
State of Delaware, and in pursuance of the Delaware General Corporation Law,
does hereby make and file this certificate.
---------------------------------
Jeanne Carnahan
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A449797
STATE
OF
CALIFORNIA
SECRETARY OF STATE'S OFFICE
CORPORATION DIVISION
I, TONY MILLER, Acting Secretary of State of the State of California,
hereby certify:
That the annexed transcript has been compared with the corporate record
on file in this office, of which it purports to be a copy, and that same is
full, true and correct.
IN WITNESS WHEREOF, I execute
this certificate and affix the
Great Seal of the State of
California this
AUG 04 1994
---------------------------
[SEAL]
/s/ Tony Miller
---------------------------
ACTING SECRETARY OF STATE
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ENDORSED FILED
In the office of the Secretary of State
of the State of Cslifornia
Aug 03 1994
Acting Secretary of State
CERTIFICATE OF DESIGNATION OF PREFERENCES
OF
SERIES A PREFERRED STOCK
OF
PAULA FINANCIAL
1. The undersigned, Roger S. Teig and Teresita E. Matos, do hereby
certify that:
1. They are the President and Chief Executive Officer, and the
Secretary, respectively, of Paula Financial, a California corporation (the
"Corporation").
2. Pursuant to authority given by the Corporation's Articles of
Incorporation and by Section 202(e) of the California Corporations Code, the
Board of Directors of the Corporation held a meeting on July 25, 1994 and
adopted the following resolution:
WHEREAS, the rights and privileges applicable to the Preferred Stock,
including the provisions relating to the convertibility of the Preferred
Stock into shares of the Corporation's Common Stock, no par value (the
"Common Stock"), are specified in the following Certificate of Designation of
Series A Preferred Stock of Paula Financial (the "Certificate of
Designation");
NOW, THEREFORE, BE IT
RESOLVED, that pursuant to the authority presently granted to and
vested in the Board of Directors of this Corporation under the provisions of
the Articles of Incorporation, as amended, of the Corporation and pursuant to
the provisions of Section 401 of the General Corporation Law of the State of
California, this Board of Directors hereby creates a series of Preferred
Stock to consist of 941,177 shares, no par value, and hereby fixes the
powers, preferences and relative participating, voting, optional and other
special rights, and the qualifications, limitations and restrictions thereof,
of said series of Preferred Stock which have not heretofore been set forth in
the Articles of Incorporation in accordance with the terms of the Certificate
of Designation attached hereto as Exhibit A.
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3. The authorized number of shares of Preferred Stock of the
corporation is 5,000,000. The number of shares constituting this Series A
Preferred Stock is 941,177, none of which shares has been issued.
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IN WITNESS WHEREOF, the undersigned officers hereby execute this
Certificate and declare, under penalty of perjury under the laws of the State
of California, that the statements set forth in this Certificate are true and
correct of their own knowledge. Executed at Pasadena, California on July 27,
1994.
/s/ Roger G. Teig
-------------------------------------
Roger G. Teig, President, Chief
Executive Officer
/s/ Teresita E. Matos
-------------------------------------
Teresita E. Matos
Secretary
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CERTIFICATE OF DEIGNATION
OF SERIES A PREFERRED STOCK
OF PAULA FINANCIAL
The following is a statement of the designations, preferences, voting
powers, qualifications, special or relative rights and privileges in respect
of the authorized capital stock of the Series A Preferred Stock of the
Corporation.
1. DESIGNATION.
A total of 941,177 shares of the Corporation's Preferred Stock shall be
designated the "Series A Preferred Stock."
2. DIVIDENDS.
(a) RESTRICTIONS ON DISTRIBUTIONS. Except as otherwise consented to
by the holders of at least 66 2/3% of the then outstanding shares of Series A
Preferred Stock (voting as a separate class), the Corporation shall not
declare or pay any dividends, or purchase, redeem, retire, or otherwise
acquire for value any shares of its capital stock for any rights, options or
warrants to purchase such shares) now or hereafter outstanding, return any
capital to its stockholders as such, or make any distribution of assets to
its stockholders as such, or permit any Subsidiary to do any of the
foregoing. "Subsidiary" means any corporation or other entity of which at least
a majority of the securities or other ownership interests having ordinary
voting power (absolutely or contingently) for the election of directors or
other persons performing similar functions are at the time owned directly or
indirectly by the Corporation and/or any of its other Subsidiaries.
Notwithstanding the foregoing, Subsidiaries may daclare and make
payment of cash and stock dividends, return capital and make distributions of
assets to the Corporation, and nothing herein contained shall prevent the
Corporation from:
(i) effecting a stock split or declaring or paying any dividend
consisting of shares of any class of capital stock paid to the holders
of shares of such class of capital stock;
(ii) complying with any specific provision of the terms of the
Series A Preferred Stock as set forth herein (including, without
limitation, redemption of the Series A Preferred Stock in accordance
with its terms);
(iii) repurchasing any stock of any director. officer, employee,
consultant or other person or entity, subject to a stock repurchase,
stock restriction or stock option agreement under which the Corporation
has the right or obligation to repurchase such shares in the event of
termination of employment or of the consultinq arrangement, or other
similar discontinuation of a business relationship (including, without
limitation, the Corporation's obligations under the PAULA Financial and
Subsidiaries Employee Stock Ownership Plan (the "ESOP") to repurchase
any stock which is offered for sale to the Corporation by either a
participant or beneficiary of a deceased participant of the ESOP in
accordance with the put options provisions set forth in ESOP Section
5.08 or any applicable successor section thereto, the Stock Purchase
Agreement dated as of July 26, 1994 among the Corporation, Norman J.
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Schnider and Elizabeth J. Schnider, as trustees of The Schnider Family
Trust, Norman J. Schnider and Elizabeth J. Schnider, as individuals,
which evidences the obligation of the Corporation to repurchase 76,100
shares of Common Stock from The Schnider Family Trust, the 1994 Stock
Incentive Plan of the Corporation to accept options and stock as payment
of the exercise price for options issued thereunder, the Agreement for
Repurchase of ESOP Stock dated as of July 26, 1994 between the
Corporation and the ESOP which evidences the obligation of the
Corporation to repurchase 367,647 shares of Common Stock from the ESOP
and the irrevocable offer by the Corporation to repurchase 178,900
shares of Common Stock from its shareholders under that certain offer
letter dated July 27, 1994 and the related transmittal letter; provided,
however, each such repurchase or payment is approved by the Board of
Directors of the Corporation; or
(iv) repurchasing any stock of any director, officer, employee,
consultant or other person or entity so long as the aggregate amount of
such repurchases during any fiscal year of the Corporation does not
exceed $250,000; provided, however, each such repurchase or payment is
approved by the Board of Directors of the Corporation; provided further,
however, to the extent that the amount of such repurchases during any
fiscal year is less than $250,000, the difference between $250,000 and
the amount of such repurchases may be carried forward and expended in a
subsequent fiscal year.
(b) PARTICIPATING DIVIDENDS. In the event that the Board of Directors
of the Corporation shall declare a dividend payable upon the then
outstanding shares of Common Stock (other than a stock dividend on the Common
Stock distributed solely in the form of additional shares of Common Stock),
each holder of shares of Series A Preferred Stock shall be entitled to the
amount of dividends as would be declared payable on the largest number of
whole shares of Common Stock into which the shares of Series A Preferred
Stock held by such holder could be converted pursuant to the provisions of
Section 6 hereof, such number determined as of the record date for the
determination of holders of Common Stock entitled to receive such dividend.
3. LIQUIDATION, DISSOLUTION OR WINDING UP.
In the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, or in the event of its
insolvency, before any distribution or payment is made to any holders of
Common Stock or any other class or series of capital stack of the Corporation
designated to be junior to the Series A Preferred Stock and subject to the
liquidation rights and preferences of any class or series of preferred stock
designated in the future to be senior to, or on a parity with, the Series A
Preferred Stock with respect to liquidation preferences, the holders of each
share of Series A Preferred Stock shall be entitled to be paid first out of
the assets of the Corporation available for distribution to holders of the
Corporation's capital stock of all classes whether such assets are capital,
surplus or earnings ("Available Assets"), an amount equal to the greater of:
(a) $17.00 per share of Series A Preferred Stock, plus all accrued
but unpaid dividends thereon, whether or not earned or declared up to and
including the date full payment shall be tendered to the holders of the
Series A Preferred Stock with respect to such liquidation, dissolution or
winding up; and
(b) an amount equal to such amount per share of Series A Preferred
Stock as would have been payable had each share of Series A Preferred Stock,
and all other outstanding shares of any class or series of capital stock of
the Corporation, if any, which are convertible into Common Stock and which
are senior to the Common Stock with respect to liquidation preferences, been
converted to Common Stock immediately prior to such event of liquidation,
dissolution or winding up, but without
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giving effect to any other liquidation preference or participation right of
any such other classes or series of capital stock of the Corporation.
The amounts set forth above and throughout this Section 3 shall be
subject to equitable adjustment whenever there shall occur a Stock dividend,
stock split, combination, reorganization, recapitalization, reclassification
or other similar event involving a change in the capital structure of the
Series A Preferred Stock.
If, upon liquidation, dissolution or winding up of the Corporation, the
Available Assets shall be insufficient to pay the holders of Series A
Preferred Stock the full amount to which they otherwise would be entitled to
receive, the holders of Series A Preferred Stock shall share ratably in any
distribution of Available Assets pro rata in proportion to the respective
liquidation preference amounts to which they would otherwise be entitled to
receive upon liquidation if all liquidation preference dollar amounts owing
to the holders of Series A Preferred Stock were paid in full.
After such payment shall have been made in full to the holders of the
Series A Preferred Stock or funds necessary for such payment shall have been
set aside by the Corporation in trust for the account of holders of the
Series A Preferred Stock so as to be available for such payment, the
remaining assets available for distribution shall be distributed ratably
among the holders of the Common Stock.
Whenever the distribution provided for in this Section 3 shall be
payable in property other than cash, the value of such distribution shall be
the fair market value of such property as determined in good faith by the
Board of Directors of the Corporation. All distributions (including
distributions other than cash) made hereunder shall be made pro rata with
respect to each share of Series A Preferred Stock in accordance with the
liquidation preference amounts described in Section 3 above. In the event of
any dispute between the holders of the Series A Preferred Stock and the
Corporation regarding the determination of the fair market value of non-cash
distributions, at the election of the holders of at least 66 2/3% of the then
outstanding shares of Series A Preferred Stock (voting as a separate class),
the Corporation shall engage a consulting or investment banking firm
selected by the Board of Directors and approved by the holders of at least
66 2/3% of the then outstanding shares of Series A Preferred Stock (voting as
a separate class) to prepare an independent appraisal of the fair market value
of such property to be distributed. The expenses of any appraisal by such
consulting or investment banking firm shall be borne by the Corporation.
4. REORGANIZATION.
If at any time or from time to time there shall be a capital
reorganization of the Common Stock, or a merger or consolidation of the
Corporation with or into another corporation unless the Corporation shall be
the surviving corporation, or the sale of all or substantially all of the
Corporation's capital stock or assets to any other person or entity, or any
other form of business combination or reorganization in which "control" (as
defined in this Section 4) of the Corporation is transferred (a
"Reorganization"), the holders of each share of Preferred Stock shall be
entitled to be paid in cash an amount equal to the greater of:
(a) S17.00 per share of Series A Preferred Stock, plus all accrued
but unpaid dividends thereon, whether or not earned or declared up to and
including the date full payment shall be tendered to the holders of the
Series A Preferred Stock with respect to such Reorganization; and
(b) an amount equal to such amount per share of Series A Preferred
Stock as would have been payable had each share of Series A Preferred Stock,
and all other outstanding shares of any
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class or series of capital stock of the Corporation, if any, which are
convertible into Common Stock and which are senior to the Common Stock with
respect to liquidation preferences, been converted to Common Stock
immediately prior to Such event of Reorganization, but without giving effect
to any other Reorganization preference or participation right of any such
other classes or series of capital stock of the Corporation.
For purposes of this Section 4, "control" shall be deemed to have been
transferred in a transaction or series of transactions in which any person,
or group of persons acting in concert, other than the ESOP, the Purchasers
(or any entity with respect to which any Purchaser beneficially owns more
than 50% of the voting securities of such entity or more than 50% of the
voting securities of such Purchaser is directly or indirectly beneficially
owned or held by such entity or such Purchaser is a partnership in which such
entity is a general partner) and holders of more than 10% of Series A
Preferred Stock immediately prior to the consummation of the Reorganization,
shall have acquired beneficial ownership of more than 25% of the Common Stock
of the Corporation (assuming all rights, options, warrants or convertible or
exchangeable securities entitling the holders thereof to subscribe for or
purchase or otherwise acquire shares of Common Stock (Common Stock
Equivalents") have been fully exercised or converted} or of substantially all
of the assets of the Corporation.
The amounts set forth above and throughout this Section 4 shall be
subject to equitable adjustment whenever there shall occur a stock dividend,
stock split, combination, reorganization, racapitalization, reclassification
or other similar event involving a change in the capital structure of the
Series A Preferred Stock.
5. VOTING POWER.
Except as otherwise expressly provided in this Section 5, or as
otherwise required by law, each holder of Series A Preferred Stock shall be
entitled to vote on all matters and shall be entitled to that number of votes
equal to the largest number of whole shares of Common Stock into which such
holder's shares of Series A Preferred Stock could be converted, pursuant to
the provisions of Section 6 hereof, at the record date for the determination
of stockholders entitled to vote on such matter or, if no such record date is
established, at the date such vote is taken or any written consent of
stockholders is solicited. Except as otherwise expressly provided in Section
5 or Section 8 hereof or as otherwise required by law, the holders of shares
of Series A Preferred Stock and Common Stock shall vote together (or render
written consents in lieu of a vote) as a single class on all matters
submitted to the stockholders of the Corporation including the election of
directors other than the Series A Directors.
The holders of the Series A Preferred Stock, voting as a separate class,
shall be entitled to elect "three directors (the "Series A Directors"). At
any annual or special meeting of the Corporation (or in a written consent in
lieu thereof) held for the purpose of electing directors, the presence in
person or by proxy (or by written consent) of the holders of at least 51% of
the outstanding shares of Series A Preferred Stock (voting as a separate
class) shall constitute a quorum for the election of the Series A Directors.
The persons receiving the highest number of affirmative votes of the shares
of Series A Preferred Stock (voting as a separate class) present in person or
by proxy at any meeting relating to the election of directors (calculated
after the determination of a quorum) shall be elected as the Series A
Directors.
Any Series A Director may be removed during his or her term of office,
without cause, by and only by, the affirmative vote or written consent of the
holders of at least a majority of the then outstanding shares of the Series A
Preferred Stock (voting as a separate class). A vacancy in a seat hald by a
Series A Director shall be filled by vote or written consent of the majority
of the then
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outstanding shares of Series A Preferred Stock (voting as a separate class)
present in person at any meeting (calculated after the determination of a
quorum) or by written consent.
Without the written consent of the holders of at least 66 2/3% of the
then outstanding shares of Series A Preferred Stock (voting as a separate
class), the number of directors of the Corporation shall not exceed nine in
number.
6. CONVERSION RIGHTS. The holders of the Series A Preferred Stock shall
have the following rights with respect to the conversion of such shares into
shares of Common Stock:
(a) GENERAL. Subject to and in compliance with the provisions of
this Section 6, all shares of Series A Preferred Stock held by any person or
entity may, at the option of such person or entity, be converted at any time
and from time to time into fully-paid and non-assessable shares of Common
Stock. The number of shares of Common Stock to which a holder of Series A
Preferred Stock shall be entitled to receive upon conversion shall be the
product Obtained by multiplying the Applicable Conversion Rate (determined as
provided in Section 6(b)) by the number of shares of Series A Preferred Stock
being converted at any time.
(b) APPLICABLE CONVERSION RATE. The conversion rate in effect at
any time for the Series A Preferred Stock (the "Applicable Conversion Rate")
shall be the quotient obtained by dividing $17.00 by the Applicable
Conversion Value, calculated as provided in Section 6(c).
(c) APPLICABLE CONVERSION VALUE. The Applicable Conversion Value in
effect from time to time, except as adjustsd in accordance with Section 6(d)
hereof, shall be $17.00 (the "Applicable Conversion Value").
(d) ADJUSTMENTS TO APPLICABLE CONVERSION VALUE OF SERIES A PREFERRED
STOCK.
(i)(A) UPON DILUTIVE ISSUANCES OF COMMON STOCK OR CONVERTIBLE
SECURITIES. If the Corporation shall, while there are any shares of
Series A Preferred Stock outstanding, issue or sell shares of its Common
Stock or Common Stock Equivalents (as defined in Section 6(d)(i)(B)(1))
without consideration or at a price per share less than the Applicable
Conversion Value in effect immediately prior to such issuance or sale,
then in each such case such Applicable Conversion Value, except as
hereinafter provided, shall be lowered so as to be equal to an amount
determined by multiplying such Applicable Conversion Value by a fraction:
(1) the numerator of which shall be (a) the number of shares
of Common Stock outstanding immediately prior to the issuance of
such additional shares of Common Stock or Common Stock Equivalents
(calculated on a fully-diluted basis assuming the conversion of all
then presently exercisable options, warrants, purchase rights or
convertible securities whose exercise or conversion price is less
than the Applicable Conversion Value then in effect), plus (b) the
number of shares of Common Stock or Common Stock Equivalents which
the net aggregate consideration, if any, received by the
Corporation for the total number of such additional sharers of
Common Stock or Common Stock Equivalents so issued would purchase
at the Applicable Conversion Value in effect immediately prior to
such issuance, and
(2) the denominator of which shall be (a) the number of shares
of Common Stock outstanding immediately prior to the issuance of
such additional shares of Common Stock or Common Stock Equivalents
(calculated on a fully-diluted basis assuming the exercise or
conversion of all then presently exercisable options, warrants,
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purchase right or convertible securities whose exercise or
conversion price is less than the Applicable Conversion Value then
in effect), plus (b) the number of such additional shares of Common
Stock or Common Stock Equivalents so issued.
The provisions of the foregoing paragraph as they may apply
to the Series A Preferred Stock may be waived in any instance (without the
necessity of convening any meeting of stockholders of the Corporation) upon
the written agreement of at least 66 2/3% of the then outstanding shares of
Series A Preferred Stock (voting as a separate class).
(i)(B) UPON DILUTIVE ISSUANCES OF WARRANTS, OPTIONS AND PURCHASE
RIGHTS TO COMMON STOCK OR CONVERTIBLE SECURITIES.
(1) For the purposes of this Section 6(d)(i), the issuance of any
Common Stock Equivalent shall be deemed an issuance of Common Stock with
respect to adjustments in the Applicable Conversion Value if the Net
Consideration Per Share (as hereinafter determined) which may be
received by the Corporation for such Common Stock shall be less than the
Applicable Conversion Value in effect at the time of such issuance. Any
obligation, agreement or undertaking to issue Common Stock Equivalents
at any time in the future shall be deemed to be an issuance at the time
such obligation, agreement or undertaking is made or arises. No
adjustment of the Applicable Conversion Value shall be made under this
Section 6(d)(i) upon the issuance of any shares of Common Stock which
are issued pursuant to the exercise, conversion or exchange of any
Common Stock Equivalents if any adjustment shall previously have bean
made upon the issuance of any such Common Stock Equivalenta as above
provided.
(2) Adjustments for Cancellation or Expiration of Common Stock
Equivalents. Should the Net Consideration Per Share of any such Common
Stock Equivalents be decreased from time to time, then, upon the
effectiveness of each such change, the Applicable Conversion Value will
be that which would have been obtained (x) had the adjustments made upon
the issuance of such Common Stock Equivalents been made upon the basis
of the actual Net Consideration Per Share of such securities, and (y)
had the adjustments made to the Applicable Conversion Value since the
date of issuance of such Common Stock Equivalents been made to such
Applicable Conversion Value as adjusted pursuant to c1ause (1) above.
Any adjustment of the Applicable Conversion Value with respect to this
Section 6(d)(i) which relates to any Common Stock Equivalent shall be
disregarded if, as, and when such Common Stock Equivalent expires or is
cancelled without being exercised, or is repurchased by the Corporation
at a price per share at or less than the original purchase price, so
that the Applicable Conversion Value effective immediately upon such
cancellation or expiration shall be equal to the Applicable Conversion
Value that would have been in effect had the expired or cancelled Common
Stock Equivalent not been issued.
(3) Net Consideration Per Share. For purposes of this paragraph,
the "Net Consideration Per Share" which may be received by the
Corporation shall be determined as follows:
(a) The "Net Consideration Per Share" shall mean the amount
equal to the total amount of consideration, if any, received by the
Corporation for the issuance of such Common Stock Equivalents, plus the
minimum amount of
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consideration, if any, payable to the Corporation upon exercise or
conversion or exchange thereof, divided by the aggregate number of
shares of Common Stock that would be issued if all such Common Stock
Equivalents were exercised, exchanged or converted.
(b) The "Net Consideration Per Share" which may be received by the
Corporation shall be determined in each instance as of the date of
issuance of Common Stock Equivalents without giving effect to any
possible future upward price adjustments or rate adjustments which may
be applicable with respect to such Common Stock Equivalents.
(i)(C) STOCK DIVIDENDS FOR HOLDERS OF CAPITAL STOCK OTHER THAN
COMMON STOCK. In the event that the Corporation shall make or issue, or shall
fix a record date for the determination of holders of any capital stock of
the Corporation other than holders of Common Stock entitled to receive a
dividend or other distribution payable in Common Stock or securities of the
Corporation convertible into or otherwiss exchangeable for shares of Common
Stock of the Corporation, then such Common Stock or other securities issued
in payment of such dividend shall be deemaed to have been issued for no
consideration, except for (1) dividends payable in shares of Common Stock
payable pro rata to holders of Series A Preferred Stock and to holders of any
other class of stock (whether or not paid to holders of any other class of
stock), or (2) with respect to the Series A Preferred Stock, dividends
payable in shares of Series A Preferred Stock which shall be deemed to have
been issued at the then Applicable Conversion Value; provided, however, that
holders of any shares of Series A Preferred Stock shall be entitled to
receive in lieu of such Series A Preferred Stock the shares of Common Stock
for which the shares of Series A Preferred Stock are then convertible.
(i)(D) CONSIDERATION OTHER THAN CASH. For purposes of this Section
6(d)(i), if a part or all of the consideration received by the Corporation in
connection with the issuance of shares of the Common Stock or the issuance of
any of the securities described in this Section 6(d)(i) consists of property
other than cash, such consideration shall be deemed to have a fair market
value as is reasonably determined in good faith by the Board of Directors of
the Corporation. In the event of any dispute between the holders of the
Series A Preferred Stock and the Corporation regarding the determination of
fair market value, on the request of the holders of at least 66 2/3% of the
outstanding shares of Series A Preferred Stock (voting as a separate class),
the Corporation shall engage a consulting firm or investment banking firm,
selected by the Board of Directors and approved by the holders of at least
66 2/3% of the outstanding shares of Series A Preferred Stock (voting as a
separate class), to prepare an independent appraisal of the fair market value
of such property to be distributed. The expenses of any appraisal by such
consulting or investment banking firm shall be borne by the Corporation.
(i)(E) EXCEPTIONS TO ANTI-DILUTION ADJUSTMENTS: BASKET FOR RESERVED
EMPLOYEE SHARES. This Section 6(d)(i) shall not apply (a) under any of the
circumstances which would constitute an Extraordinary Common Stock Event (as
described below); (b) with respect to the issuance or exercise of warrants
issued to the placement agents of the Series A Preferred Stock for 82,353
shares of Common Stock; (c) with respect to the issuance or sale of shares of
Common Stock, or the grant of options, warrants or other rights exercisable
therefor, issued or issuable after the original issue date of the Series A
Preferred Stock to directors, officers, employees and consultants of the
Corporation or any subsidiary, pursuant to any qualified or non-qualified
stock option plan or agreement, stock purchase plan or agreement, stock
restriction agreement, employee stock ownership plan (ESOP), consulting
agreement, or such
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other options, issuances, arrangements, agreements or plans approved by the
Board of Directors so long as the aggregate number of such shares (including
those shares issuable upon the exercise of Common Stock Equivalents other
than options issued to Jeffrey A. Snider to purchase 30,000 shares of Common
Stock) does not exceed 10% of the outstanding Common Stock (assuming all
Common Stock Equivalents have been fully exercised or converted) at the time
of proposed issuance; (d) with respect to the issuance or exercise of options
issued to Jeffrey A. Snider to purchase 30,000 shares of Common Stock; and
(e) as to shares or Common Stock Equivalents purchased by any holder of
Series A Preferred Stock pursuant to Article 8 of the Series A Preferred
Stock Purchase Agreement dated as of August 3, 1994 (the "Stock Purchase
Agreement") among the Corporation and the Purchasers listed on Schedule 1.01
thereto (the "Purchasers").
(d) (ii) UPON EXTRAORDINARY COMMON STOCK EVENT. Upon the happening of an
Extraordinary Common Stock Event (as hereinafter defined), the Applicable
Conversion Value and all other conversion values set forth in Section 6(d)
(i) above) shall, simultaneously with the happening of such Extraordinary
Common Stock Event, be adjusted by multiplying the applicable Conversion
Value by a fraction, the numerator of which shall be the number of shares of
Common Stock outstanding immediately prior to such Extraordinary Common Stock
Event and the denominator of which shall be the number of shares of Common
Stock outstanding immediately after such Extraordinary Common Stock Event,
and the product so obtained shall thereafter be the Applicable Conversion
Value. The Applicable Conversion Value, as so adjusted, shall be readjusted in
the same manner upon the happening of any successive Extraordinary Common
Stock Event or Events.
An "Extraordinary Common Stock Event" shall mean (i) the issue
of additional shares of Common Stock as a dividend or other distribution on
outstanding shares of Common Stock, (ii) a subdivision of outstanding shares
of Common Stock into a greater number of shares of Common Stock, or (iii) a
combination or reverse stock split of outstanding shares of Common Stock into
a smaller number of shares of the Common Stock.
(e) AUTOMATIC CONVERSION UPON QUALIFIED PUBLIC OFFERING OR ELECTION OF
SERIES A PREFERRED STOCK.
(i) Immediately upon (A) the closing of a public offering pursuant
to an effective registration statement filed pursuant to the Securities Act
of 1933, as amended covering the offer and sale of shares of Common Stock in
which the aggregate price paid for such shares by the public is equal to or
greater than $20,000,000 and in which the price per share of Common Stock
paid by the public equals or exceeds (I) for the period until December 31,
1995, 125% of the then Applicable Conversion Value, (II) for the period from
January 1, 1996 through December 31, 1996. 135% of the then Applicable
Conversion Value or (III) for the period on or after January 1, 1997, 150% of
the then Applicable Conversion Value (a "Qualified Public Offering"), or (B)
the approval, set forth in a written notice to the Corporation and all record
holders of Series A Preferred Stock, of the holders of at least 66 2/3% of
the outstanding shares of Series A Preferred Stock of an election to convert
Series A Preferred Stock into Common Stock, then all outstanding shares of
Series A Preferred Stock shall be converted automatically into the number of
shares of Common Stock into which such shares of Series A Preferred Stock are
then convertible pursuant to Section 6 hereof as of the closing and
consummation of such underwritten public offering, or the stated date of
approval of such holders of Series A Preferred Stock, without any further
action by the holders of such shares and whether or not the certificates
representing such shares are surrendered to the Corporation or its transfer
agent.
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(ii) SURRENDER OF CERTIFICATES UPON AUTOMATIC CONVERSION. Upon the
occurrence of the conversion event specified in the immediately preceding
subparagraph (i), the holders of the Series A Preferred Stock shall, upon
notice from the Corporation, surrender the certificates representing such
shares at the office of the Corporation or of its transfer agent for the
Common Stock. Thereupon, there shall be issued and delivered to such
holder a certificate or certificates for the number of shares of Common
Stock into which the shares of Series A Preferred Stock so surrendered
were convertible on the date on which such conversion occurred. The
Corporation shall not be obligated to issue such certificates unless
certificates evidencing the shares of Series A Preferred Stock being
converted are either delivered to the Corporation or any such transfer
agent, or the holder notifies the Corporation that such certificates have
been lost, stolen or destroyed and executes an agreement satisfactory to
the Corporation to indemnify the Corporation from any loss incurred by it
in connection therewith.
(f) DIVIDENDS. In the event the Corporation shall make or issue, or
shall fix a record date for the determination of holders of Common Stock
entitled to receive (and shall thereafter make or issue) a dividend or other
distribution (other than a distribution in liquidation, any other
distribution otherwise provided for herein or any dividend otherwise provided
for under Section 2(b)) with respect to the Common Stock payable in (i)
securities of the Corporation other than shares of Common Stock, or (ii)
other assets (excluding cash dividends or distributions), then and in each
such event provision shall be made so that the holders of the Series A
Preferred Stock shall receive upon conversion thereof in addition to the
number of shares of Common Stock receivable thereupon, the number of
securities or such other assets of the Corporation which they would have
received had their Series A Preferred Stock been converted into Common Stock
on the date of such event and had they thereafter, during the period from the
date of such event to and including the Conversion Date (as that term is
hereafter defined in Section 6(j)), retained such securities or such other
assets receivable by them during such period, giving application to all other
adjustments called for during such period under this Section 6 with respect
to the rights of the holders of the Series A Preferred Stock.
(g) CAPITAL REORGANIZATION OR RECLASSIFICATION. If the Common Stock
issuable upon the conversion of the Series A Preferred Stock shall be changed
into the same or different number of shares of any class or classes of
capital stock, whether by capital reorganization, recapitalization,
reclassification or otherwise (other than a subdivision or combination of
shares or stock dividend provided for elsewhere in this Section 6, or the
sale of all or substantially all of the Corporation's capital stock or assets
to any other person), then and in each such event the holders of the Series A
Preferred Stock shall have the right thereafter to convert such shares into
the kind and amount of shares of capital stock and other securities and
property receivable upon such reorganization, recapitalization,
reclassification or other change by the holders of the number of shares of
Common Stack into which such shares of Series A Preferred Stock might have
been converted immediately prior to such reorganization, recapitalization,
reclassification or change, all subject to further adjustment as provided
herein.
(h) DE MINIMIS CHANGES IN APPLICABLE CONVERSION . No adjustment in the
Applicable Conversion Value shall be required unless such adjustment would
require an increase or decrease of at least one percent (1%) of the
Applicable Conversion Value; provided, however, that any adjustments that, at
the time of the calculation thereof, are less than one percent (1%) of the
Applicable Conversion Value at such time and by reason of this Section 6(h)
are not required to be made at such time shall be carried forward and added
to any subsequent adjustment or adjustments for purposes of determining
whether such subsequent adjustments, as so supplemented, exceed the one
percent (1%) amount, all adjustments deferred prior thereto and not
previously made shall then be made. In any case, all such adjustments being
carried forward pursuant to this Section 6(h) shall be
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given effect upon the conversion of the Series A Preferred Stock by any
holder thereof for purposes of determining the Applicable Conversion Value
thereof.
(i) CERTIFICATE AS TO ADJUSTMENTS: NOTICE BY CORPORATION. In each case
of an adjustment or readjustment of the Applicable Conversion Rate, the
Corporation at its expense will furnish each holder of Series A Preferred
Stock so affected with a certificate prepared by the Treasurer or Chief
Financial Officer of the Corporation, showing such adjustment or
readjustment, and stating in detail the facts upon which such adjustment or
readjustment is based. Within 90 days of the end of each fiscal year of the
Corporation, the Corporation at its expense will furnish each holder of
Series A Preferred Stock so affected with a certificate prepared by the
independent public accountants to the Corporation, showing such adjustment or
readjustment, and stating in detail the facts upon which such adjustment or
readjustment is based.
(j) EXERCISE OF CONVERSION PRIVILEGE. To exercise its conversion
privilege, a holder of Series A Preferred Stock shall surrender the
certificate or certificates representing the shares being converted to the
Corporation at its principal office, and shall give written notice to the
Corporation at that office that such holder elects to convert such shares.
Such notice shall also state the name or names (with address or addresses) in
which the certificate or certificates for shares of Common Stock issuable
upon such conversion shall be issued. The certificate or certificates for
shares of Series A Preferred Stock surrendered for conversion shall be
accompanied by proper assignment thereof to the Corporation or in blank; The
date when such written notice is received by the Corporation. Together with
the certificate or certificates representing the shares of Series A Preferred
Stock being converted, shall be the "Conversion Date". As promptly as
practicable after the Conversion Date, the Corporation shall issue and shall
deliver to the holder of the shares of Series A Preferred Stock being
converted, or on its written order, such certificate or certificates as it
may request for the number of whole shares of Common Stock issuable upon the
conversion of such shares of Series A Preferred Stock in accordance with the
provisions of this Section 6, and cash, as provided in Section 6(k), in
respect of any fraction of a share of Common Stock issuable upon such
conversion. Such conversion shall be deemed to have been effected immediately
prior to the close of business on the Conversion Date, and at such time the
rights of the holder as holder of the converted shares of Series A Preferred
Stock shall cease and the person(s) in whose name(s) any certificate(s) for
shares of Common Stock shall be issuable upon such conversion shall be deemed
to have become the holder or holders of record of the shares of Common Stock
represented thereby.
(k) CASH IN LIEU OF FRACTIONAL SHARES. No fractional shares of Common
Stock or scrip representing fractional shares shall be issued upon the
conversion of shares of Series A Preferred Stock. Instead of any fractional
shares of Common Stock which would otherwise be issuable upon conversion of
Series A Preferred Stock, the Corporation shall pay to the holder of the
shares of Series A Preferred Stock which were converted a cash adjustment in
respect of such fractional shares in an amount equal to the same fraction of
the fair market value per share of the Common Stock (as determined in a
reasonable manner prescribed by the Board of Directors) at the close of
business on the Conversion Date. The determination as to whether or not any
fractional shares are issuable shall be based upon the aggregate number of
shares of Series A Preferred Stock being converted at any one time by any
holder thereof, not upon each share of Series A Preferred Stock being
converted.
(l) RESERVATION OF COMMON STOCK. The Corporation shall at all times
reserve and keep available out of its authorized but unissued shares of
Common Stock, solely for the purpose of effecting the conversion of the
shares of the Series A Preferred Stock, such number of its shares of Common
Stock as shall from time to time be sufficient to effect the conversion of
all outstanding shares of the Series A Preferred Stock (including any shares
of Series A Preferred Stock represented by any warrants, options,
subscription or purchase rights for Series A Preferred Stock), and if at any
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time the number of authorized but unissued shares of Common Stock shall not
be sufficient to effect the conversion of all then outstanding shares of the
Series A Preferred Stock (including any shares of Series A Preferred Stock
represented by any warrants, options, subscriptions or purchase rights for
such Series A Preferred Stock), the Corporation shall take such action as may
be necessary to increase its authorized but unissued shares of Common Stock
to such number of shares as shall be sufficient for such purpose.
(m) NO REISSUANCE OF SERIES A PREFERRED STOCK. No share or shares of
Series A Preferred Stock acquired by the Corporation by reason of redemption,
purchase, conversion or otherwise shall be reissued, and all such shares
shall be cancelled, retired and eliminated from the shares which the
Corporation shall be authorized to issue. Upon any of the foregoing events,
the Corporation shall from time to time take such appropriate corporate
action as may be necessary to reduce the authorized number of shares of the
Series A Preferred Stock.
7. REDEMPTION.
(a) PUT OPTION REDEMPTION. Subject to the limitations contained in
Section 7(h), at the written request of the holders of at least 66 2/3% of
the then outstanding shares of Series A Preferred Stock given to the
Corporation (the "Redemption Request") at any time after December 30, 1998,
the Corporation shall, upon receipt of the Redemption Request, redeem on the
date specified in the Redemption Request (the "Redemption Date"), which
Redemption Date shall be not less than 90 days after the date of the
Redemption Request, all of the then outstanding shares of Series A Preferred
Stock. The Corporation shall, within 5 days of the receipt of the Redemption
Request delivered pursuant to this Section 7(a), provide written notice
thereof to all record holders of Series A Preferred Stock.
(b) SERIES A REDEMPTION PRICE; PAYMENT. The redemption price for
each share of Series A Preferred Stock redeemed pursuant to this Section
7 shall be the greater of (i) the "Fair Market Value per share of Series A
Preferred Stock (determined in accordance with this Section 7(b)) and (ii)
the product of (A) the book value per share of Series A Preferred Stock as
determined as of the end of the most recently ended fiscal quarter of the
Corporation prior to the date of the Redemption Request in accordance with
generally accepted accounting principles times (B) 1.15 the "Series A
Redemption Price").
For purposes of this Section 7, the "Fair Market Value" of a share
of Series A Preferred Stock as of the Redemption Date shall be determined by
a nationally recognized investment bank, accounting firm or other financial
institution to be mutually agreed upon by the Corporation and the holders of
the Preferred Stock (an Appraiser") who shall be experienced in evaluating
companies in the same or similar lines of business as the Corporation and the
Subsidiaries. If within 15 days of the Redemption Request, the Corporation
and the holders of the Series A Preferred Stock have not agreed on an
Appraiser, the Corporation and the holders of the Series A Preferred Stock
shall each appoint an Appraiser. Each Appraiser shall be required to render
its decision as to Fair Market Value not later than 30 days after its
appointment. In the event that the difference between the Fair Market Values
arrived at by the Appraisers so selected shall be no more than 10% greater
than the lower of the Fair Market Values, the Fair Market Value shall be the
average of the Fair Market Values. If the two Fair Market Values shall not be
within 10% of the lower of the Fair Market Values, then the Appraisers shall
select a third independent Appraiser who shall within 30 days of appointment
determine a third Fair Market Value, provided that such third Appraiser shall
be restricted to determining a Fair Market Value which is neither higher nor
lower than the higher and lower of the other two Fair Market Values
respectively. The Fair Market Value shall be the average of the one
determined by the third independent Appraiser and the Fair Market Value
determined by one of the two other Appraisers to which it is closest. The
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determination of Fair Market Value to be determined by each Appraiser shall
be based on the greater of (i) the probable sale price for all of the
business of the Corporation that a willing strategic purchaser would pay in
an arm's length transaction divided by the number of shares of Common Stock
outstanding (calculated on a fully-diluted basis assuming the conversion of
all then presently exercisable options, warrants, purchase rights or
convertible securities then in affect) or (ii) the probable offering price
per share of Common Stock of the Corporation in a Qualified Public Offering
on the Redemption Date (assuming that the entire capitalization of the
Corporation consists of the number of shares of Common Stock outstanding on
the Redemption Date and that number of shares of Common Stock which would be
outstanding on the Redemption Date upon the conversion of all then
outstanding presently exercisable options, warrants, purchase rights or
convertible securities then in effect). The determination of the Fair Market
Value shall be based upon a review of all relevant factors, including,
without limitation, significant recent events affecting the Corporation,
including pending mergers and acquisitions; revenues and earnings of the
Corporation to the date of determination; projected earnings of the
Corporation; price earnings and revenue multiples of comparable companies
sold in the same industry; and such other matters as an Appraiser would deem
pertinent. The determination shall be set forth in a written detailed report
mutually addressed to the Board of Directors of the Corporation and the
holders of the Series A Preferred Stock. All costs related to the appointment
of and valuation by the Appraisers shall be borne by the Corporation.
The Corporation shall pay the Series A Redemption Price on the
Redemption Date in cash, or at its option, may pay up to 50% of the Series A
Redemption Price through the issuance to each holder of Series A Preferred
Stock of a promissory note of the Corporation for the principal amount by
which the Corporation's cash payment on the Redemption Date to such holder
was less than the aggregate Series A Redemption Price payable to such holder
on such date (the "Redemption Notes"). The Redemption Notes shall bear
interest at a rate per annum of the lesser of 18% or the highest rate allowed
by law. All accrued and unpaid interest on each Redemption Note and the
entire outstanding principal amount of each Redemption Note shall be due and
payable on the first anniversary of the date of issuance of such Redemption
Note. Each payment of principal and interest on any Redemption Note shall be
made pro rata among all holders of Redemption Notes based on the amounts then
due under such Redemption Note.
(c) EQUITABLE ADJUSTMENT. The Series A Redemption Price set forth in
this Section 7 shall be subject to equitable adjustment whenever there shall
occur a stock split, stock dividend, combination, recapitalization,
reclassification or other similar event involving a change in the Series A
Preferred Stock.
(d) REDEMPTION NOTICE. At least 15 days prior to the Redemption Date,
written notice (hereinafter referred to as the "Redemption Notice") shall be
mailed, certified mail, return receipt requested, by the Corporation to each
holder of record of Series A Preferred Stock at its address shown on the
records of the Corporation; provided, however, that the Corporation's failure
to give such Redemption Notice shall in no way affect its obligation to
redeem the shares of Series A Preferred Stock as provided herein. The
Redemption Notice shall contain the following information:
(i) the number of shares of Series A Preferred Stock held by the
holder which shall be redeemed on such date under Section 7(a) by the
Corporation and the total number of shares of Series A Preferred Stock
held by all holders to be so redeemed;
(ii) the Redemption Date and the Series A Redemption Price;
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(iii) whether the Series A Redemption Price shall be paid 100%
in cash or 50% in cash and 50% in Redemption Notes on the Redemption
Date; and
(iv) that the holder is to surrender to the Corporation, at the
places and times designated therein, its certificate or certificates
representing the shares of Series A Preferred Stock to be redeemed.
(e) SURRENDER OF CERTIFICATES. Each holder of shares of Series A
Preferred Stock to be redeemed shall surrender the certificate(s)
representing such shares to the Corporation at the places and times
designated in the Redemption Notice, and thereupon the Series A Redemption
Price shall be paid to the order of the person whose name appears on such
certificate(s) and each surrendered certificate shall be cancelled and retired.
(f) DIVIDENDS AND CONVERSION AFTER REDEMPTION. Each share to be
redeemed shall retain all of the rights and privileges of the Series A
Preferred Stock until such share is actually redeemed in cash or by the
issuance of the Redemption Notes, including, without limitation, the dividend
rights of Section 2 herein, the liquidation preferences of Section 3 herein,
the conversion rights of Section 6 herein and the voting rights of Section 7
herein.
(g) FAILURE TO REDEEM. If the funds of the Corporation legally
available for redemption of the Series A Preferred Stock on the Redemption
Date are insufficient to redeem the number of shares of Series A Preferred
Stock to be so redeemed on such date, the holders of shares of Series A
Preferred Stock shall share ratably in any funds legally available for
redemption of such shares according to the respective amounts which would be
payable with respect to the number of shares owned by them if the shares to
be so redeemed on such date were redeemed in full. The shares of Series A
Preferred Stock not redeemed shall remain outstanding and entitled to all
rights and preferences provided herein. In the event that the Corporation
fails to make the payments of the Series A Redemption Price on the Redemption
Date or fails to make payments on the Redemption Notes delivered pursuant
hereto on the due date thereof, whether as a consequence of lack of
liquidity, legal restriction or otherwise, the interest on the amounts then
due will be eighteen percent (18%) or the highest rate allowed by law, if
lower.
(h) DURATION OF PUT OPTION REDEMPTION. The rights of the holders of
the Series A Preferred Stock under this Section 7 shall expire upon a
Qualified Public Offering.
8. RESTRICTIONS AND LIMITATIONS.
The Corporation shall not take any corporate action or otherwise amend
its Articles of Incorporation or By-laws without the approval by vote or
written consent of the holders of at least 66 2/3% of the then outstanding
shares of Series A Preferred Stock (voting as a separate class}, each share
of Series A Preferred Stock to be entitled to one vote in each instance, if
such corporate action or amendment would change any of the rights,
preferences, privileges of or limitations provided far herein for the benefit
of any shares of Series A Preferred Stock or materially adversely affect the
rights of the holders of the Series A Preferred Stock. Without limiting the
generality of the preceding sentence, the Corporation will not amend its
Articles of Incorporation or take any other corporate action without the
approval of the holders of at least 66 2/3% of the then outstanding shares of
Series A Preferred Stock, voting separately as a single class, if such
amendment or corporate action would:
(a) cause or authorize the Corporation to redeem, purchase or
otherwise acquire for value (or pay into or set aside for a sinking fund for
such purpose), any share or shares of equity securities of the Corporation
other than as provided for in Section 2 or Section 7 hereof; or
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(b) authorize, create or issue, or obligate the Corporation to
authorize, create or issue, additional shares of any security other than the
issuance or sale of shares of Common Stock, the issuance of options to
Jeffrey A. Snider to purchase 30,000 shares, or the grant of options,
warrants or other rights exercisable therefor, issued or issuable after the
original issue date of the Series A Preferred Stock to directors, officers.
employees and consultants of the Corporation or any subsidiary, pursuant to
any qualified or non-qualified stock option plan or agreement, stock purchase
plan or agreement, stock restriction agreement, employee stock ownership plan
(ESOP), consulting agreement, or such other options, issuances, arrangements,
agreements or plans approved by the Board of Directors so long as the
aggregate number of such shares (including those Shares issuable upon the
exercise of Common Stock Equivalents and other than options issued to Jeffrey
A. Snider to purchase 30,000 shares of Common Stock does not exceed 10% of
the outstanding Common Stock (assuming all Common Stock Equivalents have been
fully exercised or converted) at the time of proposed issuance; or
(c) reduce the amount payable to the holders of Series A
Preferred Stock upon the voluntary or involuntary liquidation, dissolution or
winding up of the Corporation; or
(d) adversely affect the liquidation preferences, dividend rights,
voting rights or redemption rights of the holders of Series A Preferred
Stock; or
(e) cancel or modify the conversion rights of the holders of Series
A Preferred Stock provided for in Section 6 herein; or
(f) provide for the voluntary liquidation, dissolution,
recapitalization or winding up of the Corporation; or
(g) cause or authorize the Corporation to pay any dividend with
respect to any class of stack ranking junior to or on a parity with
the Series A Preferred Stack, other than any dividend consisting solely of
shares of any class of capital stock paid to the holders of shares of such
class of capital stock; or
(h) sell, transfer or encumber any assets other than in the
ordinary course of business; or
(i) cause or authorize, or obligate itself to cause to authorize,
any Reorganization except that the Corporation may merge with and into a
newly formed Delaware corporation for purposes of reincorporating in Delaware
so long as (a) the capitalization of such newly formed Delaware corporation
subsequent to the merger shall be identical to the capitalization of the
Corporation prior to the merger and (b) the terms of the Series A Preferred
Stock of such newly formed corporation subsequent to the merger shall be
identical to the terms of the Series A Preferred Stock prior to the merger; or
(j) amend the application of any provision of its Articles of
Incorporation or By-laws.
9. NO DILUTION OR IMPAIRMENT. The Corporation will not, by amendment of
its Articles of Incorporation or through any reorganization, transfer of
capital stock or assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms of the Series A Preferred Stock
set forth herein, but will at all times in good faith assist in the carrying
out of all such terms and in the taking of all such action as may be
necessary or appropriate in order to protect the rights of the holders of the
Series A Preferred Stock against dilution or other impairment to the extent
set forth herein. Without limiting the generality
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of the foregoing, the Corporation will take all such action as may be
necessary or appropriate in order that the Corporation may validly and
legally issue fully paid and nonassessable shares of stock on the conversion
of all Series A Preferred Stock from time to time outstanding.
10. NOTICES OF RECORD DATE. In the event of
(a) any taking by the Corporation of a record of the holders of any
class of securities for the purpose of determining the holders thereof who
are entitled to receive any dividend or other distribution, or any right to
subscribe for, purchase or otherwise acquire any shares of capital stack of
any class or any other securities or property, or to receive any other right,
or
(b) any capital reorganization of the Corporation, any
reclassification or recapitalization of the capital stock of the Corporation,
any merger or consolidation of the Corporation, or any transfer of all or
substantially all of the assets of the Corporation to any other corporation,
or any other entity or person, or
(c) any voluntary or involuntary dissolution, liquidation or winding
up of the Corporation,
then and in each such event the Corporation shall mail or cause to be mailed
to each holder of Series A Preferred Stock a notice specifying (i) the date
on which any such record is to be taken for the purpose of such dividend,
distribution or right and a description of such dividend, distribution or
right, (ii) the date on which any such reorganization, reclassification,
recapitalization, transfer, consolidation, merger, dissolution, liquidation
or winding up is expected to become effective, and (iii) the time, if any,
that is to be fixed, as to when the holders of record of Common Stock (or
other securities) shall be entitled to exchange their shares of Common Stock
(or other securities) for securities or other property deliverable upon such
reorganization, reclassification, recapitalization, transfer, consolidation,
merger, dissolution, liquidation or winding up. Such notice shall be mailed
by first class mail, postage prepaid, at least twenty (20) days prior to the
date specified in such notice on which such action is to be taken.
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A494041
Endorsed Filed
In the office of the Secretary of State
of the State of California
Jun 27, 1997
/s/ Bill Jones
BILL JONES, Secretary of State
CERTIFICATE OF AMENDMENT
OF
REINSTATED ARTICLES OF INCORPORATION
OF
PAULA FINANCIAL
Jeffrey A. Snider and Bradley K. Serwin certify that:
1. They are the President and Secretary, respectively, of PAULA Financial, a
California corporation (the "Corporation").
2. The Restated Articles of Incorporation of this Corporation are amended by
amending and restating Section 7(h) of the Certificate of Designation of
Preferences of Series A Preferred Stock of PAULA Financial to read in full
as follows:
"(h) DURATION OF PUT OPTION REDEMPTION
The rights of the holders of the Series A Preferred Stock
under this Section 7 shall expire upon the declaration by the
Securities and Exchange Commission of the effectiveness of a
registration statement filed by the Company under the Securities
Act of 1933, as amended, relating to a Qualified Public
Offering."
3. The foregoing Amendment of Restated Articles of Incorporation has been
duly approved by the Corporation's Board of Directors.
4. The foregoing Amendment of Restated Articles of Incorporation has been
duly approved by the required vote of all the outstanding shareholders of
the Corporation and by the holders of the Series A Preferred Stock of the
Corporation voting separately as a class in accordance with Sections 902
and 903 of the California Corporations Code. The total number of all
outstanding shares of the Corporation is 1,891,665. The total outstanding
Preferred Stock of the Corporation is 941,177, and the total outstanding
Common Stock of the Corporation is 950,488. The percentage vote required
was more than 50% for all shares and at least 66 2/3% for the Series A
Preferred Stock class. 100% of the Series A Preferred stock and 51.3% of
the Common Stock voted in favor of the Amendment.
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this Certificate are true and
correct of our own knowledge.
Dated: June 27, 1997
/s/ JEFFREY A. SNIDER
----------------------------
Jeffrey A. Snider, President
/s/ BRADLEY K. SERWIN
----------------------------
Bradley K. Serwin, Secretary
<PAGE>
PAULA FINANCIAL
(A DELAWARE CORPORATION)
BYLAWS
ARTICLE I
OFFICES
SECTION 1.01 REGISTERED OFFICE. The registered office of PAULA
Financial (hereinafter called the Corporation) in the State of Delaware shall be
at 9 East Loockerman Street, Dover, County of Kent, and the name of the
registered agent in charge thereof shall be the National Registered Agents,
Inc.
SECTION 1.02 OTHER OFFICES. The Corporation may also have an office or
offices at such other place or places, either within or without the State of
Delaware, as the Board of Directors (hereinafter called the Board) may from time
to time determine or as the business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 2.01 ANNUAL MEETINGS. Annual meetings of the stockholders of
the Corporation for the purpose of electing directors and for the transaction of
such other proper business as may come before such meetings may be held at such
time, date and place as the Board shall determine by resolution. Unless
otherwise indicated in the notice of the annual meeting of the stockholders, as
provided in accordance with Section 2.04 of this Article II, the annual meeting
of the stockholders shall be held each year at 4:00 PM on the fourth (4th)
Wednesday in April; however, if this falls on a legal holiday, then the annual
meeting shall be held on the next business day at the same time. Notwithstanding
the above, the date so designated shall be within five (5) months after the end
of the fiscal year of the Corporation and within fifteen (15) months after the
last annual meeting of the stockholders. At each annual meeting of the
stockholders, directors shall be elected, and any other proper business may be
transacted.
SECTION 2.02 Place of Meetings. All meetings of the stockholders shall
be held at such places, within or without the State of Delaware, as may from
time to time be designated by the person or persons calling the respective
meeting and specified in the respective notices or waivers of notice thereof. In
the absence of any such designation, such meetings shall be held at the
principal executive offices of the Corporation.
<PAGE>
SECTION 2.03 SPECIAL MEETINGS. A special meeting of the stockholders,
for any purpose or purposes whatsoever, may be called at any time by the Board
of Directors, or by the Chairman of the Board of Directors, or by the President,
or by one or more stockholders holding shares in the aggregate entitled to cast
not less than 20% of the votes at any such meeting.
If a special meeting is called by any person or persons other than the
Board of Directors or the President or the Chairman of the Board, the request
shall be in writing complying with Section 2.09 hereof and specifying the time
of such meeting and the general nature of the business proposed to be
transacted, and shall be delivered personally or sent by registered mail or by
telegraphic or other facsimile transmission to the Chairman of the Board, the
President, any Vice President or the Secretary of the Corporation.
The officer receiving such request forthwith shall cause notice to be
given to the stockholders entitled to vote, in accordance with the provisions
of Section 2.04 of this Article II, that a meeting will be held at the time
requested by the person or persons calling the meeting, not less than
thirty-five (35) nor more than ninety (90) days after the receipt of the
request. If the notice is not given within twenty (20) days after receipt of
the request, the person or persons requesting the meeting may give the
notice. Nothing contained in this paragraph of this Section 2.03 shall be
construed as limiting, fixing or affecting the time when a meeting of
stockholders called by action of the Board of Directors may be held.
SECTION 2.04 NOTICE OF MEETINGS. Except as otherwise required by law or as
set forth in Section 2.03 above, notice of each meeting of the stockholders,
whether annual or special, shall be given not less than ten (10) nor more than
sixty (60) days before the date of the meeting to each stockholder of record
entitled to vote at such meeting by delivering a typewritten or printed notice
thereof to him personally, or by depositing such notice in the United States
mail, in a postage prepaid envelope, directed to him at his post office address
furnished by him to the Secretary of the Corporation for such purpose or, if he
shall not have furnished to the Secretary his address for such purpose, then at
his post office address last known to the Secretary, or by transmitting a notice
thereof to him at such address by telegraph, cable, or wireless. Except as
otherwise expressly required by law, no publication of any notice of a meeting
of the stockholders shall be required. Every notice of a meeting of the
stockholders shall state the place, date and hour of the meeting, and, in the
case of a special meeting, shall also state the purpose or purposes for which
the meeting is called. Notice of any meeting of stockholders shall not be
required to be given to any stockholder who shall have waived such notice and
such notice shall be deemed waived by any stockholder who shall attend such
meeting in person or by proxy, except as a stockholder who shall attend such
meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting is not lawfully called or
convened. Except as otherwise expressly required by law, notice of any adjourned
meeting of the
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stockholders need not be given if the time and place thereof are announced at
the meeting at which the adjournment is taken.
SECTION 2.05 QUORUM. Except in the case of any meeting for the election of
directors summarily ordered as provided by law, the holders of record of a
majority in voting interest of the shares of stock of the Corporation entitled
to be voted thereat, present in person or by proxy, shall constitute a quorum
for the transaction of business at any meeting of the stockholders of the
Corporation or any adjournment thereof. In the absence of a quorum at any
meeting or any adjournment thereof, a majority in voting interest of the
stockholders present in person or by proxy and entitled to vote thereat or, in
the absence therefrom of all the stockholders, any officer entitled to preside
at, or to act as secretary of, such meeting may adjourn such meeting from time
to time. At any such adjourned meeting at which a quorum is present any business
may be transacted which might have been transacted at the meeting as originally
called.
SECTION 2.06 VOTING.
(a) Each stockholder shall, at each meeting of the stockholders, be
entitled to vote in person or by proxy each share or fractional share of the
stock of the Corporation having voting rights on the matter in question and
which shall have been held by him and registered in his name on the books of the
Corporation:
(i) on the date fixed pursuant to Section 6.05 of these Bylaws as the
record date for the determination of stockholders entitled to notice of and
to vote at such meeting, or
(ii) if no such record date shall have been so fixed, then (a) at
the close of business on the day next preceding the day on which notice of
the meeting shall be given or (b) if notice of the meeting shall be waived,
at the close of business on the day next preceding the day on which the
meeting shall be held.
(b) Shares of its own stock belonging to the Corporation or to another
corporation, if a majority of the shares entitled to vote in the election of
directors in such other corporation is held, directly or indirectly, by the
Corporation, shall neither be entitled to vote nor be counted for quorum
purposes. Persons holding stock of the Corporation in a fiduciary capacity shall
be entitled to vote such stock. Persons whose stock is pledged shall be entitled
to vote, unless in the transfer by the pledgor on the books of the Corporation
he shall have expressly empowered the pledgee to vote thereon, in which case
only the pledgee, or his proxy, may represent such stock and vote thereon Stock
having voting power standing of record in the names of two or more persons,
whether fiduciaries, members of a partnership, joint tenants in common, tenants
by entirety or otherwise, or with respect to which two or more persons have the
same fiduciary relationship, shall be voted in accordance with the provisions of
the General Corporation Law of the State of Delaware.
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(c) Any such voting rights may be exercised by the stockholder entitled
thereto in person or by his proxy appointed by an instrument in writing,
subscribed by such stockholder or by his attorney thereunto authorized and
delivered to the secretary of the meeting; provided, however, that no proxy
shall be voted or acted upon after three years from its date unless said
proxy shall provide for a longer period. The attendance at any meeting of a
stockholder who may theretofore have given a proxy shall not have the effect
of revoking the same unless he shall in writing so notify the secretary of
the meeting prior to the voting of the proxy. At any meeting of the
stockholders all matters, except as otherwise provided in the Certificate of
Incorporation, in these Bylaws or by law, shall be decided by the vote of a
majority in voting interest of the stockholders present in person or by proxy
and entitled to vote thereat and thereon, a quorum being present. The vote at
any meeting of the stockholders on any question need not be by ballot, unless
so directed by the chairman of the meeting. On a vote by ballot each ballot
shall be signed by the stockholder voting, or by his proxy, if there be such
proxy, and it shall state the number of shares voted.
SECTION 2.07 LIST OF STOCKHOLDERS. The Secretary of the Corporation shall
prepare and make, at least ten (10) days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any stockholder,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least ten (10) days prior to the meeting, either at a place
within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at the place
where the meeting is to be held. The list shall also be produced and kept at
the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present.
SECTION 2.08 JUDGES. If at any meeting of the stockholders a vote by
written ballot shall be taken on any question, the chairman of such meeting
may appoint a judge or judges to act with respect to such vote. Each judge so
appointed shall first subscribe an oath faithfully to execute the duties of a
judge at such meeting with strict impartiality and according to the best of
his ability. Such judges shall (a) ascertain the number of shares outstanding
and the voting power of each; (b) determine the shares represented at a
meeting and the validity of proxies and ballots; (c) count all votes and
ballots; (d) determine and retain for a reasonable period a record of the
disposition of any challenges made to any determination by the inspectors;
and (e) certify their determination of the number of shares represented at
the meeting, and their count of all votes and ballots. Reports of judges
shall be in writing and subscribed and delivered by them to the Secretary of
the Corporation. The judges need not be stockholders of the Corporation, and
any officer of the Corporation may be a judge on any question other than a
vote for or against a proposal in which he shall have a material interest.
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SECTION 2.09 ADVANCE NOTICE OF STOCKHOLDER PROPOSALS AND OF STOCKHOLDER
NOMINATIONS.
(a) At any meeting of the stockholders, only such business shall be
conducted as shall have been brought before the meeting (i) by or at the
direction of the Board or (ii) by any stockholder of the Corporation who
complies with the notice procedures set forth in this Section 2.09(a). For
business to be properly brought before any meeting of the stockholders by a
stockholder, the stockholder must have given notice thereof in writing to the
Secretary of the Corporation not less than ninety (90) days in advance of
such meeting or, if later, the seventh day following the first public
announcement of the date of such meeting. A stockholder's notice to the
Secretary shall set forth as to each matter the stockholder proposes to bring
before the meeting (A) a brief description of the business desired to be
brought before the meeting and the reasons for conducting such business at
the meeting, (B) the name and address, as they appear on the Corporation's
books, of the stockholder proposing such business, (C) the class and number
of shares of the Corporation that are beneficially owned by the stockholder,
and (D) any material interest of the stockholder in such business. In
addition, the stockholder making such proposal shall promptly provide any
other information reasonably requested by the corporation. Notwithstanding
anything in these Bylaws to the contrary-, no business shall be conducted at
any meeting of the stockholders except in accordance with the procedures set
forth in this Section 2.09. The Chairman of any such meeting shall direct
that any business not properly brought before the meeting shall not be
considered.
(b) Nominations for the election of directors may be made by the Board or
by any stockholder entitled to vote in the election of directors; PROVIDED,
HOWEVER, that a stockholder may nominate a person for election as a director
at a meeting only if written notice of such stockholder's intent to make such
nomination has been given to the Secretary of the Corporation not later than
90 days in advance of such meeting or, if later, the seventh day following
the first public announcement of the date of such meeting. Each such notice
shall set forth: (1) the name and address of the stockholder who intends to
make the nomination and of the person or persons to be nominated; (2) a
representation that the stockholder is a bolder of record of stock of the
Corporation entitled to vote at such meeting and intends to appear in person
or by proxy at the meeting and nominate the person or persons specified in
the notice; (3) a description of all arrangements or understandings between
the stockholder and each nominee and any other person or persons (naming such
person or persons) pursuant to which the nomination or nominations are to be
made by the stockholder; (4) such other information regarding each nominee
proposed by such stockholder as would be required to be included in a proxy
statement filed pursuant to the proxy rules of the United States Securities
and Exchange Commission had the nominee been nominated, or intended to be
nominated, by the Board; and (5) the consent of each nominee to serve as a
director of the Corporation if so elected. In addition, the stockholder
making such nomination shall promptly provide any other information
reasonably requested by the Corporation. No person shall be eligible for
election as a director of the Corporation unless nominated in accordance with
the procedures set forth in this Section 2.09(b). The Chairman of any meeting
of
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stockholders shall direct that any nomination not made in accordance with these
procedures be disregarded.
ARTICLE III
BOARD OF DIRECTORS
SECTION 3.01 GENERAL POWERS. The property, business and affairs of the
Corporation shall be managed by the Board.
SECTION 3.02 NUMBER; ELECTION AND TERM OF OFFICE. The number of
directors of the Corporation shall exclusively be fixed from time to time by
the Board of Directors, except that in the absence of such designation, such
number shall be nine. Each of the directors of the Corporation shall hold
once until his successor shall have been duly elected and shall qualify or
until he shall resign or shall have been removed in the manner hereinafter
provided.
(a) The directors who shall first take office after the filing of the
Certificate of Incorporation of the Corporation ("Incorporation Date") shall
serve until the first annual meeting of stockholders at which directors are
elected following the Incorporation Date ("First Annual Meeting"). Effective
at the First Annual Meeting, the Board shall be divided into three classes:
Class I, Class II and Class III. Such classes shall be as nearly equal in
number of directors as possible. Each director shall serve for a term ending
at the third annual stockholders meeting following the annual meeting at
which such director was elected; PROVIDED, HOWEVER, that the directors first
elected to Class I shall serve for a term ending at the second annual meeting
held after the Incorporation Date, the directors first elected to Class II
shall serve for a term ending at the third annual meeting held after the
Incorporation Date, and the directors first elected to Class III shall serve
for a term ending at the fourth annual meeting held after the Incorporation
Date.
(b) At each annual election held after the First Annual Meeting, the
directors chosen to succeed those whose terms then expire shall be identified
as being of the same class as the directors they succeed, unless, by reason
of any intervening changes in the authorized number of directors, the Board
of Directors shall designate one or more directorships whose term then
expires as directorships of another class in order more nearly to achieve
equality in the number of directors among the classes. When the Board of
Directors fills a vacancy resulting from the death, resignation or removal of
a director, the director chosen to fill that vacancy shall be of the same
class as the director he succeeds, unless, by reason of any previous changes
in the authorized number of directors, the Board of Directors shall designate
the vacant directorship as a directorship of another class in order more
nearly to achieve equality in the number of directors among the classes.
(c) Notwithstanding the rule that the three classes shall be as nearly
equal in number of directors as possible, in the event of any change in the
authorized number of directors each director then continuing to serve as such
will nevertheless continue as a
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director of the class of which he is a member, until the expiration of his
current term or his earlier death, resignation or removal. If any newly
created directorship or vacancy on the Board of Directors, consistent with
the rule that the three classes shall be as nearly equal in number of
directors as possible, may be allocated to one or two or more classes, the
Board of Directors shall allocate it to that of the available class whose
term of office is due to expire at the earliest date following such
allocation.
(d) During any period when the holders of Preferred Stock or any one or
more series thereof, voting as a class, shall be entitled to elect a
specified number of directors by reason of dividend arrearages or other
contingencies giving them the right to do so, then and during such time as
such right continues (1) the then otherwise authorized number of directors
shall be increased by such specified number of directors, and the holders of
the Preferred Stock or such series thereof, voting as a class, shall be
entitled to elect the additional directors as provided for, pursuant to the
provisions of such Preferred Stock or series; (2) the additional directors
shall be members of those respective classes of directors in which vacancies
are created as a result of such increase in the authorized number of
directors; and (3) each such additional director shall serve until the annual
meeting at which the term of office of his class shall expire and until his
successor shall be elected and shall qualify, or until his right to hold such
office terminates pursuant to the provisions of such Preferred Stock or
series, whichever occurs earlier. Whenever the holders of such Preferred
Stock or series thereof are divested of such rights to elect a specified
number of directors, voting as a class, pursuant to the provisions of such
Preferred Stock or series, the terms of office of all directors elected by
the holders of such Preferred Stock or series, voting as a class pursuant to
such provisions, or elected to fill any vacancies resulting from the death,
resignation or removal of directors so elected by the holders of such
Preferred Stock or series, shall forthwith terminate and the authorized
number of directors shall be reduced accordingly.
SECTION 3.03. REMOVAL OF DIRECTORS. Subject to the rights of the
holders of any series of Preferred Stock then outstanding, any director, or
the entire Board of Directors, may be removed from office at any time, but
only with cause, by the affirmative vote of the holders of a majority of the
voting stock of the corporation.
SECTION 3.04 STOCKHOLDER NOMINATIONS. Stockholder nominations for
director shall be made in accordance with Section 2.09(b) hereof.
SECTION 3.05 RESIGNATIONS. Any director of the Corporation may resign
at any time by giving written notice to the Board or to the Secretary of the
Corporation. Any such resignation shall take effect at the time specified
therein, or, if the time be not specified, it shall take effect immediately
upon its receipt; and unless otherwise specified therein, the acceptance of
such resignation shall not be necessary to make it effective.
SECTION 3.06 VACANCIES. Except as otherwise provided in the Certificate
of Incorporation, any vacancy in the Board caused by death, resignation,
disqualification, or any other cause, except as provided in this Section
3.06, may be filled by vote of the
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majority of the remaining directors, although less than a quorum. Each
director so chosen to fill a vacancy shall hold office until his successor
shall have been elected and shall qualify or until he shall resign or shall
have been removed in the manner hereinafter provided. Vacancies and newly
created directorships resulting from any increase in the authorized number of
directors shall be filled exclusively by the affirmative vote of the
majority of the then incumbent directors, although less than a quorum. No
reduction of the authorized number of directors shall have the effect of
removing any director prior to the expiration of such director's term of
office.
SECTION 3.07 PLACE OF MEETING, ETC. The Board may hold any of its
meetings at such place or places within or without the State of Delaware as
the Board may from time to time by resolution designate or as shall be
designated by the person or persons calling the meeting or in the notice or a
waiver o f notice o f any such meeting. Directors may participate in any
regular or special meeting of the Board by means of conference telephone or
similar communications equipment pursuant to which all persons participating
in the meeting of the Board can hear each other, and such participation shall
constitute presence in person at such meeting.
SECTION 3.08 FIRST MEETING. The Board shall meet as soon as practicable
after each annual election of directors and notice of such first meeting
shall not be required.
SECTION 3.09 REGULAR MEETINGS. Regular meetings of the Board may be
held at such times as the Board shall from time to time by resolution
determine. If any day fixed for a regular meeting shall be a legal holiday at
the place where the meeting is to be held, then the meeting shall be held at
the same hour and place on the next succeeding business day not a legal
holiday. Except as provided by law, notice of regular meetings need not be
given.
SECTION 3.10 SPECIAL MEETINGS. Special Meetings of the Board of
Directors for any purpose or purposes may be called at any time by the
Chairman of the Board or the President or any three directors. Except as
otherwise provided by law or by these Bylaws, notice of the time and place of
each such special meeting shall be mailed to each director, addressed to him
at his residence or usual place of business, at least four (4) days before
the day on which the meeting is to be held, or shall be sent to him at such
place by telegraph or cable or be delivered personally not less than
forty-eight (48) hours before the time at which the meeting is to be held.
Any oral notice given personally or by telephone may be communicated to
either the director or to a person at the office of the director who the
person giving the notice has reason to believe will promptly communicate it
to the director. Except where otherwise required by law or by these Bylaws,
notice of the purpose of a special meeting need not be given. Notice of any
meeting of the Board shall not be required to be given to any director who is
present at such meeting, except a director who shall attend such meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened.
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SECTION 3.11 QUORUM AND MANNER OF ACTING. Except as otherwise provided
in these Bylaws or by law, the presence of a majority of the authorized
number of directors shall be required to constitute a quorum for the
transaction of business at any meeting of the Board, and all matters shall be
decided at any such meeting, a quorum being present, by the affirmative votes
of a majority of the directors present. In the absence of a quorum, a
majority of directors present at any meeting may adjourn the same from time
to time until a quorum shall be present. Notice of any adjourned meeting need
not be given. The directors shall act only as a Board, and the individual
directors shall have no power as such.
SECTION 3.12 ACTION BY CONSENT. Any action required or permitted to be
taken at any meeting of the Board or of any committee thereof may be taken
without a meeting if a written consent thereto is signed by all members of
the Board or of such committee, as the case may be, and such written consent
is filed with the minutes of proceedings of the Board or committee.
SECTION 3.13 COMPENSATION. The directors shall receive only such
compensation for their services as directors as may be allowed by resolution
of the Board. The Board may also provide that the Corporation shall reimburse
each such director for any expense incurred by him on account of his
attendance at any meetings of the Board or Committees of the Board. Neither
the payment of such compensation nor the reimbursement of such expenses shall
be construed to preclude any director from serving the Corporation or its
subsidiaries in any other capacity and receiving compensation therefor.
SECTION 3.14 COMMITTEES. The Board may, by resolution passed by a
majority of the whole Board, designate one or more committees, each committee
to consist of one or more of the directors of the Corporation. Any such
committee, to the extent provided in the resolution of the Board and except
as otherwise limited by law, shall have and may exercise all the powers and
authority of the Board in the management of the business and affairs of the
Corporation, and may authorize the seal of the Corporation to be affixed to
all papers which may require it. Any such committee shall keep written
minutes of its meetings and report the same to the Board at the next regular
meeting of the Board. In the absence or disqualification of a member of a
committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board to act at the meeting in the
place of any such absent or disqualified member.
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ARTICLE IV
OFFICERS
SECTION 4.01 NUMBER. The officers of the Corporation shall be a
President, a Secretary and a Chief Financial Officer. The Corporation may
also have, at the discretion of the Board of Directors, a Chairman of the
Board, one or more Vice Presidents, one or more Assistant Secretaries, one or
more Assistant Financial Officers, and such other officers as may be
appointed in accordance with the provisions of Section 4.03 of this Article IV.
SECTION 4.02 ELECTION, TERM OF OFFICE AND QUALIFICATIONS. The officers
of the Corporation, except such officers as may be appointed in accordance
with Section 4.03, shall be elected annually by the Board at the first
meeting thereof held after the election thereof. Each officer shall hold
office until his successor shall have been duly chosen and shall qualify or
until his resignation or removal in the manner hereinafter provided.
SECTION 4.03 ASSISTANTS, AGENTS AND EMPLOYEES, ETC. In addition to the
officers specified in Section 4.01, the Board may appoint other assistants,
agents and employees as it may deem necessary or advisable, including one or
more Assistant Secretaries, and one or more Assistant Financial Officers,
each of whom shall hold office for such period, have such authority, and
perform such duties as the Board may from time to time determine. The Board
may delegate to any officer of the Corporation or any committee of the Board
the power to appoint, remove and prescribe the duties of any such assistants,
agents or employees.
SECTION 4.04 REMOVAL. Any officer, assistant, agent or employee of the
Corporation may be removed, with or without cause, at any time: (i) in the
case of an officer, assistant, agent or employee appointed by the Board, only
by resolution of the Board; and (ii) in the case of an officer, assistant,
agent or employee, by any officer of the Corporation or committee of the
Board upon whom or which such power of removal may be conferred by the Board.
SECTION 4.05 RESIGNATIONS. Any officer or assistant may resign at any
time by giving written notice of his resignation to the Board or the
Secretary of the Corporation. Any such resignation shall take effect at the
time specified therein, or, if the time be not specified, upon receipt
thereof by the Board or the Secretary, as the case may be; and; unless
otherwise specified therein, the acceptance of such resignation shall not be
necessary to make it effective
SECTION 4.06 VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification, or other cause, may be filled for the
unexpired portion of the term thereof in the manner prescribed in these
Bylaws for regular appointments or elections to such office.
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SECTION 4.07 CHAIRMAN OF THE BOARD. The Chairman of the Board, if such
an officer be elected, shall, if present, preside at all meetings of the
stockholders and at all meetings of the Board of Directors and exercise and
perform such other powers and duties as may be from time to time assigned to
him by the board of Directors or prescribed by the Bylaws. If there is no
President, the Chairman of the Board shall in addition be the Chief Executive
Officer of the Corporation and shall have the powers and duties described in
Section 4.08 of this Article IV.
SECTION 4.08 THE PRESIDENT. The President of the Corporation shall be
the chief executive officer of the Corporation and shall have, subject to the
control of the Board, general and active supervision and management over the
business of the Corporation and over its several officers, assistants, agents
and employees.
SECTION 4.09 THE VICE PRESIDENTS. Each Vice President shall have such
powers and perform such duties as the Board may from time to time prescribe.
At 'the request of the President, or in case of the President's absence or
inability to act upon the request of the Board, a Vice President shall
perform the duties of the President and when so acting, shall have all the
powers of, and be subject to all the restrictions upon, the President.
SECTION 4.10 THE SECRETARY. The Secretary shall, if present, record the
proceedings of all meetings of the Board, of the stockholders, and of all
committees of which a secretary shall not have been appointed in one or more
books provided for that purpose; he shall see that all notices are duly given
in accordance with these Bylaws and as required by law; he shall be custodian
of the seal of the Corporation and shall affix and attest the seal to all
documents to be executed on behalf of the Corporation under its seal; and, in
general, he shall perform all the duties incident to the office of Secretary
and such other duties as may from time to time be assigned to him by the
Board.
SECTION 4.11 THE CHIEF FINANCIAL OFFICER. The Chief Financial Officer
shall have the general care and custody of the funds and securities of the
Corporation, and shall deposit all such funds in the name of the Corporation
in such banks, trust companies or other depositories as shall be selected by
the Board. He shall receive, and give receipts for, moneys due and payable to
the Corporation from any source whatsoever. He shall exercise general
supervision over expenditures and disbursements made by officers, agents and
employees of the Corporation and the preparation of such records and reports
in connection therewith as may be necessary or desirable. He shall, in
general, perform all other duties incident to the office of Chief Financial
Officer and such other duties as from time to time may be assigned to him by
the Board. The Chief Financial Officer of this Corporation is, for purposes
of giving reports or executing any certificates or other documents requiring
the signature of the "Treasurer," deemed to be the Treasurer of this
Corporation
SECTION 4.12 COMPENSATION. The compensation of the officers of the
Corporation shall be fixed from time to time by the Board. None of such
officers shall be
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prevented from receiving such compensation by reason of the fact that he is
also a director of the Corporation. Nothing contained herein shall preclude
any officer from serving the Corporation, or any subsidiary corporation, in
any other capacity and receiving such compensation by reason of the fact that
he is also a director of the Corporation. Nothing contained herein shall
preclude any officer from serving the Corporation, or any subsidiary
corporation, in any other capacity and receiving proper compensation therefor.
ARTICLE V
CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC.
SECTION 5.01 EXECUTION OF CONTRACTS. The Board, except as otherwise
provided in these Bylaws, may authorize any officer or officers, agent or
agents, to enter into any contract or execute any instrument in the name of
and on behalf of the Corporation, and such authority may be general or
confined to specific instances; and unless so authorized by the Board or by
these Bylaws, no officer, agent or employee shall have any power or authority
to bind the Corporation by any contract or engagement or to pledge its credit
or to render it liable for any purpose or in any amount.
SECTION 5.02 CHECKS, DRAFTS, ETC. All checks, drafts or other orders
for payment of money, notes or other evidence of indebtedness, issued in the
name of or payable to the Corporation, shall be signed or endorsed by such
person or persons and in such manner as, from time to time shall be
determined by resolution of the Board. Each such officer, assistant, agent or
attorney shall give such bond, if any, as the Board may require.
SECTION 5.03 DEPOSITS. All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the
Corporation in such banks, trust companies or other depositories as the Board
may select, or as may be selected by any officer or officers, assistant or
assistants, agent or agents, or attorney or attorneys of the Corporation to
whom such power shall have been delegated by the Board. For the purpose of
deposit and for the purpose of collection for the account of the Corporation,
the President, any Vice President or the Chief Financial Officer (or any
other officer or officers, assistant or assistants, agent or agents, or
attorney or attorneys of the Corporation who shall from time to time be
determined by the board) may endorse assign and deliver checks, drafts and
other orders for the payment of money which are payable to the order of the
Corporation.
SECTION 5.04 GENERAL AND SPECIAL BANK ACCOUNTS. The Board may from time to
time authorize the opening and keeping of general and special bank accounts with
such banks, trust companies or other depositories as the Board may select or as
may be selected by any officer or officers, assistant or assistants, agent or
agents, or attorney or attorneys of the Corporation to whom such power shall
have been delegated by the Board. The Board may make such special rules and
regulations with respect to such bank accounts, not inconsistent with the
provisions of these Bylaws, as it may deem expedient.
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ARTICLE VI
SHARES AND THEIR TRANSFER
SECTION 6.01 CERTIFICATES FOR STOCK. Every owner of stock of the
Corporation shall be entitled to have a certificate or certificates, to be in
such form as the Board shall prescribe, certifying the number and class of
shares of the stock of the Corporation owned by him. The certificates
representing shares of such stock shall be numbered in the order in which
they shall be issued and shall be signed in the name of the Corporation by
the President or a Vice President, and by the Secretary or an Assistant
Secretary or by the Chief Financial Officer, acting as Treasurer. Any of or
all of the signatures on the certificates may be a facsimile. In case any
officer, transfer agent or registrar who has signed, or whose facsimile
signature has been placed upon, any such certificate, shall have ceased to be
such officer, transfer agent or registrar before such certificate is issued,
such certificate may nevertheless be issued by the Corporation with the same
effect as though the person who signed such certificate, or whose facsimile
signature shall have been placed thereupon, were such officer, transfer agent
or registrar at the date of issue. A record shall be kept of the respective
names of the persons, firms or corporations owning the stock represented by
such certificates, the number and class of shares represented by such
certificates, respectively, and the respective dates thereof, and in case of
cancellation, the respective dates of cancellation. Every certificate
surrendered to the Corporation for exchange or transfer shall be cancelled,
and no new certificate or certificates shall be issued in exchange for any
existing certificate until such existing certificate shall have been so
cancelled, except in cases provided for in Section 6.04.
SECTION 6.02 TRANSFERS OF STOCK. Transfers of shares of stock of the
Corporation shall be made only on the books of the Corporation by the
registered holder thereof, or by his attorney thereunto authorized by power
of attorney duly executed and filed with the Secretary, or with a transfer
clerk or a transfer agent appointed as provided in Section 6.03, and upon
surrender of the certificate or certificates for such shares properly
endorsed and the payment of all taxes thereon. The person in whose name
shares of stock stand on the books of the Corporation shall be deemed the
owner thereof for all purposes as regards the Corporation. Whenever any
transfer of shares shall be made for collateral security, and not absolutely,
such fact shall be so expressed in the entry of transfer if, when the
certificate or certificates shall be presented to the Corporation for
transfer, both the transferor and the transferee request the Corporation to
do so.
SECTION 6.03 REGULATIONS. The Board may make such rules and regulations
as it may deem expedient, not inconsistent with these Bylaws, concerning the
issue, transfer and registration of certificates for shares of the stock of
the Corporation. It may appoint, or authorize any officer or officers to
appoint, one or more transfer clerks or one or more transfer agents and one
or more registrars, and may require all certificates for stock to bear the
signature or signatures of any of them.
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SECTION 6.04 LOST, STOLEN, DESTROYED, AND MUTILATED CERTIFICATES. In
any case of loss, theft, destruction, or mutilation of any certificate of
stock, another may be issued in its place upon proof of such loss, theft,
destruction, or mutilation and upon the giving of a bond of indemnity to the
Corporation in such form and in such sum as the Board may direct; provided,
however, that a new certificate may be issued. without requiring any bond
when, in the judgment of the Board, it is proper so to do.
SECTION 6.05 FIXING DATE FOR DETERMINATION OF STOCKHOLDERS OF RECORD.
In order that the Corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment
thereof, or to express consent to corporate action in writing without a
meeting, or entitled to receive payment of any dividend or other distribution
or allotment of any rights, or entitled to exercise any right in respect of
any other change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board may fix, in advance, a record date, which
shall not be more than 60 nor less than 10 days before the date of such
meeting, nor more than 60 days prior to any other action. If in any case
involving the determination of stockholders for any purpose other than notice
of or voting at a meeting of stockholders or expressing consent to corporate
action without a meeting the Board shall not fix such a record date, the
record date for determining stockholders for such purpose shall be the close
of business on the day on which the Board shall adopt the resolution relating
thereto. A determination of stockholders entitled to notice of or to vote at
a meeting of stockholders shall apply to any adjournment of such meeting;
provided, however, that the Board may fix a new record date for the adjourned
meeting.
ARTICLE VII
INDEMNIFICATION
SECTION 7.01 SCOPE OF INDEMNIFICATION. The Corporation shall indemnify
and shall advance expenses (including attorneys' fees) to, in each case to
the fullest extent permitted by the Delaware General Corporation Law as the
same exists or may hereinafter be amended (the "Delaware Law"), any person
(or the estate of any person) who IS or was a party, or is threatened to be
made a party to, any threatened, pending or completed action, suit or
proceeding, whether or not by or in the right of the Corporation, and whether
civil, criminal, administrative, investigative or otherwise, by reason of the
fact that such person is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise. The indemnification and right to
advancement of expenses provided herein shall not be deemed to limit the
right of the Corporation to indemnify any other person to the fullest extent
permitted by the Delaware Law, nor shall they be deemed exclusive of any
other rights to which any person seeking indemnification from the Corporation
may be entitled under any agreement, vote of stockholders or disinterested
directors, or otherwise, both as to action in such person's official capacity
and as to action in another capacity while holding such office.
14
<PAGE>
SECTION 7.02 INSURANCE. Upon resolution passed by the Board, the
Corporation may purchase and maintain insurance on behalf of any person who
is or was a director, officer, employee or agent of the Corporation, or is or
was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust
or other enterprise against any. liability asserted against him and incurred
by him in any such capacity, or arising out of his status as such, whether or
not the Corporation would have the power to indemnify him against such
liability under the provisions of this Article.
SECTION 7.03 CONSTITUENT CORPORATIONS. For the purposes of this
Article, references to "the Corporation" include all constituent corporations
absorbed in a consolidation or merger as well as the resulting or surviving
corporation, so that any person who is or was a director, officer, employee
or agent of such a constituent corporation or is or was serving at the
request of such constituent corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise shall stand in the same position under the provisions of this
Article with respect to the resulting or surviving corporation as he would if
he had served the resulting or surviving corporation in the same capacity.
SECTION 7.04 OTHER ENTERPRISES AND SERVING AT CORPORATION'S REQUEST.
For purposes of this Article, references to "other enterprises" shall include
employee benefit plans; and references to "serving at the request of the
Corporation" shall include any service as a director, officer, employee or
agent of the corporation which imposes duties on, or involves services by,
such director, officer, employee, or agent with respect to an employee
benefit plan, its participants, or beneficiaries.
ARTICLE VIII
MISCELLANEOUS
SECTION 8.01 SEAL. The Board shall provide a corporate seal, which
shall be in the form of a circle and shall bear the name of the Corporation
and words and figures showing that the Corporation was incorporated in the
State of Delaware and the year of incorporation.
SECTION 8.02 REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The
Chairman of the Board, the President, or any Vice President, or any other
person authorized by resolution of the Board of Directors by any of the
foregoing designated officers, is authorized to vote on behalf of the
Corporation any and all shares of any other corporation or corporations,
foreign or domestic, standing in the name of the Corporation. The authority
herein granted to said officers to vote or represent on behalf of the
Corporation any and all shares held by the Corporation in any other
corporation or corporations may be exercised by any such officer in person or
by any person authorized to do so by proxy duly executed by said officer.
15
<PAGE>
SECTION 8.03 WAIVER OF NOTICES. Whenever notice is required to be given
by these Bylaws or the Certificate of Incorporation or by law, the person
entitled to said notice may waive such notice in writing, either before or
after the time stated therein, and such waiver shall be deemed equivalent to
notice.
SECTION 8.04 CONSTRUCTION AND DEFINITIONS. Unless the context requires
otherwise, the general provisions, rules of construction, and definitions in the
General Corporation Law of the State of Delaware shall govern the construction
of the Bylaws. Without limiting the generality of the foregoing, the singular
number includes the plural, the plural number includes the singular, and the
term "person" includes both a corporation and a natural person.
SECTION 8.05 AMENDMENTS. These Bylaws, or any of them, except as
specifically provided herein or in the Certificate of Incorporation, may be
altered, amended or repealed, and new Bylaws may be made, (i) by the Board, by
vote of a majority of the number of directors then in office as directors,
acting at any meeting of the Board, or (ii) by the stockholders, at any annual
meeting of stockholders, without previous notice, or at any special meeting of
stockholders, PROVIDED, that notice of such proposed amendment, modification,
repeal or adoption is given in the notice of special meeting. Any Bylaws made or
altered by the stockholders may be altered or repealed by either the Board or
the stockholders.
16
<PAGE>
CERTIFICATE OF SECRETARY
The undersigned, being the duly elected Secretary of PAULA Financial, a Delaware
corporation, hereby certifies that the Bylaws to which this Certificate is
attached were duly adopted by the Board of Directors of said Corporation on
___________, 1997.
-----------------
Bradley K. Serwin
<PAGE>
CONTENTS
INDEX OF DEFINED TERMS
Article Page
- ------- ----
1. Summary of Basic Terms. . . . . . . . . . . . . . . . . . . . . . 1
2. Demise, Term and Occupancy. . . . . . . . . . . . . . . . . . . . 2
3. Rent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
4. Operating Expense Adjustments . . . . . . . . . . . . . . . . . . 5
5. Security Deposit. . . . . . . . . . . . . . . . . . . . . . . . . 9
6. Use and Compliance with Law . . . . . . . . . . . . . . . . . . . 10
7. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
8. Alterations . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
9. Landlord's and Tenant's Property. . . . . . . . . . . . . . . . . 15
10. Repairs and Maintenance . . . . . . . . . . . . . . . . . . . . . 16
11. Utilities and Services. . . . . . . . . . . . . . . . . . . . . . 17
12. Rights of Landlords . . . . . . . . . . . . . . . . . . . . . . . 18
13. Damage or Destruction . . . . . . . . . . . . . . . . . . . . . . 19
14. Eminent Domain. . . . . . . . . . . . . . . . . . . . . . . . . . 20
15. Surrender of Premises . . . . . . . . . . . . . . . . . . . . . . 21
16. Default by Tenant . . . . . . . . . . . . . . . . . . . . . . . . 21
17. Subordination and Attornment. . . . . . . . . . . . . . . . . . . 24
18. Quiet Enjoyment . . . . . . . . . . . . . . . . . . . . . . . . . 25
19. Assignments and Subleases . . . . . . . . . . . . . . . . . . . . 25
20. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
21. Estoppel Certificates . . . . . . . . . . . . . . . . . . . . . . 27
22. Relocation of Premises. . . . . . . . . . . . . . . . . . . . . . 27
23. Broker. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
24. Exculpation and Indemnification . . . . . . . . . . . . . . . . . 28
25. Hazardous Material. . . . . . . . . . . . . . . . . . . . . . . . 29
26. Parking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
27. Right of First Refusal on Additional Space. . . . . . . . . . . . 31
28. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
EXHIBITS
EXHIBIT A: Legal Description
EXHIBIT B: Floor Plan of Premises
EXHIBIT C: Memorandum of Lease Commencement
EXHIBIT D: Work Letter for Tenant Improvements
EXHIBIT E: Building Rules and Regulations
EXHIBIT F: Parking Rules and Regulations
EXHIBIT G: Guaranty
EXHIBIT H: Cleaning Specifications
EXHIBIT I: Intentionally Omitted
EXHIBIT J: Parking Plan
(i)
<PAGE>
INDEX OF DEFINED TERMS
TERM PRIMARY REFERENCE
Additional Charges..................................................Section 3.1
Anticipated Commencement Date......................................Section 1.16
Attorneys' Fees and Expenses......................................Section 16.10
Base Costs of Operation.........................................Section 4.1 (e)
Base Taxes......................................................Section 4.1 (f)
Basic Rent.................................................Sections 1.6 and 3.1
Bid Price...........................................................Section 6.6
Building............................................................Section 1.3
Business Hours.....................................................Section 11.1
Commencement Date...................................................Section 2.2
Comparison Year.................................................Section 4.1 (g)
Costs of Operation......................................Section 4.1 (a),(b),(c)
Date of the Taking.................................................Section 14.1
Eminent Domain.....................................................Section 14.1
Expiration Date.....................................................Section 2.2
Final Statement.................................................Section 4.2 (d)
Fixtures............................................................Section 9.1
Hazardous Material.................................................Section 25.1
Interest..........................................................Section 16.12
Land................................................................Section 1.2
Landlord.......................................................Introduction and
...............................................................Section 28.8 (b)
Landlord's Affiliates..........................................Section 28.8 (c)
Landlord's Work...................................Section 2.6 (b) and Exhibit D
Lease Term..................................................Section 1.5 and 2.2
Memorandum of Lease Commencement......................Section 2.2 and Exhibit C
Parking Rules and Regulations...................Sections 6.3, 6.9 and Exhibit F
Permitted Use......................................................Section 1.13
Premises............................................................Section 1.4
Punch-List Items................................................Section 2.6 (c)
Ready for Occupancy.............................................Section 2.6 ( )
Rentable Area of Building..........................................Section 1.15
Rentable Area of Premises.....................Sections 1.14, 11.3, and 28.8 (g)
Rents...............................................................Section 3.1
Rules and Regulations..........................................Section 6.3, 6.9
..................................................................and Exhibit E
Security Deposit...........................................Sections 1.8 and 5.1
Special Work......................................Section 2.4 (b) and Exhibit D
Standard Tenant Improvements......................Section 9.5 (b) and Exhibit D
Sublet Portion.....................................Section 192 (a) and 19.2 (b)
Substitute Premises................................................Section 22.1
Successor Landlord.................................................Section 17.4
Superior Lease.....................................................Section 17.1
Superior Lessee....................................................Section 17.1
Superior Mortgage..................................................Section 17.1
Superior Mortgagee.................................................Section 17.1
Taxes...........................................................Section 4.1 (d)
Tenant........................................Introduction and Section 28.8 (h)
Tenant's Broker...........................................Section 1.10 and 23.1
Tenant's parking...........................................Section 1.9 and 26.1
Tenant's Property...................................................Section 9.2
Tenant's Share......................................................Section 1.7
Transportation Management Program..................................Section 26.2
Transportation Management Requirements.............................Section 26.2
Usable Area...........................................................Exhibit D
Work Letter.......................................Section 2.6 (a) and Exhibit D
-ii-
<PAGE>
NOTICE OF TRANSFER
Date: April 17, 1990
From: SELLER: PURCHASER:
PASADENA GATEWAY PLAZA, LACERA GATEWAY PROPERTY, INC.,
a California Limited Partnership a California Corporation
c/o Trenton Development Corp.
6500 Wilshire Blvd. #1800
Los Angeles, CA 90048
To: Pan American Underwriters, Inc., a Nevada corporation
300 North Lake Avenue, Suites 200 & 300
Pasadena, California 91101
Re: Lease dated January 1, 1989 for premises at Gateway Plaza.
You are hereby advised that the property in which you are a tenant was sold
and your lease was assigned and transferred on April 17, 1990 to Lacera
Gateway Property, Inc., a California Corporation. Your security deposit and
advance rental, if any, has been transferred to the new owner who has assumed
the security deposit obligations of the landlord.
In the future, please make all checks for rent and other charges payable to
Heitman Properties Ltd., as managing agent and forward to:
300 NORTH LAKE AVENUE, SUITE #280
PASADENA, CALIFORNIA 91101
In accordance with Article 20 of your lease, all notices, demands and requests
to Lessor, shall be forwarded in writing and sent by certified or registered
mail, postage prepaid and addressed as follows:
LACERA GATEWAY PROPERTY, INC.,
a California Corporation
c/o Heitman Properties Ltd.
300 North Lake Avenue, Suite #280
Pasadena, California 91101
with a copy to:
LACERA GATEWAY PROPERTY, INC.,
a California Corporation
c/o Heitman Properties Ltd.
9601 Wilshire Boulevard, Suite #200
Beverly Hills, California 90210
<PAGE>
Although a representative of Heitman Properties Ltd. will be contacting you
shortly with additional information relative to contacts and phone numbers,
we would appreciate your advising your accounting department of the captioned
change.
Thank you in advance for your cooperation in complying with the above request
and if we can be of any further assistance, please contact us at (818)
568-0300.
SELLER: PURCHASER:
PASADENA GATEWAY PLAZA, LACERA GATEWAY PROPERTY, INC.,
A California Limited Partnership a California Corporation
by: Heitman Advisory Corporation
its duly authorized agent
By: /s/ H. Theodore Greene By: /s/ ILLEGIBLE
------------------------------- -----------------------------
H. THEODORE GREENE, President Its: Executive Vice President
Trenton Development Corporation ------------------------
Its: General Partner
---------------------------
<PAGE>
GATEWAY PLAZA
300 NORTH LAKE AVENUE
PASADENA, CALIFORNIA
OFFICE LEASE
LANDLORD: PASADENA GATEWAY PLAZA, a California
limited partnership
TENANT: PAN AMERICAN UNDERWRITERS, INC., a Nevada
corporation
Dated for reference purposes as of: January 1, 1989
<PAGE>
LEASE AMENDMENT
THIS AMENDMENT is made as of the 28th day of September, 1989 between
PASADENA GATEWAY PLAZA, a California limited partnership ("Landlord") and PAN
AMERICAN UNDERWRITERS, INC., a Nevada corporation ("Tenant") and amends
that certain Office Lease ("Lease") dated as of January 1, 1989 in the manner
hereinafter set forth.
1. PREMISES.
Commencing as of the Commencement Date set forth in Article
2.2(a) therein, the following additional space in the Building (as that
term is defined in the Lease under Article 1.1) shall be deemed to be
included within the term "Premises" under the Lease, a drawing of which space
is attached hereto as Exhibit "A" and by this reference made a part hereof:
an increment of 1,255 square feet of rentable area comprising usable area on
the second (2nd) floor of the Building of 1,142 square feet. The additional
space described in this Paragraph 1 is sometimes hereinafter referred
to as the "Additional Area".
2. TERM.
The term of the Lease with respect to the Additional Area shall be
coterminous with the term of the Lease with respect to the premises
originally leased under the Lease and therefore the expiration date of
the Lease shall be as set forth under Article 2.2 of the Lease. It is
estimated that the additional area shall be ready for occupancy by sixty (60)
days from receipt of the building permit from the City of Pasadena.
3. BASIC RENT.
a. The Basic Rent for the Additional Area shall be comprised of basic
monthly rent of $2.20 per rentable square foot ($26.40 per rentable square
foot per annum) for the first five (5) years of the Lease Term and $2.58 per
rentable square foot ($30.96 per rentable square foot per annum) for the
second five (5) years of the lease term.
b. The Basic Rent payable with respect to the Additional Area shall be
further subject to such adjustments as may be set forth in the Lease.
c. Excused Rent - Landlord hereby unconditionally excuses Tenant from
liability for Basic Rent during the same period as the excused basic rent for
the original square footage set forth in the Lease.
4. RENTAL PAYMENT.
Upon the execution of the Lease Amendment, Tenant shall pay
<PAGE>
to the Landlord the amount equal to the Basic Rent for the Additional
Area, which amount shall be applied toward the Basic Rent payable
with respect to the first month that Basic Rent is payable with respect to
the Additional Area.
5. TENANT IMPROVEMENTS.
The Tenant agrees that a work letter for tenant improvement allowance
for the Additional Area in substantially the same form as the original area
work letter attached as Exhibit "D" to the Lease shall be deemed to apply to
the additional area except that the dates set forth in the design
schedule under Article 4.3 thereof shall not be applicable.
6. INTEGRATION.
Except as otherwise expressly provided herein, Tenant's lease of the
Additional Area shall be subject to and governed by all the terms and
conditions of the Lease.
As herein amended, the Lease is ratified, confirmed and acknowledged
to be in full force and effect.
TENANT: LANDLORD:
PAN AMERICAN UNDERWRITERS, INC., PASADENA GATEWAY PLAZA,
a Nevada corporation a California limited partnership
By /s/ Norman J. Schnider By
----------------------------- -----------------------------
Norman J. Schnider, President H. Theodore Greene,
General Partner
<PAGE>
[BLUEPRINT]
<PAGE>
LEGAL DESCRIPTION
PARCEL 1:
LOTS 7, 8, 9, 10 AND 11 OF ARNOLD AND MILLS COMPANY'S OLIVEWOOD SUBDIVISION, IN
THE CITY OF PASADENA, COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, AS PER MAP
RECORDED IN BOOK 13 PAGE 21 OF MISCELLANEOUS RECORDS, IN THE OFFICE OF THE
COUNTY RECORDER OF SAID COUNTY.
TOGETHER WITH THE WEST-HALF OF THE VACATED ALLEY ADJOINING SAID LAND ON THE
EAST, AS VACATED BY RESOLUTION NO. 967, RECORDED APRIL 23, 1971 AS INSTRUMENT
NO. 3587, WHICH WOULD PASS BY A CONVEYANCE OF THE ABOVE DESCRIBED LAND.
EXCEPT THOSE PORTIONS OF LOTS 7, 8, 9, 10 AND 11, LYING SOUTHWESTERLY AND
WESTERLY OF THE FOLLOWING DESCRIBED LINES:
BEGINNING AT A POINT IN THE SOUTHERLY LINE OF SAID LOT 11, SAID POINT BEING
DISTANT ALONG SAID SOUTHERLY LINE, NORTH 89 DEG. 29 MIN. 58 SEC. EAST, 47.43
FEET FROM THE SOUTHWESTERLY CORNER OF SAID LOT 11 AND THE BEGINNING OF A
CURVE THAT IS TANGENT TO SAID SOUTHERLY LINE, CONCAVE NORTHEASTERLY AND
HAVING A RADIUS OF l5.00 FEET THENCE NORTHWESTERLY ALONG SAID CURVE THROUGH
AN ANGLE OF 97 DEG. 14 MIN. 24 SEC. AN ARC DISTANCE OF 25.46 FEET TO A
TANGENT LINE THENCE ALONG TANGENT LINE NORTH 6 DEG. 44 MIN. 22 SEC. EAST
86.31 FEET: THENCE NORTH 1 DEG. 45 MIN. 04 SEC. EAST 100.44 FEET.
ALSO EXCEPT THEREFROM THAT PORTION THEREOF LYING WITHIN LAKE AVENUE 100.00
FEET WIDE, AS NOW ESTABLISHED AND RECORDED IN B00K 7397 PAGE 54 OF OFFICIAL
RECORDS.
PARCEL 2:
THOSE PORTIONS OF LOTS 3, 4, 5 AND 6 OF ARNOLD AND MILLS COMPANY'S OLIVEWOOD
SUBDIVISION, IN THE CITY OF PASADENA, COUNTY OF LOS ANGELES, STATE OF
CALIFORNIA, AS SHOWN ON MAP RECORDED IN BOOK 13 PAGE 21 OF MISCELLANEOUS
RECORDS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY, LYING EASTERLY,
SOUTHEASTERLY AND SOUTHERLY OF THE FOLLOWING DESCRIBED LINES:
BEGINNING AT A POINT IN THE SOUTHERLY LINE OF LOT 11 OF SAID SUBDIVISION,
SAID POINT BEING DISTANT ALONG SAID SOUTHERLY LINE NORTH 89 DEG. 29 MIN. 58
SEC. EAST 47.43 FEET FROM THE SOUTHWESTERLY CORNER OF SAID LOT 11 AND BEING
THE BEGINNING OF A CURVE THAT IS TANGENT TO SAID SOUTHERLY LINE, CONCAVE
NORTHEASTERLY AND HAVING A RADIUS OF 15.00 FEET; THENCE NORTHWESTERLY ALONG
SAID CURVE THROUGH AN ANGLE OF 97 DEG. 147 MIN. 24 SEC. AN ARC DISTANCE OF
25.46 FEET; THENCE TANGENT NORTH 6 DEG. 44 MIN. 22 SEC. EAST 86.31 FEET:
THENCE NORTH l DEG. 45 MIN. 04 SEC. EAST 100.44 FEET TO A TANGENT CURVE
CONCAVE SOUTHEASTERLY AND HAVING A RADIUS OF 16.00 FEET THENCE NORTHEASTERLY
ALONG SAID CURVE THROUGH AN ANGLE 87 DEG. 12 MIN. 56 SEC. AN ARC DISTANCE OF
22.83 FEET: THENCE TANGENT, NORTH 88 DEG. 58 MIN. 00 SEC. EAST 322.60 FEET.
TOGETHER WITH THE WEST HALF OF THE VACATED ALLEY ADJOINING SAID LAND ON THE
EAST, AS VACATED BY RESOLUTION NO. 967 OF THE CITY OF PASADENA, RECORDED
APRIL 23, 1971 AS INSTRUMENT NO. 3587, WHICH WOULD PASS BY A CONVEYANCE OF
THE ABOVE DESCRIBED LAND.
PARCEL 3:
LOTS 14, l5, 16 AND THE SOUTH 1/2 LOT 13 TOGETHER WITH THAT PORTION OF THE NORTH
25 FEET OF LOT 13 OF ARNOLD AND MILLS CO.'S OLIVEWOOD SUBDIVISION IN THE CITY OF
PASADENA, COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, AS PER MAP RECORDED IN
BOOK 13 PAGE 21 OF MISCELLANEOUS RECORDS IN THE OFFICE OF THE COUNTY RECORDER,
BOUNDED NORTHERLY AND NORTHEASTERLY BY THE FOLLOWING DESCRIBED LINE:
BEGINNING AT A POINT IN THE WESTERLY LINE OF SAID NORTH 25 FEET OF LOT 13
DISTANT THEREON NORTH 00 DEG. 30 MIN. 09 SEC. WEST 10.31 FEET FROM THE
SOUTHWESTERLY CORNER OF SAID NORTH 25 FEET; THENCE NORTH 88 DEG. 58 MIN. 00
SEC. EAST 174.95 FEET TO A TANGENT CURVE CONCAVE SOUTHWESTERLY AND HAVING A
RADIUS OF 15.00 FEET. THENCE SOUTHEASTERLY ALONG SAID CURVE THROUGH AN ANGLE
OF 78 DEG. 46 MIN. 43 SEC. AN ARC DISTANCE OF 20.62 FEET TO THE SOUTHERLY
LINE OF SAID NORTH 25 FEET.
TOGETHER WITH THE EAST HALF OF THE VACATED ALLEY ADJOINING SAID LAND ON THE
WEST, AS VACATED BY RESOLUTION NO. 967, OF THE CITY OF PASADENA, RECORDED
APRIL 23, 1971 AS INSTRUMENT NO. 3587, WHICH WOULD PASS BY A CONVEYANCE OF
THE ABOVE DESCRIBED LAND.
EXHIBIT A-1
<PAGE>
EXCEPTING THEREFROM ALL MINERALS, GASES AND OTHER HYDROCARBONS BY WHATSOEVER
NAME KNOWN THAT MAY BE WITHIN OR UNDER THE PARCEL OF LAND HEREINABOVE
DESCRIBED WITHOUT, HOWEVER, THE RIGHT TO DRILL, DIG OR MINE THROUGH THE
SURFACE OR THE UPPER 500 FEET THEREOF, AS RESERVED BY THE STATE OF
CALIFORNIA, RECORDED JANUARY 4, 1971 IN BOOK D4933 PAGE 927, OFFICIAL
RECORDS, IN THAT PORTION OF THE NORTHERLY 25 FEET OF LOT 13 OF ARNOLD AND
MlLL CO.'S OlIVEWOOD SUBDIVISION, IN THE CITY OF PASADENA, COUNTY OF LOS
ANGELES, STATE OF CALIFORNIA AS DESCRIBED ABOVE.
EXHIBIT A-2
<PAGE>
INTRODUCTION
THIS LEASE dated as of the first day of January, 1989, (which date is to be
used for reference purposes only) is made by and between PASADENA GATEWAY PLAZA,
a California limited partnership, having an office at c/o Trenton Development
Corporation, 6500 Wilshire Boulevard, Suite 1800, Los Angeles, California 90048
("Landlord") and PAN AMERICAN UNDERWRITERS, INC., a Nevada corporation
("Tenant").
ARTICLE 1
SUMMARY OF BASIC TERMS
1.1 PURPOSE. This Article defines certain basic terms used in this
Lease, subject, however, to qualifications, adjustments and exceptions set forth
elsewhere herein.
1.2 LAND. The term "Land" means that certain real property in the City
of Pasadena, County of Los Angeles, State of California, the legal description
for which is set forth in Exhibit A.
1.3 BUILDING. The term "Building" means that certain office building
constructed on the land and having the street address of 300 North Lake Avenue,
including the parking garage, outside plazas, atrium, lobbies, office and
commercial space, landscaping, water elements, fine art and the Land.
1.4 PREMISES. The term "Premises" means the space on the second and
third floors of the Building, known as Suites 200 and 300 and located
substantially as shown on the floor plans attached hereto as Exhibit B, subject
to relocation to other floor(s) pursuant to Article 22 (if applicable).
1.5 LEASE TERM. The phrase "Lease Term" means the term of this Lease,
which shall be a period of five (5) years, commencing as set forth in Section
2.2, plus the period of the Extension Option (as hereinafter defined), as set
forth in Section 2.7, if exercised, plus a stub period of a partial month as
necessary in order for the Lease Term to end on the last day of a month; unless
the Lease Term is terminated earlier pursuant to any of the provisions of this
Lease or pursuant to law.
1.6. BASIC RENT. The phrase "Basic Rent" means the sum of Seven
Hundred Sixty-One Thousand Nine Hundred Fifty-Seven Dollars ($761,957) per
annum, which is comprised of basic monthly rental of $2.20 per Rentable
square foot ($26.40 per Rentable square foot per annum), for the first five
(5) years of the Lease Term, and Eight Hundred Ninety-Three Thousand Five
Hundred Sixty-Eight Dollars ($893,568) per annum which is comprised of basic
monthly Rental of $2.58 per Rentable square foot ($30.96 per Rentable square
foot per annum), for the second five (5) years of the Lease Term (the
Extension Option term, as set forth in Section 2.7.) The Rentable Area of
the Premises is set forth in Section 1.14.
1.7 TENANT'S SHARE. The phrase "Tenant's Share" shall mean nine and
ninety-two hundreds percent (9.92%).
1.8 SECURITY DEPOSIT. The phrase "Security Deposit" means a security
deposit in the amount of monthly Basic Rent, from time to time, to be held and
used by Landlord as provided in Article 5; provided that so long as Pan American
Underwriters, Inc. is the Tenant, Landlord waives its right to a Security
Deposit.
1.9 TENANT'S PARKING. The phrase "Tenant's Parking" means one hundred
twelve (112) unreserved parking spaces and three (3) reserved parking spaces in
the Building parking garage. Tenant's Parking shall be as provided in Section
26.1, except that the three (3) reserved parking spaces and eighty seven (87) of
the unreserved parking spaces shall be free of charge to Tenant for the first
five (5) years of the Lease Term.
1.10 BROKERS. The phrase "Landlord's Broker" means John Alle Company,
whose address and telephone number are:
Address: 35 North Lake Avenue
Suite 910
Pasadena, California 91101
Telephone: (818) 795-1511
The phrase "Tenant's Broker" means Coldwell Banker Commercial Real Estate,
whose address and telephone number are:
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Address: 5757 Wilshire Boulevard, Suite 110
Los Angeles, California
Telephone: (213) 930-5908
1.11 PRIOR ADDRESS. The address of Tenant prior to the Commencement
Date (as hereinafter defined) is:
626 South Kingsley Drive
Los Angeles, California 90005
1.12 TENANT'S IDENTITY. Tenant is a corporation incorporated in the
Sate of Nevada.
1.13 PERMITTED USE. The term "Permitted Use" means the use of the
Premises strictly in accordance with Section 6.1.
1.14. RENTABLE AREA OF THE PREMISES. Upon the occurrence of the
Commencement Date, as hereinafter defined, the phrase "Rentable Area of the
Premises" shall be conclusively presumed to mean twenty-eight thousand eight
hundred sixty-two (28,862) square feet, unless changed in accordance with the
provisions of this Lease. The Rentable Area of Suite #300 is twenty-two
thousand one hundred and three (22,103) square feet, and of Suite #200 is six
thousand seven hundred fifty-nine (6,759) square feet. The Usable Area of the
Premises is at least 91% of the Rentable Area.
1.15 RENTABLE AREA OF THE BUILDING. Upon the occurrence of the
Commencement Date, as hereinafter defined, the phrase "Rentable Area of the
Building" shall be conclusively presumed to mean 296,076 square feet unless
changed in accordance with the provisions of this Lease.
1.16 ANTICIPATED COMMENCEMENT DATE. The Anticipated Commencement Date
is: June 1, 1989.
ARTICLE 2
DEMISE, TERM AND OCCUPANCY
2.1 DEMISE. Landlord hereby leases the Premises to Tenant, and Tenant
hereby hires the Premises from Landlord, pursuant to the provisions of this
Lease, reserving however to Landlord:
(a) the sole and exclusive right to consent to the use or
occupancy of the Premises by any person other than Tenant, whether by
sublease, assignment or otherwise, as governed by Section 19.1;
(b) all of the Building, as more fully set forth in Section
12.1, except for the space within the inside surfaces of the walls, hung
ceilings, floors, windows and doors bounding the premises; and
(c) the rights, interests, and estates reserved to Landlord by
provisions of this Lease or operation of law.
2.2 TERM.
(a) Commencement. The Lease Term (a) shall commence on the date
(the "Commencement Date") that is the earlier to occur of (i) the date on
which the Premises are Ready for Occupancy (as defined in this Article) or
(ii) the date Tenant, or anyone claiming under or through Tenant, first
occupies the Premises or any part thereof, with Landlord's consent, for any
purpose, and (b) shall end at noon on the last day of the Lease Term (the
"Expiration Date") or on such earlier date upon which this Lease shall be
terminated pursuant to any of the provisions of this Lease or pursuant to
law. After the Commencement Date, upon Landlord's request, Tenant shall
promptly execute a "Memorandum of Lease Commencement" in the form attached
hereto as Exhibit C, which shall specify the calendar dates of the
Commencement Date and the Expiration Date. The failure by Tenant to execute a
Memorandum of Lease Commencement Date when requested by Landlord shall not
affect the occurrence of the Commencement Date or Expiration Date.
2.3 DELAY. If Landlord is unable to deliver to Tenant possession of
the Premises on the Anticipated Commencement Date as set forth in Section 1.16,
whether as a result of the failure of Landlord substantially to complete the
Tenant Improvements or for any other reason, Landlord shall not be liable for
any damages caused thereby. In such event, this Lease shall not be void or
voidable, provided that the Tenant Improvements are completed and possession is
tendered to Tenant Ready for Occupancy (as that term is defined in subsection
2.6(b), below)
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within seventy five (75) days after the Anticipated Commencement Date set
forth in Section 1.16 hereof; subject to further extensions aggregating no
more than ninety (90) days due to acts of God, war, labor strikes, and other
occurrences beyond the control of Landlord, plus any period of time due to
delays caused by Tenant. In the event of such late delivery of the Premises,
the Commencement Date of this Lease shall be postponed by the length of such
delay in delivering possession. If Landlord has not tendered possession to
Tenant within said period in which such delay is excused as aforesaid, this
Lease shall be voidable without further obligation at the option of Tenant
upon written notice to Landlord received within five (5) days after the
expiration of said period; provided, however, should Landlord anticipate that
it will be unable to tender possession to Tenant until a date subsequent to
the expiration of the period for which such delay is excused, Landlord may,
at its election, give Tenant written notice of the date on which it can
deliver possession to Tenant, and Tenant shall then have five (5) days in
which to give written notice to Landlord of its election to terminate this
Lease, Absent Landlord's receipt of such written notice within said five (5)
days, Landlord's further delay shall be deemed excused and waived by Tenant
unless possession still is not tendered to Tenant more than five (5) days after
the delayed Commencement Date stated in Landlord's aforesaid notice.
2.4 BANKRUPTCY PRIOR TO COMMENCEMENT DATE. If at any time prior to the
Commencement Date there shall be filed by or against Tenant in any court
pursuant to any statute either of the United States or of any State a petition
in bankruptcy or insolvency or for reorganization or for the appointment of a
receiver or trustee or conservator of all or a portion of Tenant's property, or
if Tenant makes an assignment for the benefit of creditors, this Lease shall
IPSO FACTO be canceled and terminated and in such event neither Tenant nor any
person claiming through or under Tenant or by virtue of any statute or of an
order of any court shall be entitled to possession of the Premises. In addition
to the other rights and remedies given by Article 16 hereof or by virtue of any
other provision in this Lease contained or by virtue of any statute or rule of
law, Landlord may retain as damages any rent, security deposit or moneys
received by it from Tenant or others on behalf of Tenant.
2.5 OBLIGATIONS AND DUTIES. Tenant shall be bound, as of the Lease Date,
by all obligations and duties under this Lease, except as otherwise specifically
provided herein. Failure of Tenant to fulfill any such obligation and/or duty
before any other obligation and duty becomes binding shall not preclude Landlord
from obtaining any remedy available hereunder, at law, or in equity.
2.6 PREPARATION OF PREMISES.
(a) PREPARATION OF PREMISES. The Premises shall be prepared for
Tenant's occupancy in accordance with the Work Letter for Tenant Improvements
attached hereto as Exhibit D (the "Work Letter").
(b) READY FOR OCCUPANCY. The Premises shall be "Ready for
Occupancy" when (1) Landlord has substantially completed the work it is
obligated to perform pursuant to the Work Letter; and the same shall be
deemed substantially completed notwithstanding the fact that minor details of
construction, mechanical adjustments or decoration, which do not materially
interfere with Tenant's use of the Premises ("punch-list and pick-up items"),
remain to be performed; (ii) Landlord has obtained a certificate of occupancy
or temporary certificate of occupancy for the Building or the portion of the
Building where the Premises are located; (iii) the Building's sanitary,
electrical, elevator, heating, ventilating and air conditioning systems are
operational to the extent necessary to provide reasonably adequate services
to the Premises; and (iv) access to the Premises is available to Tenant.
However, if completion of any of the above four requirements for the Premises
being Ready for Occupancy is delayed due to (i) any act or omission of Tenant
or any of its employees, agents or contractors, including but not limited to,
delays due to changes in or additions to Landlord's Work (as defined in the
Work Letter) requested by Tenant or delays by Tenant in the submission of
plans, drawings, specifications or other information, the approval of working
drawings or estimates, or the giving of necessary authorizations or approvals
regarding tenant improvements, or (ii) the inclusion in Landlord's Work of
any Special Work (as defined in the Work Letter), or a shortage or
unavailability of materials required for Special Work, then the Premises
shall be deemed to have been Ready for Occupancy on the date that said four
requirements would have been completed but for such delay. Landlord shall
give Tenant at least fifteen (15) days notice in advance of the date on which
Landlord estimates that the Premises will be Ready for Occupancy. Any
variance between the date so estimated and the actual date on which the
Premises are Ready for Occupancy shall be of no consequence, and Landlord
shall not incur any liability on account of such variance.
(c) ACCEPTANCE. On the Commencement Date, Tenant shall be deemed
to have accepted the Premises and to have found them to be in satisfactory
condition, except for so-called "punch-list" and "pick-up" items. Tenant
shall inspect the Premises and, if Tenant
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finds any punch-list or pick-up items, shall submit said list to Landlord
together with an executed Memorandum of Lease Commencement (See Exhibit "C"),
describing said items with reasonable specificity and detail, within 10 days
after the Commencement Date.
(d) BUILDING CONSTRUCTION WARRANTY. Notwithstanding anything in
this Lease to the contrary, Landlord warrants that the Building, including
all of the tenant improvements was constructed in compliance with all
applicable, codes.
2.7 EXTENSION OPTION. Tenant shall have one (1) option to extend the
term of this Lease for five (5) years ( the "Extension Option"). Tenant
shall be required to give Landlord written notice of its election to exercise
the Extension Option at least six (6) months prior to commencement date of
the term of the Extension Option. Time is of the essence with respect to the
requirement that Tenant give timely notice of its election to exercise the
Extension Option, and Tenant's failure to exercise the Extension Option shall
constitute a material, irredeemable and incurable failure to satisfy a
condition precedent to the vesting of any rights in Tenant purusant to the
Extension Option, and Tenant expressly waives any right to claim relief from
forfeiture, or any other form of equitable relief from consequences of any
untimely exercise of the Extension Option. The implied covenant of good
faith and fair dealing under this Lease shall not be construed to impose upon
Landlord any obligation to notify Tenant in advance of the impending deadline
for the exercise of the Extension Option, nor shall it obligate Landlord to
excuse the tardy exercise of the Extension Option, however slight.
Tenant shall not have the right to exercise the Extension Option,
notwithstanding anything set forth above to the contrary: (a) during the
time commencing from the date Tenant becomes in default under any material
non-monetary provision of this Lease, and Landlord gives to Tenant a written
notice thereof, and continuing until the default alleged in said notice is
cured, or (b) during the period of time commencing on the day after a
monetary obligation to Landlord is due from Tenant and unpaid continuing
until the obligation is paid. The period of time within which the Extension
Option may be exercised shall not be extended or enlarged by reason of the
foregoing conditions precedent. All rights of Tenant to the Extension Option
shall terminate and be of no further force or effect even after Tenant's due
and timely exercise thereof, if, after such exercise, but prior to the
commencement date of the term of the Extension Option: (a) Tenant fails to
pay to Landlord a monetary obligation of Tenant for a period of ten (10) days
after Landlord gives written notice thereof to Tenant; (b) Tenant fails to
cure a material non-monetary default within thirty (30) days after Landlord
gives written notice to Tenant of such default; provided, however, that if
the nature of Tenant's default is such that more than thirty (30) days are
reasonably required for its cure, then Tenant shall not be in default if it
begins such cure within the thirty (30) day period described above, and,
thereafter, diligently prosecutes such cure to completion; or (c) Landlord
gives to Tenant three (3) or more notices of default (and Tenant was in fact
in default in such instances), whether or not such defaults are ultimately
cured. Landlord's waiver of its right to TERMINATE this Lease due to
Tenant's default in any instance shall not be deemed waiver of the foregoing
conditions precedent and conditions subsequent to the exercise of the
Extension Option.
ARTICLE 3
RENT
3.1 RENTS. During the Lease Term, Tenant shall pay to Landlord the
following rents for the Premises (the "Rents"): (a) Basic Rent as set forth
in Section 1.6, which shall be due and payable in equal monthly installments, in
advance during the period beginning with the Commencement Date, and on the first
day of each and every calendar month thereafter during the Lease Term, and (b)
additional charges ("Additional Charges") consisting of all other sums of money
payable by Tenant under the provisions of this Lease. Notwithstanding, the
first installment of Basic Rent shall be due and payable upon execution of this
Lease.
3.2 PAYMENT. Tenant shall pay the Rents when due, without notice or
demand, and without any abatement, deduction or setoff, except for abatements
expressly provided for elsewhere in this Lease. Tenant shall pay the Rents in
lawful money of the United States, to Landlord at its office in the Building or
to such other person or place as Landlord may designate from time to time. If
Tenant pays Rents by check, the check must be drawn on a bank that is a member
of the California Bankers Clearing House Association.
3.3 PRORATION. If the Commencement Date occurs on a day other than the
first day of a calendar month, the Basic Rent for the partial calendar month at
the commencement of the Lease Term shall be prorated on the basis of the actual
number of days in said month, and Tenant shall receive a credit against the
monthly installment of Basic Rent next coming due for any overpayment made in
the first installment of Basic Rent. If the Lease Term ends or this Lease
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otherwise terminates on a day other than the last day of a calendar month, the
Basic Rent for such last partial month shall be prorated based on the actual
number of days in said month.
3.4 EXCUSED RENT. As a material inducement to Tenant's signing of this
Lease, Landlord hereby unconditionally excuses Tenant from liability for
Basic Rent for the first fifteen (15) months of the term of this Lease.
3.5 GOVERNMENT RENT RESTRICTIONS. If the amount of the Rents payable in
accordance with this Article, including Basic Rent adjustments pursuant to
Section 3.4, exceeds that allowed by the terms of any valid government
restriction which limits the amount of rent or other charges which a
commercial lessor may charge or collect, the amount of Rents payable under
this lease shall be the maximum permitted by such governmental restriction
for the period of time during which such restriction remains in effect.
However, all increases in Rents provided for in this Lease shall, to the
extent permitted by law, be calculated upon the amount of the Rents which
would have been payable in the absence of the government restriction, and,
effective as of the expiration of the government restriction, the Rents
payable hereunder shall be increased to the amount that would have prevailed
had the government restriction never been in effect. Moreover, to the
fullest extent permitted by law, on the first due date for an installment of
Basic Rent following expiration of the government restriction, Tenant shall
pay to Landlord as Additional Charges and amount equal to the difference
between the amount of Rents which Tenant would have paid if the government
restriction had not been in force and the amount of Rents actually paid by
Tenant during the period in which the government restriction remained in
effect.
3.6 PARTIAL PAYMENT. No payment by Tenant or receipt or acceptance by
Landlord of a lesser amount than the correct Basic Rent or Additional Charges
due shall be deemed to be other than a payment on account, nor shall any
endorsement or statement on any check or any letter accompanying any check or
payment be deemed an accord and satisfaction, and Landlord may accept such
check or payment, endorsement or statement, without prejudice to any right of
Landlord to recover the balance, and irrespective of any such check or
payment, endorsement or statement, Landlord may treat such partial payment as
a default or pursue any other remedy provided in this Lease or at law.
3.7 LATE CHARGE. Tenant hereby acknowledges that the late payment of
Rents will cause Landlord to incur damages, including administrative costs, loss
of use of the overdue funds and other costs, the exact amount of which would be
impractical and extremely difficult to ascertain. Landlord and Tenant therefore
agree that if Landlord does not receive a payment of Rent within ten (10) days
after the date that such payment is due, Tenant shall pay to Landlord, as
Additional Charges, a late charge equal to five percent (5%) of the overdue
amounts.
ARTICLE 4
OPERATING EXPENSE ADJUSTMENTS
4.1 OPERATING EXPENSE DEFINITIONS. For the purpose of this Article, the
following terms shall have the meanings here ascribed to them:
(a) COSTS OF OPERATION. "Costs of Operation" shall mean, in the
Base Year and in any Comparison Year, as such terms are hereafter defined,
and subject to the adjustment set forth in Subsection 4.1 (c), all expenses,
costs and disbursements of every kind and nature paid or incurred by or on
behalf of Landlord with respect to or for the operation, maintenance and
management of the building. Without in any way limiting the generality of
the foregoing, Costs of Operation shall include the following:
(i) Wages (including all fringe benefits of every nature
and kind, Workers' Compensation and payroll taxes, but not exceeding
compensation paid in comparable first class buildings in the Pasadena area),
of employees of Landlord engaged in the operation, maintenance and management
of the Building;
(ii) Costs of goods, tools, supplies and services
supplied or used in or with respect to the operation, maintenance and
management of the Building, including without limitation the cost of
insurance premiums and insurance consultants; cleaning, painting, janitorial,
trash removal, security (including uniforms) and other services; accounting
and other consultants' fees; legal fees (excluding legal fees for services
rendered in connection with the leasing of space in the Building); operation
of elevators and security systems; heating, cooling, air conditioning and
ventilating; hot and cold water, gas, electricity (including lighting), sewer
and other utilities; maintenance of and repairs to the Building (other than
repairs required of other lessees or occupants of the Building) and to any
equipment, machinery or apparatus, including elevators, therein; window
cleaning; service agreements for equipment; fees, licenses, permits and
inspections; depreciation on personal
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property, tools, moveable equipment and coverings used in the repair,
maintenance or operation of the Building or provided by Landlord for the use
or benefit of lessees or occupants, including without limitation window
coverings and carpeting in public corridors and common areas; contesting the
validity or applicability of any law if a successful contest would reduce
Costs of Operation; maintenance, operation and repairs of the parking
garage, landscaping, signs, Plazas, furnishings, water elements, sidewalks,
streets and walkways in or adjacent to the Building; compliance with
Transportation Management Requirements (as hereinafter defined); and design,
implementation, or participation in Transportation Management Programs (as
hereinafter defined.)
(iii) Management fees and other costs and expenses paid
to Landlord's managing agent, or, if no managing agent is employed by
Landlord, but Landlord Itself performs the services of a managing agent,
then, a sum in lieu thereof which does not exceed the then-prevailing rates
for management fees for other first-class office buildings in the City of
Pasadena;
(iv) Costs of capital improvements and replacements
made after completion of the Building in accordance with Section 2.6(d)
amortized over the lesser of the useful life of such improvements or the
period of cost recovery permitted pursuant to the Internal Revenue Code,
including (but only during the amortization period) interest charges incurred
by Landlord in connection with such capital improvements and replacements
made after completion of the Building;
(v) Rentals paid by Landlord with respect to
machinery, equipment, tools, materials, facilities or systems installed or
used after completion of the Building and provided or used by Landlord for
the normal maintenance of the Building;
(vi) Those taxes, duties, charges, levies and
assessments which are expenses as a part of the Building's operation,
maintenance and management, but which are not included within Taxes (as
defined below), such as sales, use, payroll and utility taxes;
(vii) All expenses and costs incurred by Landlord
(other than for capital improvements made after completion of the Building in
accordance with Section 2.6(d), which are covered by item (iv) above) as a
result of or in order to comply with laws, including without limitation laws
pertaining to energy or natural resource conservation or environmental
protection (such as the costs of securing alternative sources of utilities,
energy, or services, and the costs of making the Building or the premises
compatible with the use of such alternative source); and
(viii) All charges, taxes, surcharges, assessments or
penalties imposed by any governmental agency or public utility as a means of
conserving or controlling the consumption of water, gas, electricity, energy
sources or products, natural resources, or other products or services.
(b) COSTS OF OPERATION - EXCLUSIONS. Costs of
Operation shall exclude the following:
(i) Taxes (as defined in Subsection 4.1(d));
(ii) Costs incurred by Landlord with respect to goods
and services (including utilities) supplied to lessees and occupants of the
Building to the extent that such lessees and occupants directly reimburse
Landlord for such costs other than as provided in this Article 4;
(iii) Costs incurred by Landlord for the repair of
damage to the Building to the extent that Landlord is reimbursed by insurance
proceeds;
(iv) Costs incurred by Landlord with respect to the
installation of tenant improvements made for new tenants in the Building; and
(v) Depreciation (other than on personal property,
tools and moveable equipment as described in Clause (ii) of Subsection 4.1(a)
above), and interest and principal on mortgages encumbering the Building or
the Land.
(vi) Costs incurred in auditing Costs of Operation if
paid by Landlord for an audit requested by a tenant of the Building pursuant
to Section 4.2(d) of such tenant's lease.
(c) COSTS OF OPERATION - ADJUSTMENTS. In the event that
during any period in the Base Year or a Comparison Year less than ninety five
percent (95%) of the Rentable Area of the
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Building is occupied and fully serviced, the Variable Costs of Operation shall
be adjusted to what the Variable Costs of Operation would have been if ninety
five percent (95%) of the Rentable Area of the Building had been occupied and
fully serviced throughout the Base Year or the Comparison Year, as the case may
be.
(d) TAXES. "Taxes" shall mean, in the Base Year or any
Comparison Year, all of the following: (i) all taxes, general and special
assessments, duties, charges and levies of every kind, character and
description whatsoever, levied, imposed or charged upon or against the
Building or any part thereof (including, without limitation, the parking
garage or the various estates in the Building or any part thereof or upon
Landlord with respect thereto; except as set forth in Subsection 9.5(c); (ii)
all taxes levied, imposed or charged on real and personal property used in
the operation, maintenance or management of the Building; (iii) all taxes
levied, imposed or charged against or measured by or based upon the rent
payable by lessees and occupants of the Building or the value of the Building
or any part thereof; (iv) all taxes and fees of every kind, character and
description whatsoever, from time to time levied, imposed or charged in the
future in lieu thereof or for which Landlord is liable with respect to the
Building, including all taxes and assessments levied for any public or mass
transit or people-mover system; and (v) costs and expenses (including legal
and other professional fees except legal fees for services rendered in
connection with the leasing of space in the Building and interest on deferred
payments) incurred by Landlord in contesting the amount, validity or
applicability of any of the foregoing. All Taxes shall be paid in
installments wherever permitted by the taxing public agency, and such
installments shall be charged to Taxes when paid. Taxes shall not include
Landlord's income, franchise, gift, estate, inheritance, transfer, excise or
excess-profits taxes to the extent that any such income, franchise, gift,
estate, inheritance, transfer, excise or excess-profits taxes are not
proclaimed by a governmental body to be levied in whole or in partial
substitution for any Taxes. In the event any Taxes of a type described in
Clauses (iii) and (iv) of this Subsection 4.1(d) are now or hereafter levied,
imposed or charged, for purposes of this Lease, Tenant's Share of such Taxes
shall be based on the assumptions that the Building is the only commercial
building owned and operated by Landlord and that the rental or other income
received by Landlord from the Building is the only rental and income received
by Landlord. Net recoveries through protest, appeals or other actions taken
by Landlord, including legal and other actions taken by Landlord, after
deduction of all costs and expenses, including legal and other professional
fees and costs, shall be deducted from Taxes for the year of receipt. If, at
the time Taxes for the Base Year or any Comparison Year are assessed, the
Building has not been fully completed (including installation of tenant
improvements in all of the space to be leased to tenants on all floors of the
completed Building) the Taxes for the Base Year or such Comparison Year shall
be adjusted to include what the Taxes would have been if the Building had
been completed at the time of such assessment, and if all such spaces in
which tenant improvements have not been installed had contained tenant
improvements valued for the purposes of such assessment at the per square
foot of Usable Area Cost of standard tenant improvement work as of the
Commencement Date.
(e) BASE COSTS OF OPERATION. "Base Costs of Operation"
shall mean the per square foot Costs of Operation for the Building for the first
twelve (12) full calendar months of the Lease term, subject to the adjustment
set forth in Subsection 4.1(c), which is determined by dividing the Costs of
Operation, as so adjusted, by the number of square feet of Rentable Area of the
Building. The Basic Rent includes Tenant's Share of the Base Costs of
Operation.
(f) BASE TAXES. "Base Taxes" shall mean the per square
foot Taxes for the Building for the first twelve (12) full calendar months of
the Lease Term, subject to the adjustment set forth in Subsection 4.1(d), which
is determined by dividing such taxes, as so adjusted, by the number of square
feet of Rentable Area of the Building. The Basic Rent includes Tenant's Share
of the Base Taxes.
(g) COMPARISON YEAR. "Comparison Year" shall mean each
calendar year after the calendar year in which the Lease Term begins and in
which any portion of the Lease Term falls.
(h) BASE YEAR. "Base Year" shall mean the first twelve
(12) calendar months of the Lease Term.
4.2 ADJUSTMENT OF RENTS.
(a) COSTS OF OPERATION. If, for any Comparison Year, Tenant's
Share of Costs of Operation exceeds the product of the Base Costs of
Operation (on a per square foot basis as set forth above) multiplied by the
Rentable Area of the Premises, Tenant shall pay the excess amount to
Landlord, as Additional Charges. Tenant shall pay such Additional Charges in
the following manner;
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(i) Prior to the commencement of any Comparison
Year, or as soon thereafter as possible, Landlord shall furnish to Tenant a
statement showing Landlord's estimate of the Costs of Operation for the
Comparison Year and the amount of any Additional Charges due from Tenant, based
upon that estimate.
(ii) On or before the first day of each calendar
month during the Comparison Year, Tenant shall pay one-twelfth (1/12) of the
Additional Charges due from Tenant for the Comparison Year, as shown by the
statement; provided, however, that if only a portion of a Comparison Year falls
within the Lease Term, on or before the first day of each calendar month during
the partial Comparison Year within the Lease Term, Tenant shall pay to Landlord
a sum equal to the total estimated Additional Charges due from Tenant for that
partial Comparison Year (based on the proration set forth in Clause (iv) of this
Subsection) divided by the number of calendar months in that partial Comparison
Year (counting any fractional calendar month as a whole month). If Landlord's
statement is furnished after January 1 of a Comparison Year, on or before the
first day of the first calendar month following Tenant's receipt of Landlord's
statement, in addition to the monthly installment of estimated Additional
Charges for the Comparison Year due on that date, Tenant shall pay another
monthly installment of estimated Additional Charges for each calendar month or
fraction thereof that has already elapsed in that Comparison Year.
(iii) There shall be a final adjustment at the end of
each Comparison Year, to reflect actual Costs of Operation, as provided in
Subsection 4.2(d).
(iv) If the Commencement Date is other than January 1
or the Lease Term expires or terminates on a day other than December 31, the
Additional Charges payable by Tenant shall be prorated on a daily basis,
based on a 360-day year.
(b) TAXES. During the first five (5) years of the Lease Term,
Tenant's Share of Taxes shall not include Tenant's Share of any increase in
Taxes attributable to any sale or change of ownership of the Building, or any
portion thereof (as defined by the California Revenue and Taxation Code and
the California Administrative Code, and applicable rules and regulations) but
shall include Tenant's Share of such an increase in Taxes during the second
five (5) years of the Lease Term (i.e., the Extension Option Term). If, for
any Comparison Year in or after which the fifth anniversary of the
Commencement Date occurs, Tenant's Share of Taxes exceeds the product of the
Base Taxes (on a per square foot basis as set forth above) multiplied by the
Rentable Area of the Premises, Tenant shall pay the excess amount to
Landlord, as Additional Charges. Tenant shall pay such Additional Charges in
the following manner:
(i) Prior to the Comparison Year in which the fifth
anniversary of the Commencement Date occurs, and prior to the commencement of
each succeeding Comparison Year, or as soon thereafter as possible, Landlord
shall furnish to Tenant a statement showing Landlord's estimate of Taxes for
the Comparison Year and the amount of any Additional Charges due from Tenant,
based upon that estimate.
(ii) On or before the first day of each calendar month
during the Comparison Year, Tenant shall pay one-twelfth (1/12th) of the
Additional Charges due from Tenant for the Comparison Year, as shown by the
statements; provided, however, that if only a portion of a Comparison Year
falls within the Lease Term, on or before the first day of each calendar
month during the partial Comparison Year within the Lease Term, Tenant shall
pay the Landlord a sum equal to the total estimated Additional Charges due
from Tenant for that partial Comparison Year based on the proration set forth
in Clause (iv) of this subsection divided by the number of calendar months in
that partial Comparison Year (counting any fractional calendar month as a
whole month). If Landlord's statement is furnished after January 1 of a
Comparison Year, on or before the first day of the first calendar month
following Tenant's receipt of Landlord's statement, in addition to the
monthly installment of estimated Additional Charges for the Comparison Year
due on that date, Tenant shall pay another monthly installment of said
estimated Additional Charges for each calendar month or fraction thereof that
has already elapsed in that Comparison Year.
(iii) If the Commencement Date is other than January 1 or
the Lease Term expires or terminates on a day other than December 31, an
appropriate adjustment shall be made in the Additional Charges payable by
Tenant in the partial Comparison Year beginning or concluding the Lease Term,
reflecting the length of that partial Comparison Year and the Taxes relating
to that period.
(iv) There shall be a final adjustment at the end of each
Comparison Year, to reflect actual Taxes, as provided in Subsection 4.2(d).
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(c) REVISED ESTIMATES. Quarterly during the Comparison Year,
and with respect to Taxes, upon the receipt of a tax bill or notification of
assessed value, Landlord may revise its estimates of Taxes and Costs of
Operation for the Comparison Year. The estimated amounts of Additional
Charges on account of Taxes and Costs of Operations, and the installment
payments with respect thereto, described in Subsections 4.2(a) and (b), shall
then be adjusted as necessary to assure that, as nearly as possible, Tenant
shall have paid Tenant's Share of Additional Charges on account of Costs of
Operation, based on the revised estimates, by the end of the Comparison Year
and that Tenant shall have paid Tenant's Share of Additional Charges on
account of Taxes when due in accordance with Subsection 4.2(b).
(d) FINAL STATEMENT. As soon as practicable after the end of
each Comparison Year (including the Comparison Year in which the Lease Term
concludes), Landlord shall present Tenant with a final statement (the "Final
Statement") of actual Costs of Operation and Taxes for that Comparison Year.
Within five days of presentation of the Final Statement, Tenant shall pay
Landlord, as Additional Charges, any amount due for Tenant's Share of Taxes
and Costs of Operation. Any credit due Tenant for overpayment of Tenant's
Share of Taxes and Costs of Operation shall be credited against the monthly
installments of Basic Rent next coming due (except that Landlord shall refund
to Tenant the amount of any such credit for the final Comparison Year in the
Lease Term). In the event Tenant shall dispute the amount set forth in the
Final Statement, Tenant shall have the right not later than ninety (90) days
following receipt of such Final Statement to cause Landlord's books and
records with respect to the preceding calendar year to be audited by a
certified public accountant mutually acceptable to Landlord and Tenant. The
findings of such auditor shall be binding on Landlord and Tenant. The
amounts payable under this subsection by Landlord to Tenant or by Tenant to
Landlord, as the case may be, shall be appropriately adjusted on the basis of
such audit. If such audit discloses a liability for further refund by
Landlord to Tenant in excess of ten percent (10%) of the payments previously
made by Tenant for such calendar year, the cost of such audit shall be borne
by Landlord (but not included in Tenant's Share of the Base Costs of
Operation); otherwise the cost of such audit shall be borne by Tenant. If
Tenant shall not request an audit in accordance with the provisions of this
Subsection within ninety (90) days of receipt of Landlord's Final Statement,
such Final Statement shall be conclusively binding upon Landlord and Tenant.
ARTICLE 5
SECURITY DEPOSIT
5.1 SECURITY DEPOSIT. Subject to Section 1.8, above, Tenant shall
deposit the Security Deposit with Landlord as security for the full and faithful
performance and observance by Tenant of Tenant's covenants and obligations under
this Lease. If Tenant defaults in the performance of any of Tenant's covenants
and obligations under this Lease, including, but not limited to, the payment of
Rents, the repair of damage to the Premises caused by Tenant or the cleaning of
the Premises after expiration of the Lease Term or earlier termination of this
Lease, the Landlord may apply all or part of the Security Deposit to the cost of
repairing such damage, the cost of cleaning the Premises, or the payment of any
other sum which Landlord may expend or may be required to expend by reason of
Tenant's default with respect to any of the terms, covenants and conditions of
this Lease, and otherwise to compensate Landlord for any other loss or damage
to Landlord occasioned by Tenant's default, including, but not limited to, any
damage or deficiency in the reletting of the Premises, whether such damage or
deficiency accrues before or after summary proceedings or other reentry by
Landlord. If Landlord so uses all or part of the Security Deposit, Tenant shall
upon demand immediately deposit with Landlord the sum necessary to replace the
amount used. If Tenant shall fully and faithfully comply with all of Tenant's
covenants and obligations under this Lease, the Security Deposit, or any balance
thereof, shall be returned or paid over to Tenant no later than sixty (60) days
after expiration of the Lease Term or earlier termination of this Lease and
delivery to Landlord of possession of the Premises. In the event of any sale or
lease of Landlord's interest in the Building, Landlord shall have the right to
transfer the Security Deposit, or balance thereof, to the vendee or lessee and
any such transfer shall release Landlord from all liability to Tenant for the
return of the Security Deposit. Tenant shall not assign or encumber or attempt
to assign or encumber the Security Deposit or any interest in it and Landlord
shall not be bound by any such assignment, encumbrance, attempted assignment or
attempted encumbrance. Landlord shall not be required to keep the Security
Deposit separate from its general funds and shall not have any fiduciary or
other duties concerning the Security Deposit except as set forth in this
Article. Tenant shall not be entitled to any interest on the Security Deposit.
Tenant hereby waives the provisions of Section 1950.7 of the California Civil
Code, and all other provisions of law, now or hereafter enacted, regarding
security deposits, including, without limitation, (i) those which provide that
Landlord may claim from a security deposit only those sums reasonably necessary
to remedy defaults in payment of rent, to repair damage caused by Tenant or to
clean the Premises, it being agreed that Landlord may in addition claim those
sums reasonably necessary to compensate Landlord for
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any other loss or damage, foreseeable or unforeseeable, caused by the act or
omission of Tenant or any officer, employee, agent or invitee of Tenant; and
(ii) those which provide that, upon the termination of Landlord's interest in
the Premises, Landlord shall either transfer to Landlord's successor, or refund
to Tenant, any balance remaining from security deposits and cleaning fees, it
being agreed that if Landlord transfers its interest in the Premises and the
Security Deposit and does not refund the Security Deposit to Tenant, Tenant
shall look solely to Landlord's successor for any refund to which Tenant may be
entitled.
ARTICLE 6
USE AND COMPLIANCE WITH LAW
6.1 USE. Tenant shall use and occupy the Premises for executive,
professional (except medical) and/or administrative office purposes in
connection with Tenant's business or profession, and for no other purpose
whatsoever. Tenant acknowledges that, unless otherwise in this Lease
expressly provided, neither Landlord nor any agent of Landlord has made any
representation or warranty with respect to the suitability of the Premises or
the Building for the conduct of Tenant's business or profession.
6.2 LICENSES AND PERMITS. If any governmental license or permit, other
than the initial Certificate of Occupancy for the Premises, shall be required
for the proper and lawful conduct of Tenant's business or the Permitted Use in
the Premises, Tenant, at its expenses, shall duly procure and thereafter
maintain such license or permit and submit the same to Landlord for inspection.
Tenant shall at all times comply with the terms and conditions of each such
license or permit.
6.3 PROHIBITED USES. Tenant shall not at any time use or occupy or
allow any person to use or occupy the Premises, or do or permit anything to be
done or kept in the Premises, in any manner which (a) violates any certificate
of occupancy in force for the Premises or for the Building; (b) causes or is
liable to cause damage to the Building, the Premises or any equipment,
facilities or other systems therein; (c) constitutes a violation of law; (d)
impairs or tends to impair the proper and economic maintenance, operation and
repair of the Building or its equipment, facilities, or systems; (e) interferes
with the transmission or reception of microwave, television, radio or other
communications signals by antenna located on the roof of the Building or
elsewhere in the Building; or (f) violates any of the Rules and Regulations
("Rules and Regulations") or the Parking Rules and Regulations ("Parking Rules
and Regulations") attached hereto as Exhibits E and F, respectively, and
incorporated herein by this reference.
6.4 COMPLIANCE BY TENANT. If Landlord or Tenant receives any notice
of the violation of any law involving the Premises or their use and occupancy
by Tenant, the party receiving such notice shall promptly forward a copy
thereof to the other. Tenant shall, at Tenant's expense, comply with all
laws and all recorded covenants, conditions and restrictions that impose any
obligation, order or duty on Landlord or Tenant, arising from or related to
(a) Tenant's use of the premises; (b) the manner of conduct of Tenant's
business or operation of its installations, equipment or other Property
therein; (c) any cause or condition created by or at the instance of Tenant,
or (d) breach of any Tenant's obligations hereunder; and Tenant shall pay all
the costs, expenses, fines, penalties and damages which may be imposed upon
Landlord by reason of or arising out of Tenant's failure to fully and
promptly comply with and observe the Provisions of this Section. Where
Tenant's compliance as required by this Section necessitates actions by
Tenant for which this Lease requires Landlord's consent, Tenant shall obtain
Landlord's consent before taking such actions. Any repairs or alterations of
the Premises by Tenant pursuant to this Section shall be subject to the
provisions of Article 8. Should Landlord or Tenant learn or have reasonable
cause to believe that a hazardous substance has been released in the Premises
or anywhere else in or beneath the Building, such party shall give the other
prompt written notice thereof, whether or not the release is in quantities
that would otherwise be reportable to a public agency.
6.5 SERVICE CONTRACTS. Tenant shall neither contract for, nor employ
any labor in connection with, the maintenance, cleaning or other servicing of
the Premises.
6.6 REPAIRS AND ALTERATIONS REQUIRED BY LAW. If Landlord shall be
required to comply with any law mandating repairs or alterations of the Premises
that would cost in excess of twelve (12) monthly installments of the Basic Rent,
Landlord may, at its option, elect to terminate this Lease upon ninety (90) days
notice thereof to Tenant. If Tenant notifies Landlord within fifteen (15) days
after the giving by Landlord of such notice of termination that Tenant will pay
for the required repairs or alterations, then this Lease shall not terminate,
but Tenant shall hold Landlord harmless from any and all costs, expenses or
liabilities in connection therewith. If Tenant shall give such notice to
Landlord, Tenant shall promptly obtain a detailed bid, in form and substance
satisfactory to Landlord, for the
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performance of all of the work needed to complete the required repairs or
alterations (as used herein, the term "work" shall include the costs of
material and labor). The bid must be from a reputable general contractor,
satisfactory to Landlord, and qualified to perform such work, and who agrees
to perform the repairs and alterations at the price set forth in the bid
("Bid Price"). Landlord shall, within twenty (20) days after the delivery to
it of the bid, notify Tenant of Landlord's election either to (1) perform the
work itself or (2) retain the contractor to perform the work in accordance
with the terms of the bid; but Landlord may, at its option, before commencing
the work or retaining the contractor, or at any time thereafter, require
Tenant to furnish to Landlord security, in form and amount satisfactory to
Landlord (including, without limitation, a bond issued by a corporate surety
licensed to do business in California) to assure payment by Tenant for the
work. If Landlord elects to perform the work itself, then Tenant shall pay
to Landlord the amount of the Bid Price, payable as and when the Bid Price
would be required to be paid under the bid, as if the bid had been accepted.
If, however, Landlord elects to retain the contractor, then Tenant shall pay
to Landlord the amount of the Bid Price, in the same installments as required
by the bid, at least ten (10) days prior to the date that each installment is
due and payable to the contractor under the bid. The provisions of Article 8
hereof, to the extent applicable, shall apply to repairs or alterations
performed by Tenant pursuant to this Section.
6.7 NONDISCRIMINATION. Tenant hereby covenants for itself, its
heirs, executors, administrators and assigns, end all persons claiming under
or through Tenant, that there shall be no discrimination or segregation of
any person or group of persons on account of race, color, creed, sex,
religion, marital status, ancestry or national origin in the leasing,
subleasing, transferring, use, or enjoyment of the Premises, nor shall Tenant
itself, or any person claiming under or through Tenant, establish or permit
any such practice or practices of discrimination or segregation with
reference to the selection, location, number, use or occupancy, of sublessees,
assigns or vendees in the Premises. This Lease is made and accepted upon and
subject to the covenants contained in this Section.
6.8 RIGHT OF POSSESSION. If, in order to comply with any law
hereafter enacted, it becomes necessary for Landlord to recover possession of
all or any portion of the Premises, Landlord shall have the right to
repossess the Premises or any portion thereof, at any time upon ninety (90)
days notice to Tenant, and when said space shall have been so permanently
repossessed, in lieu of any and all claims for damages, Landlord shall reduce
the Basic Rent by the percentage that the Rentable Area of the repossessed
space bears to the total Rentable Area of the Premises and reduce Tenant's
Share to the percentage that the Rentable Area of the portion of the Premises
left to Tenant bears to the total Rentable Area of the Building after the
repossession. However, if the space taken is of such an amount or size as to
make the remaining space unusable to Tenant, then Landlord, upon thirty (30)
days notice from Tenant, will endeavor to furnish Tenant with comparable
space, if available, elsewhere in the Building and to place Tenant in such
new space and this Lease and each and all of the terms, covenants and
conditions hereof shall thereupon remain in full force and effect and be
deemed applicable to such new space, and this Lease and each and all of the
terms, covenants and conditions hereof shall thereupon remain in full force
and effect and be deemed applicable to such new space. If Landlord shall be
unable to provide Tenant with such substitute space, then this Lease shall
cease and terminate at the end of the 30-day notice period. No exercise by
Landlord of any right reserved in this Section shall entitle Tenant to
damages for any injury or inconvenience occasioned thereby, nor shall Tenant
by reason thereof be entitled to any abatement in rent (except as expressly
set forth above).
6.9 RULES AND REGULATIONS. Tenant shall both obey the Rules and
Regulations and the Parking Rules and Regulations, as amended from time to
time, which govern the management, safety, security, care, cleanliness and
good order of the Building and Building parking garage. Landlord shall not
be responsible or liable to Tenant for violations of the Building Rules and
Regulations or the Parking Rules and Regulations by other lessees and
occupants of the Building.
ARTICLE 7
INSURANCE
7.1 USE OF PREMISES. Tenant shall not violate, or permit the
violation of, any condition imposed by any Insurance Policy covering or
relating to the Building and shall not do, or permit anything to be done, or
keep or permit anything to be kept in the Premises which might subject
Landlord to any liability or responsibility for personal injury or death or
property damage, or which would increase any insurance rate with respect to
the Building over the rate which would otherwise then be in effect or which
would result in insurance companies of good standing refusing to insure the
Building in amounts satisfactory to Landlord, or which would result in the
cancellation of any Policy covering or relating to the Building or the
assertion of any defense by the insurer in whole or in part to claims under
any such Policy.
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7.2 CASUALTY INSURANCE. During the Lease Term, Tenant shall
maintain, at Tenant's expense, All Risk Coverage Insurance, covering Tenant's
Property and all Alterations, and any other property, if any, in which Tenant
may have an insurable interest, insuring the same in the amount of its full
replacement value.
7.3 LIABILITY INSURANCE. During the Lease Term Tenant shall
maintain, at Tenant's expense, Comprehensive General Liability Insurance with
respect to the Premises, their use and occupancy by Tenant and the conduct or
operation of business therein, with combined single-limit per
occurrence/aggregate coverage of not less than $5,000,000. Said insurance
shall be written on an "occurrence" basis and not on "claims made" basis.
If, at any time during the Lease Term, Tenant owns or rents more than one
location, its liability insurance policy shall contain an endorsement to the
effect that the aggregate limit in the policy shall apply separately to each
location owned or rented by Tenant, Landlord may from time to time, but not
more frequently than once every three (3) years, require such increase in the
Policy amount to be maintained by Tenant under this Section as Landlord deems
necessary in order to maintain adequate liability coverage. Landlord will
not require Tenant to increase such coverage to an amount exceeding the
amount of coverage then being carried in comparable first class buildings in
the City of Pasadena.
7.4 OTHER INSURANCE. During the Lease Term, Tenant shall maintain,
at Tenant's expense: (a) Worker's Compensation and Employer's Liability
Insurance, in form and amounts satisfactory to Landlord; (b) Business
interruption insurance in such amounts as will reimburse Tenant for direct
end/or indirect loss of earnings and extra expense attributable to the perils
required to be insured against by Tenant's Casualty Insurance, or
attributable to loss of access to the Premises or any portion thereof as a
result of such perils, preferably, by the same insurance carrier that issues
Tenant's Casualty Insurance; and (c) Liquor Liability Insurance coverage in
limits of not less than five hundred thousand dollars ($500,000) if, as and
when, at any time during the Lease Term hereof, any alcoholic beverages of
any nature are served on the Premises.
7.5 WAIVER OF SUBROGATION. Each of the parties hereby waives any and
all rights to recovery against the other or against any other tenant or
occupant of the Building, or against the officers, employees, agents,
representatives, customers, end business visitors of such other party or of
such other tenant or occupant of the Building, for loss or damage to such
waiving party or its property or the property of others under its control,
arising from any cause insured against under the form of casualty insurance
policy required under Section 7.2 of this Lease to be carried, with all
permissible extensions and endorsements covering extended perils or under any
other policy of Insurance carried by such waiving party in lieu thereof, to
the extent such policies then in force permit such waiver. Where the effect
of this waiver of subrogation would be to increase the cost of any such
Casualty Insurance, such waiver shall not be operative if the party intended
to be benefited by such waiver does not agree to pay such increased cost
within thirty (30) days following written notice of same from the party
carrying the insurance.
7.6 POLICY REQUIREMENTS. Landlord, Landlord's Affiliates and their
agents and employees and any Superior Lessor or Superior Mortgagee, as such
terms are hereafter defined, whose name and address have been or shell be
furnished to Tenant shall be designated as additional insured parties on any
Insurance policy required by this Article to be carried by Tenant. Tenant
shall deliver to Landlord fully paid-for policies or certificates of
Insurance for the Insurance coverage required by this Article, in form
reasonably satisfactory to Landlord, issued by the Insurance company or Its
authorized agent, at least twenty (20) days before the expiration of any
existing policy. At Landlord's request, Tenant shall deliver Insurance
policies or certificates of Insurance to additional insured parties, All
policies shall be Issued by companies of recognized responsibility,
acceptable to Landlord, maintaining A rating of A-XI or better In Best's
Insurance Reports - Property Casualty (or any equivalent rating on any
successor index adopted by Best's), and licensed to do business in
California. All policies shall provide that they cannot be cancelled or
modified unless Landlord and any Superior Lessor or Superior Mortgagee named
as an additional insured party are given at least thirty (30) days prior
written notice of such cancellation or modification. In addition, Tenant
shall obtain, with respect to each Insurance Policy required by this Article,
an endorsement in favor of Landlord, Landlord's Affiliates and their agents
and employees and any Superior Mortgagee providing that each such Insurance
Policy shall remain outstanding and in full force and effect for such
parties' benefit, notwithstanding the Invalidity of such policies as to
Tenant arising as the result of any act on the part of Tenant. Tenant agrees
that if Tenant does not take out and maintain each Insurance policy required
by this Article, Landlord may (but shall not be required to) procure said
Insurance on Tenants behalf and charge Tenant the premiums, plus a twelve
percent (12%) handling charge, due upon demand. Tenant shall have the right
to provide such insurance coverage required pursuant to blanket policies
obtained by Tenant, provided such blanket policies expressly afford coverage
to the Premises and to Tenant as required by this Lease.
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7.7 PREMIUM INCREASE. If, by reason of any action or omission by
Tenant in default of any of its obligations under this Lease, including the
previsions of Section 6.3 or Section 7.1, or by reason of any Special Work
installed in the Premises, the premiums on Landlord's insurance on the
Building are higher than they otherwise would be, Tenant shall reimburse
Landlord, on demand, as Additional Charges, for that pert of the premiums
attributable to the default by Tenant or the Special Work. A schedule or
statement of rates for the Building, issued by the Insurance companies
insuring the Building, or by a fire insurance rating organization or other
similar body making rates for Insurance for the Building, shall be conclusive
evidence of the facts therein stated and of the several items and charges in
the Insurance rate then applicable to the Building.
7.8 LANDLORD'S INSURANCE. At all times during the Lease Term,
Landlord shall maintain in effect a policy of casualty insurance covering the
Building, including the parking garage and interior and adjacent landscaped
areas, insuring such property for at least ninety percent (90%) of its
replacement value, providing protection against any peril included within the
classification of fire end extended coverage "all risk;" together with
endorsements for theft and collapse. At Landlords option, Landlord may
purchase endorsements for earthquake and flood insurance, if available,
Landlord shall be entitled, at its option, to include in such policies a
deductible provision of up to five percent (5%) per occurrence. If Tenant
vacates the Premises or any portion thereof during the term of this Lease,
and if Landlord's cost for casualty insurance is increased as a consequence,
Tenant shall reimburse Landlord, upon demand, for the full amount of such
additional cost. During the Lease Term, Landlord shall carry Public
Liability Insurance in such amounts and with such deductions as Landlord
considers appropriate. Landlord may, but shall not be obligated to, obtain
and carry any other form or forms of insurance that Landlord and/or any
Superior Lessor or Superior Mortgagee may determine to be advisable.
Notwithstanding any contribution by Tenant to the cost of insurance premiums,
as provided in this Lease, Tenant acknowledges that it has no right to
receive any proceeds from any insurance policies carried by Landlord.
ARTICLE 8
ALTERATIONS
8.1 CONDITIONS. With Landlord's prior written approval, Tenant may
from time to time, at its expense, make such alterations ("Alterations") in
and to the Premises as Tenant may reasonably consider necessary for the
conduct of its business in the Premises, provided and upon the conditions
that: (a) the Alterations do not affect the outside appearance of the
Building; (b) the Alterations are non-structural and do not impair the
strength of the Building; (e) the Alterations are to the interior of the
Premises and do not affect any part of the Building outside of the Premises;
(d) the Alterations do not affect the proper functioning of the mechanical,
electrical, sanitary and other service systems of the Building, or Increase
the usage of such systems by Tenant so as to adversely affect the functioning
of such Building systems; (e) before proceeding with any Alteration, Tenant
shall submit to Landlord, for Landlord's approval, plans and specifications
for the work to be done, and Tenant shall not proceed with such work until it
obtains Landlord's approval which approval shall not unreasonably be
withheld; (f) Tenant shall pay to Landlord upon demand the reasonable costs
and expenses directly and indirectly incurred by Landlord in reviewing
Tenant's plans and specifications and inspecting the Alterations to determine
whether they are being performed in accordance with the approved plans and
specifications and in accordance with low, including, without limitation, the
fees of any architect or engineer employed by Landlord for such purpose; (g)
before Tenant proceeds with any Alteration which will cost more than $10,000
(exclusive of the costs of Items constituting Tenant's Property, as defined
in Section 9.2), as estimated by a reputable contractor designated by
Landlord, Tenant shall obtain and deliver to Landlord either (i) a
performance bond and a labor and materials payment bond for the benefit of
Landlord, issued by a corporate surety licensed to do business in California,
each in an amount equal to one hundred twenty five percent (125%) of the
estimated cost of the Alterations and in form satisfactory to Landlord, or
(ii) such other security as shall be satisfactory to Landlord; (h) not less
than fifteen (15) days, nor more then twenty (20) days prior to commencement
of the Alterations, Tenant shall notify Landlord of the work commencement
date, in order that Landlord may post notices of non-responsibility about the
Premises; and (i) Tenant shall fully and promptly comply with and observe the
rules and regulations of Landlord then in force with respect to the making of
Alterations. Landlord shall have the further right to condition its approval
upon Tenant's covenant to reimburse Landlord for the cost of removal of all
such alterations, additions or improvements, upon the expiration or sooner
termination of the term. Landlord reserves the right to perform the
Alterations as contractor, and in that event, Tenant shall pay to Landlord
the estimated cost of the Alterations (including the payments to Landlord
specified in clause (f) above but without requiring a bond as specified in
clause (g) above) plus a contractor's fee in lieu of Landlord's overhead and
profit charges equal to ten percent (10%) of said cost; Tenant shall pay such
estimated costs of Alterations and contractor's fee in four equal
installments. The initial 25% installment shall be paid prior to commencement
of Alterations. The second 25% installment shall be paid (OVER)
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Tenant shall pay to Landlord, promptly upon being billed therefor, any amount by
which the actual cost of the Alterations (including the payments to Landlord
specified in clause (f) above) exceeds payments by Tenant to Landlord for the
estimated cost of the Alterations, plus a supplemental contractor's fee equal to
ten percent (10%) of such excess. Landlord agrees to reimburse Tenant promptly,
after completion of the Alterations, any amount by which the actual cost of the
Alterations (including the payments due to Landlord as specified in clause (f)
above, plus a supplemental contractor's fee equal to ten percent (10%) of such
cost) is less than the amounts actually paid by Tenant to Landlord for the
estimated cost of such Alterations, Tenant agrees that the review and approval
by Landlord of Tenant's plans and specifications for Alterations are solely for
Landlord's benefit. Unless Landlord performs the work, Landlord shall have no
duty toward Tenant, nor shall Landlord be deemed to have made any representation
or warranty to Tenant with respect to the safety, adequacy, correctness,
efficiency or compliance with law of the plans and specifications, the
Alterations or their design, or any other matter regarding the Alterations.
8.2 PERFORMANCE. At no expense to Landlord, Tenant shall obtain all
necessary governmental permits and certificates for the commencement and
prosecution of Alterations and for final approval of the Alterations upon
completion. If Landlord does not perform the Alterations as contractor, Tenant
shall retain at Its sole expense a reputable contractor approved by Landlord to
perform the Alterations in compliance with the permits and certificates and
applicable law. The Alterations shall be diligently performed in a good and
workmanlike manner, using new materials and equipment at least equal in quality
and class to the better or (i) the original installations of the Building, or
(ii) the Building standards established by Landlord. Any Alterations in the
mechanical, electrical, sanitary, heating, ventilating, air-conditioning or
other systems of the Building shall be performed oddly by contractors approved
by Landlord. The Alterations shall be performed in a manner that does not
interfere with, delay, or impose additional expense on Landlord in the
construction, maintenance, repair or operation of the Building; and if any
additional expense is incurred by Landlord as a result of Alterations, Tenant
shall reimburse Landlord for the additional expense upon demand, as Additional
Charges. Throughout the performance of Alterations, Tenant, at Tenant's
expense, shall carry, or cause to be carried, workers' compensation Insurance as
required by law and general liability Insurance, with completed operations
endorsements, for any, occurrence in or about the Building, in such coverage
limits as Landlord may require, with insurers meeting the requirements of
Section 7.6 and otherwise satisfactory to Landlord. Landlord and the persons
specified in Section 7.6 shall be designated as additional insured parties on
the Insurance policies Tenant shall furnish Landlord with evidence satisfactory
to Landlord that such Insurance is in effect before the commencement of
Alterations and on request of Landlord during construction, Tenant shall provide
evidence satisfactory to Landlord that the Insurance remains In effect. If any
Alternations involve the removal of fixtures, equipment or other property in the
Premises which are not Tenant's Property (as defined in Section 9.2), the
removed fixtures, equipment or other Property shall be promptly replaced et
Tenant's expense with new fixtures, equipment or other property of like utility
and at least equal value, unless landlord otherwise directs Tenant in writing.
8.3 LIENS AND VIOLATIONS. Tenant, at its expense, and with diligence
and dispatch, shall procure the cancellation or discharge of all notices of
violation arising from or otherwise connected with Alterations, or any other
work, labor, services or materials done for or supplied to Tenant, or any
person claiming through or under Tenant, which shall be issued by the
Building and Safety Department of the City of Pasadena or any other
governmental entity. Tenant shall keep the Premises and the Building free of
all mechanics' liens, stop notices and other liens end encumbrances or claims
or liens or encumbrances filed in connection with Alterations performed by
Tenant, or any ether work, labor, service or materials done for or supplied
to Tenant, Including, without limitation, security interests in any
materials, fixtures or articles Installed in the Premises. Unless Tenant has
paid Landlord for the work in full, Tenant, at its expense shall satisfy or
discharge of record each stop notice, lien or encumbrance within fifteen (15)
days after it is filed. If Tenant fails to do so, Landlord shell have the
right, upon ten (10) days prior written notice to Tenant, to satisfy or
discharge the stop notice, lien or encumbrance by payment to the claimant on
whose behalf It was filed. Tenant shall reimburse Landlord on demand for the
costs and expenses so incurred by Landlord, as Additional Charges, end
without regard for any defense or offset that Tenant may have had against the
claimant, but neither the Landlord's curative action, nor the reimbursement
of Landlord by Tenant shall cure Tenant's default in failing to satisfy or
discharge the stop notice, lien or encumbrance.
8.4 MANDATED ALTERATIONS DUE TO TENANT. If the Insurance Services
Office or any other similar body, or any bureau, department or official of
the State, County or City government,
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or any other governmental authority having jurisdiction changes,
modifications, replacements alternations, in or to any Building system by
reason of Tenants trade fixtures, or other contents of the Premises
replacements, alterations or additional equipment of a penalty or charge
against the full allowance, require or recommend that any or additional
equipment be made or supplied business, or the location of partitions, or if
any such changes, modifications, become necessary to prevent the imposition
for any such system in the Insurance rate as fixed by said Office or by any
insurance company, Landlord may make and supply such changes, modifications,
replacements, alternations or additional equipment; provided that Tenant
shall be required to reimburse Landlord the full amount of sold costs and
expenses promptly upon Landlord furnishing Tenant with a statement therefor.
ARTICLE 9
LANDLORD'S AND TENANT'S PROPERTY
9.1 FIXTURES. All fixtures, equipment, improvements and
appurtenances ("Fixtures") attached to or built into the Premises at the
Commencement Date or during the Lease Term, including Alterations, shall
become and remain a part of the Premises and the property of Landlord,
regardless of whether the Fixtures were installed by Tenant or at Tenant's
expense and shall not be removed by Tenant. Further, any other personal
property in the Premises on the Commencement Date, unless installed end paid
for by Tenant, shall become Landlord's property and shall not be removed by
Tenant.
9.2 TENANT'S PROPERTY. Notwithstanding Section 9.1, all
communications and office equipment, whether or not attached to or built into
the Premises, which are installed in the Premises by or for the account of
Tenant, without expense to Landlord, and which can be removed without
substantial damage to the Premises or the Building, and all furniture,
furnishings, and other articles of movable personal property owned by Tenant
and located in the Premises shall remain the property of Tenant ("Tenant's
Property") and may be removed by Tenant at any time during the Lease Term, if
Tenant is not in default under this Lease at the time of removal. If any of
Tenant's Property is removed, Tenant shall repair, at its sole expense, any
damage to the Premises or to the Building resulting from the installation or
removal of Tenant's Property. Equipment or other property for which Landlord
shall have granted an allowance or credit to Tenant, or any item installed
for Tenant's account, but in replacement of an item that was not Tenant's
Property, shall not be deemed Tenant's Property and shall become the property
of Landlord. Nothing herein is intended to preclude Tenant's right to grant
security interests to third parties in Tenant's Property.
9.3 REMOVAL AT TERMINATION. Prior to the expiration of the Lease
Term, or immediately upon any earlier termination of this Lease, Tenant, at
its expense, shall remove from the Premises all of Tenant's Property (except
such items there of as Landlord has expressly permitted to remain, which
shall become the property of Landlord), and Tenant shall repair any damage to
the Premises or the Building resulting from the installation or removal of
Tenant's Property.
9.4 ABANDONMENT. Landlord, at its option, may consider items of
Tenant's Property that remain in the Premises after the expiration of the
Lease Term, or any earlier termination of this Lease, to have been abandoned,
and in that event such items may be retained by Landlord as its property or
disposed of by Landlord, without accountability, in such manner as Landlord
shall determine, and at Tenant's expense Landlord shall give Tenant notice
of its right to reclaim abandoned property pursuant to California Civil Code
Section 1980, at SEC., and may, thereafter, remove any or all of such Items
end dispose of the same in any manner or store the same in a public warehouse
or elsewhere for the account and at the expense and risk of Tenant. Tenant
hereby grants the Landlord a security interest in said abandoned property in
the event that it is not reclaimed within the statutory period. If Tenant
shall fail to pay the cost of storing any such property after it has been
stored for a period of thirty (30) days or more, Landlord may sell any or all
of such property at public or private sale, in such manner and at such time
and places as Landlord, in its sole discretion, may deem proper without
notice to or demand upon Tenant, and shall apply the proceeds of such sale:
first, to the cost and expenses of such sale, including reasonable attorneys'
fees actually incurred; second, to the payment of the cost for the removal
end storing of any such properties; third, to the payment Of any other sums
of money which may then or thereafter be due to Landlord from Tenant under
any of the terms hereof; and fourth, the balance, if any, to Tenant.
9.5 TAXES ON TENANT'S PROPERTY AND NON-STANDARD TENANT IMPROVEMENTS.
(a) TENANT'S PROPERTY. At least ten (10) days prior to
delinquency, Tenant shall Pay all taxes levied or assessed upon Tenant's
Property. If the assessed value of the Building, the Premises, or property
of Landlord is increased by the inclusion of a value placed upon Tenant's
Property, Tenant shall pay to Landlord, upon demand, as Additional
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Charges, the taxes levied against Landlord on account of the included value of
Tenant's Property.
(b) SPECIAL WORK. Tenant shall pay to Landlord, upon demand, as
Additional Charges, such portion of real estate tares levied or assessed
against Landlord which are attributable to that portion of the value of
tenant Improvements installed In the Premises in excess of Thirty Dollars and
Ninety Four Cents ($30.94) per square foot of the Rentable Area of the
Premises. For the purposes of calculating the amount payable by Tenant
pursuant to this Section 9.5(b), the value of tenant improvements Installed
in the Premises shall be deemed to be equal to the cost of such improvements,
including any fees paid to Landlord In connection therewith, and including
any alterations performed pursuant to Section 8.1.
(c) EXCLUSION. The portion of reel estate taxes collected by
Landlord from Tenant pursuant to this Section and free other lessees of the
Building pursuant to similar provisions in their leases shall be excluded
from Taxes for purposes of the rent adjustments described in Article 4 of
this Lease.
ARTICLE 10
REPAIRS AND MAINTENANCE
10.1 TENANT'S OBLIGATIONS. Except for Landlord's obligations as set
forth specifically in Sections 10.2 and 13.1, Tenant shall, at its expense,
throughout the Lease Term, take good ears of the Premises, the Fixtures end
Tenant's Property. Tenant shall be responsible for all maintenance and
repairs, interior and exterior, structural and non-structural, ordinary and
extraordinary, of the Premises, the Building and the Building's facilities
and systems, made necessary, in whole or in part, by (a) the existence of
Tenant's tenant improvements (as defined in the Work Letter) or Alterations;
(b) the installation, use or operation of Tenant's Property in the Premises;
(c) the moving of Tenant's Property in or out of the Building; or (d) any
act, omission, misuse or neglect of Tenant or its officers, partners,
employees, agents, contractors or invitees. Tenant, at its expense, shall
promptly replace all scratched, damaged or broken doors and glass in and
about the Premises. Tenant shall be responsible for all repairs, maintenance
and replacement of roll and floor coverings in the Premises and for the
repair end maintenance of all water fountains, sinks and sanitary and
electrical fixtures and equipment in the Premises. Tenant shall Promptly
make, at Tenant's expense, all repairs in or to the Premises for which Tenant
is responsible, and such repair work shall be subject to the provisions of
Article 8 regarding Alterations. The provisions of Section 6.5 shall apply
to contracts and labor for maintenance and repairs that Tenant is required to
perform under this Section. Landlord shall perform or cause to be performed,
at Tenant's expense, any other repairs of the Building and its facilities and
systems for which Tenant is responsible. Tenant shall reimburse Landlord on
demand, as Additional Charges, for such costs. Landlord may elect to act as
general contractor for such repairs, in which case Tenant additionally shall
pay Landlord a contractors fee in lieu of Landlords overhead and profit
charges of ten percent (10%) of the costs of such repairs. Tenant shall
pay such costs of repairs and contractor's fee in four equal installments.
The initial 25% installment shall be paid prior to commencement of the
repairs. The second 25% installment shall be paid on completion of 25% of
the repairs. The third 25% installment shall be paid on completion of 50% of
the repairs. The final 25% installment shall be paid on completion of 75% of
the repairs.
10.2 LANDLORD'S OBLIGATIONS. Through a time, on-site building manager,
Landlord shall operate the Building in a first-class, efficient manner, as
cost effectively as possible so as to minimize operating expenses consistent
with the operation of a first class office building. Landlord shall provide
on-site porter and concierge services which may be provided by the building
manager. Landlord, at its expense shall keep and maintain the structural
elements and the roof, public portions of the Building and the Building
systems and facilities serving the Premises in proper working order,
condition and repair. Landlord shall have no liability to Tenant to perform
any repairs in or about the Premises, or of Building systems and facilities
serving the Premises, however, until Tenant has first notified Landlord in
writing of the need for such repairs, describing the needed repairs in
reasonable detail. Except as otherwise expressly provided in this Lease,
Landlord shall have no liability Tenant (and Tenant waives any claim of
liability), and Tenant's covenants and obligations under this Lease shall not
be reduced or abated in any manner whatsoever, by reason of any
inconvenience, annoyance, interruption or injury to business arising from
Landlord per forming in a competent manner any maintenance, repairs,
alterations, additions or improvements in or to any portion of the Building
or the Premises or In or to the fixtures, equipment or appurtenances of the
Building or the Premises, which Landlord is required or permitted to make by
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this Lease or which are required by law. landlord shall have the right to
erect scaffolding and barricades in the Premises and the Building for
purposes of such repairs, provided that such structure do not unreasonably
impair access to the Premises. Tenant waives any rights may have under
California Civil Code Sections 1941 and 1942, and any other provisions of law
now or hereafter enacted, regarding the duties of a lessor to repair leased
Premises or the rights of lessees to make repairs if the lessor fails to do
so.
10.3 NOTICE. Tenant shall give prompt notice to Landlord of (a) any
occurrence In or about the Premises for which Landlord might be liable; (b)
any fire or other casualty in the Premises; (c) any damage to or defect in
the Premises, including the Fixtures, for the repair of which Landlord might
be responsible; and (4) any damage to or defect in any part or appurtenance
of the Building's sanitary, electrical, heating, ventilating, air
conditioning, elevator or other systems located in or Passing through the
Premises.
ARTICLE 11
UTILITIES AND SERVICES
11.1 BASIC UTILITIES AND SERVICES. Subject to rules and regulations
from time to time established by Landlord, Landlord shall furnish to the
Premises during "Business Hours," which are the periods from 8:00 a.m. to
6:00 p.m. Monday through Friday and 8:00 a.m. to 1:00 p.m. Saturday, except
for New Year's Day, Presidents' Day, Memorial Day, Independence Day, Labor
Day, Thanksgiving, Christmas and such other holidays as are generally
observed in the City of Pasadena by the closing of businesses, (a) heating,
air conditioning and ventilation in amounts required, in Landlord's
reasonable Judgment, for the use and occupancy of the Premises; (b) freight
and passenger elevator service; (c) electricity in amounts required for
normal lighting by the Building's standard overhead fluorescent fixtures, as
described in the work Letter, and for customary office machinery and
equipment; and (d) hot and cold water in amounts required for normal
lavatory, coffee room and drinking purposes. Subject to the provisions of
Section 11.2 regarding Additional Charges for additional use, passenger
elevator service, electricity and water will be available twenty four (24)
hours a day, every day of the year. Landlord shall provide heating, air
conditioning, ventilation, and freight elevator service at other than
Business Hours only by special arrangement with Tenant. Landlord shall
provide janitorial service five days per week, except for the holidays listed
above, generally consistent with that furnished in other first-class office
buildings in the City of Pasadena, and window washing at intervals reasonably
determined by Landlord, all in accordance with the Cleaning Specifications
attached hereto as Exhibit "H", and by this reference made a part hereof.
11.2 ADDITIONAL TENANT USE. Without the prior written consent of
Landlord, which consent Landlord may not unreasonably refuse, Tenant shall
not use any apparatus or device in the Premises that would cause Tenant to
use more electricity or water than Landlord has undertaken to provide in
Section 11.1. At the Commencement Date, and from time to time thereafter,
Landlord may impose a charge equal to its actual expenditures, as Additional
Charges, and establish reasonable rules and regulations for (a) the use by
Tenant of heating, air conditioning, ventilation, or freight elevators any
time other than during Business Hours; (b) the use by Tenant of heating, air
conditioning, ventilation or water in amounts exceeding the amounts Landlord
has undertaken to provide in Section 11.1; (c) the consumption by Tenant of
electricity in amounts exceeding, 1.14 kilowatt hours per square foot of
Rentable Area per month, and (d) the use of any additional or unusual
Janitorial or cleaning services required because of any non-building standard
improvements In the Premises, the carelessness of Tenant, the nature of
Tenant's business (including the operation of Tenant's business other than
during Business Hours), or for the removal of any refuse and rubbish from the
Premises, other than discarded material placed in wastepaper baskets and left
for emptying as an incident to Landlord's normal cleaning of the Premises.
Notwithstanding the foregoing, for the first six months following the
Commencement Date (the "Trial Period"), Landlord may not impose a charge, as
Additional Charges or otherwise, for the consumption by Tenant of electricity
in amounts exceeding 1.14 kilowatt per hour. Landlord shell not be required
to provide janitorial services for portions of the Premises used for
preparing or consuming food or beverages, storage or offset printing,
Landlord may charge Tenant an additional charge for cleaning if Tenant has
glass partitions or an unusual amount of glass surfaces in the interior of
the Premises. In order to determine or verify the amount of any additional
charge for excess use of water, Landlord may install, at Tenant's expense, a
meter to measure the water furnished to Premises. Any additional charge for
excess water shall include charges of Landlord equal to its actual cost for
the excess amount of water furnished and for any additionally required
Pumping or heating and any additional taxes, sewer rent or other charges
imposed by any government agency or public utility based on the quantity of
water furnished or additional charge, on account of the exceeds use by Tenant.
11.3 TEMPERATURE MAINTENANCE. Landlord makes no representation with
respect to the adequacy or fitness of the air-conditioning or ventilation
equipment in the Building to maintain temperatures which may be required
for, or because of, any extraordinary equipment of Tenant that is not
customary office equipment, and Landlord shall have no liability for loss
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or damage in connection therewith, if the temperature otherwise maintained in
any portion of the Premises by the heating, air-conditioning or ventilation
systems is affected as a result of (a) any lights, machines or equipment
(including, without limitation, electronic data processing machines) used by
Tenant in the Premises, (b) occupancy of the Premises by more than one person
per two hundred fifty (250) square feet of Rentable Area of the Premises or
(c) an electrical load in excess of four (4) watts per square foot of
Rentable Area of the Premises, Landlord shall have the right, but not the
obligation, to install any machinery and equipment which Landlord reasonably
deems necessary to restore temperature balance, including, without
limitation, modifications to the standard air-conditioning equipment, The
cost of the additional machinery and equipment, including the cost of
installation and any additional cost of operation and maintenance incurred
thereby, shall be paid by Tenant to Landlord on demand, as Additional
Charges. Notwithstanding the foregoing, Landlord acknowledges that a 4-6 ton
air conditioning capacity will be furnished to the Premises as a part of the
tenant improvements to be constructed pursuant to Exhibit "D."
11.4 EXCULPATION OF LANDLORD. Landlord shell not be liable for any
failure to furnish any services or utilities when such failure is caused by
acts of God, accidents, breakage, repairs, strikes, lockouts, other labor
disputes, alterations or improvements to the Premises or the Building, the
inability to obtain an adequate supply of fuel, water, electricity, labor or
other supplies or for any other condition beyond Landlord's reasonable
control, including, without limitation, any governmental energy conservation
program, and Tenant shall not be entitled to any damages nor shall such
failure abate or suspend Tenant's obligation to pay the Rents except as
expressly provided in Section 13.2 or constitute or be construed as a
constructive or other eviction of Tenant. In the event any governmental
entity promulgates or revises any law, or issues mandatory controls or
voluntary guidelines relating to the use or conservation of energy, water,
gas, light or electricity, the reduction of automobile or other emissions or
the provision of any other utility or service furnished by Landlord in the
Building, Landlord may, in its sole discretion, take any appropriate action
to comply with such provisions of law, mandatory controls or voluntary
guidelines, including the making of alterations to the Building. Neither
Landlord's actions nor its failure to act shall entitle Tenant to any
damages, abate or suspend Tenant's obligation to pay the Rents or constitute
or be construed as a constructive or other eviction of Tenant.
11.5 SECURITY. Landlord shell institute reasonable security measures
for the Building, but Landlord makes no guaranty that such measures will
protect persons or property from loss or injury. Twenty four (24) hour
security personnel and television monitors for twenty nine (29) cameras which
are located in the garage and common areas of the Building will be located in
the lobby. Upon payment of a reasonable deposit by Tenant, Landlord will
supply Tenant's employees with Individual key cards usable for access to the
Building, elevators and HVAC system serving the Premises.
11.6 ACCESS. Landlord, its cleaning contractor and their employees
shall have access to the Premises after 5:30 p.m. and before 8:00 a.m., and
shall have the right to use, without charge therefor, all light, power and
water in the Premises reasonably required to clean the Premises.
11.7 DIRECTORY, ELEVATOR AND PREMISES LOBBY LISTINGS. Landlord, at
Tenant's request and Landlord's expense, shall: (a) maintain listings on the
Building directory of the name of Tenant, and the names of any of Tenant's
officers and employees, provided however that Tenant shall not be entitled to
more than two (2) listings far every one thousand (1,000) square feet of the
Rentable Area of the Premises; and (b) maintain a listing of Tenant's name
and suite number in the elevator lobby of the second floor and en the wall
adjacent to the main entrance to the Premises on the second floor. The
reasonable charge of Landlord for any changes in such listings requested by
Tenant shall be paid by Tenant to Landlord on demand, as Additional Charges.
ARTICLE 12
RIGHTS OF LANDLORD
12.1 RESERVATION FROM PREMISES. Except for the space within the
inside surfaces of all walls, hung ceilings, floors, windows and doors
bounding the Premises, Landlord reserves from the Premises leased hereunder
all of the Building, including, without limitation, the roof, exterior
Building walls, core corridor walls and doors, any terraces or roofs
adjacent to the Premises, the space between hung ceilings and the slab above
and any space in or adjacent to the Premises used for shafts, stacks, pipes,
conduits, fan rooms, ducts, electric, telephone or other utilities, sinks or
other Building facilities, and the use thereof, as well as access thereto
through the Premises for the purposes of operation, maintenance, decoration
and repair of the Premises or the Building. Landlord reserves the right, and
Tenant shall permit Landlord, to install, erect, use and maintain pipes,
ducts and conduits in and through the Premises.
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12.2 ENTRY BY LANDLORD. Landlord end its agents shall have the right
to enter or pass through the Premises at reasonable times on twenty four (24)
hour notice, except in emergency circumstances where such notice would not be
practical a) subject to Section 12.4, to examine the Premises and to show
them to actual and prospective lenders, lessors, mortgagees, Purchasers, and
lessees of the Building and (b) to make repairs, alterations, additions and
improvements in the Premises, the Building or the Building's facilities and
equipment. Landlord shall have a pass key to the Premises and shall be
allowed to bring materials and equipment into the Premises as required in
connection with repairs, alterations, additions and improvements, without any
liability to Tenant and without any reduction of Tenant's covenants and
obligations and may do so (but shall not be obligated to do so) on an
overtime basis.
12.3 OBSTRUCTIONS OF LIGHT OR VIEW; CLOSURES. If at any time any
windows of the premises are temporarily darkened or the light or view
therefrom obstructed by reason of any repairs, improvement, maintenance or
cleaning In or about the Building, or if such light or view is permanently
obstructed by reason of the construction of another structure adjacent to or
in the proximity of the Building, or if any part of the Building, other than
the Premises, is temporarily or permanently closed or inoperable, the same
shall be without liability to Landlord end without any reduction or
diminution of Tenant's obligations under this Lease,
12.4 EXHIBITING THE PREMISES. During a period of twelve (12) months
prior to the expiration of the Lease Term, Landlord and its agents may
exhibit the Premises to prospective tenants during normal business hours, on
at least twenty four (24) hours advance notice to Tenant, which may be oral.
12.5 BUILDING NAME AND ADDRESS. Landlord reserves the right at any
time, on reasonable notice to Tenant, to name the building or to change the
Building's name or address, and Landlord shall have no liability to Tenant
for any cost or inconvenience occasioned thereby.
12.6 ALTERATIONS OF BUILDING. Landlord reserves the right, at any
time, without incurring any liability to Tenant therefor and without
affecting or reducing any of Tenant's covenants and obligations hereunder, to
make such changes, alterations, additions and improvements in or to the
Building, its systems and equipment, street entrances, doors, halls,
passages, elevators, escalators and stairways, and other public parts of the
Building, as Landlord shall deem necessary or desirable.
12.7 OTHER RIGHTS The enumeration of rights of Landlord In this
Article is not all inclusive, and shall not be construed to preclude or
limit other rights reserved to Landlord by this Lease or by law.
ARTICLE 13
DAMAGE OR DESTRUCTION
13.1 RESTORATION. If the Building or the Premises is partially
damaged or totally destroyed by fire or other casualty, and of this Lease is
not terminated as provided in this Article, landlord shall repair the damage
and restore or rebuild the Building or the Premises (except for Tenant's
Property), as the case may be, with reasonable dispatch after notice to
Landlord of the damage or destruction and the collection of substantially all
of the Insurance proceeds receivable on account of the casualty; provided,
however, that in no event shall Landlord be under any legal obligation to
expend on such rebuilding or restoration amounts in excess of the total
Insurance proceeds collected on account of the casualty, plus the amount of
any "deductible".
13.2 RENT ABATEMENT. Subject to the provisions of Section 13.3, if
all of or part of the Premises shall be damaged or destroyed or rendered
completely or partially untenable on account of fire or other casualty, or if
damage by fire or casualty to the Building deprives Tenant of reasonable
access to the Premises for more than five (5) days, the Basic Rent shall be
abated or reduced, as the case may be, in the proportion that the
untenantable Rentable Area at the Premises bears to the total Rentable Area
of the Premises, for the period from the date of the damage or destruction to
the date that any damage to the Premises has been substantially repaired
(i.e., except for Punch-List Items) and Tenant has reasonable access to the
Premises; provided, however, should Tenant reoccupy a portion ok the Premises
for tee purpose of doing business during the period the repair work is taking
place and prior to the date that the Premises are substantially repaired, the
Basic Rent allocable to such reoccupied portion, based upon the proportion
which the Rentable Area of the reoccupied portion of the Premises bears to
the total Rentable Area at the Premises, shall be payable by Tenant from the
date of such occupancy.
13.3 EXCEPTION TO ABATEMENT. Tenant shall not receive any abatement
or reduction of Basic Rent if (a) the Premises or any portion thereof ere
untenantable due to damage or loss of access for a period of five (5) days or
less; (b) Landlord offers to provide other space in
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the Building reasonably suited for the temporary conduct of Tenant's business
(but Landlord shall have no obligation to provide such other space); (c) Tenant
is in default of any of its obligations hereunder at. the time the Premises or
any portion thereof become untenantable; or (d) by reason of some act or
omission on' the part of Tenant, its subtenant or assignee, or its or their
partners, directors, officers, servants, employees, agents or contractors,
Landlord (or any Superior Lessor or any Superior Mortgagee) is unable to collect
all of the Insurance proceeds (including, without limitation, rent Insurance
proceeds) for damage or destruction of the Premises or the Building by fire or
other casualty. The collection of rent by Landlord under the circumstances
described in Clause (c) shall not preclude Landlord from seeking damages from
Tenant or exercising other remedies it may have under this Lease or under law.
13.4 ELECTION TO TERMINATE. If (a) the Building or the Premises is
totally destroyed by fire or other casualty, or (b) the Building is so
damaged (whether or not the Premises are damaged) that its repair or
restoration (as estimated by a reputable contractor or architect designated
by Landlord) requires the expenditure of more than twenty percent (201) of
the full insurable value of the Building immediately prior to the casualty,
or (c) less than two (2) years remain in the Lease Term at the time of the
fire or other casualty, or (d) the time necessary to rebuild or repair the
Premises or the Building, in the opinion of a reputable contractor or
architect designated by Landlord would exceed 180 days, or (e) the Building
cannot be repaired or restored except in a substantially different structural
or architectural form, or (f) the damage is due to a peril not covered by
Landlord's policy of Casualty Insurance covering the Building, then, in any
of such cases, Landlord may terminate this Lease by giving Tenant written
notice to such effect within ninety (90) days after the date of the casualty,
This Lease shall terminate on the date specified in Landlord's notice.
Notwithstanding the foregoing, Tenant shall have the right to terminate this
Lease if, within two hundred seventy (270) days of the date of sold casualty,
Landlord has not either substantially repaired and restored the Premises or
offered to relocate Tenant pending such repair and restoration to premises of
e comparable size elsewhere In the Building or in another office building
within a one (1) mile radius of the Building. During any period in which
Tenant has been relocated, Tenant shall be liable for rent to Landlord at a
rate equal to the lesser of (i) the rent otherwise payable by Tenant under
this Lease or (ii) the fair market rental value of the premises into which
Tenant has been relocated, Notwithstanding the foregoing, if less than two
(2) years remain in the Lease Term at the time of the fire or other casualty,
provided that Tenant is otherwise entitled to exercisethe Extension Option,
Tenant shall have ninety (90) days after the date of the casualty in which to
exercise the Extension Option in accordance with the provisions of Section
2.7, so that more than two (2) years will remain in the Lease Term for the
purposes of Subparagraph (c), above,
13.5 BUSINESS INTERRUPTION. Tenant shall not be entitled to terminate
this Lease, and no damages, compensation or claim shall be payable by
Landlord, for inconvenience, loss of business or annoyance arising from any
repair or restoration of any portion of the Premises or of the Building
pursuant to this Article, Landlord shall exert reasonable efforts to make
such repair or restoration promptly and in such manner as not to interfere
unreasonably with Tenant's use and occupancy of the Premises, but Landlord
shall have no obligation to perform such work on en overtime or premium-pay
basis.
13.6 TENANT'S PROPERTY. Landlord shell not be obligated to repair any
damage to or replace Tenant's Property or any alterations to the Premises as
may be made by Tenant in accordance with Article 8 hereof.
13.7 WAIVER. Tenant hereby waives the application of California Civil
Code Sections 1932 end 1933, and any other law of like import, now or
hereafter in force, to any case of damage to or destruction of Building or
the Premises by fire or other casualty, or to a taking of all or pert of the
Building or the Premises subject to the provisions of Article 14 below.
ARTICLE 14
EMINENT DOMAIN
14.1 COMPLETE TAKING. If the whole of the Building or the Premises Is
taken by condemnation, sale in lieu of condemnation, or in any other manner
for any public or quasi-public use or purpose ("Eminent Domain"), this Lease
and the term and estate hereby granted shall terminate as of the date of
vesting of title on such taking or the date that the condemning or purchasing
authority flakes possession, whichever is earlier ("Date of Taking"), and the
Rents shall be prorated and adjusted as of such date.
14.2 PARTIAL TAKING. If only part of the Building or the Land is
taken by Eminent Domain, this Lease shall be unaffected by such taking,
except that (a) Landlord may, at its option, terminate this Lease by giving
Tenant notice to that effect within ninety (90) days after the Date of the
Taking, and (b) if such pert of the Premises shall be taken as to render
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the remaining area of the Premises not reasonably adequate for Tenant to
continue operation of its business, Tenant may terminate this Lease by giving
Landlord notice to that effect within ninety (90) days after the Date Of the
Taking. This Lease Shall terminate as Of the date that such termination
notice from Landlord or Tenant Is given, and the Rents shall be prorated and
adjusted as of such termination date. Upon a partial taking, where this
Lease continues in force as to any part at the Premises, the Basic Rent shall
be reduced by the percentage that the Rentable Area of the portion of the
Premises taken bears to the Rentable Area of the Premises prier to the
taking, and Tenant's Share shell be reduced to the percentage that the
Rentable Area of the portion of the Premises left to Tenant bears to the
Rentable Area of the Building after the taking.
14.3 AWARD. Landlord shall be entitled to receive the entire award or
payment in connection with any taking of the Premises, without deduction for
any estate vested in Tenant by this Lease. Tenant hereby expressly assigns
to Landlord all of Its right, title and interest in end to every such award
or payment. Tenant shall be entitled to claim and receive any award or
payment from the condemning authority expressly granted for the taking of
Tenant's Property, interruption of Its business or moving expenses, provided
that Tenant's claim does not adversely affect landlord's award or interfere
with Landlord's prosecution of its claim for the taking. If Tenant
intervenes in a condemnation Proceeding in which Landlord Is a party,
Landlord and Landlord's counsel shall manage and control the proceeding for
the claimants.
14.4 TEMPORARY TAKING. If all or any portion of the Premises are taken
by Eminent Domain for A limited period of time, this Lease shall remain in
full force and effect and Tenant shall continue to perform all of the terms,
conditions and covenants of this Lease, including, without limitation, the
payment of Rents. Tenant shall be entitled to receive the entire award made
in connection with any such temporary taking attributable to any period
within the term of this Lease. Landlord shall be entitled to the entire
award for any such temporary taking which relates to a period after the
expiration of the term of this Lease or which is allocable to the Building,
other than the Premises, or to the cost of restoration of the Premises. If
any such temporary taking terminates prior to the expiration of the term of
this Lease, Tenant shall restore the Premises as nearly as possible to the
condition prior to the taking, at Tenant's sole cost and expense; provided
that Tenant shall receive the portion of the award attributable to such
restoration.
ARTICILE 15
SURRENDER OF PREMISES
15.1 SURRENDER. On the last day of the Lease Term, or upon any
earlier termination of this Lease, or upon any re-entry by Landlord upon the
Premises, Tenant shall quit and surrender the Premises to Landlord
"broom-clean" and in good order, condition and repair, ordinary wear and tear
excepted. Subject to and in accordance with the provisions of Section 9.3,
Tenant shall remove all of Tenant's Property from the Premises Upon
expiration of the Lease Term or earlier termination of this Lease, all of
Tenant's right, title and interest in the Premises or the Building, including
any possessory interest, shall cease.
15.2 ACCEPTANCE OF SURRENDER. Prior to expiration of the Lease Term,
or earlier termination of this Lease In accordance with the terms hereof, no
act or thing done by Landlord or Its agents shall be deemed an acceptance of
surrender of the Premises, and no agreement to accept such surrender shall be
valid unless in writing and signed by Landlord.
15.3 NO MERGER. The surrender of this Lease by Tenant or the
Termination of this Lease prior to expiration of the Lease Term shall not
constitute a merger, and at the option of Landlord shall operate as an
assignment to Landlord of any subleases of the Premises.
15.4 NO HOLDING OVER. There shall be no holding over by Tenant after
expiration of the Lease Term and the failure by Tenant to deliver possession
of the Premises to Landlord shall be an unlawful detainer.
ARTICLE 16
DEFAULT BY TENANT
16.1 DEFAULT. The occurrence of any of the following shall constitute a
material default and breach of this lease by Tenant.
(a) Any failure by Tenant to pay Basic Rent or Additional
Charges within ten (10) days of when due;
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(b) The failure of Tenant to take Possession of the Premises
within fifteen (15) days after tendered by Landlord, or the abandonment
(which Is deemed to include absence from the Premises for more than ten (10)
days while in default of any material provision at this Lease) or vacation
(except as may BE necessary to facilitate the reoccupancy of the Premises for
A permitted use pursuant to en assignment or subletting authorized under the
terms hereof) of the Premises by Tenant;
(c) The failure by Tenant to observe and perform any other
provisions of this Lease to be observed or performed by Tenant, where such
failure continues for thirty (30) days after written notice thereof by
Landlord to Tenant; provided, however, that if the nature of such default is
such that it cannot reasonably be cured within such thirty (30) period,
Tenant shall not be deemed to be in default if Tenant within that period
commences to cure the default and thereafter diligently proceeds to
completion within a reasonable time; but Tenant's right to cure under this
Subsection (c) does not apply to any matter that is in default under any
other Subsection of Section 16.1;
(d) The making by Tenant or any guarantor of Tenant's
obligations under this Lease of any general assignment for the benefit of
creditors; the filing by or against Tenant of a petition to have Tenant or
said guarantor adjudged a bankrupt or of a petition for reorganization or
arrangement under any law relating to bankruptcy (unless, in the case of a
petition filed against Tenant or guarantor, the same is dismissed within
sixty (60) days); the appointment of a trustee or receiver to take possession
of substantially all of Tenant's or guarantor's assets located at the
Premises or of Tenant's or said guarantor interest in this Lease, where
possession is not restored to Tenant or said guarantor within thirty (30)
days; or the attachment, execution or other judicial seizure of substantially
all of Tenant's or said guarantor's assets located at the Premises or of
Tenant's or said guarantor's Interest in this Lease, where such seizure Is
not discharged within thirty (30) days;
(e) The failure by Tenant to observe or perform according to the
provisions of Article 8.3 where such failure continues for more than ten (10)
days after written notice from Landlord; or
(f) The hypothecation or assignment of this Lease or subletting
of the Premises in violation of Article 19. This default shall net be
curable by Tenant.
16.2 TERMINATION OF LEASE. In the event of any such default by
Tenant, then in addition to any other remedies available to Landlord at law
or in equity, Landlord shall have the immediate option to terminate this
Lease and all rights of Tenant hereunder by giving Tenant a notice of
termination. In the event that Landlord elects so to terminate this Lease,
then Landlord may recover from Tenant:
(a) The worth at the time of award of any unpaid rent which had
been earned at the time of such termination; plus
(b) The worth at the time of award of the amount of which the
unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss Tenant proves could have been
reasonably avoided; plus
(c) The worth et the time of award of the amount by which the
unpaid rent for the balance of the term after the time of award exceeds the
amount of such rental loss that Tenant proves could be reasonably avoided;
plus
(d) Any other amount necessary to compensate Landlord for all of
the detriment proximately caused by Tenant's failure to perform its
obligations under this Lease or which in the ordinary course of things would
be likely to result therefrom, including the cost of the cleanup of any
hazardous substances that may have been released in the Premises or the
Building by Tenant; plus
(e) Such other amounts In addition to or in lieu of the
foregoing as may be permitted from time to time by applicable California law.
As used in Subsections (a) end (b) above, the "worth at the time of award" is
computed by allowing interest from the date of termination until the time of
award at the maximum rate allowable under state or federal law, or, if no such
maximum rate applies, at the rate of 18 percent per annum. As used in
subparagraph (c) above, the "worth at the time of award" is computed by
discounting such amount at the discount rate at the Federal Reserve Bank of San
Francisco at the time of award, plus one percent (1%).
16.3 REENTRY BY LANDLORD. In the event of any such default by Tenant,
Landlord shall also have the right, with or without terminating this Lease,
to reenter the Premises and
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remove all persons and property; the removed property may be stored in a public
warehouse or elsewhere at the cost of and for the account of Tenant,
16.4 INJUNCTIVE RELIEF. In the event of any breach or threatened
breach by Tenant of any of the agreements, terms, covenants or conditions
contained in this Lease, Landlord shall be entitled to enjoin such breach or
threatened breach and shall have the right to invoke any right and remedy
allowed at law or in equity or by statute or otherwise as though re-entry,
summary proceedings, and other remedies were not provided for in this Lease.
16.5 ELECTION TO TERMINATE. No reentry or taking possession of the
Premises by Landlord pursuant to Section 16.3 shall be construed as an
election to terminate Tenant's right to possession unless A written notice of
such Intention is given to Tenant or unless the termination thereof is
decreed by a court of competent jurisdiction.
16.6 REDEMPTION RIGHTS. Tenant, on behalf of itself end any end all
persons claiming through or under Tenant, hereby waives end surrenders all
right and privilege which it might have, under any present or future law, to
redeem the Premises or to have a continuance of this lease after being
dispossessed or ejected from the Premises by process of law or under the
terms of this Lease or after the termination of this Lease.
16.7 APPLICATION OF RENT PAYMENTS. Tenant agrees that Landlord may
apply any payments made by Tenant to such items as Landlord sees fit except
for payments accompanied by written notice from Tenant as to the Items to
which such payments should be credited.
16.8 COUNTERCLAIMS. Tenant shall not Interpose any counterclaim of
any kind In any unlawful detainer proceeding commenced by Landlord to recover
possession of the Premises.
16.9 PERFORMANCE BY LANDLORD. If Tenant shall default in the
performance of any of Tenant's obligations under this Lease, and the default
continues for fifteen (15) days after landlord gives Tenant notice of the
default, Landlord, without thereby waiving or curing such default, may (but
shall not be obligated to) perform the defaulted obligation for the account
and et the expense of Tenant. Landlord may perform Tenant's defaulted
obligation without notice in ease of emergency, also et Tenant's sole cost
and expense.
16.l0 ATTORNEY'S FEES AND EXPENSES. Tenant shall reimburse Landlord,
promptly, for any expenses Incurred by Landlord in connection with any
performance by it for the account of Tenant under Section 16.9. In any
dispute between Landlord and Tenant arising under this Lease, the prevailing
party shall recover from the non-prevailing party all costs and expenses,
including reasonable attorneys' fees (whether or not legal proceedings are
instituted), involved In collecting Rents or enforcing the obligations of the
nonprevailing party under this Lease, including the cost and expense of
instituting and prosecuting legal proceedings or recovering Possession of the
Premises after default by Tenant or upon expiration or sooner termination of
this Lease.
16.11 INTEREST. The amount of any Judgment obtained by Landlord or
Tenant against the other in any legal proceeding arising out of a default
under this lease shall bear interest until paid at the maximum rate allowed
on judgments by law, or, if no such maximum rate prevails, et the rate of ten
percent (10%) per annum. In the case of any damages that were certain or
ascertainable by calculation, such interest shall accrue from the day that
the defaulting party was placed on notice of the other party's right to such
damages.
16.12 NO WAIVERS. The failure of Landlord to insist, In any one or
more instances, upon the strict performance by Tenant of any of Tenant's
obligations under this Lease, or to exercise any right or remedy given
Landlord upon a default by Tenant, shall not be construed as a waiver or
relinquishment for the future, and the obligation of Tenant and Landlord's
rights and remedies upon a default shall continue and remain in full force
and effect with respect to any subsequent breach, act or omission. The
receipt by Landlord of Rents with knowledge of a breach by Tenant of any
obligation of this Lease shall not be deemed a waiver of such breach.
16.13 REMEDIES NOT EXCLUSIVE. The rights and remedies of Landlord
provided in this Article for a default by Tenant are not exclusive, and
Landlord may exercise any other right or remedy it may have pursuant to this
Lease, at law or in equity.
16.14 CHRONIC DEFAULTS. Landlord reserves the right to collect,
quarterly in advance any and all amounts owed by Tenant under this Lease
after Tenant has defaulted monetarily hereunder (and notwithstanding the
subsequent cure of any or all of such defaults), three (3) or more times in
any consecutive twelve (12) month period. Tenant shall begin such payments
on the first day of the calendar month immediately following notice from
Landlord of the exercise of such right. Tenant shall pay all intra-quarterly
upward adjustments within ten
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(10) days of notice of same from Landlord, and Landlord shall credit Tenant's
next quarterly payment with all intra-quarterly downward adjustments. Such
right may be exercised by Landlord in landlord's absolute discretion, and shall
not be construed as an obligation of Landlord.
ARTICLE l7
SUBOROINATION AND ATTORNMENT
17.1 SUBORDINATION. This Lease, and all rights of Tenant under It,
ere subordinate to all present and future leases of all or any pert of the
Building or the Land (except for leases of office or commercial space by
other occupants of the Building); existing present and future mortgages (as
the term "mortgage" is defined in Section 28.8 of this lease) encumbering the
Building, the Land or any of such leases, Including mortgages also covering
other real property; all past and future advances made under such mortgages,
ail renewals, modifications, replacements and extensions of such leases and
such mortgages and spreaders and consolidation of such mortgages; unless the
lessor under any such lease or the mortgagee under any such mortgage elects
that this Lease shall be superior to his lease or mortgage pursuant to
Section 17.2. This Section shall be self-operative end no further instrument
of subordination shell be required. However, in confirmation of
subordination, Tenant shall promptly execute, acknowledge and deliver any
instrument that Landlord, the lessor under any such lease or the mortgagee
under any such mortgage or any of their respective successors In interest may
reasonably request to evidence such subordination; provided, however, that
the foregoing provisions with respect to such subordination shall not be
effective unless the lessor under any such lease or the mortgagee under any
such mortgage shall execute with Tenant a "non disturbance agreement" under
which such lessor or mortgagee shall agree that In the event of the
termination of such leasehold estate or upon the foreclosure of any such
mortgage that Tenant's quiet enjoyment of the Premises will not be disturbed
so long as Tenant pays rent and observes and performs all of the provisions
of this Lease to be observed and performed by Tenant. If Tenant fails to
execute, acknowledge or deliver any such instrument within ten (10) days
after request therefor, such failure shall constitute a default under this
Lease. Any lease to which this Lease, at the time referred to, Is subordinate
is herein called a "Superior Lease" and the lessor of e Superior Lease or its
successor-in-interest, at the time referred to, is herein called a "Superior
Lessor"; end any mortgage to which this Lease, at the time referred to, is
subordinate is herein called a "Superior Mortgage" and the holder of a
Superior Mortgage is herein called a "Superior Mortgagee."
17.2 ELECTION TO SUBORDINATE. By written notice to Tenant, any
Superior Lessor or Superior Mortgagee may elect to subordinate Its Superior
Lease or Superior Mortgage to this Lease.
17.3 NOTICE AND CURE OF LANDLORD'S DEFAULT. If any act or omission of
Landlord would give Tenant the right, immediately or after lapse of a period
of time, to cancel or terminate this Lease, or to claim a partial or total
eviction, Tenant shall not exercise such a right (a) until it has given
written notice of the act or omission to Landlord and to each Superior
Mortgagee and Superior Lessor whose name and address shall previously have
been furnished to Tenant, and (b) until a reasonable period for remedying the
act or omission shall have elapsed following the giving of such notice and
following the time during which each such Superior Mortgagee or Superior
Lessor would be entitled under its Superior Mortgage or Superior Lease to
remedy the act or omission (which reasonable period shall be equal to the
period to which Landlord would be entitled under this Lease or otherwise,
after similar notice, to effect such remedy). If, within said reasonable
period, such a Superior Mortgagee or Superior Lessor gives Tenant notice of
its intention to remedy the act or omission, and thereafter diligently
commences the required remedial action and pursues it to completion, Tenant
shall have no right to terminate this Lease on account of the act or
omission. If such a Superior Mortgagee or Superior Lessor cannot reasonably
take the action required to remedy the act or omission without foreclosing on
Landlord's interest or Judicially recovering possession thereof so as to be
in possession of the Building, and if such Superior Mortgagee or Superior
Lessor gives Tenant a written commitment to remedy the act or omission, then,
the time within which the act or omission must be remedied to avoid a
termination or cancellation of this Lease shall be extended to include the
period of time required for such Superior Mortgagee or Superior Lessor to
obtain possession plus thirty (30) days. In the absence of an express
written assumption by the Superior Mortgagee or Superior Lessor, such
commitment by the Superior Mortgagee or Superior Lessor shall not be
considered an assumptin by the Superior Mortgagee or Superior Lessor of
Landlord's other obligations under the lease, and Landlord shall remain
solely liable for the performance of all terms, covenants and conditions of
the lease, both prior and subsequent to the exercise of any right to cure or
related remedy by the Superior Mortgagee or Superior Lessor. The exercise of
any right to cure or related remedy by a Superior Mortgagee or Superior
Lessor shall not in any way constitute a cure or waiver of a breach or
default under any note, deed of trust, ground lease, or any other instrument
executed by Landlord in such circumstances.
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17.4 ATTORNMENT. Any Superior Lessor or Superior Mortgagee who
succeeds to the rights of Landlord under this Lease, whether through exercise
of remedies in a Superior Lease or Superior Mortgage or by operation of law,
is in this Section called a "Successor Landlord," If the Successor Landlord
does not elect to treat this Lease as extinguished, upon the Successor
Landlord's request, Tenant shall attorn to and recognize the Successor
Landlord as Tenant's landlord under this Lease and shall promptly execute and
deliver any Instrument that such Successor Landlord may reasonably request to
evidence the attornment. Upon attornment, this Lease shall continue in full
force and effect and as a direct lease between the Successor Landlord and
Tenant upon all of the terms, conditions and covenants as are set forth in
this Lease, subject to the provisions of Section 24.4.
17.5 REQUIREMENTS OF SUPERIOR LESSOR OR MORTGAGEE. If any mortgagee,
Superior Lessor or Superior Mortgagee requires modification of this Lease,
Tenant shall, at Landlords request, promptly execute and deliver to Landlord
instruments effecting the modifications that the mortgagee, Superior Lessor
or Superior Mortgagee requires, provided that such modifications de not
adversely affect in a material respect any of Tenant's rights under this
Lease.
ARTICLE 18
QUIET ENJOYMENT
18.1 QUIET ENJOYMENT. So long as Tenant timely pays all the Rents and
performs all of Tenant's other obligations hereunder, Tenant shall peaceably
and quietly have, hold and enjoy the Premises during the Lease Term without
hindrance, ejection or molestation by Landlord or any person lawfully
claiming through or under Landlord, subject, nevertheless, to the provisions
of this Lease and to Superior Leases and Mortgages. This covenant is a
covenant running with the land, and is not a personal covenant of Landlord,
except to the extent of landlord's interest in this Lease and for only so
long as such interest shall continue.
ARTICLE 19
ASSIGNMENTS AND SUBLEASES
19.1 PROHIBITION. Tenant may assign or transfer this Lease, or any
Interest therein, and may sublet the Premises or any part thereof, or any
right or privilege appurtenant thereto, or suffer any other person (the
invitees, agents and servants of Tenant excepted) to occupy or use the
Premises, Or any portion thereof, or agree to any of the foregoing, only in
accordance with Section 19.2, below. Neither this Lease nor any Interest
therein shall be assignable as to the Interest of Tenant by operation of law,
Tenant may pledge, hypothecate or encumber this Lease, or any Interest
therein; provided, however, that, in each case Tenant must first obtain the
written consent of Landlord, which consent shall not unreasonably be
withheld. Any such assignment, transfer, pledge, hypothecation, encumbrance,
sublease or occupation of, or the use of the Premises by any other person
without such consent, shall be void. Any consent to any assignment,
transfer, pledge, hypothecation, encumbrance, sublease or occupation or use
of the Premises by any other person which may be given by Landlord shall not
constitute a waiver by landlord of the provisions of this Article 19 or a
release of Tenant from the full performance by it of the covenants herein
contained.
19.2 REQUIREMENTS. If Tenant desires at any time to assign this Lease
or sublet all or any portion of the Premises, Tenant shall comply with the
following requirements:
(a) First, Tenant shall notify Landlord at least thirty (30)
days prior to the proposed effective date of the assignment or sublease, in
writing, of its desire to do so and shall submit in writing to Landlord (1)
the name of the proposed sub-tenant or assignee, (2) the nature of the
proposed sub-tenant's or assignee's business to be carried on in the
Premises, (3) the terms and conditions of the proposed sublease or assignment
and (4) financial statements for the two most recent completed fiscal years
of the proposed sub-tenant or assignee, and a bank reference. Thereafter,
Tenant shall furnish such supplemental information as Landlord may reasonably
request concerning the proposed sub-tenant or assignee. At any time within
fifteen (15) days after Landlord's receipt of the information specified
above, Landlord may by written notice to lenient elect to (1) consent to the
sublease or assignment, or (2) disapprove of the sublease or assignment,
setting forth in writing Landlord's commercially reasonable grounds for
doing so. Such grounds may include, without limitation, (1) that such an
assignment or subletting with Landlord's consent would result in the breach
of a provision in a lease, deed of trust, security agreement or other
financing arrangement by which Landlord is bound, relating to the Building,
or (2) that less than eighty-five percent (85%) of the Rentable Area of the
Building has ever been leased and occupied by tenants and less than three (3)
years have expired since the Commencement Date. If Landlord consents to the
sublease or assignment within the fifteen (15) day period, Tenant may
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thereafter enter into such assignment or sublease of the Premises, or s portion
thereof, upon the terms and conditions and as of the effective date set forth in
the information furnished by Tenant to Landlord. Landlord's failure to respond
to Tenant's notification of the proposed assignment or sublease within fifteen
(15) days after Landlord's receipt of the information specified above shall be
deemed to be a consent by Landlord to such assignment or sublease.
(b) Notwithstanding Landlord having granted its consent to any
assignment of subleasing, prior to the effective date of any assignment or
the commencement date of any sublease, Landlord shall be furnished by Tenant
with (A) a copy of the fully executed sublease or assignment of lease
agreement, and (B) Tenant's written certification of the sums contributed by
Tenant, if any, for leasehold improvements to be made (by a contractor
approved by Landlord) to the subleased or assigned portion of the Premises
(at no cost or expense to Landlord) in connection with said subleasing, and
any other reasonable out-of-pocket concessions furnished to such sublessees
or assignees by Tenant.
(c) No sublease of the Premises or portion thereof, or
assignment of this Lease, may be for a period of less than One (1) year, nor
may any sublease extend beyond the expiration date of the term of this Lease;
(d) No sublease or assignment may permit the sublessee or
assignee to operate or use the Premises, or any portion thereof, for any use
or uses for which another tenant in the Building has the exclusive right to
such use or uses in the Building;
(e) Tenant shall pay to Landlord as Additional Rent, within five
(5) business days following the due dates of such sums: (a) fifty percent
(50%) of the amount by which the rent payable by such assignee, sublessee or
sublessees to Tenant throughout the term exceeds (ii) the rent otherwise
payable by Tenant to Landlord under this Lease; plus (b) fifty percent (50%)
of all other consideration payable for the assignment or sublease of this
Lease including, but not limited to, key money and the purchase price of any
personal property of Tenant to the extent it exceeds its fair market value,
net of a reasonable broker's commission and reasonable out-of-pocket costs
paid by Tenant to effect such assignment or sublease. The foregoing is a
freely negotiated arrangement between Landlord and Tenant respecting the
allocation of appreciated rentals. This covenant shall survive the expiration
of the term of this Lease; and
(f) Any notice by Tenant to Landlord pursuant to this Section
19.2, of a proposed assignment or subletting, shall to accompanied by a
payment of $250 as a fee for Landlord's time and the processing of Tenant's
request for Landlord's consent. If Landlord's consent to such proposed
assignment or subletting Is net given, such fee shall be refundable. In
addition to said fee, Tenant shall reimburse Landlord for reasonable
attorney's fees incurred by Landlord in connection with such review and the
preparation of documents in connection therewith.
19.3 ASSUMPTION OF LIABILITY. Each permitted assignee, transferee or
sublessee, other then Landlord, shall assume and be deemed to have assumed
this Lease and shall be and remain liable jointly and severally with Tenant
for the payment of the rent and for the due performance or satisfaction of
all of the provisions, covenants, conditions and agreements herein contained
on Tenant's part to be performed or satisfied. No permitted assignment or
sublease shall be binding on Landlord unless such assignee, sublessee or
Tenant shall deliver to Landlord a counterpart of such assignment or sublease
which contains a covenant of assumption by the assignee or sublessee, but the
failure or refusal of the assignee or sublessee to execute such Instrument of
assumption shall not release or discharge the assignee or sublessee from its
liability as set forth above.
19.4 PARTNERSHIPS. If Tenant is a partnership, a transfer of any
interest of a general partner, a withdrawal of any general partner from the
partnership, or the dissolution of the partnership, shall be deemed to be an
assignment of this Lease.
19.5 BARGAINED FOR RESTRICTIONS. Tenant expressly acknowledges that
the limitations and restrictions on its right to assign this Lease or to
sublet the Premises, as set forth in this Section 19, are a part of the
economic terms of this Lease that were expressly bargained for at the time
this Lease was entered into by Landlord and Tenant.
ARTICLE 20
NOTICES
20.1 NOTICES. Any notice, statement, demand, consent, approval or other
communication required or permitted to be given, rendered or made by either
party to the other, pursuant to this Lease or pursuant to any applicable law or
requirement of public authority, shall be in
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writing (whether or not so stated elsewhere in this Lease) and shall be
deemed to have been given, rendered or made only if hand-delivered or sent by
certified mall, return receipt requested, postage prepaid, addressed as
follows: (a) if to Landlord, c/o Trenton Development Corporation, 6500
Wilshire Boulevard, Suite 1800, Los Angeles, California 90048, (b) if to
Tenant, at its address in the Building, (except that before the Commencement
Date, Tenant's address, unless Tenant shall give notice to the contrary,
shall be as stated in Section 1.11), and shall be deemed to have been given,
rendered or made on the date it is hand-delivered or one day after it is
mailed, unless it is mailed outside of Los Angeles County, in which case it
shall be deemed to have been given, rendered or made on the third business
day after the day it is mailed. By giving notice as provided above, either
party may designate a different address for notices, statements, demands,
consents, approvals or other communications intended for it.
ARTICLE 21
ESTOPPEL CERTIFICATES
21.1 ESTOPPEL CERTIFICATES. Tenant agrees from time to time, within
ten (10) days after a request by Landlord, to execute and deliver to Landlord
an estoppel certificate, In form satisfactory to Landlord, which certifies,
affirms or confirms certain information including, without limitation, (a)
that this Lease is unmodified and in full force and effect (or if there have
been modifications, that the same is in full force and effect as modified,
and stating the modifications); (b) states the expiration date of the Lease
Term and that there are no agreements with Landlord to extend or renew the
Lease Term or to permit any holding over (or if there are any such
agreements, describes them and specifies the periods of extension or
renewal); (c) certifies the dates through which Rents have been paid; (d)
states whether or not, to the knowledge and belief of Tenant, Landlord is in
default in performance of, any of its obligations under this Lease, and
specifies each default of which Tenant has knowledge; (e) states whether or
not, to the knowledge and belief of Tenant, any event has occurred which,
with the giving of notice or passage of time, or both, would constitute a
default by Landlord and, if such an event has occurred, specifies each such
event; and (f) states whether Tenant is entitled to any credits, offsets,
defenses or deductions against payment of Rents, and, if so, describes them.
An estoppel certificate issued by Tenant pursuant to this Section shall be a
representation and warranty by Tenant which may be relied en by Landlord and
by others with whom Landlord may be dealing, regardless of independent
investigation. Tenant also shall include in any estoppel certificate
requested by Landlord such other information concerning this Lease as
Landlord and/or an institutional lender may reasonably request. If Tenant
fails to execute and deliver an estoppel statement within ten (10) days after
a request by Landlord, (a) Landlord's representations concerning the factual
matters covered by an estoppel certificate, as described above, sall be
conclusively presumed to be correct, and/or (b) such failure shall, at
Landlord's option, be deemed a material and incurable default entitling
Landlord to exercise its remedies under Article 16.
ARTICLE 22
RELOCATION OF PREMISES
22.1 SUBSTITUTE PREMISES. The provisions of this Article shall apply
only to Premises containing less than five thousand (5,000) square feet of
Rentable Area. Landlord may, at its option, subsequent to the Commencement
Date, elect by notice to Tenant to substitute for the Premises other office
space in the Building designated by Landlord (herein called the "Substitute
Premises"), provided that the Substitute Premises are served by the same
elevator bank as the Premises, contain approximately the same Rentable Area
as the Premises and have a configuration substantially similar to that of the
Premises. Landlord's notice shall be accompanied by a floor plan of the
Substitute Premises, and either the notice or the plan shall set forth the
Rentable Area of the Substitute Premises. Tenant shall vacate and surrender
the Premises and shall occupy the Substitute Premises promptly (and, in any
event, not later than fifteen (15) days) after Landlord has substantially
completed the work to be performed by Landlord in the Substitute Premises
pursuant to Section 22.2. Tenant shall pay the same Basic Rent per square
foot of Rentable Area and the same Additional Charges with respect to the
Substitute Premises as were payable with respect to the Premises, except that
Tenant's Share shall be adjusted to equal the percentage that the Rentable
Area of the Substitute Premises bears to the total Rentable Area in the
Building. Landlord's rights hereunder are in addition to those provided in
Section 6.8 of this Lease.
22.2 LANDLORD'S OBLIGATIONS. Tenant shall not be entitled to any
compensation for any inconvenience Interference with Tenant's business, or to
any abatement or reduction of Basic Rent or Additional Charges (other than as
set forth in Section 22.1), but Landlord shall, at Landlord's expense, do the
following: (a) furnish and install in the Substitute Premises Fixtures at
least equal in kind and quality to those contained in the Premises at the time
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such notice of substitution is given by Landlord; (b) provide to Tenant
personnel to perform under Tenant's direction the moving of Tenant's Property
from the Premises to the Substitute Premises; (c) promptly reimburse Tenant
for Tenant's actual and reasonable out-of-pocket costs incurred by Tenant in
connection with the relocation of any telephone or other communications
equipment which is moved from the Premises to the Substitute Premises,
provided such costs are approved by Landlord in advance, which approval shall
not be unreasonably withheld. Tenant agrees to cooperate with Landlord to
facilitate the prompt completion by Landlord of its obligations under this
Article and the prompt surrender by Tenant of the Premises. Without limiting
the generality of the preceding sentence, Tenant agrees (a) to provide to
Landlord promptly any approvals or Instructions, and any plans and
specifications or any other information reasonably requested by Landlord and
(b) to Promptly perform any work, other than Landlord's obligations under
this Section, to prepare the Substitute Premises for Tenant's occupancy.
22.3 APPLICATION OF LEASE. From and after the date that Tenant
actually vacates and surrenders the Premises to Landlord, this Lease (a)
shall no longer apply to the Premises, except with respect to obligations
which accrued on or prior to such surrender date; and (b) shall apply to the
Substitute Premises as if the Substitute Premises had been the space
originally demised under this Lease.
ARTICLE 23
BROKERS
23.1 BROKERS. The parties covenant, warrant and represent to each
other that no other broker except Landlord's Broker and Tenant's Broker was
in any way responsible for bringing about or consummating this Lease and that
Landlord, for its part, and Tenant, for its part, had no conversations or
negotiations with any broker except Landlord's Broker and Tenant's Broker
concerning the leasing of the Premises. Landlord agrees to indemnify, defend
and hold Tenant harmless against and from any claims for any brokerage
commissions or finders' fees by persons ether than Landlord's Broker or
Tenant's Broker who claim to have performed brokerage or finders' services
with respect to the leasing of the Premises at Landlord's request or
otherwise on Landlord's behalf, and all costs, expenses and liabilities
incurred in connection with such claims, including attorneys' fees. Tenant
agrees to indemnify, defend and hold Landlord harmless against and from any
claims for any brokerage commissions or finders' fees by persons other than
Landlord's Broker and Tenant's Broker who claim to have performed brokerage
or finders' services with respect to the Premises at Tenant's request or
otherwise on Tenant's behalf, and all costs, expenses and liabilities
incurred in connection with such claims, including attorneys' fees.
ARTICLE 24
EXCULPATION AND INDEMNIFICATION
24.1 DISCLAIMER. Landlord shell not be liable to Tenant or Its
partners, directors, officers, contractors, agents, employees, invitees,
sublessees or licensees, for any loss, injury or damage to Tenant or to any
other person, or to its or their property, irrespective of the cause of such
injury, damage or loss, except to the extent caused by or resulting from the
negligence or willful misconduct of Landlord or its employees in the
operation or maintenance of the Premises or the Building, and Tenant hereby
waives all claims in respect thereof. Neither Landlord nor Tenant shall be
liable (a) for any such damage caused by other lessees or persons in or about
the Building, or caused by operations in construction any private, public or
quasi-public work, or (b) for consequential damages.
24.2 INDEMNITY. Tenant shall defend, Indemnify and hold harmless
Landlord, Landlord's Affiliates, all Superior Lessors end Superior
Mortgagees, and its and their respective partners, directors, officers,
agents and employees from and against any and all claims, demands, liability,
loss, damage, costs and expenses arising from or in connection with (a)
Tenant's conduct or management of the Premises or of any business therein, or
any work or act whatsoever done, or any condition created (other than by
Landlord) in or about the Premises during the Lease Term or during the period
of time, if any, prior to the Commencement Date that Tenant may have been
given access to the Premises; (b) any act, omission or negligence of Tenant
or any of its subtenants or licensees or its or their partners, directors,
officers, agents, employees or contractors; (c) the use by Tenant or any of
its subtenants, licensees, guests or visitors or its or their partners,
directors, officers, agents, employees or contractors of the Building parking
facilities; (d) any accident, injury or damage whatever (unless caused or
contributed to by Landlord) occurring in or about the Premises; and (e) any
breach or default by Tenant in the full and prompt payment and performance of
Tenant's obligations under this Lease; together with all costs, expenses and
liabilities including, without limitation, all attorneys' fees and costs.
Landlord shall indemnify and hold Tenant
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harmless from and against any and all claims, demands, liability, loss, damage,
costs and expenses arising from or in connection with any breech or default by
Landlord in the full and prompt payment and performance of Landlord's
obligations under this Lease; together with all costs, expenses and liabilities
including, without limitation, all attorney's fees and costs.
24.3 EXCULPATION. Neither Landlord's partners, landlord's affiliates,
nor any Successor to landlord's interest, including any Successor landlord,
shall be personally liable for the performance of Landlord's obligations
under this lease. Tenant shall look only to Landlord's estate and property
in the Land and the Building (or the proceeds thereof), and to no other
property or assets of Landlord or Landlord's partners or affiliates, for the
satisfaction Of Tenants remedies under this Lease, or for the collection of a
judgment (or other Judicial process) requiring the payment of money by
Landlord or Landlord's partners or affiliates. The covenants and agreements
contained in this Section shall be enforceable by landlord, landlord's
partners, Landlord's Affiliates and their respective successors and assigns.
24.4 TRANSFERS OF LANDLORD'S INTEREST. The covenants and agreements
of Landlord under this Lease shall not be binding on any person at any time
holding the interest of Landlord (including the original named Landlord)
subsequent to the transfer of that person's interest in the Building, but
shall be binding on such person only during the period of time such person
holds the interest of Landlord in the Building. In the event of such a
transfer, the covenants and agreements of Landlord shall thereafter be
binding upon the transferee of Landlord's interest. If Landlord's interest
in the Building or the Land shall be sold, assigned or otherwise transferred
to any person, including any transfer upon the exercise of any remedy
provided in a Superior Lease or a Superior Mortgage or at law or equity, that
person, and each person thereafter succeeding to its interest in the Building
or the Land, shall not be (a) liable for any act or omission of Landlord
under this Lease occurring prior to such sale, assignment or other transfer;
(b) subject to any offset; defense or counterclaim accruing prior to such
sale, assignment or other transfer; (c) bound by any payment prior to such
sale, assignment or other transfer of Basic Rent or Additional Charges for
more than one month in advance and quarterly prepayments made by Tenant as
required by Section 16.14; and (d) liable for the return of the Security
Deposit except to the extent that the Security deposit has been paid over to
such person.
ARTICLE 25
HAZARDOUS MATERIAL
25.1 HAZARDOUS MATERIAL. Landlord and Tenant agree as follows with
respect to the existence or use of "Hazardous Material" (as defined in
Subsection (d) of this Section 25.1) on the Premises or the Building:
(a) Tenant shall not cause or permit any Hazardous Material to
be brought upon, kept or used in or about the Premises or the Building by
Tenant, its agents, employees, contractors or invitees, without the prior
written consent of Landlord. If Tenant breaches the obligations stated in
the preceding sentence, or if the Presence of Hazardous Material on the
Premises or the Building caused or permitted by Tenant results in
contamination of the Premises or the Building, or if contamination of the
Premises or the Building by Hazardous Material otherwise occurs for which
Tenant is legally liable to Landlord for damage resulting therefrom, then
Tenant shall indemnify, hold Landlord harmless, and defend Landlord (with
counsel reasonably acceptable to Landlord) from any and all claims,
Judgments, damages, penalties, fines, costs, liabilities or losses
(including, without limitation, diminution in value of the Premises or the
Building, damages for the loss or restriction on use of rentable or usable
space or of any amenity of the Premises or the Building, damages arising from
any adverse impact on marketing of space in the Building, and sums paid In
settlement of claims, attorneys' fees, consultant fees and expert fees) which
arise during or after the Lease Term as a result of such contamination. This
indemnification of Landlord by Tenant includes, without limitation, costs
incurred in connection with any investigation of site conditions or any
cleanup, remedial, removal or restoration work required by any federal, state
or local governmental agency or political subdivision because of Hazardous
Material present in the soil or ground water on or under the Premises or the
Building to the extent caused by Tenant, without limiting the foregoing, if
the presence of any Hazardous Material on the Premises or the Building caused
or permitted by Tenant results in any contamination of the Premises or the
Building, Tenant shall promptly take all actions at its sole expense as are
necessary to return the Premises or the Building to the condition existing
prior to the introduction of any such Hazardous Material to the Premises or
the Building; provided that Landlord's approval at such actions shall first
be obtained, which approval shall not be unreasonably withheld so long as
such actions would not potentially have any material adverse long-term or
short-term effect on the Premises or the Building.
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(b) Landlord and Tenant acknowledge that Landlord may become
legally liable for the costs of complying with laws relating to Hazardous
Material which are not the responsibility of Landlord or the responsibility
of Tenant pursuant to Subsection (a), including the following: (i) Hazardous
Material present in the soil or ground water on the land; (ii) a change in
Laws which relate to Hazardous Material which make such Hazardous Material
which is present on the Premises or In the Building as of the Commencement
Date, whether known or unknown to Landlord, a violation of such new laws;
(iii) Hazardous Material that migrates, flows, percolates, diffuses or in any
way moves on to or under the land; (iv) Hazardous Material present on or
under the Land or in the Building as a result of any discharge, dumping or
spilling (whether accidental or otherwise) on the land or in the Building by
other lessees of the Property or their agents, employees, contractors or
invitees, or by others. Accordingly, Landlord and Tenant agree that the cost
of complying with laws relating to Hazardous Material on the land or in the
Building for which Landlord may be legally liable and which are paid or
incurred by Landlord shall be a part of the Costs at Operation (and Tenant
shall pay Tenant's Share thereof in accordance with Section 4.1) unless the
cost of such compliance, as between Landlord and Tenant, is made the
responsibility of Tenant pursuant to this Section. To the extent any such
Costs of Operation relating to Hazardous Material is subsequently recovered
or reimbursed through Insurance, or recovery from responsible third parties,
or other action, Tenant shall be entitled to a proportionate reimbursement to
the extent it has paid its share of such Operating Expense to which such
recovery or reimbursement relates. Notwithstanding anything in this Section
25.1(a) to the contrary, Landlord represents and warrants that, as of the
Commencement Date, there is no asbestos in the Building or Premises, and in
the event of a breach of this rpresentation and warranty by Landlord,
Landlord shall pay all costs of removing such asbestos from the Building
and/or Premises.
(c) It is understood that under no circumstances shall Landlord
consent to any proposed assignment or sublease if (i) the assignee or
sublessee's anticipated use of the demised Premises involves the generation,
storage, use, treatment or disposal of Hazardous Material; (ii) the proposed
assignee or sublessee has been required by any prior landlord, lender or
governmental authority to take remedial action in connection with Hazardous
Material contaminating a property if the contamination resulted from such
assignee or sublessee's actions or use of the property in question; or (iii)
the proposed assignee or sublessee is subject to an enforcement order issued
by any governmental authority in connection with the use, disposal or storage
of a Hazardous Material.
(d) As used herein, the term "Hazardous Material" means any
hazardous or toxic substance, material or waste which is or becomes regulated
by any local governmental authority, the State of California or the United
States Government, The term "Hazardous Material" includes, without
limitation, any materiel or substance which is (i) defined as a "hazardous
waste," "extremely hazardous waste" or "restricted hazardous waste" under
Sections 25115, 25117 or 25122.7, or listed pursuant to Section 25140, of the
California Health an Safety Code, Division 20, Chapter 6.5 (Hazardous Waste
Control Law), (ii) defined as a "hazardous substance" under Section 25316 of
the California Health and Safety Code, Division 20, Chapter 6.8
(Carpenter-Presley-Tanner Hazardous Substance Account Act), (iii) defined as
a "hazardous material," "hazardous substance," or "hazardous waste" under
Section 25501 of the California Health and Safety Code, Division 20, Chapter
6.95 (Hazardous Materials Release Response Plans and Inventory), (iv) defined
as a "hazardous substance" under Section 25281 of the California Health and
Safety Code, Division 20, Chapter 6.7 (Underground Storage of Hazardous
Substances), (v) petroleum, (vi) asbestos, (vii) listed under Article 9 or
defined as hazardous or extremely hazardous pursuant to Article 11 of Title
22 of the California Administrative Code, Division 4, Chapter 20, (viii)
designated as a "hazardous substance" pursuant to Section 311 of the Federal
Water Pollution Control Act (33 U.S.C. & 1317), (ix) defined as a "hazardous
waste" pursuant to Section 1004 of the Federal Resource Conservation and
Recovery Act, 42 U.S.C. g 6901 et seq. (42 U.S.C. Q 6903), or (x) defined as
a "hazardous substance" pursuant to Section 101 at the Comprehensive
Environmental Response, Compensation and Liability Act, 42 U.S.C, & 9601 ET
SEG. (42 U.S.C. Section 9601).
(e) Landlord warrants that on the Commencement Date, the
Premises and the Building will have been constructed by Landlord free of
asbestos. If the Building or the Premises have not been so constructed, and
Landlord's warranty is breached, Landlord shall perform and pay for such work
as is necessary to cause the original construction of the Building and the
Premises to comply with such warranty.
ARTICLE 26
PARKING
26.1 TENANT'S PARKING. Tenant shall have the right to use Tenant's
Parking for the parking at automobiles used by Tenant, its officers and
employees, subject to payment to
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Landlord or the operator of the Building parking garage of the prevailing fee
for parking charged to lessees and occupants of the Building. The use of
Tenant's Packing shall be governed by the rules and regulations set forth in
Exhibit F attached hereto end incorporated herein by reference, which rules
end regulations may be, subject to the provisions of the Lease, modified or
amended from time to time by Landlord or the operator of the parking garage
in their reasonable discretion. Tenant's business visitors shell have the
right to perk in the parking garage only to the extent that parking space is
available and subject to payment of the prevailing fee for parking charged to
visitors to the Building. Tenant shall have the right to reduce its
allocation of parking spaces, from time to time, thereby entitling Tenant to
a corresponding reduction of parking fees. Should the allocation be so
reduced end, thereafter, should Tenant request an increase in its allocation
of parking spaces, Landlord shall be obligated to provide the same only upon
a space-available basis and not in excess of the allocation set forth In
Section 1.9 above.
26.2 TENANT'S COOPERATION AND PARTICIPATION IN TRANSPORTATION
MANAGEMENT. Tenant shall cooperate with all efforts by Landlord to comply
with any end all transportation management requirements Imposed by or
resulting from statutes or regulations, or any interpretations thereof,
promulgated by any federal, regional, state, county, municipal or local
governmental authority ("Transportation Management Requirements"). Such
cooperation by Tenant shall include, but not be limited to, registering for,
attending, and otherwise participating in any end all programs which may be
undertaken by Landlord, either independently or in cooperation with local
municipalities or governmental agencies or other property owners in the
vicinity of the Building, to reduce traffic ("Transportation Management
Programs"). Transportation Management Programs may include, but shall not be
limited to, carpools, vanpools and other ridesharing programs, public and
private transit, flexible work hours, preferential assigned parking programs,
registrar programs to coordinate tenants of the Building with existing or
proposed traffic mitigation programs, and commuter meetings to help employees
form and maintain ridesharing arrangements, use transit, bicycle, walk, or
use modes of transportation other than driving for Commutation purposes.
Tenant acknowledges that as part of any Transportation Management Program,
Tenant shall distribute employee transportation Information at the
Commencement Date and thereafter, participate in commuter activities,
designate a liaison for commuter transportation related activities,
distribute commuter information to all employees periodically and to new
employees when hired, permit employees to participate in Landlord sponsored
commuter meetings, permit employees to receive telephone and other
communications from Landlord's Transportation Coordinator to assist in the
creation and maintenance of ridesharing arrangements and use of public
transit, and otherwise participate in other programs or Services initiated
under the Transportation Management Program. Landlord shall implement rules
and regulations to comply with Transportation Management Requirements and
Transportation Management Programs, and Tenant shall comply with all such
rules and regulations, which rules end regulations may be modified or emended
from time to time by Landlord in its reasonable discretion. Any and all
costs incurred by Tenant in cooperating withLandlord as provided in this
Section 26.2 shall be paid solely by Tenant, and any and all costs incurred
by Landlord in complying with Transportation Management Requirements or
undertaking or participating in Transportation Management Programs shall be a
Cost of Operation as provided in Section 4.1(ii) of this Lease.
ARTICLE 27
RIGHT OF FIRST REFUSAL
27.1 RIGHT OF FIRST REFUSAL ON ADDITIONAL SPACE. Prior to the
expiration of this Lease as extended by any Extension Option, Tenant shall
have the right to lease additional space as and when, the same becomes
available on the second (2nd) floor of the Building ("Expansion Area").
Landlord shall not enter into any lease effecting the Expansion Area with any
third-party tenant without first offering Tenant en opportunity to lease such
space on the same terms and conditions as Landlord Is willing or may
negotiate to lease space on such floor to a third-party tenant. As used
herein, "third party tenant" excludes any tenant or party then in possession
of any portion of the Expansion Area which may desire to extend or
renegotiate its lease or rental agreement. Landlord shall offer such
opportunity to lease to Tenant by (a) notifying Tenant in writing of the
availability of the Expansion Area, (b) notifying Tenant of Landlord's
proposed terms and conditions, which may be In the form of a proposed lease.
Within five (5) working days from the date of such offer from Landlord to
Tenant, Tenant shall give Landlord written notice of its election to
negotiate with Landlord to lease the Expansion Area. If Tenant agrees with
the terms and conditions proposed by Landlord, then, landlord shall not enter
into a lease for the Expansion Area with any third-party tenant and Landlord
and Tenant shall promptly enter into a lease on Landlord's proposed terms and
conditions. If Tenant disagrees with any terms and conditions proposed by
landlord, then, Landlord and Tenant shall negotiate in good faith in an
attempt to reach agreement with respect to such terms and conditions. If
Landlord and Tenant are unable to agree upon such terms and conditions within
fifteen (15) days following Tenant's notice to Landlord of its election to
negotiate to lease the Expansion Area, Landlord may lease the Expansion Area
to any third-party tenant on any
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terms and conditions, so long as over-all they are no more favorable then those
offered to Tenant. If Landlord does not lease the Expansion Area to another
tenant within six (6) months following the expiration of the fifteen (15) day
negotiating period described hereinabove, then, Tenant's right of first refusal
as set forth in this Section 27.1 shall be reinstated.
ARTICLE 28
MISCELLANEOUS
28.1 MEMORANDUM OF LEASE. Tenant shall not record this Lease.
However, at the request of Landlord, Tenant shall promptly execute,
acknowledge and deliver to Landlord a Memorandum at Lease Commencement
pursuant to Section 2.2, which may be recorded by Landlord. Such Memorandum
of Lease Commencement shall not change or otherwise affect any of the
obligations or provisions of this Lease.
28.2 ENTIRE AGREEMENT. This Lease contains all of the agreements and
understandings related to the leasing of the Premises and the respective
obligations of Landlord and Tenant in connection therewith. Neither Landlord
nor Tenant has made or is making, and, in executing and delivering this Lease,
neither Landlord nor Tenant is relying upon, any warranties, representations,
promises or statements, except those that are expressly set forth in this Lease,
including any riders and all exhibits hereto. All prior agreements and
understandings between the parties have merged Into this Lease, which alone
fully and completely expresses the agreement of the parties.
28.3 AMENDMENTS. No agreement shall be effective to amend, change, modify,
waive, release, discharge, terminate or effect an abandonment of this Lease,
in whole or in part, unless such agreement is in writing, refers expressly to
this Lease and is signed by Landlord and Tenant.
28.4 SUCCESSORS. Except as otherwise expressly provided herein, the
obligations of this Lease shall bind and benefit the successors and assigns
of the parties hereto; provided, however, that no assignment, sublease or
other transfer in violation of the provisions of Article 19 shall operate to
vest any rights in any putative assignee, sublessee or transferee to Tenant.
28.5 FORCE MAJEURE. Neither Landlord nor Tenant shall have any liability
whatsoever to the other on account of (a) the inability of such party to
fulfill, or delay in fulfilling, any of such party's obligations under this
Lease (other than the payment of Rents) by reason of strike, other labor
trouble, governmental preemption of priorities or other controls in
connection with a natural or other public emergency or shortages of fuel,
supplies or labor resulting therefrom, or any other cause, whether similar or
dissimilar to the above, beyond such party's reasonable control; or (b) any
failure or defect in the supply, quantity or character of electricity or
water furnished to the Premises, by reason of any requirement, act or
omission of the public utility or others furnishing the Building with
electricity or water, or for any other reason, whether similar or dissimilar
to the above, beyond Landlord's reasonable control. If this Lease specifies
a time period for the performance of an obligation by landlord or for the
performance of an obligation of Tenant (other than the obligation to pay
Rents), that time period shall be extended by the period of any delay in such
performance caused by any of the events of force majeure described above.
28.6 POST-TERMINATION OBLIGATIONS. Upon the expiration of the Lease Term
or earlier termination of this Lease, neither party shall have any further
obligation or liability to the other except as otherwise expressly provided
in this Lease, and except for such obligations as by their nature or under
the circumstances can only be, or by the provisions of this Lease, may be,
performed after such expiration or earlier termination. However, any
liability for a payment of money shall survive the expiration of the Lease
Term or earlier termination of this Lease.
28.7 EXCAVATIONS. If an excavation is made upon the Land or upon land
adjacent to the Building, or is authorized to be made, then at the request of
Landlord, Tenant shall afford persons performing the excavation and shoring
license to enter the Premises solely for the purpose of doing such work as
may be necessary or desirable to preserve and and protect the Building from
injury or damage and to support the Building Tenant shall have no claim for
damages or liability against Landlord or such persons, and Tenant's
obligations under this Lease shall not be reduced or otherwise affected.
28.8 MISCELLANEOUS DEFINITIONS. For the purposes of this Lease, the
following terms shall have the meanings herein ascribed to them:
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(a) INCLUDING. The terms "including" and "include" shall be
interpreted in the non-exclusive sense unless the contrary is explicitly set
forth thereat. That is, the term "including" followed by one or more
descriptive terms shall mean "including but not limited to" said one or more
descriptive terms.
(b) LANDLORD. The term "Landlord" shall mean the Landlord herein
named or any successor in interest, but only for the time that any such
person owns the Building or a lease of the Building in accordance with and
subject to the Provisions of Section 24.4.
(c) LANDLORD'S AFFILIATES. The term "Landlord's Affiliates" shall
mean Trenton Development Corporation, H.T. Greene & Associates and H.T.
Greene, their successors and assigns.
(d) LAWS. The terms "laws," "provisions of law" and words of similar
import shall mean laws, statutes, ordinances, building end fire codes, rules,
regulations, judgments, rulings, decrees, orders and directives of any or all
of the federal, state, county and city governments and all departments,
subdivisions, bureaus, courts, agencies or offices thereof, and of any other
governmental, public or quasi-public authorities having Jurisdiction over the
Building or the Premises, and the direction of any public officer pursuant to
law, whether now or hereafter in force. References to specific statutes
include successor statutes of similar purpose and import.
(e) MORTGAGE. The term "mortgage" shall include a mortgage or deed of
trust, and the term "holder of a mortgage" or "mortgage" or words of similar
import shall include a mortgagee of a mortgage or a beneficiary of a deed of
trust.
(f) PERSON. The term "person" shall mean any natural person or
persons, a partnership, a corporation, and any other form of business or
legal association or entity.
(g) RENTABLE AREA. The term "Rentable Area" shall mean the rentable
area as determined by Landlord, according to the following formula:
(i) As to each floor of the Building on which the entire space
rentable to tenants is or will be leased to one tenant, Rentable Area shall
be the entire area bounded by the inside finished surface of the dominant
portion of the permanent outer Building walls, including all areas used for
elevator lobbies, drip lines, corridors, special stairways, special
elevators, restrooms, mechanical rooms, electrical rooms, telephone closets
situated on such floor, and a PRO RATA share of the ground floor, lobby,
without deduction for columns and other structural portions of the Building
or vertical penetrations that are included for the special use of Tenant, but
excluding the area contained within the interior walls of the Building
stairs, fire towers, vertical ducts, elevator shafts, flues, vents, stacks
and pipe shafts.
(ii) As to each floor of the Building on which space is or will
be leased to more than one tenant, Rentable Area attributable to each such
lease shall be the total of (1) the entire area included within the premises
covered by such lease, being the area bounded by the inside finished surface
of the dominant portion of the permanent outer Building walls, the exterior
of all walls separating such premises from any public corridors or other
public areas on such floor, and the centerline of all walls separating such
premises from other areas leased or to be leased to other tenants on such
floor, and (2) a pro rata portion of the area covered by the elevator
lobbies, drip lines, corridors, restrooms, mechanical rooms, electrical rooms
and telephone closets situated on such floor, and a PRO RATA share of the
ground floor lobby, without deduction for columns and other structural
portions of the Building or vertical penetrations that are included for the
special use of Tenant, but excluding the area contained within the interior
walls of the Building stairs, fire towers, vertical ducts, elevator shafts,
flues, vents, stacks and pipe shafts.
(iii) No deductions from Rentable Area shall be made for
structural or functional columns or projections of the Building.
The "Rentable Area of the Building" shall mean the aggregate Rentable
Area (determined in accordance with Clauses (i) through (iii) above) of all
space available for lease to tenants on the Lower Level through the Penthouse
Level of the Building.
(h) TENANT. The term "Tenant" shall mean the Tenant herein named or any
assignee or other successor in interest (immediate or remote) of the Tenant
herein named, who at the time in question is the owner of the Tenant's estate
and interest granted by this Lease: but the foregoing shall not be construed to
permit any sublease or assignment of this Lease in violation of Article 19, or
to relieve the Tenant herein named or any assignee or other successor
in interest (whether immediate or remote) of covenants, obligations and premises
-33-
<PAGE>
contained in this Lease. The Tenant herein named and all assignees and other
successors in interest shall remain liable for all such covenants,
obligations and conditions as principals and not as guarantors.
28.9 LIGHT AND AIR. No diminution or shutting off of light, air or
view by any structure that may be erected on lands in the vicinity of the
Building shall in any manner affect this Lease or the obligations of Tenant
hereunder, or shall impose any liability on Landlord.
28.10 GOVERNING LAW. Irrespective of the place of execution or
performance, this Lease shall be governed by and construed in accordance with
the laws of the State of California.
28.11 INVALIDITY. If any provision of this Lease or the application
thereof to any person or circumstance shall, for any reason and to any
extent, be invalid or unenforceable, the remainder of this Lease and the
application of that provision to other persons or circumstances shall not be
affected but rather shall be enforced to the extent Permitted by law.
28.12 CAPTIONS. The Table of Contents, Index of Defined Terms,
captions, headings and titles of this Lease are solely for convenience of
reference end shall not affect Its interpretation.
28.13 PRESUMPTIONS. This Lease shall be construed without regard to
any presumption or other rule requiring construction against the party
drafting a document. It shall be construed neither for nor against Landlord
or Tenant, but shall be given a reasonable interpretation in accordance with
the plain meaning of its terms and the intent of the parties.
28.14 INDEPENDENT COVENANTS. Each covenant, agreement, obligation or
other provision of this Lease on Tenant's part to be performed shall be
deemed and construed as a separate and independent covenant of Tenant, not
dependent on any other provision of this Lease.
28.15 NUMBER AND GENDER. All terms and words used in this Lease,
regardless of the number or gender in which they are used, shall be deemed to
include any other number and any other gender as the context may require.
28.16 TIME IS OF THE ESSENCE. Time is of the essence of this Lease
and of each provision hereof in which a time of performance is established.
28.17 JOINT AND SEVERAL LIABILITY. If, at any time during the Lease
Term, Tenant comprises more than one person, all such persons shall be
jointly and severally liable for payment of Rents and for performance of
every obligation of Tenant under this Lease.
28.18 SUBMISSION OF LEASE. The submission of this Lease to Tenant or
its broker, agent or attorney for review or signature does not constitute an
offer to Tenant to lease the Premises or the granting of an option to do so.
This instrument shall have no binding force or effect until its execution and
delivery by both Landlord and Tenant.
28.19 LABOR HARMONY. Tenant shall not use (and upon notice from
Landlord shall cease using) contractors, services, workmen, labor, materials
or equipment that, in Landlord's reasonable Judgment, would disturb labor
harmony with the workforce or trades engaged in performing other work, labor
or services in or about the Building.
28.20 RULES AND REGULATIONS. Tenant shall observe and comply with the
Building Rules and Regulations and the Parking Rules and Regulations for the
Building set forth in Exhibits E and F hereto, and any reasonable amendments
and additions thereto as Landlord may adopt from time to time for the
management, safety, security, care, cleanliness and good order of the
Building (the "Rules and Regulations"). Landlord shall not be responsible or
liable to Tenant for violations of the Rules and Regulations by other lessees
and occupants of the Building.
28.21 TENANT SIGN RIGHTS. Subject to all applicable codes, statutes,
ordinances, regulations and other laws and requirements of any governmental
agency or department having or claiming jurisdiction over the Premises,
including but not limited to all such laws and requirements of the City of
Pasadena Building and Safety Department, and subject to the approval, if
required, of any such governmental agency or department, Tenant shall have
the non-exclusive right to display lettering between the second and third
floors or the third and fourth floors on the exterior Lake Street side of the
Building (the precise, location to be determined by Landlord in order to
insure uniformity and harmony with signs of ground floor tenants), or on a
sign in the courtyard of the Building outside the Premises (which sign may be
used by more than one tenant), for the sole purpose of identifying its
business. Such lettering or sign shall be architecturally compatible with
the Building, and the size,
-34-
<PAGE>
location and design of such lettering or sign shall be approved by Landlord,
which approval shall not unreasonably be withheld, prior to Tenant's
installation of such lettering or such sign, and Tenant shall submit to
Landlord, for approval by Landlord, a rendering of such lettering or sign
prior to such installation. All costs and expenses incurred in connection
with Tenant's lettering and/or signs, including but not limited to all costs
and expenses of construction, installation, maintenance, repair and removal,
shall be paid by Tenant immediately upon such costs and expenses becoming
due, and Tenant shall adhere strictly to the provisions of Section 8.3,
above. Tenant agrees to indemnify, defend and hold harmless Landlord against
and from any end all claims for any such costs or expenses arising in
connection with Tenant's lettering and/or signs, and against all costs,
expenses and liabilities incurred in connection with such claims, including
attorneys' fees.
28.22 CORPORATE RESOLUTION. If Tenant is a corporation, Tenant shall
(if so requested by Landlord) deliver to Landlord concurrently with the
execution of this Lease by Tenant a certified copy of a resolution of its
board of directors authorizing the execution of this Lease and naming the
officers that are authorized to execute this Lease on behalf of the
corporation. In the alternative, Tenant may furnish Landlord with an opinion
of legal counsel satisfactory to Landlord opining that the officers of the
corporation executing this Lease are authorized to execute the same on behalf
of the corporation and that this Lease is in deed binding upon the
corporation.
28.23 STORAGE SPACE. Landlord hereby leases to Tenant, and Tenant
hereby hires from Landlord, 518 Rentable square feet of storage space in the
lower level of the Building, being the room containing column D2 adjacent to
the fan room, and more particularly described in Exhibit B-3 of this Lease.
During the Lease Term, Tenant shall pay to Landlord a storage fee, due and
payable in equal monthly installments, in advance during the period beginning
with the Commencement Date, and on the first day of each and every calendar
month thereafter during the Lease Term. The storage fee shall be the sum of
$7,770 per annum, which is comprised of basic monthly storage fees of $1.25
per Rentable square foot of storage space ($15 per Rentable square foot of
storage, space per annum) for the first five years of the Lease Term, and
$9,137.52 per annum, which is comprised of basic monthly storage fees of
$1.47 per Rentable square foot of storage space ($17.64 per Rentable square
foot of storage space per annum) for the second five years of the Lease Term
(the Extension Option, as set forth in Section 2.7).
IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Lease
as of the day and year first above written,
TENANT: LANDLORD:
PAN AMERICAN UNDERWRITERS, INC., PASADENA GATEWAY PLAZA,
a Nevada corporation a California limited partnership
By /s/ Norman J. Schnider By /s/ H. Theodore Greene
-------------------------------- -----------------------------------
Norman J. Schnider, President H. Theodore Greene, General Partner
-35-
<PAGE>
FLOOR PLAN OF PREMISES
[BLUEPRINT]
Exhibit B-1
<PAGE>
[BLUEPRINT]
Exhibit B-2
<PAGE>
LOWER LEVEL PLAN
[BLUEPRINT]
Exhibit B-3
<PAGE>
MEMORANDUM OF LEASE COMMENCEMENT
This Memorandum of Lease Commencement is made as of _______, 19__ by
Pasadena Gateway Plaza, a California limited partnership ("Landlord") having
an office at c/o Trenton Development Company, 6500 Wilshire Boulevard, Suite
1800, Los Angeles, California 90048 and Pan American Underwriters, Inc., a
Nevada corporation ("Tenant") having an office at 300 North Lake Avenue,
Suite _______, Pasadena, California 91101. Landlord and Tenant agree to and
acknowledge the following matters:
1. Landlord and Tenant have entered into a lease dated as of January
1, 1989 (the "Lease"), covering office space at 300 North Lake Avenue,
Pasadena, California, more particularly described in the Lease.
2. All terms defined in the Lease shall have the meaning when used in
this Memorandum of Lease Commencement,
3. The Commencement Date of the Lease is _______________ and the
Expiration Date of the Lease is _________________.
4. Except for so-called "punch-list" and "pickup" items set forth on
Schedule "A" attached hereto, Landlord has fulfilled all of its obligations
pursuant to Exhibit D-1 of the Lease.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Memorandum
of Lease Commencement as of the day first above written.
TENANT: LANDLORD:
PAN AMERICAN UNDERWRITERS, INC., PASADENA GATEWAY PLAZA,
a Nevada corporation a California limited partnership
By By
-------------------------------- -----------------------------
Norman J. Schnider, President H. Theodore Greene, General Partner
Exhibit C
<PAGE>
WORK LETTER FOR TENANT IMPROVEMENTS
This Work Letter supplements the Lease dated January 1, 1989 between
Pasadena Gateway Plaza, a California limited partnership as Landlord and Pan
American Underwriters, Inc., a Nevada corporation, as Tenant (the "Lease").
Terms defined in the Lease shall have the same meaning when used in this Work
Letter Landlord and Tenant agree as follows:
1. BASE BUILDING WORK.
1.1 DEFINITION. Landlord shall construct the building shell; building
core areas, including mechanical, electrical, plumbing, sprinkler and life
safety systems; a rough sprinkler system in the Premises as required by the
City of Pasadena for a Temporary Certificate of Occupancy for the building
shell and described in Paragraph 1.3 below; and core toilet rooms; public
stairs; elevators; main lobby; and exterior plazas and landscaping; and shall
provide drywall covering on the exposed side of core walls and on perimeter
columns The above work is referred to in this Work Letter as the "Base
Building Work".
1.2 HEATING, VENTILATION AND AIR CONDITIONING. As part of the Base
Building Work, Landlord is equipping the Building with a variable airvolume
heating, ventilation and air conditioning system. Thermostatic zones shall
be provided at a maximum rate of one zone for each 800 square feet of Usable
Area at Tenant's expense, as Special Work. The HVAC system has been designed
to provide an average temperature of 75 degrees Fahrenheit plus or minus two
degrees, based upon the energy budget lighting load specified in Paragraph
2.8 and a maximum occupancy of one person for each 200 square feet of Usable
Area.
1.3 SPRINKLER SYSTEM. As part of the Base Building Work, Landlord
shall provide an automatic sprinkler system consisting of mains, laterals,
uprights and upright heads, but not finished heads or "arm-overs". One
finished head shall be provided for each 200 square feet of Usable Area at
Tenant's expense, as Special Work.
1.4 FLOOR LOADS. The building structure has been designed for the
following maximum superimposed floor load capacities:
(a) FLOOR DECK. 60 pounds per square foot live load, plus 20
pounds per square foot movable partition, dead load.
(b) COLUMNS. 30 pounds per square foot live load, plus 20
pounds per square foot movable partition dead load.
2. DEFINITIONS AND SIGNAGE
2.1 USABLE AREA. As used in this Work Letter, the term "Usable Area"
means the area of the Premises, as determined by measuring the area within
the inside finished surface of the dominant portion of the permanent outer
walls of the Building, the center line of any partition between the Premises
and a Public corridor or the surface facing the Premises of any partition
separating the Premises from the building core, and the center line of any
partition that separates the Premises from adjoining premises and common
areas. No deductions shall be made for space occupied by structural or
functional columns and projections. The Usable Area of the Premises is at
least twenty-six thousand two hundred sixty four (26,264) square feet.
2.2 CODE. The term "code", as used in this Work Letter, means all
applicable electrical, building, zoning, health, safety, seismic, fire,
energy and other codes, ordinances, regulations, rulings, interpretations,
requirements and relevant provisions of law issued or adopted by the City of
Pasadena, County of Los Angeles, State of California, Federal Government or
other governmental authority.
3. SPECIAL WORK
3.1 DEFINITION. Tenant improvements that are different from or in
addition to the Base Building Work, are referred to in this Work Letter as
"Special Work".
3.2 REQUIREMENTS. All Special Work is subject to the approval of
Landlord. Tenant shall be responsible for the design of all Special Work.
Tenant shall not specify uses or materials that are subject to an insurance
hazard rate different from the rate assigned to the Building as a whole.
3.3 SPRINKLER SYSTEM. Finished heads and "arm-overs" for the
sprinkler system in the Premises shall be installed at the expense of Tenant,
as Special Work. After Landlord's
Exhibit D-1
<PAGE>
initial installation of the sprinkler system, as part of the Base Building
Work, any raising, lowering, moving or adding of sprinkler heads shall be
done at Tenant's expense, as Special work.
3.4 LIFE SAFETY SYSTEM. The emergency lighting, exit signs, branch
wiring, alarm's, smoke detectors, speakers and other devices required by code
for the life safety system in the Premises are not included in the Base
Building work and shall be installed at Tenant's expense, as Special Work.
4. TENANT'S PLANS
4.1 DESCRIPTION. Tenant shall have an architect licensed by the State
of California ("Tenant's Architect") prepare architectural plans and
specifications for the layout and improvements of the Premises ("Tenant's
Plans"), all in such form and detail as required by Landlord and Landlord's
contractors. Tenant's Plans shall be in form and content sufficient to
secure all required governmental approvals. All of the fees and charges of
Tenant's Architect for all of the work required by this Work Letter shall be
an item of cost in the Tenant Allowance. Tenant's Architect shall assure
that Tenant's Plans are consistent with the plans and specifications for the
Base Building Work. Tenant's Plans include the following:
(a) SPACE PLAN: The "Space Plan" shall be a schematic space
plan for the Premises, including a full and accurate description of the size
and location of all partitions, doors, furniture and equipment. The Space
Plan shall be reviewed and approved by the Pasadena building and fire
departments for compliance with applicable building, fire and safety codes.
(b) TENANT IMPROVEMENT DRAWINGS: The "Tenant Improvement
Drawings" shall include all information necessary for construction of Special
Work and all information necessary for Landlord's engineers to complete
mechanical and electrical working drawings.
4.2 MECHANICAL AND ELECTRICAL. Tenant's Plans shall contain all
information required for the preparation of mechanical end electrical working
drawings. Mechanical and electrical working drawings shall be prepared at
Tenant's expense by Landlord's engineers. Landlord shall be responsible for
coordination of all engineering work with Tenant's Plans.
4.3 DESIGN SCHEDULE. Tenant's Plans shall be processed on or before
the date indicated in the following schedule:
Expected
Return to Resubmit to Landlord
Submit to Tenant with Landlord with Final
Landlord Required Rev. Required Rev. Approval
- -------------------------------------------------------------------------------
SPACE PLAN 1/20/89
- -------------------------------------------------------------------------------
FINAL PLANS
(Including
Special Work) 2/15/89 2/21/89 2/24/89 2/28/89
- -------------------------------------------------------------------------------
4.4 PERMITS. Tenant's Architect shall be responsible for submission
of Tenant's Plans for plan check by the City of Pasadena. Landlord's
contractor will apply for the building permit for the tenant improvements in
the Premises. All fees and expenses for securing the building permit and all
other permits necessary for construction of the tenant improvements shall be
an item of cost in the Tenant Allowance.
5. COST OF SPECIAL WORK
5.1 TENANT'S CONTRIBUTION. Tenant agrees to pay for Tenant's
Contribution, if any, as that term is defined in Section 9. After Landlord's
approval of Tenant's Plans and prior to the commencement of Special Work,
Landlord shall submit to Tenant a written estimate of the cost of all Special
Work. Tenant shall approve or disapprove the estimate in writing within
seven (7) days after receipt by Tenant.
5.2 PAYMENT. Tenant shall pay Landlord a total for overhead and profit
for Special Work equal to 15% of the estimated cost of the Special Work, to
be adjusted in accordance with Section 9.
Exhibit D-2
<PAGE>
6. [This Section is Intentionally Omitted.]
7. CHANGES, ADDITIONS OR ALTERATIONS
If Tenant shall request any change, addition or alteration in the Final
Plans, Tenant's Architect shall prepare end submit to Landlord plans and
specifications with respect to such change, addition or alteration. Any such
change, addition or alteration shall be subject to Landlord's approval, which
shall not unreasonably be withheld or delayed. Upon approval by Landlord,
Tenant promptly shall pay Landlord the cost of such change, addition or
alteration, as estimated by Landlord, in accordance with Section 9.
8. DELAY
Tenant shall be responsible for and pay and all costs and expenses
incurred by Landlord relating to any delay in the commencement or completion
of the Base Building Work or Special Work, and any increase in the cost of
the Base Building work or Special Work, caused by (a) Tenant's failure to
review and approve its Tenant Plans by the dates specified in Paragraph 4.4,
including any failure to approve Tenant's Plans incorporating revisions
prepared by Landlord by the specified deadlines; (b) Tenant's failure to
approve Landlord's cost estimate within the time limit provided in Paragraph
5.1 or to pay for Special Work (including Landlord's overhead and profit)
upon approval of Landlord's cost estimate; (c) Tenant's requirements for
Special Work, including delays caused by shortages, unavailability or
extraordinary procurement times of materials required for Special Work; (d)
delays caused by construction of tenant improvements out of the normal
sequence in order to accommodate Special Work; (e) any changes, additions or
alterations requested by Tenant in the Final Plans and (f) any other delay
requested or caused by Tenant. If, however, Tenant incurs out of pocket
costs or expenses in connection with delays caused by Landlord in completion
of the tenant improvements, Landlord shall reimburse Tenant for such costs
and expenses.
9. TENANT ALLOWANCE
Tenant shall receive an allowance of $34.00 for each square foot of
Usable Area of the Premises ("Tenant's Allowance"). Landlord shall reimburse
Tenant up to $3.00 for each square foot of Usable Area of the Premises, for
fees paid by Tenant to Ridgeway and Associates for services rendered in
connection with preparing the space plan for the Premises. The Tenant
Allowance shall be reduced by all amounts reimbursed to Tenant for fees paid
for preparation of the Space Plan. This Tenant Allowance shall be used only
for the design and installation of portions of Special Work that constitutes
permanent improvements to the Premises, including carpeting, and that become
Landlord's property upon installation, as provided in the Lease; but not for
Tenant's Property. Tenant shall be entitled to no payment or rent reduction
for any unused part of the Tenant Allowance. In the event the estimated cost
of Special Work, exceeds the aforesaid Tenant Allowance, the excess shall be
paid by Tenant subject to adjustment at the completion of the Special Work as
provided herein ("Tenants Contribution"). Tenants Contribution shall be paid
by Tenant to Landlord, in the same ratio as the Tenant Allowance bears to the
Tenant Contribution, as construction progresses and within ten (10) days
after each bill is rendered. At the option of Landlord, work on tenant
improvements may be halted pending the curing of any default in the timely
payment of such bills, and such interruptions shall not postpone the
Anticipated Commencement Date. The cost of any Tenant change-order shall be
paid by Tenant to Landlord, in advance. Landlord shall perform all Special
Work pursuant to this Section 9; however, Tenant shall have the right to take
out three competitive bids for construction contracts to perform such Special
Work, and Landlord's cost to perform such Special Work then shall be within
ten percent (10%) of the average of Tenant's three (3) bids. On completion
of the Special Work, Landlord shall provide to Tenant an accounting of the
actual cost of performing the Special Work. In the event the sum of the
Tenant Allowance plus the Tenant's Contribution exceeds the actual cost of
the Special Work, including Landlord's overhead end profit, Landlord shall
pay the difference to Tenant. In the event the sum of the Tenant Allowance
plus the Tenant's Contribution is less than the actual cost of the Special
Work, including Landlord's overhead and profit, Tenant shall pay the
difference to Landlord.
10. MOVE-IN
The Premises shall be thoroughly cleaned, at Landlord's sole cost and
expense, prior to and immediately following Tenant's move-in to said
Premises. Tenant shall not be charged for
Exhibit D-3
<PAGE>
the use of elevators or hoists during the construction of said Premises or
Tenant's actual move-in to the Building.
IN WITNESS of their agreement, Landlord and Tenant have executed this Work
Letter as of the date of this Lease.
TENANT: LANDLORD:
PAN AMERICAN UNDERWRITERS, INC., PASADENA GATEWAY PLAZA,
a Nevada corporation a California limited partnership
By /s/ Norman J. Schnider By /s/ H. Theodore Greene
-------------------------------- -----------------------------
Norman J. Schnider, President H. Theodore Greene, General Partner
Exhibit D-4
<PAGE>
BUILDING RULES AND REGULATIONS
These Rules and Regulations are attached to and form a part of the
lease dated January 1, 1989 between Pasadena Gateway Plaza, a California
limited partnership as Landlord and Pan American Underwriters, Inc., a Nevada
corporation, as Tenant.
1. The rights of each tenant in entrances, corridors, parking ramps
and areas, elevators and other public areas servicing the Building are
limited to ingress to end egress from such tenant's premises for the tenant
and its employees, licensees and invitees, and no tenant shall use, or permit
the use of, the entrances, corridors or elevators for any other purpose. No
tenant shall invite to the tenant's premises, or permit the visit of, persons
in such numbers or under such conditions as to interfere with the use and
enjoyment of any of the plazas, entrances, corridors, elevators and other
facilities of the Building by any other tenants. Fire exits and stairways
are for emergency use only, and they shall not be used for another purpose to
the tenants, their employees, licensees or invitees. No tenant shall
encumber or obstruct, or permit the encumbrance or obstruction of any of the
sidewalks, plazas, entrances, corridors, doorways, elevators, fire exits or
stairways of the Building, landlord reserves the right to control and operate
the public portions of the Building and the public facilities, as well as
facilities furnished for the common use of the tenants, in such manner as it
in its reasonable judgment deems best for the benefit of the tenants
generally. No tenant and no invitees or employees of tenant shall be allowed
on the roof of the Building.
2. Landlord may refuse admission to the Building during the days and
hours specified in Rule 35 to any person not known to the watchman in charge
or not having a pass issued by Landlord or the tenant whose premises are to
be entered or not otherwise properly identified, and landlord may require all
persons admitted to or leaving the Building outside at Business Hours on
Business Days to provide appropriate identification and to register. Tenant
shall be responsible for all persons for whom it issues any such pass and
shall be liable to Landlord for all acts or omissions of such persons. Any
person whose presence in the Building at any time shall, in the judgment of
Landlord, or its representatives, be prejudicial to the safety, character or
reputation of the Building or of its tenants may be denied access to the
Building or may be ejected therefrom. During any invasion, riot, public
excitement or other commotion, Landlord may prevent all access to the
Building by closing the doors or otherwise for the safety of the tenants and
protection of property in the Building.
3. Tenants shall obtain ice, drinking water, food, beverage, linen,
barbering, shoe-polishing, floor-polishing, plant-care, catering or other
similar services only from vendors who have registered with the Building
office and/or who have been approved by Landlord for provision of such
services in the Building.
4. The cost of repairing any damage to the public portions of the
Building, to the public facilities or to any facilities used in common with
other tenants, caused by a tenant or its employees, agents, contractors,
licensees or invitees, shall be paid by the tenant.
5. No awnings or other projections shall be attached to the outside
walls of the Building. No curtains, blinds, shades or screens which are
different from the standards adopted by Landlord for the Building shall be
attached to or hung in, or used in connection with any exterior window or
door of the premises of any tenant without the Prior written consent of
Landlord. Such curtains, blinds, shades or screens must be of a quality,
type, design and color, and attached in the manner approved by Landlord.
6. No lettering, sign, advertisement, notice or object shall be
displayed in or on the exterior windows or doors, or on the outside of any
tenant's premises, or at any point inside any tenant's premises where the
same might be visible outside of such premises, without the prior written
consent of Landlord, except as provided in Section 28.2l. In the event of
the violation of the foregoing by any tenant, Landlord may remove the same
without any liability, and may charge the expense incurred in such removal to
the tenant violating this rule. Interior signs, elevator cab designations and
lettering on doors or the Building directory shall, if and when approved by
Landlord; be inscribed, painted or affixed for each tenant by Landlord at the
expense of such tenant, and shall be of size, color and style acceptable to
Landlord.
7. The skylights, windows and doors that reflect or admit light and
air into the halls, passageways or other public places in the Building shall
not be covered or obstructed by any tenant.
8. No showcases or other articles shall be put in front of or affixed
to any part of the exterior of the Building, nor placed in the halls,
corridors or vestibules, except by a newsstand licensed by Landlord.
Exhibit E-1
<PAGE>
9. No bicycles, vehicles or animals of any kind shall be brought into
or kept in or about the premises of any tenant of the Building.
10. Tenants shall permit no noise, vibration or odor to escape from
their premises. Nothing shall be done or Permitted in the premises of any
tenant which would impair or interfere with the use or enjoyment by any other
tenant of any other space in the Building.
11. Tenants and their contractors, employees, agents, visitors and
licensees shall not at any time bring into or keep upon the premises of the
Building any foul or noxious gas or substance or any inflammable,
combustible, explosive or otherwise hazardous fluid, chemical or substance.
l2. All removals, or the carrying in or out of any safes, freight,
furniture, packages, boxes, crates or any other object or matter of any
description, must take place during such hours, in such elevators and in such
manner as Landlord or its agent may determine from time to time. Persons
employed to move safes and other heavy objects shall be acceptable to
Landlord. Before moving large quantities of furniture and equipment into or
out of the Building, tenants shall notify Landlord and shall comply with
Landlord's requirements concerning the time and manner in which the work
shall be performed. All labor and engineering costs incurred by Landlord in
connection with any moving, including a reasonable charge for overhead and
profit, shall be paid by tenant to Landlord, on demand. Landlord shall not
be responsible for loss or damage to any such safe or property from any
cause, and all damage done to the Building by moving or maintaining any such
safe or other property shall be repaired at the expense of tenant.
13. Landlord reserves the right to inspect all objects and matter to
be brought into the Building and to exclude from the Building any objects or
matter which violate any of these Rules and Regulations or the Lease of which
this Exhibit is a part. Landlord may require any person leaving the Building
with any package or other object or matter to submit a pass issued by the
tenant from whose premises the item is being removed, listing the item. This
rule shall not be deemed to impose any responsibility or liability on
Landlord for the protection of any tenant against the removal of property
from the premises of such tenant. Landlord shall in no way be liable to any
tenant for damages or loss arising from the admission, exclusion or ejection
of any person to or from the premises or the Building under the provisions of
this rule or of other of these Rules and Regulations.
14. No tenant shall occupy or permit any portion of its premises to be
occupied as an office for a public stenographer or public typist, or for the
storage, manufacture, or sale of food, liquor, drugs or tobacco in any form,
or as a barber, beauty or manicure shop, or as a school or classroom, unless
such use has been specifically approved by Landlord. No tenant shall use or
permit its Premises or any part thereof to be used for manufacturing or the
sale of at retail or auction of merchandise, goods or property of any kind.
These prohibitions supplement the Prohibited uses specified in the Lease of
which this Exhibit is a part.
15. Subject to the Terms of the Lease, Landlord shall have the right
to prohibit any advertising or identifying sign by any tenant which, in
Landlord's reasonable judgment, tends to impair the reputation of the
Building or its desirability as a building for others, and upon written
notice from Landlord, such tenant shall refrain from and discontinue such
advertising or identifying sign.
16. Landlord shall have the right to prescribe the weight, size and
position of safes and other objects of excessive weight, and no safe or other
object whose weight exceeds the lawful load for the area upon which it would
stand shall be brought into or kept upon any tenant's Premises. If, in the
judgment of Landlord, it is necessary to distribute the concentrated weight
of any heavy object, the work involved in such distribution shall be done at
the expense of the tenant and in such manner as Landlord shall determine.
l7. No machinery or mechanical equipment other than computers and
ordinary business machines may be installed or operated in any tenant's
premises without Landlord's prior written consent, which consent shall not be
unreasonably withheld or delayed, and in no event shall any machines or
mechanical equipment be so placed or operated as to disturb other tenants.
Machines and mechanical equipment that Landlord permits a tenant to install
and use shall be so equipped, installed and maintained by the tenant as to
prevent any noise, vibration or electrical or other interference from being
transmitted from the tenant's premises to any other area of the Building.
18. Landlord, its contractors, and their respective employees shall
have the right to use, without charge therefor, all light, power and water in
the premises of any tenant while cleaning or making repairs or alterations in
the premises of such tenant.
Exhibit E-2
<PAGE>
19. No premises of any tenant shall be used for lodging or sleeping or
for any immoral or illegal purpose.
20. The requirements of tenants will be attended to only upon
application at the office of the Building. Employees of Landlord shall not
perform any work or do anything outside of their regular duties, unless under
special instructions from Landlord.
21. Canvassing, soliciting and peddling in the Building are prohibited
and each tenant shall cooperate to prevent the same.
22. No tenant shall cause or permit any unusual or objectionable odors
to emanate from its premises which would annoy other tenants or create a
public or private nuisance. No cooking shall be done in the premises of any
tenant except as is expressly permitted in such tenant's lease.
23. No acids, vapors or other materials shall be discharged or
permitted to be discharged into the waste lines, vents or flues of the
Building which may damage them. The sinks and toilets and other plumbing
fixtures in or serving any tenant's premises shall not be used for any
purpose other than the purposes for which they were designed or constructed,
and no sweepings, rubbish, rags, acids or other foreign substances shall be
deposited therein. A tenant shall be liable to Landlord for all damages
resulting from any misuse of the fixtures by the tenant or the tenant's
servants, employees, agents, visitors or licensees. All garbage receptacles
used in the premises of any tenant shall be emptied, cared for and cleaned by
and at the expense of tenant.
24. All entrance doors in a tenant's premises shall be left locked by
the tenant when the tenant's premises are not in use. Entrance doors shall
not be left open at any time. Each tenant, before closing and leaving its
premises at any time, shall turn out all lights and entirely shut off all
water faucets.
25. Hand trucks shall not be used in the Building unless they are
equipped with rubber tires and side guards.
26. Tenants shall cooperate with Landlord in obtaining maximum
efficiency of the Building air-conditioning system by lowering and partially
closing window blinds when the sun's rays fall directly on windows of the
premises. Tenant shall not obstruct, alter or in any way impair the
efficient operation of the Building heating, ventilating and air-conditioning
systems and shall not place furniture, equipment or other objects where they
would interfere with air flow. Tenant shall not tamper with or change the
setting of any thermostats or temperature control valves.
27. Landlord will direct electricians as to where and how telephone
and telegraph wires are to be introduced. No boring or cutting for wires or
stringing of wires will be allowed without the prior written consent of
Landlord. The location of telephones, call boxes and other office equipment
affixed to the premises shall be subject to the approval of Landlord.
28. Linoleum, tile, carpet and other floor covering shall be affixed
to the floor of the premises only in a manner previously approved in writing
by Landlord. The expenses of repairing any damage resulting from a violation
of this rule or the removal of any floor covering installed by a tenant shall
be borne by the tenant.
29. No person shall be allowed to transport or carry unpackaged
beverages, food, open food containers, etc. on any passenger elevators. The
transportation of such items shall be via the freight elevator in such manner
as prescribed by Landlord.
30. Landlord shall have the right, on reasonable notice to Tenant,
exercisable without liability to tenant, to change the name and street
address of the Building of which the premises are a part.
31. The bulletin board or directory of the Building shall be provided
exclusively for the display of the name and location of tenants only and
Landlord reserves the right to exclude any other names therefrom and
otherwise limit the number of listings thereon.
32. Landlord reserves the right to close and keep locked all entrance
and exit doors and otherwise regulate access of all persons to the halls,
corridors, elevators and stairways in the Building on Sundays and legal
holidays and on other days between the hours at 6:00 P.M. and 7:00 A.M., and
at such other times as Landlord may deem advisable for the adequate
protection and safety of the Building, its tenants and property of the
Building. Access to the premises may be refused unless the person seeking
access is known by the employee of the Building in charge to be authorized to
enter, has a pass or is otherwise properly
Exhibit E-3
<PAGE>
identified. Landlord shall not be held responsible or liable for damages for
any error with regard to the admission to or exclusion from the Building of any
person.
33. Subject to the terms of the Lease, Landlord reserves the right to
rescind, alter or waive any rule or regulation at any time prescribed for the
Building when, in its reasonable Judgment, it deems it necessary, desirable
or proper for its best interest and for the best interests of the tenants
generally, and no alteration or waiver of any rule or regulation in favor of
one tenant shall operate as an alteration or waiver in favor of any other
tenant. Landlord shall not be responsible or liable to any tenant for the
non-observance or violation by any other tenant of any of the rules and
regulations at any time prescribed for the Building.
Exhibit E-4
<PAGE>
PARKING RULES AND REGULATIONS
These Parking Rules and Regulations are attached to and form a part of
the Lease dated January 1, 1989 between Pasadena Gateway Plaza, a California
limited partnership as Landlord and Pan American Underwriters, Inc., a Nevada
corporation as Tenant.
1. The location of each tenant's parking shall be as designated by
Landlord from time to time, but no tenant shall be entitled to have any
specific parking space or spaces designated for such tenant's exclusive use
unless otherwise agreed to by Landlord in writing.
2. Subject to the provisions of the Lease, Tenant shall pay to
Landlord, as consideration for Tenant's parking privileges, monthly
installments of Fifty Dollars ($50.00) for each unreserved parking space, and
Seventy Five Dollars ($75,00) for each reserved parting space. Each such
installment is payable in advance on the first (1st) day of each calendar
month, in lawful money of the United States of America. Tenant shall pay
such consideration to Landlord or its designated agent, without deduction,
offset, prior notice or demand, at 6500 Wilshire Boulevard, Suite 1800, Los
Angeles, California 90048, or such other place as Landlord shall designate in
writing from time to time. Timely payment of such consideration is an
express condition precedent to Tenant's right to exercise its parking
privileges. No deductions or allowances from the payments due hereunder
shall be made for the time in which a parking space is not used.
3. From time to time, Landlord shall have the right to increase the
prevailing monthly parking charge for the Building to a monthly charge
consistent with charges at comparable first class buildings in the Pasadena
area, and Tenant shall pay to Landlord, as additional consideration for
Tenant's parking privileges, any increase in the prevailing monthly parking
charge for the Building. Tenant shall pay such additional consideration to
Landlord in the same manner as provided in paragraph 2 hereof.
4. Only automobiles specifically designated by Tenant to Landlord
shall be entitled to the use of such tenant's parking privileges. Such
automobiles shall be clearly identified with parking identification stickers
furnished by Landlord, or with other suitable identification specified by
Landlord, and such parking identification devices shall not be transferable
or transferred from any designated automobile(s) to any other automobile(s)
without Landlord's prior written consent. Any automobile parked in the
Building parking garage without such identification devices may be towed at
the expense of the owner thereof, as provided by applicable city or county
ordinance(s). If the serial or other identifying number of any
identification device has been obliterated, then such device shall be deemed
null and void.
5. Tenant's parking privileges are personal to that tenant, and are
not assignable or transferable in any manner whatsoever without Landlord's
prior written consent. Tenant shall not have the right to allow any other
person to exercise its parking privileges, even if Tenant is not itself
exercising such right on a particular day or during any particular period of
time, without Landlord's prior written consent.
6. Landlord shall provide a parking attendant and means for parking
validation for guests end visitors to the Building.
7. Landlord shall not be liable for, and Tenant waives, any and all
claims for theft, fire damage, collision damage, vandalism or damage of any
kind to any automobile, or to equipment or articles left in any automobile,
while entering, leaving or parked in the Building parking garage, either
during normal Building business hours or after hours. Landlord shall not be
liable for, and Tenant waives, any and all claims for injury to persons or
property arising out of Tenant's parking privileges.
8. Landlord shall not be liable to Tenant, in damages or otherwise,
nor shall Landlord be deemed in default under any lease because of Tenant's
inability to park the automobile(s) as contemplated herein for less than six
(6) days in any calendar month, due to force majeure, strikes, lockouts or
other labor troubles, riots, war, insurrection, failure of any public utility
to furnish services, accidents, or any other similar or dissimilar causes
beyond Landlord's control. There shall be no reduction or abatement of the
consideration payable hereunder by reason of any such failure or occurrence,
nor for vacations or holidays, unless extending beyond six (6) days in any
calendar month.
9. Automobiles shall be parked entirely within the stall lines
painted on the floor.
10. All directional signs and arrows shall be observed.
Exhibit F-1
<PAGE>
11. The speed limit shall be five (5) miles per hour.
12. Parking is prohibited in areas:
(a) not striped for parking;
(b) designated as aisles;
(c) where "no parking" signs are posted;
(d) designated as ramps;
(d) designated as reserved spaces, except for the person for whom
it is reserved.
13. Garage managers or attendants are not authorized to make or allow
any exceptions to these Parking Rules and Regulations, as may be modified or
amended from time to time.
14. Except when valet parking is utilized, every driver shall park his
own car, and every driver shall assume all responsibility for damage to his
car or theft of or from his car.
15. Loss or theft of parking identification devices from automobiles
must be reported to the parking operator immediately, and a lost or stolen
report must be filed by the customer at that time. Any parking
identification devices reported lost or stolen found on any unauthorized
automobile will be confiscated and the illegal holder will be subject to
prosecution. Lost or stolen devices found by the purchaser must be reported
to the parking operator immediately.
16. Parking spaces are for the express purpose of parking one
automobile per space and for no other purpose. Washing, waxing, cleaning or
servicing of any vehicle by the customer and/or his agents is prohibited.
17. The parking operator reserves the right to refuse the sale of
monthly parking privileges and/or parking identification devices to any
tenant or person and/or his agents or representatives who willfully refuses
to comply with these Parking Rules and Regulations, or with posted or
unposted federal, state, regional, county, city or local ordinances, laws,
regulations or agreements.
18. Tenant shall acquaint all persons to whom Tenant assigns parking
space with these Parking Rules and Regulations.
19. It is expressly a condition precedent to Tenant's right to
exercise its parking privileges that Tenant not be in default under its lease
of premises in the Building, and any default by Tenant under its lease shall,
at Landlord's sole option, preclude Tenant's rights to park in the Building
parking garage until such default be cured. Any termination of the Lease
shall terminate Tenant's parking privileges in the Building parking garage.
20. Landlord may contract with a parking operator for the operation
and management of the Building parking garage. Upon execution of such a
contract by Landlord, Landlord's parking operator shall have all the rights
and duties of Landlord with respect to Tenants' parking, including but not
limited to the right to enforce the terms, covenants and conditions of each
lease that pertains to Tenant's parking, and to receive payment of the
consideration provided herein.
Exhibit F-2
<PAGE>
GUARANTEE OF LEASE
WHEREAS, a certain Lease of even date herewith has been, or will be,
executed by and between PASADENA GATEWAY PLAZA, a California limited
partnership, therein referred to as "Landlord", and PAN AMERICAN
UNDERWRITERS, INC., a Nevada corporation, therein referred to as "Tenant",
covering certain premises in the County of Pasadena, State of California, and
WHEREAS, the Landlord under said Lease requires as a condition to its
execution of said Lease that the undersigned guarantee the full performance
of the obligations of the Tenant under Said Lease, and
WHEREAS, the undersigned is desirous that Landlord enter into said
Lease with Tenant,
NOW, THEREFORE, in consideration of the execution of said Lease by
PASADENA GATEWAY PLAZA, as Landlord, the undersigned hereby unconditionally
guarantees the full performance of each and all of the terms, covenants and
conditions of said Lease to be kept and performed by said Tenant, including
the payment of all rentals and other charges to accrue thereunder. The
undersigned further agrees as follows:
(1) That this covenant and agreement on its part shall continue in
favor of the Landlord notwithstanding any extension, modification, or
alterations of said Lease entered into by and between the parties thereto, or
their successors or assigns, or notwithstanding any assignment of said Lease,
with or without the consent of the Landlord, and no extension modification,
alteration or assignment of the above referred to Lease shall in any manner
release or discharge the undersigned and it does hereby consent thereto;
(2) That this Guarantee will continue unchanged by any bankruptcy,
reorganization or insolvency of the Tenant or any successor or assignee
thereof or by any disaffirmance or abandonment by a trustee of Tenant;
(3) The Landlord may, without notice, assign this Guarantee of Lease
in whole or in part and no assignment or transfer of the Lease shall operate
to extinguish or diminish the liability of the undersigned hereunder;
(4) That the liability of the undersigned under this Guarantee of
Lease shall be primary and that in any right of action which shall accrue to
Landlord under the Lease, the Landlord may, at its option, proceed against
the undersigned without having commenced any action, or having obtained any
judgment against the Tenant;
(5) To pay Landlord's reasonable attorney's fees and all costs and
other expenses incurred in any collection or attempted collection or in any
negotiations relative to the obligations hereby guaranteed or enforcing this
Guarantee of Lease against the undersigned, individually and jointly; and
(6) To waive notice of any demand by the Landlord, as well as any
notice of default in the payment of rent or any other amounts contained or
reserved in the Lease,
The use of the singular herein shall include the plural. The
obligation of two or more parties shall be joint and several. The terms and
provisions of this Guarantee shall be binding upon and inure to the benefit
of the respective successors and assigns of the parties herein named.
IN WITNESS WHEREOF, the undersigned has caused this Guarantee to be
executed this 9th day of February, 1989.
PAULA FINANCIAL,
a California corporation
By: /s/ Norman J. Schnider, President
----------------------------------
Exhibit G
<PAGE>
CLEANING SPECIFICATIONS
The Landlord shall provide janitorial service for the leased premises
at Pasadena Gateway Plaza at no cost to the Tenant in accordance with the
following specifications.
DAILY (Five days per week, Legal Holidays excepted)
1. Clean restrooms as follows:
(a) Wet mop floor - disinfect
(b) Clean and disinfect fixtures
(c) Empty and wash receptacles
(d) Wash all partitions and ceramic walls as required
(e) Clean and polish mirrors
(f) Put out supplies which will be furnished by Landlord
2. Dust mop all tile floors, using treated mops
3. Vacuum all carpeting, remove spots
4. Dust furniture, ledges, sills, and all other dust collecting surfaces
5. Empty waste baskets and ash trays; empty sand urns and refill with
clean sand
6. Buff entrance lobby and hallways
7. Clean drinking fountains - polish
8. Wet mop elevator lobby floor - buff
9. Damp mop to remove spills on tile floors
10. Remove rubbish and trash
ll. Sweeping of employee lounge floor including set cleaning of any
spills, if applicable
12. Wet sponge wiping of employee lounge table tops including cleaning
of any spills, if applicable
13. Spot clean carpet stains for removal of spills where applicable
WEEKLY
1. Clean and buff polish lobby floor
2. Spotwash woodwork around door handles and light fixtures
3. Wet mop employee lounge floors weekly, if applicable
MONTHLY
1. Machine clean, wax and polish floors
2. Vacuum venetian blinds
3. High dusting
SEMI ANNUALLY
1. Wash all exterior windows
Exhibit H-1
<PAGE>
ANNUALLY
1. Wash all interior windows
2. Clean all airgrill returns
3. Shampoo carpets
Exhibit H-2
<PAGE>
[BLUEPRINT]
1 LEVEL B-5.5 PARKING PLAN
------------------------
Exhibit J-1
<PAGE>
[BLUEPRINT]
2 LEVEL B-5 PARKING PLAN
----------------------
Exhibit J-2
<PAGE>
[BLUEPRINT]
1 LEVEL B-4 PARKING PLAN
----------------------
Exhibit J-3
<PAGE>
[BLUEPRINT]
2 LEVEL B-3 PARKING PLAN
----------------------
Exhibit J-4
<PAGE>
[BLUEPRINT]
1 LEVEL B-2 PARKING PLAN
----------------------
Exhibit J-5
<PAGE>
[BLUEPRINT]
2 LEVEL B-1 PARKING PLAN
----------------------
Exhibit J-6
<PAGE>
[BLUEPRINT]
1 LEVEL B-1 PARKING PLAN
----------------------
Exhibit J-7
<PAGE>
[BLUEPRINT]
2 LEVEL P-2 PARKING PLAN
----------------------
Exhibit J-8
<PAGE>
[BLUEPRINT]
1 LEVEL P-3 PARKING PLAN
----------------------
Exhibit J-9
<PAGE>
[BLUEPRINT]
2 LEVEL P-4 PARKING PLAN
----------------------
Exhibit J-10
<PAGE>
[BLUEPRINT]
1 LEVEL P-5 PARKING PLAN
----------------------
Exhibit J-11
<PAGE>
SECOND AMENDMENT TO
OFFICE BUILDING LEASE
THIS SECOND AMENDMENT to GATEWAY PLAZA Office Building Lease
("Amendment") is made as of the 27th day of April, 1993, by and between
LACERA Gateway Property, Inc, a California corporation ("Landlord") and PAULA
INSURANCE COMPANY, a California corporation ("Tenant").
RECITALS
A. Landlord's predecessor-in-interest, PASADENA GATEWAY PLAZA, a
California limited partnership, and Tenant's predecessor-in-interest, PAN
AMERICAN UNDERWRITERS, INC. a Nevada corporation, entered into that certain
Gateway Plaza Office Lease (the "Original Lease") dated January 1, 1989,
pursuant to which Tenant leased from Landlord approximately 28,862 rentable
square feet (the "Original Premises") on the second and third floors of that
certain office building (the "Building") located at 300 North Lake Avenue,
Pasadena, California 91101.
B. Landlord's predecessor-in-interest and Tenant's
predecessor-in-interest entered into that certain Lease Amendment, to Gateway
Plaza Office Lease, dated September 28, 1989 (the "First Amendment"),
pursuant to which Article 22(a) of the Original Lease was modified to reflect
the addition of 1,255 rentable square feet, located on the second floor of
the Building, to the existing Premises (such additional space plus the
Original Premises to be collectively referred to as the "Premises") The term
of this tenancy is coterminous with that set forth in the Original Lease.
C. The Original Lease, as amended by the First Amendment, was assigned
from the predecessor-in-interest, PAN AMERICAN UNDERWRITERS, INC., a Nevada
corporation to the assignee, PAULA INSURANCE COMPANY, a California
corporation, effective May 1, 1993, in accordance with (he provisions set
forth in the attached gateway Plaza Assignment and Assumption of Lease and
Consent.
D. The Original Lease, as amended by the First Amendment, and assigned,
is hereinafter collectively referred to as the "Lease".
E. Tenant desires, and Landlord has agreed, to reduce the size of the
Premises, extend the term thereof and to adjust the Basic Rent and certain
other terms and provisions of the Lease.
<PAGE>
AGREEMENT
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged by the parties, the parties agree
as follows:
1. DEFINED TERMS. Each capitalized term used in this Amendment shall
have the same meaning ascribed to such term in the Lease, except that the
following terms shall have the following meanings:
(a) "Renewal Premises" shall mean those spaces originally known
as Suite 200 on the second floor and Suite 300 on the third floor, as
outlined in the floor plan attached hereto as Exhibit "A".
(b) "Rentable Area of the Renewal Premises" shall be deemed to
be: Suite 200 which contains 3,248 rentable square feet and Suite 300 which
contains 22,103 rentable square feel, thus reflecting a total of 25,351
rentable square feet.
(c) "Tenant's Share" for the Renewal Premises shall be deemed to
be 8.56%.
2. EXTENSION OF TERM.
Article 1.5 of the Lease is hereby deleted in its entirety and
replaced with the following:
Effective May 1, 1993, the phrase "Lease Term" shall mean
the term of this lease, which shall be a period of six (6) years, commencing
on May 1, 1993, plus the period of the Extension Option (as defined in
Section 6 of this Amendment), if exercised; unless the Lease Term is
terminated earlier pursuant to any of the provisions of this Lease or
pursuant to law.
Article 1.16 of the Lease is hereby deleted in its entirety.
Article 2.2(a) of the Lease is hereby deleted in its entirety.
The first sentence of Article 2.3 of the Lease is hereby deleted
in its entirety and replaced with the following:
If Landlord is unable to deliver to Tenant possession of
the Premises on the Commencement Date, whether as a result of the failure of
Landlord substantially to complete the Tenant Improvements or for any other
reason, Landlord shall not be liable (or any damages caused thereby.
The second sentence of Article 2.3 is amended by deleting
the term "Anticipated" and deleting the phrase, "set forth in Section 1.16
hereof".
2
<PAGE>
3. BASIC RENT
Article 1.6 of the Lease is hereby deleted in its entirety and
replaced with the following:
Commencing May 1, 1993, through and including April 30,
1994, the Basic Rent for the Renewal Premises shall be Five hundred
thirty-two thousand three hundred seventy-one Dollars ($532,371.00), payable
in equal monthly installments of Forty-four thousand three hundred sixty-four
and 25/100 Dollars ($44,364.25). Commencing May 1, 1994, through and
including April 30, 1995, the Basic Rent for the Renewal Premises shall be
Five hundred thirty-two thousand three hundred seventy-one Dollars
($532,371.00), payable in equal monthly installments of Forty-four thousand
three hundred sixty-four and 25/100 Dollars ($44,364.25). Commencing May 1,
1995, through and including April 30, 1996, the Basic Rent for the Renewal
Premises shall be Five hundred thirty-five thousand four hundred thirteen and
12/100 Dollars ($535,413.12), payable in equal monthly installments of
Forty-four thousand six hundred seventeen and 76/100 Dollars ($44,617.76).
Commencing May 1, 1996, through and including April 30, 1997, the Basic Rent
for the Renewal Premises shall be Five hundred forty-seven thousand five
hundred eighty-one and 60/100 Dollars ($547,581.60), payable in monthly equal
installments of Forty-five thousand six hundred thirty-one and 80/100 Dollars
($45,631.80). Commencing May 1, 1997, through and including April 30, 1998,
the Basic Rent for the Renewal Premises shall be Six hundred eight thousand
four hundred twenty-four Dollars ($608,424.00), payable in equal monthly
installments of Fifty thousand seven hundred and two Dollars ($50,702.00).
Commencing May 1, 1998, through and including April 30, 1999, the Basic Rent
for the Renewal Premises shall be Six hundred thirty-eight thousand eight
hundred forty-five and 20/100 Dollars ($638,845.20), payable in equal monthly
installments of Fifty-three thousand two hundred thirty-seven and 10/100
Dollars ($53,237.10).
4. OPERATING EXPENSE ADJUSTMENTS.
(a) Section 4.1(c) is hereby amended by deleting all references to
the term "ninety-five percent (95%)" and replacing same with "one hundred
percent (100%)".
(b) Section 4.1(d)(iv) is hereby deleted in its entirety and
replaced with the following:
"(iv) all taxes and fees of every kind, character and
description whatsoever, from time to time levied, imposed or charged in the
future in lieu thereof or for which Landlord is liable with respect to the
Building, including, hut not limited to, possessory interest taxes, "in lieu"
fees and all taxes and assessments levied for any public or mass transit or
people-mover system;"
(c) Section 4.1(g) is hereby deleted in its entirety and replaced
with thc following:
(g) COMPARISON YEAR. "Comparison Year shall mean each
calendar year after thc Base Year."
3
<PAGE>
(d) Section 4.1(h) is hereby deleted in its entirety and replaced
with the following
"(h) BASE YEAR. "Base Year" shall mean the calendar year
1993."
(e) Section 4.2(b) is hereby amended by the addition of the
following provision after the first paragraph thereof:
"(i) Within three (3) days after receiving any statement
and/or tax bill with respect to any and all possessory interest taxes or
similar taxes due and owing with respect to the Premises from the appropriate
governmental authority(ies), Tenant shall deliver such statement and/or bill
to Landlord for payment by Landlord directly to said governmental
authority(ies), subject to reimbursement by Tenant pursuant to the terms of
this Section 4.2(b)."
(f) Section 4.2(b) is further amended by changing all references
to Clauses (i) through (iv) therein to (ii) through (v) respectively.
5. SURRENDER OF SECOND FLOOR SPACE.
The Lease is further amended by the addition of the following
additional paragraph:
"28.24 SURRENDER OF THE SECOND FLOOR SPACE. Effective May 1,
1993, Tenant hereby surrenders to Landlord, and Landlord hereby accepts the
surrender from Tenant, all of Tenant's right, title and interest in and to
that portion of the Premises located on the second floor as outlined in the
floor plan attached hereto as Exhibit "B" and hereinafter referred to as the
"Surrendered Premises" (which Surrendered Premises shall constitute the
entire Premises less the Renewal Premises). In connection with said
surrender, Tenant shall vacate the Surrendered Premises on or prior to May 1,
1993, and shall comply with all obligations set forth in Article 15 of the
Lease regarding Surrender of Premises. The surrender right, personal to
Tenant, is not transferable and cannot be assigned to any other entity.
Prior to May 1, 1993, Landlord shall contract for the
improvements required to re-demise the Renewal Premises, which improvements
shall he performed in accordance with the attached Revised Space Plan,
hereinafter referred to as Exhibit "C", provided that no delays have been
caused by the Tenant. Landlord shall pay (or all costs associated with said
improvements, and shall select the contractors to perform such improvement
work, and Tenant shall have no right whatsoever to approve or disapprove the
contractors selected by Landlord."
6. EXTENSION OPTION.
Article 2.7 of the Lease is hereby deleted in its entirety and
replaced by the following:
(a) Provided that the Tenant, is not in material default or
breach under any of the terms, covenants and conditions of this Lease and
occupies said space, Tenant shall have the right to extend the term
4
<PAGE>
of this lease for one (1) sixty (60) month period (the "Option Period"),
commencing one day after the Expiration Date (the "Extended Term Commencement
Date") and ending sixty (60) months after the Extended Term Commencement
Date. Tenant shall exercise this right to extend the term of this Lease by
written notice ("Tenant's Notice") to that effect sent certified mail, return
receipt requested, with postage prepaid to Landlord no earlier than twelve
(12) months and no later than nine (9) months prior to the Expiration Date
(such period to be hereinafter referred to as the "Notice Period"). If the
option is properly and timely exercised, then all of the same covenants,
agreements, terms, conditions, limitations, exceptions and reservations
contained in this Lease (unless changed or modified by mutual agreement),
shall apply. Notwithstanding the foregoing, the Basic Rent payable during the
Option Period shall be determined in the manner set forth below.
(b) The Basic Rent as of the Extended Term Commencement Date
shall equal the fair market rental value of the Premises. The term "fair
market rental value" shall mean the monthly amount per rentable square foot
that a willing, comparable, non-renewal, non-equity tenant occupying
approximately 25,000 rentable square feet would pay, and willing, comparable
landlords holding for long-term investment of comparable office buildings at
least seventy-five percent (75%) leased (if any such comparably leased
buildings are available) and occupied in the Pasadena area would accept, in
an arms length transaction, giving appropriate consideration to rental rates
per rentable square foot, the type of escalation clauses (including without
limitation, operating expenses, real estate taxes and CPI), the extent of
liability under the escalation clauses (e.g. whether determined on a net
lease basis or by increases over a particular base year or base dollar
amount), abatement provisions reflecting free rent during the Lease term,
length of Lease term, size and location of premises being leased, an existing
build-out comparable to that of the Premises suitable for Tenant's use, and
other generally applicable terms and conditions of tenancy for the space in
question. Landlord shall estimate fair market value by using its best good
faith judgment, consistent with the provisions stated above. Landlord shall
provide written notice of such estimate at least one hundred sixty (160) days
prior to the Extended Term Commencement Date together with any comparables
used by Landlord in arriving at its estimate, which are not subject to any
restrictions on disclosure. In the event Landlord docs not provide written
notice of such estimate of Basic Rent by one hundred forty-five (145) days
prior to the Extended Term Commencement Date, Tenant may provide written
notice to Landlord of Tenant's estimate of fair market value by using its
best good faith judgement, consistent with the provisions stated above.
together with any comparables used by Tenant in arriving at its estimate,
which are not subject to any restrictions on disclosure Tenant, (or Landlord,
in the event Tenant gives notice) shall have thirty (30) days ("Review
Period") after receipt of notice of the new estimate of Basic Rent within
which to accept such Basic Rent or to reasonably object thereto in writing
stating in detail the basis for such objection and setting forth
5
<PAGE>
Tenant's (or Landlord's, in the event Tenant gives notice) estimate of the
Basic Rent. If Tenant (or Landlord, in the event Tenant gives notice) so
objects, Landlord and Tenant shall attempt in good faith to agree upon fair
market rental, using their best good faith efforts, consistent with the
provisions stated above If Landlord and Tenant fail to reach agreement within
thirty (30) days following the Review Period (the "Outside Agreement Date"),
then each party's estimate shall be submitted to arbitration in accordance
with Subsections (i) through (vii) below. Failure of the party receiving
notice of estimated fair market value to so elect in writing within such
period shall conclusively by deemed its approval of the new Basic Rent
determined by Landlord (or Tenant, in the event Tenant gives notice).
(i) Landlord and Tenant shall each appoint an MAI appraiser with
at least ten (10) years experience appraising office buildings in the greater
Los Angeles/Pasadena area. The determination of the arbitrators shall bc
limited solely to the issue of whether Landlord's or Tenant's submitted
estimate of the actual fair market rental for the Premises as determined by
the arbitrators, taking into account the definition of fair market rental
value set forth above, is more accurate. Each such arbitrator shall be
appointed within fifteen (15) days after the Outside Agreement Date.
(ii) The two arbitrators so appointed shall with fifteen (15)
days of the date of the appointment of the last appointed arbitrator agree
upon and appoint a third arbitrator who shall be qualified under the same
criteria set forth hereinabove for qualifications of the initial two
arbitrators.
(iii) The three arbitrators shall within thirty (30) days of the
appointment of the third arbitrator reach a decision as to whether the
parties shall use Landlord's or Tenant's submitted estimate of fair market
rental, and shall notify Landlord and Tenant thereof. The arbitrators shall
have no right to propose a middle ground or any modification of either of the
two estimates submitted by Landlord and Tenant.
(iv) The decision of the majority of the three arbitrators shall
be binding upon Landlord and Tenant and shall be set forth in a written award
signed by a majority of the arbitrators and delivered to Landlord and Tenant.
(v) If either Landlord or Tenant fails to appoint an arbitrator
within fifteen (15) days after the Outside Agreement Date, the arbitrator
appointed by one of them shall reach a decision, notify Landlord and Tenant
thereof, and such arbitrator's decision shall be binding upon Landlord and
Tenant.
(vi) If the two arbitrators fail to agree upon and appoint a
third arbitrator, then the appointment of the third arbitrator shall be
dismissed and the matter to be decided shall be forthwith submitted to
arbitration under the provision of the American Arbitration Association, but
subject to the instructions set forth in Article 2.7(B).
6
<PAGE>
(vii) The cost of arbitration shall bc paid by Landlord and
Tenant equally.
If the Basic Rent has not been determined by the applicable Extended
Term Commencement Date, then until such determination is made, but in no
event for more than three (3) months, Tenant shall pay rent in the greater of
the amount of Tenant's estimate or the rent in effect immediately prior to
the Extended Term Commencement Date, and thereafter until the determination
is made, in the amount of Landlord's estimate. Once the determination is
made, any necessary adjustments in rental payments for the period commencing
with the Extended Term Commencement Date shall bc made between the parties
within ten (10) days after the date of the determination by Landlord
reimbursing to Tenant any overpayment, or Tenant paying to Landlord any
underpayment, whichever is applicable
(c) Tenant shall have no right to extend the term of the Lease as
provided in Section 2.7 if Tenant is in material default or breach under any
of the terms, covenants and conditions of this Lease as of the date of
Tenant's Notice. If the time to exercise such notice lapses and Tenant has not
cured any material default or breach prior to the last day of the Notice
Period, then any subsequent attempt to exercise such option shall be deemed
null and void, and this Lease shall terminate upon the Expiration Date. If
Tenant materially defaults or breaches any of the terms, covenants and
conditions of this Lease during the period from the date of Tenant's Notice
until the Expiration Date, the right to extend the term of this Lease
hereunder shall bc deemed null and void, and this Lease shall terminate upon
the Expiration Date.
(d) Once Tenant has timely and properly exercised its right to
extend the term of this Lease by delivery of Tenant's Notice to Landlord,
Tenant may not subsequently withdraw its exercise.
(e) It is expressly understood and agreed that the right to
extend the term of this Lease provided in this Article 2.7 is non-assignable
and may not be exercised by anyone, or in favor of anyone, other than the
initial Tenant. This entire Article 2.7 shall be deemed stricken from this
Lease and of no force or effect if the initial Tenant assigns its interest in
this Lease.
(f) Tenant must be in possession of the Premises and must remain
in possession of the Premises and operating its business from the Premises at
the time Tenant delivers Tenant's Notice through and including the Expiration
Date If Tenant is not in possession, fails to remain in possession and/or
fails to operate its business from the Premises throughout such period, then
Tenant shall no( have the right to extend the term
7
<PAGE>
of this Lease, any prior exercise of such right shall he deemed null and
void, and this Lease shall terminate upon the Expiration Date.
(g) In the event Tenant exercises the Extension Option, Landlord
and Tenant shall execute and deliver an amendment to the Lease, as amended
hereby, reflecting the renewal of the term of the Lease on the terms herein
provided, which amendment shall be executed and delivered promptly after the
determination of the Basic Rental for the Option Period
7. RIGHT OF FIRST REFUSAL ON ADDITIONAL SPACE. Article 27.1 contained
within the Lease is hereby deleted in its entirety and replaced with the
following:
27.1 RIGHT OF FIRST OFFER ON ADDITIONAL SPACE. Provided Tenant is
not in default of any of the terms and conditions contained within the Lease
and is in possession of the Premises, subject and subordinate to the rights
granted to the renegotiation of any lease of any tenant who may be in
possession of contiguous space or to the rights granted to other tenants in
the Building, and subject to prior leases, Tenant shall have the right of
first offer to lease additional contiguous space if, as and when, the same
becomes available on the second (2nd) floor of the Building ("Expansion
Area"). Landlord shall not enter into any lease affecting the Expansion Area
with any third-party tenant without first offering Tenant an opportunity to
1ease such space on the same terms and conditions as Landlord is willing or
may negotiate to lease space on such floor to a third-party tenant, however,
in no event shall the per square foot Basic Rent be less than the Basic Rent
in effect for the Premises. As used herein, "third-party tenant" excludes any
tenant or party then in possession of any portion of the Expansion Area which
may desire to extend or renegotiate its lease or rental agreement. Landlord
shall first offer such opportunity to lease to Tenant by (a) notifying Tenant
in writing of the availability of the Expansion Area, and (b) notifying
Tenant of Landlord's proposed terms and conditions, which may by in the form
of a proposed lease. Within five (5) working days from the date of such offer
from Landlord to Tenant, Tenant shall give Landlord written notice of its
election to accept the terms and conditions as set forth by Landlord.
Landlord and Tenant shall then, within fifteen (15) days of Tenant's
acceptance ("Acceptance Period"), execute an amendment to Lease or a
reconstituted Lease incorporating the Expansion Area to the Premises. If no
such instrument is executed during the Acceptance Period, or if Tenant fails
to accept Landlord's offer within the five (5) day period, Landlord shall
have 180 days ("Extension Period") in which to lease the Expansion Area. in
whole or in part, to a third-party tenant under any terms and conditions
acceptable to Landlord. If Landlord is unable to lease the Expansion Area, in
whole or in part, during the Extension Period, Tenant's right of first offer
shall be reinstated. Tenant shall be offered the Expansion Area no more than
three times during the Lease Term.
8
<PAGE>
8. TENANT'S PARKING
Article 1.9 contained within the Lease is hereby deleted in its
entirety and replaced with the following:
The phrase "Tenant's Parking" means seventy-nine (79)
unreserved parking spaces and three (3) reserved parking spaces in the
Building parking garage. Tenant's Parking shall be as provided in Section
26.1, except that the seventy-nine (79) unreserved parking spaces and three
(3) reserved parking spaces shall bc free of charge to Tenant for the Lease
Term. Any additional parking space requested by Tenant shall bc on an "as
available" basis and under the terms and conditions set for in Section 26.1,
except that the rate for additional unreserved parking spaces shall not
exceed $50.00 per parking space per month and the reserved parking spaces
shall not exceed $75.00 per parking space per month.
9. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, each of which shall be an original, but all of which shall
constitute one and the same instrument.
10. NO OTHER AMENDMENTS. Except as modified by this Amendment, the
provisions of the Lease shall remain unaffected and in full force and effect.
11. DEFINITIONS As used herein, all capitalized terms shall have the
same meanings as defined in the Lease, unless otherwise defined herein.
9
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Addendum as of
the day and first year above indicated.
LANDLORD:
LACERA Gateway Property, Inc.
a California corporation
By: HEITMAN ADVISORY CORPORATION
an Illinois corporation,
its agent
By: /s/ [ILLEGIBLE]
---------------------------
Its: VICE PRESIDENT
--------------------------
TENANT:
Paula Insurance Company,
a California corporation
By: /s/ Norman J. Schnider
----------------------------
Its: President
---------------------------
10
<PAGE>
[BLUEPRINT]
EXHIBIT "A"
<PAGE>
[BLUEPRINT]
Ridgeway
PAULA FINANCIAL/EXPANSION
EXHIBIT "A"
<PAGE>
[BLUEPRINT]
EXHIBIT "B"
<PAGE>
[BLUEPRINT]
EXHIBIT "C"
<PAGE>
THIRD AMENDMENT TO
OFFICE BUILDING LEASE
THIS THIRD AMENDMENT to GATEWAY PLAZA Office Building Lease
("Amendment") is made as of the 16th day of September, 1994, by and between
LACERA Gateway Property, Inc., a California corporation ("Landlord") and
PAULA INSURANCE COMPANY, a California corporation ("Tenant").
RECITALS
A. Landlord's predecessor-in-interest, PASADENA GATEWAY PLAZA, a
California limited partnership and Tenant's predecessor-in-interest, PAN
AMERICAN UNDERWRITERS, INC., a Nevada corporation, entered into that certain
Gateway Plaza Office Lease (the "Original Lease") dated January 1, 1989,
pursuant to which Tenant's predecessor-in-interest leased from Landlord
approximately 28,862 rentable square feet (the "Original Premises") on the
second and third floors of that certain office building (the "Building")
located at 300 North Lake Avenue, Pasadena, California 91101.
B. Landlord's predecessor-in-interest and Tenant's
predecessor-in-interest entered into that certain Lease Amendment to Gateway
Plaza Office Lease, dated September 28, 1989 (the "First Amendment"),
pursuant to which Article 2.2(a) of the Original Lease was modified to
reflect the addition of 1,255 rentable square feet, located on the second
floor of the Building, to the existing Premises (such additional space plus
the Original Premises to be collectively referred to as the "Revised Original
Premises").
C. The Original Lease, as amended by the First Amendment, was assigned by
PAN AMERICAN UNDERWRITERS, INC., a Nevada corporation, to Tenant effective
May 1, 1993, in accordance with the provisions set forth in the attached
Gateway Plaza Assignment and Assumption of Lease and Consent (the
"Assignment").
D. Landlord and Tenant entered into that certain Lease Amendment to
Gateway Plaza Office Lease, dated April 27, 1993 (the "Second Amendment"),
pursuant to which Article 28.24 was included to surrender an area on the
second floor containing approximately
<PAGE>
4,766 rentable square feet from the Revised Original Premises (the Revised
Original Premises less the reduced space to be collectively referred to as
the "Premises").
E. The Original Lease, as amended by the First Amendment, Assignment and
Second Amendment, is hereinafter collectively referred to as the "Lease".
F. Tenant desires, and Landlord has agreed, to increase the size of the
Premises, to adjust the Basic Rent and certain other terms and provisions of
the Lease.
AGREEMENT
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged by the parties, the parties agree
as follows:
1. DEFINED TERMS. Each capitalized term used in this Amendment shall
have the same meaning ascribed to such term in the Lease, except that the
following terms shall have the following meanings:
(a) "Premises" shall mean those spaces originally known as Suite
200 and Suite 202 on the second floor and Suite 300 on the third floor, as
outlined in the floor plan attached hereto as Exhibit "A".
(b) "Rentable Area of the Premises" shall be deemed to be: Suite
200 which contains approximately 3,248 rentable square feet, Suite 202 which
contains approximately 1,405 rentable square feet and Suite 300 which
contains approximately 22,103 rentable square feet, thus reflecting a total
of 26,756 rentable square feet.
(c) "Tenant's Share" for the Premises shall be deemed to be 9.45%
(d) "Expansion Area" shall mean that additional space known as
Suite 202 containing approximately 1,405 rentable square feet.
2. BASIC RENT.
Article 1.6 of the Lease and Article 3 of the Second Amendment
are hereby deleted in their entirety and replaced with the following:
Commencing upon Substantial Completion of the tenant improvements
associated with Suite 202 (as further defined in the Work Letter Agreement
attached as
<PAGE>
Exhibit "B"), through and including April 30, 1995, the Basic Rent shall be
Forty-six thousand eight hundred twenty-three Dollars ($46,823.00) per month.
Commencing May 1, 1995, through and including April 30, 1996, the Basic Rent
for the Premises shall be Five hundred sixty-five thousand eighty-six and
72/100 Dollars ($565,086.72), payable in equal monthly installments of
Forty-seven thousand ninety and 56/100 Dollars ($47,090.56). Commencing May
1, 1996, through and including April 30, 1997, the Basic Rent for the
Premises shall be Five hundred seventy-seven thousand nine hundred twenty
nine and 60/100 Dollars ($577,929.60), payable in equal monthly installments
of Forty-eight thousand one hundred sixty and 80/100 ($48,160.80). Commencing
May 1, 1997, through and including April 30, 1998, the Basic Rent for the
Premises shall be Six hundred forty-two thousand one hundred forty-four
Dollars ($642,144.00), payable in equal monthly installments of Fifty-three
thousand five hundred twelve Dollars ($53,512.00). Commencing May 1, 1998,
through and including April 30, 1999, the Basic Rent for the Premises shall
be Six hundred seventy-four thousand two hundred fifty-one and 20/100 Dollars
($674,251.20), payable in equal monthly installments of Fifty-six thousand
one hundred eighty-seven and 60/100 Dollars ($56,187.60).
3. BROKERS.
Tenant represents that except for Heitman Properties Ltd., Tenant
has not retained, contracted or dealt with any real estate broker,
salesperson or finder in connection with this Amendment. Tenant shall agree
to indemnify and hold Landlord and Heitman Properties Ltd. harmless from and
against any and all liabilities and claims for commissions and fees arising
out of a breach of the foregoing representation. Landlord shall be
responsible for the payment of any commissions or fees due to Heitman
Properties Ltd.
4. TENANT IMPROVEMENTS.
Within ninety (90) days following the mutual execution and
delivery of this Amendment, subject to force majeure and Tenant Delays as
detailed in the Work Letter Agreement, Landlord shall deliver possession of
the Expansion Area to Tenant in substantial conformance with Landlord's
obligations pursuant to the Work Letter Agreement attached hereto as Exhibit
"B". Tenant shall execute a Suite Acceptance Agreement on Landlord's Standard
Form attached hereto as Exhibit "C".
<PAGE>
5. PARKING.
Article 8 of the Second Amendment to Office Building Lease is
hereby deleted in its entirety and replaced with the following:
The phrase "Tenant's Parking" means eighty three (83) unreserved
parking spaces and three (3) reserved parking spaces in the Building parking
garage. Tenant's Parking shall be as provided in Section 26.1 of the Lease,
except that the eighty three (83) and three (3) reserved parking spaces shall
be free to change to Tenant for the Lease Term. Any additional parking space
requested by Tenant shall be on an "as available" basis and under the terms
and conditions set forth in Section 26.1, except that the rate for additional
unreserved parking spaces shall not exceed $50.00 per parking space per month
and the reserved parking spaces shall not exceed $75.00 per parking space per
month.
6. COUNTERPARTS.
This Amendment may be executed in any number of counterparts,
each of which shall be an original, but all of which shall constitute one and
the same instrument.
7. AMENDMENTS.
Except as modified by this Amendment, the provisions of the Lease
as modified by the First Amendment and Second Amendment to Office Building
Lease shall remain in full force and effect.
8. DEFINITIONS.
As used herein, all capitalized terms shall have the same
meanings as defined in the Lease, unless otherwise defined herein.
9. Except for those provisions which are inconsistent with this
Amendment and those terms, covenants and conditions for which performance has
heretofore been completed, all other terms, covenants and conditions of the
Lease shall remain in full force and effect.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Third Amendment to
Lease as of the day and year first written.
LANDLORD
LACERA Gateway Property, Inc.
a California corporation
By: HEITMAN ADVISORY CORPORATION
an Illinois corporation, its agent
By: /s/ [ILLEGIBLE]
--------------------------
Its: Executive Vice President
-------------------------
TENANT
PAULA INSURANCE COMPANY
a California corporation
By: /s/ James P. Nicholson
--------------------------
Its: Sr. V.P.
-------------------------
<PAGE>
[BLUEPRINT]
SECOND FLOOR
GATEWAY PLAZA
PASADENA, CALIFORNIA
EXHIBIT "A" PREMISES
<PAGE>
EXHIBIT B
WORK LETTER AGREEMENT
[LANDLORD PERFORMS WORK]
This Work Letter Agreement ("WorkLetter") is executed simultaneously
with that certain Third Amendment to Office Building Lease (the "Amendment")
between PAULA INSURANCE COMPANY, a California corporation, as "Tenant", and
LACERA GATEWAY PROPERTY, INC., a California corporation, as "Landlord",
relating to demised premises ("Premises") at the building commonly known as
GATEWAY PLAZA, Pasadena, California (the "Building"), which Premises are more
fully identified in the Amendment. Capitalized terms used herein, unless
otherwise defined in this Work Letter, shall have the respective meanings
ascribed to them in the Lease (as defined in the Amendment), as amended by
the Amendment.
For and in consideration of the agreement to enter into the Amendment
and the mutual covenants contained herein and in the Amendment, Landlord and
Tenant hereby agree as follows:
1. TENANT'S INITIAL PLANS; THE WORK. Tenant desires Landlord to
perform certain leasehold improvement work in the Expansion Area in
substantial accordance with the plan or plans (collectively, the "Initial
Plan") prepared by Reuter & Associates dated August 17, 1994 and last revised
August 19, 1994, a copy or copies of which is/are attached hereto as Schedule
1. Such work, as shown in the Initial Plan and as more fully detailed in the
Working Drawings (as defined and described in Paragraph 2 below), shall be
hereinafter referred to as the "Work". Not later than September 5, 1994,
Tenant shall furnish to Landlord such additional plans, drawings,
specifications and finish details as Landlord may reasonably request to
enable Landlord's architects and engineers to prepare mechanical, electrical
and plumbing plans and to prepare the Working Drawings, including a final
telephone layout and special electrical connection requirements, if any. All
plans, drawings, specifications and other details describing the Work which
have been or are hereafter furnished by or on behalf of Tenant shall be
subject to Landlord's approval, which Landlord agrees shall not be
unreasonably withheld. Landlord shall not be deemed to have acted
unreasonably if it withholds its approval of any plans, specifications,
drawings or other details or of any Additional Work (as defined in Paragraph
7 below) because, in Landlord's reasonable opinion, the work, as described in
any such item, or the Additional Work, as the case may be: (a) is likely to
adversely affect Building systems, the structure of the Building or the
safety of the Building and/or its occupants; (b) might impair Landlord's
ability to furnish services to Tenant or other tenants in the Building; (c)
would increase the cost of operating the Building; (d) would violate any
governmental laws, rules or ordinances (or interpretations thereof); (e)
contains or uses hazardous or toxic materials or substances; (f) would
adversely affect the appearance of the Building; (g) might adversely affect
another tenant's premises; (h) is prohibited by any ground lease affecting
the Building or any mortgage, trust deed or other instrument encumbering the
Building; or (i) is likely to be substantially delayed because of
unavailability or shortage of labor or materials necessary to perform such
work or the difficulties or unusual nature of such work. The foregoing
reasons, however, shall not be the only reasons for which Landlord may
withhold its approval, whether or not such other
<PAGE>
reasons are similar or dissimilar to the foregoing. Neither the approval by
Landlord of the Work or the Initial Plan or any other plans, drawings,
specifications or other items associated with the Work nor Landlord's
performance, supervision or monitoring of the Work shall constitute any
warranty by Landlord to Tenant of the adequacy of the design for Tenant's
intended use of the Expansion Area.
2. WORKING DRAWINGS. If necessary for the performance of the Work
and not included as part of the Initial Plan attached hereto, Landlord, at
Tenant's sole cost and expense, shall prepare or cause to be prepared final
working drawings and specifications for the Work (the "Working Drawings")
based on and consistent with the Initial Plan and the other plans, drawings,
specifications, finish details and other information furnished by Tenant to
Landlord and approved by Landlord pursuant to Paragraph 1 above. So long as
the Working Drawings are consistent with the Initial Plan, Tenant shall
approve the Working Drawings within three (3) days after receipt of same from
Landlord by initialing and returning to Landlord each sheet of the Working
Drawings or by executing Landlord's approval form then in use, whichever
method of approval Landlord may designate.
3. PERFORMANCE OF THE WORK. Landlord, at Tenant's sole cost and
expense, shall cause the Work to be performed using building standard
materials, quantities and procedures then in use by Landlord ("Building
Standards"), except as may be stated or shown otherwise in the Working
Drawings.
Tenant shall be responsible for the Cost of the Work (as defined below)
and shall approve the Cost of the Work prior to the commencement of the Work
and execute a Tenant Work Order agreement (attached hereto as Exhibit D). For
purposes of this Amendment, the term "Cost of the Work" shall mean and
include any and all costs and expenses of the Work, including, without
limitation, the cost of the Working Drawings by Reuter & Associates, cost of
the engineering drawings by C.J. Barszcz & Associates, permits and fees, all
labor (including overtime), materials constituting the Work and Landlord's
supervision costs of ten percent (10%) of the Cost of the Work. Tenant shall
remit fifty percent (50%) of the Cost of the Work upon execution of the
Tenant Work Order and shall remit the balance upon substantial completion of
the Work.
4. AUTHORIZATION TO PROCEED. Landlord may proceed with the Work at
any time after the execution of this Work Letter and the completion of the
Working Drawings, if applicable; provided, however, that Landlord, at its
option, may request Tenant to execute and deliver to Landlord a separate
written authorization (in the form then in use by Landlord) to proceed with
the Work, in which event Tenant shall execute and deliver such written
authorization within three (3) days after Landlord's request therefor, and,
at Landlord's option, no Work shall be commenced until Tenant has executed
and delivered to Landlord such authorization.
5. SUBSTANTIAL COMPLETION. Landlord shall use its reasonable efforts
to cause the Work to be "substantially completed" on or before the date which
is ninety 90 days following the mutual execution and delivery of the
Amendment, subject to delays caused by strikes, lockouts, boycotts or other
labor problems, casualties, discontinuance of any utility or other service
required for performance of the Work, unavailability or shortages of
materials or other problems in obtaining materials necessary for performance
of the Work or any other matter beyond the control of Landlord (or beyond the
control of Landlord's contractors or subcontractors performing the Work) and
also subject to "Tenant
<PAGE>
Delays" (as defined and described in Paragraph 6 of this Work Letter). The
Work shall be deemed to be "substantially completed" for all purposes under
this Work Letter and the Lease if and when Landlord's architect issues a
written certificate to Landlord and Tenant, certifying that the Work has been
substantially completed (i.e., completed except for "punchlist" items listed
in such architect's certificate) in substantial compliance with the Working
Drawings, or when Tenant first takes occupancy of the Expansion Area,
whichever first occurs. If the Work is not deemed to be substantially
completed on or before the date which is 90 days following the mutual
execution and delivery of the Amendment, (a) Landlord agrees to use
reasonable efforts to complete the Work as soon as practicable thereafter,
(b) the Lease shall remain in full force and effect, and (c) Landlord shall
not be deemed to be in breach or default of the Lease or this Work Letter as
a result thereof and Landlord shall have no liability to Tenant as a result
of any delay in occupancy (whether for damages, abatement of Rent or
otherwise). Notwithstanding the foregoing, in the event the Work is delayed
as a result of a Tenant Delay, the Work shall be deemed to be substantially
complete on the date that the Work would have been substantially complete,
but for the Tenant Delay (as reasonably determined by Landlord). Landlord
agrees to use reasonable diligence to complete all punchlist work listed in
the aforesaid architect's certificate promptly after substantial completion.
6. TENANT DELAYS. The following shall constitute "Tenant Delays".
(i) the failure of Tenant to furnish all or any plans,
drawings, specifications, finish details or the other information required
under Paragraph 1 above on or before the date stated in Paragraph 1;
(ii) the failure of Tenant to grant approval of the Working
Drawings within the time required under Paragraph 2 above;
(iii) the failure of Tenant to comply with the requirements
of Paragraph 4 above;
(iv) Tenant's requirements for special work or materials,
finishes, or installations other than the Building Standards or Tenant's
requirement for special construction staging or phasing;
(v) the performance of any Additional Work (as defined in
Paragraph 7 below) requested by Tenant or the performance of any work in the
Expansion Area by any person, firm or corporation employed by or on behalf of
Tenant, or any failure to complete or delay in completion of such work; or
(vi) any other act or omission of Tenant.
7. ADDITIONAL WORK. Upon Tenant's request and submission by Tenant
(at Tenant's sole cost and expense) of the necessary information and/or plans
and specifications for work other than the Work described in the Working
Drawings ("Additional Work") and the approval by Landlord of such Additional
Work, which approval Landlord agrees shall not be unreasonably withheld,
Landlord shall perform such Additional Work,
<PAGE>
at Tenant's sole cost and expense, subject, however, to the following
provisions of this Paragraph 7. Prior to commencing any Additional Work
requested by Tenant, Landlord shall submit to Tenant a written statement of
the cost of such Additional Work, which cost shall include a fee payable to
Landlord in the amount of 10% of the total cost of such Additional Work as
compensation to Landlord for monitoring the Additional Work hereinafter
referred to collectively as "Landlord's Additional Compensation"), and,
concurrently with such statement of cost, Landlord shall also submit to
Tenant a proposed tenant extra order (the "TEO") for the Additional Work in
the standard form then in use by Landlord. Tenant shall execute and deliver
to Landlord such TEO and shall pay to Landlord the entire cost of the
Additional Work, including Landlord's Additional Compensation (as reflected
in Landlord's statement of such cost), within five (5) days after Landlord's
submission of such statement and TEO to Tenant. If Tenant fails to execute or
deliver such TEO or pay the entire cost of such Additional Work within such
5-day period, then Landlord shall not be obligated to do any of the
Additional Work and may proceed to do only the Work, as specified in the
Working Drawings.
8. TENANT ACCESS. Landlord, in Landlord's reasonable discretion and
upon request by Tenant, may grant to Tenant a license to have access to the
Expansion Area prior to the substantial completion of the Work to allow
Tenant to do other work required by Tenant to make the Expansion Area ready
for Tenant's use and occupancy (the "Tenant's Pre-Occupancy Work"). It shall
be a condition to the grant by Landlord and continued effectiveness of such
license that:
(a) Tenant shall give to Landlord a written request to have such
access to the Expansion Area not less than five (5) days prior to the date on
which such access will commence, which written request shall contain or shall
be accompanied by each of the following items, all in form and substance
reasonably acceptable to Landlord: (i) a detailed description of and schedule
for Tenant's Pre-Occupancy Work; (ii) the names and addresses of all
contractors, subcontractors and material suppliers and all other
representatives of Tenant who or which will be entering the Expansion Area on
behalf of Tenant to perform Tenant's Pre-Occupancy Work or will be supplying
materials for such work, and the approximate number of individuals, itemized
by trade, who will be present in the Expansion Area; (iii) copies of all
contracts, subcontracts and material purchase orders pertaining to Tenant's
Pre-Occupancy Work; (iv) copies of all plans and specifications pertaining to
Tenant's Pre-Occupancy Work; (v) copies of all licenses and permits required
in connection with the performance of Tenant's Pre-Occupancy Work; (vi)
certificates of insurance (in amounts satisfactory to Landlord and with the
parties identified in, or required by, the Lease named as additional
insureds) and instruments of indemnification against all claims, costs,
expenses, damages and liabilities which may arise in connection with Tenant's
Pre-Occupancy Work; and (vii) assurances of the ability of Tenant to pay for
all of Tenant's Pre-Occupancy Work and/or a letter of credit or other
security deemed appropriate by Landlord securing Tenant's lien-free
completion of Tenant's Pre-Occupancy Work.
(b) Such pre-term access by Tenant and its representatives shall
be subject to scheduling by Landlord.
<PAGE>
(c) Tenant's employees, agents, contractors, workmen, mechanics,
suppliers and invitees shall work in harmony and not interfere with Landlord
or Landlord's agents in performing the Work and any Additional Work in the
Expansion Area, Landlord's work in other premises and in common areas of the
Building, or the general operation of the Building. If at any time any such
person representing Tenant shall cause or threaten to cause such disharmony
or interference, including labor disharmony, and Tenant fails to immediately
institute and maintain such corrective actions as directed by Landlord, then
Landlord may withdraw such license upon twenty-four hours' prior written
notice to Tenant.
(d) Any such entry into and occupancy of the Expansion Area by
Tenant or any person or entity working for or on behalf of Tenant shall be
deemed to be subject to all of the terms, covenants, conditions and
provisions of the Lease, specifically including the provisions regarding
Tenant's improvements and alterations, and excluding only the covenant to pay
Rent. Landlord shall not be liable for any injury, loss or damage which may
occur to any of Tenant's Pre-Occupancy Work made in or about the Expansion
Area or to property placed therein prior to the substantial completion of the
Work, the same being at Tenant's sole risk and liability. Tenant shall be
liable to Landlord for any damage to the Expansion Area or to any portion of
the Work or Additional Work caused by Tenant or any of Tenant's employees,
agents, contractors, workmen or suppliers. In the event that the performance
of Tenant's Pre-Occupancy Work causes extra costs to Landlord or requires the
use of elevators during hours other than 7:00 a.m. to 6:00 p.m. on Monday
through Friday (excluding holidays) or of other Building services, Tenant
shall reimburse Landlord for such extra cost and/or shall pay Landlord for
such elevator service or other Building services at Landlord's standard rates
then in effect.
9. LEASE PROVISIONS. The terms and provisions of the Lease, as
amended, insofar as-they are applicable to this Work Letter, are hereby
incorporated herein by reference. All amounts payable by Tenant to Landlord
hereunder shall be deemed to be additional Rent under the Lease and, upon any
default in the payment of same, Landlord shall have all of the rights and
remedies provided for in the Lease, as amended.
10. MISCELLANEOUS.
(a) This Work Letter shall be governed by the laws of the state
in which the Expansion Area are located.
(b) This Work Letter may not be amended except by a written
instrument signed by the party or parties to be bound thereby.
(c) Any person signing this Work Letter on behalf of Tenant
warrants and represents he/she has authority to sign and deliver this Work
Letter and bind Tenant.
(d) Notices under this Work Letter shall be given in the same
manner as under the Lease.
(e) The headings set forth herein are for convenience only.
(f) This Work Letter sets forth the entire agreement of Tenant and
<PAGE>
Landlord regarding the Work.
(g) In the event that the final working drawings and
specifications are included as part of the Initial Plan attached hereto, or
in the event Landlord performs the Work without the necessity of preparing
working drawings and specifications, then whenever the term "Working
Drawings" is used in this Agreement, such term shall be deemed to refer to
the Initial Plan and all supplemental plans and specifications approved by
Landlord.
11. EXCULPATION OF LANDLORD AND HEITMAN. Notwithstanding anything to
the contrary contained in this Work Letter, it is expressly understood and
agreed by and between the parties hereto that:
(a) The recourse of Tenant or its successors or assigns against
Landlord with respect to the alleged breach by or on the part of Landlord of
any representation, warranty, covenant, undertaking or agreement contained in
this Work Letter or the Lease (collectively, "Landlord's Work Letter
Undertakings") shall extend only to Landlord's interest in the real estate,
of which the Expansion Area demised under the Lease, as amended. Documents
are a part (hereinaffer, "Landlord's Real Estate") and not to any other
assets of Landlord or its officers, directors or shareholders; and
(b) Except to the extent of Landlord's interest in Landlord's
Real Estate, no personal liability or personal responsibility of any sort
with respect to any of Landlord's Work Letter Undertakings or any alleged
breach thereof is assumed by, or shall at any time be asserted or enforceable
against, Landlord, Heitman Advisory Corporation or Heitman Properties Ltd.,
or against any of their respective directors, officers, employees, agents,
constituent partners, beneficiaries, trustees or representatives.
<PAGE>
IN WITNESS WHEREOF, this Work Letter Agreement is executed as of the
____________ day of __________, 19__.
TENANT:
PAULA INSURANCE COMPANY,
a California corporation
By: /s/ James A. Nicholson
-------------------------------
Title: Sr. V.P.
----------------------------
LANDLORD:
LACERA GATEWAY PROPERTY, INC.,
a California corporation
By: HEITMAN ADVISORY
CORPORATION, an Illinois
corporation, its agent
By: /s/ [ILLEGIBLE]
-------------------------------
Title: Executive Vice President
------------------------
<PAGE>
[BLUEPRINT]
SCHEDULE 1. SPACE PLAN
<PAGE>
FOURTH AMENDMENT TO
OFFICE BUILDING LEASE
THIS FOURTH AMENDMENT to GATEWAY PLAZA Office Building Lease
("Amendment") is made as of the 12th day of May, 1995, by and between LACERA
Gateway Property, Inc., a California corporation ("Landlord") and PAULA
INSURANCE COMPANY, a California corporation ("Tenant").
RECITALS
A. Landlord's predecessor-in-interest, PASADENA GATEWAY PLAZA, a
California limited partnership and Tenant's predecessor-in-interest, PAN
AMERICAN UNDERWRITERS, INC., a Nevada corporation, entered into that certain
Gateway Plaza Office Lease (the "Original Lease") dated January 1, 1989,
pursuant to which Tenant's predecessor-in-interest leased from Landlord's
predecessor-in-interest approximately 28,862 rentable square feet (the
"Original Premises") on the second and third floors of that certain office
building (the "Building") located at 300 North Lake Avenue, Pasadena,
California 91101.
B. Landlord's predecessor-in-interest and Tenant's
predecessor-in-interest entered into that certain Lease Amendment to Gateway
Plaza Office Lease, dated September 28, 1989 (the "First Amendment"),
pursuant to which Article 2.2(a) of the Original Lease was modified to
reflect the addition of 1,255 rentable square feet, located on the second
floor of the Building, to the Original Premises (such additional space plus
the Original Premises to be collectively referred to as the "Expanded
Premises").
C. PAN AMERICAN UNDERWRITERS, INC's right, title and interest under
the Original Lease as amended by the First Amendment, was assigned to Tenant
effective May 1, 1993, in accordance with the provisions set forth in the
attached Gateway Plaza Assignment and Assumption of Lease and Consent (the
"Assignment").
D. Landlord and Tenant entered into that certain Lease Amendment to
Gateway Plaza
<PAGE>
Office Lease, dated April 27, 1993 (the "Second Amendment"), pursuant to
which Article 28.24 was included to surrender an area on the second floor
containing approximately 4,766 rentable square feet from the Revised Original
Premises (the Expanded Premises less the reduced space to be collectively
referred to as the "Revised Original Premises").
E. Landlord and Tenant entered into that certain Lease Amendment to
Gateway Plaza Office Lease, dated September 16, 1994 (the "Third Amendment"),
pursuant to which Article 1.6 was amended to incorporate an area on the
second floor, commonly referred to as Suite 202, containing approximately
1,405 rentable square feet to the Revised Original Premises (the Revised
Original Premises plus the additional space to be collectively referred to as
the "Revised Premises").
F. The Original Lease, as amended by the First Amendment,
Assignment, Second Amendment and Third Amendment, is hereinafter collectively
referred to as the "Lease".
G. Tenant desires, and Landlord has agreed, to increase the size of
the Revised Premises, to adjust the Basic Rent and certain other terms and
provisions of the Lease.
AGREEMENT
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged by the parties, the parties agree
as follows:
1. DEFINED TERMS. Each capitalized term used in this Amendment
shall have the same meaning ascribed to such term in the Lease, except that
the following terms shall have the following meanings:
(a) "Premises" shall mean those spaces commonly known as Suite
200, Suite 202, Suite 205, Suite 210 and Suite 250 on the second floor and
Suite 300 on the third floor, as outlined in the floor plan attached hereto
as Exhibit "A".
(b) "Rentable Area of the Premises" shall be deemed to be: Suite
200 which contains approximately 3,248 rentable square feet, Suite 202 which
contains approximately 1,405 rentable square feet, Suite 205 which contains
approximately 963 rentable square feet, Suite 210 which contains
approximately 2,504 rentable square feet,
<PAGE>
Suite 250 which contains approximately 3,650 rentable square feet and Suite
300 which contains approximately 22,103 rentable square feet, thus reflecting
a total of approximately 33,873 rentable square feet. (c) "Tenant's Share"
for the Premises shall be deemed to be 11.44% (d) "Expansion Area" shall mean
that additional space known as Suite 205 containing approximately 963
rentable square feet, Suite 210 containing approximately 2,504 rentable
square feet and Suite 250 containing approximately 3,650 rentable square feet.
2. BASIC RENT.
Article 1.6 of the Original Lease, Article 3 of the Second
Amendment and Article 2 of the Third Amendment are hereby deleted in their
entirety and replaced with the following:
Commencing the Expansion Area Commencement Date (defined below)
through and including April 30, 1996, the monthly Basic Rent for the Premises
shall be Fifty-nine Thousand Six Hundred Sixteen and 48/100 Dollars
($59,616.48). Commencing May 1, 1996, through and including April 30, 1997,
the Basic Rent for the Premises shall be Seven Hundred Thirty-one Thousand
Six Hundred Fifty-six and 80/100 Dollars ($731,656.80), payable in equal
monthly installments of Sixty Thousand Nine Hundred Seventy-one and 40/100
($60,971.40). Commencing May 1, 1997, through and including April 30, 1998,
the Basic Rent for the Premises shall be Eight Hundred Twelve Thousand Nine
Hundred Fifty-two Dollars ($812,952.00), payable in equal monthly
installments of Sixty-seven thousand Seven Hundred Forty-six Dollars
($67,746.00). Commencing May 1, 1998, through and including April 30, 1999,
the Basic Rent for the Premises shall be Eight Hundred Fifty-three Thousand
Five Hundred Ninety-nine and 60/100 Dollars ($853,599.60), payable in equal
monthly installments of Seventy-one Thousand One Hundred Thirty-three and
30/100 Dollars ($71,133.30).
3. ABATEMENT OF RENT.
Provided that Tenant is not in default under any of the terms and
conditions contained in the Lease, as amended, a portion of the monthly Basic
Rent in the amount of Twelve Thousand Five Hundred Twenty-five and 92/100
Dollars ($12,525.92) shall be abated each month for the six month period
which commences on the Expansion Area
<PAGE>
Commencement Date.
4. BROKERS.
Tenant represents that except for Heitman Properties Ltd., Tenant
has not retained, contracted or dealt with any real estate broker,
salesperson or finder in connection with this Amendment. Tenant shall agree
to indemnify and hold Landlord and Heitman Properties Ltd. harmless from and
against any and all liabilities and claims for commissions and fees arising
out of a breach of the foregoing representation. Landlord shall be
responsible for the payment of any commissions or fees due to Heitman
Properties Ltd.
5. TENANT IMPROVEMENTS.
A. Landlord hereby agrees to perform certain tenant improvement
work to the Expansion Area in accordance with the terms of the Work Letter
attached hereto as Exhibit B (the "Work Letter"). At the time Landlord
delivers possession of the Expansion Area to Tenant in accordance with the
Work Letter, Tenant shall execute a Suite Acceptance Agreement on Landlord's
Standard Form attached hereto as Exhibit "C".
B. For purposes of the Amendment, the term "Expansion Area
Commencement Date" shall mean the later of (i) July 1, 1995, or (ii) the date
that the Work (as defined in the Work Letter) is substantially completed.
6. PARKING.
Effective as of the Expansion Area Commencement Date, Article 8
of the Second Amendment and Article 5 of the Third Amendment to Office
Building Lease are hereby deleted in their entirety and replaced with the
following:
The phrase "Tenant's Parking" means one hundred three (103)
unreserved parking spaces and four (4) reserved parking spaces in the
Building parking garage. Tenant's Parking shall be as provided in Section
26.1 of the Lease, except that the one hundred three (103) and four (4)
reserved parking spaces shall be free of charge to Tenant for the Lease Term.
Any additional parking space requested by Tenant shall be on an "as
available" basis and under the terms and conditions set forth in Section
26.1, except that the rate for additional unreserved parking spaces shall not
exceed $50.00 per parking space per month and the reserved parking spaces
shall not exceed $75.00 per parking
<PAGE>
space per month.
7. COUNTERPARTS.
This Amendment may be executed in any number of counterparts,
each of which shall be an original, but all of which shall constitute one and
the same instrument.
8. AMENDMENTS.
Except as modified by this Amendment, the provisions of the Lease
shall remain in full force and effect.
9. DEFINITIONS.
As used herein, all capitalized terms shall have the same
meanings as defined in the Lease, unless otherwise defined herein.
IN WITNESS WHEREOF, the parties have executed this Fourth Amendment to
Lease as of the day and year first written.
LANDLORD:
LACERA Gateway Property, Inc.
a California corporation
By: HEITMAN/JMB ADVISORY CORPORATION
an Illinois corporation, its agent
By: /s/ [ILLEGIBLE]
--------------------------------
Its: VICE PRESIDENT
-------------------------------
TENANT:
PAULA INSURANCE COMPANY
a California corporation
By: /s/ [ILLEGIBLE]
--------------------------------
Its: V.P. General Counsel
-------------------------------
<PAGE>
[BLUEPRINT]
Second Floor
Gateway Plaza
Pasedena, California
EXHIBIT A
<PAGE>
[BLUEPRINT]
Third Floor
Gateway Plaza
Pasedena, California
Heitman Properties
<PAGE>
EXHIBIT B
WORK LETTER AGREEMENT
[Landlord Performs Work]
[Allowance]
This Work Letter Agreement ("Work Letter") is executed simultaneously
with that certain Fourth Amendment (the "Amendment") between PAULA INSURANCE
COMPANY, a California corporation, as "Tenant", and LACERA GATEWAY PROPERTY,
INC., a California corporation, as "Landlord", relating to certain expansion
premises ("Expansion Area") at the building commonly known as GATEWAY PLAZA,
Pasadena, California (the "Building"), which Expansion Area is more fully
identified in the Amendment. Capitalized terms used herein, unless otherwise
defined in this Work Letter, shall have the respective meanings ascribed to
them in the Lease (as defined in the Amendment), as thereafter modified.
For and in consideration of the agreement to lease the Expansion Area
and the mutual covenants contained herein and in the Lease, Landlord and
Tenant hereby agree as follows:
1. TENANT'S INITIAL PLANS: THE WORK. Tenant desires Landlord to
perform certain leasehold improvement work in the Expansion Area in
substantial accordance with the plan or plans (collectively, the "Initial
Plan") prepared by CAD Charettes dated May 6, 1995 (Revision 2). Such work,
as shown in the Initial Plan and as more fully detailed in the Working
Drawings (as defined and described in Paragraph 2 below), shall be
hereinafter referred to as the "Work". Not later than May 20, 1995, Tenant
shall furnish to Landlord such additional plans, drawings, specifications and
finish details as Landlord may reasonably request to enable Landlord's
architects and engineers to prepare mechanical, electrical and plumbing plans
and to prepare the Working Drawings, including a final telephone layout and
special electrical connection requirements, if any. All plans, drawings,
specifications and other details describing the Work which have been or are
hereafter furnished by or on behalf of Tenant shall be subject to Landlord's
approval, which Landlord agrees shall not be unreasonably withheld. Landlord
shall not be deemed to have acted unreasonably if it withholds its approval
of any plans, specifications, drawings or other details or of any Additional
Work (as defined in Paragraph 7 below) because, in Landlord's reasonable
opinion, the work, as described in any such item, or the Additional Work, as
the case may be: (a) is likely to adversely affect Building systems, the
structure of the Building or the safety of the Building and/or its occupants;
(b) might impair Landlord's ability to furnish services to Tenant or other
tenants in the Building; (c) would increase the cost of operating the
Building; (d) would violate any governmental laws, rules or ordinances (or
interpretations thereof); (e) contains or uses hazardous or toxic materials
or substances; (f) would adversely affect the appearance of the Building; (g)
might adversely affect another tenant's premises; (h) is prohibited by any
ground lease affecting the Building or any mortgage, trust deed or other
instrument encumbering the Building; or (i) is likely to be substantially
delayed because of unavailability or shortage of labor or non-building
standard materials necessary to perform such work or the difficulties or
unusual nature of such work. The foregoing reasons, however, shall not be the
only reasons for which Landlord may withhold its approval, whether or not
such other reasons are similar or dissimilar to the foregoing. Neither the
approval by Landlord of the Work or the Initial Plan or any other plans,
drawings, specifications or other items associated with the Work nor
Landlord's performance, supervision or monitoring of the Work shall
constitute any warranty by Landlord to Tenant of the adequacy of the design
for Tenant's intended use of the Expansion Area.
2. WORKING DRAWINGS. If necessary for the performance of the Work
and not included as part of the Initial Plan attached hereto, Landlord shall
prepare or cause to be prepared final working drawings and specifications for
the Work (the "Working Drawings") based on and consistent with the Initial
Plan and the other plans, drawings, specifications, finish details and other
information furnished by Tenant to Landlord and approved by Landlord pursuant
to Paragraph 1 above. So long as the Working Drawings are consistent with the
Initial Plan, Tenant shall approve the Working Drawings within three (3)
working days after receipt of same from Landlord by initialing and returning
to Landlord each sheet of the Working Drawings or by executing Landlord's
approval form then in use, whichever method of approval Landlord
<PAGE>
may designate.
3. PERFORMANCE OF THE WORK; ALLOWANCE. Except as hereinafter
provided to the contrary, Landlord shall cause the performance of the Work
using (except as may be stated or shown otherwise in the Working Drawings)
building standard materials, quantities and procedures then in use by
Landlord ("Building Standards"). The Work shall be competitively bid by
Landlord between three (3) general contractors meeting Landlord's selection
criteria. Upon receipt of such bids from the contractors, Landlord and Tenant
shall select a bid mutually acceptable to both parties. Landlord shall pay
for a portion of the "Cost of the Work" (as defined below) in an amount not
to exceed $106,755.00 (such amount being $15.00 per rentable square foot of
the Expansion Area which is to be improved, as described in the Working
Drawings) (the "Allowance"), and Tenant shall pay for the entire Cost of the
Work in excess of the Allowance. Tenant shall not be entitled to any credit,
abatement or payment from Landlord in the event that the amount of the
Allowance specified above exceeds the Cost of the Work. For purposes of this
Agreement, the term "Cost of the Work" shall mean and include any and all
costs and expenses of the Work, including, without limitation, the cost of
the Working Drawings, preparation of any mechanical, electrical and/or
plumbing plans and/or drawings, fees and expenses in connection with
obtaining all applicable permits and approvals, expenses incurred in
connection with the demolition and removal of any existing improvements in
the Expansion Area and all labor (including overtime) and materials
constituting the Work.
4. PAYMENT. Prior to commencing the Work, Landlord shall submit to
Tenant a written statement of the total Cost of the Work (which shall include
the amount of any overtime projected as necessary to substantially complete
the Work by the Commencement Date specified in the Lease) as then known by
Landlord, and such statement shall indicate the amount, if any, by which the
total Cost of the Work exceeds the Allowance (the "Excess Costs"). Tenant
agrees, within three (3) working days after submission to it of such
statement, to execute and deliver to Landlord, in the form then in use by
Landlord, an authorization to proceed with the Work, and Tenant shall also
then pay to Landlord an amount equal to fifty percent (50%) of the Excess
Costs, the balance to be paid upon substantial completion of the Work. No
Work shall be commenced until Tenant has fully complied with the preceding
provisions of this Paragraph 4. In the event, and each time, that any change
order by Tenant, or other event or circumstance, other than events caused by
the building's original construction, improvements of the previous tenant or
other events solely within Landlord's control, causes the Cost of the Work to
be increased after the time that Landlord delivers to Tenant the aforesaid
initial statement of the Cost of the Work, Landlord shall deliver to Tenant a
revised statement of the total Cost of the Work, indicating the revised
calculation of the Excess Costs, if any. Within three (3) business days after
submission to Tenant of any such revised statement, Tenant shall pay to
Landlord an amount equal to fifty percent (50%) of the Excess Costs, the
balance to be paid upon the substantial completion of the Work, as shown in
such revised statement, less the amounts previously paid by Tenant to
Landlord on account of the Excess Costs, and Landlord shall not be required
to proceed further with the Work until Tenant has paid such amount. Delays in
the performance of the Work resulting from the failure of Tenant to comply
with the provisions of this Paragraph 4 shall be deemed to be delays caused
by Tenant.
5. SUBSTANTIAL COMPLETION. Landlord shall use it's reasonable
efforts to cause the Work to be "substantially completed" by July 1, 1995,
subject to delays caused by strikes, lockouts, boycotts or other labor
problems, casualties, discontinuance of any utility or other service required
for performance of the Work, unavailability or shortages of materials or
other problems in obtaining materials necessary for performance of the Work
or any other matter beyond the control of Landlord (or beyond the control of
Landlord's contractors or subcontractors performing the Work) and also
subject to "Tenant Delays" (as defined and described in Paragraph 6 of this
Work Letter). The Work shall be deemed to be "substantially completed" for
all purposes under this Work Letter and the Lease if and when Landlord's
architect issues a written certificate to Landlord and Tenant, certifying
that the Work has been substantially completed (i.e., completed except for
"punchlist" items listed in such architect's certificate) in substantial
compliance with the Working Drawings, or when Tenant first takes occupancy of
the Expansion Area, whichever first occurs. If the Work is not deemed to be
substantially completed by July 1, 1995, (a) Landlord agrees to use
reasonable efforts to complete the Work as soon as practicable thereafter,
(b) the Lease shall remain in full force and effect, and (c) Landlord shall
not be deemed to be in breach or default of the Lease or this Work Letter as
a result thereof and Landlord shall have no liability to Tenant as a result
of any delay in occupancy (whether for damages, abatement of Rent or
otherwise). In the event of Tenant Delays,
<PAGE>
the Work shall be deemed to be substantially completed on the date that the
Work would have been substantially completed but for the Tenant Delays.
Landlord agrees to use reasonable diligence to complete all punchlist work
listed in the aforesaid architect's certificate promptly after substantial
completion.
6. TENANT DELAYS. There shall be no extension of the scheduled
commencement or expiration date of the term of the Lease (as otherwise
permissibly extended under Paragraph 5 above) if the Work has not been
substantially completed on said scheduled commencement date by reason of any
delay attributable to Tenant ("Tenant Delays"), including without limitation:
(i) the failure of Tenant to furnish all or any plans, drawings,
specifications, finish details or the other information required under
Paragraph 1 above on or before the date stated in Paragraph 1;
(ii) the failure of Tenant to grant approval of the Working
Drawings within the time required under Paragraph 2 above;
(iii) the failure of Tenant to comply with the requirements of
Paragraph 4 above;
(iv) the performance of any Additional Work (as defined in
Paragraph 7 below) requested by Tenant or the performance of any work in the
Expansion Area by any person, firm or corporation employed by or on behalf of
Tenant, or any failure to complete or delay in completion of such work; or
(v) any other act or omission of Tenant.
7. ADDITIONAL WORK. Upon Tenant's request and submission by Tenant
(at Tenant's sole cost and expense) of the necessary information and/or plans
and specifications for work other than the Work described in the Working
Drawings ("Additional Work") and the approval by Landlord of such Additional
Work, which approval Landlord agrees shall not be treasonably withheld,
Landlord shall perform such Additional Work, at Tenant's sole cost and
expense, subject, however, to the following provisions of this Paragraph 7.
Prior to commencing any Additional Work requested by Tenant, Landlord shall
submit to Tenant a written statement of the cost of such Additional Work,
which cost shall include a fee payable to Landlord in the amount of 10% of
the total cost of such Additional Work as compensation to Landlord for
monitoring the Additional Work (such fee and additional charge being
hereinafter referred to collectively as "Landlord's Additional
Compensation"), and, concurrently with such statement of cost, Landlord shall
also submit to Tenant a proposed tenant extra order (the "TEO") for the
Additional Work in the standard form then in use by Landlord. Tenant shall
execute and deliver to Landlord such TEO and shall pay to Landlord the entire
cost of the Additional Work, including Landlord's Additional Compensation (as
reflected in Landlord's statement of such cost), within five (5) working days
after Landlord's submission of such statement and TEO to Tenant. If Tenant
fails to execute or deliver such TEO or pay the entire cost of such
Additional Work within such 5 working day period, then Landlord shall not be
obligated to do any of the Additional Work and may proceed to do only the
Work, as specified in the Working Drawings.
8. TENANT ACCESS. Landlord, in Landlord's reasonable discretion and
upon request by Tenant, may grant to Tenant a license to have access to the
Expansion Area prior to the date designated in the Lease for the commencement
of the term of the Lease to allow Tenant to do other work required by Tenant
to make the Expansion Area ready for Tenant's use and occupancy (the
"Tenant's Pre-Occupancy Work"). It shall be a condition to the grant by
Landlord and continued effectiveness of such license that
(a) Tenant shall give to Landlord a written request to have such
access to the Expansion Area not less than five (5) days prior to the date on
which such access will commence, which written request shall contain or shall
be accompanied by each of the following items, all in form and substance
reasonably acceptable to Landlord: (i) a detailed description of and
schedule for Tenant's Pre-Occupancy Work; (ii) the names and addresses of all
contractors, subcontractors and material suppliers and all other
representatives of Tenant who or which will be entering the Expansion
<PAGE>
Area on behalf of Tenant to perform Tenant's Pre-Occupancy Work or will be
supplying materials for such work, and the approximate number of individuals,
itemized by trade, who will be present in the Expansion Area; (iii) copies of
all contracts, subcontracts and material purchase orders pertaining to
Tenant's Pre-Occupancy Work; (iv) copies of all plans and specifications
pertaining to Tenant's Pre-Occupancy Work; (v) copies of all licenses and
permits required in connection with the performance of Tenant's Pre-Occupancy
Work; (vi) certificates of insurance (in amounts satisfactory to Landlord and
with the parties identified in, or required by, the Lease named as,
additional insureds) and instruments of indemnification against all claims,
costs, expenses, damages and liabilities which may arise in connection with
Tenant's Pre-Occupancy Work; and (vii) assurances of the ability of Tenant to
pay for all of Tenant's Pre-Occupancy Work and/or a letter of credit or other
security deemed appropriate by Landlord securing Tenant's lien-free
completion of Tenant's Pre-Occupancy Work.
(b) Such pre-term access by Tenant and its representatives shall
be subject to scheduling by Landlord.
(c) Tenant's employees, agents, contractors, workmen, mechanics,
suppliers and invitees shall work in harmony and not interfere with Landlord
or Landlord's agents in performing the Work and any Additional Work in the
Expansion Area, Landlord's work in other premises and in common areas of the
Building, or the general operation of the Building. If at any time any such
person representing Tenant shall cause or threaten to cause such disharmony
or interference, including labor disharmony, and Tenant fails to immediately
institute and maintain such corrective actions as directed by Landlord, then
Landlord may withdraw such license upon twenty-four (24) hours' prior written
notice to Tenant.
(d) Any such entry into and occupancy of the Expansion Area by
Tenant or any person or entity working for or on behalf of Tenant shall be
deemed to be subject to all of the terms, covenants, conditions and
provisions of the Lease, specifically including the provisions of Section 8
thereof (regarding Tenant's improvements and alterations to the Expansion
Area), and excluding only the covenant to pay Rent. Landlord shall not be
liable for any injury, loss or damage which may occur to any of Tenant's
Pre-Occupancy Work made in or about the Expansion Area or to property placed
therein prior to the commencement of the term of the Lease, the same being at
Tenant's sole risk and liability, except for Landlord's gross negligence and
willful misconduct. Tenant shall be liable to Landlord for any damage to the
Expansion Area or to any portion of the Work or Additional Work caused by
Tenant or any of Tenant's employees, agents, contractors, workmen or
suppliers. In the event that the performance of Tenant's Pre-Occupancy Work
causes extra costs to Landlord or requires the use of elevators during hours
other than 6:00 a.m. to 6:00 p.m. on Monday through Friday (excluding
holidays) or of other Building services, Tenant shall reimburse Landlord for
such extra cost and/or shall pay Landlord for such elevator service or other
Building services at Landlord's standard rates then in effect.
9. LEASE PROVISIONS. The terms and provisions of the Lease, insofar
as they are applicable to this Work Letter, are hereby incorporated herein by
reference. All amounts payable by Tenant to Landlord hereunder shall be
deemed to be additional Rent under the Lease and, upon any default in the
payment of same, Landlord shall have all of the rights and remedies provided
for in the Lease.
10. MISCELLANEOUS.
(a) This Work Letter shall be governed by the laws of the state
in which the Expansion Area are located.
(b) This Work Letter may not be amended except by a written
instrument signed by the party or parties to be bound thereby.
(c) Any person signing this Work Letter on behalf of Tenant
warrants and represents he/she has authority to sign and deliver this Work
Letter and bind Tenant.
<PAGE>
(d) Notices under this Work Letter shall be given in the same
manner as under the Lease.
(e) The headings set forth herein are for convenience only.
(f) This Work Letter sets forth the entire agreement of Tenant
and Landlord regarding the Work.
(g) In the event that the final working drawings and
specifications are included as part of the Initial Plan attached hereto, or
in the event Landlord performs the Work without the necessity of preparing
working drawings and specifications, then whenever the term "Working
Drawings" is used in this Agreement, such term shall be deemed to refer to
the Initial Plan and all supplemental plans and specifications approved by
Landlord.
11. EXCULPATION OF LANDLORD AND HEITMAN. Notwithstanding anything to
the contrary contained in this Work Letter, it is expressly understood and
agreed by and between the parties hereto that:
(a) The recourse of Tenant or its successors or assigns against
Landlord with respect to the alleged breach by or on the part of Landlord of
any representation, warranty, covenant, undertaking or agreement contained in
this Work Letter (collectively, "Landlord's Work Letter Undertakings") shall
extend only to Landlord's interest in the real estate of which the Expansion
Area demised under the Lease are a part (hereinafter, "Landlord's Real
Estate") and not to any other assets of Landlord or its officers, directors
or shareholders; and
(b) Except to the extent of Landlord's interest in Landlord's
Real Estate, no personal liability or personal responsibility of any sort
with respect to any of Landlord's Work Letter Undertakings or any alleged
breach thereof is assumed by, or shall at any time be asserted or enforceable
against, Landlord, Heitman/JMB Advisory Corporation or Heitman Properties
Ltd., or against any of their respective directors, officers, employees,
agents, constituent partners, beneficiaries, trustees or representatives.
IN WITNESS WHEREOF, this Work Letter Agreement is executed as of the
12th day of May, 1995.
TENANT: LANDLORD:
PAULA INSURANCE COMPANY LACERA GATEWAY PROPERTY, INC., a
a California corporation California corporation
By: HEITMAN/JMB ADVISORY
CORPORATION, an Illinois
corporation, its agent
By: /s/ [ILLEGIBLE]
-------------------------
Title: V.P. General Counsel
---------------------- By: /s/ [ILLEGIBLE]
---------------------------
Title: VICE PRESIDENT
------------------------
<PAGE>
EXHIBIT C
SUITE ACCEPTANCE AGREEMENT
Building Name/Address:___________________________________________________
Tenant Name:_____________________________________________________________
Tenant Code:____________________________ Suite #:__________________
Management's Tenant Contact:_______________ Phone #:__________________
Gentlemen:
As a representative of the above referenced tenant, I/we have physically
inspected the suite noted above and its improvements with _____________,
a representative of ______________________ (name of HPL Corporation). I/we
accept the suite improvements as to compliance with all the requirements
indicated in our lease, also including the following verified information
below:
Lease Commencement Date:_____________________ Occupancy Date:__________
Lease Rent Start Date *:______________ Actual Rent Start *:____________
Lease Expiration Date:________________ Actual Expiration Date:____________
Date Keys Delivered:_______________________
Items requiring attention:_____________________________________________________
_______________________________________________________________________________
* If these dates are not the same, attach documentation.
Tenant acknowledges that Landlord has not made any representation or warranty
with respect to the condition of the Premises or the Building or with respect
to the suitability or fitness of either for the conduct of Tenant's permitted
use or for any other purpose. Landlord disclaims any warranty that the
Premises are suitable for Tenant's use and Tenant acknowledges that it has
had a full opportunity to make its own determination in this regard.
NOTE: This inspection is to be made prior to tenant move-in.
Very truly yours, DISTRIBUTION
Tenant
____________________________ Tenant Lease File
By: ________________________ Regional Leasing Manager:________________
HPL Accounting:__________________________
Its:________________________ HPL Document Control:____________________
Regional Engineer:_______________________
Date:_______________________ HPL Construction:________________________
<PAGE>
GATEWAY PLAZA
ASSIGNMENT AND ASSUMPTION OF
LEASE AND CONSENT
THIS AGREEMENT is made this 27th day of April, 1993, by and between
LACERA Gateway Property, Inc, a California Corporation ("Landlord"), Pan
American Underwriters, Inc., a Nevada corporation ("Assignor") and Paula
insurance Company, a California corporation ("Assignee").
WITNESSETH
A. Pursuant to a lease (the "Lease") dated January 1, 1989, Landlord
leased to Assignor certain premises (the "Premises") on the second and third
floor of the certain building located at 300 North Lake Avenue, Pasadena
California known as Gateway Plaza.
B. Landlord is the owner of the aforesaid building and is the Landlord
under the Lease.
C. Assignor desires to assign all of its right, title and interest in and
to the Lease to Assignee and Assignee desires to accept such assignment and
assume the obligations of Assignor under the Lease.
D. Landlord is willing to consent to such assignment and assumption upon
the following terms and conditions.
NOW, THEREFORE, it is hereby agreed as follows:
1. ASSIGNMENT. Assignor transfers, assigns and sets over to Assignee all
of the right, title and interest of Assignor in and to the Lease. The
assignment herein made shall be effective as of May 1, 1993 (the Effective
Date"). Assignor agrees that such assignment shall not release or discharge
Assignor from any liability or obligation of the tenant under the Lease
accrued prior to the effective date of this assignment. Assignor is released
from liabilities and obligations arising under the Lease from and after the
effective date of this assignment. Assignor agrees that the service of notice
to Assignor hereunder shall be deemed given when same has been deposited in
the United States mails, postage prepaid, addressed to Assignor at:
300 North Lake Avenue, Suite 300 Pasadena, California 91101
2. ACCEPTANCE AND ASSUMPTION. Assignee accepts the assignment made in
Paragraph 1 above, assumes the lease, agrees to pay all rent and other
charges accruing under the Lease from and after the Effective Date and agrees
to observe and perform all of the other covenants, agreements and obligations
to be observed or performed by the tenant under the Lease from and after the
Effective Date. Assignee has inspected the Premises and knows the present
physical condition thereof and confirms that neither Landlord nor managing
agent of the Building, or their respective officers, directors, employees,
agents or beneficiaries have made any representation or warranty to Assignee
concerning the physical condition of the Premises, or otherwise, expressed or
implied, and that Assignee does not accept the Premises in reliance upon any
such representation or warranty.
<PAGE>
3. CONSENT. Landlord hereby consents to the assignment made in Paragraph 1
above and the acceptance and assumption made in Paragraph 2 above; provided,
that notwithstanding such consent:
(a) Assignor is not and shall not be released or discharged from any
liability or obligation of the tenant under the Lease accrued prior to the
Effective Date of this assignment;
(b) Landlord does not waive any accrued claims, rights, suits or
actions against Assignor under the Lease,
(c) No addition, alteration or improvement shall be made to the
Premises by Assignor or Assignee without the prior written consent of
Landlord and any such addition, alteration or improvement shall be made
subject to Section 8 as and to the extent required under the Lease; and
(d) Such consent is limited to the assignment and assumption herein
made and shall not relieve Assignor or Assignee from their obligation to
obtain the consent of Landlord to (i) any future assignment, in whole or in
part, of the interest of the tenant under the Lease, or (ii) any future
sublease of the Premises, or any part thereof, as and to the extent required
by the Lease.
4. INDEMNIFICATION. Assignor and Assignee hereby agree to indemnify,
defend (if requested by Landlord) and hold harmless Landlord, the managing
agent of the Building and their respective officers, directors, employees,
agents and beneficiaries from and against any and all liabilities and claims
for brokerage fees or commissions asserted against or incurred by any of said
indemnities and arising out of or in connection with the assignment and
assumption made herein.
5. BINDING EFFECT. This Agreement shall be binding upon and inure to the
benefit of Landlord, its successors and assigns and Assignor, Assignee and
their respective heirs, legal representatives and permitted successors: and
permitted assigns.
IN WITNESS WHEREOF, this instrument is executed as of the day and year
aforesaid.
ASSIGNOR: Pan American Underwriters, Inc., a Nevada corporation
/s/ [ILLEGIBLE]
- -------------------------
Vice President/Controller
- -------------------------
ASSIGNEE: Paula Insurance Company, a California corporation
/s/ [ILLEGIBLE]
- -------------------------
President
- -------------------------
LANDLORD: LACERA Gateway Property, Inc., a California corporation
/s/ [ILLEGIBLE]
- -------------------------
VICE PRESIDENT
By: HEITMAN ADVISORY CORPORATION,
an Illinois corporation,
its agent.
<PAGE>
WCB PROPERTIES LEASE AGREEMENT
FOR
5000 MEADOWS BUILDING
Landlord hereby leases to Tenant, and Tenant hereby leases from
Landlord, upon and subject to the terms, covenants, provisions, and
conditions of this Lease Agreement (the "5000 Meadows Lease"), the premises
described below in Section 5, and located in the 5000 Meadows Building (the
"5000 Meadows Building") located on the land described in EXHIBIT A attached
to and incorporated in this Lease. On the same date as this 5000 Meadows
Lease, Tenant is entering into a lease (the "KW3 Lease") between WCB
Thirty-Two Limited Partnership, a Delaware limited partnership, as lessor,
and Tenant for space in the Kruse Woods Three Building (the "KW3 Building")
for occupancy at a later date. This 5000 Meadows Lease shall be upon the same
terms and conditions as the KW3 lease and for that purpose the parties do
hereby incorporate into and make a part of this 5000 Meadows Lease the
provisions of the KW3 Lease except: (i) the Basic Lease Information; (ii)
Sections 4, 5, 30, 32 and 33; and (iii) all exhibits other than Exhibit D,
Rules and Regulations, which is incorporated herein. Each reference in the
KW3 Lease to any of the Basic Lease Information shall mean the respective
information set forth herein. In the event of any conflict between the terms
and conditions set forth below in this 5000 Meadows Lease and the
incorporated provisions from the KW3 Lease, the following terms and
conditions shall control.
1. BUILDING: 5000 Meadows Building
2. LANDLORD: WCB FIFTEEN LIMITED PARTNERSHIP,
a Delaware limited partnership
3. LANDLORD'S ADDRESS FOR GIVING OF NOTICES AND PAYMENT OF RENT:
WCB PROPERTIES
220 N.W. Second, Suite 1050
Portland, OR 97209
Attn: Jim Edwards
4. TENANT: PAULA INSURANCE COMPANY,
dba AGRI-COMP INSURANCE COMPANY
300 North Lake Avenue, #300
Pasadena, CA 91101
5. PREMISES: The floor area on the third floor of the Building
consisting of approximately 1,734 rentable square feet as outlined
on the floor plan of the Building attached hereto as Exhibit B.
(Section 1.2; Exhibit B)
6. PARKING ALLOWANCE: None.
7. USE OF PREMISES: Offices for the following type of business:
Insurance Offices.
8. LEASE DOCUMENT ISSUANCE AND REFERENCE DATE: September 19, 1996.
9. INTENTIONALLY DELETED
10. INTENTIONALLY DELETED
11. COMMENCEMENT DATE: September 23, 1996.
12. EXPIRATION DATE: The day prior to the actual Commencement Date
under the KW3 Lease.
13. RENT: Monthly Base Rent Amount: $1,625.00
The months referred to above are the full calendar months after any
first partial month of the Lease Term. The monthly Base Rent rate
for any such partial month shall be the same as the rate specified
for the first full calendar month when Base Rent is payable. Tenant
has deposited One Thousand Six Hundred Twenty-Five and No/100
Dollars ($1,625.00) to be applied against the first month's Rent.
(Section 1.4)
14. TENANT'S PERCENTAGE OF OPERATING EXPENSES: Intentionally Deleted.
15. BASE YEAR FOR ADJUSTMENTS TO OPERATING EXPENSES: Intentionally
Deleted.
Page 1 - WCB PROPERTIES LEASE AGREEMENT
<PAGE>
16. INTENTIONALLY DELETED
17. BROKERS: Cushman & Wakefield of Oregon, Inc. and Hume Myer Tenant
Counsel, L.L.,C.
LANDLORD TENANT
WCB FIFTEEN LIMITED PARTNERSHIP, PAULA INSURANCE COMPANY, dba AGRI-COMP
a Delaware limited partnership INSURANCE COMPANY
By: WCB Fifteen Inc.,
a Delaware corporation,
the General Partner
By: /s/ Jim Edwards By: /s/ Bradley K. Serwin
------------------------- ----------------------------
Jim Edwards Bradley K. Serwin
Vice President Vice President
Date: Oct. 16, 1996 Date: 10/11/96
------------------------ ----------------------------
Page 2 - WCB PROPERTIES LEASE AGREEMENT
<PAGE>
EXHIBIT A
LEGAL DESCRIPTION
5000 MEADOWS
A Parcel of land situated in the Northeast 1/4 of Section 7, Township 2
South, Range 1 East of the Willamette Meridian, in the County of Clackamas
and State of Oregon, being more particularly described as follows:
Beginning at a 1-1/4-inch iron pipe (found) at the angle point in the East
line of Lot 6 of the duly recorded plat of "BONITA MEADOWS"; thence
along the East line of said Lot 6 and its Northerly prolongation
therefrom, N. 00 degrees 14' 52" E., distance of 392.92 feet to a point on
the Southerly right-of-way line of Meadows Road, presently a 60.00 foot
right-of-way; thence along said Southerly right-of-way line along the arc of
a 530.00 foot radius curve concave North through a central angle of 36
degrees 41' 19" (chord bears N. 89 degrees 36' 55" E., a distance of 333.61
feet), a distance of 339.38 feet to a point of tangency; thence continuing
along said Southerly right-of-way line N. 71 degrees 16' 16" E., a distance
of 155.01 feet; thence leaving said Southerly right-of-way line S. 00 degrees
05' 56" E., a distance of 417.39 feet to a point of intersection with the
Northerly right-of-way line of Carman Drive; thence along said Northerly
right-of-way line along the arc of a 745.81 foot radius curve concave South
through a central angle of 02 degrees 31' 26" (chord bears S. 89 degrees 03'
01" W., a distance of 32.85 feet), continuing along said Northerly
right-of-way line S. 87 degrees 47' 49" W., a distance of 197.91 feet
to a point of curvature; thence continuing along said Northerly right-of-way
line along the arc of a 550.90 foot radius curve concave to the South through
a central angle of 14 degrees 59' 04" (chord bears S. 80 degrees 18'
21" W., a distance of 143.66 feet), a distance of 144.07 feet to a point of
intersection with the Northerly line of "BRYANT ACRES PLAT 4"; thence along
said Northerly line, N. 87 degrees 30' 33" W., a distance of 110.71 feet to
the point of beginning.
Containing: 4.1528 acres, more or less.
<PAGE>
EXHIBIT B
[LOGO] 5000 MEADOWS
- -------------------------------------------------------------------------------
THIRD FLOOR
[FLOOR PLAN]
[LETTERHEAD]
<PAGE>
FIRST AMENDMENT OF
KRUSE WOODS LEASE AGREEMENT
This Amendment is entered into between WCB THIRTY-TWO LIMITED PARTNERSHIP, a
Delaware limited partnership doing business in Oregon as WCB THIRTY-TWO
LIMITED PARTNERSHIP, A LIMITED PARTNERSHIP OF DELAWARE (the "Landlord"), and
PAULA INSURANCE COMPANY, dba AGRI-COMP INSURANCE COMPANY (the "Tenant"), a
California corporation.
RECITALS
A. Landlord and Tenant entered into a WCB Properties Lease Agreement
dated September 19, 1996 (the "Lease") for certain office space on the first
floor of the Kruse Woods Three Building located as more particularly
described in the Lease (the "Premises").
B. Landlord and Tenant wish to relocate the Premises to the fourth
floor of the Building, to more particularly specify the amount of rentable
square feet in the Premises, and to otherwise amend the Lease as set forth
below. Unless otherwise indicated, all terms used in this First Amendment
shall have the meanings attributed to them in the Lease. References herein to
the Lease also include this First Amendment where the context requires.
AGREEMENT
IN CONSIDERATION of the premises and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged,
the parties agree to amend items 3, 5, 6, 11, 13 and 14 of the Basic Lease
Information portion of the Lease and Sections 32 and 33 of the main body of
the Lease as follows:
3. LANDLORD'S ADDRESS FOR GIVING OF NOTICES AND PAYMENT OF RENT.
WCB Thirty-Two Limited Partnership
c/o Transwestern Property Company
5285 S.W. Meadows Road, Suite 370
Lake Oswego, OR 97035
With a Copy of All Notices to:
WCB Properties
220 N.W. Second Avenue, Suite 1050
Portland, OR 97209
Attn: Jim Edwards
5. PREMISES. The Premises shall consist of approximately 4,570
rentable square feet located on the fourth floor of the building, as more
particularly described in the floor plan attached hereto as "Exhibit A"
incorporated herein by this reference.
6. PARKING ALLOWANCE. Sixteen (16) spaces in the Building parking
garage.
Page 1 - First Amendment of Lease
<PAGE>
11. COMMENCEMENT DATE. July 1, 1997 or such earlier or later date as
provided in Section 30 of the Lease Agreement.
13. BASE RENT.
Months Monthly Base Rent
------ -----------------
1-60 $8759.17
The months referred to above are the full calendar months after any first
partial month of the Lease Term. The monthly Base Rent rate for any such
partial month shall be the same as the rate specified for the first full
calendar month when Base Rent is payable. Tenant shall deposit Eight Thousand
Seven Hundred Fifty-nine and 17/100ths Dollars ($8,759.17) to be applied
against the first month's Rent.
14. TENANT'S PERCENTAGE OF OPERATING EXPENSES. 5.15% based on a total
Building rentable area of 88,678 square feet.
SECTION 32. FIRST RIGHT OF REFUSAL. Deleted.
SECTION 33. RIGHT TO LEASE ADDITIONAL SPACE. Deleted.
Except as otherwise stated herein, the terms of the Lease shall remain
in effect. No other modification to the Lease is made or intended to be made
hereby. As amended herein, the Lease is hereby confirmed and reaffirmed by
Landlord and Tenant, and it shall remain in full force and effect except as
modified in this document. In the event of any conflict between the Lease and
this Amendment, the terms and conditions of this Amendment shall control. To
the extent that this Amendment may have been executed following any effective
dates set forth in the Lease, said effective dates are hereby ratified,
confirmed and approved. This Amendment contains the entire agreement of
Landlord and Tenant with respect to the subject matter hereof, and may not be
amended or modified except by an instrument executed in writing by Landlord
and Tenant.
IN WITNESS WHEREOF, the parties have executed this First Amendment of
Kruse Woods Lease Agreement as of the date and year indicated below.
Landlord: Tenant:
WCB THIRTY-TWO LIMITED PAULA INSURANCE COMPANY, dba
PARTNERSHIP, a Delaware limited AGRI-COMP INSURANCE COMPANY
partnership doing business in Oregon as a California corporation
WCB THIRTY-TWO LIMITED PARTNERSHIP,
A LIMITED PARTNERSHIP OF DELAWARE
by its general partner
WCB Thirty-Two, Inc.,
a Delaware corporation
By: By: /s/ Bradley K. Serwin
--------------------- ---------------------
Name: Name: Bradley K. Serwin
--------------------- ---------------------
Title: Title: Sr. Vice President
--------------------- --------------------
Date: Date: 4/29/97
--------------------- --------------------
Page 2 - First Amendment of Lease
<PAGE>
[FLOOR PLAN]
<PAGE>
LEASE
THIS LEASE entered into this 18th day of October, 1994 by and between
ALTAFFER SURVIVOR TRUST, Lessor, of 2010 South Waverly Lane, Fresno,
California 93727 and PAN AMERICAN UNDERWRITERS, INC., Lessee, of 300 North
Lake Avenue, Pasadena, California, 91101,
WITNESSETH
Lessor does lease Lessee that Real Property in the City of Fresno described as
follows:
Approximately 7,589 square feet of office space improved to Lessee's
specifications located at 1780 E. Bullard Avenue, Suite 101, Fresno, California,
as shown on Exhibit A attached.
1. RENT
Lessee shall pay an annual basic rental of Ninety-Five Thousand Four
Hundred Seventy-four and 52/100 Dollars ($95,474.52). The annual basic
rental shall be paid in equal installments of Seven Thousand Nine Hundred
Fifty-six and 21/100 Dollars ($7,956.21) payable in advance on the First
Day (1st) of each calendar month commencing on the First Day (1st) day of
lease commencement.
2. TERM
The term of this Lease shall be Five (5) Years and two (2) months commencing
on the sixteenth (16th) day of January, 1995, and ending on the fifteenth
(15th) day of March, 2000.
3. REAL PROPERTY TAX PARTICIPATION
Lessor shall pay all Real Estate Taxes and assessments on the Leased
property.
4. USE OF PREMISES
The premises shall be used as an office for the conduct of Lessee's
Insurance Business, in and about the Leased premises. Lessee agrees to
observe and, promptly at Lessee's own cost and expense, to comply with all
orders, laws, ordinances and regulations of public authorities.
5. UTILITIES
Lessee shall pay for all charges for Gas, Electricity, Light, Heat, Power,
and Telephone or other communication service used, rendered, supplied upon
or in connection with the Leased property and shall indemnify Lessor
against any Liability or Damage of such account.
6. REPAIRS AND UPKEEP
A. Lessee, at Lessee's own expense, shall maintain the interior of the
Leased premises in a clean and sanitary state.
B. Lessor shall be responsible for maintaining and repairing the Leased
premises and exterior common areas in all particulars. However, if
repairs are necessitated as a result of the acts of Lessee, licensees,
invitees, or guests of Lessee at the premises, then the cost of such
repairs shall be charged to Lessee.
7. ALTERATIONS AND IMPROVEMENTS
No alteration, addition or improvement to the Leased property shall be
made by Lessee without the written consent of the Lessor, such consent
shall not be unreasonably withheld. Any alteration, addition or
improvement made by Lessee after such consent shall have been given and
any fixtures installed as part thereof, shall at the Lessor's option
become the property of the Lessor upon expiration or other sooner
termination of this Lease.
<PAGE>
8. SURRENDER OF LEASED PROPERTY
Lessee shall, on the last date of the term or upon the sooner termination
of the term, peaceably and quietly surrender the Leased property to Lessor
including all alterations, additions and improvements, placed by the
Lessee thereon (excepting moveable furniture, moveable personal property
or moveable trade fixtures put in at the expense of the Lessee) in as good
condition and repair as at the commencement of the Lease. All the property
removable by the Lessee pursuant to the provisions of this paragraph shall
be removed by the Lessee on or before the expiration of the Lease terms,
and all property not so removed shall be deemed abandoned by Lessee. If
the Lessor so elects, Lessor may remove such moveable furniture, personal
property or trade fixtures from the Leased Property and store them at
Lessee's risk and expense. Lessee shall repair and restore and save the
Lessor harmless from all damage to the Leased property caused by such
removal whether by the Lessee or by the Lessor.
9. LESSOR'S UNDERTAKING FOR INSURANCE
Lessor shall be responsible for providing property insurance on Leased
premises.
10. LIABILITY FOR ACCIDENT OR INJURY AND LIABILITY INSURANCE
Lessee shall carry and maintain at Lessee's own expense throughout the
term of this Lease any extension or renewal thereof public liability
insurance and damage to property in a combined single limit sum not less
than $1,000,000.00, all such insurance to insure both Lessor and Lessee as
their interest may appear with a responsible insurance company or
companies against loss or damage and claims of every kind and nature. From
time to time as such policies are obtained or renewed, Lessee shall
furnish Lessor written certificate of the insurance carrier stating the
principal terms of such policies. Lessor shall in no event be liable for
any accident of injury (including death) to persons or damage to property
which shall occur in any manner whatsoever in or about the Leased premises
as a result or any condition, matter or thing within the control of
Lessee, whether such condition, matter or thing shall exist with or
without the knowledge of Lessor, and Lessee hereby covenants and agrees to
indemnify and hold harmless Lessor from and against any and all liability
damages, suits, and claims of every kind of nature, including reasonable
attorney's fees, made or brought by or on behalf of any person or on
account of any such accident injury, death or damage.
ll. DESTRUCTION OF PREMISES
In case of damages by fire or other casualty to the Leased property
without the fault of the Lessor, if the damage is so extensive as to
amount practically to the total destruction of the Leased property or of
the building constructed thereon this Lease shall cease and the rent
shall be apportioned to the time of damage. In all other cases where the
Leased property is damaged by fire or other casualty without the fault of
the Lessee, Lessor shall repair the damage with reasonable dispatch, and
if the damage has rendered the Leased property untenantable in whole or
in part, there shall be an apportionment of the rent until the damage has
been repaired. In determining what constitutes reasonable dispatch,
consideration shall be given to delays caused by strikes, adjustment of
insurance, and other causes beyond Lessor's control. Lessee shall in no
event be entitled to compensation of damages on account of any
inconvenience or annoyance in making repairs on account of any such
damage.
12. ATTORNEYS' FEE
In the event any suit is brought by either part against the other to
enforce any of the terms or provisions of this Lease, then it is agreed
that successful party to such suit shall be entitled to attorney's fees
to be fixed by the court in such action.
13. NOTICES
Any notice may be given by either party to the other by delivering the
same personally to such party in writing or by mailing the same by
United States Registered Mail in an envelope with sufficient postage,
prepaid thereon, addressed to such party as set forth in the first
paragraph of this Lease, or such other place as either party may
designate.
14. TIME OF ESSENCE
Time and exact performance and each thereon are of the essence of this
Lease and parts and paragraphs thereof.
<PAGE>
15. ARBITRATION OF ALL CONTROVERSIES; APPLICATION OF STATE LAW
Any controversy which shall arise between Lessor and Lessee regarding
rights, duties or liabilities hereunder of either party shall be settled
by arbitration. Such arbitration shall be before one (1) disinterested
arbitrator, if one can be agreed upon, otherwise before three (3)
disinterested arbitrators, one (1) named by the Lessee and one (1) by the
two thus chosen. The arbitrator or arbitrators shall determine the
controversy in accordance with the laws of the State of California as
applied to the facts found by him or them.
16. SUCCESSORS AND ASSIGNS
The covenants and conditions herein contained shall, subject to the
provisions as to assignment, apply to and bind the successors, heirs,
executors, administrators and assigns of the parties hereto.
17. LESSEE OPTION
A. The Lessee shall have an option to renew this Lease for an additional
Five (5) year term at then prevailing market rental for comparable
space in the Fresno area.
B. The Lessee agrees to notify the Lessor not later than Ninety (90) days
prior to expiration of the initial Lease term in order to exercise this
Option.
18. ESCALATIONS
Lessee shall pay, as additional rent, Lessee's prorata share, if any, of
the amount by which the recurring operating costs of the building, in
which the Leased premises are located, exceed such expenses for the first
full lease year following the commencement of this Lease. Building
operating costs shall include, but are not limited to; water, sewer and
garbage charges, common gas, electricity and utility charges, parts,
supplies and labor charges for maintenance of the building, its roof,
attachments and common areas, plumbing, electrical, heating, cooling and
air conditioning units, ducting, lighting, sweeping and security,
gardening maintenance and supplies, property taxes and assessments on the
building and common areas, building and public liability insurance
premiums, and the management fee, if any, paid to a third party to
oversee any or all of the building operations. Lessees prorata share
shall be sixty-two percent (62%) of the total for 1780 E. Bullard. In no
case shall Lessee's liability for it's share of increased costs in any
one year be more than four percent (4%) greater than the previous year.
19. TENANT IMPROVEMENTS
Lessor shall contract to create the improvements and floorplan shown on
Exhibit "A", including associated exterior frontage work, prior to
Lessee's occupancy. That contract shall be for no more than $135,713. Any
work required in excess of that amount shall be contracted and paid for
directly by the Lessee. Additionally, Lessor shall pay for all plans,
permits and fees associated with the total improvement package.
20. PARKING
Lessor shall provide five (5) parking stalls in front of Lessee's
entrance marked "45 MINUTE" to encourage client use. Lessor shall not
lease to another Tenant in 1780 E. Bullard whose parking requirements
exceed 4.5 stalls per 1,000 square feet of leased space.
21. SIGNAGE
Lessee shall be permitted to install, at their expense, either a monument
sign on the northwest corner of Cedar and Bullard or signs on the
existing wall on the Bullard frontage. Any signs will conform to City and
Association ordinances in effect.
22. FIRST RIGHT OF REFUSAL: At any time during Lessee's tenancy that the approx.
1,661 square feet of space adjacent to theirs in the southeast corner at
1780 E. Bullard, currently addressed as Suite 115, is vacant, Lessee
shall have the first right of refusal to lease it. Should Lessor receive
an acceptable offer to lease the space, they shall notify Lessee in
writing of such. Lessee shall have five (5) business days from receipt of
that notice to notify Lessor that they wish to lease the additional space
on a term concurrent with the term of their lease in effect at that time
and at a rate and with improvements to be negotiated.
<PAGE>
23. ALL AGREEMENTS CONTAINED HEREIN
This Lease contains all of the covenants, conditions, stipulations,
agreements and provisions agreed upon between the parties hereto in
relation to the Leased premises, and this Lease supersedes and cancels
each and every other agreement, promise and/or negotiation between the
parties with reference to the Leased premises; and no employee, agent or
representative of the Lessor or the Lessee has authority to change,
modify or alter the terms hereof, and neither party shall be bound by any
inducement, statement, representation, promise or agreement not in
conformity herewith.
IN WITNESS WHEREOF the parties hereof have set their hand.
LESSOR:
ALTAFFER SURVIVOR TRUST
11/16/94 By: /s/ Gladys Altaffer, Trustee
- ---------------------- ----------------------------
Date Gladys Altaffer, Trustee
LESSEE:
PAN AMERICAN UNDERWRITERS, INC.
11/07/94 By: /s/ [ILLEGIBLE]
- ---------------------- ----------------------------
Date
(4)
<PAGE>
EXHIBIT A
[FLOOR PLAN]
<PAGE>
AGREEMENT OF REINSURANCE
NO. 7448
GENERAL REINSURANCE CORPORATION
a Delaware corporation
having its principal offices at
Financial Centre
695 East Main Street P.O. Box 10350
Stamford, Connecticut 06904-2350
(herein referred to as the "Reinsurer")
and
PAULA INSURANCE COMPANY
Gateway Plaza
300 North Lake Avenue, Suite 300
Pasadena, California 91101
(herein referred to as the "Company")
- --------------------------------------------------------------------------------
In consideration of the mutual covenants of this Agreement the parties
agree as follows:
The Company shall reinsure with the Reinsurer and the Reinsurer shall
accept as reinsurance from the Company the business described in the Exhibit
listed below which is attached to and made a part of this Agreement and in
each Exhibit which hereafter may be attached to and made a part of this
Agreement. The terms, conditions and limitations of this Agreement and of the
Exhibits shall determine the rights and obligations of the parties.
EXHIBIT A - EXCESS OF LOSS REINSURANCE
of
Workers' Compensation and
Employers' Liability Business
ARTICLE I - SCOPE OF AGREEMENT
This Agreement is solely between the Company and the Reinsurer.
Performance of the respective obligations of each party under this Agreement
shall be rendered
GENERAL REINSURANCE CORPORATION
<PAGE>
solely to the other party; however, in the instance of the insolvency of the
Company, the liability of the Reinsurer shall be modified to the extent set
forth in the article entitled INSOLVENCY OF THE COMPANY. In no instance shall
any insured of the Company or any claimant against an insured of the Company
have any rights under this Agreement.
ARTICLE II - GENERAL CONDITIONS, DEFINITIONS AND INTERPRETATIONS
(a) BUSINESS
The term business shall have the meaning set forth in the
appropriate Exhibit. The term policy(ies) shall mean the contracts
of the Company affording insurance with respect to such business.
(b) COMPANY
When more than one company is named as a party to this Agreement,
the first such company named shall be the agent of the other
companies with respect to all matters pertaining to this Agreement.
(c) COMPANY RETENTION
The Company shall retain for its own account the entire amount set
forth as the Company Retention; however, this requirement shall be
satisfied if such amount is retained by the Company or its
affiliated companies under common management or common ownership or
both.
(d) ERRORS AND OMISSIONS
The Reinsurer shall not be relieved of liability by reason of an
error or accidental omission by the Company in reporting any claim
or loss or any business reinsured under this Agreement, provided
such error or omission is rectified promptly after discovery.
The Reinsurer shall be obligated only for the return of the premium
paid to the Reinsurer with respect to business reported but not
reinsured under this Agreement.
-2-
GENERAL REINSURANCE CORPORATION
<PAGE>
(e) SPECIAL ACCEPTANCES
Business which is beyond the terms, conditions or limitations of
this Agreement may be submitted to the Reinsurer for special
acceptance hereunder and such business, if accepted by the
Reinsurer, shall be subject to all of the terms, conditions and
limitations of this Agreement except as modified by the special
acceptance. Business which was specially accepted under prior
Agreement No. 6374 shall be accepted under this Agreement without a
new submission.
ARTICLE III - CLAIMS AND LOSSES, ADJUSTMENT EXPENSE AND SALVAGE
(a) CLAIMS AND LOSSES
All payments of claims or losses by the Company within the limits
of liability or amounts of insurance of the policy(ies) of the
Company and within the limits of liability or amounts of
reinsurance set forth in the applicable Exhibit shall be binding on
the Reinsurer, subject to all the terms, conditions and limitations
of this Agreement. The Reinsurer shall reimburse the Company for
the Reinsurer's portion of each payment in settlement of claims or
losses made by the Company and the Reinsurer's portion of the
Company's adjustment expense payments, if any, apportioned between
the parties as set forth in the Exhibits, in connection with such
claim or loss payments; however, in the instance of the insolvency
of the Company, the liability of the Reinsurer shall be modified to
the extent set forth in the article entitled INSOLVENCY OF THE
COMPANY.
The Company shall investigate and settle or defend all claims and
losses. When requested by the Reinsurer, the Company shall permit
the Reinsurer, at the expense of the Reinsurer, to be associated
with the Company in the defense or control of any claim, loss or
legal proceeding which involves or is likely to involve the
Reinsurer.
(b) ADJUSTMENT EXPENSE
Adjustment expense shall mean all expenditures made by the Company
and allocated to an individual claim or loss, other than payments
to any salaried employee of the Company, in connection with the
disposition of claims, losses or legal proceedings including
investigation, negotiation and legal expenses, court costs,
statutory penalties and accrued interest, other than accrued
interest which is a part of a judgment.
-3-
GENERAL REINSURANCE CORPORATION
<PAGE>
(c) SALVAGE
The Company shall pay to or credit the Reinsurer with the
Reinsurer's portion of any salvage recovered.
With respect to reinsurance under this Agreement on a share basis,
salvage shall be apportioned between the parties in the same ratio
as the amounts of their respective liabilities for the claim or
loss. With respect to reinsurance under this Agreement on an excess
basis, salvage shall be applied between the parties in the order
inverse to that in which their respective liabilities attached.
Salvage shall mean any recovery made by the Company in connection
with a claim or loss, less all expenses paid by the Company, other
than payments to any salaried employee of the Company, in making
such recovery.
ARTICLE IV - REPORTS AND REMITTANCES
In addition to the reports and remittances required by the applicable
Exhibit, the Company shall furnish such other information as may be required
by the Reinsurer for the completion of the Reinsurer's quarterly and annual
statements and internal records.
All reports shall be rendered on forms mutually acceptable to the
Company and the Reinsurer.
ARTICLE V - RESERVES AND TAXES
The Reinsurer shall maintain such reserves as may be required with
respect to the Reinsurer's portion of unearned premium, claims, losses and
adjustment expense.
The Company shall be liable for all taxes on premiums ceded to the
Reinsurer under this Agreement. If the Reinsurer is obligated to pay any
taxes on such premiums, the Company shall reimburse the Reinsurer; however,
the Company shall not be required to pay taxes twice on the same premiums.
-4-
GENERAL REINSURANCE CORPORATION
<PAGE>
ARTICLE VI - OFFSET
The Company or the Reinsurer may offset any balance(s), whether on
account of premiums, commission, claims or losses, adjustment expense,
salvage, or any other amount(s) due from one party to the other under this
Agreement or under any other agreement heretofore or hereafter entered into
between the Company and the Reinsurer, whether acting as assuming reinsurer
or as ceding company.
ARTICLE VII - INSPECTION OF RECORDS
The Company shall allow the Reinsurer to inspect, at all reasonable
times, all records of the Company with respect to the business reinsured
under this Agreement, or with respect to claims, losses or legal proceedings
which involve or are likely to involve the Reinsurer.
ARTICLE VIII - ARBITRATION
Should any difference of opinion arise between the Reinsurer and the
Company which cannot be resolved in the normal course of business with
respect to the interpretation of this Agreement or the performance of the
respective obligations of the parties under this Agreement, the difference
shall be submitted to arbitration.
One arbitrator shall be chosen by the Reinsurer, one by the Company and
an umpire by the two arbitrators before they enter upon arbitration. If the
arbitrators have not chosen an umpire at the end of 10 days following the
last date of the selection of the two arbitrators, each of the arbitrators
shall name three of whom the other declines two and the decision shall be
made of the remaining two by drawing lots.
-5-
GENERAL REINSURANCE CORPORATION
<PAGE>
The arbitrators and umpire shall be officials of insurance or reinsurance
companies authorized to transact business in one or more states of the United
States of America and writing the kind of business about which the difference
has arisen. The arbitrators and umpire are relieved from all judicial
formalities and may abstain from following the strict rules of law and they
shall make their award with a view to effecting the general purpose of this
Agreement rather than in accordance with the literal interpretation of the
language, and the decision of the majority shall be final and binding upon the
parties under this Agreement.
If either party fails to choose an arbitrator within one month after
receiving the written request of the other party to do so, the latter shall
choose both arbitrators, who shall choose the umpire as provided.
Each party shall submit its case to the arbitrators and umpire within
one month after receipt of advises of the selection of the umpire unless the
period is extended by the arbitrators.
The costs of arbitration, including the fees of the arbitrators and
umpire, shall be borne equally unless the arbitrators and umpire shall decide
otherwise. The arbitration shall be held at the times and place agreed upon
by the arbitrators and umpire. The laws of the State of California shall
govern the arbitration.
ARTICLE IX - INSOLVENCY OF THE COMPANY
In the event of the insolvency of the Company, the reinsurance proceeds
will be paid to the Company or the liquidator on the basis of the amount of
the claim allowed in the insolvency proceeding without diminution by reason
of the inability of the Company to pay all or part of the claim.
-6-
GENERAL REINSURANCE CORPORATION
<PAGE>
The Reinsurer shall be given written notice of the pendency of each
claim against the Company on the policy(ies) reinsured hereunder within a
reasonable time after such claim is filed in the insolvency proceedings. The
Reinsurer shall have the right to investigate each such claim and to
interpose, at its own expense, in the proceeding where such claim is to be
adjudicated, any defenses which it may deem available to the Company or its
liquidator. The expense thus incurred by the Reinsurer shall be chargeable,
subject to court approval, against the insolvent Company as part of the
expense of liquidation to the extent of a proportionate share of the benefit
which may accrue to the Company solely as a result of the defense undertaken
by the Reinsurer.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in duplicate this 16th day of February, 1990.
GENERAL REINSURANCE CORPORATION
/s/ Anthony J. Anastanio
Vice President
Attest: /s/ C. Mark Debley
PAULA INSURANCE COMPANY
/s/ Norman J. Schneider
President
Attest: /s/ Teresita E. Matos
-7-
Agreement No. 7448
GENERAL REINSURANCE CORPORATION
<PAGE>
EXHIBIT A
Attached to and made a part of
AGREEMENT OF REINSURANCE NO. 7448
EXCESS OF LOSS REINSURANCE
of
Workers' Compensation and Employers' Liability Business
- -------------------------------------------------------------------------------
SECTION 1 - LIABILITY OF THE REINSURER
The Reinsurer shall pay to the Company with respect to each accident
under Workers' Compensation and Employers' Liability business of the Company
the amount of net loss sustained by the Company in excess of the Company
Retention but not exceeding the Limits of Liability of the Reinsurer as set
forth in the Schedule of Reinsurance, plus a proportionate share of
adjustment expense.
SCHEDULE OF REINSURANCE
- -------------------------------------------------------------------------------
Company Retention Limits of Liability of the Reinsurer
- -------------------------------------------------------------------------------
First Second
Excess Cover Excess Cover
------------ ------------
Each Accident Each Accident Each Accident
------------- ------------- -------------
California and $150,000 $150,000 $4,850,000
Arizona Business
- -------------------------------------------------------------------------------
SECTION 2 - DEFINITIONS AND INTERPRETATIONS
(a) WORKERS' COMPENSATION AND EMPLOYERS' LIABILITY BUSINESS
This term shall mean the insurance for California and Arizona
employers afforded by Parts One, Two and Three of a standard
provisions Workers' Compensation and Employers' Liability Policy.
GENERAL REINSURANCE CORPORATION
<PAGE>
(b) ACCIDENT
This term shall mean each accident or occurrence or series of
accidents or occurrences arising out of one event; provided, with
respect to bodily injury by disease, each such injury to each
employee shall be considered a separate accident, and the date of
accident shall be the date of commencement of compensable
disability.
(c) NET LOSS
This term shall mean all payments by the Company, adjusted in
accordance with the section entitled ADJUSTED DOLLAR COVERAGE, in
settlement of claims or losses, payment of compensation or other
benefits, or satisfaction of judgments or awards, after deduction
of salvage, and shall exclude adjustment expense and payments or
liability in excess of the Company's policy limit(s); however in
the instance of the insolvency of the Company, this definition
shall be modified to the extent set forth in the article entitled
INSOLVENCY OF THE COMPANY.
SECTION 3 - EXCLUSIONS
This Exhibit shall not apply to:
(a) Business accepted by the Company as reinsurance from other insurers;
(b) Insurance written by the aviation underwriting unit, howsoever styled,
of the Company or written by the Company as a member of an aviation
insurance group or pool or association;
(c) Insurance with respect to operations involving:
(1) Aircraft flight and ground operations;
(2) Amusement parks or devices, exhibitions (including fireworks),
carnivals, circuses;
(3) Caisson or coffer dam work, dam, dike, lock or revetment
construction;
(4) Chemical manufacturing;
A-2
GENERAL REINSURANCE CORPORATION
<PAGE>
(5) Manufacturing, packing, handling or shipping of explosives,
explosive substances intended for use as an explosive,
ammunitions, fuses, arms or fireworks;
(6) Gas (including liquefied petroleum gas) companies, dealers,
distributors or construction;
(7) Maritime or federal employments, or steamship lines or agencies
or stevedoring;
(8) Mining or quarries;
(9) Oil or gas lease operators or contractors; oil or gas wells work;
oil or gas pipeline construction or operations; oil rig derrick
work;
(10) Railroad operation or construction;
(11) Sewer, subway or water main construction, or shaft sinking or
tunnelling;
(12) Wrecking;
(13) Asbestos manufacturing.
If the Company provides insurance for an insured with respect to any
operations listed in one or more of the exclusions under (c), except
exclusion (5), and such operations constitute only a minor and incidental
part of the total operations of the insured, such exclusion(s) shall not
apply.
If the Company is bound, without the knowledge of and contrary to the
instructions of the Company's supervisory underwriting personnel, on any
insurance of the Company falling within the scope of one or more of the
exclusions set forth in this section, these exclusions, except exclusion (a)
shall be suspended with respect to such business until 30 days after an
underwriting supervisor of the Company acquires knowledge of such business.
A-3
GENERAL REINSURANCE CORPORATION
<PAGE>
SECTION 4 - REINSURANCE PREMIUM
The Company shall pay to the Reinsurer:
(a) For the First Excess Cover:
(1) A net rate of 1.460% of the Company's earned premium for
California Workers' Compensation and Employers' Liability
Business; and
(2) A net rate of 2.540% of the Company's earned premium for Arizona
Workers' Compensation and Employers' Liability Business.
(b) For the Second Excess Cover:
(1) A net rate of 1.185% of the Company's earned premium for
California Workers' Compensation and Employers' Liability
Business; and
(2) A net rate of 1.395% of the Company's earned premium for Arizona
Workers' Compensation and Employers' Liability Business.
SECTION 5 - CONTINGENT COMMISSION
On the First Excess Cover only, the Reinsurer shall pay to the Company a
contingent commission of 66 2/3% of the amount by which the Reinsurer's
Income exceeds the Reinsurers' Outgo for each rating period.
With respect to the contingent commission and the calculation thereof,
the following interpretations and reporting provisions shall apply:
(a) RATING PERIOD
The initial rating period shall be from July 1, 1985, to June 30,
1990, (the period from July 1, 1985, to June 30, 1989 under
Agreement No. 6374 between the Reinsurer and the Company and the
period from July 1, 1989, to June 30, 1990 under this Agreement),
and thereafter each rating period shall consist of 60 months to
begin concurrently with the expiration of the previous rating
period; however, in the event of termination of
A-4
GENERAL REINSURANCE CORPORATION
<PAGE>
this Exhibit, the following rating periods shall be combined and
shall constitute a single rating period:
(1) The period from the last completed rating period until the date
of termination, and
(2) The period from the date of termination until expiration or
termination of the reinsurance, if any, then in effect.
(b) REINSURER'S INCOME
This term shall mean the reinsurance premium earned during the rating
period.
(c) REINSURER'S OUTGO
This term shall mean:
(1) The Reinsurer's portion of claims, losses and adjustment expense
paid, less the Reinsurer's portion of salvage recovered,
resulting from accidents taking place during the rating period;
(2) Plus the Reinsurer's portion of reserves for claims, losses, and
adjustment expense, including reserves for claims and losses
incurred but not reported developed by application of the
following table, resulting from accidents taking place during the
rating period;
Percentage of Reinsurer's Income Cumulatively
From Inception of Rating Period to the
Following Anniversaries:
--------------------------------------------------------
First 61%
Second 44%
Third 32%
Fourth 24%
Fifth 12%
Sixth and subsequent 6% unless otherwise agreed
(3) Plus 15% of the Reinsurer's Income as an allowance for the
Reinsurer's management expenses.
(d) INTERIM STATEMENTS OF CONTINGENT COMMISSION
Six months after each anniversary of the commencement of a rating
period, the Reinsurer shall render to the Company an
A-5
GENERAL REINSURANCE CORPORATION
<PAGE>
interim statement of contingent commission for the time from the
commencement of the rating period until such anniversary. The
amount thereof, payable subject to the following schedule, shall be
balanced against the amount previously paid the Company, and the
difference due either party shall be remitted promptly.
The Contingent Commission
At the completion of payable shall be
----------------------------------------- --------------------------
1) the first year of the rating period 20% of the amount due
2) the second year of the rating period 40% of the amount due
3) the third year of the rating period 60% of the amount due
4) the fourth year of the rating period 80% of the amount due
5) the fifth year of the rating period 100% of the amount due.
(e) FINAL STATEMENT OF CONTINGENT COMMISSION
Six months after the end of a rating period, the Reinsurer
shall render to the Company a statement of contingent
commission for the entire rating period. The amount thereof
shall be balanced against the amount previously paid the
Company, and the difference due either party shall be remitted
promptly.
Annually thereafter, revised statements shall be rendered to
the Company reflecting changes in the original statement until
all losses which occurred during the rating period are fully
discharged, and the amount due either party because of such
changes shall be remitted promptly.
(f) TERMINATION
If this Exhibit is terminated by The Contingent Commission
the Company at any time during percentage shall be
---------------------------------------- --------------------------
1) the first year of any rating period Nil
2) the second year of any rating period 20% of 66 2/3%
3) the third year of any rating period 40% of 66 2/3%
4) the fourth year of any rating period 60% of 66 2/3%
5) the fifth year of any rating period 80% of 66 2/3%.
If this Exhibit is still in force at the end of a rating
period, the Contingent Commission percentage for the entire
rating period shall be 100% of 66 2/3%.
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GENERAL REINSURANCE CORPORATION
<PAGE>
If this Exhibit is terminated by the Reinsurer, the Contingent
Commission percentage for each rating period, or fractional
part thereof, shall be 100% of 66 2/3%.
SECTION 6 - REPORTS AND REMITTANCES
(a) REINSURANCE PREMIUM
Within 25 days after the close of each month, the Company
shall render to the Reinsurer a report of the reinsurance
premium by state for the month; and the amount due the
Reinsurer shall be remitted within 60 days after the close of
the month.
(b) CLAIMS AND LOSSES
The Company shall report promptly to the Reinsurer each claim
or loss for which the Company's estimated amount of net loss
is $75,000 or more and shall also report all cases of serious
injury which, regardless of considerations of liability or
coverage, might involve this reinsurance, including but not
limited to the following:
(1) Cord injury - paraplegia, quadriplegia;
(2) Amputations - requiring a prosthesis;
(3) Brain damage affecting mentality or central nervous system - such
as permanent disorientation, behavior disorder, personality
change, seizures, motor deficit, inability to speak (aphasia),
hemiplegia or unconsciousness (comatose);
(4) Blindness;
(5) Burns - involving over 10% of body with third degree or 30% of
body with second degree;
(6) Multiple fractures - involving more than one member or non-union;
(7) Fracture of both heel bones (fractured bilateral os calcis);
(8) Nerve damage causing paralysis and loss of sensation in arm and
hand (brachial plexus nerve damage);
(9) Massive internal injuries affecting body organs;
A-7
GENERAL REINSURANCE CORPORATION
<PAGE>
(10) Injury to nerves at base of spinal canal (Cauda Equina) or any
other back injury resulting in incontinence of bowel and/or
bladder;
(11) Fatalities;
(12) Any other serious case which, in the Company's judgment, might
involve the Reinsurer.
The Company shall advise the Reinsurer of the estimated amount of
net loss and adjustment expense in connection with each such claim
or loss and of any subsequent changes in such estimates.
Upon receipt of a definitive statement of net loss and adjustment
expense from the Company, the Reinsurer shall pay promptly to the
Company the Reinsurer's portion of net loss and Reinsurer's portion
of adjustment expense, if any. Any subsequent changes shall be
reported by the Company to the Reinsurer and the amount due either
party shall be remitted promptly.
SECTION 7 - ADJUSTED DOLLAR COVERAGE
In determining net loss under this Exhibit, the parties intend to adjust
payments made by the Company which are allocable to the first $2,100,000 of any
claim or loss, to the benefit and price levels in effect at the time of
eligibility for benefits. The Company shall be solely responsible for actual
payments in excess of the net loss as adjusted. Actual payments shall be
adjusted as described below and as illustrated in the examples in the attached
Appendix A.
(a) PERIODIC COMPENSATION AND ECONOMIC LOSS BENEFITS
All worker's compensation payments other than medical and
medical rehabilitation payments shall be included in net loss to
the extent of the amount of any currently effective weekly award
or the amount required by law for the first full benefit week
(or other benefits period if payments are made on other than a
weekly basis) following the date of accident, whichever is less.
Additional benefits greater than the amount awarded for the
first benefit period, whether granted retroactively or
prospectively, are excluded from net loss.
A-8
GENERAL REINSURANCE CORPORATION
<PAGE>
(b) MEDICAL AND MEDICAL REHABILITATION BENEFITS
Medical and medical rehabilitation benefits shall be adjusted by
dividing payments made in each calendar year by the quotient of
the medical component of the Consumer's Price Index (CPI) for
that year divided by the medical component of the CPI for the
year of the accident; such quotient, however, not to be less
than one.
(c) EMPLOYERS' LIABILITY PAYMENTS
Employers' Liability payments shall be adjusted by dividing
payments made in each calendar year by the quotient of the
medical component of the Consumer's Price Index (CPI) for that
year divided by the medical component of the CPI for the year of
the accident; such quotient, however, not to be less than one.
If the Bureau of Labor Statistics changes the composition of the CPI so
as to destroy the continuity of the medical component of the CPI, the parties
shall make suitable adjustments in the calculations. A qualified independent
actuary shall be retained to determine the adjustments if the parties are
unable to agree on such adjustments.
SECTION 8 - COMMENCEMENT
This Exhibit applies to new and renewal policies of the Company becoming
effective at and after 12:01 A.M., July 1, 1989, and to policies in force at
12:01 A.M., July 1, 1989, for claims and losses resulting from accidents
occurring at and after the aforesaid time and date.
SECTION 9 - TERMINATION BY THE COMPANY
The Company may terminate this Exhibit at any time by sending to the
Reinsurer, by registered mail to its principal office, notice stating the
time and date when,
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GENERAL REINSURANCE CORPORATION
<PAGE>
not less than 90 days after the date of mailing of such notice, termination
shall be effective. In such instance, the liability of the Reinsurer with
respect to policies in effect at the time and date of termination shall
continue until cancellation or expiration or the next anniversary of each
such policy, whichever comes first.
The reinsurance premium for policies in force at the time and date of
termination shall be calculated by applying the provisions of the section
entitled REINSURANCE PREMIUM to the monthly earned premiums that derive from
the unearned premium applicable to policies in force at the time and date of
termination.
SECTION 10 - TERMINATION BY THE REINSURER
The Reinsurer may terminate this Exhibit at any time by sending to the
Company, by registered mail to its principal office, notice stating the time
and date when, not less than 90 days after the date of mailing of such
notice, termination shall be effective. In such instance, the liability of
the Reinsurer with respect to policies in effect at the time and date of
termination shall continue until cancellation or expiration or the next
anniversary of each such policy, whichever comes first.
The reinsurance premium for policies in force at the time and date of
termination shall be calculated by applying the provisions of the section
entitled REINSURANCE PREMIUM to the monthly earned premiums that derive from
the unearned premium applicable to policies in force at the time and date of
termination.
The following conditions for termination shall apply in the
circumstances hereafter set forth:
(a) If any amount payable by the Company to the Reinsurer
becomes more than 30 days overdue, the Reinsurer may terminate
this Exhibit in its entirety by sending to the Company, by regis-
A-10
GENERAL REINSURANCE CORPORATION
<PAGE>
tered mail to its principal office, notice stating the time and
date when, not less than 5 days after the date of mailing of such
notice, termination shall be effective.
(b) If the Company is merged with or purchased by another
Company, or if controlling interest is sold or changed so as to
produce a loss in control over conduct of the business by the
current owners, the Company shall immediately notify the
Reinsurer by registered mail to its principal office giving
details (to the extent of its knowledge thereof) of the
particulars of such merger, change, sale or purchase. Within 35
days after the date of mailing of such notice by the Company, the
Reinsurer may terminate this Exhibit in its entirety by sending
to the Company, by registered mail to its principal office,
notice stating the time and date when not less than 5 days after
the date of mailing of such notice, termination shall be effective
If the Company fails to notify the Reinsurer of such merger,
purchase, change or sale, the Reinsurer, within 35 days after the
Reinsurer has acquired knowledge of the merger, purchase, change
or sale, may terminate this Exhibit in its entirety by sending to
the Company, by registered mail to its principal office, notice
stating the time and date when, not less than 5 days after the
mailing of such notice, termination shall be effective.
In any instance that the Reinsurer terminates this Exhibit in accordance
with sub-paragraphs (a) or (b) above, the Reinsurer shall not be liable for
claims or losses resulting from accidents taking place after the effective
time and date of termination.
A-11
Agreement No. 7448
GENERAL REINSURANCE CORPORATION
<PAGE>
APPENDIX A
Attached to and made a part of
EXHIBIT A OF AGREEMENT NO. 7448
ADJUSTED DOLLAR COVERAGE EXAMPLE
EXAMPLE A: Periodic Compensation and Economic Loss Benefits Only
Company Retention: $150,000
Accident Date: July 1, 1989
Benefits Stop: December 31, 1994
Loss in Adjusted Dollars
Company Periodic Compensation Company's Reinsurer's
Payments (Current Law Level) Liability Liability
-------- ------------------------ --------- -----------
1989 $ 30,000 $ 30,000 $ 30,000 -0-
1990 $ 31,500 $ 30,000 $ 30,000 -0-
1991 $ 33,075 $ 30,000 $ 30,000 -0-
1992 $ 34,729 $ 30,000 $ 30,000 -0-
1993 $ 36,465 $ 30,000 $ 30,000 -0-
1994 $ 38,288 $ 30,000 -0- $30,000
-------- -------- -------- -------
$204,057 $180,000 $150,000 $30,000
-------- -------- -------- -------
Excess of Company Payments over
Loss in Adjusted Dollars $ 24,057
--------
$174,057
EXAMPLE B: Medical and Rehabilitation Benefits Only
Company Retention: $150,000
Accident Date: July 1, 1989
Benefits Stop: December 31, 1994
<TABLE>
<CAPTION>
CPI CPI Loss in
Company Payment Accident Adjusted Company's Reinsurer's
Payments Year Year Quotient Dollars Liability Liability
-------- ------- -------- -------- -------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1989 $ 30,000 500 500 1.0000 $ 30,000 $ 30,000 -0-
1990 $ 32,250 537.5 500 1.0750 $ 30,000 $ 30,000 -0-
1991 $ 34,669 575.1 500 1.1502 $ 30,142 $ 30,142 -0-
1992 $ 37,269 616.5 500 1.2330 $ 30,226 $ 30,226 -0-
1993 $ 40,064 661.5 500 1.3230 $ 30,283 $ 29,632 $ 651
1994 $ 43,069 711.1 500 1.4222 $ 30,283 -0- $30,283
-------- -------- -------- --------
$217,321 $180,934 $150,000 $30,934
Excess of Company Payments over
Loss in Adjusted Dollars $ 36,387
--------
$186,387
</TABLE>
GENERAL REINSURANCE CORPORATION
<PAGE>
EXAMPLE C: Periodic Compensation and Medical Benefits Combined (Details as
above)
<TABLE>
<CAPTION>
Loss in Adjusted Dollars
Total ----------------------------------------
Company Periodic Company's Reinsurer's
Payments Compensation Medical Total Liability Liability
-------- ------------ -------- -------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
1989 $ 60,000 $ 30,000 $ 30,000 $ 60,000 $ 60,000 -0-
1990 $ 63,750 $ 30,000 $ 30,000 $ 60,000 $ 60,000 -0-
1991 $ 67,744 $ 30,000 $ 30,142 $ 60,142 $ 30,000 $ 30,000
1992 $ 71,998 $ 30,000 $ 30,226 $ 60,226 -0- $ 60,226
1993 $ 76,529 $ 30,000 $ 30,283 $ 60,283 -0- $ 60,283
1994 $ 81,357 $ 30,000 $ 30,283 $ 60,283 -0- $ 60,283
-------- ------------ -------- -------- --------- -----------
$421,378 $180,000 $180,934 $360,934 $150,000 $210,934
</TABLE>
Excess of Company Payments over
Total Loss in Adjusted Dollars $ 60,444
--------
$210,444
Page 2 of 2
Appendix A to A
Agreement No. 7448
GENERAL REINSURANCE CORPORATION
<PAGE>
EXHIBIT B
Attached to and made a part of
AGREEMENT OF REINSURANCE NO. 7448
THIRD EXCESS OF LOSS REINSURANCE
of
Workers' Compensation and Employers' Liability Business
- --------------------------------------------------------------------------------
SECTION 1 - LIABILITY OF THE REINSURER
The Reinsurer shall pay to the Company with respect to each accident
under Workers' Compensation and Employers' Liability business of the Company
the amount of net loss sustained by the Company in excess of the sum of the
Company Retention and underlying reinsurance but not exceeding the Limit of
Liability of the Reinsurer as set forth in the Schedule of Reinsurance, plus
a proportionate share of adjustment expense.
SCHEDULE OF REINSURANCE
- --------------------------------------------------------------------------------
Company Retention and
Class of Business Underlying Reinsurance Limit of Liability of the Reinsurer
- --------------------------------------------------------------------------------
Each Accident Each Accident
------------- -------------
Workers' Compensation
and Employers'
Liability Business $5,250,000 $5,000,000
- --------------------------------------------------------------------------------
SECTION 2 - DEFINITIONS AND INTERPRETATIONS
(a) WORKERS' COMPENSATION AND EMPLOYERS' LIABILITY BUSINESS
This term shall mean the insurance for employers afforded by
Parts One, Two and Three of a standard provisions Workers'
Compensation and Employers' Liability Policy.
GENERAL REINSURANCE CORPORATION
<PAGE>
(b) ACCIDENT
This term shall mean each accident or occurrence or series of
accidents or occurrences arising out of one event; provided,
with respect to bodily injury by disease, each such injury to
each employee shall be considered a separate accident, and the
date of accident shall be the date of commencement of
compensable disability.
(c) NET LOSS
This term shall mean all payments by the Company, in settlement
of claims or losses, payment of compensation or other benefits,
or satisfaction of judgments or awards, after deduction of
salvage, and shall exclude adjustment expense and payments or
liability in excess of the Company's policy limit(s); however in
the instance of the insolvency of the Company, this definition
shall be modified to the extent set forth in the article
entitled INSOLVENCY OF THE COMPANY.
SECTION 3 - EXCLUSIONS
This Exhibit shall not apply to:
(a) Business accepted by the Company as reinsurance from other insurers;
(b) Insurance written by the aviation underwriting unit, howsoever
styled, of the Company or written by the Company as a member of
an aviation insurance group or pool or association;
(c) Insurance with respect to operations involving:
(1) Aircraft flight and ground operations;
(2) Amusement parks or devices, exhibitions (including fireworks),
carnivals, circuses;
(3) Caisson or coffer dam work, dam, dike, lock or revetment
construction;
(4) Chemical manufacturing;
(5) Manufacturing, packing, handling or shipping of explosives,
explosive substances intended for use as an explosive,
ammunitions, fuses, arms or fireworks;
B-2
GENERAL REINSURANCE CORPORATION
<PAGE>
(6) Gas (including liquefied petroleum gas) companies, dealers,
distributors or construction;
(7) Maritime or federal employments, or steamship lines or agencies
or stevedoring;
(8) Mining or quarries;
(9) Oil or gas lease operators or contractors; oil or gas wells
work; oil or gas pipeline construction or operations; oil rig
derrick work;
(10) Railroad operation or construction;
(11) Sewer, subway or water main construction, or shaft sinking or
tunnelling;
(12) Wrecking;
(13) Asbestos manufacturing.
If the Company provides insurance for an insured with respect to any
operations listed in one or more of the exclusions under (c), except
exclusion (5), and such operations constitute only a minor and incidental
part of the total operations of the insured, such exclusion(s) shall not
apply.
If the Company is bound, without the knowledge of and contrary to the
instructions of the Company's supervisory underwriting personnel, on any
insurance of the Company falling within the scope of one or more of the
exclusions set forth in this section, these exclusions, except exclusion (a)
shall be suspended with respect to such business until 30 days after an
underwriting supervisor of the Company acquires knowledge of such business.
SECTION 4 - REINSURANCE PREMIUM
The Company shall pay to the Reinsurer 0.55% of the Company's earned
premium for Workers' Compensation and Employers' Liability Business.
B-3
GENERAL REINSURANCE CORPORATION
<PAGE>
SECTION 5 - REPORTS AND REMITTANCES
(a) REINSURANCE PREMIUM
Within 25 days after the close of each month, the Company shall
render to the Reinsurer a report of the reinsurance premium by
state for the month; and the amount due the Reinsurer shall be
remitted within 60 days after the close of the month.
(b) CLAIMS AND LOSSES
The Company shall report promptly to the Reinsurer each claim or
loss for which the Company's estimated amount of net loss 50% or
more of the amount of the Company Retention and shall also
report all cases of serious injury which, regardless of
considerations of liability or coverage, might involve this
reinsurance, including but not limited to the following:
(1) Cord injury - paraplegia, quadriplegia;
(2) Amputations - requiring a prosthesis;
(3) Brain damage affecting mentality or central nervous
system - such as permanent disorientation, behavior disorder,
personality change, seizures, motor deficit, inability to speak
(aphasia), hemiplegia or unconsciousness (comatose);
(4) Blindness;
(5) Burns - involving over 10% of body with third degree or 30% of
body with second degree;
(6) Multiple fractures - involving more than one member or
non-union;
(7) Fracture of both heel bones (fractured bilateral os calcis);
(8) Nerve damage causing paralysis and loss of sensation in arm and
hand (brachial plexus nerve damage);
(9) Massive internal injuries affecting body organs;
(10) Injury to nerves at base of spinal canal (Cauda Equina) or any
other back injury resulting in incontinence of bowel and/or
bladder;
B-4
GENERAL REINSURANCE CORPORATION
<PAGE>
(11) Fatalities;
(12) Any other serious case which, in the Company's judgment, might
involve the Reinsurer.
The Company shall advise the Reinsurer of the estimated amount
of net loss and adjustment expense in connection with each such
claim or loss and of any subsequent changes in such estimates.
Upon receipt of a definitive statement of net loss and
adjustment expense from the Company, the Reinsurer shall pay
promptly to the Company the Reinsurer's portion of net loss and
Reinsurer's portion of adjustment expense, if any. Any
subsequent changes shall be reported by the Company to the
Reinsurer and the amount due either party shall be remitted
promptly.
SECTION 6 - COMMENCEMENT
This Exhibit applies to new and renewal policies of the Company becoming
effective at and after 12:01 A.M., July 1, 1996, and to policies in force at
12:01 A.M., July 1, 1996, for claims and losses resulting from accidents
occurring at and after the aforesaid time and date.
SECTION 7 - TERMINATION BY THE COMPANY
The Company may terminate this Exhibit at any time by sending to the
Reinsurer, by registered mail to its principal office, notice stating the
time and date when, not less than 90 days after the date of mailing of such
notice, termination shall be effective. In such instance, the liability of
the Reinsurer with respect to policies in effect at the time and date of
termination shall continue until cancellation or expiration or the next
anniversary of each such policy, whichever comes first.
The reinsurance premium for policies in force at the time and date of
termination shall be calculated by applying the provisions of the section
entitled REINSURANCE PREMIUM to the monthly earned premiums that derive from
the unearned premium applicable to policies in force at the time and date of
termination.
B-5
GENERAL REINSURANCE CORPORATION
<PAGE>
SECTION 8 - TERMINATION BY THE REINSURER
The Reinsurer may terminate this Exhibit at any time by sending to the
Company, by registered mail to its principal office, notice stating the time
and date when, not less than 90 days after the date of mailing of such
notice, termination shall be effective. In such instance, the liability of
the Reinsurer with respect to policies in effect at the time and date of
termination shall continue until cancellation or expiration or the next
anniversary of each such policy, whichever comes first.
The reinsurance premium for policies in force at the time and date of
termination shall be calculated by applying the provisions of the section
entitled REINSURANCE PREMIUM to the monthly earned premiums that derive from
the unearned premium applicable to policies in force at the time and date of
termination.
The following conditions for termination shall apply in the
circumstances hereafter set forth:
(a) If any amount payable by the Company to the Reinsurer becomes more
than 30 days overdue, the Reinsurer may terminate this Exhibit in
its entirety by sending to the Company, by registered mail to its
principal office, notice stating the time and date when, not less
than 5 days after the date of mailing of such notice, termination
shall be effective.
(b) If the Company is merged with or purchased by another Company, or if
controlling interest is sold or changed so as to produce a loss in
control over conduct of the business by the current owners, the
Company shall immediately notify the Reinsurer by registered mail
to its principal office giving details (to the extent of its
knowledge thereof) of the particulars of such merger, change, sale
or purchase. Within 35 days after the date of mailing of such
notice by the Company, the Reinsurer may terminate this Exhibit in
its entirety by sending to the Company, by registered mail to its
principal office, notice stating the time and date when not less
than 5 days after the date of mailing of such notice, termination
shall be effective.
If the Company fails to notify the Reinsurer of such merger,
purchase, change or sale, the Reinsurer, within 35 days after the
Reinsurer has acquired knowledge of the merger, purchase, change or
sale, may terminate this Exhibit in its entirety by sending to the
Company, by registered
B-6
GENERAL REINSURANCE CORPORATION
<PAGE>
mail to its principal office, notice stating the time and date when,
not less than 5 days after the mailing of such notice, termination
shall be effective.
In any instance that the Reinsurer terminates this Exhibit in
accordance with subparagraphs (a) or (b) above, the Reinsurer shall
not be liable for claims or losses resulting from accidents taking
place after the effective time and date of termination.
B-7
Agreement No. 7448
GENERAL REINSURANCE CORPORATION
<PAGE>
ENDORSEMENT NO. 1
Attached to and made a part of
AGREEMENT OF REINSURANCE
NO. 7448
between
GENERAL REINSURANCE CORPORATION
and
PAULA INSURANCE COMPANY
IT IS MUTUALLY AGREED that as respects new and renewal policies of the
Company becoming effective at and after 12:01 A.M., July 1, 1991, and
policies of the Company in force at 12:01 A.M., July 1, 1991, Section 4 of
Exhibit A to this Agreement is amended to read:
"SECTION 4 - REINSURANCE PREMIUM
The Company shall pay to the Reinsurer:
(a) For the First Excess Cover:
(1) A net rate of 1.61% of the Company's earned premium for
California Workers' Compensation and Employers' Liability
Business; and
(2) A net rate of 2.79% of the Company's earned premium for Arizona
Workers' Compensation and Employers' Liability Business.
(b) For the Second Excess Cover:
(1) A net rate of 1.30% of the Company's earned premium for
California Workers' Compensation and Employers' Liability
Business; and
(2) A net rate of 1.53% of the Company's earned premium for Arizona
Workers' Compensation and Employers' Liability Business."
IN WITNESS WHEREOF, the parties hereto have caused this Endorsement
GENERAL REINSURANCE CORPORATION
<PAGE>
to be executed in duplicate this 5th day of August, 1991.
GENERAL REINSURANCE CORPORATION
/s/ Anthony J. Anastanio
------------------------
Vice President
Attest: /s/ C. Mark Debley
PAULA INSURANCE COMPANY
/s/ Norman J. Schmids
------------------------
President/CEO
Attest: /s/ Teresita E. Matos
-2-
Endorsement No. 1
Agreement No. 7448
GENERAL REINSURANCE CORPORATION
<PAGE>
ENDORSEMENT NO. 2
Attached to and made a part of
AGREEMENT OF REINSURANCE
NO. 7448
between
GENERAL REINSURANCE CORPORATION
and
PAULA INSURANCE COMPANY
IT IS MUTUALLY AGREED that, as respects claims and losses resulting from
accidents taking place at and after 12:01 A.M., October 1, 1993, the Schedule
of Reinsurance in Section 1 - LIABILITY OF THE REINSURER of Exhibit A to this
Agreement is amended to read as follows:
"SCHEDULE OF REINSURANCE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
Company Retention Limits of Liability of the Reinsurer
- ------------------------------------------------------------------------------------
First Second
Excess Cover Excess Cover
------------- --------------
Each Accident Each Accident Each Accident
------------- ------------- --------------
<S> <C> <C> <C>
California and
Arizona Business $200,000 $100,000 $4,850,000"
</TABLE>
IT IS FURTHER AGREED that as respects new and renewal policies of the
Company becoming effective at and after 12:01 A.M., October 1, 1993, and
policies of the Company in force at 12:01 A.M., October 1, 1993, Section 4 of
Exhibit A to this Agreement is amended to read as follows:
"SECTION 4 - REINSURANCE PREMIUM
The Company shall pay to the Reinsurer:
(a) For the First Excess Cover:
GENERAL REINSURANCE CORPORATION
<PAGE>
(1) A net rate of 0.67% of the Company's earned premium for
California Workers' Compensation and Employers' Liability
Business; and
(2) A net rate of 1.66% of the Company's earned premium for Arizona
Workers' Compensation and Employers' Liability Business.
(b) For the Second Excess Cover:
(1) A net rate of 1.91% of the Company's earned premium for
California Workers' Compensation and Employers' Liability
Business; and
(2) A net rate of 2.10% of the Company's earned premium for Arizona
Workers' Compensation and Employers' Liability Business."
IT IS FURTHER AGREED that, effective October 1, 1993, Appendix A is
replaced with Appendix A Revised (Effective October 1, 1993) attached hereto.
IN WITNESS WHEREOF, the parties hereto have caused this Endorsement to
be executed in duplicate this 13th day December, 1993.
GENERAL REINSURANCE CORPORATION
/s/ [ILLEGIBLE]
Vice President
ATTEST: /s/ [ILLEGIBLE]
PAULA INSURANCE COMPANY
ATTEST: /s/ [ILLEGIBLE] /s/ [ILLEGIBLE]
-2-
Endorsement No. 2
Agreement No. 7448
GENERAL REINSURANCE CORPORATION
<PAGE>
Effective October 1, 1993
APPENDIX A REVISED
Attached to and made a part of
EXHIBIT A OF AGREEMENT NO. 7448
ADJUSTED DOLLAR COVERAGE EXAMPLE
EXAMPLE A: Periodic Compensation and Economic Loss Benefits Only
Company Retention: $200,000
Accident Date: October 1, 1993
Benefits Stop: December 31, 1998
<TABLE>
<CAPTION>
Loss in Adjusted Dollars
Company Periodic Compensation Company's Reinsurer's
Payments (Current Law Level) Liability Liability
-------- ------------------- --------- ---------
<S> <C> <C> <C> <C>>
1993 $ 40,000 $ 40,000 $ 40,000 -0-
1994 $ 42,000 $ 40,000 $ 40,000 -0-
1995 $ 44,100 $ 40,000 $ 40,000 -0-
1996 $ 46,305 $ 40,000 $ 40,000 -0-
1997 $ 48,620 $ 40,000 $ 40,000 -0-
1998 $ 51,051 $ 40.000 -0- $40,000
-------- -------- -------- -------
$272,076 $240,000 $200,000 $40,000
Excess of Company Payments over
Loss in Adjusted Dollars $ 32,076
--------
$232,076
</TABLE>
EXAMPLE B: Medical and Rehabilitation Benefits Only
Company Retention: $200,000
Accident Date: October 1, 1993
Benefits Stop: December 31, 1998
<TABLE>
<CAPTION>
CPI CPI Loss in
Company Payment Accident Adjusted Company's Reinsurer's
Payments Year Year Quotient Dollars Liability Liability
-------- ---- ---- -------- ------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
1993 $ 40,000 661.5 661.5 1.0000 $ 40,000 $ 40,000 -0-
1994 $ 43,000 711.1 661.5 1.0750 $ 40,000 $ 40,000 -0-
1995 $ 46,225 764.4 661.5 1.1556 $ 40,000 $ 40,000 -0-
1996 $ 49,692 821.8 661.5 1.2423 $ 40,010 $ 40,010 -0-
1997 $ 53,419 883.4 661.5 1.3354 $ 40,002 $ 39,990 $ 12
1998 $ 57,425 949.7 661.5 1.4358 $ 39,995 -0- $39,995
-------- -------- -------- -------
$289,761 $240,007 $200,000 $40,007
Excess of Company Payments over
Loss in Adjusted Dollars $ 49,754
--------
$249,754
</TABLE>
GENERAL REINSURANCE CORPORATION
<PAGE>
EXAMPLE C: Periodic Compensation and Medical Benefits Combined (Details
as above)
<TABLE>
<CAPTION>
Total LOSS IN ADJUSTED DOLLARS
---------------------------------
Company Periodic Company's Reinsurer's
Payments Compensation Medical Total Liability Liability
-------- ------------ ------- ------ --------- ---------
<S> <C> <C> <C> <C> <C> <C>
1993 $ 80,000 $ 40,000 $ 40,000 $ 80,000 $ 80,000 -0-
1994 $ 85,000 $ 40,000 $ 40,000 $ 80,000 $ 80,000 -0-
1995 $ 90,325 $ 40,000 $ 40,000 $ 80,000 $ 80,000 -0-
1996 $ 95,997 $ 40,000 $ 40,010 $ 80,010 $ 20,000 $ 60,010
1997 $102,039 $ 40,000 $ 40,002 $ 80,002 -0- $ 80,002
1998 $108,476 $ 40,000 $ 39,995 $ 79,995 -0- $ 79,995
-------- --------- ------- -------- -------- --------
$561,837 $240,000 $240,007 $480,007 $200,000 $220,007
Excess of Company Payments over
Total Loss in Adjusted Dollars $ 81,830
--------
$281,830
</TABLE>
Page 2 of 2
Appendix A Revised
Agreement No. 7448
GENERAL REINSURANCE CORPORATION
<PAGE>
ENDORSEMENT NO. 3
Attached to and made a part of
AGREEMENT OF REINSURANCE
NO. 7448
between
GENERAL REINSURANCE CORPORATION
and
PAULA INSURANCE COMPANY
IT IS MUTUALLY AGREED that, effective at 12:01 A.M., January 1, 1994,
the first sentence of Article IX - INSOLVENCY of this Agreement is amended to
read as follows:
"In the event of the insolvency of the Company, the reinsurance proceeds
will be paid to the Company or the liquidator, immediately upon demand, with
reasonable provision for verification, on the basis of the amount of the
claim allowed in the insolvency proceeding without diminution by reason of
the inability of the Company to pay all or part of the claim."
IN WITNESS WHEREOF, the parties hereto have caused this Endorsement to
be executed in duplicate this 9th day of March, 1994
GENERAL REINSURANCE CORPORATION
/s/ [ILLEGIBLE]
Vice President
Attest: /s/ [ILLEGIBLE]
PAULA INSURANCE COMPANY
Attest: /s/ [ILLEGIBLE] /s/ [ILLEGIBLE]
GENERAL REINSURANCE CORPORATION
<PAGE>
ENDORSEMENT NO. 4
Attached to and made a part of
AGREEMENT OF REINSURANCE
NO. 7448
between
GENERAL REINSURANCE CORPORATION
and
PAULA INSURANCE COMPANY
IT IS MUTUALLY AGREED that, as respects new and renewal policies of the
Company becoming effective at and after 12:01 A.M., December 1, 1994,
Agri-Comp Insurance Company of Salem, Oregon is hereby added as a reinsured
party hereunder.
In consideration of the foregoing, Exhibit A of this Agreement is
amended as follows:
I - The Schedule of Reinsurance in Section 1 - LIABILITY OF THE
REINSURER is amended to read as follows:
"SCHEDULE OF REINSURANCE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Company Retention Limits of Liability of the Reinsurer
- -----------------------------------------------------------------------------
First Second
Excess Cover Excess Cover
------------- -------------
Each Accident Each Accident Each Accident
------------- ------------- -------------
<S> <C> <C> <C>
California, Arizona
and Oregon Business $200,000 $100,000 $4,850,000"
- -----------------------------------------------------------------------------
</TABLE>
II - Sub-paragraph (a) of Section 2 - DEFINITIONS AND INTERPRETATIONS is
amended to read as follows:
"(a) WORKERS' COMPENSATION AND EMPLOYERS' LIABILITY BUSINESS
This term shall mean the insurance for California, Arizona and
Oregon employers afforded by Parts One, Two and Three of a
standard provi-
GENERAL REINSURANCE CORPORATION
<PAGE>
sions Workers' Compensation and Employers' Liability Policy."
III - Section 4 is amended to read as follows:
"SECTION 4 - REINSURANCE PREMIUM
The Company shall pay to the Reinsurer:
(a) For the First Excess Cover:
(1) A net rate of 0.67% of the Company's earned premium for
California Workers' Compensation and Employers' Liability
Business;
(2) A net rate of 1.66% of the Company's earned premium for Arizona
Workers' Compensation and Employers' Liability Business;
(3) A net rate of 1.66% of the Company's earned premium for Oregon
Workers' Compensation and Employers' Liability Business.
(b) For the Second Excess Cover:
(1) A net rate of 1.91% of the Company's earned premium for
California Workers' Compensation and Employers' Liability
Business;
(2) A net rate of 2.10% of the Company's earned premium for Arizona
Workers' Compensation and Employers' Liability Business;
(3) A net rate of 2.10% of the Company's earned premium for Oregon
Workers' Compensation and Employers' Liability Business."
IN WITNESS WHEREOF, the parties hereto have caused this Endorsement to be
-2-
GENERAL REINSURANCE CORPORATION
<PAGE>
executed in duplicate this 22nd day of February, 1995.
GENERAL REINSURANCE CORPORATION
/s/ [ILLEGIBLE]
Vice President
Attest /s/[ILLEGIBLE]
PAULA INSURANCE COMPANY
AGRI-COMP INSURANCE COMPANY
ATTEST: /s/[ILLEGIBLE] /s/ [ILLEGIBLE]
-3-
Endorsement No. 4
Agreement No. 7448
GENERAL REINSURANCE CORPORATION
<PAGE>
ENDORSEMENT NO. 5
Attached to and made a part of
AGREEMENT OF REINSURANCE
NO. 7448
between
GENERAL REINSURANCE CORPORATION
and
PAULA INSURANCE COMPANY
AGRI-COMP INSURANCE COMPANY
IT IS MUTUALLY AGREED that, as respects claims and losses resulting from
accidents taking place at and after 12:01 A.M., July 1, 1995, the Schedule of
Reinsurance in Section 1 - LIABILITY OF THE REINSURER of Exhibit A is amended
to read as follows:
"SCHEDULE OF REINSURANCE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Company Retention Limits of Liability of the Reinsurer
- -----------------------------------------------------------------------------
First Second
Excess Cover Excess Cover
------------- -------------
Each Accident Each Accident Each Accident
------------- ------------- -------------
<S> <C> <C> <C>
California, Arizona
and Oregon Business $200,000 $100,000 $4,900,000"
- -----------------------------------------------------------------------------
</TABLE>
IN WITNESS WHEREOF, the parties hereto have caused this Endorsement to be
executed in duplicate this 10th day of JULY, 1996.
GENERAL REINSURANCE CORPORATION
/s/ illegible
Vice President
Attest /s/ illegible
PAULA INSURANCE COMPANY
AGRI-COMP INSURANCE COMPANY
Attest /s/ illegible /s/ illegible
GENERAL REINSURANCE CORPORATION
<PAGE>
ENDORSEMENT NO. 6
Attached to and made a part of
AGREEMENT OF REINSURANCE
NO. 7448
between
GENERAL REINSURANCE CORPORATION
and
PAULA INSURANCE COMPANY
AGRI-COMP INSURANCE COMPANY
IT IS MUTUALLY AGREED that, effective 12:01 A.M., July 1, 1996, this
Agreement is amended as follows:
I - As respects claims and losses resulting from accidents taking place
at and after such time and date, the Schedule of Reinsurance in
Section 1 LIABILITY OF THE REINSURER of Exhibit A is amended to read
as follows:
"SCHEDULE OF REINSURANCE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Class of Business Company Retention Limits of Liability of the Reinsurer
- -----------------------------------------------------------------------------
First Second
Excess Cover Excess Cover
------------- -------------
Each Accident Each Accident Each Accident
------------- ------------- -------------
<S> <C> <C> <C>
Workers' Compensation
and Employers'
Liability Business $250,000 $250,000 $4,750,000"
- ------------------------------------------------------------------------------
</TABLE>
II - As respects new and renewal policies of the Company becoming effective
at and after such time and date and policies of the Company in force
at such time and date sub-paragraph (a) of Section 2 - DEFINITIONS AND
INTERPRETATIONS is amended to read as follows:
"(a) WORKERS' COMPENSATION AND EMPLOYERS' LIABILITY BUSINESS
This term shall mean the insurance for employers afforded by Parts
One, Two and Three of a standard provisions Workers' Compensation and
Employers' Liability Policy."
GENERAL REINSURANCE CORPORATION
<PAGE>
III - As respects new and renewal policies of the Company becoming
effective at and after such time and date and policies of the
Company in force at such time and date Section 4 is amended to read
as follows:
"SECTION 4 - REINSURANCE PREMIUM
The Company shall pay to the Reinsurer:
(a) For the First Excess Cover:
(1) A net rate of 1.45% of the Company's earned premium for
California Workers' Compensation and Employers' Liability
Business;
(2) A net rate of 1.79% of the Company's earned premium for all other
states Workers' Compensation and Employers' Liability Business.
(b) For the Second Excess Cover:
(1) A net rate of 1.04% of the Company's earned premium for
California Workers' Compensation and Employers' Liability
Business;
(2) A net rate of 1.03% of the Company's earned premium for all other
states Workers' Compensation and Employers' Liability Business."
IV - As respects claims and losses resulting from accidents taking place
at and after such time and date, the first paragraph of sub-paragraph
(b) of Section 6 - REPORTS AND REMITTANCES is amended to read as
follows:
"The Company shall report promptly to the Reinsurer each claim or
loss for which the Company's estimated amount of net loss is 50% or
more of the amount of the Company Retention and shall also report
all cases of serious injury which, regardless of considerations of
liability or coverage, might involve this reinsurance, including
but not limited to the follow:"
-2-
GENERAL REINSURANCE CORPORATION
<PAGE>
V - The following Exhibit attached hereto is hereby made a part of this
Agreement:
EXHIBIT B - THIRD EXCESS OF LOSS REINSURANCE
of
Workers' Compensation and Employers' Liability Business
IN WITNESS WHEREOF, the parties hereto have caused this Endorsement to be
executed in duplicate this 27th day of September, 1996.
GENERAL REINSURANCE CORPORATION
/s/ illegible
Vice President
Attest /s/ illegible
PAULA INSURANCE COMPANY
AGRI-COMP INSURANCE COMPANY
Attest /s/ illegible /s/ illegible
-3-
Endorsement No. 6
Agreement No. 7448
GENERAL REINSURANCE CORPORATION
<PAGE>
[LOGO]
HCI AGREEMENT NO. 380
WORKERS' COMPENSATION AND EMPLOYERS' LIABILITY
EXCESS OF LOSS REINSURANCE AGREEMENT
(hereinafter referred to as "Agreement")
between
PAULA INSURANCE COMPANY
300 North Lake Avenue
Suite 300
Pasadena, California 91101
(hereinafter referred to as the "Company")
and
The Subscribing Reinsurers executing
the Interests and Liabilities Agreements attached to this Agreement
(hereinafter collectively referred to as the "Reinsurers")
- --------------------------------------------------------------------------------
In consideration of the promises set forth in this Agreement, the parties agree
as follows:
ARTICLE I - SCOPE OF AGREEMENT
As a condition precedent to the Reinsurers' obligations under this
Agreement, the Company shall cede to the Reinsurers the business described in
this Agreement, and the Reinsurers shall accept such business as reinsurance
from the Company.
This Agreement is comprised of General Articles I through XIV and the
Exhibit(s) listed below and each Exhibit which may be made a part of this
Agreement. The terms of the General Articles and of the Exhibit(s) shall
determine the rights and obligations of the parties. The terms of the General
Articles shall apply to each Exhibit unless specifically amended therein. In
the event of termination of all the Exhibits made a part of this Agreement,
the General Articles shall automatically terminate when the liability of the
Reinsurers under said Exhibits ceases.
EXHIBIT A - THIRD EXCESS OF LOSS REINSURANCE
of
WORKERS' COMPENSATION AND EMPLOYERS'
LIABILITY BUSINESS
EXHIBIT B - FOURTH EXCESS OF LOSS REINSURANCE
of
WORKERS' COMPENSATION BUSINESS
EXHIBIT C - FIFTH EXCESS OF LOSS REINSURANCE
of
WORKERS' COMPENSATION BUSINESS
<PAGE>
ARTICLE II - PARTIES TO THE AGREEMENT
This Agreement is solely between the Company and the Reinsurers. For the
purposes of this Agreement, when more than one Company is named as a party to
this Agreement, the first Company named shall be the agent of the other
companies as to all matters pertaining to this Agreement. Performance of the
obligations of each party under this Agreement shall be rendered solely to
the other party. However, if the Company becomes insolvent, the liability of
the Reinsurers shall be modified to the extent set forth in the article
entitled INSOLVENCY OF THE COMPANY. In no instance shall any insured of the
Company or any claimant against an insured of the Company have any rights
under this Agreement.
ARTICLE III - GENERAL CONDITIONS, DEFINITIONS AND
INTERPRETATIONS
(a) BUSINESS
The term business shall have the meaning set forth in the
appropriate Exhibit. The term policy(ies) shall mean the
contracts of the Company affording insurance with respect to
such business.
(b) COMPANY
When more than one company is named as a party to this
Agreement, the first such company named shall be the agent of
the other companies with respect to all matters pertaining to
this Agreement.
(c) COMPANY RETENTION
The Company shall retain for its own account the entire amount
set forth as the Company Retention; however, this requirement
shall be satisfied if such amount is retained by the Company or
its affiliated companies under common management or common
ownership or both.
(d) ERRORS AND OMISSIONS
The Reinsurers shall not be relieved of liability by reason of
an error or accidental omission by the Company in reporting any
claim or loss or any business reinsured under this Agreement,
provided such error or omission is rectified promptly after
discovery.
The Reinsurers shall be obligated only for the return of the
premium paid to the Reinsurers with respect to business
reported but not reinsured under this Agreement.
However, the provisions of this paragraph (d) shall not apply
with respect to a loss reported to the Reinsurers subsequent to
the period stipulated in paragraph (b) of the sections entitled
REPORTS AND REMITTANCES in Exhibits B and C to this Agreement.
-2-
<PAGE>
(e) SPECIAL ACCEPTANCES
Business which is beyond the terms, conditions or limitations
of this Agreement may be submitted to the Reinsurers for
special acceptance hereunder and such business, if accepted by
the Reinsurers, shall be subject to all of the terms,
conditions and limitations of this Agreement except as modified
by the special acceptance.
ARTICLE IV - CLAIMS AND LOSSES, ADJUSTMENT EXPENSE AND
SALVAGE
(a) CLAIMS AND LOSSES
All payments of claims or losses by the Company within the
limits of liability or amounts of insurance of the policy(ies)
of the Company and within the limits of liability or amounts of
reinsurance set forth in the applicable Exhibit shall be
binding on the Reinsurers, subject to all the terms, conditions
and limitations of this Agreement. The Reinsurers shall
reimburse the Company for the Reinsurers' portion of each
payment in settlement of claims or losses made by the Company
and the Reinsurers' portion of the Company's adjustment expense
payments, if any, apportioned between the parties as set forth
in the Exhibits, in connection with such claim or loss
payments; however, in the instance of the insolvency of the
Company, the liability of the Reinsurers shall be modified to
the extent set forth in the article entitled INSOLVENCY OF THE
COMPANY.
The Company shall investigate and settle or defend all claims
and losses. When requested by the Reinsurers, the Company shall
permit the Reinsurers, at the expense of the Reinsurers, to be
associated with the Company in the defense or control of any
claim, loss or legal proceeding which involves or is likely to
involve the Reinsurers.
(b) ADJUSTMENT EXPENSE
Adjustment expense shall mean all expenditures made by the
Company and allocated to an individual claim or loss, other
than payments to any salaried employee of the Company, in
connection with the disposition of claims, losses or legal
proceedings including investigation, negotiation and legal
expenses, court costs, and accrued interest, other than accrued
interest which is a part of a judgment.
(c) SALVAGE
The Company shall pay to or credit the Reinsurers with the
Reinsurers' portion of any salvage recovered.
-3-
<PAGE>
With respect to reinsurance under this Agreement on a share
basis, salvage shall be apportioned between the parties in the
same ratio as the amounts of their respective liabilities for
the claim or loss. With respect to reinsurance under this
Agreement on an excess basis, salvage shall be applied between
the parties in the order inverse to that in which their
respective liabilities attached.
Salvage shall mean any recovery made by the Company in
connection with a claim or loss, less all expenses paid by the
Company, other than payments to any salaried employee of the
Company, in making such recovery.
ARTICLE V - REPORTS AND REMITTANCES
In addition to the reports and remittances required by the applicable
Exhibits, the Company shall furnish such other information as may be required
by the Reinsurers for the completion of the Reinsurers' quarterly and annual
statements and internal records.
All reports shall be rendered on forms mutually acceptable to the Company
and the Reinsurers.
ARTICLE VI - RESERVES AND TAXES
The Reinsurers shall maintain such reserves as may be required with
respect to the Reinsurers' portion of unearned premium, claims, losses and
adjustment expense.
The Company shall be liable for all taxes on premiums ceded to the
Reinsurers under this Agreement. If the Reinsurers are obligated to pay any
taxes on such premiums, the Company shall reimburse the Reinsurers; however,
the Company shall not be required to pay taxes twice on the same premiums.
ARTICLE VII - OFFSET
The Company or the Reinsurers may offset any balance(s), whether on
account of premiums, commission, claims or losses, adjustment expense,
salvage, or any other amount(s) due from one party to the other under this
Agreement.
ARTICLE VIII - INSPECTION OF RECORDS
The Company shall allow the Reinsurers to inspect, at all reasonable
times, all records of the Company with respect to the business reinsured
under this Agreement, or with respect to claims, losses or legal proceedings
which involve or are likely to involve the Reinsurers.
ARTICLE IX - ARBITRATION
Should any difference of opinion arise between any of the Reinsurers and
the Company which cannot be resolved in the normal course of business with
respect to the interpretation of this Agreement or the performance of the
respective obligations of the
-4-
<PAGE>
parties under this Agreement, the difference shall be submitted to arbitration.
If more than one Reinsurer is involved in the same dispute, all such Reinsurers
shall constitute and act as one party for purposes of this Article and
communications shall be made by the Company to each of the Reinsurers
constituting the one party; provided, however, that nothing herein shall impair
the rights of such Reinsurers to assert several, rather than joint, defenses of
claims, nor be construed as changing the liability of the Reinsurers under the
terms of this Agreement from several to joint.
One arbitrator shall be chosen by the Reinsurer(s), one by the Company and
an umpire by the two arbitrators before they enter upon arbitration. If the
arbitrators have not chosen an umpire at the end of 10 days following the
last date of the selection of the two arbitrators, each of the arbitrators
shall name three of whom the other declines two and the decision shall be
made of the remaining two by drawing lots.
The arbitrators and umpire shall be officials of insurance or reinsurance
companies authorized to transact business in one or more states of the United
States of America and writing the kind of business about which the difference
has arisen. The arbitrators and umpire are relieved from all judicial
formalities and may abstain from following the strict rules of law and they
shall make their award with a view to effecting the general purpose of this
Agreement rather than in accordance with the literal interpretation of the
language, and the decision of the majority shall be final and binding upon
the parties under this Agreement.
If either party fails to choose an arbitrator within one month after
receiving the written request of the other party to do so, the latter shall
choose both arbitrators, who shall choose the umpire as provided.
Each party shall submit its case to the arbitrators and umpire within one
month after receipt of advices of the selection of the umpire unless the
period is extended by the arbitrators.
The costs of arbitration, including the fees of the arbitrators and
umpire, shall be borne equally unless the arbitrators and umpire shall decide
otherwise. The arbitration shall be held at the times and place agreed upon
by the arbitrators and umpire. The laws of the State of California shall
govern the arbitration.
ARTICLE X - INSOLVENCY OF THE COMPANY
In the event of the insolvency of the Company, the reinsurance proceeds
will be paid to the Company or the liquidator immediately upon demand, with
reasonable provision for verification, on the basis of the amount of the
claim allowed in the insolvency proceeding without diminution by reason of
the inability of the Company to pay all or part of the claim.
The Reinsurers shall be given written notice of the pendency of each claim
against the Company on the policy(ies) reinsured hereunder within a
reasonable time after such claim is filed in the insolvency proceedings. The
Reinsurers shall have the right to investigate each such claim and to
interpose, at their own expense, in the proceeding where such claim is to be
adjudicated, any defenses which they may deem available to the Company or its
liquidator. The expense thus incurred by the Reinsurers shall be chargeable,
subject to court approval, against the insolvent Company as part of the
expense f liquidation to the extent of a proportionate share of the benefit
which may accrue to the Company solely as a result of the defense undertaken
by the Reinsurers.
-5-
<PAGE>
ARTICLE XI - LOSS RESERVES (U.S. DOLLAR REINSURANCE LETTERS OF CREDIT)
(This Article applies only to those Reinsurers who cannot qualify for
credit in any State or any other governmental body having jurisdiction
over the Company's loss reserves.)
As regards all business coming within the scope of this Agreement, the
Company agrees that when it shall file with the Insurance Department or set
up on its books reserves for losses covered hereunder which it shall be
required to set up by law, it will forward to the Reinsurers a statement
showing the proportion of such loss reserves which is applicable to them.
These reserves will consist solely of known outstanding losses that have been
reported to the Reinsurers and allocated adjustment expense relating thereto.
Each such Reinsurer hereby agrees it will apply for and secure delivery to
the Company of a clean, unconditional, irrevocable Letter of Credit issued by
a member bank of the Federal Reserve System acceptable to the Company, in an
amount equal to such Reinsurer's proportion of said loss reserves or, at the
option of such Reinsurer, provide a cash advance in an amount equal to such
Reinsurer's proportion of said loss reserves. No reserves established in
accordance with the foregoing shall include or be applied towards security
for losses incurred but not reported.
The Company undertakes to use and apply any amounts which it may draw upon
such Irrevocable Letter of Credit pursuant to the terms of this Agreement, if
any, under which the Letter of Credit is held, and for the following purposes
only:
(a) To pay such Reinsurer's share or to reimburse the Company for such
Reinsurer's share of any ultimate net loss reinsured by this Agreement.
(b) To make refund of any sum which is in excess of the actual amount
required to pay such Reinsurer's share of any ultimate net loss
reinsured by this Agreement.
The designated bank shall have no responsibility whatsoever in connection
with the propriety of withdrawals made by the Company or the disposition of
funds withdrawn, except to see that withdrawals are made only upon the order
of properly authorized representatives of the Company.
ARTICLE XII - SERVICE OF SUIT
(This Article applies only to those Reinsurers who are domiciled outside the
United States of America and also to Reinsurers unauthorized in the State of
New York.)
In the event of the failure of the Reinsurers to whom this Article
applies, or any one of them, to pay any amount claimed to be due hereunder,
such Reinsurers, at the request of the Company, will submit to the
jurisdiction of any court of competent jurisdiction within the United States,
and will comply with all requirements necessary to give such court
jurisdiction, and all matters arising hereunder shall be determined in
accordance with the law and practice of such court.
Service of process in such suit may be made upon Messrs. Mendes and Mount,
750 Seventh Avenue, New York, New York 10019-6829, and in any suit instituted
against any
-6-
<PAGE>
one of them upon this Agreement, the Reinsurers will abide by the final decision
of such court or any appellate court in the event of an appeal.
The above named are authorized and directed to accept service of process
on behalf of the Reinsurers in any such suit and/or upon the request of the
Company to give a written undertaking to the Company that they will enter a
general appearance on behalf of Reinsurers or any one of them in the event
such a suit shall be instituted.
Further, pursuant to any statute of any state, territory, or district of
the United States which makes provisions therefor, the Reinsurers to whom
this Article applies hereby designate the Superintendent, Commissioner or
Director of Insurance or other officer specified for that purpose in the
statute, or his successor or successors in office, as their true and lawful
attorney upon whom may be served any lawful process in any action, suit, or
proceeding instituted by or on behalf of the Company or any beneficiary
hereunder arising out of this Agreement, and hereby designate the above named
Mendes and Mount as the firm to whom the said officer is authorized to mail
such process or a true copy thereof.
ARTICLE XIII - FEDERAL EXCISE TAX
(This Article applies only to those Reinsurers domiciled outside the United
States of America, excepting Reinsurers exempt from the Federal Excise Tax.)
The Reinsurers have agreed to allow for the purpose of paying Federal
Excise Tax 1% of the premium payable hereon to the extent such premium is
subject to Federal Excise Tax.
In the event of any return of premium becoming due hereon the Reinsurers
will deduct 1% from the amount of the return and the Company or its Agent
should take steps to recover the tax from the United States Government.
ARTICLE XIV - INTERMEDIARY
Herbert Clough Inc. is hereby recognized as the Intermediary negotiating
this Agreement for all business hereunder. All communications (including but
not limited to notices, statements, premiums, return premiums, commissions,
taxes, losses, loss adjustment expense, salvages, and loss settlements)
relating thereto shall be transmitted to the Company or the Reinsurers
through Herbert Clough Inc., Financial Centre, P.O. Box 10216, Stamford,
Connecticut 06904-2216. Payments by the Company to the Intermediary shall be
deemed to constitute payment to the Reinsurers. Payments by the Reinsurers to
the Intermediary shall be deemed only to constitute payment to the Company to
the extent that such payments are actually received by the Company.
-7-
<PAGE>
EXHIBIT A
Attached to and made a part of
HCI Agreement No. 380
WORKERS' COMPENSATION AND EMPLOYERS' LIABILITY
EXCESS OF LOSS REINSURANCE AGREEMENT
THIRD EXCESS OF LOSS REINSURANCE
of
WORKERS' COMPENSATION AND EMPLOYERS' LIABILITY BUSINESS
SECTION 1 - LIABILITY OF THE REINSURERS
The Reinsurers shall pay to the Company with respect to each accident
under Workers' Compensation and Employers' Liability business of the Company
the amount of net loss sustained by the Company in excess of the sum of the
Company Retention and Underlying Reinsurance, but not exceeding the Limit of
Liability of the Reinsurers as set forth in the Schedule of Reinsurance, plus
a proportionate share of adjustment expense.
SCHEDULE OF REINSURANCE
- --------------------------------------------------------------------------------
Underlying Limit of Liability
Company Retention Reinsurance of the Reinsurers
- --------------------------------------------------------------------------------
Each Accident Each Accident Each Accident
$200,000 $5,000,000 $5,000,000
- --------------------------------------------------------------------------------
As respects workers' compensation business, the Reinsurers shall not be
liable for any portion of the net loss arising out of any one accident unless:
(a) Two or more insured persons of the Company are involved in the
accident resulting in such net loss; and
(b) The amount of net loss with respect to at least two insured persons
of the Company involved in such accident exceeds $25,000 each.
This condition does not apply to employers' liability business.
SECTION 2 - DEFINITIONS AND INTERPRETATIONS
(a) WORKERS' COMPENSATION AND EMPLOYERS' LIABILITY BUSINESS
This term shall mean the insurance afforded by Parts One, Two, and
Three of a standard provisions Workers' Compensation and Employers'
Liability Policy and any endorsements attached thereto.
<PAGE>
(b) ACCIDENT
This term shall mean each and every accident or occurrence or series
of accidents or occurrences arising out of one event, whether
involving one or several of the Company's policies and regardless of
the number of employees or employers involved.
(c) NET LOSS
This term shall mean all payments by the Company in settlement of
claims or losses, payment of compensation or other benefits, or
satisfaction of judgments or awards, after deduction of salvage, and
shall exclude adjustment expense and payments or liability in excess
of the Company's policy limit(s); however in the instance of the
insolvency of the Company, this definition shall be modified to the
extent set forth in the article entitled INSOLVENCY OF THE COMPANY.
SECTION 3 - EXCLUSIONS
This Exhibit shall not apply to:
(a) Business accepted by the Company as reinsurance from other insurers;
(b) Insurance written by the aviation underwriting unit, howsoever styled,
of the Company or written by the Company as a member of an aviation
insurance group or pool or association;
(c) Any extra or non-contractual damages or legal fees and expenses
attendant to the defense thereof, including but not limited to
compensatory, exemplary and punitive damages or fines or statutory
penalties which are awarded against the Company as a result of an act,
omission, or course of conduct committed by or on behalf of the
Company;
(d) Insurance with respect to operations involving:
(1) Aircraft flight and ground operations;
(2) Amusement parks or devices, exhibitions (including fireworks),
carnivals, circuses;
(3) Caisson or coffer dam work, dam, dike, lock or revetment
construction;
(4) Chemical manufacturing;
(5) Manufacturing, packing, handling or shipping of explosives,
explosive substances intended for use as an explosive,
ammunitions, fuses, arms or fireworks;
A-2
<PAGE>
(6) Gas (including liquefied petroleum gas) companies, dealers,
distributors or construction;
(7) Maritime or federal employments, or steamship lines or agencies
or stevedoring;
(8) Mining or quarries;
(9) Oil or gas lease operators or contractors; oil or gas wells work;
oil or gas pipeline construction or operations; oil rig derrick
work;
(10) Railroad operation or construction;
(11) Sewer, subway or water main construction, or shaft sinking or
tunneling;
(12) Wrecking;
(13) Bodily injury (including occupational disease) arising from the
manufacture, removal, installation, storage, mining, handling or
transportation of asbestos if the insured's operations, at the
time of policy issuance, present known and/or generally
recognizable asbestos exposures; however, this exclusion shall
not apply to the removal, installation, storage, handling or
transportation of asbestos if such removal, installation,
storage, handling or transportation is incidental to the
insured's overall operations.
The term "incidental", as used in this exclusion, is intended to
recognize the fact that certain insureds (such as, but not
limited to, plumbing, carpentry, etc. contractors) will
infrequently, but regularly, encounter asbestos within the scope
of their operations - even though their operations, as such, do
not involve the manufacture, removal, installation, storage,
mining, handling, or transportation of asbestos. This exclusion
does not apply to such "incidental" operations.
(e) Occupational disease losses defined as follows:
"Occupational disease" means any abnormal condition that fulfills all
of the following conditions:
(1) It is not traceable to a definite compensable accident occurring
during the employee's present or past employment;
(2) It has been caused by exposure to a disease-producing causative
agent present in the workers' occupational environment; and
(3) It has resulted in a disability or death;
(f) Cumulative injury losses defined as follows:
"Cumulative injury" means any injury that fulfills all of the following
conditions:
A-3
<PAGE>
(1) It is not traceable to a definite compensable accident occuring
during the employee's present of present employment;
(2) It has occurred from, and has bees aggravated by, a repetitive
employment-related activity;
(3) It has resulted in disability or death;
If the Company provides insurance for an insured with respect to any
operations listed in one or more of the exclusions under (d), except
exclusion (d)(5), and such operations constitute only a minor and incidental
part of the total operations of the insured such exclusion(s) shall not apply.
If the Company is bound, without the knowledge of and contrary to the
instructions of the Company's supervisory underwriting personnel, on any
insurance of the Company falling within the scope of one or more of the
exclusions set forth in this section, these exclusions, except (a) and (c)
shall be suspended with respect to such business until 30 days after an
underwriting supervisor of the Company acquires knowledge of such business.
SECTION 4 - REINSURANCE PREMIUM
The Company shall pay to the Reinsurance a net, i.e., not subject to
commission reinsurance rate of 0.71% of the net premiums earned by the
Company on the business reinsured hereunder, subject to an annual minimum
deposit reinsurance premium of $363,000.
SECTION 5 - REPORTS AND REMITTANCES
(a) REINSURANCE PREMIUM
On or before the first day of each calendar quarter commencing on
July 1, 1995, the Company shall pay to the Reinsurers one quarter of
the annual minimum and deposit reinsurance premium stipulated in the
section entitled REINSURANCE PREMIUM.
As soon as possible after June 30, 1996, and each subsequent June
30th, the Company shall furnish to the Reinsurers a statement of the
premium earned by the Company on the business reinsured hereunder
during the annaual period ending on such June 30th. The Company shall
calculate the reinsurance premium thereon, and remit to the Reinsurers
the amount of reinsurance premium, if any, in excess of the annual
minimum and deposit reinsurance premium.
(b) CLAIMS AND LOSSES
The Company shall report promptly to the Reinsurers each claim or
loss which, in the Company's opinion, may involve the reinsurance
A-4
<PAGE>
afforded by this Exhibit, and shall also provide written notice of any claim or
circumstance involving the following injuries:
(1) Cord injury - paraplegia, quadriplegia;
(2) Amputations - requiring a prosthesis;
(3) Brain damage affecting mentality or central nervous system such
as permanent disorientation, behavior disorder, personality
change, seizures, motor deficit, inability to speak (aphasia),
hemiplegia or unconsciousness (comatose);
(4) Burns-involving over 10% of body with third degree or 30% of body
with second degree; (5) Fatalities; (6) Permanent Total
disability.
The Company shall advise the Reinsurers of the estimated amount
of net loss and adjustment expense in connection with each such
claim or loss and of any subsequent changes in such estimates.
Upon receipt of a definitive statement of net loss and adjustment
expense from the Company, the Reinsurers shall pay promptly to
the Company the Reinsurers' portion of net loss and Reinsurers'
portion of adjustment expense, if any. Any subsequent changes
shall be reported by the Company to the Reinsurers and the amount
due either party shall be remitted promptly.
SECTION 6 - COMMENCEMENT AND TERMINATION
This Exhibit applies to new and renewal policies of the Company becoming
effective at and after 12:01 A.M., July 1, 1995, and to policies in force at
12:01 A.M., July 1, 1995, for claims and losses resulting from accidents
occurring at and after the aforesaid time and date.
This Exhibit may be terminated on any June 30th by either party sending to
the other, by registered mail to its principal office, not less than 90 days
prior written notice. The Reinsurers shall not be liable for any claims or
losses resulting from accidents occurring after the effective time and date
of termination.
Notwithstanding the foregoing, if the Company is merged with or purchased
by another Company, or if controlling interest is sold or changed so as to
produce a loss in control over conduct of the business by the current owners,
the Company shall immediately notify the Reinsurers by registered mail to its
principal office giving details (to the extent of its knowledge thereof) of
the particulars of such merger, change, sale or purchase. Within 35 days
after the date of mailing of such notice by the Company, the Reinsurers may
terminate this Exhibit in its entirety by sending to the Company, by
registered mail to its principal office, notice stating the time and date
when not less than 5 days after the date of mailing of such notice,
termination shall be effective.
A-5
<PAGE>
If the Company fails to notify the Reinsurers of such merger, purchase,
change or sale, the Reinsurers, within 35 days after the Reinsurers have
acquired knowledge of the merger, purchase, change or sale, may terminate
this Exhibit in its entirety by sending to the Company, by registered mail to
its principal office, notice stating the time and date when, not less than 5
days after the mailing of such notice, termination shall be effective.
In any instance that the Reinsurers terminate this Exhibit in accordance
with the two previous paragraphs, the Reinsurers shall not be liable for
claims or losses resulting from accidents occurring after the effective time
and date of termination.
SECTION 7 - REINSTATEMENT
The Limit of Liability of the Reinsurers under this Exhibit with respect
to each accident shall be reduced by an amount equal to the amount of
liability paid by the Reinsurers, but that part of the liability of the
Reinsurers that is so reduced shall be automatically reinstated, subject to
the maximum payment of $10,000,000 of net loss with respect to all accidents
occurring during each annual period from July 1st through June 30th that this
Exhibit is in effect.
In consideration of this automatic reinstatement, the Company shall pay to
the Reinsurers for each amount reinstated an additional reinsurance premium
which shall be the product of the annual reinsurance premium set forth in the
section entitled REINSURANCE PREMIUM for the annual period during which the
accident occurs and the amount so reinstated divided by $5,000,000.
The reinsurance premium so developed for each amount reinstated shall be
in addition to the reinsurance premium set forth in the section entitled
REINSURANCE PREMIUM, and shall be paid by the Company immediately following
loss payment by the Reinsurers.
A-6
<PAGE>
TERMINATION ENDORSEMENT
Attached to and made a part of HCI AGREEMENT NO. 380
WORKERS' COMPENSATION AND EMPLOYERS' LIABILlTY EXCESS OF LOSS REINSURANCE
AGREEMENT
THIRD EXCESS OF LOSS REINSURANCE
of
WORKERS' COMPENSATION AND EMPLOYERS' LIABILITY BUSINESS
between
PAULA INSURANCE COMPANY
300 North Lake Avenue
Pasadena, California 91101
(herein referred to as the "Company")
and
The Subscribing Reinsurer(s) executing the
Interests and Liabilities Agreements attached to this Agreement
(herein referred to as the "Reinsurers")
- --------------------------------------------------------------------------------
IT IS MUTUALLY AGREED that, effective 12:01 A.M., July 1, 1996, this
Exhibit is terminated. The Reinsurer shall not be liable for claims and
losses resulting from accidents occurring at and after the aforesaid time and
date.
<PAGE>
EXHIBIT B
Attached to and made a part of
HCI Agreement No. 380
WORKERS' COMPENSATION AND EMPLOYERS' LIABILITY
EXCESS OF LOSS REINSURANCE AGREEMENT
FOURTH EXCESS OF LOSS REINSURANCE OF
WORKERS' COMPENSATION BUSINESS
SECTION 1 - LIABILITY OF THE REINSURERS
The Reinsurers shall pay to the Company with respect to accident
occurrence under Workers' Compensation business of the Company, the amount of
net loss sustained by the Company in excess of the sum of the Company
Retention and Underlying Reinsurance, but not exceeding the Limit of
Liability of the Reinsurers as set forth in the Schedule of Reinsurance, plus
a proportionate share of adjustment expense.
SCHEDULE OF REINSURANCE
- --------------------------------------------------------------------------------
Underlying Limit of Liability
Company Retention Reinsurance of the Reinsurers
- --------------------------------------------------------------------------------
Each Accident Each Accident Each Accident
$200,000 $10,000,000 $10,000,000
- --------------------------------------------------------------------------------
For the purpose of determining the amount of net loss sustained by the
Company, it is deemed that the amount of net loss any one employee shall not
exceed $2,000,000.
SECTION 2 - DEFINITIONS AND INTERPRETATIONS
(a) WORKERS' COMPENSATION BUSINESS
This term shall mean the insurance afforded by Parts One, Two, and
Three of a standard provisions Workers' Compensation and Employers'
Liability Policy and any endorsements attached thereto.
(b) ACCIDENT
This term shall mean each and every accident or occurrence or series
of accidents or occurrences arising out of one event, whether
involving one or several of the Company's policies and regardless of
the number of employees or employers involved.
<PAGE>
(c) NET LOSS
This term shall mean all payments by the Company in settlement of
claims of losses, payment of compensation or other benefits, or
satisfaction of judgements or awards, after deductions of salvage, and
shall exclude adjustment expenses and payments or liability in excess
of the Company's policy limit(s); however in the instance of the
insolvency of the Company, this definition shall be modified to the
extent set forth in the article entitled INSOLVENCY OF THE COMPAY.
SECTION 3 - EXCLUSIONS
This Exhibit shall not apply to:
(a) Business accepted by the Company as reinsurance from other insurers;
(b) Insurance written by the aviation underwriting unit, howsoever
styled, of the Company or written by the Company as a member of an
aviation insurance group or pool or association;
(c) Any extra or non-contractual damages or legal fees and expenses
attendant to the defense thereof, including but not limited to
compensatory, exemplary and punitive damages or fines or statutory
penalties which are awarded against the Company as a result of an act,
ommission, or course of conduct committed by or on behalf of the
Company;
(d) Insurance with respect to operations involving:
(1) Aircraft flight and ground operations;
(2) Amusement parks or devices, exhibitions (including fireworks),
carnivals, circuses;
(3) Caisson or coffer dam work, dam, dike, lock or revement
constuction;
(4) Chemical manufacturing;
(5) Manufacturing, packing, handling or shipping of explosives,
explosive substances intended for use as an explosive,
ammunitions, fuses, arms or fireworks;
(6) Gas (including liquified petroleum gas) companies, dealers,
distributors or construction;
(7) Maritime or federal employments, or steamship lines or agencies
or setvedoring;
B-2
<PAGE>
(8) Mining or quarries;
(9) Oil or gas lease operators or contractors; oil or gas wells work;
oil or gas pipeline construction or operations; oil rig derrick
work;
(10) Railroad operation or construction;
(11) Sewer, subway or water main construction, or shaft sinking or
tunneling;
(12) Wrecking;
(13) Bodily injury (including occupational disease) arising from the
manufacture, removal, installation, storage, mining, handling or
transportation of asbestos if the insured's operations, at the
time of policy issuance, present known and/or generally
recognizable asbestos exposures; however, this exclusion shall
not apply to the removal, installation, storage, handling or
transportation of asbestos if such removal, installation,
storage, handling or transportation is incidental to the
insured's overall operations.
The term "incidental", as used in this exclusion, is intended to
recognize the fact that certain insureds (such as, but not
limited to, plumbing, carpentry, etc. contractors) will
infrequently, but regularly, encounter asbestos within the scope
of their operations - even though their operations, as such, do
not involve the manufacture, removal, installation, storage,
mining, handling, or transportation of asbestos. This exclusion
does not apply to such "incidental" operations;
(e) Employers' Liability;
(f) Occupational disease losses defined as follows:
"Occupational disease" means any abnormal condition that fulfills
all of the following conditions:
(1) It is not traceable to a definite compensable accident occurring
during the employee's present or past employment;
(2) It has been caused by exposure to a disease-producing causative
agent present in the workers' occupational environment; and
(3) It has resulted in a disability or death;
(g) Cumulative injury losses defined as follows:
"Cumulative injury" means any injury that fulfills all of the following
conditions:
B-3
<PAGE>
(1) It is not traceable to a definite compensable accident occurring
during the employee's present or present employment;
(2) It has occurred from, and has been aggravated by, a repetitive
employment-related activity;
(3) It has resulted in a disability or death."
(h) Jones Act;
(i) United States Longshoremen and Harborworkers Act;
(j) War, civil war,
(k) Insolvency funds;
(1) Excess and Surplus Lines;
(m) Professional sports teams;
(n) Nuclear incidents;
(o) Commercial airline personnel; flight and non-flight personnel.
If the Company provides insurance for an insured with respect to any
operations listed in one or more of the exclusions under (d), except
exclusion (d)(5), and such operations constitute only a minor and incidental
part of the total operations of the insured, such exclusion(s) shall not
apply.
SECTION 4 - REINSURANCE PREMIUM
The Company shall pay to the Reinsurers a net, i.e., not subject to
commission, reinsurance rate of 0.13% of the net premiums earned by the
Company on the business reinsured hereunder, subject to an annual minimum and
deposit reinsurance premium of $66,650.
SECTION 5 - REPORTS AND REMITTANCES
(a) REINSURANCE PREMIUM
On or before the first day of each calendar quarter commencing on July
1, 1995, the Company shall pay to the Reinsurers one quarter of the
annual minimum and deposit reinsurance premium stipulated in the
section entitled REINSURANCE PREMIUM.
As soon as possible after June 30, 1996, and each subsequent June
30th, the Company shall furnish to the Reinsurers a statement of the
premium earned by the Company on the business reinsured hereunder
during the annual period ending on such June 30th. The Company shall
calculate the reinsurance premium thereon and remit
B-4
<PAGE>
to the Reinsurers the amount of reinsurance premium, if any, in excess
of the annual minimum and deposit reinsurance premium.
(b) NOTICE OF CLAIMS
The Company will give written notice of loss under this Exhibit to the
Reinsurers not later than 60 months after the end of the annual period
from July 1st through June 30th during which the accident occurs to be
considered for claim payment. The Company shall also promptly notify
the Reinsurers in writing and thereafter promptly and fully inform the
Reinsurers in writing, of all negotiations entered into by the Company
concerning all claims which may involve the reinsurance provided under
this Exhibit, and shall provide the Reinsurers prior written notice on
any other action. relating to such claims including any payment of
such claims by the Company. The Company shall give prompt written
notification to the Reinsurers on any claim for which the Company has
created a loss reserve equal to or greater than 50 percent of the
Company's retention of this reinsurance. In addition, the Company
shall notify the Reinsurers in writing of any material changes in its
loss reserves. The Company further agrees to forward to the Reinsurers
copies of such pleadings and reports of investigations as are
pertinent to the claim and/or as may be requested by the Reinsurers.
Upon receipt of a definitive statement of net loss and adjustment
expense from the Company, the Reinsurers shall pay promptly to the
Company the Reinsurers' portion of net loss and the Reinsurers'
portion of adjustment expense, if any. Any subsequent changes shall be
reported by the Company to the Reinsurers and the amount due either
party shall be remitted promptly.
(c) COMMUTATION OF LOSSES
60 months after the end of each annual period from July 1st through
June 30th, the Company shall advise the Reinsurers of any outstanding
claims or accidents during that annual period which have not been
finally settled and which may cause a claim under this Exhibit.
The Reinsurers may then, or at any time thereafter, request that their
liability with respect to one or more of such unsettled claims be
commuted. Upon such request, the Reinsurers and the Company shall
review such claim and shall attempt to reach a settlement by mutual
agreement. If the Reinsurers and the Company cannot reach a settlement
by mutual agreement, then the Reinsurers and the Company shall
mutually appoint an independent actuary (F.S.A./F.C.A.S. or
A.S.A./A.C.A.S.) who shall investigate, determine and capitalize the
present value of any such unsettled claims. In the event the
Reinsurers and the Company cannot reach an agreement on a independent
actuary, each party shall appoint an actuary. The two chosen actuaries
shall then select a third actuary. If either party refuses or neglects
to appoint an actuary within 30 days after receipt of the written
request for commutation, the requesting party may appoint a second
actuary. If the two actuaries
B-5
<PAGE>
fail to agree on the selection of a third actuary within 30 days of
their appointment, each of them shall name three individuals, of whom
the other shall decline two, and the decision shall be made by drawing
lots. All actuaries selected by drawing lots shall be disinterested in
the outcome of the commutation. The decision of the majority shall be
final and binding upon the parties.
Any payment by the Reinsurers under this paragraph (c) shall
constitute a complete release of the Reinsurers for their liability as
respects any such claim. The cost of any independent actuary shall be
shared on an equal basis by the Reinsurers and the Company.
SECTION 6 - COMMENCEMENT AND TERMINATION
This Exhibit applies to new and renewal policies of the Company becoming
effective at and after 12:01 A.M., July 1, 1995 and to policies in force at
12:01 A.M., July 1, 1995, for claims and losses resulting from accidents
occurring at and after the aforesaid time and date.
This Exhibit may be terminated on any June 30th by either party sending to
the other, by registered mail to its principal office, not less than 90 days
prior written notice. The Reinsurers shall not be liable for any claims or
losses resulting from accidents occurring after the effective time and date
of termination.
Notwithstanding the foregoing, if the Company is merged with or purchased
by another Company, or if controlling interest is sold or changed so as to
produce a loss in control over conduct of the business by the current owners,
the Company shall immediately notify the Reinsurers by registered mail to its
principal office giving details (to the extent of its knowledge thereof) of
the particulars of such merger, change, sale or purchase. Within 35 days
after the date of mailing of such notice by the Company, the Reinsurers may
terminate this Exhibit in its entirety by sending to the Company, by
registered mail to its principal office, notice stating the time and date
when not less than 5 days after the date of mailing of such notice,
termination shall be effective.
If the Company fails to notify the Reinsurers of such merger, purchase,
change or sale, the Reinsurers, within 35 days after the Reinsurers have
acquired knowledge of the merger, purchase, change or sale, may terminate
this Exhibit in its entirety by sending to the Company, by registered mail to
its principal office, notice stating the time and date when, not less than 5
days after the mailing of such notice, termination shall be effective.
In any instance that the Reinsurers terminate this Exhibit in accordance
with the two previous paragraphs, the Reinsurers shall not be liable for
claims or losses resulting from accidents occurring after the effective time
and date of termination.
SECTION 7 - REINSTATEMENT
The Limit of Liability of the Reinsurers under this Exhibit with respect
to each accident shall be reduced by an amount equal to the amount of
liability paid by the Reinsurers, but that part of the liability of the
Reinsurers that is so reduced shall be automatically reinstated, subject to
the maximum payment of $20,000,000 of net loss with respect to all accidents
occurring during each annual period from July 1st through June 30th that this
Exhibit is in effect.
B-6
<PAGE>
In consideration of this automatic reinstatement, the Company shall pay to
the Reinsurers for each amount reinstated an additional reinsurance premium
which shall be the product of the annual reinsurance premium set forth in the
section entitled REINSURANCE PREMIUM for the annual period during which the
accident occurs and the amount so reinstated divided by $10,000,000.
The reinsurance premium so developed for each amount reinstated shall be
in addition to the reinsurance premium set forth in the section entitled
REINSURANCE PREMIUM, and shall be paid by the Company immediately following
loss payment by the Reinsurers.
B-7
<PAGE>
ENDORSEMENT NO. 1
Attached to and made a part of
EXHIBIT B
to
HCI AGREEMENT NO. 380
WORKERS' COMPENSATION AND EMPLOYERS' LIABILITY EXCESS OF LOSS REINSURANCE
AGREEMENT
(HEREINAFTER REFERRED TO AS "AGREEMENT")
FOURTH EXCESS OF LOSS REINSURANCE OF
WORKERS' COMPENSATION BUSINESS
between
PAULA INSURANCE COMPANY
300 North Lake Avenue
Pasadena, California 91101
(hereinafter referred to as the "Company")
and
The Subscribing Reinsurers executing
the Interests and Liabilities Agreements attached to this Agreement
(hereinafter collectively referred to as the "Reinsurers")
IT IS MUTUALLY AGREED that, as respects new and renewal policies of the
Company becoming effective at and after 12:01 A.M., July 1, 1996, and
policies in force at 12:01 A.M., July 1, 1996, Section 1 of Exhibit B is
amended to read:
"SECTION 1 - LIABILITY OF THE RElNSURERS
The Reinsurers shall pay to the Company with respect to accident
occurrence under Workers' Compensation business of the Company, the amount of
net loss sustained by the Company in excess of the sum of the Company
Retention and Underlying Reinsurance, but not exceeding the Limit of
Liability of the Reinsurers as set forth in the Schedule of Reinsurance, plus
a proportionate share of adjustment expense.
<PAGE>
EXHIBIT C
Attached to and made a part of
HCI Agreement No. 380
WORKERS' COMPENSATION AND EMPLOYERS' LIABILITY
EXCESS OF LOSS REINSURANCE AGREEMENT
FIFTH EXCESS OF LOSS REINSURANCE
OF
WORKERS' COMPENSATION BUSINESS
SECTION 1 - LIABILITY OF THE REINSURERS
The Reinsurers shall pay to the Company with respect to each accident
under Workers' Compensation business of the Company, the amount of net loss
sustained by the Company in excess of the sum of the Company Retention and
Underlying Reinsurance, but not exceeding the Limit of Liability of the
Reinsurers as set forth in the Schedule of Reinsurance, plus a proportionate
share of adjustment expense.
SCHEDULE OF REINSURANCE
- -------------------------------------------------------------------------------
Underlying Limit of Liability
Company Retention Reinsurance of the Reinsurers
- -------------------------------------------------------------------------------
Each Accident Each Accident Each Accident
$200,000 $20,000,000 $10,000,000
- -------------------------------------------------------------------------------
For the purpose of determining the amount of net loss sustained by the
Company, it is deemed that the amount of net loss any one employee shall not
exceed $2,000,000.
SECTION 2 - DEFINITIONS AND INTERPRETATIONS
(a) WORKERS' COMPENSATION BUSINESS
This term shall mean the insurance afforded by Parts One, Two, and
Three of a standard provisions Workers' Compensation and Employers'
Liability Policy and any endorsements attached thereto.
(b) ACCIDENT
This term shall mean each and every accident or occurrence or
series of accidents or occurrences arising out of one event,
whether involving one or several of the Company's policies and
regardless of the number of employees or employers involved.
<PAGE>
(c) NET LOSS
This term shall mean all payments by the Company in settlement of
claims or losses, payment of compensation or other benefits, or
satisfaction of judgments or awards, after deduction of salvage,
and shall exclude adjustment expense and payments or liability in
excess of the Company's policy limit(s); however in the instance of
the insolvency of the Company, this definition shall be modified to
the extent set forth in the article entitled INSOLVENCY OF THE
COMPANY.
SECTION 3 - EXCLUSIONS
This Exhibit shall not apply to:
(a) Business accepted by the Company as reinsurance from other insurers;
(b) Insurance written by the aviation underwriting unit,
howsoever styled, of the Company or written by the Company as a
member of an aviation insurance group or pool or association;
(c) Any extra or non-contractual damages or legal fees and
expenses attendant to the defense thereof, including but not
limited to compensatory, exemplary and punitive damages or fines or
statutory penalties which are awarded against the Company as a
result of an act, omission, or course of conduct committed by or on
behalf of the Company;
(d) Insurance with respect to operations involving:
(1) Aircraft flight and ground operations;
(2) Amusement parks or devices, exhibitions
(including fireworks), carnivals, circuses;
(3) Caisson or coffer dam work, dam, dike, lock or revetment
construction;
(4) Chemical manufacturing,
(5) Manufacturing, packing, handling or shipping of explosives,
explosive substances intended for use as an explosive,
ammunitions, fuses, arms or fireworks;
(6) Gas (including liquefied petroleum gas) companies, dealers,
distributors or construction;
(7) Maritime or federal employments, or steamship lines or agencies
or stevedoring;
C-2
<PAGE>
(8) Mining or quarries;
(9) Oil or gas lease operators or contractors; oil or gas wells
work; oil or gas pipeline construction or operations; oil rig
derrick work;
(10) Railroad operation or construction;
(11) Sewer, subway or water main construction, or shaft sinking or
tunneling;
(12) Wrecking;
(13) Bodily injury (including occupational disease) arising from the
manufacture, removal, installation, storage, mining, handling or
transportation of asbestos if the insured's operations, at the
time of policy issuance, present known and/or generally
recognizable asbestos exposures; however, this exclusion
shall not apply to the removal, installation, storage, handling
or transportation of asbestos if such removal, installation,
storage, handling or transportation is incidental to the
insured's overall operations.
The term "incidental", as used in this exclusion, is intended
to recognize the fact that certain insureds (such as, but not
limited to, plumbing, carpentry, etc. contractors) will
infrequently, but regularly, encounter asbestos within the
scope of their operations - even though their operations, as
such, do not involve the manufacture, removal, installation,
storage, mining, handling, or transportation of asbestos. This
exclusion does not apply to such "incidental" operations;
(e) Employers' Liability;
(f) Occupational disease losses defined as follows:
"Occupational disease" means any abnormal condition that fulfills all
of the following conditions:
(1) It is not traceable to a definite compensable accident occurring
during the employee's present or past employment;
(2) It has been caused by exposure to a disease-producing causative
agent present in the workers' occupational environment; and
(3) It has resulted in a disability or death;
(g) Cumulative injury losses defined as follows:
"Cumulative injury" means any injury that fulfills all of the
following conditions:
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<PAGE>
(1) It is not traceable to a definite compensable accident occurring
during the employee's present or present employment;
(2) It has occurred from, and has been aggravated by, a repetitive
employment-related activity;
(3) It has resulted in a disability or death."
(h) Jones Act
(i) United States Longshoremen and Harborworkers Act;
(j) War, civil war,
(k) Insolvency funds;
(1) Excess and Surplus Lines;
(m) Professional sports teams;
(n) Nuclear incidents;
(o) Commercial airline personnel; flight and non-flight personnel.
If the Company provides insurance for an insured with respect to any
operations listed in one or more of the exclusions under (d), except
exclusion (d)(5), and such operations constitute only a minor and incidental
part of the total operations of the insured, such exclusion(s) shall not
apply.
SECTION 4 - REINSURANCE PREMIUM
The Company shall pay to the Reinsurers a net, i.e., not subject to
commission, reinsurance rate of 0.085% of the net premiums earned by the
Company on the business reinsured hereunder, subject to an annual minimum and
deposit reinsurance premium of $43,520.
SECTION 5 - REPORTS AND REMITTANCES
(a) REINSURANCE PREMIUM
On or before the first day of each calendar quarter commencing on
July 1, 1995, the Company shall pay to the Reinsurers one quarter
of the annual minimum and deposit reinsurance premium stipulated in
the section entitled REINSURANCE PREMIUM.
As soon as possible after June 30, 1996, and each subsequent June
30th, the Company shall furnish to the Reinsurers a statement of
the premium earned by the Company on the business reinsured
hereunder during the annual period ending on such June 30th. The
Company shall calculate the reinsurance premium thereon and remit
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<PAGE>
to the Reinsurers the amount of reinsurance premium, if any, in
excess of the annual minimum and deposit reinsurance premium.
(b) NOTICE OF CLAIMS
The Company will give written notice of loss under this Exhibit to
the Reinsurers not later than 60 months after the end of the annual
period from July 1st through June 30th during which the accident
occurs to be considered for claim payment. The Company shall also
promptly notify the Reinsurers in writing and thereafter promptly
and fully inform the Reinsurers in writing, of all negotiations
entered into by the Company concerning all claims which may involve
the reinsurance provided under this Exhibit, and shall provide the
Reinsurers prior written notice on any other action relating to
such claims including any payment of such claims by the Company.
The Company shall give prompt written notification to the
Reinsurers on any claim for which the Company has created a loss
reserve equal to or greater than 50 percent of the Company's
retention of this reinsurance. In addition, the Company shall
notify the Reinsurers in writing of any material changes in its
loss reserves. The Company further agrees to forward to the
Reinsurers copies of such pleadings and reports of investigations
as are pertinent to the claim and/or as may be requested by the
Reinsurers.
Upon receipt of a definitive statement of net loss and
adjustment expense from the Company, the Reinsurers shall pay
promptly to the Company the Reinsurers' portion of net loss and the
Reinsurers' portion of adjustment expense, if any. Any subsequent
changes shall be reported by the Company to the Reinsurers and the
amount due either party shall be remitted promptly.
(c) COMMUTATION OF LOSSES
60 months after the end of each annual period from July 1st through
June 30th, the Company shall advise the Reinsurers of any
outstanding claims or accidents during that annual period which
have not been finally settled and which may cause a claim under
this Exhibit.
The Reinsurers may then, or at any time thereafter, request that
their liability with respect to one or more of such unsettled
claims be commuted. Upon such request, the Reinsurers and the
Company shall review such claim and shall attempt to reach a
settlement by mutual agreement. If the Reinsurers and the Company
cannot reach a settlement by mutual agreement, then the Reinsurers
and the Company shall mutually appoint an independent actuary
(F.S.A./F.C.A.S. or A.S.A./A.C.A.S.) who shall investigate,
determine and capitalize the present value of any such unsettled
claims. In the event the Reinsurers and the Company cannot reach an
agreement on a independent actuary, each party shall appoint an
actuary. The two chosen actuaries shall then select a third
actuary. If either party refuses or neglects to appoint an actuary
within 30 days after receipt of the written request for
commutation, the requesting party may appoint a second actuary. If
the two actuaries
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<PAGE>
fail to agree on the selection of a third actuary within 30 days of
their appointment, each of them shall name three individuals, of
whom the other shall decline two, and the decision shall be made by
drawing lots. All actuaries selected by drawing lots shall be
disinterested in the outcome of the commutation. The decision of
the majority shall be final and binding upon the parties.
Any payment by the Reinsurers under this paragraph (c) shall
constitute a complete release of the Reinsurers for their liability
as respects any such claim. The cost of any independent actuary
shall be shared on an equal basis by the Reinsurers and the Company.
SECTION 6 - COMMENCEMENT AND TERMINATION
This Exhibit applies to new and renewal policies of the Company becoming
effective at and after 12:01 A.M., July 1, 1995, and to policies in force at
12:01 A.M., July 1, 1995, for claims and losses resulting from accidents
occurring at and after the aforesaid time and date.
This Exhibit may be terminated on any June 30th by either party sending
to the other, by registered mail to its principal office, not less than 90
days prior written notice. The Reinsurers shall not be liable for any claims
or losses resulting from accidents occurring after the effective time and
date of termination.
Notwithstanding the foregoing, if the Company is merged with or
purchased by another Company, or if controlling interest is sold or changed
so as to produce a loss in control over conduct of the business by the
current owners, the Company shall immediately notify the Reinsurers by
registered mail to its principal office giving details (to the extent of its
knowledge thereof) of the particulars of such merger, change, sale or
purchase. Within 35 days after the date of mailing of such notice by the
Company, the Reinsurers may terminate this Exhibit in its entirety by sending
to the Company, by registered mail to its principal office, notice stating
the time and date when not less than 5 days after the date of mailing of such
notice, termination shall be effective.
If the Company fails to notify the Reinsurers of such merger, purchase,
change or sale, the Reinsurers, within 35 days after the Reinsurers have
acquired knowledge of the merger, purchase, change or sale, may terminate
this Exhibit in its entirety by sending to the Company, by registered mail to
its principal office, notice stating the time and date when, not less than 5
days after the mailing of such notice, termination shall be effective.
In any instance that the Reinsurers terminate this Exhibit in accordance
with the two previous paragraphs, the Reinsurers shall not be liable for
claims or losses resulting from accidents occurring after the effective time
and date of termination.
SECTION 7 - REINSTATEMENT
The Limit of Liability of the Reinsurers under this Exhibit with respect
to each accident shall be reduced by an amount equal to the amount of
liability paid by the Reinsurers, but that part of the liability of the
Reinsurers that is so reduced shall be automatically reinstated, subject to
the maximum payment of $20,000,000 of net loss with respect to all accidents
occurring during each annual period from July 1st through June, that this
Exhibit is in effect.
C-6
<PAGE>
In consideration of this automatic reinstatement, the Company shall pay
to the Reinsurers for each amount reinstated an additional reinsurance
premium which shall be the product of the annual reinsurance premium set
forth in the section entitled REINSURANCE PREMIUM for the annual period
during which the accident occurs and the amount so reinstated divided by
$10,000,000.
The reinsurance premium so developed for each amount reinstated shall be
in addition to the reinsurance premium set forth in the section entitled
REINSURANCE PREMIUM, and shall be paid by the Company immediately following
loss payment by the Reinsurers.
C-7
<PAGE>
ENDORSEMENT NO. 1
Attached to and made a part of
EXHIBIT C
to
HCI AGREEMENT NO. 380
WORKERS' COMPENSATION AND EMPLOYERS' LIABILITY
EXCESS OF LOSS REINSURANCE AGREEMENT
(HEREINAFTER REFERRED TO AS "AGREEMENT")
FIFTH EXCESS OF LOSS REINSURANCE
OF
WORKERS' COMPENSATION BUSINESS
between
PAULA INSURANCE COMPANY
300 North Lake Avenue
Pasadena, California 91101
(hereinafter referred to as the "Company")
and
The Subscribing Reinsurers executing
the Interests and Liabilities Agreements attached to this Agreement
(hereinafter collectively referred to as the "Reinsurers")
IT IS MUTUALLY AGREED that, as respects new and renewal policies of the
Company becoming effective at and after 12:01 A.M., July 1, 1996, and
policies in force at 12:01 A.M., July 1, 1996, Section 1 of Exhibit C is
amended to read:
"SECTION 1 - LIABILITY OF THE REINSURERS
"The Reinsurers shall pay to the Company with respect to each accident
under Workers' Compensation business of the Company, the amount of net loss
sustained by the Company in excess of the sum of the Company Retention and
Underlying Reinsurance, but not exceeding the Limit of Liability of the
Reinsurers as set forth in the Schedule of Reinsurance, plus a proportionate
share of adjustment expense.
<PAGE>
Effective: July 1, 1995
INTERESTS AND LIABILITIES AGREEMENT
TO
HCI AGREEMENT NO. 380
WORKERS' COMPENSATION AND EMPLOYERS' LIABILITY
EXCESS OF LOSS REINSURANCE AGREEMENT
between
PAULA INSURANCE COMPANY
Pasadena, California
and
SKANDIA AMERICA REINSURANCE CORPORATION
New York, New York
(hereinafter referred to as the "Subscribing Reinsurer")
- -------------------------------------------------------------------------------
The Subscribing Reinsurer agrees to assume the following shares of the
liability under the Workers' Compensation and Employers' Liability Excess of
Loss Cover set forth in the attached Agreement:
5.00% of Exhibit A
Nil% of Exhibit B
Nil% of Exhibit C
As consideration the Subscribing Reinsurer shall receive identical
shares of the premiums named therein.
The shares of the Subscribing Reinsurer shall be separate and apart from the
shares of the other Reinsurers. and the Subscribing Reinsurer shall in no
event participate in the Interests and Liabilities of the other Reinsurers.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in duplicate this 22nd day of January, 1996.
PAULA INSURANCE COMPANY
Attest: /s/ Bradley K. Serwin
SKANDIA AMERICA REINSURANCE CORPORATION
Attest: /s/ [ILLEGIBLE] /s/ [ILLEGIBLE]
VICE PRESIDENT VICE PRESIDENT
<PAGE>
Effective: July 1, 1996
ADDENDUM NO. 1
to
INTERESTS AND LIABILITIES AGREEMENT
attached to and made a part of
HCI AGREEMENT NO. 380
WORKERS' COMPENSATION AND EMPLOYERS' LIABILITY
EXCESS OF LOSS REINSURANCE AGREEMENT
between
PAULA INSURANCE COMPANY
Pasadena, California
and
SKANDIA AMERICA REINSURANCE CORPORATION
New York, New York
(hereinafter referred to as the "Subscribing Reinsurer")
- -------------------------------------------------------------------------------
The Subscribing Reinsurer acknowledges and accepts the attachment of the
TERMINATION ENDORSEMENT to Exhibit A of the Workers' Compensation and
Employers' Liability Excess of Loss Reinsurance Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Addendum to be
executed in duplicate this 19th day of November 1996/
/s/ [ILLEGIBLE]
PAULA INSURANCE COMPANY
Attest: /s/ Bradley K. Serwin
/s/ [ILLEGIBLE]
SKANDIA AMERICA REINSURANCE CORPORATION
Attest: /s/ [ILLEGIBLE]
<PAGE>
Effective: July 1, 1995
INTERESTS AND LIABILITIES AGREEMENT
to
HCI AGREEMENT NO. 380
WORKERS' COMPENSATION AND EMPLOYERS' LIABILITY
EXCESS OF LOSS REINSURANCE AGREEMENT
between
PAULA INSURANCE COMPANY
Pasadena, California
and
PINEHURST ACCIDENT REINSURANCE GROUP
Philadelphia, Pennsylvania
(hereinafter referred to as the "Subscribing Reinsurer")
- -------------------------------------------------------------------------------
The Subscribing Reinsurer agrees to assume the following shares of the
liability under the Workers' Compensation and Employers' Liability Excess of
Loss Cover set forth in the attached Agreement:
Nil% of Exhibit A
100.00% of Exhibit B
25.00% of Exhibit C
As consideration the Subscribing Reinsurer shall receive identical
shares of the premiums named therein.
The shares of the Subscribing Reinsurer shall be separate and apart from the
shares of the other Reinsurers, and the Subscribing Reinsurer shall in no
event participate in the Interests and Liabilities of the other Reinsurers.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in duplicate this 22nd day of January,1996.
PAULA INSURANCE COMPANY
Attest: /s/ Bradley K. Serwin
PINEHURST ACCIDENT REINSURANCE GROUP
Via: Reinsurance Management Services, Inc.
Attest: /s/ [ILLEGIBLE]
/s/ [ILLEGIBLE]
<PAGE>
Effective: July 1, 1996
ADDENDUM NO. 1
to
INTERESTS AND LIABILITIES AGREEMENT
attached to and made a part of
HCI AGREEMENT NO. 380
WORKERS' COMPENSATION AND EMPLOYERS' LIABILITY
EXCESS OF LOSS REINSURANCE AGREEMENT
between
PAULA INSURANCE COMPANY
Pasadena, California
and
PINEHURST ACCIDENT REINSURANCE GROUP
Philadelphia, Pennsylvania
(hereinafter referred to as the "Subscribing Reinsurer")
- -------------------------------------------------------------------------------
The Subscribing Reinsurer acknowledges and accepts the attachment of the
ENDORSEMENT No. 1 to Exhibit B and ENDORSEMENT No. 1 to Exhibit C of the
Workers' Compensation and Employers' Liability Excess of Loss Reinsurance
Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Addendum to be
executed in duplicate this 19th day of November 1996.
/s/ [ILLEGIBLE]
PAULA INSURANCE COMPANY
Attest: /s/ Bradley K. Serwin
PINEHURST ACCIDENT REINSURANCE GROUP
Via. Reinsurance Management Services, Inc.
Attest: /s/ [ILLEGIBLE]
<PAGE>
Effective: July 1, 1995
INTERESTS AND LIABILITIES AGREEMENT
to
HCI AGREEMENT NO. 38O
WORKERS' COMPENSATION AND EMPLOYERS' LIABILITY
EXCESS OF LOSS REINSURANCE AGREEMENT
between
PAULA INSURANCE COMPANY
Pasadena, California
and
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
Philadelphia, Pennsylvania
(hereinafter referred to as the "Subscribing Reinsurer")
- -------------------------------------------------------------------------------
The Subscribing Reinsurer agrees to assume the following shares of the
liability under the Workers' Compensation and Employers' Liability Excess of
Loss Cover set forth in the attached Agreement:
Nil% of Exhibit A
Nil% of Exhibit B
75.00% of Exhibit C
As consideration the Subscribing Reinsurer shall receive identical
shares of the premiums named therein.
The shares of the Subscribing Reinsurer shall be separate and apart from the
shares of the other Reinsurers, and the Subscribing Reinsurer shall in no
event participate in the Interests and Liabilities of the other Reinsurers.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in duplicate this 22nd day of January, 1996.
/s/ [ILLEGIBLE]
PAULA INSURANCE COMPANY
Attest: /s/ Bradley K. Serwin
NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY
Attest: /s/ [ILLEGIBLE] /s/ Paul R. Larson
Assistant Vice President Assistant Vice President
<PAGE>
Effective: July 1, 1996
INTERESTS AND LIABILITIES AGREEMENT
attached to and made a part of
HCI AGREEMENT NO. 38O
WORKERS' COMPENSATION AND EMPLOYERS' LIABILITY
EXCESS OF LOSS REINSURANCE AGREEMENT
between
PAULA INSURANCE COMPANY
Pasadena, California
and
RELIASTAR LIFE INSURANCE COMPANY
(FORMERLY NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY)
Philadelphia, Pennsylvania
(hereinafter referred to as the "Subscribing Reinsurer")
- -------------------------------------------------------------------------------
The Subscribing Reinsurer acknowledges and accepts the attachment of the
ENDORSEMENT No. 1 to Exhibit C of the Workers' Compensation and Employers'
Liability Excess of Loss Reinsurance Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Addendum to be
executed in duplicate this 19th day of November 1996.
/s/ [ILLEGIBLE]
PAULA INSURANCE COMPANY
Attest: /s/ Bradley K. Serwin
RELIASTAR LIFE INSURANCE COMPANY
(formerly NORTHWESTERN NATIONAL
LIFE INSURANCE COMPANY)
Attest: /s/ [ILLEGIBLE] /s/ Paul R. Larson
Assistant Vice President Assistant Vice President
<PAGE>
PAULA Financial
1994 STOCK INCENTIVE PLAN
Section 1. PURPOSE OF PLAN
The purpose of this 1994 Stock Incentive Plan ("Plan") of PAULA
Financial, a California corporation (the "Company"), is to enable the Company
and its subsidiaries to attract, retain and motivate their employees by
providing for or increasing the proprietary interests of such employees in
the Company, and to enable the Company to attract, retain and motivate its
non-employee directors and further align their interests with those of the
stockholders of the Company by providing for or increasing the proprietary
interests of such directors in the Company.
Section 2. PERSONS ELIGIBLE UNDER PLAN
Any person, including any director of the Company, who is an employee of
the Company or any of its subsidiaries (an "Employee") shall be eligible to
be considered for the grant of Awards (as hereinafter dined) hereunder. Any
director of the Company who is not an Employee (a "Non-employee Director")
shall automatically receive Non-employee Director Options (as hereinafter
defined) pursuant to Section 10 hereof, but shall not otherwise participate
in this Plan.
Section 3. AWARDS
(a) The Committee (as hereinafter defined), on behalf of the Company, is
authorized under this Plan to enter into any type of arrangement with an
Employee that is not inconsistent with the provisions of this Plan and that,
by its terms, involves or might involve the issuance of (i) shares of common
stock, no par value, of the Company ("Common Shares") or (ii) a Derivative
Security (as such term is defined in Rule 16a-1 promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), as such
Rule may be amended from time to time) with an exercise or conversion
privilege at a price related to the Common Shares or with a value derived
from the value of the Common Shares. The entering into of any such
arrangement is referred to herein as the "grant" of an "Award."
(b) Awards are not restricted to any specified form or structure and may
include, without limitation, sales or bonuses of stock, restricted stock,
stock options, reload stock options, stock purchase warrants, other rights to
acquire stock, securities convertible into to or redeemable for stock, stock
appreciation rights, limited stock appreciation rights, phantom stock,
dividend equivalents, performance units or performance shares, and an Award
may consist of one such security or benefit, or two or more of them in tandem
or in the alternative.
(c) Common Shares may be issued pursuant to an Award for any lawful
consideration as determined by the Committee, including, without limitation,
services rendered by the recipient of such Award.
(d) Subject to the provisions of this Plan, the Committee, in its sole
and absolute discretion, shall determine all of the terms and conditions of
each Award granted under this Plan, which terms and conditions may include,
among other things:
(i) a provision permitting the recipient of such Award, including any
recipient who is a director or officer of the Company, to pay the purchase
price of the Common Shares or other property issuable pursuant to such Award,
or such recipient's tax withholding obligation with respect to such issuance,
in whole or in part, by any one or more of the following:
B-1
<PAGE>
(A) the delivery of previously owned shares of capital stock of the
Company (including "pyramiding") or other property,
(B) a reduction in the amount of Common Shares or other property
otherwise issuable pursuant to such Award, or
(C) the delivery of a promissory note, the terms and conditions of
which shall be determined by the Committee;
(ii) a provision conditioning or accelerating the receipt of benefits
pursuant to such Award, either automatically or in the discretion of the
Committee, upon the occurrence of specified events, including, without
limitation, a change of control of the Company, an acquisition of a specified
percentage of the voting power of the Company, the dissolution or liquidation
of the Company, a sale of substantially all of the property and assets of the
Company or an event of the type described in Section 7 hereof; or
(iii) a provision required in order for such Award to qualify as an
incentive stock option under Section 422 of the Internal Revenue Code (an
"Incentive Stock Option").
Section 4. STOCK SUBJECT TO PLAN
(a) The aggregate number of Common Shares that may be issued pursuant to
all Incentive Stock Options granted under this Plan shall not exceed 275,000,
subject to adjustment as provided in Section 7 hereof.
(b) At any time, the aggregate number of Common Shares issued and
issuable pursuant to all Awards (including all Incentive Stock Options) and
Non-employee Director Options granted under this Plan shall not exceed
275,000, subject to adjustment as provided in Section 7 hereof.
(c) For purposes of Section 4(b) hereof, the aggregate number of Common
Shares issued and issuable pursuant to Awards and Non-employee Director
Options granted under this Plan shall at any time be deemed be equal to the
sum of the following:
(i) the number of Common Shares which were issued prior to such time
pursuant to Awards and Non-employee Director Options granted under this Plan,
other than Common Shares which were subsequently reacquired by the Company
pursuant to the terms and conditions of such Awards or Non-employee Director
Options and with respect to which the holder thereof received no benefits of
ownership, such as dividends; plus
(ii) the number of Common Shares which were otherwise issuable prior to
such time pursuant to Awards and Non-employee Director Options granted under
this Plan, but which were withheld by the Company as payment of the purchase
price of the Common Shares issued pursuant to such Awards or Non-employee
Director Options or as payment of the recipient's tax withholding obligation
with respect to such issuance; plus
(iii) the maximum number of Common Shares which are or may be issuable
at or after such time pursuant to Awards and Non-employee Director Options
granted under this Plan prior to such time.
Section 5. DURATION OF PLAN
B-2
<PAGE>
Neither Awards nor Non-employee Director Options shall be granted under
this Plan after March 31, 2004. Although Common Shares may be issued after
March 31, 2004 pursuant to Awards and Non-employee Director Options granted
prior to such date, no Common Shares shall be issued under this Plan after
March 31, 2014.
Section 6. ADMINISTRATION OF PLAN
(a) This Plan shall be administered by a committee (the "Committee") of
the Board of Directors of the Company (the "Board") consisting of two or more
directors. At all times after the Company makes an initial public offering of
its Common Shares or otherwise registers its Common Shares under the Exchange
Act, each of the directors who are members of the Committee shall be a
"disinterested person" (as such term is defined in Rule 16b-3 promulgated
under the Exchange Act, as such Rule may be amended from time to time).
(b) Subject to the provisions of this Plan, the Committee shall be
authorized and empowered to do all things necessary or desirable in
connection with the administration of this Plan, including, without
limitation, the following:
(i) adopt, amend and rescind rules and regulations relating to this
Plan;
(ii) determine which persons meet the requirements of Section 2 hereof
for eligibility under this Plan and to which of such eligible persons, if
any, Awards shall be granted hereunder;
(iii) grant Awards to eligible persons and determine the terms and
conditions thereof, including the number of Common Shares issuable pursuant
thereto;
(iv) determine whether, and the extent to which adjustments are required
pursuant to Section 7 hereof; and
(v) interpret and construe this Plan and the terms and conditions of any
Award or Non- employee Director Options granted hereunder.
Section 7. ADJUSTMENTS
If the outstanding securities of the class then subject to this Plan are
increased, decreased or exchanged for or converted into cash, property or a
different number or kind of securities, or if cash, property or securities
are distributed in respect of such outstanding securities, in either case as
a result of a reorganization, merger, consolidation, recapitalization,
restructuring, reclassification, dividend (other than a regular, quarterly
cash dividend) or other distribution, stock split, reverse stock split or the
like, or if substantially all of the property and assets of the Company are
sold, then, unless the terms of such transaction shall provide otherwise, the
Committee shall make appropriate and proportionate adjustments in (a) the
number and type of shares or other securities or cash or other property that
may be acquired pursuant to Incentive Stock Options and other Awards and
Non-employee Director Options theretofore granted under this Plan and (b) the
maximum number and type of shares or other securities that may be issued
pursuant to Incentive Stock Options and other Awards and Non-employee
Director Options thereafter granted under this Plan.
Section 8. AMENDMENT AND TERMINATION OF PLAN
B-3
<PAGE>
The Board may amend or terminate this Plan at any time and in any
manner; provided, however, that (i) no such amendment or termination shall
deprive the recipient of any Award or Non-employee Director Option
theretofore granted under this Plan, without the consent of such recipient,
of any of his or her rights thereunder or with respect thereto, and (ii)
Section 10 hereof shall not be amended more than once every six months, other
than to comport with changes in the Internal Revenue Code, the Employee
Retirement Income Security Act, or the rules thereunder.
Section 9. EFFECTIVE DATE OF PLAN
This Plan shall be effective as of March 31, 1994, the date upon which
it was approved by the Board; provided, however, that no Common Shares may be
issued under this Plan until it has been approved, directly or indirectly, by
(a) the affirmative votes of the holders of a majority of the securities of
the Company present, or represented, and entitled to vote at a meeting duly
held in accordance with the laws of the State of California or (b) the
written consent of the holders of majority of the securities of the Company
entitled to vote.
Section 10. Non-employee DIRECTOR OPTIONS
(a) On the first business day of each of the Company's fiscal years
beginning with the fiscal year commencing in January 1995, each director who
is not an employee of the Company (a "Non-employee Director"), shall
automatically be granted an option (a "Non-employee Director Option") to
purchase 2,750 Common Shares. If a person shall become a Non-employee
Director on any day after a Date of Grant (as defined below) and prior to the
end of the fiscal year of the Company immediately following such Date of
Grant, and Non-employee Director Options may be granted under this Plan on
such day, such person shall automatically be granted a Non-employee Director
Option to purchase that number of Common Shares equal to (1) 2,750 multiplied
by (2) a fraction, the numerator of which is equal to 365 minus the number of
days since the end of the last fiscal year, and the denominator of which is
equal to 365.
(b) In addition, each Non-employee Director on the date of the
consummation of the Company's initial public offering shall be granted a
Non-employee Director Option to purchase 2,750 shares on such date, with an
exercise price per share equal to the initial public offering price per share
in such offering.
(c) If, on any date upon which Non-employee Director Options are to be
automatically granted pursuant to this Section 10, the number of Common
Shares remaining available for options under this Plan is insufficient for
the grant to each Non-employee Director of a Non-employee Director Option to
purchase the entire number of Common Shares specified in this Section 10,
then a Non-employee Director Option to purchase a proportionate amount of
such available number of Common Shares (rounded to the nearest whole share)
shall be granted to each Non-employee Director on such date.
(d) Each Non-employee Director Option granted under this Plan shall
become exercisable immediately upon the date such Non-employee Director
Option is granted (the "Date of Grant").
(e) Each Non-employee Director Option granted under this Plan shall
expire upon the first to occur of the following:
(i) The first anniversary of the date upon which the optionee
shall cease
B-4
<PAGE>
to be a Non-employee Director as a result of death, total disability or
retirement pursuant to the Company's then applicable retirement policy,
if any;
(ii) The 90th day after the date upon which the optionee shall cease
to be a Non- employee Director for any reason other than death or total
disability; or
(iii) The fifth anniversary of the Date of Grant of such Non-employee
Director Option.
(f) Each Non-employee Director Option granted pursuant to paragraph (a)
of this Section 10 shall have an exercise price equal to 100% of the fair
market value of the Common Shares as reasonably determined by the Committee
on the business day preceding the Date of Grant. The exercise price of any
Non-employee Director Option granted under this Plan, including Non-employee
Director Options granted under paragraph (b) of this Section 10, shall be
payable in cash or by check upon the date of exercise.
B-5
<PAGE>
PAULA FINANClAL
1997 STOCK INCENTIVE PLAN
Section 1. PURPOSE OF PLAN
The purpose of this 1997 Stock Incentive Plan ("Plan") of PAULA
Financial (the "Company"), is to enable the Company to attract, retain and
motivate its employees by providing for or increasing the proprietary
interests of such employees in the Company, and to enable the Company to
attract, retain and motivate its nonemployee directors and key non-employee
consultants ("Consultants") and further align their interest with those of
the shareholders of the Company by providing for or increasing the
proprietary interest of such directors in the Company.
Section 2. PERSONS ELIGIBLE UNDER PLAN
Any person who is an employee or director of, or Consultant to, the
Company or any of its subsidiaries or affiliates (an "Eligible Person") shall
be eligible to be considered for the grant of Awards (as hereinafter defined)
hereunder.
Section 3. AWARDS
(a) The Committee (as hereinafter defined), on behalf of the
Company, is authorized under this Plan to enter into any type of arrangement
with an Eligible Person that is not inconsistent with the provisions of this
Plan and that, by its terms, involves or might involve the issuance of (i)
shares of Common Stock of the Company or of any other class of security of
the Company which is convertible into shares of the Company's Common Stock
("Shares") or (ii) a right or interest with an exercise or conversion
privilege at a price related to the Shares or with a value derived from the
value of the Shares, which right or interest may, but need not, constitute a
"Derivative Security," as such term is defined in Rule 16a-1 promulgated
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
as such Rule may be amended from time to time. The entering into of any such
arrangement is referred to herein as the "grant" of an "Award."
(b) Awards are not restricted to any specified form or structure
and may include, without limitation, sales or bonuses of stock, restricted
stock, stock options, reload stock options, stock purchase warrants, other
rights to acquire stock, securities convertible into or redeemable for stock,
stock appreciation rights, limited stock appreciation rights, phantom stock,
dividend equivalents, performance units or performance shares, and an Award
may consist of one such security or benefit, or two or more of them in tandem
or in the alternative. The terms upon which an Award is granted shall be
evidenced by a written agreement executed by the Company and the Eligible
Person to whom such Award is granted.
<PAGE>
(c) Subject to paragraph (d)(ii) below, Awards may be issued,
and Shares may be issued pursuant to an Award, for any lawful consideration
as determined by the Committee, including, without limitation, services
rendered by the Eligible Person.
(d) Subject to the provisions of this Plan, the Committee, in
its sole and absolute discretion, shall determine all of the terms and
conditions of each Award granted under this Plan, which terms and conditions
may (but need not) include, among other things:
(i) provisions permitting the Committee to allow or require the
recipient of such Award, including any Eligible Person who is a director or
officer of the Company, or permitting any such recipient the right, to pay
the purchase price of the Shares or other property issuable pursuant to such
Award, and/or such recipient's tax withholding obligation with respect to
such issuance, in whole or in part, by any one or more of the following means:
(A) the delivery of cash;
(B) the delivery of other property deemed acceptable by the
Committee;
(C) the delivery of previously owned shares of capital
stock of the Company (including "pyramiding") or other property;
(D) a reduction in the amount of Shares or other property
otherwise issuable pursuant to such Award; or
(E) the delivery of a promissory note of the Eligible
Person or of a third party, the terms and conditions of which shall be
determined by the Committee;
(ii) provisions specifying the exercise or settlement price
for any option, stock appreciation right or similar Award, or specifying
the method by which such price is determined, provided that the exercise
or settlement price of any option, stock appreciation right or similar
Award that is intended to qualify as "performance based compensation" for
purposes of Section 162(m) of the Internal Revenue Code of 1986, as
amended (the "Code") shall be not less than the fair market value of a
Share on the date such Award is granted;
(iii) provisions relating to the exercisability and/or
vesting of Awards, lapse and non-lapse restrictions upon the Shares
obtained or obtainable under Awards or under the Plan and the termination,
expiration and/or forfeiture of Awards;
(iv) provisions conditioning or accelerating the grant of an
Award or the receipt of benefits pursuant to such Award, either
automatically or in the discretion of the Committee, upon the occurrence
of specified events, including, without limitation, the achievement of
performance goals, the exercise or settlement of a previous Award, the
satisfaction of an event or condition within the control of the recipient
of the Award or within the control of others, a change of control of the
Company, an acquisition of a
2
<PAGE>
specified percentage of the voting power of the Company, the dissolution
or liquidation of the Company, a sale of substantially all of the property
and assets of the Company or an event of the type described in Section 7
hereof;
(v) provisions required in order for such Award to qualify
(A) as an incentive stock option under Section 422 of the Code (an
"Incentive Stock Option"), (B) as "performance based compensation" under
Section 162(m) of the Code, and/or (C) for an exemption from Section 16 of
the Exchange Act; and/or
(vi) provisions restricting the transferability of Awards or
Shares issued under Awards.
(e) Unless otherwise provided by the Committee in the written
agreement evidencing an Award, the terms of any stock option granted under
the Plan shall provide:
(i) that the exercise price thereof shall not be less than
100% of the fair market value of a share of Common Stock on the date the
option is granted;
(ii) that the term of such option shall be ten years from the
date of grant;
(iii) that if the Eligible Person to whom such option was
granted (the "Participant") ceases to be an Eligible Person for any
reas on other than death or disability, the option shall not thereafter
become exercisable to an extent greater than it could have been
exercised on the date the Participant's status as an Eligible Person
ceased, and that on the death or disability of a Participant the option
shall become fully exercisable;
(iv) that the option shall expire thirty (30) days after the
Participant ceases to be an Eligible Person for any reason other than
death or disability and shall expire one year after the Participant's
death or disability; and
(v) that the option shall not be assignable or otherwise
transferable except by will or by the laws of descent and distribution or
pursuant to a domestic relations order, and during the lifetime of the
Participant, the option shall be exercisable only by the Participant or
the transferee under a domestic relations order.
(f) The Committee may establish the performance criteria and
level of achievement versus these criteria which shall determine the target
and maximum amount payable under an Award, which criteria may be based on
financial performance and/or personal performance evaluations.
Notwithstanding anything to the contrary herein, the performance criteria for
any Award that is intended by the Committee to satisfy the requirements for
"performance-based compensation" under Code Section 162(m) shall be a measure
based on one or more Qualifying Performance Criteria (as defined below)
selected by the Committee and specified at the time the Award is granted. The
Committee shall certify the extent to which any Qualifying Performance
Criteria has been satisfied prior to payment or settlement of any Award
3
<PAGE>
that is intended by the Committee to satisfy the requirements for
"performance-based compensation" under Code Section 162(m). For purposes
of this Plan, the term "Qualifying Performance Criteria" shall mean any
one or more of the following performance criteria, either individually,
alternatively or in any combination, applied to either the Company as a
whole or to a business unit or subsidiary, either individually,
alternatively or in any combination, and measured either on an absolute
basis or relative to a pre-established target, to previous years' results
or to a designated comparison group, in each case as specified by the
Committee in the Award: (i) cash flow, (ii) earnings per share (including
earnings before interest, taxes and amortization), (iii) return on equity,
(iv) total stockholder return, (v) return on capital, (vi) return on assets
or net assets, (vii) revenue, (viii) income or net income, (ix) operating
income or net operating income, (x) operating profit or net operating profit,
(xi) operating margin, (xii) return on operating revenue, and (xiii) market
share.
Section 4. STOCK SUBJECT TO PLAN
(a) Subject to adjustment as provided in Section 7 hereof, at
any time, the aggregate number of Shares issued and issuable pursuant to all
Awards (including all Incentive Stock Options) granted under this Plan shall
not exceed 100,000. Such maximum number does not include the number of Shares
subject to the unexercised portion of any Incentive Stock Option granted
under this Plan that expires or is terminated.
(b) Subject to adjustment as provided in Section 7 hereof, the
aggregate number of Shares subject to Awards granted during any calendar year
to any one Eligible Person (including the number of shares involved in Awards
having a value derived from the value of Shares) shall not exceed 50,000.
(c) The aggregate number of Shares issued under this Plan at any
time shall equal only the number of shares actually issued upon exercise or
settlement of an Award and not settled in cash or returned to the Company
upon forfeiture of an Award or in payment or satisfaction of the purchase
price, exercise price or tax withholding obligation of an Award.
Section 5. NATURE AND DURATION OF PLAN
(a) This Plan is intended to constitute an unfunded arrangement
for a select group of management or other key employees. This plan in
intended to qualify as a compensatory benefit plan within the meaning of Rule
701 under the Securities Act of 1933.
(b) No Awards shall be made under this Plan after the tenth
anniversary of the Effective Date of the Plan (as provided in Section 9).
Although Shares may be issued after the tenth anniversary of the Effective
Date pursuant to Awards made prior to such date, no Shares shall be issued
under this Plan after the twentieth anniversary of the Effective Date.
Section 6. ADMINISTRATION OF PLAN
(a) This Plan shall be administered by one or more committees of
the Board of Directors of the Company (the "Board") (any such committee, the
"Committee"). If no
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persons are designated by the Board to serve on the Committee, the Plan shall
be administered by the Board and all references herein to the Committee shall
refer to the Board. The Board shall have the discretion to appoint, add,
remove or replace members of the Committee, and shall have the sole authority
to fill vacancies on the Committee. Unless otherwise provided by the Board:
(i) with respect to any Award for which such is necessary and desired for
such Award to be exempted by Rule 16b-3 of the Exchange Act, the Committee
shall consist of the Board of directors or of two or more directors each of
whom is a "non-employee director" (as such term is defined in Rule 16b-3
promulgated under the Exchange Act, as such Rule may be amended from time to
time), (ii) with respect to any Award that is intended to qualify as
"performance based compensation" under Section 162(m) of the Code, the
Committee shall consist of two or more directors, each of whom is an "outside
director" (as such term is defined under Section 162(m) of the Code), and
(iii) with respect to any other Award, the Committee shall consist of one or
more directors (any of whom also may be an employee who has been granted or
is eligible to be granted Awards under the Plan).
(b) Subject to the provisions of this Plan, the Committee shall
be authorized and empowered to do all things necessary or desirable in
connection with the administration of this Plan with respect to the Awards
over which such Committee has authority, including, without limitation, the
following:
(i) adopt, amend and rescind rules and regulations relating
to this Plan;
(ii) determine which persons are Eligible Persons (including
which consultants are "key consultants" eligible to receive awards under
the Plan) and to which of such Eligible Persons, if any, and when Awards
shall be granted hereunder;
(iii) grant Awards to Eligible Persons and determine the
terms and conditions thereof, including the number of Shares subject
thereto and the circumstances under which Awards become exercisable or
vested or are forfeited or expire, which terms may but need not be
conditioned upon the passage of time, continued employment, the
satisfaction of performance criteria, the occurrence of certain events
(including events which the Board or the Committee determine constitute a
change of control), or other factors;
(iv) at any time cancel an Award, with or without the consent
of the holder thereof, and grant a new Award to such holder in lieu
thereof, which new Award may be the same or a different type of Award, may
be for a greater or lesser number of Shares, may have a higher or lower
exercise or settlement price and otherwise may have similar or dissimilar
terms to the cancelled Award;
(v) determine whether, and the extent to which adjustments
are required pursuant to Section 7 hereof, and
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<PAGE>
(vi) interpret and construe any terms and conditions of, and
define any terms used in, this Plan, any rules and regulations under the
Plan and/or any Award granted under this Plan.
(vii) determine the terms and conditions of the
Nonemployee Director Options that are automatically granted hereunder,
other than the terms and conditions specified in Section 10 hereof].
All decisions, determinations, and interpretations of the Committee shall be
final and conclusive upon any Eligible Person to whom an Award has been
granted and to any other person holding an Award.
(c) The Committee may, in the terms of an Award or otherwise,
temporarily suspend the exercisability of an Award and/or the issuance of
Shares under an Award if the Committee determines that securities law or
other considerations so warrant.
Section 7. ADJUSTMENTS
If the outstanding securities of the class then subject to this Plan
are increased, decreased or exchanged for or converted into cash, property or
a different number or kind of shares or securities, or if cash, property or
shares or securities are distributed in respect of such outstanding
securities, in either case as a result of a reorganization, merger,
consolidation, recapitalization, restructuring, reclassification, dividend
(other than a regular, quarterly cash dividend) or other distribution, stock
split, reverse stock split, spin-off or the like, or if substantially all of
the property and assets of the Company are sold, then, unless the terms of
such transaction shall provide otherwise, the Committee shall make
appropriate and proportionate adjustments in (i) the number and type of
shares or other securities or cash or other property that may be acquired
pursuant to Awards theretofore granted under this Plan other than Incentive
Stock Options and the exercise or settlement price of such Awards, and (ii)
the maximum number and type of shares or other securities that may be issued
pursuant to such Awards thereafter granted under this Plan; provided,
however, that notwithstanding the foregoing, (A) such aggregate number of
Shares shall be subject to adjustment under this Section 7 only to the extent
that such will not affect the status of any Award intended to qualify as
"performance based compensation" under Section 162(m) of the Code; and (B)
the maximum number and type of shares or other securities that may be
acquired pursuant to Incentive Stock Options theretofore granted under this
Plan and that may be subject to Incentive Stock Options thereafter granted
under this Plan (which need not correspond to the maximum number and type of
shares or other securities that may be issued pursuant to such Awards
thereafter granted under this Plan) shall be determined under this Section 7
in a manner consistent with the requirements for Incentive Stock Options.
Section 8. AMENDMENT AND TERMINATION OF PLAN
The Board may amend, alter or discontinue the Plan or any agreement
evidencing an Award made under the Plan, but no amendment or alteration shall
be made which would impair the rights of any Award holder, without such
holder's consent, under any Award
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<PAGE>
theretofore granted, provided that no such
consent shall be required if the Committee determines in its sole discretion
and prior to the date of any change of control (as defined, if applicable, in
the agreement evidencing such Award) that such amendment or alteration is not
reasonably likely to significantly diminish the benefits provided under such
Award. The Committee may determine whether or not any amendment to a
previously granted Award is, for purposes of the Plan, deemed to be a
cancellation and new grant of the Award. Notwithstanding the foregoing, if an
amendment to the Plan would affect the ability of Awards granted under the
Plan to comply with any law, rule or regulation (including any rule of a
self-regulatory organization), and if the Committee determines that it is
necessary or desirable for any Awards theretofore or thereafter granted that
are intended to comply with any such provision to so comply, the amendment
shall be approved by the Company's stockholders to the extent required for
such Awards to continue to comply with such law, rule or regulation.
Section 9. EFFECTIVE DATE OF PLAN
The Effective Date of this Plan shall be the date upon which it was
approved by the Board, subject however to approval of the Plan by the
affirmative votes of the holders of a majority of the securities of the
Company present, or represented, and entitled to vote at the Company's annual
meeting of stockholders.
Section 10. COMPLIANCE WITH OTHER LAWS AND REGULATIONS
The Plan, the grant and exercise of Awards thereunder, and the
obligation of the Company to sell and deliver shares under such Awards, shall
be subject to all applicable federal and state laws, rules and regulations
and to such approvals by any governmental or regulatory agency as may be
required. The Company shall not be required to issue or deliver any
certificates for shares of Common Stock prior to the completion of any
registration or qualification of such shares under any federal or state law
or issuance of any ruling or regulation of any government body which the
Company shall, in its sole discretion, determine to be necessary or advisable.
Section 11. NO RIGHT TO COMPANY EMPLOYMENT
Nothing in this Plan or as a result of any Award granted pursuant to
this Plan shall confer on any individual any right to continue in the employ
of the Company or interfere in any way with the right of the Company to
terminate an individual's employment at any time. The agreement evidencing an
Award may contain such provisions as the Committee may approve with respect
to the effect of approved leaves of absence.
Section 12. LIABILITY OF COMPANY
The Company and any affiliate which is in existence or hereafter comes
into existence shall not be liable to an Eligible Person or other persons as
to:
(a) The Non-Issuance of Shares. The non-issuance or sale of
shares as to which the Company has been unable to obtain from any regulatory
body having jurisdiction the
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authority deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any shares hereunder, and
(b) Tax Consequences. Any tax consequence expected, but not
realized, by any Eligible Person or other person due to the issuance,
exercise, settlement, cancellation or other transaction involving any Award
granted hereunder.
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<PAGE>
STOCK OPTION AGREEMENT
(Immediate Vesting - Non-Plan)
This Stock Option Agreement ("Agreement") is made and entered into as of
the Date of Grant indicated below by and between PAULA FINANCIAL, a
California corporation (the "Company"), and the person named below as
Employee.
WHEREAS, Employee is an employee of the Company, and
WHEREAS, the compensation committee of the Board of Directors of the
Company (the "Committee") has approved the grant to Employee of an option to
purchase shares of the common stock, no par value, of the Company (the
"Common Stock"), on the other terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the foregoing recitals and the
covenants set forth herein, the parties hereto hereby agree as follows:
1. GRANT OF OPTION; CERTAIN TERMS AND CONDITIONS. The Company hereby
grants to Employee, and Employee hereby accepts, as of the Date of Grant, an
option to purchase the number of shares of Common Stock indicated below. (the
"Option Shares") at the Exercise Price per share indicated below, which
option shall expire at 5:00 o'clock p.m., Pacific Time, on the Expiration
Date indicated below and shall be subject to all of the terms and conditions
set forth in this Agreement (the "Option"). The Option shall become
exercisable to purchase ("vest with respect to") the Option Shares as
indicated below.
Employee:
Date of Grant: October 26, 1996
Number of share purchasable:
Exercise Price per share: $19.00
Vesting Period: Immediate upon Date of Grant.
Expiration Date: October 25, 2006
The Option is not intended to qualify as an incentive stock option under
Section 422 of the Internal Revenue Code (an "Incentive Stock Option").
<PAGE>
2. TERMINATION OF OPTION
(a) Termination of Employment.
(i) TERMINATION WITHIN ONE YEAR AFTER CHANGE OF CONTROL. In
the event that Employee shall cease to be an employee of the Company or any
of its subsidiaries (such event shall be referred to herein as the
"Termination" of Employee's "Employment") for any reason, or for no reason,
within one year after a Change of Control (as hereinafter defined), then the
Option shall terminate upon the earlier of the Expiration Date or the first
anniversary of the date of such Termination of Employment. "Change of
Control" shall mean the first to occur of the following events:
(X) any date upon which the directors of the Company who were
nominated by the Board of Directors (the "Board") for election as
directors or appointed by the Board cease to constitute a majority
of the directors of the Company;
(Y) the date of the first public announcement that any person
or entity, together with all Affiliates and Associates (as such
capitalized terms are defined in Rule 12b-2 promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"))
of such person or entity, shall have become the Beneficial Owner
(as defined in Rule 13d-3 promulgated under the Exchange Act) of
voting securities of the Company representing 50% or more of the
voting power of the Company (a "50% Stockholder"), provided,
however, that the terms "person" and "entity," as used in this
clause (Y), shall not include (1) the Company or any of its
subsidiaries, (2) any employee benefit plan of the Company or any
of its subsidiaries including the Company's Employee Stock
Ownership Plan, (3) any entity holding voting securities of the
Company for or pursuant to the terms of any such plan or (4) any
person or entity if the transaction that resulted in such person or
entity becoming a 50% Stockholder was approved in advance by the
Board; or
(Z) a reorganization, merger or consolidation of the Company
(other than an reorganization, merger or consolidation the sole
purpose of which is to change the Company's domicile solely within
the United States) the consummation of which results in the
outstanding securities of any class then subject to the Option
being exchanged for or converted into cash, property and/or a
different kind of securities.
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<PAGE>
(ii) RETIREMENT. If Employee's Employment is Terminated by
reason of Employee's retirement in accordance with the Company's then-current
retirement policy ("Retirement"), and a Change of Control shall not have
occurred within one year prior thereto, then the Option shall terminate upon
the earlier of the Expiration Date or the first anniversary of the date of
such Retirement.
(iii) DEATH OR PERMANENT DISABILITY. If Employee's Employment
is Terminated by reason of the death or Permanent Disability (as hereinafter
defined) of Employee, and a Change of Control shall not have occurred within
one year prior thereto, then the Option shall terminate upon the earlier of
the Expiration Date or the first anniversary of the date of such Termination
of Employment. "Permanent Disability" shall mean the inability to engage in
any substantial gainful activity by reason of any medically determinable
physical or mental impairment which can be expected to result in death or
which has lasted or can be expected to last for a continuous period of not
less than 12 months. Employee shall not be deemed to have a Permanent
Disability until proof of the existence thereof shall have been furnished to
the Board in such form and manner, and at such times, as the Board may
require. Any determination by the Board that Employee does not have a
Permanent Disability shall be final and binding upon the Company and Employee.
(iv) OTHER TERMINATION. If Employee's Employment is Terminated
for no reason, or for any reason other than Retirement, death or Permanent
Disability, and a Change of Control shall not have occurred within one year
prior thereto, then the Option shall terminate upon the earlier of the
Expiration Date or 30 days after the date of such Termination of Employment.
(b) DEATH FOLLOWING TERMINATION OF EMPLOYMENT. Notwithstanding
anything to the contrary in this Agreement, if Employee shall die at any time
after the Termination of his or her Employment and prior to the termination
of this Option, then the Option shall terminate on the earlier of the
Expiration Date or the first anniversary of the date of such death.
(c) OTHER EVENTS CAUSING TERMINATION OF OPTION. Notwithstanding
anything to the contrary in this Agreement, the Option shall terminate upon
the consummation of any of the following events, or, if later, the thirtieth
day following the first date upon which such event shall have been approved
by both the Board and the shareholders of the Company:
(i) the dissolution of the Company; or
(ii) a sale of substantially all of the property and assets of
the Company, unless the terms of such sale shall provide otherwise.
3. ADJUSTMENTS. In the event that the outstanding securities of the
class then subject to the Option are increased, decreased or exchanged for or
converted into cash, property and/or a different number or kind of
securities, or cash, property and/or
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<PAGE>
securities are distributed in respect of such outstanding securities, in
either case as a result of a reorganization, merger, consolidation,
recapitalization, reclassification, dividend (other than a regular, quarterly
cash dividend) or other distribution, stock split, reverse stock split,
spin-off or the like, or in the event that substantially all of the property
and assets of the Company are sold, then, unless such event shall cause the
Option to terminate pursuant to Section 2(c) hereof, the Committee shall make
appropriate and proportionate adjustments in the number and type of shares or
other securities or cash or other property that may thereafter be acquired
upon the exercise of the Option; provided, however, that any such adjustments
in the Option shall be made without changing the aggregate Exercise Price of
the then unexercised portion of the Option.
4. EXERCISE. The Option shall be exercisable during Employee's
lifetime only by Employee or by his or her guardian or legal representative,
and after Employee's death only by the person or entity entitled to do so
under Employee's last will and testament or applicable intestate law. The
Option may only be exercised by the delivery to the Company of a written
notice of such exercise, which notice shall specify the number of Option
Shares to be purchased (the "Purchased Shares") and the aggregate Exercise
Price for such shares (the "Exercise Notice"), together with payment in full
of such aggregate Exercise Price in cash or by check payable to the Company
or, in whole or in part:
(a) by the delivery to the Company of a promissory note in a form
and amount satisfactory to the Committee; or
(b) by the delivery to the Company of a certificate or certificates
representing shares of Common Stock which have been held by Employee for at
least six months, duly endorsed or accompanied by a duly executed stock
powers, which delivery effectively transfers to the Company good and valid
title to such shares, free and clear of any pledge, commitment, lien, claim
or other encumbrance (such shares to be valued on the basis of the aggregate
fair market value (as determined by the Committee in their good faith and
reasonable judgment) thereof on the date of such exercise).
5. PAYMENT OF WITHHOLDING TAXES. If the Company becomes obligated to
withhold an amount on account of any tax imposed as a result of the exercise
of the Option, including, without limitation, any federal, state, local or
other income tax, or any F.I.C.A., state disability insurance tax or other
employment tax, then Employee shall, on the first day upon which the Company
becomes obligated to pay such amount to the appropriate taxing authority, pay
such amount to the Company in cash or by check payable to the Company, or, in
whole or in part, by the delivery to the Company of a certificate or
certificates representing shares of Common Stock, duly endorsed or
accompanied by duly executed stock powers, which delivery effectively
transfers to the Company good and valid title to such shares, free and clear
of any pledge, commitment, lien, claim or other encumbrance or by instructing
the Company to withhold and retain that number of shares otherwise issuable
upon exercise of the Option having an aggregate fair market value (as
determined by the Committee in their good faith and reasonable judgment)
equal to such amount.
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<PAGE>
6. NOTICES. All notices and other communications required or permitted
to be given pursuant to this Agreement shall be in writing and shall be
deemed given if delivered personally or five days after mailing by certified
or registered mail, postage prepaid, return receipt requested, to the Company
at 300 North Lake Avenue, Suite 300, Pasadena, California 91101, Attention:
Chief Financial Officer, or to Employee at the address set forth beneath his
or her signature on the signature page hereto, or at such other addresses as
they may designate by written notice in the manner aforesaid.
7. STOCK EXCHANGE REQUIREMENTS; APPLICABLE LAWS. Notwithstanding
anything to the contrary in this Agreement, the Option may not be exercised
and no certificate representing all or any part of the shares issuable
hereunder shall be issued or delivered, if (a) such shares have not been
admitted to listing upon official notice of issuance on each stock exchange
upon which shares of that class are then listed or (b) in the opinion of
counsel to the Company, such exercisability, issuance or delivery would cause
the Company to be in violation of or to incur liability under any federal,
state or other securities law, or any requirement of any stock exchange
listing agreement to which the Company is a party, or any other requirement
or law or of any administrative or regulatory body having jurisdiction over
the Company.
8. NONTRANSFERABILITY. Neither the Option nor any interest therein may
be sold, assigned, conveyed, gifted, pledged, hypothecated or otherwise
transferred in any manner other than by will or the laws of descent and
distribution.
9. INTERPRETATION. The Option is not granted pursuant to the Company's
1994 Stock Incentive Plan. The interpretation and construction by the
Committee of this Agreement and the Option shall be final and binding upon
the Employee.
10. SHAREHOLDER RIGHTS. No person or entity shall be entitled to vote,
receive dividends or be deemed for any purpose the holder of any Option
Shares until the Option shall have been duly exercised to purchase such
Option Shares in accordance with the provisions of this Agreement.
11. EMPLOYMENT RIGHTS. No provision of this Agreement or of the Option
granted hereunder shall (a) confer upon Employee any right to continue in the
employ of the Company or any of its subsidiaries, (b) affect the right of the
Company and each of its subsidiaries to terminate the employment of Employee,
with or without cause, or (c) confer upon Employee any right to participate
in any employee welfare or benefit plan or other program of the Company or
any of its subsidiaries other participation in this Agreement. Employee
hereby acknowledges and agrees that the Company and each of its subsidiaries
may terminate the employment of Employee at any time and for any reason, or
for no reason, unless Employee and the Company or such subsidiary are parties
to a written employment agreement that expressly provides otherwise.
12. GOVERNING LAW. This Agreement and the Option granted hereunder
shall be governed by and construed and enforced in accordance with the laws
of the State of California.
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<PAGE>
13. FINANCIAL STATEMENTS. So long as this Option is outstanding, the
Company shall provide annual audited financial statements to the Employee.
IN WITNESS WHEREOF, the Company and Employee have duly executed this
Agreement as of the Date of Grant.
PAULA FINANCIAL
By:____________________________________
Title:
EMPLOYEE
_______________________________________
Signature
_______________________________________
Street Address
_______________________________________
City, State and Zip Code
_______________________________________
Social Security Number
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<PAGE>
STOCK OPTION AGREEMENT
(Executive - Non-Plan)
This Stock Option Agreement ("Agreement") is made and entered into as of
the Date of Grant indicated below by and between PAULA FINANCIAL, a
California corporation (the "Company"), and the person named below as
Employee.
WHEREAS, Employee is an employee of the Company, and
WHEREAS, the compensation committee of the Board of Directors of the
Company (the "Committee") has approved the grant to Employee of an option to
purchase shares of the common stock, no par value, of the Company (the
"Common Stock"), on the other terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the foregoing recitals and the
covenants set forth herein, the parties hereto hereby agree as follows:
1. GRANT OF OPTION; CERTAIN TERMS AND CONDITIONS. The Company hereby
grants to Employee, and Employee hereby accepts, as of the Date of Grant, an
option to purchase the number of shares of Common Stock indicated below (the
"Option Shares") at the Exercise Price per share indicated below, which
option shall expire at 5:00 o'clock p.m., Pacific Time, on the Expiration
Date indicated below and shall be subject to all of the terms and conditions
set forth in this Agreement (the "Option"). The Option shall become
exercisable to purchase ("vest with respect to") the Option Shares as
indicated below.
Employee:
Date of Grant: October 26, 1996
Number of share purchasable:
Exercise Price per share: $19.00
Vesting Period: 20% on Date of Grant, 20% per year on each
anniversary of the Date of Grant.
Expiration Date: October 25, 2006
The Option is not intended to qualify as an incentive stock option under
Section 422 of the Internal Revenue Code (an "Incentive Stock Option").
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<PAGE>
2. TERMINATION OF OPTION.
(a) Termination of Employment.
(i) Retirement. In the event that Employee shall cease to be an
employee of the Company or any of its subsidiaries (such event shall be
referred to herein as the "Termination" of Employee's "Employment") by reason of
Employee's retirement in accordance with the Company's then-current retirement
policy ("Retirement"), then the Option shall terminate upon the earlier of the
Expiration Date or six months following a Liquidity Event. However, if a
Liquidity Event has occurred prior to the Termination of Employment, then the
Option shall terminate upon the earlier of the Expiration Date or the first
anniversary of the date of such Retirement.
A "Liquidity Event" shall mean:
(X) the closing of a public offering pursuant to an effective
registration statement filed under the Securities Act of 1933, as
amended, covering the offer and sale of shares of Common Stock of
the Company in which the aggregate price paid for such shares by
the-public is equal to or greater than $20,000,000; or
(Y) the date the Company agrees to make a market for the securities
issuable upon exercise of this Option at the fair market value of
such securities.
(Z) the closing of an acquisition or merger of the Company as a
result of which the Option (pursuant to Section 3 hereof) becomes
exercisable for securities of a Company that are traded on a national
securities exchange or quoted through the NASDAQ National Market System.
(ii) DEATH OR PERMANENT DISABILITY. If Employee's Employment is
Terminated by reason of the death or Permanent Disability (as hereinafter
defined) of Employee, then the Option shall terminate upon the earlier of the
Expiration Date or six months following a Liquidity Event. However, if a
Liquidity Event has occurred prior to the Termination of Employment, then the
Option shall terminate upon the earlier of the Expiration Date or the first
anniversary of the date of such Termination of Employment. "Permanent
Disability" shall mean the inability to engage in any substantial gainful
activity by reason of any medically determinable physical or mental
impairment which can be expected to result in death or which has lasted or
can be expected to last for a continuous period of not less than 12 months.
Employee shall not be deemed to have a Permanent Disability until proof of
the existence thereof shall have been furnished to the Board in such form and
manner, and at such times, as the Board may require. Any determination by
the Board that Employee does not have a Permanent Disability shall be final
and binding upon the Company and Employee.
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<PAGE>
(iii) OTHER TERMINATION. If Employee's Employment is Terminated for
no reason, or for any reason (including resignation) other than Retirement,
death, Permanent Disability or For Cause, then the Option shall terminate upon
the earlier of the Expiration Date or six months following a Liquidity Event.
However, if a Liquidity Event has occurred prior to the Termination of
Employment, then the Option shall terminate upon the earlier of the Expiration
Date or the first anniversary of the date of such Termination of Employment.
(iv) TERMINATION FOR CAUSE. If Employee's Employment is Terminated
For Cause, then the Option shall terminate 30 days after the date of such
Termination of Employment. "For Cause" shall mean commission of a felony, or
grossly negligent or willful injury to the Company.
(b) OTHER EVENTS CAUSING TERMINATION OF OPTION. Notwithstanding anything
to the contrary in this Agreement, the Option shall terminate upon the
consummation of any of the following events, or, if later, the thirtieth day
following the first date upon which such event shall have been approved by both
the Board and the shareholders of the Company:
(i) the dissolution of the Company;
(ii) a sale of substantially all of the property and assets of the
Company, unless the terms of such sale shall provide otherwise; or
(iii) any transaction the terms of which provide that the Employee
will immediately receive the spread between the fair market value of the
securities underlying this Option and the Exercise Price if the Board of
Directors, in their sole discretion, determine to so terminate this Option in
connection with such transaction.
3. ADJUSTMENTS. In the event that the outstanding securities of the class
then subject to the Option are increased, decreased or exchanged for or
converted into cash, property and/or a different number or kind of securities,
or cash, property and/or securities are distributed in respect of such
outstanding securities, in either case as a result of a reorganization, merger,
consolidation, recapitalization, reclassification, dividend (other than a
regular, quarterly cash dividend) or other distribution, stock split, reverse
stock split, spin-off or the like, or in the event that substantially all of the
property and assets of the Company are sold, then, unless such event shall cause
the Option to terminate pursuant to Section 2(b) hereof, the Committee shall
make appropriate and proportionate adjustments in the number and type of shares
or other securities or cash or other property that may thereafter be acquired
upon the exercise of the Option; provided, however, that any such adjustments in
the Option shall be made without changing the aggregate Exercise Price of the
then unexercised portion of the Option.
4. EXERCISE. The Option shall be exercisable during Employee's lifetime
only by Employee or by his or her guardian or legal representative, and after
Employee's death only by the person or entity entitled to do so under Employee's
last will and testament or
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<PAGE>
applicable intestate law. The Option may only be exercised by the delivery
to the Company of a written notice of such exercise, which notice shall specify
the number of Option Shares to be purchased (the "Purchased Shares") and the
aggregate Exercise Price for such shares (the "Exercise Notice"), together with
payment in full of such aggregate Exercise Price in cash or by check payable to
the Company or, in whole or in part:
(a) by the delivery to the Company of a promissory note in a form and
amount satisfactory-to the Committee; or
(b) by the delivery to the Company of a certificate or certificates
representing shares of Common Stock which have been held by Employee for at
least six months, duly endorsed or accompanied by a duly executed stock powers,
which delivery effectively transfers to the Company good and valid title to such
shares, free and clear of any pledge, commitment, lien, claim or other
encumbrance (such shares to be valued on the basis of the aggregate fair market
value (as determined by the Committee in their good faith and reasonable
judgment) thereof on the date of such exercise).
5. PAYMENT OF WITHHOLDING TAXES. If the Company becomes obligated to
withhold an amount on account of any tax imposed as a result of the exercise of
the Option, including, without limitation, any federal, state, local or other
income tax, or any F.I.C.A., state disability insurance tax or other employment
tax, then Employee shall, on the first day upon which the Company becomes
obligated to pay such amount to the appropriate taxing authority, pay such
amount to the Company in cash or by check, or, in whole or in part, by the
delivery to the Company of a certificate or certificates representing shares of
Common Stock, duly endorsed or accompanied by duly executed stock powers, which
delivery effectively transfers to the Company good and valid title to such
shares, free and clear of any pledge, commitment, lien, claim or other
encumbrance or by instructing the Company to withhold and retain that number of
shares otherwise issuable upon exercise of the Option having an aggregate fair
market value (as determined by the Committee in their good faith and reasonable
judgment) equal to such amount.
6. NOTICES. All notices and other communications required or permitted to
be given pursuant to this Agreement shall be in writing and shall be deemed
given if delivered personally or five days after mailing by certified or
registered mail, postage prepaid, return receipt requested, to the Company at:
300 North Lake Avenue, Suite 300
Pasadena, California 91101
Attention: Chief Financial Officer
or to Employee at the address set forth beneath his or her signature on the
signature page hereto, or at such other addresses as they may designate by
written notice in the manner aforesaid.
4
<PAGE>
7. STOCK EXCHANGE REQUIREMENTS: APPLICABLE LAWS. Notwithstanding anything
to the contrary in this Agreement, the Option may not be exercised and no
certificate representing all or any part of the shares issuable hereunder shall
be issued or delivered, if (a) such shares have not been admitted to listing
upon official notice of issuance on each stock exchange upon which shares of
that class are then listed or (b) in the opinion of counsel to the Company, such
exercisabilty, issuance or delivery would cause the Company to be in violation
of or to incur liability under any federal, state or other securities law, or
any requirement of any stock exchange listing agreement to which the Company is
a party, or any other requirement or law or of any administrative or regulatory
body having jurisdiction over the Company.
8. NONTRANSFERABILITY. Neither the Option nor any interest therein may be
sold, assigned, conveyed, gifted, pledged, hypothecated or otherwise transferred
in any manner other than by will or the laws of descent and distribution.
9. INTERPRETATION. The Option is not granted pursuant to the Company's
1994 Stock Incentive Plan. The interpretation and construction by the
Committee of this Agreement and the Option shall be final and binding upon
the Employee.
10. SHAREHOLDER RIGHTS. No person or entity shall be entitled to vote,
receive dividends or be deemed for any purpose the holder of any Option Shares
until the Option shall have been duly exercised to purchase such Option Shares
in accordance with the provisions of this Agreement.
11. EMPLOYMENT RIGHTS, No provision of this Agreement or of the Option
granted hereunder shall (a) confer upon Employee any right to continue in the
employ of the Company or any of its subsidiaries, (b) affect the right of the
Company and each of its subsidiaries to terminate the employment of Employee,
with or without cause, or (c) confer upon Employee any right to participate in
any employee welfare or benefit plan or other program of the Company or any of
its subsidiaries other than participation in this Agreement. Employee hereby
acknowledges and agrees that the Company and each of its subsidiaries may
terminate the employment of Employee at any time and for any reason, or for no
reason, unless Employee and the Company or such subsidiary are parties to a
written employment agreement that expressly provides otherwise.
12. GOVERNING LAW. This Agreement and the Option granted hereunder shall
be governed by and construed and enforced in accordance with the laws of the
State of California.
13. FINANCIAL STATEMENTS. So long as this Option is outstanding, the
Company shall provide annual audited financial statements to the Employee.
IN WITNESS WHEREOF, the Company and Employee have duly executed this
Agreement as of the Date of Grant.
PAULA FINANCIAL
5
<PAGE>
By: __________________________
Title:
EMPLOYEE
______________________________
Signature
______________________________
Street Address
______________________________
City, State and Zip Code
______________________________
Social Security Number
6
<PAGE>
STOCK OPTION AGREEMENT
(Immediate Vesting)
This Stock Option Agreement ("Agreement") is made and entered into as of
the Date of Grant indicated below by and between PAULA FINANCIAL, a
California corporation (the "Company"), and the person named below as
Employee.
WHEREAS, Employee is an employee of the Company, and
WHEREAS, the compensation committee of the Board of Directors of the
Company (the "Committee") has approved the grant to Employee of an option to
purchase shares of the common stock, no par value, of the Company (the
"Common Stock"), on the other terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the foregoing recitals and the
covenants set forth herein, the parties hereto hereby agree as follows:
1. GRANT OF OPTION; CERTAIN TERMS AND CONDITIONS. The Company hereby
grants to Employee, and Employee hereby accepts, as of the Date of Grant, an
option to purchase the number of shares of Common Stock indicated below (the
"Option Shares") at the Exercise Price per share indicated below, which
option shall expire at 5:00 o'clock p.m., Pacific Time, on the Expiration
Date indicated below and shall be subject to all of the terms and conditions
set forth in this Agreement (the "Option"). The Option shall become
exercisable to purchase ("vest with respect to") the Option Shares as
indicated below.
Employee:
Date of Grant: October 26, 1996
Number of share purchasable:
Exercise Price per share: $19.00
Vesting Period. Immediate upon Date of Grant.
Expiration Date: October 25, 2006
The Option is not intended to qualify as an incentive stock option under
Section 422 of the Internal Revenue Code (an "Incentive Stock Option").
<PAGE>
2. TERMINATION OF OPTION.
(a) Termination of Employment.
(i) TERMINATION WITHIN ONE YEAR AFTER CHANGE OF CONTROL. In the
event that Employee shall cease to be an employee of the Company or any of
its subsidiaries (such event shall be referred to herein as the "Termination"
of Employee's "Employment") for any reason, or for no reason, within one year
after a Change of Control (as hereinafter defined), then the Option shall
terminate upon the earlier of the Expiration Date or the first anniversary of
the date of such Termination of Employment. "Change of Control" shall mean
the first to occur of the following events:
(X) any date upon which the directors of the Company who were
nominated by the Board of Directors (the "Board") for election as
directors or appointed by the Board cease to constitute a majority
of the directors of the Company;
(Y) the date of the first public announcement that any person
or entity, together with all Affiliates and Associates (as such
capitalized terms are defined in Rule 12b-2 promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) of
such person or entity, shall have become the Beneficial Owner (as
defined in Rule 13d-3 promulgated under the Exchange Act) of voting
securities of the Company representing 50% or more of the voting
power of the Company (a "50% Stockholder"), provided, however, that
the terms "person" and "entity," as used in this clause (Y), shall
not include (1) the Company or any of its subsidiaries, (2) any
employee benefit plan of the Company or any of its subsidiaries
including the Company's Employee Stock Ownership Plan, (3) any
entity holding voting securities of the Company for or pursuant to
the terms of any such plan or (4) any person or entity if the
transaction that resulted in such person or entity becoming a 50%
Stockholder was approved in advance by the Board; or
(Z) a reorganization, merger or consolidation of the Company
(other than an reorganization, merger or consolidation the sole
purpose of which is to change the Company's domicile solely within
the United States) the consummation of which results in the
outstanding securities of any class then subject to the Option being
exchanged for or converted into cash, property and/or a different
kind of securities.
2
<PAGE>
(ii) RETIREMENT. If Employee's Employment is Terminated by reason
Employee's retirement in accordance with the Company's then-current
retirement policy ("Retirement"), and a Change of Control shall not have
occurred within one year prior thereto, then the Option shall terminate upon
the earlier of the Expiration Date or the first anniversary of the date of
such Retirement.
(iii) DEATH OR PERMANENT DISABILITY. If Employee's Employment is
Terminated by reason of the death or Permanent Disability (as hereinafter
defined) of Employee, and a Change of Control shall not have occurred within
one year prior thereto, then the Option shall terminate upon the earlier of
the Expiration Date or the first anniversary of the date of such Termination
of Employment. "Permanent Disability" shall mean the inability to engage in
any substantial gainful activity by reason of any medically determinable
physical or mental impairment which can be expected to result in death or
which has lasted or can be expected to last for a continuous period of not
less than 12 months. Employee shall not be deemed to have a Permanent
Disability until proof of the existence thereof shall have been furnished to
the Board in such form and manner, and at such times, as the Board may
require. Any determination by the Board that Employee does not have a
Permanent Disability shall be final and binding upon the Company and Employee.
(iv) OTHER TERMINATION. If Employee's Employment is Terminated for
no reason, or for any reason other than Retirement, death or Permanent
Disability, and a Change of Control shall not have occurred within one year
prior thereto, then the Option shall terminate upon the earlier of the
Expiration Date or 30 days after the date of such Termination of Employment.
(b) DEATH FOLLOWING TERMINATION OF EMPLOYMENT. Notwithstanding anything
to the contrary in this Agreement, if Employee shall die at any time after
the Termination of his or her Employment and prior to the termination of this
Option, then the Option shall terminate on the earlier of the Expiration Date
or the first anniversary of the date of such death.
(c) OTHER EVENTS CAUSING TERMINATION OF OPTION. Notwithstanding
anything to the contrary in this Agreement, the Option shall terminate upon
the consummation of any of the following events, or, if later, the thirtieth
day following the first date upon which such event shall have been approved
by both the Board and the shareholders of the Company:
(i) the dissolution of the Company; or
(ii) a sale of substantially all of the property and assets of the
Company, unless the terms of such sale shall provide otherwise.
3. ADJUSTMENTS. In the event that the outstanding securities of the
class then subject to the Option are increased, decreased or exchanged for or
converted into cash, property and/or a different number or kind of
securities, or cash, property and/or
3
<PAGE>
securities are distributed in respect of such outstanding securities, in
either case as a result of a reorganization, merger, consolidation,
recapitalization, reclassification, dividend (other than a regular, quarterly
cash dividend) or other distribution, stock split reverse stock split,
spin-off or the like, or in the event that substantially all of the property
and assets of the Company are sold, then, unless such event shall cause the
Option to terminate pursuant to Section 2(c) hereof, the Committee shall make
appropriate and proportionate adjustments in the number and type of shares or
other securities or cash or other property that may thereafter be acquired
upon the exercise of the Option; provided, however, that any such adjustments
in the Option shall be made without changing the aggregate Exercise Price of
the then unexercised portion of the Option.
4. EXERCISE. The Option shall be exercisable during Employee's
lifetime only by Employee or by his or her guardian or legal representative,
and after Employee's death only by the person or entity entitled to do so
under Employee's last will and testament or applicable intestate law. The
Option may only be exercised by the delivery to the Company of a written
notice of such exercise, which notice shall specify the number of Option
Shares to be purchased (the "Purchased Shares") and the aggregate Exercise
Price for such shares (the "Exercise Notice"), together with payment in full
of such aggregate Exercise Price in cash or by check payable to the Company
or, in whole or in part:
(a) by the delivery to the Company of a promissory note in a form
and amount satisfactory to the Committee; or
(b) by the delivery to the Company of a certificate or certificates
representing shares of Common Stock which have been held by Employee for at
least six months,-duly endorsed or accompanied by a duly executed stock
powers, which delivery effectively transfers to the Company good and valid
title to such shares, free and clear of any pledge, commitment, lien, claim
or other encumbrance (such shares to be valued on the basis of the aggregate
fair market value (as determined by the Committee in their good faith and
reasonable judgment) thereof on the date of such exercise).
5. PAYMENT OF WITHHOLDING TAXES. If the Company becomes obligated to
withhold an amount on account of any tax imposed as a result of the exercise
of the Option, including, without limitation, any federal, state, local or
other income tax, or any F.I.C.A., state disability insurance tax or other
employment tax, then Employee shall, on the first day upon which the Company
becomes obligated to pay such amount to the appropriate taxing authority, pay
such amount to the Company in cash or by check payable to the Company, or, in
whole or in part, by the delivery to the Company of a certificate or
certificates representing shares of Common Stock, duly endorsed or
accompanied by duly executed stock powers, which delivery effectively
transfers to the Company good and valid title to such shares, free and clear
of any pledge, commitment, lien, claim or other encumbrance or by instructing
the Company to withhold and retain that number of shares otherwise issuable
upon exercise of the Option having an aggregate fair market value (as
determined by the Committee in their good faith and reasonable judgment)
equal to such amount.
4
<PAGE>
6. NOTICES. All notices and other communications required or permitted
to be given pursuant to this Agreement shall be in writing and shall be
deemed given if delivered personally or five days after mailing by certified
or registered mail, postage prepaid, return receipt requested, to the Company
at 300 North Lake Avenue, Suite 300, Pasadena, California 91101, Attention:
Chief Financial Officer, or to Employee at the address set forth beneath his
or her signature on the signature page hereto, or at such other addresses as
they may designate by written notice in the manner aforesaid.
7. STOCK EXCHANGE REQUIREMENTS: APPLICABLE LAWS. Notwithstanding
anything to the contrary in this Agreement, the Option may not be exercised
and no certificate representing all or any part of the shares issuable
hereunder shall be issued or delivered, if (a) such shares have not been
admitted to listing upon official notice of issuance on each stock exchange
upon which shares of that class are then listed or (b) in the opinion of
counsel to the Company, such exercisability, issuance or delivery would cause
the Company to be in violation of or to incur liability under any federal,
state or other securities law, or any requirement of any stock exchange
listing agreement to which the Company is a party, or any other requirement
or law or of any administrative or regulatory body having jurisdiction over
the Company.
8. NONTRANSFERABILITY. Neither the Option nor any interest therein may
be sold, assigned, conveyed, gifted, pledged, hypothecated or otherwise
transferred in any manner other than by will or the laws of descent and
distribution.
9. PLAN. The Option is being awarded pursuant to the Plan, as in
effect on the Date of Grant, and is subject to all the terms and conditions
of the Plan, as the same may be amended from time to time provided, however,
that no such amendment shall deprive Employee, without his or her consent, of
the Option or any of Employee's rights under this Agreement. The
interpretation and construction by the Committee of the Plan, this Agreement
and such rules and regulations as may be adopted by the Committee for the
purpose of administering the Plan shall be final and binding upon the
Employee. Until the Option shall be exercised or be forfeited, the Company
shall, upon written request therefor, send a copy of the Plan, in its current
form, to the holder of record of the Option.
10. SHAREHOLDER RIGHTS. No person or entity shall be entitled to vote,
receive dividends or be deemed for any purpose the holder of any Option
Shares until the Option shall have been duly exercised to purchase such
Option Shares in accordance with the provisions of this Agreement.
11. EMPLOYMENT RIGHTS. No provision of this Agreement or of the Option
granted hereunder shall (a) confer upon Employee any right to continue in the
employ of the Company or any of its subsidiaries, (b) affect the right of the
Company and each of its subsidiaries to terminate the employment of Employee,
with or without cause, or (c) confer upon Employee any right to participate
in any employee welfare or benefit plan or other program of the Company or
any of its subsidiaries other than participation in the Plan pursuant to this
Agreement. Employee hereby acknowledges and agrees that the Company and each
of its subsidiaries may terminate the employment of Employee at any
5
<PAGE>
time and for any reason, or for no reason, unless Employee and the Company or
such subsidiary are parties to a written employment agreement that expressly
provides otherwise.
12. GOVERNING LAW. This Agreement and the Option granted hereunder
shall be governed by and construed and enforced in accordance with the laws
of the State of California.
13. FINANCIAL STATEMENTS. So long as this Option is outstanding, the
Company shall provide annual audited financial statements to the Employee.
IN WITNESS WHEREOF, the Company and Employee have duly executed this
Agreement as of the Date of Grant.
PAULA FINANCIAL
By:
----------------------------------
Title:
EMPLOYEE
--------------------------------------
Signature
--------------------------------------
Street Address
--------------------------------------
City, State and Zip Code
--------------------------------------
Social Security Number
6
<PAGE>
STOCK OPTION AGREEMENT
(Executive)
This Stock Option Agreement ("Agreement") is made and entered into as of
the Date of Grant indicated below by and between PAULA FINANCIAL, a
California corporation (the "Company"), and the person named below as
Employee.
WHEREAS, Employee is an employee of the Company, and
WHEREAS, the compensation committee of the Board of Directors of the
Company (the "Committee") has approved the grant to Employee of an option to
purchase shares of the common stock, no par value, of the Company (the
"Common Stock"), on the other terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the foregoing recitals and the
covenants set forth herein, the parties hereto hereby agree as follows:
1. GRANT OF OPTION: CERTAIN TERMS AND CONDITIONS. The Company hereby
grants to Employee, and Employee hereby accepts, as of the Date of Grant, an
option to purchase the number of shares of Common Stock indicated below (the
"Option Shares") at the Exercise Price per share indicated below, which
option shall expire at 5:00 o'clock p.m., Pacific Time, on the Expiration
Date indicated below and shall be subject to all of -the terms and conditions
set forth in this Agreement (the "Option"). The Option shall become
exercisable to purchase ("vest with respect to") the Option Shares as
indicated below.
Employee:
Date of Grant: October 26, 1996
Number of share purchasable:
Exercise Price per share: $19.00
Vesting Period: 20% on Date of Grant, 20% per year on
each anniversary of the Date of Grant.
Expiration Date: October 25, 2006
The Option is not intended to qualify as an incentive stock option under
Section 422 of the Internal Revenue Code (an "Incentive Stock Option").
<PAGE>
2. TERMINATION OF OPTION.
(a) Termination of Employment.
(i) Retirement. In the event that Employee shall cease to be
an employee of the Company or any of its subsidiaries (such event shall be
referred to herein as the "Termination" of Employee's "Employment") by reason
of Employee's retirement in accordance with the Company's then-current
retirement policy ("Retirement"), then the Option shall terminate upon the
earlier of the Expiration Date or six months following a Liquidity Event.
However, if a Liquidity Event has occurred prior to the Termination of
Employment, then the Option shall terminate upon the earlier of the
Expiration Date or the first anniversary of the date of such Retirement.
A "Liquidity Event" shall mean:
(X) the closing of a public offering pursuant to an
effective registration statement filed under the Securities Act
of 1933, as amended, covering the offer and sale of shares of
Common Stock of the Company in which the aggregate price paid for
such shares by the public is equal to or greater than
$20,000,000; or
(Y) the date the Company agrees to make a market for the
securities issuable upon exercise of this Option at the fair
market value of such securities.
(Z) the closing of an acquisition or merger of the Company
as a result of which the Option (pursuant to Section 3 hereof) becomes
exercisable for securities of a Company that are traded on a national
securities exchange or quoted through the NASDAQ National Market System.
(ii) DEATH OR PERMANENT DISABILITY. If Employee's Employment
is Terminated by reason of the death or Permanent Disability (as hereinafter
defined) of Employee, then the Option shall terminate upon the earlier of the
Expiration Date or six months following a Liquidity Event. However, if a
Liquidity Event has occurred prior to the Termination of Employment, then the
Option shall terminate upon the earlier of the Expiration Date or the first
anniversary of the date of such Termination of Employment. "Permanent
Disability" shall mean the inability to engage in any substantial gainful
activity by reason of any medically determinable physical or mental
impairment which can be expected to result in death or which has lasted or
can be expected to last for a continuous period of not less than 12 months.
Employee shall not be deemed to have a Permanent Disability until proof of
the existence thereof shall have been furnished to the Board in such form and
manner, and at such times, as the Board may require. Any determination by
the Board that Employee does not have a Permanent Disability shall be final
and binding upon the Company and Employee.
2
<PAGE>
(iii) OTHER TERMINATION. If Employee's Employment is Terminated
for no reason, or for any reason (including resignation) other than
Retirement, death, Permanent Disability or For Cause, then the Option shall
terminate upon the earlier of the Expiration Date or six months following a
Liquidity Event. However, if a Liquidity Event has occurred prior to the
Termination of Employment, then the Option shall terminate upon the earlier
of the Expiration Date or the first anniversary of the date of such
Termination of Employment.
(iv) TERMINATION FOR CAUSE. If Employee's Employment is
Terminated For Cause, then the Option shall terminate 30 days after the date
of such Termination of Employment. "For Cause" shall mean commission of a
felony, or grossly negligent or willful injury to the Company.
(b) OTHER EVENTS CAUSING TERMINATION OF OPTION. Notwithstanding
anything to the contrary in this Agreement, the Option shall terminate upon
the consummation of any of the following events, or, if later, the thirtieth
day following the first date upon which such event shall have been approved
by both the Board and the shareholders of the Company:
(i) the dissolution of the Company;
(ii) a sale of substantially all of the property and assets of
the Company, unless the terms of such sale shall provide otherwise; or
(iii) any transaction the terms of which provide that the
Employee will immediately receive the spread between the fair market value of
the securities underlying this Option and the Exercise Price if the Board of
Directors, in their sole discretion, determine to so terminate this Option in
connection with such transaction.
3. ADJUSTMENTS. In the event that the outstanding securities of the
class then subject to the Option are increased, decreased or exchanged for or
converted into cash, property and/or a different number or kind of
securities, or cash, property and/or securities are distributed in respect of
such outstanding securities, in either case as a result of a reorganization,
merger, consolidation, recapitalization, reclassification, dividend (other
than a regular, quarterly cash dividend) or other distribution, stock split,
reverse stock split, spin-off or the like, or in the event that substantially
all of the property and assets of the Company are sold, then, unless such
event shall cause the Option to terminate pursuant to Section 2(b) hereof,
the Committee shall make appropriate and proportionate adjustments in the
number and type of shares or other securities or cash or other property that
may thereafter be acquired upon the exercise of the Option; provided,
however, that any such adjustments in the Option shall be made without
changing the aggregate Exercise Price of the then unexercised portion of the
Option.
4. EXERCISE. The Option shall be exercisable during Employee's
lifetime only by Employee or by his or her guardian or legal representative,
and after Employee's death only by the person or entity entitled to do so
under Employee's last will and testament or
3
<PAGE>
applicable intestate law. The Option may only be exercised by the delivery to
the Company of a written notice of such exercise, which notice shall specify the
number of Option Shares to be purchased (the "Purchased Shares") and the
aggregate Exercise Price for such shares (the "Exercise Notice"), together with
payment in full of such aggregate Exercise Price in cash or by check payable to
the Company or, in whole or in part:
(a) by the delivery to the Company of a promissory note in a
form and amount satisfactory to the Committee; or
(b) by the delivery to the Company of a certificate or
certificates representing shares of Common Stock which have been held by
Employee for at least six months, duly endorsed or accompanied by a duly
executed stock powers, which delivery effectively transfers to the Company
good and valid title to such shares, free and clear of any pledge,
commitment, lien, claim or other encumbrance (such shares to be valued on the
basis of the aggregate fair market value (as determined by the Committee in
their good faith and reasonable judgment) thereof on the date of such
exercise).
5. PAYMENT OF WITHHOLDING TAXES. If the Company becomes obligated to
withhold an amount on account of any tax imposed as a result of the exercise
of the Option, including, without limitation, any federal, state, local or
other income tax, or any F.I.C.A., state disability insurance tax or other
employment tax, then Employee shall, on the first day upon which the Company
becomes obligated to pay such amount to the appropriate taxing authority, pay
such amount to the Company in cash or by check, or, in whole or in part, by
the delivery to the Company of a certificate or certificates representing
shares of Common Stock, duly endorsed or accompanied by duly executed stock
powers, which delivery effectively transfers to the Company good and valid
title to such shares, free and clear of any pledge, commitment, lien, claim
or other encumbrance or by instructing the Company to withhold and retain
that number of shares otherwise issuable upon exercise of the Option having
an aggregate fair market value (as determined by the Committee in their good
faith and reasonable judgment) equal to such amount.
6. NOTICES. All notices and other communications required or
permitted to be given pursuant to this Agreement shall be in writing and
shall be deemed given if delivered personally or five days after mailing by
certified or registered mail, postage prepaid, return receipt requested, to
the Company at:
300 North Lake Avenue, Suite 300
Pasadena, California 91101
Attention: Chief Financial Officer
or to Employee at the address set forth beneath his or her signature on the
signature page hereto, or at such other addresses as they may designate by
written notice in the manner aforesaid.
4
<PAGE>
7. STOCK EXCHANGE REQUIREMENTS. APPLICABLE LAWS. Notwithstanding
anything to the contrary in this Agreement, the Option may not be exercised
and no certificate representing all or any part of the shares issuable
hereunder shall be issued or delivered, if (a) such shares have not been
admitted to listing upon official notice of issuance on each stock exchange
upon which shares of that class are then listed or (b) in the opinion of
counsel to the Company, such exercisabilty, issuance or delivery would cause
the Company to be in violation of or to incur liability under any federal,
state or other securities law, or any requirement of any stock exchange
listing agreement to which the Company is a party, or any other requirement
or law or of any administrative or regulatory body having jurisdiction over
the Company.
8. NONTRANSFERABILITY. Neither the Option nor any interest therein
may be sold, assigned, conveyed, gifted, pledged, hypothecated or otherwise
transferred in any manner other than by will or the laws of descent and
distribution.
9. PLAN. The Option is being awarded pursuant to the Plan, as in
effect on the Date of Grant, and is subject to all the terms and conditions
of the Plan, as the same may be amended from time to time provided, however,
that no such amendment shall deprive Employee, without his or her consent, of
the Option or any of Employee's rights under this Agreement. The
interpretation and construction by the Committee of the Plan, this Agreement
and such rules and regulations as may be adopted by the Committee for the
purpose of administering the Plan shall be final and binding upon the
Employee. Until the Option shall be exercised or be forfeited, the Company
shall, upon written request therefor, send a copy of the Plan, in its current
form, to the holder of record of the Option.
10. SHAREHOLDER RIGHTS. No person or entity shall be entitled to
vote, receive dividends or be deemed for any purpose the holder of any Option
Shares until the Option shall have been duly exercised to purchase such
Option Shares in accordance with the provisions of this Agreement.
11. EMPLOYMENT RIGHTS. No provision of this Agreement or of the
Option granted hereunder shall (a) confer upon Employee any right to continue
in the employ of the Company or any of its subsidiaries, (b) affect the right
of the Company and each of its subsidiaries to terminate the employment of
Employee, with or without cause, or (c) confer upon Employee any right to
participate in any employee welfare or benefit plan or other program of the
Company or any of its subsidiaries other than participation in the Plan
pursuant to this Agreement. Employee hereby acknowledges and agrees that the
Company and each of its subsidiaries may terminate the employment of Employee
at any time and for any reason, or for no reason, unless Employee and the
Company or such subsidiary are parties to a written employment agreement that
expressly provides otherwise.
12. GOVERNING LAW. This Agreement and the Option granted hereunder
shall be governed by and construed and enforced in accordance with the laws
of the State of California.
5
<PAGE>
13. FINANCIAL STATEMENTS. So long as this Option is outstanding, the
Company shall provide annual audited financial statements to the Employee.
IN WITNESS WHEREOF, the Company and Employee have duly executed this
Agreement as of the Date of Grant.
PAULA FINANClAL
By:
-----------------------
Title:
EMPLOYEE
--------------------------
Signature
--------------------------
Street Address
--------------------------
City, State and Zip Code
--------------------------
Social Security Number
6
<PAGE>
STOCK OPTION AGREEMENT
(Stepped Vesting)
This Stock Option Agreement ("Agreement") is made and entered into as of
the Date of Grant indicated below by and between PAULA FINANCIAL, a
California corporation (the "Company"), and the person named below as
Employee.
WHEREAS, Employee is an employee of the Company, and
WHEREAS, the compensation committee of the Board of Directors of the
Company (the "Committee") has approved the grant to Employee of an option to
purchase shares of the common stock, no par value, of the Company (the
"Common Stock"), on the other terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the foregoing recitals and the
covenants set forth herein, the parties hereto hereby agree as follows:
1. GRANT OF OPTION; CERTAIN TERMS AND CONDITIONS. The Company hereby
grants to Employee, and Employee hereby accepts, as of the Date of Grant, an
option to purchase the number of shares of Common Stock indicated below (the
"Option Shares") at the Exercise Price per share indicated below, which
option shall expire at 5:00 o'clock p.m., Pacific Time, on the Expiration
Date indicated below and shall be subject to all of the terms and conditions
set forth in this Agreement (the "Option"). The Option shall become
exercisable to purchase ("vest with respect to") the Option Shares as
indicated below.
Employee:
Date of Grant: October 26, 1996
Number of share purchasable:
Exercise Price per share: $19.00
Vesting Period: 20% upon Date of Grant and 20% per year on
each anniversary of Date of Grant.
Expiration Date: October 25, 2006
The Option is not intended to qualify as an incentive stock option under
Section 422 of the Internal Revenue Code (an "Incentive Stock Option").
<PAGE>
2. TERMINATION OF OPTION.
(a) Termination of Employment.
(i) TERMINATION WITHIN ONE YEAR AFTER CHANGE OF CONTROL. In the
event that Employee shall cease to be an employee of the Company or any of
its subsidiaries (such event shall be referred to herein as the "Termination"
of Employee's "Employment") for any reason, or for no reason, within one year
after a Change of Control (as hereinafter defined), then the Option shall
terminate upon the earlier of the Expiration Date or the first anniversary of
the date of such Termination of Employment. "Change of Control" shall mean
the first to occur of the following events:
(X) any date upon which the directors of the Company who were nominated
by the Board of Directors (the "Board") for election as directors or
appointed by the Board cease to constitute a majority of the directors of
the Company;
(Y) the date of the first public announcement that any person or
entity, together with all Affiliates and Associates (as such capitalized
terms are defined in Rule 12b-2 promulgated under the Securities Exchange
Act of 1934, as amended (the "Exchange Act")) of such person or entity,
shall have become the Beneficial Owner (as defined in Rule 13d-3 promulgated
under the Exchange Act) of voting securities of the Company representing 50%
or more of the voting power of the Company (a "50% Stockholder"), provided,
however, that the terms "person" and "entity," as used in this clause (Y),
shall not include (1) the Company or any of its subsidiaries, (2) any
employee benefit plan of the Company or any of its subsidiaries including
the Company's Employee Stock Ownership Plan, (3) any entity holding voting
securities of the Company for or pursuant to the terms of any such plan or
(4) any person or entity if the transaction that resulted in such person or
entity becoming a 50% Stockholder was approved in advance by the Board; or
(Z) a reorganization, merger or consolidation of the Company (other
than an reorganization, merger or consolidation the sole purpose of which is
to change the Company's domicile solely within the United States) the
consummation of which results in the outstanding securities of any class
then subject to the Option being exchanged for or converted into cash,
property and/or a different kind of securities.
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(ii) RETIREMENT. If Employee's Employment is Terminated by reason of
Employee's retirement in accordance with the Company's then-current retirement
policy ("Retirement"), and a Change of Control shall not have occurred within
one year prior thereto, then the Option shall terminate upon the earlier of the
Expiration Date or the first anniversary of the date of such Retirement.
(iii) DEATH OR PERMANENT DISABILITY. If Employee's Employment is
Terminated by reason of the death or Permanent Disability (as hereinafter
defined) of Employee, and a Change of Control shall not have occurred within
one year prior thereto, then the Option shall terminate upon the earlier of
the Expiration Date or the first anniversary of the date of such Termination
of Employment. "Permanent Disability" shall mean the inability to engage in
any substantial gainful activity by reason of any medically determinable
physical or mental impairment which can be expected to result in death or
which has lasted or can be expected to last for a continuous period of not
less than 12 months. Employee shall not be deemed to have a Permanent
Disability until proof of the existence thereof shall have been furnished to
the Board in such form and manner, and at such times, as the Board may
require. Any determination by the Board that Employee does not have a
Permanent Disability shall be final and binding upon the Company and Employee.
(iv) OTHER TERMINATION. If Employee's Employment is Terminated
for no reason, or for any reason other than Retirement, death or Permanent
Disability, and a Change of Control shall not have occurred within one year
prior thereto, then the Option shall terminate upon the earlier of the
Expiration Date or 30 days after the date of such Termination of Employment.
(b) DEATH FOLLOWING TERMINATION OF EMPLOYMENT. Notwithstanding anything
to the contrary in this Agreement, if Employee shall die at any time after
the Termination of his or her Employment and prior to the termination of this
Option, then the Option shall terminate on the earlier of the Expiration Date
or the first anniversary of the date of such death.
(c) OTHER EVENTS CAUSING TERMINATION OF OPTION. Notwithstanding anything
to the contrary in this Agreement, the Option shall terminate upon the
consummation of any of the following events, or, if later, the thirtieth day
following the first date upon which such event shall have been approved by
both the Board and the shareholders of the Company:
(i) the dissolution of the Company; or
(ii) a sale of substantially all of the property and assets of the
Company, unless the terms of such sale shall provide otherwise.
3. ADJUSTMENTS. In the event that the outstanding securities of the
class then subject to the Option are increased, decreased or exchanged for or
converted into cash, property and/or a different number or kind of
securities, or cash, property and/or
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securities are distributed in respect of such outstanding securities, in
either case as a result of a reorganization, merger, consolidation,
recapitalization, reclassification, dividend (other than a regular, quarterly
cash dividend) or other distribution, stock split, reverse stock split,
spin-off or the like, or in the event that substantially all of the property
and assets of the Company are sold, then, unless such event shall cause the
Option to terminate pursuant to Section 2(c) hereof, the Committee shall make
appropriate and proportionate adjustments in the number and type of shares or
other securities or cash or other property that may thereafter be acquired
upon the exercise of the Option; provided, however, that any such adjustments
in the Option shall be made without changing the aggregate Exercise Price of
the then unexercised portion of the Option.
4. EXERCISE. The Option shall be exercisable during Employee's lifetime
only by Employee or by his or her guardian or legal representative, and after
Employee's death only by the person or entity entitled to do so under
Employee's last will and testament or applicable intestate law. The Option
may only be exercised by the delivery to the Company of a written notice of
such exercise, which notice shall specify the number of Option Shares to be
purchased (the "Purchased Shares") and the aggregate Exercise Price for such
shares (the "Exercise Notice"), together with payment in full of such
aggregate Exercise Price in cash or by check payable to the Company or, in
whole or in part:
(a) by the delivery to the Company of a promissory note in a form
and amount satisfactory to the Committee; or
(b) by the delivery to the Company of a certificate or certificates
representing shares of Common Stock which have been held by Employee for at
least six months, duly endorsed or accompanied by a duly executed stock
powers, which delivery effectively transfers to the Company good and valid
title to such shares, free and clear of any pledge, commitment, lien, claim
or other encumbrance (such shares to be valued on the basis of the aggregate
fair market value (as determined by the Committee in their good faith and
reasonable judgment) thereof on the date of such exercise).
5. PAYMENT OF WITHHOLDING TAXES. If the Company becomes obligated to
withhold an amount on account of any tax imposed as a result of the exercise
of the Option, including, without limitation, any federal, state, local or
other income tax, or any F.I.C.A., state disability insurance tax or other
employment tax, then Employee shall, on the first day upon which the Company
becomes obligated to pay such amount to the appropriate taxing authority, pay
such amount to the Company in cash or by check payable to the Company, or, in
whole or in part, by the delivery to the Company of a certificate or
certificates representing shares of Common Stock, duly endorsed or
accompanied by duly executed stock powers, which delivery effectively
transfers to the Company good and valid title to such shares, free and clear
of any pledge, commitment, lien, claim or other encumbrance or by instructing
the Company to withhold and retain that number of shares otherwise issuable
upon exercise of the Option having an aggregate fair market value (as
determined by the Committee in their good faith and reasonable judgment)
equal to such amount.
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<PAGE>
6. NOTICES. All notices and other communications required or permitted
to be given pursuant to this Agreement shall be in writing and shall be
deemed given if delivered personally or five days after mailing by certified
or registered mail, postage prepaid, return receipt requested, to the Company
at 300 North Lake Avenue, Suite 300, Pasadena, California 91101, Attention:
Chief Financial Officer, or to Employee at the address set forth beneath his
or her signature on the signature page hereto, or at such other addresses as
they may designate by written notice in the manner aforesaid.
7. STOCK EXCHANGE REQUIREMENTS; APPLICABLE LAWS. Notwithstanding
anything to the contrary in this Agreement, the Option may not be exercised
and no certificate representing all or any part of the shares issuable
hereunder shall be issued or delivered, if (a) such shares have not been
admitted to listing upon official notice of issuance on each stock exchange
upon which shares of that class are then listed or (b) in the opinion of
counsel to the Company, such exercisability, issuance or delivery would cause
the Company to be in violation of or to incur liability under any federal,
state or other securities law, or any requirement of any stock exchange
listing agreement to which the Company is a party, or any other requirement
or law or of any administrative or regulatory body having jurisdiction over
the Company.
8. NONTRANSFERABILITY. Neither the Option nor any interest therein may
be sold, assigned, conveyed, gifted, pledged, hypothecated or otherwise
transferred in any manner other than by will or the laws of descent and
distribution.
9. PLAN. The Option is being awarded pursuant to the Plan, as in effect
on the Date of Grant, and is subject to all the terms and conditions of the
Plan, as the same may be amended from time to time provided, however, that no
such amendment shall deprive Employee, without his or her consent, of the
Option or any of Employee's rights under this Agreement. The interpretation
and construction by the Committee of the Plan, this Agreement and such rules
and regulations as may be adopted by the Committee for the purpose of
administering the Plan shall be final and binding upon the Employee. Until
the Option shall be exercised or be forfeited, the Company shall, upon
written request therefor, send a copy of the Plan, in its current form, to
the holder of record of the Option.
10. SHAREHOLDER RIGHTS. No person or entity shall be entitled to vote,
receive dividends or be deemed for any purpose the holder of any Option
Shares until the Option shall have been duly exercised to purchase such
Option Shares in accordance with the provisions of this Agreement.
11. EMPLOYMENT RIGHTS. No provision of this Agreement or of the Option
granted hereunder shall (a) confer upon Employee any right to continue in the
employ of the Company or any of its subsidiaries, (b) affect the right of the
Company and each of its subsidiaries to terminate the employment of Employee,
with or without cause, or (c) confer upon Employee any right to participate
in any employee welfare or benefit plan or other program of the Company or
any of its subsidiaries other than participation in the Plan pursuant to this
Agreement. Employee hereby acknowledges and agrees that the Company and each
of its subsidiaries may terminate the employment of Employee at any
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time and for any reason, or for no reason, unless Employee and the Company or
such subsidiary are parties to a written employment agreement that expressly
provides otherwise.
12. GOVERNING LAW. This Agreement and the Option granted hereunder
shall be governed by and construed and enforced in accordance with the laws
of the State of California.
13. FINANCIAL STATEMENTS. So long as this Option is outstanding, the
Company shall provide annual audited financial statements to the Employee.
IN WITNESS WHEREOF, the Company and Employee have duly executed this
Agreement as of the Date of Grant.
PAULA FINANCIAL
By:
----------------------------
Title:
EMPLOYEE
-------------------------------
Signature
-------------------------------
Street Address
-------------------------------
City, State and Zip Code
-------------------------------
Social Security Number
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<PAGE>
INDEMNIFICATION AGREEMENT
This Indemnification Agreement, dated as of ______________, 1997, is made by and
between PAULA Financial, a Delaware corporation (the "Corporation"), and
the person whose name, address and position at the Corporation and/or any of the
direct or indirect subsidiaries of the Corporation appear on the signature page
hereto ("Indemnitee").
RECITALS
A. Indemnitee is currently serving as, or is assuming the position of, a
director and/or officer of the Corporation and/or, at the Corporation's
request, a director, officer, employee and/or agent of another corporation,
partnership, joint venture, trust or other enterprise, and the Corporation
wishes Indemnitee to continue in such capacity(ies);
B. The Corporation and Indemnitee recognize that the present state of
the law is too uncertain to provide the Corporation's directors and officers
with adequate and reliable advance knowledge or guidance with respect to the
legal risks and potential liabilities to which they may become personally
exposed as a result of performing their duties for the Corporation;
C. The Certificate of Incorporation (the "Articles") and the Bylaws (the
"Bylaws") of the Corporation each provide that the Corporation may indemnify,
to the fullest extent permitted by law, certain persons, including directors,
officers, employees or agents of the Corporation, against specified expenses
and losses arising out of certain threatened, pending or completed actions,
suits or proceedings;
D. Section 145(f) of the Delaware General Corporation Law (the "DGCL")
expressly recognizes that the indemnification provided by the other
subsections of Section 145 of the DGCL shall not be deemed exclusive of any
other rights to which those seeking indemnification or advancement of
expenses may be entitled under any bylaw, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in an official
capacity and as to action in another capacity while holding such office;
E. Indemnitee has indicated that he may not be willing to serve, or
continue to serve, as a director and/or officer of the Corporation and/or, at
the Corporation's request, as a director, officer, employee and/or agent of
another corporation, partnership, joint venture, trust or other enterprise in
the absence of an indemnification agreement of the Corporation;
F. The Board of Directors of the Corporation has concluded that, to
retain and attract talented and experienced individuals to serve as directors
and officers of the Corporation and to encourage such individuals to take the
business risks necessary for the success of the Corporation, it is necessary
for the Corporation to contractually indemnify them, and to assume for itself
liability for expenses and damages in connection with claims against them in
connection with their service to the Corporation, and has further concluded
that the failure to provide such contractual indemnification could result in
great harm to the Corporation and its stockholders.
<PAGE>
AGREEMENT
NOW, THEREFORE, the Corporation and Indemnitee agree as follows:
1. DEFINITIONS.
(a) "Expenses" means, for the purposes of this Agreement, all direct
and indirect costs of any type or nature whatsoever (including, without
limitation, any fees and disbursements of Indemnitee's counsel, accountants
and other experts and other out-of-pocket costs) actually and reasonably
incurred by Indemnitee in connection with the investigation, preparation,
defense or appeal of a Proceeding; PROVIDED, HOWEVER, that Expenses shall not
include judgments, fines, penalties or amounts paid in settlement of a
Proceeding unless such matters may be indemnified under applicable provisions
of the DGCL.
(b) "Proceeding" means, for the purposes of this Agreement, any
threatened, pending or completed action, suit or proceeding whether civil,
criminal, administrative or investigative (including actions, suits or
proceedings brought by or in the right of the Corporation) in which
Indemnitee may be or may have been involved as a party or otherwise, by
reason of the fact that Indemnitee is or was a director or officer of the
Corporation, by reason of any action taken by him or of any inaction on his
part while acting as such director or officer or by reason of the fact that
he is or was serving at the request of the Corporation as a director,
officer, employee or agent of another foreign or domestic corporation,
partnership, joint venture, trust or other enterprise, or was a director
and/or officer of the foreign or domestic corporation which was a predecessor
corporation to the Corporation or of another enterprise at the request of
such predecessor corporation, whether or not he is serving in such capacity
at the time any liability or expense is incurred for which indemnification or
reimbursement can be provided under this Agreement.
2. INDEMNIFICATION.
(a) THIRD PARTY PROCEEDINGS. To the fullest extent permitted by law,
the Corporation shall indemnify Indemnitee against Expenses and liabilities
of any type whatsoever (including, but not limited to, judgments, fines,
penalties, and amounts paid in settlement (if the settlement is approved in
advance by the Corporation)) actually and reasonably incurred by Indemnitee
in connection with a Proceeding (other than a Proceeding by or in the right
of the Corporation) if Indemnitee acted in good faith and in a manner
Indemnitee reasonably believed to be in, or not opposed to, the best
interests of the Corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe Indemnitee's conduct was
unlawful. The termination of any Proceeding by judgment, order, settlement,
conviction, or upon a plea of NOLO CONTENDERE or its equivalent, shall not,
of itself, create a presumption that Indemnitee did not act in good faith and
in a manner that Indemnitee reasonably believed to be in, or not opposed to,
the best interests of the Corporation, or, with respect to any criminal
Proceeding, had reasonable cause to believe that Indemnitee's conduct was
unlawful. Notwithstanding the foregoing, no indemnification shall be made in
any criminal proceeding where Indemnitee has been adjudged guilty unless a
disinterested majority of the directors determines that Indemnitee did not
receive, participate in or share in any pecuniary benefit to the detriment of
the Corporation and, in view of all the circumstances of the case, Indemnitee
is fairly and reasonably entitled to indemnity for Expenses or liabilities.
(b) PROCEEDINGS BY OR IN THE RIGHT OF THE CORPORATION. To the fullest
extent permitted by law, the Corporation shall indemnify Indemnitee against
Expenses actually
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and reasonably incurred by Indemnitee in connection with the defense or
settlement of a Proceeding by or in the right of the Corporation to procure a
judgment in its favor if Indemnitee acted in good faith and in a manner
Indemnitee reasonably believed to be in, or not opposed to, the best
interests of the Corporation. Notwithstanding the foregoing, no
indemnification shall be made in respect of any claim, issue or matter as to
which Indemnitee shall have been adjudged to be liable to the Corporation in
the performance of Indemnitee's duty to the Corporation unless and only to
the extent that the court in which such Proceeding is or was pending shall
determine upon application that, in view of all the circumstances of the
case, Indemnitee is fairly and reasonably entitled to indemnity for Expenses
and then only to the extent that the court shall determine.
(c) SCOPE. Notwithstanding any other provision of this Agreement other
than Sections 3 and 13, the Corporation shall indemnify Indemnitee to the
fullest extent permitted by law, notwithstanding that such indemnification is
not specifically authorized by other provisions of this Agreement, the
Articles, the Bylaws or statute.
3. LIMITATIONS ON INDEMNIFICATION. Any other provision herein to the
contrary notwithstanding, the Corporation shall not be obligated pursuant to
the terms of this Agreement:
(a) EXCLUDED ACTS. To indemnify Indemnitee for any acts or omissions
or transactions from which a director may not be relieved of liability under
Section 102(b)(7) of the DGCL; or
(b) CLAIMS INITIATED BY INDEMNITEE. To indemnify or advance Expenses to
Indemnitee with respect to Proceedings or claims initiated or brought
voluntarily by Indemnitee and not by way of defense, except with respect to
proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other statute or law or otherwise as required under
Section 145 of the DGCL, but such indemnification or advancement of Expenses
may be provided by the Corporation in specific cases if a majority of the
disinterested directors has approved the initiation or bringing of such suit;
or
(c) LACK OF GOOD FAITH. To indemnify Indemnitee for any Expenses
incurred by Indemnitee with respect to any proceeding instituted by
Indemnitee to enforce or interpret this Agreement, if a court of competent
jurisdiction determines that each of the material assertions made by
Indemnitee in such proceeding was not made in good faith or was frivolous; or
(d) INSURED CLAIMS. To indemnify Indemnitee for Expenses or
liabilities of any type whatsoever (including, but not limited to, judgments,
fines or penalties, and amounts paid in settlement) which have been paid
directly to or on behalf of Indemnitee by an insurance carrier under a policy
of directors' and officers' liability insurance maintained by the Corporation
or any other policy of insurance maintained by the Corporation or Indemnitee;
or
(e) CLAIMS UNDER SECTION 16(B). To indemnify Indemnitee for Expenses
and the payment of profits arising from the purchase and sale by Indemnitee
of securities in violation of Section 16(b) of the Securities Exchange Act of
1934, as amended, or any similar successor statute.
4. DETERMINATION OF RIGHT TO INDEMNIFICATION. Upon receipt of a written
claim addressed to the Board of Directors for indemnification pursuant to
Section 2 of this Agreement, the Corporation shall determine by any of the
methods set forth in Section 145(d)
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of the DGCL whether Indemnitee has met the applicable standards of conduct
that make it permissible under applicable law to indemnify Indemnitee. If a
claim under Section 2 of this Agreement is not paid in full by the
Corporation within ninety days after such written claim has been received by
the Corporation, Indemnitee may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim and, unless such action
is dismissed by the court as frivolous or brought in bad faith, Indemnitee
shall be entitled to be paid also the expense of prosecuting such claim.
Neither the failure of the Corporation (including its Board of Directors,
independent legal counsel, or its stockholders) to make a determination prior
to the commencement of such action that indemnification of Indemnitee is
proper in the circumstances because Indemnitee has met the applicable
standard of conduct under applicable law, nor an actual determination by the
Corporation (including its Board of Directors, independent legal counsel or
its stockholders) that Indemnitee has not met such applicable standard of
conduct, shall create a presumption that Indemnitee has not met the
applicable standard of conduct. The court in which such action is brought
shall determine whether Indemnitee or the Corporation shall have the burden
of proof concerning whether Indemnitee has or has not met the applicable
standard of conduct.
5. ADVANCEMENT AND REPAYMENT OF EXPENSES. The Expenses incurred by
Indemnitee in defending and investigating any Proceeding shall be paid by the
Corporation prior to the final disposition of such Proceeding within thirty
days after receiving from Indemnitee copies of invoices presented to
Indemnitee for such Expenses and an undertaking by or on behalf of Indemnitee
to the Corporation to repay such amount to the extent it is ultimately
determined that Indemnitee is not entitled to indemnification. In
determining whether or not to make an advance hereunder, the ability of
Indemnitee to repay shall not be a factor. Notwithstanding the foregoing, in
a proceeding brought by the Corporation directly, in its own right (as
distinguished from an action brought derivatively or by any receiver or
trustee), the Corporation shall not be required to make the advances called
for hereby if a majority of the disinterested directors determine that it
does not appear that Indemnitee has met the standards of conduct that made it
permissible under applicable law to indemnify Indemnitee and that the
advancement of Expenses would not be in the best interests of the Corporation
and its stockholders.
6. PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any
provision of this Agreement to indemnification or advancement by the
Corporation of some or a portion of any Expenses or liabilities of any type
whatsoever (including, but not limited to, judgments, fines, penalties, and
amounts paid in settlement) incurred by him in the investigation, defense,
settlement or appeal of a Proceeding, but is not entitled to indemnification
or advancement of the total amount thereof, the Corporation shall
nevertheless indemnify or pay advancements to Indemnitee for the portion of
such Expenses or liabilities to which Indemnitee is entitled.
7. NOTICE TO CORPORATION BY INDEMNITEE. Indemnitee shall notify the
Corporation in writing of any matter with respect to which Indemnitee intends
to seek indemnification hereunder as soon as reasonably practicable following
the receipt by Indemnitee of written notice thereof; provided that any delay
in so notifying the Corporation shall not constitute a waiver by Indemnitee
of his rights hereunder. The written notification to the Corporation shall be
addressed to the Board of Directors and shall include a description of the
nature of the Proceeding and the facts underlying the Proceeding and be
accompanied by copies of any documents filed with the court, if any, in which
the Proceeding is pending. In addition, Indemnitee shall give the
Corporation such information and cooperation as it may reasonably require and
as shall be within Indemnitee's power.
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8. DEFENSE OF CLAIM. In the event that the Corporation shall be
obligated under Section 5 hereof to pay the Expenses of any Proceeding
against Indemnitee, the Corporation, if appropriate, shall be entitled to
assume the defense of such Proceeding, with counsel approved by Indemnitee,
which approval shall not be unreasonably withheld, upon the delivery to
Indemnitee of written notice of its election to do so. After delivery of
such notice, approval of such counsel by Indemnitee and the retention of such
counsel by the Corporation, the Corporation will not be liable to Indemnitee
under this Agreement for any fees of counsel subsequently incurred by
Indemnitee with respect to the same Proceeding; provided that (i) Indemnitee
shall have the right to employ his own counsel in any such Proceeding at
Indemnitee's expense, and (ii) if (A) the employment of counsel by Indemnitee
has been previously authorized by the Corporation, or (B) Indemnitee shall
have reasonably concluded that there may be a conflict of interest between
the Corporation and Indemnitee in the conduct of such defense or (C) the
Corporation shall not, in fact, have employed counsel to assume the defense
of such Proceeding, then the fees and expenses of Indemnitee's counsel shall
be paid by the Corporation.
9. ATTORNEYS' FEES. If any legal action is necessary to enforce the
terms of this Agreement, the prevailing party shall be entitled to recover,
in addition to other amounts to which the prevailing party may be entitled,
actual attorneys' fees and court costs as may be awarded by the court.
10. CONTINUATION OF OBLIGATIONS. All agreements and obligations of the
Corporation contained herein shall continue during the period Indemnitee is a
director or officer of the Corporation, or is or was serving at the request
of the Corporation as a director, officer, fiduciary, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
and shall continue thereafter so long as Indemnitee shall be subject to any
possible Proceeding by reason of the fact that Indemnitee served in any
capacity referred to herein.
11. SUCCESSORS AND ASSIGNS. This Agreement establishes contract rights
that shall be binding upon, and shall inure to the benefit of, the
successors, assigns, heirs and legal representatives of the parties hereto.
12. NON-EXCLUSIVITY.
(a) The provisions for indemnification and advancement of expenses set
forth in this Agreement shall not be deemed to be exclusive of any other
rights that Indemnitee may have under any provision of law, the Articles or
Bylaws, the vote of the Corporation's stockholders or disinterested
directors, other agreements or otherwise, both as to action in his official
capacity and action in another capacity while occupying his position as a
director or officer of the Corporation.
(b) In the event of any changes, after the date of this Agreement, in
any applicable law, statute, or rule that expand the right of a Delaware
corporation to indemnify its directors and officers, Indemnitee's rights and
the Corporation's obligations under this Agreement shall be expanded to the
fullest extent permitted by such changes. In the event of any changes in any
applicable law, statute or rule, that narrow the right of a Delaware
corporation to indemnify a director and officer, such changes, to the extent
not otherwise required by such law, statute or rule to be applied to this
Agreement, shall have no effect on this Agreement or the parties' rights and
obligations hereunder.
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13. EFFECTIVENESS OF AGREEMENT. This Agreement shall be effective as
of the date set forth on the first page and may apply to acts or omissions of
Indemnitee that occurred prior to such date if Indemnitee was a director or
officer of the Corporation or its predecessor, or was serving at the request
of the Corporation or its predecessor as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, at the time such act or omission occurred.
14. SEVERABILITY. Nothing in this Agreement is intended to require or
shall be construed as requiring the Corporation to do or fail to do any act
in violation of applicable law. The Corporation's inability, pursuant to
court order, to perform its obligations under this Agreement shall not
constitute a breach of this Agreement. The provisions of this Agreement
shall be severable as provided in this Section 14. If this Agreement or any
portion hereof shall be invalidated on any ground by any court of competent
jurisdiction, then the Corporation shall nevertheless indemnify Indemnitee to
the fullest extent permitted by any applicable portion of this Agreement that
shall not have been invalidated, and the balance of this Agreement not so
invalidated shall be enforceable in accordance with its terms.
15. GOVERNING LAW. This Agreement shall be interpreted and enforced in
accordance with the laws of the State of Delaware without regard to its rules
pertaining to conflicts of laws. To the extent permitted by applicable law,
the parties hereby waive any provisions of law that render any provision of
this Agreement unenforceable in any respect.
16. NOTICE. All notices, requests, demands and other communications
under this Agreement shall be in writing and shall be deemed duly given (i)
if delivered by hand and receipted for by the party addressed, on the date of
such receipt, or (ii) if delivered by facsimile transmission to the recipient
followed by a copy sent by mail on the same date as the facsimile
transmission, on the date of receipt of such facsimile transmission, or (iii)
if mailed by certified or registered mail with postage prepaid, on the third
business day after the mailing date. Addresses for notice to either party
are as shown on the signature page of this Agreement, or as subsequently
modified by written notice.
17. MUTUAL ACKNOWLEDGMENT. Both the Corporation and Indemnitee
acknowledge that in certain instances, federal law or applicable public
policy may prohibit the Corporation from indemnifying its directors and
officers under this Agreement or otherwise. Indemnitee understands and
acknowledges that the Corporation has undertaken or may be required in the
future to undertake with the Securities and Exchange Commission to submit the
question of indemnification to a court in certain circumstances for a
determination of the Corporation's right under public policy to indemnify
Indemnitee.
18. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall constitute an original.
19. AMENDMENT AND TERMINATION. No amendment, modification, termination
or cancellation of this Agreement shall be effective unless in writing signed
by both parties hereto.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year set forth above.
PAULA FINANCIAL,
a Delaware corporation
By:
------------------------
Title:
---------------------
[ADDRESS AND NOTICE PERSON]
INDEMNITEE:
- ----------------------------------
Indemnitee
- ----------------------------------
[ADDRESS]
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CONVERTIBLE REVOLVING LOAN NOTE
$15,000,000.00 March 31, 1997
FOR VALUE RECEIVED, the undersigned, PAULA FINANCIAL, a California
corporation ("Borrower"), hereby promises to pay to the order of SANWA BANK
CALIFORNIA, a California banking corporation ("Lender"), at its office at 601
South Figueroa Street, Los Angeles, California 90017 (or such other place as
Lender may direct from time to time in writing), in lawful money of the
United States and in immediately available funds: (1) the principal amount of
FIFTEEN MILLION DOLLARS ($15,000,000.00) or such lesser amount as Lender may
advance to Borrower as Revolving Loans under (and as that term and
capitalized terms not otherwise defined herein are defined in) that certain
Credit Agreement dated as of March 31, 1997 by and between Borrower and
Lender (as amended, extended and replaced from time to time, the "Credit
Agreement"), on December 31, 1999 (the "Conversion Date"); provided, however,
that if on the Conversion Date there has not occurred and be continuing an
Event of Default or Potential Default, the aggregate principal amount of
Revolving Loans outstanding (or such lesser amount as Borrower may elect)
shall be converted to a term loan (the "Term Loan"), which Term Loan shall be
payable in seven (7) consecutive, equal quarterly principal installments,
each such installment to be in an amount equal to 1/16th of the Term Loan and
with said installments to be payable on the last Business Day of each
calendar quarter, commencing on the first such date following the Conversion
Date, and one final installment in the amount necessary to prepay the Term
Loan in full on December 31, 2001, and (2) interest on amounts outstanding
hereunder at the rates and payable at the times set forth in the Credit
Agreement.
Reference is hereby made to the Credit Agreement for rights of
prepayment and other rights of Lender and obligations of Borrower with respect
hereto, including, without limitation, to Events of Default pursuant to which
amounts outstanding hereunder may become immediately due and payable.
Borrower agrees to pay all collection expenses, court costs and
reasonable attorneys' fees and disbursements (whether or not litigation is
commenced) which may be incurred in connection with the collection or
enforcement of this Note.
<PAGE>
This Note shall be governed by and construed in
accordance with the laws of the State of California, without giving effect to
choice of law rules.
PAULA FINANCIAL, a California corporation
By: /s/ James A. Nicholson
------------------------------------
Print Name: James A. Nicholson
-----------------------------
Title: Chief Financial Officer
---------------------------------
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<PAGE>
CREDIT AGREEMENT
THIS CREDIT AGREEMENT (the "Agreement") is made and dated as of the
31st day of March, 1997, by and between SANWA BANK CALIFORNIA, a California
banking corporation (the "Lender"), and PAULA FINANCIAL, a California
corporation (the "Borrower").
RECITALS
A. The Borrower has requested the Lender to extend credit to the
Borrower in the form of a convertible revolving credit facility.
B. The Borrower and the Lender desire to set forth herein the
mutually agreed upon terms and conditions of such credit extension.
NOW, THEREFORE, in consideration of the above Recitals and for other
good and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto hereby agree as follows:
AGREEMENT
1. CREDIT FACILITY: REPAYMENT OF PRINCIPAL: INTEREST-RELATED PROVISIONS.
1(a) REVOLVING LOANS. On the terms and subject to the
conditions set forth herein, the Lender agrees that it shall from time to
time to and including the Conversion Date (as that term and other capitalized
terms not otherwise defined herein are defined in PARAGRAPH 9 below), make
loans (collectively, the "Revolving Loans," and each a "Revolving Loan") in
an aggregate amount not to exceed at any one time outstanding the Revolving
Credit Limit. Amounts borrowed hereunder and repaid prior to the Conversion
Date may, subject to the terms and conditions set forth herein, be reborrowed
as provided herein. Subject to the conversion feature set forth in PARAGRAPH
1(b) below, the principal balance of Revolving Loans advanced hereunder shall
be due and payable in full upon the Conversion Date.
1(b) CONVERSION TO TERM LOAN. On the Conversion Date and subject
to the terms and conditions set forth herein, the Borrower may elect to convert
all or any portion of the aggregate principal balance of Revolving Loans
outstanding hereunder on such date to a term loan (the "Term Loan"). The
principal amount of the Term Loan shall be payable in seven (7) consecutive
equal quarterly installments, each in an amount equal to one sixteenth (1/16th)
of the original principal balance of the Term Loan, said installments to be
payable on the last Business Day of each calendar quarter, commencing on the
first such date following the Conversion Date, and one final installment in the
amount necessary to repay the Term Loan in full on the Final Maturity Date.
<PAGE>
1(c) CALCULATION OF INTEREST. The Borrower shall pay interest on
Revolving Loans outstanding hereunder and, following the Conversion Date, on the
outstanding principal balance of the Term Loan, from the date disbursed or, in
the case of the Term Loan, converted, to but not including the date of payment,
at a rate per annum equal to, at the option of and as selected by the Borrower
from time to time (subject to the provisions of PARAGRAPHS 1(e), 1(f) and 1(g)
below): (1) the Reference Rate during the applicable computation period, (2) the
Applicable COF Rate for the selected Interest Period, (3) the Applicable LIBOR
Rate for the selected Interest Period, or (4) the Applicable Eurodollar Rate for
the selected Interest Period. Loans during such periods as they bear interest at
the Reference Rate shall be referred to herein as "Reference Rate Loans," and
Loans during such periods as they bear interest at the Applicable COF Rate, the
Applicable LIBOR Rate or the Applicable Eurodollar Rate shall sometimes be
referred to herein as "Fixed Rate Loans".
1(d) INTEREST BILLING AND PAYMENT REQUIREMENTS. Interest
accruing on Reference Rate Loans shall be payable monthly, in arrears, for each
month on or before the first Business Day of the next succeeding month in the
amount set forth in an interest billing for such Loans delivered by the Lender
to the Borrower (which delivery may be telephonic and later confirmed in
writing). Interest accruing on Fixed Rate Loans shall be payable, in arrears, on
the last day of the applicable Interest Period therefor, or in the case of Fixed
Rate Loans with Interest Periods ending later than ninety (90) days from the
date funded, at the end of each ninety (90) day period from the date funded and
at the end of the applicable Interest Period therefor.
1(e) ELECTION OF TYPE OF LOAN: CONVERSION OPTIONS: FUNDING OF LOANS.
(1) The Borrower may elect from time to time to
have Loans funded by giving the Lender irrevocable notice of such
election no later than: (i) in the case of a Reference Rate Loan or
a Fixed Rate Loan bearing interest at the Applicable COF Rate, 12:00
noon (Los Angeles time) on the requested funding date, (ii) in the
case of a Fixed Rate Loan bearing interest at the Applicable LIBOR
Rate or the Applicable Eurodollar Rate, 12:00 noon (Los Angeles
time) on the second Eurodollar Business Day preceding the proposed
funding date. The principal amount of each Fixed Rate Loan shall be
in the minimum amount of $500,000.00 and whole multiples of
$100,000.00 in excess thereof.
(2) The Borrower may elect from time to time to
convert Loans outstanding: (i) as Fixed Rate Loans to Reference Rate
Loans by giving the Lender irrevocable notice of such election no
later than 12:00 noon (Los Angeles time) on the last day of the
Interest Period for such Fixed Rate Loan, (ii) as Fixed Rate Loans
or Reference Rate Loans to Fixed Rate Loans bearing interest at the
Applicable COF Rate by giving the Agent irrevocable notice of such
election no later than 12:00 noon (Los Angeles time) on the last day
of the Interest Period therefor or, in the case of the conversion of
a Reference Rate Loan, the proposed date of conversion, and (iii) as
Reference Rate Loans or Fixed Loans bearing interest at the
Applicable COF Rate to Fixed Rate Loans bearing interest at the
Applicable LIBOR Rate or the Applicable Eurodollar Rate by giving
the Lender irrevocable notice of such election no later than
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12:00 noon (Los Angeles time) on the second Eurodollar Business Day
preceding the proposed conversion date. Any conversion of Fixed Rate
Loans may only be made on the last day of the applicable Interest
Period.
(3) The Borrower may elect from time to time to have
any Fixed Rate Loan continued as a similar type of Fixed Rate Loan
upon the expiration of the Interest Period applicable thereto by
giving the Agent irrevocable notice of such election no later than:
(i) in the case of a Fixed Rate Loan bearing interest at the
Applicable COF Rate, 12:00 noon (Los Angeles time) on last day of
the applicable Interest Period therefor, and (ii) in the case of
other types of Fixed Rate Loans, 12:00 noon (Los Angeles time) on
the second Eurodollar Business Day preceding the last day of such
Interest Period.
(4) No Loan may be funded as a Fixed Rate Loan, no
Reference Rate Loan may be converted into a Fixed Rate Loan, no
Fixed Rate Loan may be converted into another type of Fixed Rate
Loan nor may any Fixed Rate Loan be continued as such if an Event of
Default or Potential Default has occurred and is continuing at the
requested funding, conversion or continuation date.
(5) All or any part of outstanding Loans may be
funded, continued or converted as provided herein, provided that any
funding as, continuation of or conversion to a Fixed Rate Loan shall
be in the minimum amount of $500,000.00 and increments of
$100,000.00 in excess thereof.
(6) If the Borrower shall fail to give notice of its
election to continue or convert a Fixed Rate Loan as provided above,
the Borrower shall be deemed to have elected to convert such Fixed
Rate Loan to a Reference Rate Loan on the last day of the applicable
Interest Period.
(7) Each request for the funding, continuation or
conversion of a Loan shall be evidenced by the timely delivery by
the Borrower to the Agent of a duly executed Loan Request (which
delivery may be by facsimile transmission).
l(f) ILLEGALITY. Notwithstanding any other provisions herein,
if any law, regulation, treaty or directive or any change therein or in the
governmental, regulatory or judicial interpretation or application thereof,
shall make it unlawful for the Lender to make or maintain a given type of
Fixed Rate Loan as contemplated by this Agreement: (1) the commitment of the
Lender hereunder to make or to continue Fixed Rate Loans as such type of
Fixed Rate Loan or to convert Reference Rate Loans to such type of Fixed Rate
Loan shall forthwith be canceled and (2) Loans then outstanding as such type
of Fixed Rate Loan, if any, shall be converted automatically to Reference
Rate Loans or, subject to the notice provisions set forth in PARAGRAPH 1(e)
above, another type of Fixed Rate Loan at the end of their respective
Interest Periods or within such earlier period as may be required by law. In
the event of a conversion of any such Fixed Rate Loan prior to the end of its
applicable Interest Period the Borrower hereby agrees promptly to pay the
Lender, upon demand, the amounts required pursuant to PARAGRAPH 1(i) below,
it being agreed and understood that such conversion shall constitute a
prepayment for all
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<PAGE>
purposes hereof. The provisions hereof shall survive the termination of this
Agreement and payment of the outstanding Loans and all other Obligations.
1(g) INABILITY TO DETERMINE RATE. In the event that the Lender
shall have reasonably determined (which determination shall be conclusive and
binding upon the Borrower) that by reason of circumstances affecting the
London interbank or eurodollar market adequate and reasonable means do not
exist for ascertaining the Applicable LIBOR Rate or Applicable Eurodollar
Rate for any Interest Period, the Lender shall promptly upon such
determination so notify the Borrower. If such notice is given: (1) any Loan
that was to have been funded or continued as or converted to such type of
Fixed Rate Loan shall be funded or converted to a Reference Rate Loan or,
subject to the notice requirements of PARAGRAPH 1(e) above, another type of
Fixed Rate Loan, and (2) any Loan outstanding as such type of Fixed Rate Loan
shall be converted, on the last day of the then current Interest Period with
respect thereto, to a Reference Rate Loan or, subject to the notice
requirements of PARAGRAPH 1(e) above, another type of Fixed Rate Loan. Until
such notice has been withdrawn by the Lender, the Borrower shall not have the
right to have a Loan funded or continued as or to convert any Loan into such
type of Fixed Rate Loan.
1(h) REQUIREMENTS OF LAW: INCREASED COSTS. In the event that
any change from and after the Effective Date in applicable law, order,
regulation, treaty or directive issued by any central bank or other
governmental authority, agency or instrumentality or in the governmental,
regulatory or judicial interpretation or application thereof, or compliance
by the Lender with any request or directive (whether or not having the force
of law) issued following the Effective Date by any central bank or other
governmental authority, agency or instrumentality:
(1) Does or shall subject the Lender to any tax of any kind
whatsoever with respect to this Agreement or any Loans made
hereunder, or change the basis of taxation of payments to the Lender
of principal, fee, interest or any other amount payable hereunder
(except for change in the rate of tax on the overall net income of
the Lender);
(2) Does or shall impose, modify or hold applicable any
reserve, capital requirement, special deposit, compulsory loan or
similar requirements against assets held by, or deposits or other
liabilities in or for the account of, advances or loans by, or other
credit extended by, or any other acquisition of funds by, any office
of the Lender which are not otherwise included in the determination
of interest payable on the Obligations on the Effective Date; or
(3) Does or shall impose on the Lender any other condition;
and the result of any of the foregoing is to increase the cost to the Lender of
making, renewing or maintaining any Loan or to reduce any amount receivable in
respect thereof or the rate of return on the capital of the Lender or any
corporation controlling the Lender, then, in any such case, the Borrower shall
promptly pay to the Lender, upon its written demand, any additional amounts
necessary to compensate the Lender for such additional cost or reduced amounts
receivable or
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<PAGE>
rate of return as reasonably determined by the Lender with respect to this
Agreement or Loans made hereunder but only to the extent the Lender is generally
requiring such compensation from its borrowers with respect to credit facilities
in the nature of the credit facility evidenced hereby. If the Lender becomes
entitled to claim any additional amounts pursuant to this PARAGRAPH 1(h), it
shall promptly notify the Borrower of the event by reason of which it has become
so entitled. A certificate as to any additional amounts payable pursuant to the
foregoing sentence containing the calculation thereof in reasonable detail
submitted by the Lender to the Borrower shall be conclusive in the absence of
manifest error. The provisions hereof shall survive the termination of this
Agreement and payment of the outstanding Loans and all other Obligations.
1(i) PREPAYMENT PREMIUM. In addition to all other payment
obligations hereunder, in the event: (1) any Loan which is outstanding as a
Fixed Rate Loan is prepaid prior to the last day of the applicable Interest
Period, whether following the occurrence of an Event of Default or otherwise, or
(2) the Borrower shall fail to borrow, to continue or to make a conversion to a
Fixed Rate Loan after the Borrower has given notice thereof as provided in
PARAGRAPH 1(e) above, then the Borrower shall immediately pay to the Lender an
additional premium sum compensating the Lender for losses, costs and expenses
reasonably incurred by the Lender in connection with such prepayment or such
failure to borrow, continue or convert. If the Lender becomes entitled to claim
any additional amounts pursuant to this PARAGRAPH 1(i), it shall promptly notify
the Borrower of the event by reason of which it has become so entitled. A
certificate as to any additional amounts payable pursuant to the foregoing
sentence containing the calculation thereof in reasonable detail submitted by
the Lender to the Borrower shall be conclusive in the absence of manifest error.
The provisions hereof shall survive the termination of this Agreement and
payment of the outstanding Loans and all other Obligations.
1(j) FUNDING. The Lender shall be entitled to fund all or any
portion of the Loans in any manner it may determine in its sole discretion,
including, without limitation, in the Grand Cayman inter-bank market, the London
inter-bank market and within the United States.
1(k) CREDIT SUPPORTING DOCUMENTS. As credit support for the
Obligations, the Borrower will execute and deliver or cause to be executed and
delivered to the Lender: (1) from each of the Guarantors, a guaranty in the form
of that attached hereto as EXHIBIT A (each a "Guaranty," and, collectively and
severally, the "Guaranties"), (2) from each of the Guarantors, a subordination
agreement in the form of that attached hereto as EXHIBIT B (a "Guarantor
Subordination Agreement," and, collectively and severally, the "Guarantor
Subordination Agreements"), and (3) from the parties shown as signatory thereto,
a standstill and subordination agreement in the form of that attached hereto as
EXHIBIT C (the "Standstill Agreement").
2. MISCELLANEOUS PROVISIONS.
2(a) USE OF PROCEEDS. The proceeds of all Loans shall be
utilized by the Borrower for any lawful general corporate purpose.
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2(b) REQUEST FOR LOANS: MAKING OF LOANS. If the Borrower
desires to borrow a Revolving Loan hereunder or to convert Revolving Loans
outstanding to the Term Loan, the Borrower shall deliver a Loan Request therefor
to the Lender, which shall be delivered no later than 12:00 noon (Los Angeles
time) by facsimile transmission, on the Business Day required pursuant to
PARAGRAPH 1(e) above, or, in the case of the Term Loan, on the Conversion Date.
The Lender shall fund each Revolving Loan by wiring or depositing the proceeds
thereof to Account No. 0495-24595 maintained in the Borrower's name with the
Lender; provided, however, that until such Account has been formally established
(which shall occur no later than thirty (30) days following the Effective Date),
the Lender shall fund each Revolving Loan by wiring or depositing the proceeds
thereof to such account as the Borrower may specify in the related Loan Request.
2(c) NOTE. The obligation of the Borrower to repay the Loans
shall be evidenced by a note payable to the order of the Lender in the form of
that attached hereto as EXHIBIT D (the "Note").
2(d) NATURE AND PLACE OF PAYMENTS. All payments made on account
of the Obligations shall be made by the Borrower, without setoff or
counterclaim, in lawful money of the United States of America in immediately
available funds, free and clear of and without deduction for any taxes, fees or
other charges of any nature whatsoever imposed by any taxing authority and must
be received by the Lender by 12:00 noon (Los Angeles time) on the day of
payment, it being expressly agreed and understood that if a payment is received
after 12:00 noon (Los Angeles time) by the Lender, such payment will be
considered to have been made by the Borrower on the next succeeding Business Day
and interest thereon shall be payable by the Borrower at the Reference Rate
during such extension. All payments on account of the Obligations shall be made
to the Lender through its office located at 601 South Figueroa Street, Los
Angeles, California 90017. If any payment required to be made by the Borrower
hereunder becomes due and payable on a day other than a Business Day, the due
date thereof shall be extended to the next succeeding Business Day and interest
thereon shall be payable at the rate otherwise applicable thereto during such
extension.
2(e) DEFAULT INTEREST. Upon the occurrence and during the
continuance of an Event of Default the Obligations shall bear interest at a
per annum rate equal to two percent (2%) in excess of the rate of interest
otherwise applicable thereto or, if such Obligations do not otherwise bear
interest, at a per annum rate equal to two percent (2%) in excess of the
Reference Rate..
2(f) COMPUTATIONS. All computations of interest and fees payable
hereunder shall be based upon a year of three hundred and sixty (360) days for
the actual number of days elapsed.
2(g) PREPAYMENTS. The Borrower may prepay Loans hereunder, other
than Fixed Rate Loans, in whole or in part at any time, without premium or
penalty. Principal amounts prepaid on the Term Loan shall be applied to
installments thereon in inverse order of maturity. The Borrower shall pay in
connection with any prepayment hereunder all interest
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accrued but unpaid on Loans to which such prepayment is applied and any
prepayment premium payable pursuant to PARAGRAPH 1(i) above, concurrently with
payment to the Lender of any principal amounts.
2(h) FEES. The Borrower shall pay to the Lender:
(1) On or before the Effective Date, a non-refundable
commitment fee in the amount of $37,500.00; and
(2) During the period from the Effective Date to the
Conversion Date, on the first Business Day of the first month of
each calendar quarter (and on the Conversion Date) for the
immediately preceding calendar quarter (or portion thereof),
commencing on the first such date following the Effective Date, a
non-usage fee in the amount set forth in a fee billing delivered by
the Lender to the Borrower, which non-usage fee shall be computed at
the per annum rate of one-quarter of one percent (0.25%) against the
average daily Revolving Credit Limit in effect during the
immediately preceding calendar quarter (or portion thereof) less the
daily average amount of Revolving Loans outstanding during such
calendar quarter (or portion thereof).
2(i) TELEPHONIC/FACSIMILE COMMUNICATIONS. Any agreement of the
Lender herein to receive certain notices by telephone or facsimile is solely
for the convenience and at the request of the Borrower. The Lender shall be
entitled to rely on the authority of any Person purporting to be an authorized
Person and the Lender shall not have any liability to the Borrower or any other
Person on account of any action taken or not taken by the Lender in reliance
upon such telephonic or facsimile notice. The obligation of the Borrower to
repay the Obligations shall not be affected in any way or to any extent by any
failure by the Lender to receive written confirmation of any telephonic or
facsimile notice or the receipt by the Lender of a confirmation which is at
variance with the terms understood by the Lender to be contained in the
telephonic or facsimile notice.
3. CONDITIONS TO MAKING LOANS.
3(a) FIRST REVOLVING LOAN. As conditions precedent to the
obligation of the Lender to make the first Revolving Loan hereunder:
(1) The Borrower shall have delivered or shall have had
delivered to the Lender, in form and substance satisfactory to the
Lender and its counsel, each of the following:
(i) A duly executed copy of this Agreement;
(ii) A duly executed copy of each of the Guaranties,
the Guarantor Subordination Agreements and the Standstill
Agreement;
(iii) Such credit applications, financial statements,
authorizations and such information concerning the Borrower and
its Subsidiaries
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and their respective businesses, operations and conditions
(financial and otherwise) as the Lender may reasonably request;
(iv) Certified copies of resolutions of the Board of
Directors of the Borrower and each of the Guarantors approving
the execution and delivery of the Loan Documents to which such
Person is a party;
(v) A certificate of the Secretary or an Assistant
Secretary of the Borrower and each of the Guarantors certifying
the names and true signatures of the officers of such Person
authorized to sign the Loan Documents to which such Person is a
party;
(vi) An opinion of counsel for the Borrower and the
Guarantors in the form of EXHIBIT E attached hereto and
covering such other matters as the Lender may reasonably
request;
(vii) A copy of each of the Certificate of
Incorporation and Bylaws of the Borrower, certified by the
Secretary or an Assistant Secretary of the Borrower as of the
date of this Agreement as being accurate and complete;
(viii) A certificate of good standing, including tax
status, for the Borrower from the Secretary of State of the
State of California as of a recent date;
(ix) A certificate of the chief financial officer or
treasurer of the Borrower in the form of that attached hereto
as EXHIBIT F dated as of the date of this Agreement accompanied
by calculations in detail satisfactory to the Lender
demonstrating compliance by the Borrower and PICO with the
financial covenants set forth in PARAGRAPH 6(o) below as of
December 31, 1996; and
(x) Evidence that the Existing Credit Facility has
been, or will on the Effective Date be, terminated.
(2) All acts and conditions (including, without limitation,
the obtaining of any necessary regulatory approvals and the making
of any required filings, recordings or registrations) required to be
done and performed and to have happened precedent to the execution,
delivery and performance of the Loan Documents and to constitute the
same legal, valid and binding obligations, enforceable in accordance
with their respective terms, shall have been done and performed and
shall have happened in due and strict compliance with all applicable
laws.
(3) All documentation, including, without limitation,
documentation for corporate and legal proceedings in connection with
the transactions contemplated by the Loan Documents shall be
satisfactory in form and substance to the Lender and its counsel.
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3(b) ONGOING REVOLVING LOANS: TERM LOAN. As conditions precedent
to the Lender's obligation to make any Loan hereunder, including the first
Revolving Loan and the Term Loan, at and as of the date of the funding thereof:
(1) There shall have been delivered to the Lender a Loan
Request therefor;
(2) The representations and warranties of the Borrower
contained in the Loan Documents shall be accurate and complete in
all respects as if made on and as of such date; and
(3) There shall not have occurred and be continuing an
Event of Default or Potential Default.
By delivering a Loan Request to the Lender hereunder, the Borrower shall be
deemed to have represented and warranted the accuracy and completeness of the
statements set forth in SUBPARAGRAPHS (o)(2) through (b)(3) above.
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
As an inducement to the Lender to enter into this Agreement and to
make Loans as provided herein, the Borrower represents and warrants to the
Lender that:
4(a) FINANCIAL CONDITION. The financial statements of the
Borrower, dated the Statement Date, a copy of which have heretofore been
furnished to the Lender, are complete and correct and present fairly, in all
material respects, in accordance with GAAP the financial condition of the
Borrower and its consolidated Subsidiaries at such date and the consolidated
results of their operations and changes in financial position for the fiscal
period then ended. The Borrower has heretofore furnished to the Lender the
annual Statutory Statement for each of the Regulated Subsidiaries for the
most recent fiscal year ending prior to the Effective Date, which Statutory
Statements present fairly, in all material respects, the financial condition
of the respective Regulated Subsidiary in accordance with SAP.
4(b) NO CHANGE. Since the Statement Date there has been no
Material Adverse Effect nor has the Borrower or any of its Subsidiaries entered
into, incurred or assumed any long-term debt, mortgages, material leases or oral
or written commitments, nor commenced any significant project, nor made any
purchase or acquisition of any significant property, except the investment by
PICO of approximately $1,200,000.00 in the capital stock of CAPAX Management &
Insurance Services, a California corporation.
4(c) CORPORATE EXISTENCE: COMPLIANCE WITH LAW. The Borrower and
each of its Subsidiaries: (1) is duly organized, validly existing and in good
standing as a corporation under the laws of its jurisdiction of incorporation
and is qualified to do business in each jurisdiction where its ownership of
property or conduct of business requires such qualification and where failure to
qualify could have a Material Adverse Effect, (2) has the corporate power and
authority and the legal right to own and operate its property and to conduct
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business in the manner in which it does and proposes so to do, and (3) is
in compliance with all Requirements of Law and Contractual Obligations failure
to comply with which could have a Material Adverse Effect.
4(d) CORPORATE POWER: AUTHORIZATION: ENFORCEABLE OBLIGATIONS.
The Borrower and each of the Guarantors has the corporate power and authority
and the legal right to execute, deliver and perform the Loan Documents to
which it is a party and has taken all necessary corporate action to authorize
the execution, delivery and performance of such Loan Documents. The Loan
Documents have been duly executed and delivered on behalf of the Borrower and
the Guarantors, as applicable, and constitute legal, valid and binding
obligations of such Persons enforceable against such Persons in accordance
with their respective terms, subject to the effect of applicable bankruptcy
and other similar laws affecting the rights of creditors generally and the
effect of equitable principles whether applied in an action at law or a suit
in equity.
4(e) NO LEGAL BAR. The execution, delivery and performance of
the Loan Documents, the borrowings hereunder and the use of the proceeds
thereof, will not violate any Requirement of Law or any Contractual
Obligation of the Borrower or any of its Subsidiaries or create or result in
the creation of any Lien on any assets of the Borrower or any of its
Subsidiaries.
4(f) NO MATERIAL LITIGATION. Except as disclosed on EXHIBIT G
hereto, no litigation, investigation or proceeding (including, without
limitation, Hazardous Materials Claims) of or before any arbitrator or
Governmental Authority is pending or, to the knowledge of the Borrower,
threatened by or against the Borrower or any of its Subsidiaries or against
any of such Persons' properties or revenues which is likely to be adversely
determined and which, if adversely determined, is likely to have a Material
Adverse Effect.
4(g) TAXES. The Borrower and each of its Subsidiaries have
filed or caused to be filed all tax returns that are required to be filed and
have paid all taxes shown to be due and payable on said returns or on any
assessments made against them or any of their property other than taxes which
are being contested in good faith by appropriate proceedings and as to which
the Borrower or applicable Subsidiary has established adequate reserves in
conformity with GAAP.
4(h) INVESTMENT COMPANY ACT. The Borrower is not an "investment
company" or a company "controlled" by an "investment company" within the
meaning of the Investment Borrower Act of 1940, as amended.
4(i) SUBSIDIARIES. Attached hereto as EXHIBIT H is an accurate
and complete list of all presently existing Subsidiaries, including all
Regulated Subsidiaries, of the Borrower, their respective jurisdictions of
incorporation and qualification and the percentage of their capital stock
owned by the Borrower or other Subsidiaries. All of the issued and
outstanding shares of capital stock of such Subsidiaries have been duly
authorized and issued and are fully paid and non-assessable.
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4(j) FEDERAL RESERVE BOARD REGULATIONS. Neither the Borrower
nor any of its Subsidiaries is engaged or will engage, principally or as one
of its important activities, in the business of extending credit for the
purpose of "purchasing" or "carrying" any "margin stock" within the
respective meanings of such terms under Regulation U. No part of the proceeds
of any Loan issued hereunder will be used for "purchasing" or "carrying"
"margin stock" as so defined or for any purpose which violates, or which
would be inconsistent with, the provisions of the Regulations of the Board of
Governors of the Federal Reserve System.
4(k) ERISA. (1) No Prohibited Transactions, Accumulated
Funding Deficiencies, withdrawals from Multiemployer Plans or Reportable
Events have occurred with respect to any Plans or Multiemployer Plans that,
in the aggregate, could subject the Borrower to any tax, penalty or other
liability where such tax, penalty or liability is not covered in full, for
the benefit of the Borrower, by insurance; (2) no notice of intent to
terminate a Plan has been filed, nor has any Plan been terminated under
Section 4041 of ERISA, nor has the PBGC instituted proceedings to terminate,
or appoint a trustee to administer, a Plan, and no event has occurred or
condition exists which might constitute grounds under section 4042 of ERISA
for the termination of, or the appointment of a trustee to administer, any
Plan; (3) the present value of all benefit liabilities (as defined in section
4001(a)(16) of ERISA) under all Plans (based on the actuarial assumptions
used to fund the Plans) does not exceed the assets of the Plans; and (4) the
execution, delivery and performance by the Borrower of this Agreement and the
Loans hereunder and the use of the proceeds thereof will not involve any
Prohibited Transactions.
4(l) ASSETS. The Borrower and each of its Subsidiaries has good
and marketable title to all property and assets reflected in the financial
statements referred to in PARAGRAPH 4(a) above, except property and assets
sold or otherwise disposed of in the ordinary course of business subsequent
to the respective dates thereof and for interests of other Persons as
mandated by Applicable Insurance Regulatory Authorities. Neither the Borrower
nor any of its Subsidiaries has outstanding Liens on any of its properties or
assets nor are there any security agreements to which the Borrower or any of
its Subsidiaries is a party, or title retention agreements, whether in the
form of leases or otherwise, of any personal property except as reflected in
the financial statements referred to in PARAGRAPH 4(a) above or as permitted
under PARAGRAPH 6(a) below.
4(m) SECURITIES ACTS. The Borrower has no legal liability with
respect to the issuance of any unregistered securities in violation of the
registration requirements of Section 5 of the Securities Act of 1933, as
amended, or any other law, and is not violating any rule, regulation or
requirement under the Securities Act of 1933, as amended, or the Securities
and Exchange Act of 1934, as amended. The Borrower is not required to qualify
an indenture under the Trust Indenture Act of 1939, as amended, in connection
with its execution and delivery of the Note.
4(n) CONSENTS, ETC. No consent, approval, authorization of, or
registration, declaration or filing with any governmental authority is
required on the part of the Borrower or any of the Guarantors in connection
with the execution and delivery of the Loan
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Documents or the performance of or compliance with the terms, provisions and
conditions thereof.
4(o) HAZARDOUS MATERIALS. Neither the Borrower nor, to the best
knowledge of the Borrower, any other Person has: (1) caused or permitted any
Hazardous Materials to be placed, held, located or disposed of in, on, under or
about the Property or any part thereof, and neither the Property, nor any part
thereof, has ever been used (whether by the Borrower or, to the best knowledge
of the Borrower, by any other Person) for activities involving, directly or
indirectly, the use, generation, treatment, storage or disposal of any Hazardous
Materials; (2) caused or permitted to be incorporated into or utilized in the
construction of any improvements located on the Property any chemical, material,
or substance to which exposure is prohibited, limited or regulated by any
Hazardous Materials Laws or which, even if not so regulated, is known to pose a
hazard (either in its present form or if disturbed or removed) to the health and
safety of the occupants of the Property or of property adjacent to the Property;
or (3) discovered any occurrence or condition on the Property or any property
adjacent to or in the vicinity of the Property that could cause the Property or
any part thereof to be subject to any restrictions on the ownership, occupancy,
transferability or use of the Property under any Hazardous Materials Laws.
5. AFFIRMATIVE COVENANTS. The Borrower hereby covenants and agrees
with the Lender that, as long as any Obligations remain unpaid or the Lender has
any obligation to make Loans hereunder, the Borrower shall:
5(a) FINANCIAL STATEMENTS. Furnish or cause to be furnished to
the Lender:
(1) Within one hundred twenty (120) days after the last day
of each fiscal year of the Borrower, consolidated and consolidating
statements of income and statements of changes in financial position
of the Borrower and its consolidated Subsidiaries for such year and
balance sheets as of the end of such year presented fairly, in all
material respects, in accordance with GAAP and accompanied by an
unqualified report of a firm of independent certified public
accountants acceptable to the Lender;
(2) Within sixty (60) days after the last day of each of
the first three fiscal quarters of the Borrower, consolidated
statements of income and changes in financial position for such
fiscal quarter and balance sheets as of the end of such fiscal
quarter of the Borrower and its consolidated Subsidiaries,
accompanied in each case by a certificate of the chief financial
officer of the Borrower stating that such financial statements are
presented fairly in accordance with GAAP;
(3) Promptly after the filing thereof with the Applicable
Insurance Regulatory Authority and in any event within one hundred
twenty (120) days after the last day of each fiscal year of each
Regulated Subsidiary, the annual Statutory Statement of such
Regulated Subsidiary for such year, accompanied by: (i) the opinion
thereon of the chief financial officer of such Regulated Subsidiary
stating that such Statutory Statement presents fairly, in all
material respects, the financial condition of
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such Regulated Subsidiary for such fiscal year in accordance with SAP,
and (ii) an annual review of reserves of such Regulated Subsidiary
prepared by an independent actuarial firm satisfactory to the Lender;
(4) Promptly after the filing thereof with the Applicable
Insurance Regulatory Authority and in any event within sixty (60)
days after the last day of the first three fiscal quarters of each
Regulated Subsidiary, the quarterly Statutory Statement of such
Regulated Subsidiary for such quarterly period, accompanied by a
certificate of the chief financial officer of such Regulated
Subsidiary stating that such Statutory Statement presents fairly, in
all material respects, the financial condition of such Regulated
Subsidiary for such quarterly fiscal period in accordance with SAP;
(5) Concurrently with each delivery of financial statements
pursuant to SUBPARAGRAPHS (a)(1) through (a)(4) above, a certificate
of the chief financial officer of the Borrower, in form and detail
reasonably satisfactory to the Lender, setting forth calculations
certified to be true, complete and correct showing compliance of the
Borrower and PICO, as applicable, with the financial covenants set
forth in PARAGRAPH 6(o) below as of the last day of the fiscal
period then ending and setting forth Indebtedness incurred by the
Borrower and its Subsidiaries during such fiscal period permitted
pursuant to Items 2 and 3 of the schedule of Permitted Other Debt
and, in the case of the annual financial statements of the Borrower
delivered pursuant to SUBPARAGRAPH (a)(1) above, annual budgets and
projections in form and detail reasonably satisfactory to the Lender;
(6) Promptly upon receipt thereof: (i) a copy of the
results of each triennial examination by each Applicable Insurance
Regulatory Authority of the financial condition and operations of
the Borrower and any Regulated Subsidiary and (ii) a copy of each
final annual report from the NAIC as to each Regulated Subsidiary's
compliance with each of the IRIS Tests;
(7) Promptly upon receipt thereof, a copy of any material
correspondence, notice or report to or from any Applicable Insurance
Regulatory Authority, including, without limitation, any NAIC
specified survey filed with the NAIC and any management discussion
and analysis report required by statute or regulation;
(8) Promptly upon the mailing thereof to the shareholders
of the Borrower generally or to holders of Subordinated Indebtedness
generally, copies of all financial statements, reports and proxy
statements so mailed and copies of all regular and periodic reports
and all registration statements, if any, which the Borrower files
with the Securities and Exchange Commission;
(9) Promptly upon receipt thereof, a copy of each
management letter delivered to the Borrower by the Borrower's
independent certified public accountants;
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(10) Promptly upon request, such additional reports,
including without limitation, ESOP valuations, annual budgets and
projections and rating agency reports, as the Lender may reasonably
request;
(11) Promptly, such additional financial and other
information, including, without limitation, financial statements of
the Borrower or any Affiliate, as the Lender may from time to time
reasonably request, including, without limitation, such information
as is necessary for the Lender to sell, assign or otherwise transfer
all or portions of, and participations in, the Lender's interest in
the Loans hereunder or to enable other financial institutions to
become signatories hereto; and
(12) Promptly after the same are provided to the press,
copies of all press releases issued by the Borrower.
5(b) PAYMENT OF INDEBTEDNESS. And shall cause each of its
Subsidiaries to, pay, discharge or otherwise satisfy at or before maturity or
before it becomes delinquent, defaulted or accelerated, as the case may be, all
its Indebtedness (including taxes), except Indebtedness being contested in good
faith and for which provision is made to the reasonable satisfaction of the
Lender for the payment thereof in the event the Borrower or such Subsidiary is
found to be obligated to pay such Indebtedness and which Indebtedness is
thereupon promptly paid by the Borrower or such Subsidiary.
5(c) MAINTENANCE OF EXISTENCE AND PROPERTIES; COMPLIANCE. And
shall cause each of its Subsidiaries to, maintain its corporate existence (other
than in connection with the Reincorporation of the Borrower) and maintain all
rights, privileges, licenses, approvals, franchises, properties and assets
necessary or desirable in the normal conduct of its business, and comply with
all Contractual Obligations and Requirements of Law.
5(d) INSPECTION OF PROPERTY; BOOKS AND RECORDS; DISCUSSIONS. And
shall cause each of its Subsidiaries to, keep proper books of record and account
in which full, true and correct entries in conformity with GAAP or SAP, as
applicable, and all Requirements of Law shall be made of all dealings and
transactions in relation to its business and activities, and permit
representatives of the Lender (at no cost or expense to the Borrower or any
Subsidiary unless there shall have occurred and be continuing an Event of
Default) to visit and inspect any of its properties and examine and make
abstracts from and copies of any of its books and records at any reasonable time
and as often as may reasonably be desired by the Lender, and to discuss the
business, operations, properties and financial and other condition of the
Borrower and any of its Subsidiaries with officers and employees of such
parties, and with their independent certified public accountants.
5(e) NOTICES. Promptly give written notice to the Lender of:
(1) The occurrence of any Potential Default or Event of
Default;
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(2) Any litigation or proceeding affecting the Borrower
or any of its Subsidiaries which could have a Material Adverse
Effect; and
(3) Any other Material Adverse Effect.
5(f) EXPENSES. Pay all reasonable out-of-pocket expenses
(including fees and disbursements of counsel) of the Lender incident to the
preparation, negotiation and administration of the Loan Documents and the
protection of the rights of the Lender under the Loan Documents, or otherwise
incident to the enforcement of payment of the Obligations, whether by judicial
proceedings or otherwise, and before as well as after judgment including,
without limitation, in connection with bankruptcy, insolvency, liquidation,
reorganization, moratorium or other similar proceedings involving the Borrower
or a "workout" of the Obligations. The obligations of the Borrower under this
PARAGRAPH 5(f) shall be effective and enforceable whether or not any Loan is
made hereunder and shall survive payment of all other Obligations.
5(g) LOAN DOCUMENTS. And shall cause each of the Guarantors to,
comply with and observe all terms and conditions of the Loan Documents to which
it is party.
5(h) INSURANCE. And shall cause each of its Subsidiaries to,
obtain and maintain insurance with responsible companies in such amounts and
against such risks as are usually carried by corporations engaged in similar
businesses similarly situated, and furnish the Lender on request full
information as to all such insurance.
5(i) HAZARDOUS MATERIALS. And shall cause each of its
Subsidiaries to:
(1) Keep and maintain all Property in compliance with, and
not cause or permit any Property to be in violation of, any
Hazardous Materials Laws or any federal, state or local laws,
ordinances or regulations relating to industrial hygiene or to the
environmental conditions on, under or about any Property, including,
but not limited to, soil and ground water conditions.
(2) Not cause or permit the discharge, release or disposal
of any Hazardous Materials in, on, under or about any Property, nor
use, generate, manufacture or store, or permit to be used,
generated, manufactured, or stored in, on, under or about any
Property, or transport to or from or permit to be transported to or
from any Property, any Hazardous Materials.
(3) Immediately advise the Lender in writing of (i) any
threatened or actual Hazardous Materials Claims, (ii) the Borrower's
or any Subsidiary's receipt of any notice of any violation of
Hazardous Materials Laws (and the Borrower shall immediately provide
the Lender with a copy of such notice of violation), and
(iii) the Borrower's or any Subsidiary's discovery of any occurrence
or condition on any Property or any property adjacent to or in the
vicinity of any Property that could cause the Property or any part
thereof to be in violation of any Hazardous Materials Laws or to be
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subject to any restrictions on the ownership, occupancy,
transferability or use of the Property under any Hazardous Materials
Laws.
5(j) ERISA. Furnish to the Lender:
(1) Promptly and in any event within ten (10) days after
the Borrower knows or has reason to know of the occurrence of a
Reportable Event with respect to a Plan with regard to which notice
must be provided to the PBGC, a copy of such materials required to
be filed with the PBGC with respect to such Reportable Event and in
each such case a statement of the chief financial officer of the
Borrower setting forth details as to such Reportable Event and the
action which the Borrower proposes to take with respect thereto;
(2) Promptly and in any event within ten (10) days after
the Borrower knows or has reason to know of any condition existing
with respect to a Plan which presents a material risk of termination
of the Plan, imposition of an excise tax, requirement to provide
security to the Plan or incurrence of other liability by the
Borrower or any ERISA Affiliate, a statement of the chief financial
officer of the Borrower describing such condition;
(3) At least ten (10) days prior to the filing by any plan
administrator of a Plan of a notice of intent to terminate such
Plan, a copy of such notice;
(4) Promptly and in no event more than ten (10) days after
the filing thereof with the Secretary of the Treasury, a copy of any
application by the Borrower or an ERISA Affiliate for a waiver of
the minimum funding standard under section 412 of the Code;
(5) Promptly and in no event more than ten (10) days after
the filing thereof with the Internal Revenue Service, copies of each
annual report which is filed on Form 5500, together with certified
financial statements for the Plan (if any) as of the end of such
year and actuarial statements on Schedule B to such Form 5500;
(6) Promptly and in any event within ten (10) days after it
knows or has reason to know of any event or condition which might
constitute grounds under section 4042 of ERISA for the termination
of, or the appointment of a trustee to administer, any Plan, a
statement of the chief financial officer of the Borrower describing
such event or condition;
(7) Promptly and in no event more than ten (10) days after
receipt thereof by the Borrower or any ERISA Affiliate, a copy of
each notice received by the Borrower or an ERISA Affiliate
concerning the imposition of any withdrawal liability under section
4202 of ERISA; and
(8) Promptly after receipt thereof a copy of any notice the
Borrower or any ERISA Affiliate may receive from the PBGC or the
Internal Revenue
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Service with respect to any Plan or Multiemployer Plan; provided,
however, that this SUBPARAGRAPH (8) shall not apply to notices of
general application promulgated by the PBGC or the Internal Revenue
Service.
5(k) RISK-BASED CAPITAL RATIO. Cause each Regulated Subsidiary
to comply with the minimum risk-based capital ratio requirements or guidelines
applicable to it established by the NAIC or the Applicable Insurance Regulatory
Authority.
5(l) ADEQUATE REINSURANCE. Cause each Regulated Subsidiary to
enter into and maintain Reinsurance Agreements with reinsurers with an A.M. Best
& Co. rating of not less than A- or, with respect to PICO's employment practices
liability coverage, syndicates affiliated with Lloyd's of London, to the extent
required so as not to exceed retention limits as established from time to time
by the Borrower in its reasonable business judgment and consistent with the
methodology and procedures for establishing the same as in effect on the
Effective Date.
5(m) MAINTENANCE OF RATING. Cause PICO to have an A.M. Best &
Co. rating of not less than B++.
6. NEGATIVE COVENANTS. The Borrower hereby agrees that, as long as
any Obligations remain unpaid or the Lender has any obligation to make Loans
hereunder, the Borrower shall not, directly or indirectly:
6(a) LIENS. And shall not permit any Subsidiary to, create,
incur, assume or suffer to exist, any Lien upon any of its property and assets
except:
(1) Liens or charges for current taxes, assessments or
other governmental charges which are not delinquent or which remain
payable without penalty, or the validity of which are contested in
good faith by appropriate proceedings upon stay of execution of the
enforcement thereof, provided the Borrower or such Subsidiary shall
have set aside on its books and shall maintain adequate reserves for
the payment of same in conformity with GAAP;
(2) Liens, deposits or pledges made to secure statutory or
regulatory obligations, surety or appeal bonds, or bonds for the
release of attachments or for stay of execution, or to secure the
performance of bids, tenders, contracts (other than for the payment
of borrowed money), leases or for purposes of like general nature in
the ordinary course of the Borrower's or such Subsidiary's business;
(3) Purchase money Liens for property hereafter acquired,
conditional sale agreements, or other title retention agreements,
with respect to property hereafter acquired; provided, however, that
no such Lien or agreement shall extend to any property other than
the property acquired;
(4) Statutory Liens of carriers, warehousemen, mechanics,
materialmen and other similar Liens imposed by law and created in
the ordinary course of business for amounts not yet due or which are
being contested in good faith by
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appropriate proceedings and with respect to which adequate reserves
are being maintained in conformity with GAAP; and
(5) Attachment and judgment Liens not otherwise
constituting an Event of Default each of which Lien is in existence
less than forty five (45) days after the entry thereof or with
respect to which execution has been stayed, payment is covered in
full by insurance.
6(b) INDEBTEDNESS. And shall not permit any Subsidiary to,
create, incur, assume or suffer to exist, or otherwise become or be liable, in
respect of any Indebtedness except:
(1) The Obligations of such Persons under the Loan
Documents;
(2) Indebtedness reflected in the financial statements
referred to in PARAGRAPH 4(a) above (other than Indebtedness under
the Existing Credit Facility);
(3) Trade debt incurred in the ordinary course of business
and outstanding less than thirty (30) days after the same has become
due and payable or which is being contested in good faith, provided
provision is made to the satisfaction of the Lender for the eventual
payment thereof in the event it is found that such contested trade
debt is payable by the Borrower;
(4) Indebtedness secured by Liens permitted under PARAGRAPH
6(a) above; and
(5) Permitted Other Debt.
6(c) CONSOLIDATION AND MERGER. And shall not permit any
Subsidiary to, liquidate or dissolve or enter into any consolidation or merger
(other than in connection with the Reincorporation), partnership, joint venture,
syndicate or other combination unless the Borrower or such Subsidiary shall be
the surviving entity and following the consummation thereof there shall not
exist an Event of Default or Potential Default.
6(d) ACQUISITIONS. And shall not permit any Subsidiary to,
purchase or acquire or incur liability for the purchase or acquisition of any or
all of the assets or business of any person, firm or corporation, other than
purchases and acquisitions of assets or businesses consistent with lines of
business carried on by the Borrower or such Subsidiary on the Effective Date;
provided, however, that in no event shall the Borrower or any of its
Subsidiaries consummate (1) any single acquisition, whether in a single
transaction or a series of transactions, for total compensation in excess of
$10,000,000.00, or (2) acquisitions from and after the Effective Date for an
aggregate total compensation in excess of $15,000,000.00 without the prior
written consent of the Lender.
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6(e) PAYMENT OF DIVIDENDS. And shall not permit any Subsidiary
to, declare or pay any dividends upon its shares of stock now or hereafter
outstanding or make any distribution of assets to its stockholders as such,
whether in cash, property or securities, except (1) dividends payable in shares
of capital stock and cash in lieu of fractional shares or in options, warrants
or other rights to purchase shares of capital stock, (2) dividends payable by
the Subsidiaries to the Borrower (it being agreed and understood that the
Borrower shall not permit to exist any Contractual Obligations restricting the
payment of dividends by any Subsidiary to the Borrower except those imposed by
applicable regulatory authorities on the Regulated Subsidiaries), and (3) if,
but only if, at the date of payment thereof and both before and after giving
effect to the payment thereof there does not exist an Event of Default or
Potential Default, dividends payable by the Borrower to its shareholders.
6(f) PURCHASE OR RETIREMENT OF STOCK. And shall not permit any
Subsidiary to, acquire, purchase, redeem or retire any shares of its capital
stock now or hereafter outstanding at any time at which there shall exist an
Event of Default or Potential Default.
6(g) INVESTMENTS; ADVANCES. And shall not permit any Subsidiary
to, make or commit to make any advance, loan or extension of credit or capital
contribution to, or purchase any stock, bonds, notes, debentures or other
securities of, or make any other investment in, any Person except investments in
Persons conducting businesses in similar lines of business to those conducted by
the Borrower or such Subsidiary on the Effective Date; provided, however, that
in no event shall any Regulated Subsidiary make or commit to make any advance,
loan or extension of credit or capital contribution to, or purchase any stock,
bonds, notes, debentures or other securities of, or make any other investment
in, any Person except to the extent permitted under and consistent with the
Statement of Investment Policy, Guidelines and Objectives of PICO and PACO as
amended as of February 26, 1996, a copy of which Statement has been delivered to
the Lender and except that such investments can be made in amounts not exceeding
$3,000,000.00 in the aggregate in privately-held insurance agencies and
insurance servicing companies (such as third party administrators, premium
finance companies, etc.), and subject to the additional restrictions that in no
event shall: (1) equity investments in equity securities held by any Regulated
Subsidiary at any date exceed thirty percent (30%) of such Regulated
Subsidiary's surplus plus excess statutory reserves adjustment at such date, or
(2) any Regulated Subsidiary make any fixed maturity investment which has a
rating lower than NAIC Class 2 at the date of acquisition thereof by such
Regulated Subsidiary.
6(h) SALE OF ASSETS. And shall not permit any Subsidiary to,
sell, lease, assign, transfer or otherwise dispose of any of its assets (other
than obsolete or worn out property), whether now owned or hereafter acquired,
other than in the ordinary course of business as presently conducted and at fair
market value.
6(i) ERISA. And shall not permit any Subsidiary to:
(1) Terminate or withdraw from any Plan so as to result in
any material liability to the PBGC;
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(2) Engage in or permit any person to engage in any
Prohibited Transaction involving any Plan which would subject the
Borrower or such Subsidiary to any material tax, penalty or other
liability;
(3) Incur or suffer to exist any material Accumulated
Funding Deficiency, whether or not waived, involving any Plan;
(4) Allow or suffer to exist any event or condition which
presents a risk of incurring a material liability to the PBGC;
(5) Amend any Plan so as to require the posting of security
under section 401(a)(29) of the Code; or
(6) Fail to make payments required under section 412(m) of
the Code and section 302(e) of ERISA which would subject the
Borrower or such Subsidiary to any material tax, penalty or other
liability.
6(j) LIMITATION ON TRANSACTIONS WITH AFFILIATES. And shall not
permit any Subsidiary to, purchase, acquire or lease any property from, or sell,
transfer or lease any property to, or lend or advance any money to, or borrow
any money from, or guarantee any obligation of, or acquire any stock,
obligations or securities of, or enter into any merger or consolidation
agreement, or any management or similar fee, agreement with, any Affiliate, or
enter into any other transaction or arrangement or make any payment to
(including, without limitation, on account of any management fees, service fees,
home office charges, consulting fees, technical services charges or tax sharing
charges) or otherwise deal with, in the ordinary course of business or
otherwise, any Affiliate other than on terms no less favorable to the Borrower
or such Subsidiary as would be obtained in an arms-length transaction with a
non-Affiliate; provided, however, that nothing contained herein shall prohibit
any transaction among the Borrower and the Guarantors entered into in the normal
course of business and with reasonable business judgment.
6(k) CHANGE IN BUSINESS. And shall not permit any Subsidiary to,
engage in any material line of business substantially different from those lines
of business carried on by it on the Effective Date.
6(l) ACCOUNTING CHANGES. And shall not permit any Subsidiary to,
make any significant change in accounting treatment or reporting practices,
except as required by GAAP or SAP, as applicable, or change its fiscal year.
6(m) SUBSIDIARIES. And shall not permit any Subsidiary to, form
or acquire following the Effective Date any Subsidiary unless such Subsidiary
shall immediately upon formation execute and deliver to the Lender a Guaranty
and a Guarantor Subordination Agreement.
6(n) CAPITAL EXPENDITURES. And shall not permit any Subsidiary
to, make or commit to make (by way of acquisition of the securities of any
Person or otherwise),
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Capital Expenditures other than Capital Expenditures of the Borrower and its
Subsidiaries taken in the aggregate not exceed $3,000,000.00 in any fiscal year.
6(o) FINANCIAL COVENANTS. Permit:
(1) PICO's ratio, determined in accordance with SAP, of net
premiums written during the most recent ending four fiscal quarters
to surplus plus excess statutory reserves as of the last day of the
most recent ending fiscal quarter, to exceed 3.00:1.00; or
(2) At any date, PICO's surplus at such date plus excess
statutory reserves, to be less than the sum of: (i) $27,500,000.00,
plus, from and after the January 1, 1997, (ii) fifty percent (50%)
of amounts paid in as capital and fifty percent (50%) of statutory
net income; or
(3) At and as of the end of any fiscal quarter, the
Borrower's ratio of consolidated Funded Debt to consolidated
stockholders equity (excluding consolidated net unrealized gains or
losses as required pursuant to FASB 115), determined in accordance
with GAAP, to exceed 0.60:1.00; or
(4) At and as of the end of any fiscal quarter, the
Borrower's consolidated stockholder's equity to be less than: (i)
$34,000,000.00, plus (ii) seventy five percent (75%) of the net
proceeds of any equity offering of the Borrower received following
the Effective Date, plus (iii) fifty percent (50%) of consolidated
net income from and after January 1, 1997, determined in accordance
with GAAP; or
(5) At and as of the end of any fiscal year, the Borrower's
consolidated Fixed Charge Coverage Ratio to be less than 1.25: 1.00;
or
(6) At and as of the end of any fiscal year, the Borrower's
consolidated Interest Coverage Ratio to be less than 3.00:1.00.
6(p) REINCORPORATION. Enter into and consummate the
Reincorporation unless: (1) both before and after giving such consummation there
would not exist an Event of Default or Potential Default, and (2) there has
been, or concurrently with such consummation of the Reincorporation there will
be, executed and delivered to the Lender such documents, instruments and
agreements, including, without limitation, amendments to the Loan Documents, as
the Lender may reasonably request.
7. EVENTS OF DEFAULt. Upon the occurrence of any of the following
events (an "Event of Default"):
7(a) The Borrower shall fail to pay any principal on the Loans on
the date when due or fail to pay within three days of the date when due any
other Obligation under the Loan Documents; or
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7(b) Any representation or warranty made by the Borrower or any
Guarantor in any Loan Document or in connection with any Loan Document shall be
inaccurate or incomplete in any respect on or as of the date made; or
7(c) The Borrower or any Subsidiary shall fail to maintain its
corporate existence (other than in connection with the Reincorporation) or shall
default in the observance or performance of any covenant or agreement contained
in PARAGRAPH 5(m) or PARAGRAPH 6 above; or
7(d) The Borrower shall fail to observe or perform any other
term or provision contained in the Loan Documents and such failure shall
continue for thirty (30) days after notice of such failure is given by the
Lender to the Borrower; or
7(e) The Borrower or any Subsidiary shall default in any payment
of principal of or interest on any Indebtedness (other than the Obligations) in
an aggregate amount for the Borrower and all such Subsidiaries in excess of
$250,000.00 or any other event shall occur, the effect of which is to permit
such Indebtedness to be declared or otherwise to become due prior to its stated
maturity; or
7(f) (1) The Borrower or any of its Subsidiaries shall commence
any case, proceeding or other action (i) under any existing or future law of any
jurisdiction, domestic or foreign, relating to bankruptcy, insolvency,
reorganization or relief of debtors, seeking to have an order for relief entered
with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or
seeking reorganization, arrangement, adjustment, winding-up, liquidation,
dissolution, composition or other relief with respect to it or its debts, or
(ii) seeking appointment of a receiver, trustee, custodian or other similar
official for it or for all or any substantial part of its assets, or the
Borrower or any of its Subsidiaries shall make a general assignment for the
benefit of its creditors; or (2) there shall be commenced against the Borrower
or any of its Subsidiaries any case, proceeding or other action of a nature
referred to in clause (1) above which (i) results in the entry of an order for
relief or any such adjudication or appointment, or (ii) remains undismissed,
undischarged or unbonded for a period of sixty (60) days; or (3) there shall be
commenced against the Borrower or any of its Subsidiaries, any case, proceeding
or other action seeking issuance of a warrant of attachment, execution,
distraint or similar process against all or substantially all of its assets
which results in the entry of an order for any such relief which shall not have
been vacated, discharged, stayed, satisfied or bonded pending appeal within
sixty (60) days from the entry thereof; or (4) the Borrower or any of its
Subsidiaries shall take any action in furtherance of, or indicating its consent
to, approval of, or acquiescence in (other than in connection with a final
settlement), any of the acts set forth in clause (1), (2) or (3) above; or (5)
the Borrower or any of its Subsidiaries shall generally not, or shall be unable
to, or shall admit in writing its inability to pay its debts as they become due;
or
7(g) (1) Any Reportable Event or a Prohibited Transaction shall
occur with respect to any Plan; or (2) a notice of intent to terminate a Plan
under section 4041 of ERISA shall be filed; or (3) a notice shall be received by
the plan administrator of a Plan that the PBGC has instituted proceedings to
terminate a Plan or appoint a trustee to administer a Plan; or
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(4) any other event or condition shall exist which might, in the opinion of the
Lender, constitute grounds under section 4042 of ERISA for the termination of,
or the appointment of a trustee to administer, any Plan; or (5) the Borrower or
any ERISA Affiliate shall withdraw from a Multiemployer Plan under circumstances
which the Lender determines could have a material adverse effect on the
financial condition of the Borrower; or
7(h) One or more judgments or decrees shall be entered against
the Borrower or any of its Subsidiaries and all such judgments or decrees shall
not have been vacated, discharged, stayed, satisfied or bonded pending appeal
within forty five (45) days from the entry thereof or in any event later than
five days prior to the date of any proposed sale thereunder; or
7(i) Any Guarantor shall fail to observe or comply with any term
or condition of its Guaranty or its Guarantor Subordination Agreement or shall
attempt to rescind or revoke its Guaranty or its Guarantor Subordination
Agreement, with respect to future transactions or otherwise; or
7(j) The Borrower shall cease to own one hundred percent (100%)
of PICO;
THEN, automatically upon the occurrence of an Event of Default under
PARAGRAPH 7(f) above, and at the option of the Lender upon the occurrence of any
other Event of Default, the Lender's obligation to make Loans shall terminate
and the Obligations due and payable, without demand upon or presentment to the
Borrower, which are expressly waived by the Borrower, and the Lender may
immediately exercise all rights, powers and remedies available to it at law, in
equity or otherwise.
8. MISCELLANEOUS PROVISIONS.
8(a) NO ASSIGNMENT. The Borrower may not assign its rights or
obligations under this Agreement without the prior written consent of the
Lender. Subject to the foregoing, all provisions contained in this Agreement or
any document or agreement referred to herein or relating hereto shall inure to
the benefit of the Lender, its successors and assigns, and shall be binding upon
the Borrower, its successors and assigns.
8(b) AMENDMENT; NO WAIVER. This Agreement may not be amended or
terms or provisions hereof waived unless such amendment or waiver is in writing
and signed by the Lender and the Borrower. It is expressly agreed and understood
that the failure by the Lender to elect to accelerate amounts outstanding
hereunder and/or to terminate the obligation of the Lender to make Loans
hereunder shall not constitute an amendment or waiver of any term or provision
of this Agreement. No delay or failure by the Lender to exercise any right,
power or remedy shall constitute a waiver thereof by the Lender, and no single
or partial exercise by the Lender of any right, power or remedy shall preclude
other or further exercise thereof or any exercise of any other rights, powers or
remedies.
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8(c) CUMULATIVE RIGHTS. The rights, powers and remedies of the
Lender hereunder are cumulative and in addition to all rights, power and
remedies provided under any and all agreements between the Borrower and the
Lender relating hereto, at law, in equity or otherwise.
8(d) ENTIRE AGREEMENT. This Agreement and the documents and
agreements referred to herein embody the entire agreement and understanding
between the parties hereto and supersede all prior agreements and
understandings relating to the subject matter hereof and thereof.
8(e) SURVIVAL. All representations, warranties, covenants and
agreements herein contained on the part of the Borrower shall survive the
termination of this Agreement and shall be effective until the Obligations
are paid and performed in full or longer as expressly provided herein.
8(f) NOTICES. All notices, consents, requests and demands to or
upon the respective parties hereto shall be in writing, and shall be deemed
to have been given or made when delivered in person or when deposited in the
United States mail, postage prepaid, or, when delivered to the overnight
courier service, or in the case of telex or telecopy notice, when sent,
verification received, in each case addressed or sent as set forth on
SCHEDULE I attached hereto, or such other address as either party may
designate by notice to the other in accordance with the terms of this
PARAGRAPH 8(f).
8(g) GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of California, without
giving effect to choice of law rules.
8(h) ASSIGNMENTS; PARTICIPATIONS.
(1) The Lender may at any time, with the consent of the
Borrower, which consent shall not be unreasonably withheld, assign
or delegate to one or more Persons all or a portion of the Loans and
the other rights and obligations of the Lender hereunder; provided,
however, the the Lender need not obtain the consent of the Borrower
to any such assignment or delegation at any time at which there
shall exist and be continuing an Event of Default or Potential
Default.
(2) The Lender may at any time sell to one or more Persons
participating interests in the Loans and the other rights and
obligations of the Lender hereunder; provided, however, that (i) the
Lender's obligations under this Agreement shall remain unchanged,
(ii) the Lender shall remain solely responsible for the performance
of such obligations, (iii) the Borrower shall continue to deal
solely and directly with the Lender, and (iv) following such sale
the Lender and its Affiliates shall continue to hold for their own
account more than fifty percent (50%) of the dollar amount of the
Revolving Credit Limit (prior to the Conversion Date) and the
outstanding principal balance of the Term Loan (following the
Conversion Date).
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(3) For purposes of this PARAGRAPH 8(h), the Lender may
disclose to a potential or actual assignee or participant any and
all information supplied to the Lender by or on behalf of the
Borrower and its Subsidiaries. The Borrower agrees to execute and
deliver, and to cause to be executed and delivered, to the Lender
such documents, instruments and agreements, including, without
limitation, amendments to the Loan Documents, deemed necessary or
desirable by the Lender to effect such transfers.
8(i) COUNTERPARTS. This Agreement and the other Loan Documents
may be executed in any number of counterparts, all of which together shall
constitute one agreement.
8(j) ACCOUNTING TERMS. All accounting terms not otherwise
defined herein are used with the meanings given such terms under GAAP.
8(k) AUTHORIZATION TO DISCLOSE. The Borrower hereby authorizes
the Lender to disclose to the Guarantors any and all information concerning the
Borrower, its business, properties and condition (financial or otherwise) now or
hereafter in the Lender's possession or within its control to the extent
reasonably deemed necessary or desirable by the Lender.
8(l) WAIVER OF JURY TRIAL. SUBJECT TO PARAGRAPH 8(m) BELOW, THE
COMPANY, FOR ITSELF AND THE GUARANTORS, AND THE LENDER EACH WAIVE THEIR
RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED
UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN
DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION,
PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES
AGAINST ANY OTHER PARTY, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT
CLAIMS, OR OTHERWISE. THE COMPANY, FOR ITSELF AND THE GUARANTORS, AND THE
LENDER EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A
COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE PARTIES
FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY
OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING
WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY
OF THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION HEREOF OR
THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS,
SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS.
8(m) DISPUTE RESOLUTION. It is understood and agreed that upon
the request of any party hereto any dispute, claim, or controversy of any kind,
whether in contract or in tort, statutory or common law, legal or equitable now
existing or hereinafter arising out of, pertaining to or in connection with this
Agreement or the other Loan Documents, or any related agreements, documents, or
instruments, shall be resolved through final and binding arbitration
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administered by Judicial Arbitration & Mediation Services, Inc. ("J.A.M.S.").
The hearing shall be conducted at a location determined by the arbitrator in Los
Angeles, California and shall be administered by and in accordance with the then
existing Rules of Practice and Procedure of Judicial Arbitration & Mediation
Services, Inc., and judgment upon any award rendered by the arbitrator may be
entered by any State or Federal Court having jurisdiction thereof. The
arbitrator shall determine which is the prevailing party or parties and shall
include in the award that party's or parties' reasonable attorneys fees and
costs. As soon as practicable after selection of the arbitrator, the arbitrator
or his/her designated representative shall determine a reasonable estimate of
anticipated fees and costs of the arbitrator, and render a statement to each
party setting forth that party's pro-rata share of said fees and costs.
Thereafter each party shall, within ten days of receipt of said statement,
deposit said sum with the arbitrator. Failure of any party to make such a
deposit shall result in a forfeiture by the non-depositing party of the right to
prosecute or defend that claim which is the subject of the arbitration, but
shall not otherwise serve to abate, stay under this PARAGRAPH 8(m), nor any
other provision of this dispute resolution provision, shall limit the right of
any party to obtain provisional or ancillary remedies such as injunctive relief
from any court having jurisdiction before, during or after the pendency of any
arbitration. The institution and maintenance of an action for the pursuit of
provisional or ancillary remedies shall not constitute a waiver of the right of
any party, including the plaintiff, to submit the controversy or claim to
arbitration.
9. DEFINITIONS. For purposes of this Agreement, the terms set forth
below shall have the following meanings:
"ACCUMULATED FUNDING DEFICIENCY" shall mean a funding deficiency
described in section 302 of ERISA.
"AFFILIATE" shall mean, as to any corporation, any other
corporation directly or indirectly controlling, controlled by or under direct
or indirect common control with, such corporation. "Control" as used herein
means the power to direct the management and policies of such corporation.
"AGREEMENT" shall mean this Agreement, as the same may be amended,
extended or replaced from time to time.
"APPLICABLE COF RATE" shall mean for any Interest Period, the COF
Rate on the first day of such Interest Period plus the Fixed Rate Loan
Spread..
"APPLICABLE EURODOLLAR RATE" shall mean for any Interest Period,
the Eurodollar Rate on the first day of such Interest Period plus the Fixed
Rate Loan Spread.
"APPLICABLE INSURANCE REGULATORY AUTHORITY" shall mean, when used
with reference to any Regulated Subsidiary, the insurance department or
similar administrative agency or authority located in any State in which such
Regulated Subsidiary is domiciled or licensed.
"APPLICABLE LIBOR RATE shall mean for any Interest Period, the
LIBOR Rate on the first day of such Interest Period plus the Fixed Rate Loan
Spread.
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"BUSINESS DAY" shall mean any day other than a Saturday, a Sunday
or a day on which banks in Los Angeles, California are authorized or
obligated to close their regular banking business.
"CAPITAL EXPENDITURE" shall mean, for any period, the aggregate of
all expenditures for the acquisition or leasing of fixed or capital assets or
additions to equipment (including replacements, capitalized repairs and
improvements during such period) which should be capitalized under GAAP on a
consolidated balance sheet, less net proceeds from sales of fixed or capital
assets received during such period. For the purpose of this definition, the
purchase price of equipment which is purchased simultaneously with the
trade-in of existing equipment or with insurance proceeds shall be included
in Capital Expenditures only to the extent of the gross amount of such
purchase price less the credit granted by the seller of such equipment for
such equipment being traded in at such time, or the amount of such proceeds,
as the case may be.
"CODE" shall mean the Internal Revenue Code of 1986, as amended,
and the rules and regulations issued thereunder as from time to time in
effect.
"COF RATE" shall mean the rate of interest which the Lender
determines, in its sole and absolute discretion, to be equal to the Lender's
cost of acquiring funds in an amount approximately equal to the amount of the
Loan to which such rate shall apply for a period of time approximately equal
to the relevant Interest Period. Such cost of funds shall be adjusted for any
and all assessments, surcharges and reserve requirements pertaining to the
borrowing or purchase of such funds by the Lender.
"COMBINED EARNINGS" shall mean the sum (without duplication) of:
(a) the combined (without duplication) Dividend Capacity of the Regulated
Subsidiaries, plus (b) EBITDA, and plus (c) the combined tax provision,
established in accordance with GAAP, for the Regulated Subsidiaries.
"COMMONLY CONTROLLED ENTITY" of a Person shall mean a Person,
whether or not incorporated, which is under common control with such Person
within the meaning of Section 414(c) of the Internal Revenue Code.
"CONTRACTUAL OBLIGATION" as to any Person shall mean any provision
of any security issued by such Person or of any agreement, instrument or
undertaking to which such Person is a party or by which it or any of its
property is bound.
"CONVERSION DATE" shall mean December 31, 1999, as such date may be
extended from time to time by written agreement of the Borrower and the
Lender.
"DEBT SERVICE" shall mean for any fiscal year the sum, for the
Borrower and its Subsidiaries (other than Regulated Subsidiaries) of the
following: (a) all payments of principal of Funded Debt scheduled to be made
during the following fiscal year plus (b) all Interest Expense for the
immediately preceding fiscal year, plus (c) consolidated provision for taxes
for such immediately preceding fiscal year.
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"DIVIDEND CAPACITY" shall mean for any fiscal year the dollar
amount of a cash dividend Regulated Subsidiaries could make to the Borrower
without obtaining any special insurance regulatory approval.
"EBITDA" shall mean, for any period, the sum for the Borrower and
its Subsidiaries other than the Regulated Subsidiaries (determined on a
consolidated basis without duplication in accordance with GAAP), of the
following: (a) net earnings (calculated before income taxes, minority
interests and extraordinary items), plus (b) the sum of the following (to the
extent deducted in determining net earnings) for such period: (1) interest
expense, amortization or write-off of debt discount and debt issuance costs
and commissions, discounts and other fees and charges associated with
Indebtedness, (2) depreciation and amortization expense and (iii)
amortization of intangibles and organization costs.
"EFFECTIVE DATE" shall mean the date as of which all conditions
precedent to the funding of the first Loan hereunder have been met and such
Loan funded.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended, and the rules and regulations issued thereunder as from
time to time in effect.
"ERISA AFFILIATE" shall mean each trade or business, including the
Borrower, whether or not incorporated, which together with the Borrower would
be treated as a single employer under section 4001 of ERISA.
"EURODOLLAR BUSINESS DAY" shall mean a Business Day upon which
commercial banks in the eurocurrency market are open for domestic and
international business.
"EURODOLLAR RATE" shall mean with respect to any Fixed Rate Loan
which is to bear interest at the Applicable Eurodollar Rate, rate determined
by the Lender's Treasury Desk as being the approximate rate at which the
Lender could purchase offshore U.S. dollar deposits in an amount
approximately equal to the amount of such Fixed Rate Loan and for a period of
time approximately equal to the selected Interest Period therefor, adjusted
for any and all assessments, surcharges and reserve requirement pertaining to
the purchase by the Lender of such U.S. dollar deposits.
"EVENT OF DEFAULT" shall have the meaning given such term in
PARAGRAPH 7 above.
"EXISTING CREDIT FACILITY" shall mean that certain credit facility
provided to the Borrower by Wells Fargo Bank, N.A., as successor in interest
to First Interstate Bank of California, evidenced by that certain Loan
Agreement dated July 26, 1994, as amended.
"FINAL MATURITY DATE" shall mean December 31, 2001, as such date
may be extended by written agreement of the Lender and the Borrower.
"FIXED CHARGE COVERAGE RATIO" shall mean for any period, the ratio
of: (a) Combined Earnings for such period to (b) Debt Service for such period.
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"FIXED RATE LOANS" shall have the meaning given such term in
PARAGRAPH 2(c) above.
"FIXED RATE LOAN SPREAD" shall mean one and three eighths of one
percent (1.375%).
"FUNDED DEBT" shall mean all obligations for borrowed money and
capitalized lease obligations.
"GAAP" shall mean generally accepted accounting principles in the
United States of America in effect from time to time.
"GOVERNMENTAL AUTHORITY" shall mean any nation or government, any
state or other political subdivision thereof, or any entity exercising
executive, legislative, judicial, regulatory or administrative functions of
or pertaining to government.
"GUARANTORS" shall mean each of Pan American Underwriters, Inc.,
Pan American Underwriters Insurance Agents & Brokers, Inc., Agri-Comp
Insurance Agency, Inc., Pan Pacific Benefit Administrators, Inc., Paula
Trading Company Insurance Agency & Brokers, Inc., and all Subsidiaries of the
Borrower formed following the Effective Date.
"GUARANTOR SUBORDINATION AGREEMENT" shall have the meaning given
such term in PARAGRAPH 1(k) above.
"GUARANTY" shall have the meaning given such term in PARAGRAPH 1(k)
above.
"HAZARDOUS MATERIALS" shall mean any flammable materials (excluding
wood products normally used in construction), explosives, radioactive
materials, hazardous wastes, toxic substances or related materials,
including, without limitation, any substances defined as or included in the
definitions of "hazardous substances," "hazardous wastes," "hazardous
materials," "special wastes," "solid wastes" or "toxic substances" under any
applicable federal, state, county, regional or local laws, ordinances,
regulations or guidelines.
"HAZARDOUS MATERIALS CLAIMS" shall mean any enforcement, cleanup,
removal or other governmental or regulatory action or order, or any
governmental claim for damages or other compensation, with respect to the
Property, made under or pursuant to any Hazardous Materials Laws, and/or any
claim asserted in writing by any third party relating to damage,
contribution, cost recovery or other compensation, loss or injury resulting
from any Hazardous Materials.
"HAZARDOUS MATERIALS EVENT" shall have the meaning given such term
in PARAGRAPH 5(j)(4) above.
"HAZARDOUS MATERIALS LAWS" shall mean any applicable federal, state,
county, regional or municipal laws, ordinances, regulations or guidelines
relating to Hazardous Materials.
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"INDEBTEDNESS" of any Person shall mean all obligations for money
borrowed, obligations with respect to the face amount of letters of credit
issued for the account of such Person, capitalized lease obligations and all
indebtedness and liabilities of others assumed or guarantied by such Person,
determined in accordance with GAAP.
"INTEREST COVERAGE RATIO" shall mean for any period, the ratio of:
(a) Combined Earnings for such period to (b) Interest Expense for such period.
"INTEREST EXPENSE" shall mean for any period, the sum without
duplication, for the Borrower and its Subsidiaries (other than Regulated
Subsidiaries), of all interest payable in cash during such period (or, in the
case of prepaid interest, deducted in the computation of net income for such
period) in respect of Funded Debt (whether or not actually paid), plus
consolidated provision for taxes.
"INTEREST PERIOD" shall mean with respect to any Fixed Rate Loan,
the period commencing on the date such Loan is advanced and ending from 30,
60, 90, 180 or 360 days thereafter, as designated in the related Loan
Request; provided, however, that (a) any Interest Period which would
otherwise end on a day which is not a Business Day shall be extended to the
next succeeding Business Day, (b) prior to the Conversion Date no Interest
Period shall end after the Conversion Date and (c) following the Conversion
Date, assuming the Term Loan is made on such date, no Interest Period shall
end after the Final Maturity Date.
"IRIS TESTS" shall mean the ratios and other financial measurements
developed by the NAIC under its Insurance Regulatory Information System or,
in lieu thereof, any successor thereto, replacement thereof or substitute
implemented by the NAIC.
"LIBOR RATE" shall mean, with respect to any Fixed Rate Loan which
is to bear interest at the Applicable LIBOR Rate, the rate for the applicable
Interest Period shown on Page 3750 of the Telerate screen for the
corresponding deposits of U.S. dollars two Eurodollar Business Days prior to
the first day of such Interest Period, or, if such Telerate quote is not
available, the rate at which deposits in immediately available U.S. dollars
in an amount equal to the amount of such Fixed Rate Loan having a maturity
approximately equal to such Interest Period are offered to the Lender in the
London interbank market, at approximately 11:00 a.m. (London time) two
Eurodollar Business Days prior to the first day of such Interest Period,
adjusted, in any case, for any and all assessments, surcharges and reserve
requirements pertaining to the purchase by the Lender of such U.S. dollar
deposits.
"LIEN" shall mean any security interest, mortgage, pledge, lien,
claim on property, charge or encumbrance (including any conditional sale or
other title retention agreement), any lease in the nature thereof, and the
filing of or agreement to give any financial statement under the Uniform
Commercial Code of any jurisdiction.
"LOANS" shall mean, as applicable, the Revolving Loans and the Term
Loan and shall also be deemed to refer to Reference Rate Loans and Fixed Rate
Loans.
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"LOAN DOCUMENTS" shall mean this Agreement, the Note, the
Guaranties, the Guarantor Subordination Agreements, the Standstill Agreement
and each other document, instrument and agreement executed by the Borrower
and the Guarantors in connection herewith or therewith, as any of the same
may be amended, extended or replaced from time to time.
"LOAN REQUEST" shall mean a request for a Loan in form satisfactory
to the Lender.
"MATERIAL ADVERSE EFFECT" shall mean the occurrence of any event
which could reasonably be expected to have a material adverse effect on the
Borrower, on PICO or on the Borrower and its consolidated Subsidiaries taken
as a whole or on the properties and/or business of the Borrower, PICO or of
the Borrower and its consolidated Subsidiaries taken as a whole or on the
ability of the Borrower to pay and perform the Obligations.
"MULTIEMPLOYER PLAN" shall mean a Plan described in section
4001(a)(3) of ERISA to which the Borrower or any ERISA Affiliate is required
to contribute on behalf of any of its employees.
"NAIC" shall mean the National Association of Insurance
Commissioners or any successor thereto.
"NOTE" shall have the meaning given such term in PARAGRAPH 2(c)
above.
"OBLIGATIONS" shall mean any and all debts, obligations and
liabilities of the Borrower to the Lender arising out of or related to the
Loan Documents (whether principal, interest, fees or otherwise, whether now
existing or hereafter arising, whether voluntary or involuntary, whether or
not jointly owed with others, whether direct or indirect, absolute or -
contingent, contractual or tortious, liquidated or unliquidated, arising by
operation of law or otherwise, whether or not from time to time decreased or
extinguished and later increased, created or incurred and whether or not
extended, modified, rearranged, restructured, refinanced or replaced,
including without limitation, modifications to interest rates or other
payment terms of such debts, obligations or liabilities).
"PACO" shall mean PAULA Assurance Company, a California corporation.
"PBGC" shall mean the Pension Benefit Guaranty Corporation
established pursuant to Subtitle A of Title IV of ERISA and any successor
thereto.
"PERMITTED OTHER DEBT" shall mean that Indebtedness described on
EXHIBIT I attached hereto.
"PERSON" shall mean any corporation, natural person, firm, joint
venture, partnership, trust, unincorporated organization, government or any
department or agency of any government.
"PICO" shall mean PAULA Insurance Company, a California corporation.
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"PLAN" shall mean any plan (other than a Multiemployer Plan)
subject to Title IV of ERISA maintained for employees of the Borrower or any
ERISA Affiliate (and any such plan no longer maintained by the Borrower or
any of its ERISA Affiliates to which the Borrower or any of its ERISA
Affiliates has made or was required to make any contributions during the five
years preceding the date on which such plan ceased to be maintained).
"POTENTIAL DEFAULT" shall mean an event which but for the lapse of
time or the giving of notice, or both, would constitute an Event of Default.
"PROHIBITED TRANSACTION" shall mean any transaction described in
section 406 of ERISA which is not exempt by reason of section 408 of ERISA or
the transitional rules set forth in section 414(c) of ERISA and any
transaction described in section 4975(c)(1) of the Code which is not exempt
by reason of section 4975(c)(2) or section 4975(d) of the Code, or the
transitional rules of section 2003(c) of ERISA.
"PROPERTY" shall mean, collectively and severally, any and all real
property, including all improvements and fixtures thereon, owned or occupied
by the Borrower.
"REFERENCE RATE" shall mean the fluctuating per annum rate which is
quoted, published or announced from time to time by the Lender in Los
Angeles, California as its "Reference Rate". The Reference Rate is a rate set
by the Lender based upon various factors including the Lender's costs and
desired return, general economic conditions, and other factors, and is used
as a reference point for pricing some loans, which may be priced at, above or
below the Reference Rate.
"REFERENCE RATE LOANS" shall have the meaning given such term in
PARAGRAPH 1(c) above.
"REGULATED SUBSIDIARY" shall mean PICO, PACO and any other
Subsidiary of the Borrower which is licensed to underwrite insurance coverage
by the Applicable Insurance Regulatory Authority.
"REINCORPORATION" shall mean the formation of a Delaware subsidary
of the Borrower and the merger of the Borrower into said Delaware subsidiary,
with the Delaware subsidiary being the surviving corporation.
"REINSURANCE AGREEMENT" shall mean any agreement, contract, treaty
or other arrangement whereby other insurers assume insurance from PICO.
"REPORTABLE EVENT" shall mean any of the events set forth in
section 4043(b) of ERISA or the regulations thereunder, a withdrawal from a
Plan described in section 4063 of ERISA, a cessation of operations described
in section 4068(f) of ERISA, an amendment to a Plan necessitating the posting
of security under section 401(a)(29) of the Code, or a failure to make a
payment required by section 412(m) of the Code and section 302(e) of ERISA
when due.
32
<PAGE>
"REQUIREMENTS OF LAW" shall mean as to any Person the Certificate
of Incorporation and ByLaws or other organizational or governing documents of
such Person, and any law, treaty, rule or regulation, or a final and binding
determination of an arbitrator or a determination of a court or other
Governmental Authority, in each case applicable to or binding upon such
Person or any of its property or to which such Person or any of its property
is subject.
"REVOLVING CREDIT LIMIT" shall mean $15,000,000.00, as such amount
may be increased or decreased by written agreement of the Lender and the
Borrower.
"REVOLVING LOANS" shall have the meaning given such term in
PARAGRAPH 1(a) above.
"SAP" shall mean, with respect to a Regulated Subsidiary, the
accounting procedures and practices prescribed or permitted by the Applicable
Insurance Regulatory Authority for such Regulated Subsidiary, applied on a
consistent basis.
"STANDSTILL AGREEMENT" shall have the meaning given such term in
PARAGRAPH 1(k) above.
"STATEMENT DATE" shall mean December 31, 1996.
"STATUTORY STATEMENT" shall mean with respect to a Regulated
Subsidiary a statement of the condition and affairs of such Regulated
Subsidiary, prepared in accordance with SAP and filed with the Applicable
Insurance Regulatory Authority.
"SUBORDINATED INDEBTEDNESS" shall mean Indebtedness subordinated to
the Obligations to the satisfaction of the Lender in its sole and absolute
discretion.
"SUBSIDIARY" shall mean any corporation more than fifty percent
(50%) of the stock of which having by the terms thereof ordinary voting power
to elect the board of directors, managers or trustees of the corporation
(irrespective of whether or not at the time stock of any other class or
classes of such corporation shall have or might have voting power by reason
of the happening of any contingency) shall, at the time as of which any
determination is being made, be owned, either directly or through
Subsidiaries.
"TERM LOAN" shall have the meaning given such term in PARAGRAPH
1(b) above.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed as of the day and year first above written.
[SIGNATURES ON NEXT PAGE)
33
<PAGE>
PAULA FINANCIAL, a California
corporation, as the Borrower
By: /s/ James A. Nicholson
----------------------------
Print Name: James A. Nicholson
---------------------
Title: Chief Financial Officer
--------------------------
SANWA BANK CALIFORNIA, as the
Lender
By: /s/ John C. Hyche
----------------------------
John C. Hyche, Vice President
34
<PAGE>
SCHEDULE OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DOCUMENT
<S> <C>
A Form of Guaranty
B Form of Guarantor Subordination Agreement
C Form of Standstill Agreement
D Form of Note
E Form of Legal Opinion of Counsel for the Borrower and the Guarantors
F Form of Officer's Certificate
G Litigation Schedule
H Schedule of Subsidiaries
I Schedule of Permitted Other Debt
Schedule I: Addresses, Telephone and Fax Numbers of Parties
</TABLE>
35
<PAGE>
EXHIBIT A
TO AGREEMENT
FORM OF
CREDIT GUARANTY
THIS CREDIT GUARANTY (the "Guaranty") is made and dated as of the
day of _______, 19__ by _______________________________________________ ,
a _______________ corporation ("Guarantor") in favor of SANWA BANK CALIFORNIA
("Lender").
RECITALS
A. Pursuant to that certain Credit Agreement, dated as of March ,
1997 (as the same may be amended, extended or replaced from time to time, the
"Credit Agreement" and with capitalized terms not otherwise defined herein
used with the meanings given such terms in the Credit Agreement), Lender
agreed to extend credit to PAULA FINANCIAL, a California corporation
("Borrower"), on the terms and subject to the provisions set forth more
particularly therein.
B. As a condition precedent to Lender's obligation to extend such
credit, Guarantor is required to execute and deliver this Guaranty to Lender.
NOW, THEREFORE, in consideration of the above Recitals and for
other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, Guarantor hereby agrees as follows:
AGREEMENT
1. Guarantor hereby unconditionally guarantees the payment when
due, upon maturity, acceleration or otherwise, of all obligations of Borrower
to Lender under the Credit Agreement and the other Loan Documents, whether
heretofore, now, or hereafter made, incurred or created, whether voluntary or
involuntary and however arising, absolute or contingent, liquidated or
unliquidated, determined or undetermined (collectively and severally, the
"Obligations"), whether or not such Obligations are from time to time
reduced, or extinguished and thereafter increased or incurred, whether
Borrower may be liable individually or jointly with others, whether or not
recovery upon such Obligations may be or hereafter become barred by any
statute of limitations, and whether or not such Obligations may be or
hereafter become otherwise unenforceable.
2. Guarantor unconditionally guarantees the payment of the
Obligations, whether or not due or payable by Borrower, upon: (a) the
dissolution, insolvency or business
<PAGE>
failure of, or any assignment for benefit of creditors by, or commencement of
any bankruptcy, reorganization, arrangement, moratorium or other debtor
relief proceedings by or against, Borrower or Guarantor, or (b) the
appointment of a receiver for, or the attachment, restraint of or making or
levying of any order of court or legal process affecting, the property of
Borrower or Guarantor, and unconditionally promises to pay such Obligations
to Lender, or order, on demand, in lawful money of the United States.
3. The liability of Guarantor hereunder is exclusive and
independent of any security for or other guaranty of the Obligations, whether
executed by Guarantor or by any other party, and the liability of Guarantor
hereunder is not affected or impaired by (a) any direction of application of
payment by Borrower or by any other party, or (b) any other guaranty,
undertaking or maximum liability of Guarantor or of any other party as to the
Obligations, or (c) any payment on or in reduction of any such other guaranty
or undertaking, or (d) any revocation or release of any obligations of any
other guarantor of the Obligations, or (e) any dissolution, termination or
increase, decrease or change in personnel of Guarantor, or (f) any payment
made to Lender on the Obligations which Lender repays to Borrower pursuant to
court order in any bankruptcy, reorganization, arrangement, moratorium or
other debtor relief proceeding, and Guarantor waives any right to the
deferral or modification of Guarantor's obligations hereunder by reason of
any such proceeding.
4. The obligations of Guarantor hereunder are independent of the
Obligations of Borrower, and a separate action or actions may be brought and
prosecuted against Guarantor whether or not action is brought against
Borrower and whether or not Borrower be joined in any such action or actions.
Guarantor waives, to the fullest extent permitted by law, the benefit of any
statute of limitations affecting its liability hereunder or the enforcement
thereof. Any payment by Borrower or other circumstance which operates to toll
any statute of limitations as to Borrower shall operate to toll the statute
of limitations as to Guarantor.
5. All payments made by Guarantor under this Guaranty shall be
made without set-off or counterclaim and free and clear of and without
deductions for any present or future taxes, fees, withholdings or conditions
of any nature ("Taxes"). Guarantor shall pay any such Taxes, including Taxes
on any amounts so paid, and will promptly furnish Lender copies of any tax
receipts or such other evidence of payment as Lender may require.
6. Guarantor authorizes Lender (whether or not after termination
of this Guaranty), without notice or demand (except as shall be required by
applicable statute and cannot be waived), and without affecting or impairing
its liability hereunder, from time to time to (a) renew, compromise, extend,
increase, accelerate or otherwise change the time for payment of, or
otherwise change the terms of Obligations or any part thereof, including
increase or decrease of the rate of interest thereon; (b) take and hold
security for the payment of this Guaranty or the Obligations and exchange,
enforce, waive and release any such security; (c) apply such security and
direct the order or manner of sale thereof as Lender in its discretion may
determine; and (d) release or substitute any one or more endorsers,
guarantors, Borrower or other obligors. Lender may, without notice to or the
further consent of Borrower or Guarantor, assign this Guaranty in whole or in
part to any person acquiring an interest in the Obligations.
2
<PAGE>
7. It is not necessary for Lender to inquire into the capacity or
power of Borrower or the officers acting or purporting to act on its behalf,
and Obligations made or created in reliance upon the professed exercise of
such powers shall be guaranteed hereunder.
8. Guarantor waives any right to require Lender to (a) proceed
against Borrower or any other party; (b) proceed against or exhaust any
security held from Borrower; or (c) pursue any other remedy in Lenders' power
whatsoever. Guarantor waives any personal defense based on or arising out of
any personal defense of Borrower other than payment in full of the
Obligations, including, without limitation, any defense based on or arising
out of the disability of Borrower, or the unenforceability of the Obligations
or any part thereof from any cause, or the cessation from any cause of the
liability of Borrower other than payment in full of the Obligations. Lender
may, at its election, foreclose on any security now or in the future held for
the Obligations by one or more judicial or nonjudicial sales, or exercise any
other right or remedy Lenders and Collateral Agent may have against Borrower,
or any security, without affecting or impairing in any way the liability of
Guarantor hereunder except to the extent the Obligations have been paid.
Guarantor waives all rights and defenses arising out of an election of
remedies by Lender, even though that election of remedies, such as a
nonjudicial foreclosure with respect to security for a guaranteed obligation,
has destroyed Guarantor's rights of subrogation and reimbursement against the
principal by operation of Section 580d of the California Code of Civil
Procedure.
9. Guarantor hereby waives any claim or other rights which
Guarantor may now have or may hereafter acquire against the Borrower or any
other guarantor of all or any of the Obligations that arise from the
existence or performance of Guarantor's obligations under this Guaranty or
any other of the Loan Documents (as such claims and rights being referred to
as the "Guarantor's Conditional Rights"), including, without limitation, any
right of subrogation, reimbursement, exoneration, contribution, or
indemnification, any right to participate in any claim or remedy which Lender
has against the Borrower or any collateral which Lender now has or hereafter
acquires for the Obligations, whether or not such claim, remedy or right
arises in equity or under contract, statute or common law, by any payment
made hereunder or otherwise, including, without limitation, the right to take
or receive from the Borrower, directly or indirectly, in cash or other
property or by setoff or in any other manner, payment or security on account
of such claim or other rights. If, notwithstanding the foregoing provisions,
any amount shall be paid to Guarantor on account of Guarantor's Conditional
Rights and either (a) such amount is paid to Guarantor at any time when the
Obligations shall not have been paid or performed in full, or (b) regardless
of when such amount is paid to Guarantor any payment made by Borrower to
Lender is at any time determined to be a preferential payment, then such
amount paid to Guarantor shall be deemed to be held in trust for the benefit
of Lender and shall forthwith be paid to Lender to be credited and applied
upon the Obligations, whether matured or unmatured, in such order and manner
as Lender, in its sole discretion, shall determine. To the extent that any of
the provisions of this Paragraph shall not be enforceable, Guarantor agrees
that until such time as the Obligations have been paid and performed in full
and the period of time has expired during which any payment made by the
Borrower or Guarantor to Lender maybe determined to be a preferential
payment, Guarantor's Conditional Rights to the extent not validly
3
<PAGE>
waived shall be subordinate to Lender's right to full payment and performance
of the Obligations and Guarantor shall not seek to enforce Guarantor's
Conditional Rights during such period.
10. Guarantor waives all presentments, demands for performance,
protests and notices, including, without limitation, notices of
nonperformance, notices of protest, notices of dishonor, notices of
acceptance of this Guaranty, and notices of the existence, creation or
incurring of new or additional Obligations. Guarantor assumes all
responsibility for being and keeping itself informed of Borrower's financial
condition and assets, and of all other circumstances bearing upon the risk of
nonpayment of the Obligations and the nature, scope and extent of the risks
which Guarantor assumes and incurs hereunder, and agrees that Lender shall
have no duty to advise Guarantor of information known to it regarding such
circumstances or risks.
11. In addition to the Obligations, Guarantor agrees to pay
reasonable attorneys' fees and all other costs and expenses incurred by
Lender in enforcing this Guaranty in any action or proceeding arising out of,
or relating to, this Guaranty. This Guaranty and the liability and
obligations of Guarantor hereunder are binding upon Guarantor and its
successors and assigns, and this Guaranty inures to the benefit of and is
enforceable by Lender and its successors, transferees, and assigns. Lender
hereby agrees to use reasonable efforts to provide to Guarantor a copy of any
notice of the occurrence of an Event of Default under the Credit Agreement
which it gives to the Borrower; provided, however, that the failure of Lender
to provide any such notice shall not in any manner or to any extent affect
the obligations of Guarantor under this Guaranty.
12. Guarantor agrees to execute any and all further documents,
instruments and agreements as Lender from time to time reasonably requests to
evidence Guarantor's obligations hereunder.
13. Guarantor hereby represents and warrants and agrees that:
(a) Guarantor (1) is duly organized, validly existing and in
good standing as a corporation under the laws of the State of__________and is
qualified to do business in each jurisdiction where its ownership of property
or conduct of business requires such qualification and where failure to
qualify would have a material adverse effect on Guarantor or its property
and/or business or on the ability of Guarantor to pay or perform the
Obligations, (2) has the corporate power and authority and the legal right to
own and operate its property and to conduct business in the manner in which
it does and proposes so to do, and (3) is in compliance with all Requirements
of Law and Contractual Obligations, the failure to comply with which could
have a material adverse effect on the business, operations, assets or
financial or other condition of Guarantor.
(b) Guarantor has the corporate power and authority and the
legal right to execute, deliver and perform this Guaranty and has taken all
necessary corporate action to authorize the execution, delivery and
performance of this Guaranty. This Guaranty has been duly executed and
delivered on behalf of Guarantor and constitutes the legal, valid and binding
obligations of Guarantor enforceable against Guarantor in accordance with its
terms, subject to
4
<PAGE>
the effect of applicable bankruptcy and other similar laws affecting the
rights of creditors generally and the effect of equitable principles whether
applied in an action at law or a suit in equity.
(c) No consent, approval, authorization of, or registration,
declaration or filing with any governmental authority is required on the part
of Guarantor in connection with the execution and delivery of this Guaranty
or the performance of or compliance with the terms, provisions and conditions
hereof.
(d) Guarantor has reviewed the Credit Agreement and the
Exhibits thereto and acknowledges and agrees to all terms and conditions
thereof as they relate to the Guarantor or to the Obligations guaranteed
hereunder.
14. This Guaranty shall be governed by and construed in accordance
with the laws of the State of California without giving effect to choice of
law rules.
15. The terms and provisions hereof may not be waived, altered,
modified or amended except in writing duly signed by Lender and by Guarantor.
16. All notices given by Lender or Guarantor to the other shall be
in writing unless otherwise provided for herein, delivered personally or by
depositing the same in the United States mail, registered or certified mail,
with postage prepaid, addressed to the party at the address set forth beneath
its signature below or sent by recognized courier service with a tracking
system to such party at such address whether or not such delivery is refused.
Either Lender or Guarantor may change the address to which notices are to be
sent by notice of such change to the other party given as provided herein.
Such notices shall be effective on the date received or, if mailed, on the
third Business Day following the date mailed.
Executed as of the day and year first above written.
________________________________________,
a _______________________ corporation
By:____________________________
Name:__________________________
Title:_________________________
Address:_______________________
_______________________
Attn:__________________
TEL: __________________
FAX: __________________
5
<PAGE>
SANWA BANK CALIFORNIA
By____________________________________
Name__________________________________
Title_________________________________
Address: 601 South Figueroa Street
Los Angeles, California 90017
Attn: John C. Hyche,
Vice President
TEL: (213) 896-7543
FAX: (213) 896-7282
6
<PAGE>
EXHIBIT B
TQ AGREEMENT
FORM OF
GUARANTOR SUBORDINATION AGREEMENT
THIS SUBORDINATION AGREEMENT is made and dated as of the___day
of_________________ , 19__ by and among PAULA FINANCIAL, a California
corporation (the "Borrower"), ________________________________________
a___________________ corporation (the "Creditor"), and SANWA BANK CALIFORNIA
(the "Lender").
RECITALS
The Lender has agreed to extend credit to the Borrower pursuant to
the terms and subject to the conditions set forth in that certain Credit
Agreement dated as of March , 1997 by and between the Borrower and the Lender
(as the same may be amended, extended or replaced from time to time, the
"Credit Agreement," and with capitalized terms not Otherwise defined herein
used with the meanings given such terms in the Credit Agreement), including,
without limitation, the condition that Creditor execute and deliver to the
Lender a continuing guaranty of the Obligations of Borrower to the Lender
under the Credit Agreement and this Subordination Agreement.
NOW, THEREFORE, in consideration of the above Recitals and for
other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the parties hereto hereby agree as follows:
AGREEMENT
1. Creditor has extended and will in the future extend credit to
Borrower from time to time. The principal of all now existing and hereafter
arising indebtedness of Borrower to Creditor together with accrued but unpaid
interest thereon is hereinafter referred to as "the Claim."
2. Creditor is the sole and absolute owner of the Claim and has
not sold, assigned, transferred or otherwise disposed of any right it may
have to repayment of the Claim or any security therefor.
3. The Claim and all rights and remedies of Creditor with respect
thereto and any lien securing payment thereof are and shall continue to be
subject, subordinate and rendered junior in the right of payment to the
Obligations, as the same may be extended, amended or replaced form time to
time; provided, however, that unless and until there shall occur an Event of
Default or Potential Default Borrower may make and Creditor may receive
payments on account of the Claim made in the normal course of Borrower's
business.
<PAGE>
4. Unless and until the Obligations shall have been fully paid
and discharged and any agreement by the Lender to make further loans or
advances to Borrower shall have terminated, except as expressly permitted
pursuant to Paragraph 3 above:
(a) Borrower will not make or give, and Creditor will not
receive, directly or indirectly, any payment, advance, credit or further
security of any kind whatsoever on account of the Claim, or any new or
further evidence thereof;
(b) Creditor will not sell, assign, transfer or endorse the
Claim or any part or evidence thereof;
(c) Creditor will pay to the Lender promptly upon receipt,
for application against the Obligations, any and all amounts which may be
received by Creditor on account of the Claim; and
(d) Creditor will not take, or permit any action to be taken,
to assert, collect or enforce the Claim or any part thereof.
5. Each of Borrower and Creditor waives notice of acceptance of
this Subordination Agreement by the Lender and Lender, and Creditor waives
notice of and consent to the making, amount and terms of any loan or loans
which the Lender may from time to time make to Borrower and any renewal or
extension thereof and any action which the Lender in its sole and absolute
discretion may take or omit to take with respect thereto.
6. This Subordination Agreement shall constitute a continuing
agreement of subordination and the Lender may, from time to time and without
notice to Creditor, lend money to or make other financial arrangements with
Borrower in reliance hereon until written notice of termination shall be
delivered by Creditor to the Lender by certified mail, return receipt
requested. The receipt by the Lender of such notice shall not affect this
Subordination Agreement as it relates to any Obligations then existing, to
any Obligations incurred thereafter pursuant to a previous commitment by the
Lender or to any amendments to, or extensions or renewals of, any such
Obligations.
7. In the event of a default in the performance or observance of
any of the foregoing, the Obligations shall forthwith become due and payable
at the election of the Lender, without presentment, demand or notice of any
kind, all of which are hereby waived.
8. Creditor agrees as follows:
(a) Upon any distribution of all of the assets of Borrower to
creditors of Borrower upon the dissolution, winding up, liquidation,
arrangement, or reorganization of Borrower, whether in any bankruptcy,
insolvency, arrangement, reorganization or receivership proceeding or upon an
assignment for the benefit of creditors or any other marshalling of the
assets and liabilities of Borrower or otherwise, any payment or distribution
of any kind (whether in cash, property or securities) which otherwise would
be payable or deliverable upon or with respect to the Claim shall be paid or
delivered directly to the Lender for application (in the case
2
<PAGE>
of cash) to, or as collateral (in the case of non-cash property or
securities) for, the payment or prepayment of the Obligations until the
Obligations shall have been paid in full.
(b) If any proceeding referred to in subsection (a) above is
commenced by or against Borrower:
(1) The Lender is hereby irrevocably authorized and
empowered (in their own name or in the name of Creditor or otherwise), but
shall have no obligation, to demand, sue for, collect and receive every
payment or distribution referred to in subsection (a) above and give
acquittance therefor and to file claims and proofs of claim and take such
other action (including, without limitation, voting the Claim or enforcing
any security interest or other lien securing payment of the Claim) as it may
deem necessary or advisable for the exercise or enforcement of any of the
rights or interests of the Lender hereunder; and
(2) Creditor shall duly and promptly take such action
as Lender or the Lender may request (i) to collect the Claim for account of
the Lender and to file appropriate claims or proofs of claim in respect of
the Claim, (ii) to execute and deliver to the Lender such powers of attorney,
assignments, or other instruments as it may request in order to enable it to
enforce any and all claims with respect to, and any security interests and
other liens securing payment of, the Claim, and (iii) to collect and receive
any and all payments or distributions which may be payable or deliverable
upon or with respect to the Claim.
(c) All payments or distributions upon or with respect to the
Claim which are received by Creditor contrary to the provisions of this
Subordination Agreement shall be received in trust for the benefit of the
Lender, shall be segregated from other funds and property held by Creditor
and shall be forthwith paid over to the Lender in the same form as so
received (with any necessary endorsement) to be applied (in the case of cash)
to, or held as collateral (in the case of non-cash property or securities)
for, the payment or prepayment of the Obligations.
(d) The Lender is hereby authorized to demand specific
performance of this Subordination Agreement, whether or not the Borrower
shall have complied with any or all of the provisions hereof applicable to
it, at any time when the Creditor shall have failed to comply with any of the
provisions of this Subordination Agreement applicable to it.
9. It is the intent of Creditor to create by this Subordination
Agreement a security interest in favor of the Lender in the Claim and in
Creditor's other rights to receive money or other property from Borrower,
whether such rights shall constitute accounts, contract rights, chattel
paper, instruments, general intangibles or otherwise. Creditor hereby grants
to the Lender a security interest in the Claim in order to secure the payment
and performance of the Creditor's obligations pursuant to this Subordination
Agreement.
10. Creditor authorizes the Lender (whether or not after
revocation of this Subordination Agreement), without notice or demand (except
as shall be required by applicable statute and cannot be waived), and without
affecting or impairing Creditor's obligations hereunder, from time to time to
(a) renew, compromise, extend, increase, accelerate or otherwise
3
<PAGE>
SERIES A PREFERRED STOCK PURCHASE AGREEMENT
dated as of August 3, 1994 among
PAULA FINANCIAL
and
THE PURCHASERS LISTED ON SCHEDULE 1.01
<PAGE>
TABLE OF CONTENTS
1. PURCHASE, SALE AND TERMS OF SHARES . . . . . . . . . . . 1
1.01. THE PREFERRED SHARES . . . . . . . . . . . . . 1
1.02. THE CONVERSION SHARES . . . . . . . . . . . . 1
1.03. PURCHASE PRICE AND CLOSINg . . . . . . . . . . 1
1.04. USE OF PROCEEDS . . . . . . . . . . . . . . . 2
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY . . . . , 2
2.01. ORGANIZATION, STANDING AND POWER OF THE
COMPANY . . . . . . , . . . . . . . . . . . . . . . 2
2.02. AUTHORITY: ENFORCEABILITY; NO CONFLICT . . . . 2
2.03. CAPITALIZATION . . . . . . . . . . . . . . . . 3
2.04. SUBSIDIARIES . . . . . . . . . . . . . . . . . 4
2.05. STATUS OF SHARES . . . . . . . . . . . . . . . 5
2.06. FINANCIAL STATEMENTS . . . . . . . . . . . . . 5
2.07. LIABILITIES . . . . . . . . . . . . . . . . . 6
2.08. INDEBTEDNESS . . . . . . . . . . . . . . . . . 6
2.09. TITLE TO ASSETS . . . . . . . . . . . . . . . 6
2.10. ACTIONS PENDING . . . . . . . . . . . . . . . 7
2.11. COMPLIANCE WITH LAW . . . . . . . . . . . . . 7
2.12. TAXES . . . . . . . . . . . . . . . . . . . . 7
2.13. ERISA . . . . . . . . . . . . . . . . . . . . 7
2.14. NO MATERIAL ADVERSE CHANGE . . . . . . . . . . 8
2.15. CERTAIN FEES . . . . . . . . . . . . . . . . . 8
2.16. DISCLOSURE . . . . . . . . . . . . . . . . . . 8
2.17. OPERATION OF BUSINESS . . . . . . . . . . . . 9
2.18. ENVIRONMENTAL AND SAFETY MATTERS . . . . . . . 9
2 19. BOOKS AND RECORDS . . . . . . . . . . . . . . 9
2.20. MATERIAL AGREEMENTS . . . . . . . . . . . . . 9
2.21. TRANSACTIONS WITH AFFILIATES . . . . . . . . . 10
2.22. SECURITIES ACT OF 1933 . . . . . . . . . . . . 10
2.23. GOVERNMENTAL APPROVALS . . . . . . . . . . . . 10
2.24. INSURANCE . . . . . . . . . . . . . . . . . . 11
2.25. EMPLOYEES . . . . . . . . . . . . . . . . . . 11
2.26. ABSENCE OF CERTAIN DEVELOPMENTS . . . . . . . 11
2.27. UNITED STATES REAL PROPERTY HOLDING
CORPORATION . . . . . . . . . . . . . . . . . . . . 13
2.28. INSURANCE BUSINESS . . . . . . . . . . . . . . 13
2.29. RESERVES . . . . . . . . . . . . . . . . . . . 13
2.30. REGULATORY FILINGS . . . . . . . . . . . . . . 13
2.31. A.M. BEST RATING . . . . . . . . . . . . . . . 13
2.32. REINSURANCE. . . . . . . . . . . . . . . . . . 14
2.33. INVESTMENT PORTFOLIO . . . . . . . . . . . . . 14
3. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS . . . . 14
3.01. ORGANIZATION AND STANDING OF THE PURCHASERS. . 14
3.02. AUTHORITY; ENFORCEABILITY; NO CONFLICT . . . . 14
3.03. ACQUISITION FOR INVESTMENT . . . . . . . . . . 15
3.04. FINANCING . . . . . . . . . . . . . . . . . . 15
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3.05. GOVERNMENTAL APPROVALS . . . . . . . . . . . . 15
4. CONDITIONS TO PURCHASER'S OBLIGATIONS . . . . . . . . . 16
4.01. REPRESENTATIONS AND WARRANTIES . . . . . . . . 16
4.02. CORPORATE PROCEEDINGS . . . . . . . . . . . . 16
4.03. INCUMBENCY CERTIFICATE . . . . . . . . . . . . 16
4.04. OFFICER'S CERTIFICATE . . . . . . . . . . . . 16
4.05. CONSENTS, LICENSES, APPROVALS. ETC . . . . . . 16
4.06. GOOD STANDING CERTIFICATES . . . . . . . . . . 17
4.07. NO PROCEEDINGS OR LITIGATION . . . . . . . . . 17
4.08. CERTIFICATE OF DESIGNATION . . . . . . . . . . 17
4.09. LEGAL OPINION . . . . . . . . . . . . . . . . 17
4.10. SHAREHOLDERS AGREEMENT . . . . . . . . . . . . 17
4.11. VOTING AGREEMENT . . . . . . . . . . . . . . . 17
4.12. BANK DOCUMENTS . . . . . . . . . . . . . . . . 17
4.13. EXPENSES . . . . . . . . . . . . . . . . . . . 18
4.14. OTHER PURCHASERS . . . . . . . . . . . . . . . 18
4.15. BOARD OF DIRECTORS . . . . . . . . . . . . . . 18
4.16. ESOP REPURCHASE . . . . . . . . . . . . . . . 18
4.17. SCHNIDER REPURCHASE . . . . . . . . . . . . . 18
4.18. TENDER OFFER . . . . . . . . . . . . . . . . . 19
4.19. SNIDER STOCK AND OPTIONS . . . . . . . . . . . 19
4.20. COMPLIANCE WITH THIS AGREEMENT AND RELATED
AGREEMENTS . . . . . . . . . . . . . . . . . . . . 19
4.21. PROCEEDINGS SATISFACTORY . . . . . . . . . . . 19
5. AFFIRMATIVE COVENANTS OF THE COMPANY . . . . . . . . . . 19
5.01. INSPECTION RIGHTS . . . . . . . . . . . . . . 19
5.02. BUDGETS APPROVAL . . . . . . . . . . . . . . . 20
5.03. FINANCINGS . . . . . . . . . . . . . . . . . . 20
5.04. MEETINGS OF DIRECTORS AND COMMITTEES . . . . . 20
5.05. BY-LAWS; MEETINGS AND INDEMNIFICATION . . . . 20
5.06. CORPORATE EXISTENCE . . . . . . . . . . . . . 20
5.07. PROPERTIES, BUSINESS. INSURANCE . . . . . . . 21
5.08. EXPENSES OF DIRECTORS . . . . . . . . . . . . 21
5.09. COMPLIANCE WITH LAWS . . . . . . . . . . . . . 21
5.10. KEEPING OF RECORDS AND BOOKS OF ACCOUNT . . . 21
5.11. SIZE OF BOARD AND COMMITTEES . . . . . . . . . 21
5.12. CONSUMMATION OF SCHNIDER REPURCHASE . . . . . 22
5.13. CONSUMMATION OF TENDER OFFER . . . . . . . . . 22
5.14. REPORTING REGUIREMENTS . . . . . . . . . . . . 22
5.15. REPORTS TO INVESTOR DIRECTORS . . . . . . . . 23
5.16. MAINTENANCE OF KEY MAN INSURANCE . . . . . . . 24
5.17. REPAYMENT OF WELLS FARGO BANK . . . . . . . . 24
6. NEGATIVE COVENANTS OF THE COMPANY . . . . . . . . . . . 24
6.01. DEALINGS WITH AFFILIATES . . . . . . . . . . . 24
6.02. COMPENSATION TO OFFICERS . . . . . . . . . . . 25
6.03. MAINTENANCE OF OWNERSHIP OF SUBSIDIARIES . . . 25
6.04. CONDUCT OF BUSINESS . . . . . . . . . . . . . 25
6.05. RESTRICTIONS ON INDEBTEDNESS . . . . . . . . . 25
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6.06. ASSUMPTIONS OR GUARANTIES OF INDEBTEDNESS OF
OTHER PERSONS. . . . . . . . . . . . . . . . . . . . 25
6.07. INVESTMENTS IN OTHER CORPORATIONS OR
ENTITIES . . . . . . . . . . . . . . . . . . . 25
6.08. AMENDMENTS . . . . . . . . . . . . . . . . . . 26
6.09. OTHER AGREEMENTS . . . . . . . . . . . . . . . 26
6.10. REINSURANCE AGREEMENTS . . . . . . . . . . . . 26
6.11. AMENDMENTS . . . . . . . . . . . . . . . . . . 27
7. REGISTRATION RIGHTS . . . . . . . . . . . . . . . . . . 27
7.01. DEMAND REGISTRATIONS . . . . . . . . . . . . . 27
7.02. INCIDENTAL REGISTRATION. . . . . . . . . . . . 30
7.03. HOLDBACK AGREEMENTS. . . . . . . . . . . . . . 31
7.04. REGISTRATION PROCEDURES. . . . . . . . . . . . 32
7.05. INDEMNIFICATION. . . . . . . . . . . . . . . . 35
7.06. RULE 144 . . . . . . . . . . . . . . . . . . . 40
8. RIGHT OF FIRST REFUSAL . . . . . . . . . . . . . . . . . 40
8.01. RIGHT OF FIRST REFUSAL . . . . . . . . . . . . 40
8.02. NOTICE OF ACCEPTANCE . . . . . . . . . . . . . 41
8.03. CONDITIONS TO ACCEPTANCES AND PURCHASE . . . . 41
8.04. FURTHER SALE . . . . . . . . . . . . . . . . . 42
8.05. TERMINATION AND WAIVER OF RIGHT OF FIRST
OFFER . . . . . . . . . . . . . . . . . . . . 42
8.06. EXCEPTION . . . . . . . . . . . . . . . . . . 42
9. DEFINITIONS AND ACCOUNTING TERMS . . . . . . . . . . . . 43
9.01. CERTAIN DEFINED TERMS . . . . . . . . . . . . 43
10. INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . 52
10.01. GENERAL INDEMNITY. . . . . . . . . . . . . . . 52
10.02. INDEMNIFICATION PROCEDURE . . . . . . . . . . 52
11. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . 53
11.01. NO WAIVER; CUMULATIVE REMEDIES . . . . . . . . 53
11.02. AMENDMENTS, WAIVERS AND CONSENTS . . . . . . . 53
11.03. ADDRESSES FOR NOTICES . . . . . . . . . . . . 54
11.04. COSTS, EXPENSES AND TAXES . . . . . . . . . . 54
11.05. BINDING EFFECT; ASSIGNMENT . . . . . . . . . . 55
11.06. SURVIVAL OF REPRESENTATIONS AND WARRANTIES . . 55
11.07. PRIOR AGREEMENTS . . . . . . . . . . . . . . . 55
11.08. SEVERABILITY . . . . . . . . . . . . . . . . . 56
11.09. CONFIDENTIALITY. . . . . . . . . . . . . . . . 56
11.10. GOVERNING LAW . . . . . . . . . . . . . . . . 56
11.11. HEADINGS . . . . . . . . . . . . . . . . . . . 56
11.12. COUNTERPARTS . . . . . . . . . . . . . . . . . 57
11.13. FURTHER ASSURANCES . . . . . . . . . . . . . . 57
11.14. WAIVER . . . . . . . . . . . . . . . . . . . . 57
11.15. SPECIFIC ENFORCEMENT . . . . . . . . . . . . . 57
11.16. RESTRICTIONS ON FURTHER ACQUISITIONS . . . . . 57
11.17. REDEMPTION NOTES . . . . . . . . . . . . . . . 58
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SERIES A PREFERRED STOCK PURCHASE AGREEMENT
Dated as of August 3, 1994
Each of the Purchasers Listed
on Schedule 1.01
Ladies and Gentlemen:
PAULA FINANCIAL, a California corporation (the "Company") hereby
agrees with each of you as follows:
1. PURCHASE, SALE AND TERMS OF SHARES
1.01. THE PREFERRED SHARES. The Company has authorized the issuance and
sale of 941,177 shares (the "Preferred Shares") of its authorized but
unissued shares of Series A Preferred Stock, no par value (the "Series A
Preferred Stock"), at a purchase price of $17.00 per share to the persons
(individually a "Purchaser" and collectively the "Purchasers") and in the
respective amounts set forth in Schedule 1.01 hereto. The designation,
rights, preferences and other terms and provisions of the Series A Preferred
Stock are set forth in the Certificate of Designation attached as EXHIBIT A
hereto.
1.02. THE CONVERSION SHARES. The Company has authorized and has
reserved and covenants to continue to reserve, free of preemptive
rights and other similar contractual rights of stockholders, a
sufficient number of its authorized but unissued shares of its Common Stock,
no par value (the "Common Stock"), to satisfy the rights of conversion of the
holders of the Preferred Shares. Any shares of Common Stock issuable upon
conversion of the Preferred Shares (and such shares when issued) are herein
referred to as the "Conversion Shares." The Preferred Shares and the
Conversion Shares are sometimes collectively referred to as the "Shares."
1.03. PURCHASE PRICE AND CLOSING. The Company agrees to issue and sell
to the Purchasers and, in consideration of and in express reliance upon the
representations, warranties, covenants, terms and conditions of this
Agreement, the Purchasers, severally but not jointly, agree to purchase that
number of the Preferred Shares set forth opposite their respective names in
Schedule 1.01. The aggregate purchase price of the Preferred Shares being
acquired by each Purchaser is set forth opposite such Purchaser's name in
Schedule 1.01. The closing of the purchase and sale of the
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Preferred Shares to be acquired by the Purchasers from the Company under this
Agreement (the "Closing") shall take place at the offices of Messrs.
Gibson, Dunn & Crutcher, 2029 Century Park East, Los Angeles, CA 90067 at
10:00 a.m. on August 3, 1994, or at such time and date thereafter as the
Purchasers and the Company may agree (the "Closing Date"). At the Closing,
the Company will deliver to each Purchaser certificates for the number and
series of Preferred Shares set forth opposite its name under the heading
"Number of Preferred Shares" in Schedule 1.01 registered in such Purchaser's
name (or its nominee), against delivery of a check or checks payable to the
order of the Company, or a transfer of funds to the account of the Company by
wire transfer, representing the net cash consideration set forth opposite
each such Purchaser's name on Schedule 1.01.
1.04. USE OF PROCEEDS. The Company shall use the cash proceeds from
the sale of the Preferred Shares to redeem no lass than 592,647 shares of
Common Stock from its shareholders (of which at least 367,647 shall be
repurchased from the ESOP), to contribute to the capital of PICO to increase
its capacity to write insurance and for working capital purposes.
2. REPRESENTATIONS AND WARRANTIES OP THE COMPANY
The Company hereby represents and warrants to the Purchasers as of the
Closing Date as follows:
2.01. ORGANIZATION, STANDING AND POWER OF THE COMPANY. Each of the
Company and the Subsidiaries is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation. Each of the Company and the Subsidiaries has all requisite
power and authority to own, lease and operate its properties and assets and
to conduct its business as now being conducted and is duly qualified to do
business in good standing in those foreign jurisdictions in which such
qualification is required.
2.02. AUTHORITY; ENFORCEABILITY; NO CONFLICT. The Company has all
requisite corporate power and authority to enter into this Agreement and each
Related Agreement to which it is a party, to issue and sell the Shares, and
to carry out its obligations hereunder and under each Related Agreement to
which it is a party. The execution, delivery and performance of this
Agreement and each Related Agreement to which it is a party by the Company
and the issuance and sale of the Shares by the Company have been duly and
validly authorized by all requisite corporate proceedings on the part of the
Company. This Agreement and each Related Agreement to which it is a party
when executed and delivered by the Company is a valid and binding obligation
of the Company, enforceable against the Company in accordance with its terms,
except that (i) such enforcement may be subject to bankruptcy, insolvency,
2
<PAGE>
reorganization, moratorium, rehabilitation, liquidation, conservatorship,
receivership or other similar laws now or hereafter in effect relating to
creditors' rights generally and (ii) the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to equitable
defenses and to the discretion of the court before which any proceeding
therefor may be brought. Except as set forth on Schedule 2.02, the
execution and delivery of this Agreement and each Related Agreement to which
it is a party by the Company does not, and the consummation by the Company of
the transactions contemplated hereby and thereby will not result in or
constitute: (a) a default, breach or violation of or under the Articles of
Incorporation or the By-Laws, (b) a default, breach or violation of or under
any mortgage, deed of trust, indenture, note, bond, license, lease agreement
or other instrument or obligation to which the Company or any Subsidiary is a
party or by which any of their respective properties or assets are bound if
such default, breach or violation could reasonably be expected to have a
Material Adverse Effect, (c) a violation of any statute, rule, regulation,
order, judgment or decree of any court, public body or authority by which the
Company, any Subsidiary or any of their respective properties or assets are
bound if such violation could reasonably be expected to have a Material
Adverse Effect, (d) an event which (with notice or lapse of time or both)
would permit any Person to terminate, accelerate the performance required by,
or accelerate the maturity of any indebtedness or obligation of the Company
or any Subsidiary under any agreement or commitment to which the Company or
any Subsidiary is a party or by which the Compare or any Subsidiary is bound
or by which any of their respective properties or assets are bound if such
termination or acceleration could reasonably be expected to have a Material
Adverse Effect, (e) the creation or imposition of any lien, charge or
encumbrance on any property of the Company or any Subsidiary under any
agreement or commitment to which the Company or any Subsidiary is a party or
by which the Company or any Subsidiary is bound or by which any of their
respective properties or assets are bound if such creation or imposition
could reasonably be expected to have a Material Adverse Effect, or (f) an
event which would require any consent under any agreement to which the
Company or any Subsidiary is a party or by which the Company or any
Subsidiary is bound or by which any of their respective properties or assets
are bound if the failure to obtain such consent could reasonably be expected
to have a Material Adverse Effect (other than the consent of Wells Fargo Bank
which is not expected to be obtained due to the repayment of all obligations
owed to Wells Fargo Bank).
2.03. CAPITALIZATION. The authorized capital stock of the Company
consists of (a) 10,000,000 shares of Common Stock, of which 1,795,419 shares
are outstanding, 941,177 are reserved for issuance upon conversion of the
Series A Preferred Stock, 275,000 are reserved for issuance under the Stock
Option Plan, 82,353 are
3
<PAGE>
reserved for issuance upon the exercise of warrants issued to the Placement
Agents and 30,000 are reserved for issuance upon the exercise of options
issued to Jeffrey A. Snider (the "Snider Options") and (b) 5,000,000 shares
of Preferred Stock, no par value, of which 941,777 have been designated as
Series A Preferred Stock, none of which are outstanding. All of the
outstanding shares of Common Stock have been duly authorized and validly
issued, and are fully paid and non-assessable. Except for the options issued
or to be issued under the Stock Option Plan, warrants to be issued to the
Placement Agents on the Closing Date, the Snider Options or as provided
herein or in any of the Related Agreements, there are no outstanding
preemptive, conversion or other rights, options or warrants granted or issued
by or binding upon the Company for the purchase or acquisition by any other
Person of any shares of capital stock of the Company or any other securities
convertible into, exchangeable for or evidencing the right to subscribe for
any shares of such capital stock. Except for the Company's obligations under
the ESOP, the Tender Offer, the Schnider Agreement and the Certificate of
Designation, the Company is not subject to any obligation (contingent or
otherwise) to repurchase or otherwise acquire or retire any shares of its
capital stock or any convertible securities, rights or options of the type
described in the preceding sentence. Except as provided herein, the Company
is not a party to any agreement granting registration rights to any person
with respect to any of its equity or debt securities. Except as set forth in
the Voting Agreement and the Shareholders Agreement, the Company is not a
party to, and it has no Knowledge of, any agreement restricting the voting or
transfer, of any shares of the capital stock of the Company. Except as set
forth on Schedule 2.03, the offer and sale of all capital stock, convertible
securities, rights or options of the Company issued prior to the Closing Date
complied with or were exempt from all applicable federal and state securities
laws and no stockholder has a right of rescission or damages with respect
thereto.
2.04. SUBSIDIARIES. Schedule 2.04 sets forth each Subsidiary showing the
jurisdiction of its incorporation or organization and showing the percentage
of each Person's ownership of the outstanding stock or other interests of
such Subsidiary. All of the outstanding shares of capital stock of each
Subsidiary have been duly authorized and validly issued, and are fully paid and
non-assessable. There are no outstanding preemptive, conversion or other
rights, options, warrants or agreements granted or issued by or binding upon any
Subsidiary for the purchase or acquisition of any shares of capital stock
of any Subsidiary or any other securities convertible into, exchangeable
for or evidencing the right to subscribe for any shares of such capital stock.
Neither the Company nor any Subsidiary is subject to any obligation
(contingent or otherwise) to repurchase or otherwise acquire or retire any
shares of the capital stock of any Subsidiary or any convertible securities,
rights or options of the type described in
4
<PAGE>
the preceding sentence. Except for restrictions set forth in the Bank Credit
Agreement, under applicable insurance laws and as otherwise provided for
herein, neither the Company nor any Subsidiary is a party to, nor has any
Knowledge of, any agreement restricting the voting or transfer of any shares
of the capital stock of any Subsidiary.
2.05. STATUS OF SHARES. The Preferred Shares to be issued at the Closing
have been duly authorized by all necessary corporate action on the part of
the Company. When issued and paid for as provided in this Agreement, the
Preferred Shares will be validly issued and outstanding, fully paid and
nonassessable, and the issuance of such Preferred Shares is not and will not
be subject to preemptive or other similar contractual rights of any other
stockholder of the Company. The Conversion Shares have been duly authorized
by all necessary corporate action on the part of the Company and have been
duly reserved for issuance. When the Conversion Shares are issued such shares
will be validly issued and outstanding, fully paid and nonassessable and the
issuance of such shares will not be subject to preemptive or other similar
contractual rights of any other stockholder of the Company.
2.06. FINANCIAL STATEMENTS.
(a) The consolidated and consolidating balance sheets of the
Company and the Subsidiaries as at December 31, 1993, 1992, 1991, 1990 and
1989, and the related consolidated and consolidating income statements and
statements of cash flows and changes in stockholders' equity of the Company
and the Subsidiaries for the fiscal years then ended, together with the
opinion on the consolidated statements of KPMG Peat Marwick, independent
certified public accountants, and the interim consolidated and consolidating
balance sheets of the Company and the Subsidiaries as at June 30, 1994, and
the related consolidated and consolidating income statements and statements
of cash flows and changes in stockholders' equity of the Company and the
Subsidiaries for the six month period then ended, are materially complete and
correctand fairly present the financial condition of the Company and the
Subsidiaries at such dates and the results of the operations of the Company
and the Subsidiaries for the periods covered by such statements, all in
accordance with GAAP consistently applied.
(b) The statutory balance sheets of PICO and PACO as at
December 31, 1993, 1992, 1991, 1990 and 1989, and the related statutory
income statements of PICO and PACO for the fiscal years then ended, and the
interim statutory balance sheets of PICO and PACO as at June 30, 1994, and
the related statutory income statements of PICO and PACO for the six month
period then ended, are materially complete and correct and fairly present
the financial condition of PICO and PACO at such dates and the results
5
<PAGE>
of the operations of PICO and PACO for the periods covered by such
statements, all in accordance with SAP consistently applied.
(c) Unaudited consolidated and consolidating pro forma balance
sheets of the Company and the Subsidiaries and statutory balance sheets of
PICO and PACO as at June 30, 1994 (the "Pro Forma Balance Sheets") are
attached as Schedule 2.06(c). The Pro Forma Balance Sheets (i) presents
fairly, in all material respects, the financial condition of the Company and
the Subsidiaries at June 30, 1994 incorporating adjustments necessary to
reflect the consummation of the transactions contemplated hereby and (ii) the
historical components have been prepared, in all material respects, in
accordance with GAAP and SAP consistently applied.
(d) The projections and PRO FORMA financial information
furnished to the Purchasers in the Confidential Offering Memorandum prepared
by the Placement Agents, attached as an Exhibit or Schedule hereto or
delivered to the Purchasers in connection herewith are based on good faith
estimates and assumptions by the management of the Company, it being
recognized by the Purchasers, however, that projections as to future events
are not to be viewed as fact and that actual results during the period or
periods covered by any such projections may differ from the projected results
and that the differences may be material.
2.07. LIABILITIES. Except as set forth on the Pro Forma Balance Sheets,
neither the Company nor any Subsidiary has any material liabilities,
obligations, claims or losses (whether liquidated or unliquidated, secured or
unsecured, absolute, accrued, contingent or otherwise) that would be required
to be disclosed on a balance sheet of the Company or any Subsidiary
(including the notes thereto) in conformity with GAAP or SAP.
2.08. INDEBTEDNESS. Schedule 2.08 sets forth all outstanding secured and
unsecured Indebtedness of the Company or any Subsidiary, or for which the
Company or any Subsidiary has commitments, immediately after the Closing
Date. Neither the Company nor any Subsidiary is in default with respect to
any Indebtedness.
2.09. TITLE TO ASSETS. Each of the Company and the Subsidiaries has good
and marketable title to all of its real and personal property reflected in
the Pro Forma Balance Sheets, free of any mortgages, pledges, charges, liens,
security interests or other encumbrances, except for Permitted Liens and
those indicated on Schedule 2.09. Each of the Company and the Subsidiaries
enjoys peaceful and undisturbed possession under all leases under which it is
operating, and all said leases are valid and subsisting and in full force and
effect.
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<PAGE>
2.10. ACTIONS PENDING. There is no action, suit, claim, investigation or
proceeding pending or, to the knowledge of the Company, threatened against
the Company or any Subsidiary which questions the validity of this Agreement
or any of the Related Agreements or any action taken or to be taken pursuant
hereto or thereto. Except as set forth on Schedule 2.10, there is no action,
suit, claim, investigation or proceeding pending or, to the knowledge of the
Company, threatened, against or involving the Company, any Subsidiary or any
of their respective properties or assets. There are no outstanding orders,
judgments, injunctions, awards or decrees of any court, arbitrator or
governmental or regulatory body against the Company or any Subsidiary.
2.11. COMPLIANCE WITH LAW. The business of the Company and the
Subsidiaries has been and is presently being conducted so as to comply with
all applicable federal, state, and local governmental laws, rules,
regulations and ordinances, the noncompliance with which would not have a
Material Adverse Effect. Each of the Company and the Subsidiaries has all
franchises, permits, licenses, consents and other governmental or regulatory
authorizations and approvals necessary for the conduct of its business as now
being conducted by it unless the failure to possess such franchises, permits,
licenses, consents and other governmental or regulatory authorizations and
approvals could not reasonably be expected to have a Material Adverse Effect.
2.12. TAXES. Except as set forth on Schedule 2.12, each of the Company
and the Subsidiaries has accurately prepared and timely filed all federal,
state and other tax returns required by law to be filed by it, has paid or
made provisions for the payment of all taxes shown to be due and all
additional assessments, and adequate provisions have been and are reflected
in the financial statements of the Company and the Subsidiaries for all
current taxes and other charges to which the Company or any Subsidiary is
subject and which are not currently due and payable. None of the federal
income tax returns of the Company or any Subsidiary for the years subsequent
to December 31, 1990 have been audited by the Internal Revenue Service. The
Company has no Knowledge of any additional assessments, adjustments or
contingent tax liability (whether federal or state) pending or threatened
against the Company or any Subsidiary for any period, nor of any basis for
any such assessment, adjustment or contingency.
2.13. ERISA. Schedule 2.13 lists each "employee benefit plan", as
defined in Section 3(3) of the ERISA, and any other bonus, severance or
termination pay, stock option or stock purchase, incentive pay or other plan,
program or arrangement covering present or former employees of the Company or
any Subsidiary which is maintained or contributed to by the Company or any
Subsidiary (the "Plans"). None of the Plans is subject to the provisions of
Title IV of ERISA, and none of the Plans is a
7
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multiemployer Plan as defined in Section 3(37) of ERISA (a
"Multiemployer Plan"). Neither the Company nor any Subsidiary has incurred
any liability to the Pension Benefit Guaranty Corporation or has incurred any
liability with respect to a Multiemployer Plan. None of the Plans is subject
to the minimum funding standards set forth in Section 302 of ERISA or Section
412 of the Code. None of the Company, any Subsidiary or any of their
respective officers or employees has engaged in a "prohibited transaction" as
defined in Section 406 of ERISA or Section 4975 of the Code with respect to
any Plan which would subject any of such parties to a civil penalty under
Section 502(i) of ERISA or an excise tax under Section 4975 of the Code.
Except as set forth on Schedule 2.13, each of the Plans has been operated in
all material respects in accordance with applicable law, including ERISA and
the Code. None of the Plans is an employee welfare plan, as defined in
Section 3(1) of ERISA, which provides health or life insurance benefits to
employees of the Company or any Subsidiary following their retirement. Each
Plan that is intended to be qualified under Section 401(a) of the Code has
received an opinion letter from the Internal Revenue Service indicating that
such Plan was so qualified as at the time of its review, and the Company
knows of no reason that would cause such letter to be revoked.
2.14. NO MATERIAL ADVERSE CHANGE. Since June 30, 1994, (a) there has
been no material adverse change in the business, assets, operations, affairs,
financial projections or financial condition of the Company or any
Subsidiary; and (b) neither the business, financial condition, operation,
financial projections or affairs of the Company, any Subsidiary nor any of
their respective properties or assets have been adversely affected in any
material respect as the result of any legislative or regulatory change, any
revocation or change in any franchise, permit, license or right to do
business, or any other event or occurrence, whether or not insured against.
2.15. CERTAIN FEES. Except as set forth on Schedule 2.15, no broker's,
finder's or financial advisory fees or commissions will be payable by the
Company or any Subsidiary with respect to the transactions contemplated by
this Agreement and the Related Agreements.
2.16. DISCLOSURE. Neither this Agreement or the Schedules hereto nor any
of the Related Agreements or any other document, certificate or instrument
furnished to the Purchasers by or on behalf of the Company or any Subsidiary
in connection with the transactions contemplated by this Agreement or any of
the Related Agreements, contains any untrue statement of a material fact or
omits to state a material fact necessary in order to make the statements
contained herein or therein not misleading.
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2.17. OPERATION OF BUSINESS.
(a) Each of the Company and the Subsidiaries owns or possesses
all patents, trademarks, service marks, trade names, copyrights, licenses and
authorizations as set forth on Schedule 2.17(a), and all rights with respect
to the foregoing, necessary for the conduct of its business as now conducted
without any conflict, to the Knowledge of the Company, with the rights of
others.
(b) Each of the Company and the Subsidiaries is duly licensed
and in good standing to write, broker or administer the lines of insurance
listed on Schedule 2.17(b) in all jurisdictions listed on Schedule 2.17(b).
2.18. ENVIRONMENTAL AND SAFETY MATTERS. Except as set forth on Schedule
2.18, each of the Company and the Subsidiaries is in material compliance with
the provisions of all federal, state and local laws relating to pollution,
protection of the environment or occupational safety and health applicable to
it or to real property owned or leased by it or to the use, operation or
occupancy thereof. Except as set forth on Schedule 2.18, neither the Company
nor any Subsidiary has engaged in any activity in violation of any provision
of any federal, state or local law relating to pollution, protection of the
environment or occupational safety and health.Neither the Company nor any
Subsidiary, to the Knowledge of the Company, has any liability, absolute or
contingent, arising under facts in existence on the Closing Date of which the
Company has Knowledge, under any federal, state or local law relating to
pollution, protection of the environment or occupational safety and health.
2.19. BOOKS AND RECORDS. The records and documents of the Company and
the Subsidiaries accurately reflect in all material respects information
relating to the business of the Company and the Subsidiaries, the location
and collection of its assets, and the nature of all transactions giving rise
to the obligations or accounts receivable of the Company or any Subsidiary.
2.20. MATERIAL AGREEMENTS. Except as set forth on Schedule 2.20, neither
the Company nor any Subsidiary is a party to any written or oral contract,
instrument, agreement, commitment, obligation, plan or arrangement, a copy of
which would be required to be filed with the Commission as an exhibit to a
registration statement on Form S-1 if the Company or any Subsidiary were
registering securities under the Securities Act. The Company, each Subsidiary
and, to the best of the Company's Knowledge, each other party thereto have in
all material respects performed all the obligations required to be performed
by them to date under the foregoing agreements, have received no notice of
default and are not in default under any lease, agreement or contract now in
effect
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to which the Company or any Subsidiary is a party or by which it or its
property may be bound, the result of which could cause a Material Adverse
Effect. Except as set forth on Schedule 2.20, each of the contracts or
agreements listed on Schedule 2.20 is in full force and effect with no
default, or to the Company's Knowledge, anticipated or threatened default or
failure of performance or observance of any obligations or conditions
contained therein, and none of the foregoing parties nor the Company or any
Subsidiary has provided any written notice of default or of its intention to
terminate these agreements.
2.21. TRANSACTIONS WITH AFFILIATES. Except as set forth on Schedule 2.21
or Schedule 2.25, there are no loans, leases, agreements, contracts, royalty
agreements, management contracts or arrangements or other continuing
transactions between (a) the Company, any Subsidiary or any of their
respective customers or suppliers on the one hand, and (b) any officer,
employee, consultant or director of the Company, any Subsidiary or any Person
owning any capital stock of the Company or any Subsidiary or any member of
the immediate family of such officer, employee, consultant, director or
stockholder or any corporation or other entity controlled by such officer,
employee, consultant, director or stockholder, or a member of the immediate
family of such officer, employee, consultant, director or stockholder on the
other hand.
2.22. SECURITIES ACT OF 1933. The Company has complied and will comply
with all applicable federal and state securities laws in connection with the
offer, issuance and sale of the Preferred Shares hereunder. Neither the
Company nor anyone acting on its behalf has or will sell, offer to sell or
solicit offers to buy the Preferred Shares or similar securities to, or
solicit offers with respect thereto from, or enter into any preliminary
conversations or negotiations relating thereto with, any Person, so as to
bring the issuance and sale of the Preferred Shares under the registration
provisions of the Securities Act and applicable state securities laws.
2.23. GOVERNMENTAL APPROVALS. Except as set forth on Schedule 2.23 and
except for the filing of any notice prior or subsequent to the Closing that
may be required under applicable state and/or Federal securities laws (which,
if required, shall be filed on a timely basis), no authorization, consent,
approval, license, exemption of or filing or registration with any court or
governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, is or will be necessary for, or in
connection with, the execution and delivery by the Company of this Agreement,
for the offer, issue, sale, execution or delivery of the Preferred Shares, or
for the performance by the Company of its obligations under this Agreement
and each Related Agreement to which it is a party.
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2.24. INSURANCE. Each of the Company and the Subsidiaries carries
insurance covering its properties and business adequate and customary for the
type and scope of the properties, assets and business, and similar to
companies of comparable size and condition similarly situated in the same
industry in which the Company or such Subsidiary operates, but in any event
in amounts sufficient to prevent the Company or such Subsidiary from becoming
a co-insurer or self-insurer, with provision for reasonable deductibles.
2.25. EMPLOYEES. Neither the Company nor any Subsidiary has any
collective bargaining arrangements or agreements covering any of its
employees. Except as set forth on Schedule 2.25, neither the Company nor any
Subsidiary has any employment contract, proprietary information agreement,
noncompetition agreement, nonsolicitation agreement, confidentiality
agreement, or any other similar contract or agreement or any restrictive
covenant, relating to the right of any officer, employee, or consultant to be
employed or engaged by the Company or such Subsidiary because of the nature
of the business conducted or to be conducted by the Company or such
Subsidiary or relating to the use of trade secrets or proprietary information
of others, and the continued employment or engagement of the Company's or
such Subsidiary's officers, employees or consultants does not subject the
Company, any Subsidiary or any Purchaser to any liability with respect to any
of the foregoing matters. Since January 1, 1994, no officer, consultant or
Key Employee of the Company or any Subsidiary whose termination, either
individually or in the aggregate, could have a material adverse effect on the
Company or any Subsidiary, has terminated or to the Knowledge of the Company,
has any present intention of terminating, his employment or engagement with
the Company or any Subsidiary.
2.26. ABSENCE OF CERTAIN DEVELOPMENTS. Except as provided in Schedule
2.26, since June 30, 1994, neither the Company nor any Subsidiary has:
(a) issued any stock, bonds or other corporate securities or any
rights, options or warrants with respect thereto;
(b) borrowed any amount or incurred or become subject to any
liabilities (absolute or contingent) except current liabilities incurred in
the ordinary course of business which are comparable in nature and amount to
the current liabilities incurred in the ordinary course of business during
the comparable portion of its prior fiscal year, as adjusted to reflect the
current nature and volume of the Company's or such Subsidiary's business;
(c) discharged or satisfied any lien or encumbrance or paid any
obligation or liability (absolute or contingent), other than current
liabilities paid in the ordinary course of business;
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(d) declared or made any payment or distribution of cash or other
property to stockholders with respect to its stock, or purchased or redeemed,
or made any agreements so to purchase or redeem, any shares of its capital
stock;
(e) mortgaged or pledged any of its assets, tangible or
intangible, or subjected them to any liens, charge or other encumbrance,
except liens for current property taxes not yet due and payable;
(f) sold, assigned or transferred any other tangible assets, or
cancelled any debts or claims, except in the ordinary course of business;
(g) sold, assigned or transferred any patents, patent rights,
trademarks, trade names, copyrights, trade secrets or other intangible assets
or intellectual property rights, or disclosed any proprietary confidential
information to any person except to customers in the ordinary course of
business or to the Purchasers or their representatives;
(h) suffered any substantial losses or waived any rights of
material value, whether or not in the ordinary course of business, or
suffered the loss of any material amount of prospective business;
(i) made any changes in employee compensation except in the
ordinary course of business and consistent with past practices;
(j) made capital expenditures or commitments therefor that
aggregate in excess of $100,000;
(k) entered into any other transaction other than in the ordinary
course of business, or entered into any other material transaction, whether
or not in the ordinary course of business;
(l) made charitable contributions or pledges in excess of $25,000;
(m) suffered any material damage, destruction or casualty loss,
whether or not covered by insurance;
(n) experienced any material problems with labor or management
in connection with the terms and conditions of their employment; or
(o) effected any two or more events of the foregoing kind which
in the aggregate would be material to the Company or such Subsidiary.
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2.27. UNITED STATES REAL PROPERTY HOLDING CORPORATION. Neither the
Company nor any Subsidiary is now or has ever been a "United States Real
Property Holding Corporation" as defined in Section 897(c)(2) of the Code and
Section 1.897-2(b) of the Regulations promulgated by the Internal Revenue
Service.
2.28. INSURANCE BUSINESS. Except as set forth on Schedule 2.28 and
except with respect to terms specifically negotiated with policyholders, all
policies of insurance issued by PICO or PACO as now in force are, to the
extent required under applicable law, on forms approved by insurance
regulatory authorities of the jurisdiction where issued or which have been
filed and not objected to by such authorities within the periods provided for
objection. Any premium rates required to be filed with or approved by
insurance regulatory authorities by PICO or PACO have been so filed or
approved and premiums charged conform thereto.
2.29. RESERVES. Except as set forth on Schedule 2.29, each reserve and
other liability item listed in the most recent statutory financial statements
of PICO or PACO is fairly stated in accordance with sound actuarial
principles and meets the requirements of the insurance laws and regulations
of the State of California. Except as set forth on Schedule 2.29, the
insurance reserves and liabilities reflected in such statutory financial
statements and established on the books of such Subsidiaries, taken as a
whole, for all anticipated payments under policies currently or previously in
force, including incurred but not reported losses, dividends, losses, claims
and expenses are reasonable to cover the total amount of all reasonably
anticipated matured and unmatured liabilities and obligations of such
Subsidiaries under all outstanding insurance policies and reinsurance and
coinsurance agreements and other similar contracts. Such Subsidiaries own
assets that qualify as admitted assets under applicable state insurance laws
in an amount at least equal to all of their required insurance reserves and
minimum statutory and capital surplus.
2.30. REGULATORY FILINGS. Except as set forth on Schedule 2.30, each of
PICO and PACO has filed or otherwise provided all reports, data, other
information and applications required to be filed with or otherwise provided to
the office of the California Commissioner of Insurance, and all other federal,
state or local governmental authorities with jurisdiction over PICO and PACO and
all required regulatory approvals in respect thereof are in full force and
effect on the date hereof. All such regulatory filings were in compliance
with applicable law when filed and no deficiencies have been asserted by
such governmental authority with respect to any such regulatory filings
that have not been satisfied.
2.31. A.M. BEST RATING. PICO has been rated "A-" by A.M. Best Company,
Inc. ("A.M. Best") and neither the Company nor any
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Subsidiary has received any communication from A.M. Best that A.M. Best intends
to lower or remove such rating.
2.32. REINSURANCE. Each insurance carrier with whom PICO has entered
into any reinsurance agreement is listed on Schedule 2.32 and each such
carrier is rated "A" or higher by A.M. Best.
2.33. INVESTMENT PORTFOLIO. Except as set forth on Schedule 2.33, the
investment portfolio of the Company and the Subsidiaries consists entirely of
fixed maturity securities of which 99.8% were government securities or were
rated "AAA" by Standard & Poor's Corporation (or an equivalent rating by any
other nationally recognized rating agency) and 100% of which were cash or
cash equivalents rated A-1 or P-1 by Standard & Poor's Corporation (or an
equivalent rating by any other nationally recognized rating agency).
3. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS
Each of the Purchasers severally but not jointly hereby represents and
warrants to the Company as of the Closing Date as follows:
3.01. ORGANIZATION AND STANDING OF THE PURCHASERS. Each Purchaser is a
corporation or partnership duly incorporated or organized, validly existing
and in good standing under the laws of the jurisdiction of its incorporation
or organization.
3.02. AUTHORITY; ENFORCEABILITY; NO CONFLICT. Each Purchaser has all
requisite corporate or partnership power and authority to enter into this
Agreement and each Related Agreement to which it is a party and to carry out
its obligations hereunder and thereunder. The execution, delivery and
performance of this Agreement and each Related Agreement to which it is a
party by each Purchaser have been duly and validly authorized by all
requisite corporate or partnership proceedings on the part of such Purchaser.
This Agreement and each Related Agreement to which it is a party when
executed and delivered by such Purchaser is a valid and binding obligation of
such Purchaser, enforceable against it in accordance with its terms, except
that (i) such enforcement may be subject to bankruptcy, insolvency,
reorganization, moratorium, rehabilitation, liquidation, conservatorship,
receivership or other similar laws now or hereafter in effect relating to
creditors' rights generally and (ii) the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to equitable
defenses and to the discretion of the court before which any proceeding
therefor may be brought. The execution and delivery of this Agreement and
each Related Agreement to which it is a party by such Purchaser does not, and
consummation by such Purchaser of the transactions contemplated hereby will
not, result in or constitute (a) a default, breach or violation of or under
the organizational
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documents of such Purchaser, (b) a default, breach or violation of or under
any mortgage, deed of trust, indenture, note, bond, license, lease agreement
or other instrument or obligation to which such Purchaser is a party or by
which any of its properties or assets are bound, except for any defaults,
breaches or violations which would not, individually or in the aggregate,
have a material adverse effect on such Purchaser or prevent or materially
delay the consummation by such Purchaser of the transactions contemplated
hereby, or (c) a violation of any statute, rule, regulation, order, judgment
or decree of any court, public body or authority, except for any violations
which would not, individually or in the aggregate, have a material adverse
effect on such Purchaser or prevent or materially delay the consummation by
such Purchaser of the transactions contemplated hereby.
3.03. ACQUISITION FOR INVESTMENT. Each Purchaser is an "accredited
investor" as defined in Regulation D under the Securities Act, and is
acquiring the Preferred Shares solely for its own account for the purpose of
investment and not with a view to or for sale in connection with any
distribution thereof, and it has no present intention or plan to effect any
distribution of the Preferred Shares. Each Purchaser acknowledges that it is
able to bear the financial risks associated with an investment in the
Preferred Shares and that it has been given full access to such records of
the Company and the Subsidiaries and to the officers of the Company and the
Subsidiaries as it has deemed necessary and appropriate to conducting its due
diligence investigation. The Preferred Shares will bear a legend to the
following effect:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended, or the laws of the
State of California or elsewhere, and may not be sold or transferred
except in compliance with that Act and such laws."
3.04. FINANCING. Each Purchaser has sufficient funds and will have
sufficient funds at all times through the Closing to consummate the
transactions contemplated hereby. No Purchaser will be rendered insolvent by
reason of its investments in the Company nor will it be left with
unreasonably small capital for purposes of operating its businesses.
3.05. GOVERNMENTAL APPROVALS. Except for the consent required pursuant
to California Insurance Code Section 1215 et al which shall be obtained on or
prior to the Closing Date, no authorization, consent, approval, license,
exemption of or filing or registration with any court or governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, is or will be necessary for, or in connection with, the execution,
delivery and performance by each Purchaser of this Agreement and each Related
Agreement to which it is a party.
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4. CONDITIONS TO PURCHASER'S OBLIGATIONS
The obligation of each Purchaser to purchase and pay for the Preferred
Shares to be purchased by it at the Closing is subject to the following
conditions:
4.01. REPRESENTATIONS AND WARRANTIES. Each of the representations and
warranties set forth in Section 2 hereof shall be true, accurate and correct
at ice Closing Date with the same effect as though made at and as of such
time.
4.02. CORPORATE PROCEEDINGS. The Purchasers shall have received a copy
of the resolutions of the Board of Directors of the Company authorizing (a)
the approval of the Certificate of Designation, (b) the increase of the Board
of Directors from seven to nine members, (c) the execution, delivery and
performance by the Company of this Agreement and each Related Agreement to
which it is a party, (d) the issuance of the Preferred Shares and (e) the
execution, delivery and performance by the Company of all other agreements or
matters contemplated hereby or executed in connection herewith, certified by
the Secretary or an Assistant Secretary of the Company on the Closing Date.
4.03. INCUMBENCY CERTIFICATE. The Purchasers shall have received a
certificate of the Secretary or an Assistant Secretary of the Company, dated
the Closing Date, which shall certify the names of the officers of the
Company authorized to sign this Agreement and the Related Agreements to which
it is a party, the certificates for the Preferred Shares and the other
documents, instruments or certificates to be delivered pursuant hereto and
thereto, together with the true signatures of such officers.
4.04. OFFICER'S CERTIFICATE. The Purchasers shall have received a
certificate of the President and Treasurer of the Company, dated the Closing
Date, which shall certify that the representations and warranties contained
in Section 2 hereof are true and correct as of the Closing Date and that all
actions required to be taken by the Company prior to or at the Closing have
been taken by the Company as of the Closing Date.
4.05. CONSENTS, LICENSES, APPROVALS, ETC. The Purchasers shall have
received certified true copies of all consents, licenses and approvals
required or requested by the Purchasers in writing delivered to the Company
in a timely manner (including, without limitation, all approvals required of
the insurance commissioners, directors or superintendents, as the case may
be, of the insurance departments of the various jurisdictions in which PICO
or PACO is domiciled or licensed to write insurance) in connection with the
execution, delivery, performance, validity and enforceability of this
Agreement, and each Related Agreement, and such consents,
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licenses and approvals shall be in full force and effect and be reasonably
satisfactory in form and substance to the Purchasers.
4.06. GOOD STANDING CERTIFICATES. The Purchasers shall have received a
certificate of the appropriate public official in the jurisdiction of
incorporation of the Company and each Subsidiary as to the due incorporation
and good standing of the Company and such Subsidiary together with certified
copies of all charter documents of the Company and such Subsidiary and shall
have received certificates of appropriate public officials of each other
jurisdiction in which the Company or such Subsidiary is required to qualify
to do business as a foreign corporation as to the due qualification and good
standing of the Company or such Subsidiary.
4.07. NO PROCEEDINGS OR LITIGATION. No action, suit or proceeding before
any arbitrator or any governmental authority shall have been commenced, no
investigation by any governmental authority shall have been threatened,
against the Company or any Subsidiary, or any of the officers or directors of
the Company or any Subsidiary seeking to restrain, prevent or change the
transactions contemplated by this Agreement, and each Related Agreement, or
seeking damages in connection with such transactions.
4.08. CERTIFICATE OF DESIGNATION. The Certificate of Designation of the
Series A Preferred Stock of the Company, setting forth, without limitation,
the designations, preferences, powers, qualifications, special or relative
rights and privileges of the Series A Preferred Stock (the "Certificate of
Designation"), in the form of EXHIBIT A, shall have been filed with the
Secretary of State of California.
4.09. LEGAL OPINION. The Purchasers shall have received a legal opinion
from Gibson, Dunn & Crutcher, counsel to the Company, dated the Closing Date
and substantially in the form of EXHIBIT B and as to such other matters as
the Purchasers may reasonably request.
4.10. SHAREHOLDERS AGREEMENT. Each of the Purchasers, the Key Employees
and the Company shall have entered into a Shareholders Agreement (as amended
from time to time, the "Shareholders Agreement"), substantially in the form
of EXHIBIT C.
4.11. VOTING AGREEMENT. Each of the Purchasers, the Key Employees and
the Company shall have entered into a Voting Agreement (as amended from time
to time, the "Voting Agreement"), substantially in the form of EXHIBIT D.
4.12. BANK DOCUMENTS. The Purchasers shall have received certified
complete and correct copies of the Bank Loan Documents (including all schedules,
exhibits, annexes and amendments thereto) satisfactory in form and substance to
the Purchasers. The Company
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shall have a revolving line of credit available to it in an amount not less
than $9,000,000 in accordance with the terms of the Bank Credit Agreement and
such line of credit shall have a maturity of not less than 54 months from the
Closing Date with all outstandings at maturity to be converted to a term loan
amortizing in equal amounts over a period not less than 30 months.
4.13. EXPENSES. All fees and disbursements required to be paid pursuant
to Section 11.04 hereof shall have been paid in full.
4.14. OTHER PURCHASERS. No Purchaser shall have failed to execute and
deliver this Agreement or to accept delivery of or make payment for the
Preferred Shares to be purchased by it on the Closing Date.
4.15. BOARD OF DIRECTORS. The members of the Board of Directors
immediately following the Closing shall consist of not more than nine
members, who initially shall be Roger G. Teig, James A. Nicholson, Leroy J.
Combs, Jeffrey A. Snider, Jerry M. Miller, Ronald W. Waisner, John B.
Clinton, Gerard Vecchio and Owen Stevenson Crihfield. The Board of Directors
shall establish an Executive Committee, an Executive Compensation and Stock
Option Committee and an Audit Committee. The Executive Compensation and Stock
Option Committee shall consist of not more than three (3) members, at least
one of whom shall be an Investor Director selected by the holders of at least
51% of the outstanding shares of Series A Preferred Stock and at least one of
whom shall be an Independent Director. The Audit Committee shall consist of
not more than three (3) members, one of whom shall be an Investor Director
selected by the holders of at least 51% of the outstanding shares of Series A
Preferred Stock and two of whom shall be Independent Directors.
4.16. ESOP REPURCHASE. The Purchasers shall have received copies of
cancelled certificates representing 367,647 shares of Common Stock held by
the ESOP, shall have received an opinion from Houlihan, Lokey, Howard & Zukin
stating that the current fair market value of such shares does not exceed the
purchase price of $17.00 per share and shall have received evidence that such
repurchase shall have been consummated substantially in accordance with the
ESOP Purchase Agreement, a complete and correct copy of which has been
delivered to the Purchasers.
4.17. SCHNIDER REPURCHASE. The Purchasers shall have received (a)
a complete and correct copy of the Schnider Agreement, (b) evidence that all
Key Employees shall have guarantied the tender of at least 76,100 shares
pursuant to the Schnider Agreement and (c) evidence that $1,293,700.00 of the
proceeds of the sale of the Preferred Shares shall have been deposited
with First Interstate Bank of California, as escrow agent (in such capacity,
the "Escrow Agent"), to be disbursed in accordance with the terms
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of an Escrow Agreement, dated as of the Closing Date (the "Escrow
Agreement"), among the Company, the Escrow Agent and the Purchasers, which
shall be reasonably satisfactory in form and substance to the Purchasers.
4.18. TENDER OFFER. The Purchasers shall have received evidence that (a)
the Tender Offer has been initiated, (b) at least 20,000 shares shall been
irrevocably tendered pursuant to the Tender Offer, (c) all Key Employees
shall have guarantied the tender of at least 118,900 shares pursuant to the
Tender Offer and (d) $2,531,300.00 of the proceeds of the sale of the
Preferred Shares shall have been deposited with the Escrow Agent to be
disbursed in accordance with the terms of an Escrow Agreement.
4.19. SNIDER STOCK AND OPTIONS. The Purchasers shall have received
satisfactory evidence that Jeffrey A. Snider shall have purchased 30,000
shares of Common Stock for $17.00 per share and shall have been issued the
Snider Options.
4.20. COMPLIANCE WITH THIS AGREEMENT AND RELATED AGREEMENTS. The Company
shall have performed, satisfied and complied in all material respects with
all covenants, agreements and conditions required by this Agreement or any
Related Agreement to be performed, satisfied or complied with by the Company
at or prior to the Closing.
4.21. PROCEEDINGS SATISFACTORY. All proceedings taken in connection with
the issuance and sale of the Preferred Shares and all documents and papers
relating thereto shall be satisfactory in form and substance to the
Purchasers. Each Purchaser shall have received copies of such documents and
papers as such Purchaser may reasonably request in connection with this
Agreement and the Related Agreements.
5. AFFIRMATIVE COVENANTS OF THE COMPANY
The Company covenants and agrees that on and after the Closing Date and
until the consummation of a Qualified Public Offering it will:
5.01. INSPECTION RIGHTS. Permit during normal business hours, upon
reasonable request and reasonable notice, each Purchaser or any employees,
agents or representatives thereof, to examine and make reasonable copies of
and extracts from the records and books of account of, and visit and inspect
the properties, assets, operations and business of the Company and any
Subsidiary, and to discuss the affairs, finances and accounts of the Company
and any Subsidiary with any of its officers, consultants, directors, Key
Employees, attorneys or independent accountants.
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5.02. BUDGETS APPROVAL. Prior to the commencement of each fiscal year,
prepare and submit to, and obtain in respect thereof the approval of the
majority of the members of the Board of Directors, a business plan and
monthly operating budget in detail for each fiscal year, monthly operating
expenses and profit and loss projections, quarterly balance sheet
projections, quarterly cash flow projections and a capital expenditure budget
for the fiscal year.
5.03. FINANCINGS. Promptly, fully and in detail, inform all of the
members of the Board of Directors of any discussions, offers or contracts
relating to possible financings of any material nature for the Company or any
Subsidiary, whether initiated by the Company, any Subsidiary or any other
Person.
5.04. MEETINGS OF DIRECTORS AND COMMITTEES. Hold meetings of the Board
of Directors not less than on a quarterly basis; and hold meetings of the
Executive Committee of the Board of Directors on not less than a monthly
basis. If neither director designated by the Conning Funds is able to attend
a meeting of the Board of Directors, the Conning Funds shall be entitled to
designate a representative to observe such meeting and such representative
shall be given access to the same information as each director in attendance
at such meeting. RFE Investment Partners IV, L.P. shall also be entitled to
designate a representative to observe each meeting of the Board of Directors
and such representative shall be given access to the same information as each
director in attendance at such meeting. Notwithstanding the foregoing,
neither the Conning Funds nor RFE Investment Partners IV, L.P. shall be
permitted to redesignate its observer unless such redesignation is permanent
or shall have been approved by the prior written consent of the Board of
Directors.
5.05. BY-LAWS; MEETINGS AND INDEMNIFICATION. Use its best efforts to at
all times maintain its By-Laws to provide that (a) any two directors shall
have the right to call a meeting of the Board of Directors in accordance with
Section 3.11 of the By-Laws (as constituted on the Closing Date), (b) any
holder or holders of at least 10% of the outstanding shares of the capital
stock of the Company shall have the right to call a meeting of the
stockholders in accordance with Section 2.03 of the By-Laws (as constituted
on the Closing Date) and (c) at least 48 hours prior notice shall be given to
each director of the Board of Directors in accordance with Section 3.11 of
the By-Laws (as constituted on the Closing Date). The Company shall at all
times maintain provisions in its By-laws or Articles of Incorporation
indemnifying all officers and directors against liability to the maximum
extent permitted under the laws of the state of its incorporation.
5.06. CORPORATE EXISTENCE. Maintain, and cause each of its Subsidiaries,
to maintain their respective corporate existence,
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intellectual property rights, other rights and franchises in full force and
effect to the extent appropriate in accordance with good business practice
except that the Company may merge with and into a newly formed Delaware
corporation for purposes of reincorporating in Delaware so long as (a) the
capitalization of such newly formed Delaware corporation subsequent to the
merger shall be identical to the capitalization of the Company prior to the
merger and (b) the terms of the Series A Preferred Stock of such newly
formed corporation subsequent to the merger shall be identical to the terms
of the Series A Preferred Stock prior to the merger.
5.07. PROPERTIES. BUSINESS, INSURANCE. Maintain, and cause each of its
Subsidiaries, to maintain as to their respective properties and business,
with financially sound and reputable insurers, insurance against such
casualties and contingencies and of such types and in such amounts as is
customary for companies of a similar size and financial condition similarly
situated within the same industry.
5.08. EXPENSES OF DIRECTORS. Promptly reimburse in full each director of
the Company who is not an officer or employee of the Company (or if neither
director designated by the Conning Funds is able to attend a meeting of the
Board of Directors, then the designated observer of the Conning Funds) and
the designated observer of RFE Investment Partners IV, L.P. for all of his
reasonable out-of-pocket expenses incurred in attending each meeting of the
Board of Directors or any committee thereof within a reasonable time
following presentment of customary documentation evidencing such expenditures.
5.09. COMPLIANCE WITH LAWS. Comply, and cause each Subsidiary to comply,
with all applicable laws, rules, regulations and orders, noncompliance with
which could have a material adverse effect on its business, assets,
operations or condition, financial or otherwise.
5.10. KEEPING OF RECORDS AND BOOKS OF ACCOUNT. Keep, and cause each
Subsidiary to keep, adequate records and books of account, in which complete
entries will be made in accordance with GAAP consistently applied, reflecting
all financial transactions of the Company and such Subsidiary, and in which,
for each fiscal year, all proper reserves for depreciation, depletion,
obsolescence, amortization, taxes, bad debts and other purposes in connection
with its business shall be made.
5.11. SIZE OF BOARD AND COMMITTEES. Fix and maintain the number of
directors on the Board of Directors at no more than nine members, which
members shall in any event include two members designated by the Conning
Funds and one member designated by the other Purchasers; and fix and maintain
the number of members of the Executive Compensation and Stock Option
Committee and the Audit
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Committee of the Board of Directors at no more than three. The Executive
Compensation and Stock Option Committee shall consist of not more than three
(3) members, at least one of whom shall be an Investor Director selected by
the holders of at least 51% of the outstanding shares of Series A Preferred
Stock and at least one of whom shall be an Independent Director. The Audit
Committee shall consist of not more than three (3) members, one of whom shall
be an Investor Director selected by the holders of at least 51% of the
outstanding shares of Series A Preferred Stock and two of whom shall be
Independent Directors. The Executive Compensation and Stock Option Committee
shall have, among its responsibilities, the review and approval of
nonqualified stock option grants and the establishment of executive
compensation and bonuses. The Audit Committee shall have, among its
responsibilities, the recommendation of the engagement, appointment and
removal of the independent public accountants or auditors of the Company to
the Board of Directors.
5.12. CONSUMMATION OF SCHNIDER REPURCHASE. Consummate the repurchase of
76,100 shares from The Schnider Family Trust under the Schnider Agreement no
later than 60 days subsequent to the Closing Date.
5.13. CONSUMMATION OF TENDER OFFER. Consummate the Tender Offer no later
than 60 days subsequent to the Closing Date.
5.14. REPORTING REQUIREMENTS. Furnish the following to each Purchaser:
(a) QUARTERLY REPORTS: as soon as available and in any event
within 45 days after the end of each of the first three fiscal quarters of
the Company, consolidated and consolidating balance sheets of the Company
and the Subsidiaries as of the end of such period and consolidated and
consolidating statements of income and statements of cash flows and changes
in stockholders' equity of the Company and the Subsidiaries for such period
and for the period commencing at the end of the previous fiscal year and
ending with the end of such period, setting forth in each case in comparative
form the corresponding figures for the corresponding period of the preceding
fiscal year, and including comparisons to the budget or business plan and an
analysis of the variances from the budget or plan, prepared in accordance
with GAAP consistently applied;
(b) ANNUAL REPORTS: as soon as available and in any event within
90 days after the end of each fiscal year of the Company, a copy of the
annual audit report (including all notes thereto) for such year for the
Company and the Subsidiaries, including therein consolidated and
consolidating balance sheets of the Company and the Subsidiaries as of the
end of such fiscal year and consolidated and consolidating statements of
income and statements of cash flows and changes in stockholders' equity of the
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Company and the Subsidiaries for such fiscal year, setting forth in each case
in comparative form the corresponding figures for the preceding fiscal year,
all such consolidated statements to be duly certified by the chief financial
officer of the Company and an independent public accountant of recognized
national standing approved by the Audit Committee;
(c) STATUTORY FINANCIAL STATEMENTS: as soon as available and in
any event within 30 days of their filing with state insurance regulatory
authorities, all annual and quarterly statutory financial statements of the
Subsidiaries which are insurance companies, prepared in accordance with SAP
consistently applied;
(d) ACTUARIAL REPORTS: as soon as available and in any event
within 90 days after the end of each fiscal year of the Company, a report of
a qualified independent actuary with respect to the loss reserves of such
Subsidiary for which such a report is appropriate;
(e) REPORTS AND OTHER INFORMATION: within 10 days after
receipt, publication, commencement or occurrence, copies of all consulting
reports, management reports and notices of all material actions made
available to any director of the Company or any Subsidiary, filings made with
the Commission, such information as the Company or any Subsidiary shall make
available to any of its stockholders, and such other information as any
Purchaser shall reasonably request; and
(f) OFFICER'S CERTIFICATE: as soon as possible and in any event
within 30 days after the end of a fiscal quarter, a certificate executed by a
duly authorized officer of the Company representing as to the compliance of
the Company with the provisions of Section 5 and Section 6.
5.15. REPORTS TO INVESTOR DIRECTORS. Furnish the following to each
Investor Director and the designated observer of RFE Investment Partners IV,
L.P.:
(a) ACCOUNTANT'S LETTERS: within 10 days after receipt, copies
of all accountant's letters, reviews and reports to management;
(b) BUDGETS AND OPERATING PLAN: as soon as available and in any
event prior to the beginning of each fiscal year of the Company, a business
plan and monthly and quarterly operating budgets for the forthcoming fiscal
year;
(c) NOTICE OF ADVERSE CHANGES: promptly after the occurrence
thereof and in any event within 10 days after each occurrence, notice of any
default under the Bank Credit Agreement
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or any other material agreement; or any material litigation, proceedings,
suits or investigations affecting the Company or any Subsidiary; or any
material adverse change in the business, assets, operations or condition of
the Company or any Subsidiary;
(d) SEC FILINGS: within 10 days of occurrence, copies of all
filings made with the Commissioner; and
(e) MANAGEMENT DISCUSSION AND ANALYSIS: at the same time as the
delivery of the quarterly and annual reports to the Purchasers, a descriptive
analysis by management of the Company of the financial results of most
recently ended fiscal period including comparisons to the corresponding
results for the corresponding period of the preceding fiscal year, and
including descriptive comparisons to the budget or business plan and an
analysis of the variances from the budget or plan; provided that such
descriptive analysis shall be acceptable to the extent that it conforms with
similar analyses provided to the Purchasers prior to the Closing Date.
5.16. MAINTENANCE OF KEY MAN INSURANCE. Maintain term life insurance on
the life of Roger G. Teig, Jeffrey A. Snider, James A. Nicholson and Leroy J.
Combs in an amount not less than $1,250,000 for so long as he remains a
director, officer or employee of the Company, the proceeds of which are
payable to the Company. The Company will provide the Conning Funds, and will
request that the issuer of such policy provide such party, with at least
thirty (30) days' prior written notice before such policy is terminated (for
failure to pay premium or otherwise) or assigned, or before any change is
made in the designation of the beneficiary thereof.
5.17. REPAYMENT OF WELLS FARGO BANK. Repay in full all Indebtedness of
the Company owing to Wells Fargo Bank within 10 days of the Closing Date.
6. NEGATIVE COVENANTS OF THE COMPANY
The Company covenants and agrees that on and after the Closing Date and
until the consummation of a Qualified Public Offering it will not without the
prior written approval of holders of at least 66 2/3% of the Shares:
6.01. DEALINGS WITH AFFILIATES. Enter into any material transaction
(other than the repurchase of shares of Common Stock in compliance with the
Company's obligations under the ESOP), including, without limitation, any
real property leases, any loans or extensions of credit, release of guarantee
or consulting agreement with any Affiliate.
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6.02. COMPENSATION TO OFFICERS. Enter into, amend, modify or waive in
any material respect any employment, benefit or compensation arrangement with
any Key Employee, or pay to any Key Employee, senior manager or officer
compensation (including salary and bonus) in excess of that provided in any
Employment Agreement as in effect in the Closing Date except as approved by
the Executive Compensation and Stock Option Committee of the Board of
Directors.
6.03. MAINTENANCE OF OWNERSHIP OF SUBSIDIARIES. Sell or otherwise
dispose of any shares of capital stock of any Subsidiary, except to a
wholly-owned Subsidiary, or permit any Subsidiary to issue, sell or otherwise
dispose of any shares or rights to acquire any of its capital stock or the
capital stock of any Subsidiary, except to the Company or a wholly-owned
Subsidiary; provided, however, that the Company may liquidate, merge or
consolidate any Subsidiary into or with itself, provided that the Company is
the surviving entity, or into or with a wholly-owned Subsidiary, or the
Company may sell all or a portion of any Subsidiary to the Company or a
wholly-owned Subsidiary.
6.04. CONDUCT OF BUSINESS. Engage, or permit any Subsidiary to engage,
in any business other than the business engaged in by the Company or any
Subsidiary on the date hereof and any businesses or activities similar or
related thereto, except as otherwise approved in each instance by at least 70%
of the members of the Board of Directors, such approval to include the
affirmative vote of at least two Investor Directors (one of whom shall have been
designated by the Conning Funds and the other of whom shall have been designated
by the Purchasers other than the Conning Funds).
6.05. RESTRICTIONS ON INDEBTEDNESS. Create, incur or assume, or permit
any of its Subsidiaries to create, incur or assume, any Indebtedness if,
after giving effect to such creation, incurrence or assumption, the Leverage
Ratio would exceed .50 to 1.00.
6.06. ASSUMPTIONS OR GUARANTIES OF INDEBTEDNESS OF OTHER PERSONS.
Assume, guarantee, endorse or otherwise become directly or contingently
liable on, or permit any Subsidiary to assume, guarantee, endorse or
otherwise become directly or contingently liable on (including, without
limitation, liability by way of agreement, contingent or otherwise, to
purchase, to provide funds for payment, to supply funds to or otherwise
invest in the debtor or otherwise to assure the creditor against loss) any
Indebtedness of any Person other than the Company, any Subsidiary or the
ESOP, except for guaranties by endorsement of negotiable instruments for
deposit or collection in the ordinary course of business.
6.07. INVESTMENTS IN OTHER CORPORATIONS OR ENTITIES. Make or
permit any Subsidiary to make, any loan or advance to any Person,
or purchase, otherwise acquire, or permit any Subsidiary to
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purchase or otherwise acquire, the capital stock, assets comprising the
business of, obligations of, or any interest in, any other corporation or
entity which will not be operated as a wholly-owned Subsidiary, except:
(a) investments by the Company or a Subsidiary in evidences of
indebtedness issued or fully guaranteed by the United States of America or
any state or public subdivision thereof;
(b) investments by the Company or a Subsidiary in
certificates of deposit, notes, acceptances and repurchase agreements
having a maturity of not more than one year from the date of acquisition issued
by a fiscally sound and reputable bank organized in the United States
having capital, surplus and undivided profits of at least $100,000,000;
(c) investments by the Company or a Subsidiary in the
highest-rated commercial paper;
(d) investments by the Company or a Subsidiary in "Money Market"
fund shares, or in money market accounts fully insured by the Federal Deposit
Insurance Corporation and sponsored by banks and other financial
institutions, provided that the investments consist principally of the types
of investments described in clauses (a), (b) or (c) of this Section 6.07;
(e) loans or advances from a Subsidiary to the Company or from
the Company to a wholly-owned Subsidiary; or
(f) investments by the Company or any Subsidiary in such
financial instruments and with such financial advisors, as may be approved
from time to time by the Board of Directors or the PICO or PACO investment
committees.
6.08. AMENDMENTS. Amend or waive any provision of the Articles of
Incorporation or By-laws of the Company in any way that would adversely
affect the liquidation preferences, dividend rights, voting rights or
redemption rights of the holders of the Series A Preferred Stock.
6.09. OTHER AGREEMENTS. Enter into any agreement in which the terms of
such agreement would materially restrict or materially impair the right to
perform of the Company or any Subsidiary under this Agreement, any Related
Agreement or the Articles of Incorporation of the Company.
6.10. REINSURANCE AGREEMENTS. Enter into, or permit any Subsidiary to
enter into, any reinsurance agreement with any insurance carrier having an
A.M. Best rating less than "A".
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6.11. AMENDMENTS. Amend, supplement or otherwise change (or agree to any
amendment, supplement or other change of) the terms of the Tender Offer or
the Schnider Agreement.
7. REGISTRATION RIGHTS
The Purchasers shall have the right to register their Registrable
Securities in accordance with the following provisions:
7.01. DEMAND REGISTRATIONS.
(a) Except as otherwise provided below, at any time and from time
to time commencing after the Closing Date, upon the written request of the
holders of at least 51% of the Registrable Securities (the "Initiating
Holders"), that the Company effect the registration under the Securities Act
(such a written request being hereinafter referred to as a "Demand
Registration") of any of the Registrable Securities, the Company will
promptly give written notice to all other holders of Registrable Securities
that a Demand Registration has been received. For a period of 15 days
following delivery of such notice, the other holders of Registrable
Securities may request that the Company also register their Registrable
Securities and after the expiration of such 15 day period, the Company shall
notify all holders of Registrable Securities of the number of Registrable
Securities to be registered. Thereupon, the Company will use its best efforts
to cause the prompt registration under the Securities Act, subject to the
provisions of this Section 7, of all Registrable Securities which the holders
thereof have requested the Company to register,-and in connection therewith,
prepare and file on such appropriate form as the Company, in its reasonable
discretion, shall determine, a Registration Statement under the Securities
Act to effect such registration; provided, however, that the Company shall
not be required to effect a Demand Registration unless the market value of
the Registrable Securities to be sold in any such Demand Registration shall
be estimated to be at least $7,500,000 at the time of the filing of such
Registration Statement.
With respect to any Registration Statement filed, or to be filed,
pursuant to this Section 7.01(a), if the Company shall furnish to the holders
of Registrable Securities a certified resolution of the Board of Directors
stating that in the Board of Directors' good faith judgment it would (because
of the existence of, or in anticipation of, any acquisition or financing,
merger, sale of assets, recapitalization or other similar corporate activity,
or the unavailability for reasons beyond the Company's control of any
required audited financial statements, or any other event or condition of
similar significance to the Company) be materially disadvantageous (a
"Disadvantageous Condition") to the Company or its stockholders for such a
Registration Statement to be maintained Effective, or to be filed and become
Effective, and
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setting forth the general reasons for such judgment, the Company shall be
entitled to cause such Registration Statement to be withdrawn and the
effectiveness of such Registration Statement terminated, or, in the event no
Registration Statement has yet been filed, shall be entitled not to file any
such Registration Statement, until such Disadvantageous Condition no longer
exists (notice of which the Company shall promptly deliver to all holders of
Registrable Securities). Upon receipt of any such notice of a Disadvantageous
Condition, such holders of Registrable Securities will forthwith discontinue
use of the disclosure document contained in such Registration Statement and,
if so directed by the Company, each such holder will deliver to the Company
all copies, other than permanent file copies then in such holder's
possession, of the disclosure document then covering such Registrable
Securities current at the time of receipt of such notice, and, in the event
no Registration Statement has yet been filed, all drafts of the disclosure
document covering such Registrable Securities. In the event that the Company
shall give any notice of a Disadvantageous Condition, the Company shall at
such time as it in good faith deems appropriate file a new Registration
Statement covering the Registrable Securities that were covered by such
withdrawn Registration Statement, and such Registration Statement shall be
maintained Effective for such time as may be necessary so that the period of
effectiveness of such new Registration Statement, when aggregated with the
period during which such initial Registration Statement was Effective, shall
be such time as may be otherwise required by Section 7.01(c).
The holders of 51% of the Registrable Securities requested to be
registered may, at any time prior to the Effective Date of the Registration
Statement relating to such registration, revoke such request, without
liability to any of the other holders of Registrable Securities, by providing
a written notice to the Company revoking such request.
(b) NUMBER OF REGISTRATIONS; EXPENSES. The Company shall not be
obligated to effect more than two registrations of Registrable Securities
pursuant to requests from the holders of Registrable Securities under this
Section 7.01 during the term of this Agreement. The Company shall pay all
Registration Expenses in connection with the two registrations which the
holders of Registrable Securities are entitled to request pursuant to this
Section 7.01. However, each holder of Registrable Securities shall pay all
underwriting discounts and commissions and transfer taxes, if any, relating
to the sale or disposition of such holder's Registrable Securities pursuant
to this Section 7.01. Notwithstanding any other provisions contained in this
Section 7.01, the Company shall not be required to register any Registrable
Securities pursuant to an Effective Registration Statement in connection with
a request for such registration made in accordance with this Section 7.01 if
the previous Registration Statement with
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respect to any request made pursuant to this Section 7.01 or any other
Registration Statement relating to equity securities filed by the Company
(other than a registration (i) relating to shares of Common Stock issuable
upon exercise of employee stock options or in connection with any employee
benefit or similar plan of the Company or (ii) in connection with an
acquisition by the Company of another company) became Effective less than 180
days prior to such request.
(c) EFFECTIVE REGISTRATION STATEMENT. A registration requested
pursuant to this Section 7.01 shall be deemed to have been effected if (i)
the Company shall have caused the preparation of a substantially complete
draft of the Registration Statement, presented it to the holders of
Registrable Securities and, whether or not the Registration Statement is
filed with the Commission, such holders decide not to proceed with the
registration unless such holders reimburse the Company for its out-of-pocket
costs relating to the preparation of the Registration Statement or (ii) the
Registration Statement relating thereto has become Effective under the
Securities Act and any of the Registrable Securities of the holders thereof
included in such registration have actually been sold thereunder; PROVIDED,
HOWEVER, that if any Effective Registration Statement requested pursuant to
this Section 7.01 is discontinued in connection with a Disadvantageous
Condition, such Registration Statement shall not be included as one of the
registrations which may be requested pursuant to this Section 7.01; PROVIDED
FURTHER, that if after any Registration Statement requested pursuant to this
Section 7.01 becomes Effective (x) such Registration Statement is subject
t-o-any stop order, -injunction or other order or requirement of the
Commission or other governmental agency or court solely due to the actions or
omissions to act of the Company or (y) less than 50% of all of the
Registrable Securities included in such registration have been sold
thereunder as a direct result of actions taken by the Company, such
Registration Statement shall not be included as one of the registrations
which such holders of Registrable Securities are entitled to request pursuant
to Section 7.01(b).
(d) SELECTION OF UNDERWRITERS. If any requested registration
pursuant to this Section 7.01 is in the form of an underwritten offering, the
Company shall have the right to select the investment banker and manager or
co-managers that will administer the offering, subject to the reasonable
approval of the holders holding 51% of the Registrable Securities in respect
of which registration has been requested.
(e) PRIORITY IN REQUESTED REGISTRATIONS. If a requested
registration pursuant to this Section 7.01 involves an underwritten offering
and the managing underwriter shall advise the Company in writing that, in its
view, the number of equity securities requested to be included in such
registration exceeds the largest number of securities which can be sold
without having
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a material adverse effect on such offering, including the price at which such
securities can be sold, the Company will include in such registration (i)
FIRST, Registrable Securities proposed to be registered by holders thereof,
pro rata based on the number of securities proposed to be registered by
each such holder and (ii) SECOND, securities that the Company proposes to
issue and sell for its own account and (iii) THIRD, all other securities
proposed to be registered by the holders thereof, pro rata based on the
number of securities proposed to be registered by each such Person.
7.02. INCIDENTAL REGISTRATION.
(a) If the Company at any time proposes to register any of its
equity securities under the Securities Act (other than a registration (i)
relating to shares of Common Stock issuable upon exercise of employee stock
options or in connection with any employee benefit or similar plan of the
Company, (ii) in connection with an acquisition by the Company of another
company, or (iii) pursuant to Section 7.01) in a manner which would permit
registration of Registrable Securities for sale to the public under the
Securities Act, it shall each such time, subject to the provisions of Section
7.02(b), give prompt written notice to all holders of record of Registrable
Securities of its intention to do so and of such holders' rights under this
Section 7.02, at least 30 days prior to the anticipated filing date of the
Registration Statement relating to such registration. Such notice shall offer
all such holders the opportunity to include in such Registration Statement
such number of Registrable Securities as each such holder may request. Upon
the written request of any. such holder made within 20 days after the receipt
of the Company's notice (which request shall specify the number of
Registrable Securities intended to be disposed of by such holder and the
intended method of disposition thereof), the Company will use its best
efforts to effect the registration under the Securities Act of all
Registrable Securities which the Company has been so requested to register by
the holders thereof; PROVIDED, that (x) if such registration involves an
underwritten offering, all holders of Registrable Securities requesting to be
included in the Company's registration must sell their Registrable Securities
to the underwriters selected by the Company on the same terms and conditions
as apply to the Company; and (y) if, at any time after giving written notice
of its intention to register any securities pursuant to this Section 7.02(a)
and prior to the Effective Date of the Registration Statement filed in
connection with such registration, the Company shall determine for any reason
not to register such securities, the Company shall give written notice to all
holders of Registrable Securities and shall thereupon be relieved of its
obligation to register any Registrable Securities in connection with such
registration (without prejudice, however, to rights of the holders of
Registrable Securities under Section 7.01). If a registration pursuant to
this Section 7.02(a) involves an underwritten public
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offering, any holder of Registrable Securities requesting to be included in
such registration may elect, in writing prior to the date of the final
"preliminary prospectus" circulated in connection with the offering of the
Registration Statement filed in connection with such registration, not to
register such Registrable Securities in connection with such registration. No
registration effected under this Section 7.02 shall relieve the Company of
its obligations to effect registrations upon request under Section 7.01.
The Company shall pay all Registration Expenses in connection with each
registration of Registrable Securities requested pursuant to this Section
7.02. However, each holder of Registrable Securities shall pay all
underwriting discounts and commissions and transfer taxes, if any, relating
to the sale or disposition of such holder's Registrable Securities pursuant
to a Registration Statement effected pursuant to this Section 7.02.
(b) PRIORITY IN INCIDENTAL REGISTRATIONS. If a registration
pursuant to this Section 7.02 involves an underwritten offering and the
managing underwriter advises the Company in writing that, in its good faith
view, the number of equity securities (including all Registrable
Securities) which the Company, the holders of Registrable Securities and any
other persons intend to include in such registration exceeds the largest
number of securities which can be sold without having a material adverse
effect on such offering, including the price at which such Registrable
Securities can be sold, the Company will include in such registration (i)
FIRST, securities that the Company proposes to issue and sell far its own
account, (ii) SECOND, Registrable Securities. proposed to be registered by
the holders thereof, pro rata based on the number of securities proposed to
be registered by each such Person and (iii) THIRD, all other securities
proposed to be registered by the holders thereof, pro rata based on the
number of securities proposed to be registered by each such Person.
7.03. HOLDBACK AGREEMENTS.
(a) If any registration of Registrable Securities shall be in
connection with an underwritten public offering, each holder of Registrable
Securities agrees not to effect any sale or distribution, including any
private placement or any sale pursuant to Rule 144 or any successor
provision, under the Securities Act, of any Registrable Securities, and not
to effect any such sale or distribution of any other equity security of the
Company or of any security convertible into or exchangeable or exercisable
for any equity security of the Company (in each case, other than as part of
such underwritten public offering) during the seven days prior to, and during
the 90 day period which begins on the Effective Date of such Registration
Statement (except as part of such registration) provided that each holder of
Registrable Securities has received written notice of such registration at
least two Business Days prior to the anticipated beginning of the seven day
period referred
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to above.
(b) If any registration of Registrable Securities shall be in
connection with an underwritten public offering, the Company agrees (i) not
to effect any sale or distribution of any of its equity securities or of any
security convertible into or exchangeable or exercisable for any equity
security of the Company (other than any such sale or distribution of such
securities in connection with any merger or consolidation by the Company or
any Affiliate or the acquisition by the Company or an Affiliate of the
Company of the capital stock or substantially all the assets of any other
Person or in connection with an employee stock ownership or other benefit
plan) during the seven days prior to, and during the 90 day period which
begins on, the Effective Date of such Registration Statement (except as part
of such registration) and (ii) that any agreement entered into after the date
hereof pursuant to which the Company issues or agrees to issue any privately
placed equity securities shall contain a provision under which the holders of
such securities agree not to effect any sale or distribution of any such
securities during the period referred to in the foregoing clause (i),
including any sale pursuant to Rule 144 under the Securities Act (except as
part of such registration, if permitted).
7.04. REGISTRATION PROCEDURES. In connection with any offering of
Registrable Securities registered pursuant to this Section 7, the Company
shall:
(a) Prepare and file with the Commission within 90 days after
receipt of a request for registration, a Registration Statement on any form
for which the Company then qualifies or which counsel for the Company shall
deem appropriate, and which form shall be available for the sale of the
Registrable Securities in accordance with the intended methods of
distribution thereof, and use its best efforts to cause such Registration
Statement to become and remain Effective as provided herein, PROVIDED that
before filing with the Commission a Registration Statement or disclosure
document constituting part of a Registration Statement or any amendments or
supplements thereto, the Company will (x) furnish to one counsel selected by
the holders of 51% of the Registrable Securities covered by such Registration
Statement copies of all such documents proposed to be filed for said
counsel's review and comment and (y) notify each holder of Registrable
Securities covered by such Registration Statement of any stop order issued or
threatened by the Commission and take all reasonable actions required to
prevent the entry of such stop order or to remove it if entered.
(b) Prepare and file with the Commission such amendments and
supplements to such Registration Statement and any disclosure document
constituting part of such Registration Statement used in connection therewith
as may be necessary to keep
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Effective such Registration Statement for a period of not less than 90 days
or such shorter period which will terminate when all Registrable Securities
covered by such Registration Statement have been sold (but not before the
expiration of the applicable prospectus delivery period, if applicable,
referred to in Section 4(3) of the Securities Act and Rule 174, or any
successor thereto, if applicable), and comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by
such Registration Statement during such period in accordance with the
intended methods of disposition by the sellers thereof set forth in such
Registration Statement.
(c) Furnish to each holder and each underwriter, if
any, of Registrable Securities covered by such Registration Statement
such number of copies of such Registration Statement, each amendment and
supplement thereto (in each case including all exhibits thereto), and the
disclosure document included in such Registration Statement (including each
preliminary disclosure document), in conformity with the requirements of the
Securities Act, and such other documents as any holder of Registrable
Securities may reasonably request in order to facilitate the disposition
of the Registrable Securities owned by such holder.
(d) Use its best efforts to register or qualify such Registrable
Securities under such other state securities or "blue sky" laws of such
jurisdictions as any holder, and underwriter, if any, of Registrable
Securities covered by such Registration Statement reasonably requests and do
any and all other acts and things which may be reasonably necessary or
advisable to enable such holder and each underwriter, if any, to consummate
the disposition in such jurisdictions of the Registrable Securities owned by
such holder; PROVIDED that the Company will not be required to (x) qualify
generally to do business in any jurisdiction where it would not otherwise be
required to qualify but for this Section 7.04(d), (y) subject itself to
taxation in any such jurisdiction or (z) consent to general service of
process in any such jurisdiction.
(e) Use its best efforts to cause the Registrable Securities
covered by such Registration Statement to be registered with or approved by
such other governmental agencies or authorities as may be necessary by virtue
of the business and operations of the Company to enable the holder or holders
thereof to consummate the disposition of such Registrable Securities.
(f) Immediately notify each holder of such Registrable Securities
at any time when a disclosure document relating thereto is required to be
delivered under the Securities Act of the happening of any event which comes
to the Company's attention if as a result of such event the disclosure
document included in such Registration Statement contains an untrue
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statement of a material fact or omits to state any material fact required to
be stated therein or necessary to make the statements therein not misleading,
and the Company will promptly prepare and furnish to such holder a supplement
or amendment to such disclosure document so that, as thereafter delivered to
the purchasers of such Registrable Securities, such disclosure document will
not contain an untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading.
(g) Use its best efforts to cause all such Registrable Securities
to be listed on a national securities exchange (including NASDAQ) and on each
securities exchange on which similar securities issued by the Company may
then be listed, and enter into such customary agreements including a listing
application and indemnification agreement in customary form, and to provide a
transfer agent and registrar for such Registrable Securities covered by such
Registration Statement no later than the Effective Date of such Registration
Statement.
(h) Enter into such customary agreements (including an
underwriting agreement in customary form) and take all such other actions as
the holders of 51% of the Registrable Securities being covered by such
Registration Statement or the underwriters retained by such holders, if any,
reasonably request in order to expedite or facilitate the disposition of such
Registrable Securities, including customary representations, warranties,
indemnities and agreements.
(i) Make available for inspection by any holder of Registrable
Securities covered by such Registration Statement, any underwriter
participating in any disposition pursuant to such Registration Statement, and
any attorney, accountant or other agent retained by any such holder or
underwriter (collectively, the "Inspectors"), all financial and other
records, pertinent corporate documents and properties of the Company
(collectively, "Records"), if any, as shall be reasonably necessary to enable
them to exercise their due diligence responsibility, and cause the Company's
and its Affiliates' officers, directors and employees to supply all
information and respond during normal business hours to all inquiries
reasonably requested by any such Inspector in connection with such
Registration Statement.
(j) Use its best efforts to obtain a "cold comfort" letter from
the Company's independent public accountants in customary form and covering
such matters of the type customarily covered by "cold comfort" letters as the
holders of 51% in interest of the Registrable Securities being sold
reasonably request.
(k) Otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission, and make
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available to the holders of Registrable Securities, as soon as reasonably
practicable, an earnings statement covering a period of at least twelve
months, beginning with the first quarter after the Effective Date of the
Registration Statement, which earnings statement shall satisfy the provisions
of Section 11(a) of the Securities Act and Rule 158 thereunder.
It shall be a condition precedent to the obligation of the Company to
take any action with respect to securities of a holder of Registrable
Securities that such holder shall furnish to the Company such information
regarding the securities held by such holder and the intended method of
disposition thereof as the Company shall reasonably request and as shall be
required in connection with the action taken by the Company.
Each holder of Registrable Securities agrees that, upon receipt of any
notice from the Company of the happening of any event of the kind described
in Section 7.04(f), such holder will forthwith discontinue disposition of
Registrable Securities until such holder's receipt of the copies of the
supplemented or amended disclosure document contemplated by Section 7.04(f)
hereof, and, if so directed by the Company, such holder will deliver to the
Company (at the Company's expense) all copies (including, without limitation,
any and all drafts), other than permanent file copies, then in such holder's
possession, of the disclosure document covering such Registrable Securities
current at the time of receipt of such notice. In the event the Company shall
give any such notice, the period mentioned in Section 7.04(b) shall be
extended by the number of days during the period from and including the date
of the giving of such notice pursuant to Section 7.04(f) hereof to and
including the date when each holder of Registrable Securities covered by such
Registration Statement shall have received the copies of the supplemented or
amended disclosure document contemplated by Section 7.04 hereof.
7.05. INDEMNIFICATION.
(a) INDEMNIFICATION BY THE COMPANY. In the event of any
registration of any securities of the Company under the Securities Act
pursuant to this Agreement, the Company will indemnify and hold
harmless, to the full extent permitted by law, each of the holders of any
Registrable Securities covered by such Registration Statement, their
respective directors and officers, general partners, limited partners and
managing directors, each other person who participates as an underwriter in
the offering or sale of such securities and each other person, if
any, who controls, is controlled by or is under common control with any such
holder or any such underwriter within the meaning of the Securities Act (and
directors, officers, controlling persons, partners and managing directors of
any of the foregoing), against any and all losses, claims, damages or
liabilities, joint or several, and
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expenses (including any amounts paid in any settlement effected with the
Company's consent, which consent will not be unreasonably withheld) to which
such holder, any such director or officer or general or limited partner or
managing director or any such underwriter or controlling person may become
subject under the Securities Act, state securities or "blue sky" laws, common
law or otherwise, insofar as such losses, claims, damages or liabilities (or
actions or proceedings in respect thereof) or expenses arise out of or are
based upon (i) any untrue statement or alleged untrue statement of any
material fact contained, on the Effective Date thereof, in any Registration
Statement under which such securities were registered under the Securities
Act, any preliminary, final or summary disclosure document contained therein,
or any amendment or supplement thereto, (ii) any omission or alleged omission
to state therein a material fact required to be stated therein or necessary
to make the statements therein not misleading, or (iii) any violation or
alleged violation by the Company of any federal, state or common law rule or
regulation applicable to the Company and relating to action required of or
inaction by the Company in connection with any such registration. The Company
shall reimburse each such holder and each such director, officer, general
partner, limited partner, managing director or underwriter and controlling
person for any legal or any other expenses reasonably incurred by them in
connection with investigating or defending such loss, claim, liability,
action or proceeding, PROVIDED, that the Company shall not be liable in any
such case to the extent that any such loss, claim, damage, liability (or
action or proceeding in respect thereof) or expense arises out of or is based
upon any untrue statement or alleged untrue statement or omission or alleged
omission made in such Registration Statement or amendment or supplement
thereto or in any such preliminary, final or summary disclosure document in
reliance upon and in conformity with written information furnished to the
Company through an instrument duly executed by such holder in its capacity as
a holder of Registrable Securities in the Company or any such director,
officer, general or limited partner, managing director or underwriter
specifically stating that it is for use in the preparation thereof; and,
PROVIDED FURTHER, that the Company shall not be liable to any holder of
Registrable Securities, any person who participates as an underwriter in the
offering or sale of Registrable Securities, if any, or any other person, if
any, who controls such underwriter within the meaning of the Securities Act,
pursuant to this Section with respect to any preliminary disclosure document
or the final disclosure document or the final disclosure document as amended
or supplemented as the case may be, to the extent that any such loss, claim,
damage or liability of such underwriter or controlling person results from
the fact that such underwriter sold Registrable Securities to a person to
whom there was not sent or given, at or prior to the written confirmation of
such sale, a copy of the final disclosure document or of the final disclosure
document as then amended or supplemented, whichever is most recent, if the
Company
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has previously furnished copies thereof to such underwriter and such final
disclosure document, as then amended or supplemented, had corrected any such
misstatement or omission. The indemnity provided for herein shall remain in
full force and effect regardless of any investigation made by or on behalf of
such holder or any such director, officer, general partner, limited partner,
managing director, underwriter or controlling person and shall survive the
transfer of such securities by such holder.
(b) INDEMNIFICATION BY THE HOLDERS OF REGISTRABLE SECURITIES AND
UNDERWRITERS. The Company may require, as a condition to including any
Registrable Securities in any Registration Statement filed in accordance with
the provisions hereof, that the Company shall have received an undertaking
reasonably satisfactory to it from the holders of such Registrable Securities
or any underwriter, to indemnify and hold harmless (in the same manner and to
the same extent as set forth in paragraph (a) above) the Company and its
directors, officers, controlling persons and all other prospective sellers
and their respective directors, officers, general and limited partners,
managing directors, and their respective controlling persons with respect to
any statement or alleged statement in or omission or alleged omission from
such Registration Statement, any preliminary, final or summary disclosure
document contained therein, or any amendment or supplement, if such statement
or alleged statement or omission or alleged omission was made in reliance
upon and in conformity with written information furnished to the Company or
its representatives through an instrument duly executed by or on behalf of
such holder or underwriter specifically stating that it is for use in the
preparation of such Registration Statement, preliminary, final or summary
disclosure document or amendment or supplement, or a document incorporated by
reference into any of the foregoing. Such indemnity shall remain in full
force and effect regardless of any investigation made by or on behalf of the
Company or any of the holders of Registrable Securities, underwriters or any
of their respective directors, officers, general or limited partners,
managing directors or controlling persons and shall survive the transfer of
such securities by such holder, PROVIDED, HOWEVER, that no such holder shall
be liable in the aggregate for any amounts exceeding the product of the sale
price per Registrable Security and the number of Registrable Securities being
sold pursuant to such Registration Statement or disclosure document by such
holder.
(c) NOTICES OF CLAIMS, ETC. Promptly after receipt by an
indemnified party hereunder of written notice of the commencement of any
action or proceeding with respect to which a claim for indemnification may be
made pursuant to this Section 7.05, such indemnified party will, if a claim
in respect thereof is to be made against an indemnified party, promptly give
written notice to the indemnifying party of the commencement of such action,
PROVIDED that the failure of any indemnified party to give
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notice as provided herein shall not relieve the indemnifying party of its
obligations under the preceding subsections of this Section, except. to the
extent that the indemnifying party is actually materially prejudiced by such
failure to give notice. In case any such action is brought against an
indemnified party, unless in such indemnified party's counsel's reasonable
professional judgment a conflict of interest between such indemnified and
indemnifying parties may exist in respect of such claim, the indemnifying
party will be entitled to participate in and, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, to the
extent that it may wish, with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party for any legal
or other expenses subsequently incurred by the latter in connection with the
defense thereof, unless in such indemnified party's counsel's reasonable
professional judgment a conflict of interest between such indemnified and
indemnifying parties arises in respect of such claim after the assumption of
the defense thereof, and the indemnifying party will not be subject to any
liability for any settlement made without its consent (which consent shall
not be unreasonably withheld). No indemnifying party will consent to entry of
any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
indemnified party of a release from all liability in respect to such claim or
litigation. An indemnifying party who is not entitled to, or elects not to,
assume the defense of a claim will not be obligated to pay the fees and
expenses of more than one counsel in any single jurisdiction for all parties
indemnified by such indemnifying party with respect to such claim.
Notwithstandinganything to the contrary set forth herein, and without
limiting any of the rights set forth above, in any event any party will have
the right to retain, at its own expense, counsel with respect to the defense
of a claim.
(d) OTHER INDEMNIFICATION. Indemnification similar to that
specified in the preceding subsections of this Section 7.05 (with appropriate
modifications) shall be given by the Company and each holder of Registrable
Securities with respect to any registration or other qualification of
securities which is provided for in this Agreement or is otherwise provided
for by the Company under any federal or state law or regulation or
governmental authority other than the Securities Act.
(e) CONTRIBUTION. In order to provide for just and equitable
contribution in circumstances in which the indemnity agreement provided for
in this Section is for any reason held to be unenforceable although
applicable in accordance with its terms, the Company, the holders of
Registrable Securities and the underwriters shall contribute to the aggregate
losses, liabilities, claims,
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damages and expenses of the nature contemplated by such indemnity agreement
incurred by the Company, the holders of Registrable Securities and the
underwriters, in such proportions that underwriters are responsible for that
portion represented by the percentage that: the underwriting discount
appeariag disclosure document bears to the initial public offering price
appearing therein and the Company and the holders of Registrable Securities
are responsible for the balance, PROVIDED, HOWEVER, that person guilty of
fraudulent misrepresentation (within meaning of Section 11(f) of the
Securities Act) shall be entitled contribution from any person who was not
guilty of such fraudulent misrepresentation As between the Company holders of
Registrable Securities, such parties shall contribute to the aggregate
losses, liabilities, claims, damages and expenses of nature contemplated by
such indemnity agreement in such proportion as shall be appropriate to
reflect (x) the relative benefits received by the Company, on the one hand,
and the holders of the Registrable Securities included in the offering on the
other hand, fram the offering of the Registrable Securities and any other
securities included in such offering, and (y) the relative fault,of the
Company, on the one hand, and the holders of the Registrable Securities
included in the offering, on the other, with respect to the statements or
omissions which resulted in such loss, liability, claim, damage or expense,
or action in respect thereof, as well as any other relevant equitable
considerations The relative benefits received by the Company, on the one
hand, and the holders of the Registrable Securities on the other, with
respect to such offering shall be deemed to be in the same proportion as the
sum of total purchase price paid to the Company in respect Registrable
Securities plus the total net proceeds from offering of any securities
included in such offering (before deducting expenses) received by the Company
bears to the amount by which the total net proceeds from the offering of
Registrable Securities (before deducting expenses) received by the holders of
the Registrable Securities with respect to such offering exceeds purchase
price paid to the Company in respect Registrable Securities, and in each case
the net proceeds received from such offering shall be determined as set forth
disclosure document. The relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact
relates to information supplied by the Company or the holders of the
Registrable Securities, the intent of the parties and their relative
knowledge, access to information and oppartunity to correct or prevent such
statement or omission Company and the holders of the Registrable Securities
agree that it would not be just and equitable if contribution pursuant to
this Section were to be determined by pro rata allocation or by any other
method of allocation which does not take inta account the equitable
considerations referred to herein. Notwithstanding anything to the contrary
contained herein, the Company and the
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holders of Registrable Securities agree that any contribution required
to be made by such bolder pursuant to this Section 7.05(e) shall not exceed the
net proceeds from the offering of Registrable Securities (before deducting
expenses) received by such holder with respect to such offering For purposes
of this Section, each Person, if any, who controls a holder of Registrable
Securities or an Underwriter within the meaning of Section 15 of the Securities
Act shall have the same rights to contribution as Such holder or Underwriter,
and each director of the Company, each officer of the Company who signed the
Registration Statement, and each person, if any, who controls the Company within
the meaning of Section 15 of the Securities Act shall have the same rights to
contribution as the Company
7.06. RULE 144. At all times after a public offering of any of the
Company's equity securities, the Company agrees that it well in a timely
manner all reports required to be filed by it pursuant to the Exchange Act,
and, if at any time the Company is not required to file such reports, it will
make available to the public, to the extent required to permit the sale of
Shares by any holder of Registrable Securities pursuant to Rule 144, current
information about itself and its activities as contemplated by Rule 144 under
the Securities Act, as such Rule may be amended from time to time
Notwithstanding the foregoing, the Company may deregister any class of its
equity securities under Section 12 of the Exchange Act or suspend its duty to
file reports with respect to any class, of its securities pursuant to
Section 15(d) of the Exchange Act if it is then permitted to do so pursuant to
the Exchange Act and the rules and regulations thereunder.
8. RIGHT OF FIRST REFUSAL
8.01. RIGHT OF FIRST REFUSAL. Before the Company shall issue, sell or
exchange, agree or obligate itself to issue, sell or exchange (a) any shares
of Common Stock, (b) any other equity security of the Company, including
without limitation, shares preferred stock, (c) any convertible debt security
of the Company including without limitation, any debt security which by its
terms is convertible into or exchangeable for any equity security of the
Company, (d) any security of the Company that is a, combination of debt and
equity, or (e) any option, warrant or other right subscribe for, purchase or
otherwise acquire any such equity security or any such convertible debt
security of the Company, the Company shall, in each case, first offer to sell
such securities (the "Offered Securities") to those Purchasers then holding
capital stock of the Company (the "Offerees") as follows the Company shall
offer to sell to each Offeree an amount of the Offered Securities (the "Basic
Amount") sufficient to allow each Offeree to maintain a proportional interest
in the Company equal to the number shares of Common Stock (including for the
purposes of such calculation the number of shares of Common Stock issuable
upon
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conversion of the Series A Preferred Stock or conversion, exercise of other
securities or options of the Company then held by such Offeree over the total
number of shares of Common Stock issued and outstanding and the number of
shares of Common Stock issuable upon conversion of the Preferred Stock or
conversion or exercise of other securities or options of the Company,
determined immediately prior to the issue, sale or exchange of the Offered
Securities, at a price and on such other terms as applicable to such
issuance, sale or exchange of Offered Securities. Such terms and price, and
the Offerees' respective Basic Amounts, shall be specified by the Company in
writing delivered to the Offerees "Offer"), which Offer by its terms shall
remain open irrevocable for a period of thirty (30) days from receipt of the
Offer.
8.02. NOTICE OF ACCEPTANCE. Notice of each Offeree's intention to
accept, in whole or in part, any Offer made pursuant to Section 8.01 shall be
evidenced by a writing signed by such Offeree and delivered to the Company
prior to the and of the 30-day period of such offer, setting forth such of
the Offeree's Basic Amount as such Offeree elects to purchase (the "Notice
Acceptance")
8.03. CONDITIONS TO ACCEPTANCES AND PURCHASE.
(a) PERMITTED SALES OF REFUSED SECURITIES. In the event that
Notices of Acceptance are not given by the Offerees in respect of all the
Offered Securities, the Company shall have ninety (90) days from the
expiration of the 30-day period set forth in Section 8.01 to sell all or any
part of such Offered Securities a Notice of Acceptance has not been given by
Offerees (the "Refused Securities") to the Person or Persons, but only far
cash and otherwise in all respects upon terms conditions, including, without
limitation, unit price and interest rates, which are no more favorable, in
the aggregate, to such other Person or Persons or less favorable to the
Company than .those' set forth in the Offer.
(b) REDUCTION IN AMOUNT OF OFFERED SECURITIES. In the event the
Company shall propose to sell less than all the Offered Securities (any such
sa1e to be in the manner and on the terms specified in Section 8.03(a)
above), then each Offeree shall be obligated to reduce the number of shares
or other units of Offered Securities specified in its respective Notice of
Acceptance to an amount which shall be not less than the amount of the
Offered Securities which such Offeree elected to purchase pursuant Section
8.02 multiplied by a fraction, (i) the numerator of which shall be the amount
of Offered Securities which the Company actually proposes to sell, and
(ii) the denominator of which shall be the amount of all Offered Securities
In the event that any Offeree reduces the number or amount of Offered
Securities
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specified in its respective Notice of Acceptance, the Company may not sell
or otherwise dispose of more than the reduced amount of Offered Securities
until such securities have again been offered to the Offerees in accordance
with Section 8.01.
(c) CLOSING. Upon the closing, which shall include full payment
to the Company, of the sale to such other Person or Persons of all or less
than all tbe Refused Securities, the Offerees shall purchase from the
Company, and the Company shall sell to the Offerees, the number of Offered
Securities specified in the Notices of Acceptance, as reduced pursuant to
Section 8.03(b) if the Offerees have so elected, upon the terms and
conditions specified in the Offer. The purchase by the Offerees of any
Offered Securities is subject in all cases to the preparation, execution and
delivery by the Company and the Offerees of a purchase agreement relating to
such Offered Securities reasonably satisfactory in form and substance to the
Offerees and their respective counsel; provided that if the purchasers of
Refused Securities agree to close on terms offered to Offerees, the refusal
the Offerees to close shall not prevent the sale of Refused Securities or any
portion of the Offered Securities to such purchasers.
8.04. FURTHER SALE. Subject to the proviso contained at the end of
Section 8.03(c), in each case, any Offered Securities not purchased by the
Offerees or other Person or Persons in accordance with Section 8.03 may not
be sold or otherwise disposed of until they are again offered to the Offerees
under the procedures specified in Sections 8.01, 8.02 and 8.03.
8.05. TERMINATION AND WAIVER OF RIGHT OF FIRST OFFER. The rights of the
Offerees under this Section 8 shall terminate immediately prior to the
effectiveness of the registration statement with respect to a Qualified
Public Offering, but expressly conditioned on the consummation of a Qualified
Public Offering.
8.06. EXCEPTION. The rights of the Offerees under this Section 8 shall
not apply to the following (a) Common Stock issued as a stock dividend to
holders of Common Stock or upon any subdivision or combination of shares of
Common Stock; (b) Series A Preferred Stock issued as a dividend to holders of
Series A Preferred Stock upon any subdivision or combination of shares of
Series A Preferred Stock, (c) the Conversiom Shares, (d) 82,353 shares of
Common Stock issuable upon the exercise of warrants issued to the Placement
Agents, (e) shares of Common Stock, options exercisable therefor, issued
after the date hereof to directors, officers or employees of or consultants
to the Company or any Subsidiary pursuant to any qualified or non-qualified
stock option plan or agreement, employee stock ownership plan, stock purchase
agreement, stock plan, stock restriction agreement, or
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consulting agreement or such other options, arrangements, agreements or plans
approved by the Executive Compensation and Stock Option Committee so long as
the aggregate number of such shares (including those shares issuable upon the
exercise of options issued other than the Snider Options) does not exceed 10%
of the number of Fully Diluted Outstanding Common Stock at the time of
proposed issuance, (f) 30,000 shares of Common Stock issued upon the exercise
of the Snider Options, (g) securities issued solely in consideration for the
acquisition (whether by merger or otherwise) by the Company of all or
substantially all of the capital stock or assets of any other entity, (h)
securities issued in a transaction in which the entire proceeds (net of
expenses) of issuance are used to pay, satisfy and discharge obligations of
the Company to the Purchasers and (i) securities issued in a transaction in
which the entire proceeds (net of expenses) of issuance are used to pay,
satisfy and discharge Indebtedness owed by the Company to any Person other
than a Subsidiary.
9. DEFINITIONS AND ACCOUNTING TERMS
9.01. CERTAIN DEFINED TERMS. As used in this Agreement, the following
terms shall have the following meanings:
"Affiliate" shall mean any officer or director of the Company or any
Subsidiary or holder of five percent (5%) or more of any class of capital
stock of the Company or any Subsidiary, or any member of their respective
immediate families or any corporation or other entity directly or indirectly
controlled by one or more of such officers, directors or 5% stockholders or
members of their immediate families.
"Agreement" shall mean this Series A Preferred Stock Purchase Agreement,
including all amendments, modifications or supplements thereto.
"A.M. Best" shall have the meaning assigned to that term in Section 2.31.
"Applicable Conversion Value" shall have the meaning assigned to such
term in the Certificate of Designation.
"Articles of Incorporation" shall mean the Articles of Incorporation of
the Company, including all amendments, modifications or supplements thereto.
"Bank Credit Agreement" shall mean the Credit Agreement, dated as of the
Closing Date, between the Company and First Interstate Bank of California.
"Bank Loan Documents" shall mean each of the Loan Documents
(as such term is defined in the Bank Credit Agreement).
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"Basic Amount" shall have the meaning assigned to that term in Section
8.01.
"Board of Directors" shall mean the board of directors of the Company as
constituted from time to time.
"Business Day" shall mean any day except a Saturday, Sunday or other day
on which commercial banks in the State California are authorized by law or
executive order to close.
"By-Laws" shall have the meaning assigned to such term in Section 4.09.
"Certificate of Designation" shall have the meaning assigned to such term
in Section 4.08.
"Closing" shall have the meaning assigned to such term in Section 1.03.
"Closing Date" shall have the meaning assigned to such term in Section
1.03.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Commission" shall mean the Securities and Exchange Commission or any
other federal agency then administering Securities Act or Exchange Act.
"Common Stock" shall mean (a) the Company's Common Stock, no par value,
as authorized on the date of this Agreement, (b) any other capital stock of
any class or classes (however designated) of the Company, authorized on or
after the date hereof, the holders of which shall have the right, without
limitation as to amount, either to all or to a share of the balance of
current dividends and liquidating dividends after the payment of dividends
and distributions on any shares entitled to preference, and the holders of
which shall ordinarily, in the absence of contingencies or in the absence of
any provision to the contrary in the Articles Incorporation, be entitled to
vote for the election of a majority of directors of the Company (even though
the right so to vote has been suspended by the happening of such a
contingency or provision), and (c) any other securities into which or for
which any of the securities described in (a) or (b) may be converted or
exchanged pursuant to a plan of recapitalization, reorganization, merger,
sale of assets or otherwise.
"Company" shall have the meaning assigned to such term in the
introductory sentence hereof.
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"Conning Funds" shall mean Conning Insurance Capital Limited Partnership
II, a Delaware limited partnership, Conning Insurance Capital International
Partners II, a Cayman Islands limited partnership, Conning Insurance Capital
Limited Partnership III, a Delaware limited partnership, and Conning
Insurance Capital International Partners III, L.P., a Cayman Islands limited
partnership.
"Consolidated Capitalization" means, at any date determination thereof,
the sum of (a) Consolidated Indebtedness plus (b) Consolidated Net Worth.
"Consolidated Indebtedness" means, at any date of determination thereof,
all Indebtedness of the Company and the Subsidiaries, as determined on a
consolidated basis in accordance with GAAP.
"Consolidated Net Worth" means, at any date of determination thereof, all
amounts that would be included under stockholders' equity on a consolidated
balance sheet of the Company and the Subsidiaries, as determined on a
consolidated basis in accordance with GAAP.
"Conversion Shares" shall have the meaning assigned to such term in
Section 1.02.
"Demand Registration" shall have the meaning assigned to such term in
Section 7.01(a).
"Disadvantageous Condition" Shall have the meaning assigned to such term
in Section 7.01(a).
"Effective" shall mean that all requirements under the Securities Act
with respect to a Registration Statement have been satisfied and that the
Commission has officially approved the public distribution or circulation of
the Registration Statement in connection with a public offering of
Registrable Securities.
"Effective Date" shall mean the date on which a Registration Statement
is declared to be Effective.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended.
"Escrow Agent" shall have the meaning assigned to that term in
Section 4.17.
"Escrow Agreement" shall have the meaning assigned to that term in
Section 4.17.
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"ESOP" shall mean the PAULA Financial and Subsidiaries Employee Stock
Ownership Plan (including, without limitation, the PAULA Financial and
Subsidiaries Employee Stock Ownership Trust), including all amendments,
supplements or modifications thereto.
"ESOP Purchase Agreement" shall mean the Agreement for Repurchase of ESOP
Stock, dated as of July 11, 1994, between the Company and the ESOP which
evidences the obligation of the Company to repurchase 367,647 shares of
Common Stock from the ESOP.
"Exchange Act" shall mean the Securities Exchange Act 1934, as amended,
and the rules and regulations promulgated pursuant thereto.
"Fully Diluted Outstanding Common Stock" shall mean at the time of the
proposed issuance the number of issued shares actually outstanding (excluding
any shares of the Company held by the Company as "treasury stock") at such
time together with the number of shares of Common Stock which could be
acquired at such time pursuant to all rights, options, warrants or
convertible or exchangeable securities entitling the holders thereof to
subscribe for or purchase or otherwise acquire shares of Common Stock as if
such rights, options, warrants or convertible or exchangeable securities have
been fully exercised or converted and the full amount of all Common Stock
obtained in connection therewith has been obtained.
"GAAP" shall mean generally accepted accounting principles in the United
States of America as in effect from time to time, applied on a basis
consistent with those used in the preparation of the financial statements
referred to in Section 2.06 (except for changes concurred in by the
independent public accountants to the Company and the Subsidiaries).
"Indebtedness" shall mean (a) any liability for borrowed money or
evidenced by a note or similar obligation given in connection with the
acquisition of any property or other assets (other than trade accounts
payable incurred in the ordinary course of business), (b) all guaranties,
endorsements and other contingent obligations, in respect of Indebtedness of
others, whether or not the same are or should be reflected in the Company's
balance sheet (or the notes thereto), except guaranties by endorsement of
negotiable instruments for deposit or collection or similar transactions in
the ordinary course of business, and (c) the present value of any lease
payments due under leases required to be capitalized in accordance with GAAP.
"indemnified party" shall have the meaning given such term in
Section 10.02.
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"Independent Directors" mean those directors of the Company who are
neither Management Directors nor Investor Directors.
"Initiating Holders" shall have the meaning given such term in Section
7.01(a).
"Initial Public Offering" shall mean the first offering for sale of
Common Stock for the account of the Company or for the account of any holder
of securities that has registration rights pursuant to an Effective
Registration Statement.
"Inspectors" shall have the meaning given such term in Section 7.05(i).
"Investor Directors" mean those directors of the Company who are
representatives of the Purchasers.
"Key Employee" shall mean and includes the Chairman, President, Chief
Executive Officer, Chief Operating Officer, Chief Financial Officer, any
executive officer of the Company or any Subsidiary with policy-making
functions including, without limitation, the head of each Subsidiary, or
any other individual so designated by the Board of Directors, and in any
event shall be deemed to include Roger G. Teig, Jeffrey A. Snider,
James A. Nicholson, Leroy J. Combs and Victor Gloria III.
"Knowledge" shall mean, after reasonable inquiry, no information has
come to the attention of any Key Employee, giving any such Key Employee
actual knowledge of facts contrary to the existence or absence of such facts
indicated.
"Leverage Ratio" means, at any date of determination thereof, the ratio
of (a) Consolidated Indebtedness to (b) Consolidated Capitalization.
"Management Directors" mean those directors of the Company who are
Key Employees.
"Material Adverse Effect" means any material adverse effect on (a) the
business, profits, properties or condition of the Company and the
Subsidiaries, taken as a whole, (b) the ability of the Company to perform its
obligations under the Agreement or any Related Agreement and (c) the binding
nature, validity or enforceability of this Agreement or any Related
Agreement, which, in each case, arises from, or reasonably could be expected
to arise from, any action or omission of action on the part of the Company or
any Subsidiary or the occurrence of any event or the existence of any fact or
condition in respect of the Company or any Subsidiary or any of their
respective properties.
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"Multiemployer Plan" shall have the meaning given such term in Section
2.13.
"NASD" shall mean the National Association of Securities Dealers, Inc.
"NASDAQ" shall mean the National Association of Securities Dealers
Automated Quotations System.
"Notice of Acceptance" shall have the meaning assigned to such term in
Section 8.02.
"Offer" shall have the meaning assigned to such term in Section 8.01.
"Offeree" shall have the meaning assigned to such term in Section 8.01.
"Offered Securities" shall have the meaning assigned to that term in
Section 8.01.
"PACO" shall mean Paula Assurance Company, a California corporation.
"Permitted Liens" shall mean (a) liens or charges for current taxes,
assessments or other governmental charges which are not delinquent or which
remain payable without penalty, or the validity of which is contested in good
faith by appropriate proceedings upon stay of execution of the enforcement
thereof, provided the Company shall have set aside on its books and shall
maintain adequate reserves for their payment in conformity with GAAP, (b)
liens, deposits or pledges made to secure statutory obligations surety or
appeal bonds, or bonds for the release of attachments or for stay of
execution, or to secure the performance of bids, tenders, contracts (other
than for the payment of borrowed money), leases or for purposes of like
general nature in the ordinary course of its business and (c) purchase money
security interests for equipment hereafter acquired, conditional sale
agreements, or other title retention agreements, with respect to equipment
hereafter acquired, provided, however, that no such security interest or
agreements shall extend to any property other than the after-acquired
equipment then being purchased.
"Person" shall mean an individual, corporation, partnership, joint
venture, trust, university, or unincorporated organization, or a government
or any agency or political subdivision thereof.
"PICO" shall mean Paula Insurance Company, a California corporation.
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"Placement Agent" shall mean Prudential Securities Incorporated and
Conning a Company in their capacities as placement agent to the Company in
connection with the sale of the Preferred Shares.
"Plans" shall have the meaning assigned to such term in Section
2.13.
"Preferred Shares" shall have the meaning assigned to such term in
Section 1.01.
"Pro Forma Balance Sheets" shall have the meaning assigned to
such term in Section 2.06(c).
"Purchaser" shall have the meaning assigned to such term in Section
1.01.
"Qualified Public Offering" shall mean a public offering pursuant to an
Effective Registration Statement under the Securities Act covering the offer
and sale of the shares of the Common Stock in which the aggregate price paid
by the public for such shares shall equal or exceed $20,000,000 and in which
the price per share of Common Stock to the public equals or exceeds (a) for
the period until December 31, 1995, 125% of the then Applicable Conversion
Value applicable to the Series A Preferred Stock, (b) for the period from
January 1, 1996 through December 31, 1996, 135% of the then Applicable
Conversion Value applicable to the Series A Preferred Stock or (c) for the
period on or after January 1, 1997, 150% of the then Applicable Conversion
Value applicable to the Series A Preferred Stock.
"Records" shall have the meaning assigned to that term in Section 7.04(i).
"Redemption Notes" shall have the meaning assigned to that term in
the Certificate of Designation.
"Refused Securities" shall have the meaning assigned to that term in
Section 8.03.
"Registrable Securities" shall mean (a) the Conversion Shares and (b) the
shares of capital stock of the Company acquired by the Purchasers pursuant to
Section 8 or any shares of capital stock of the Company acquired after the
date hereof by any such Purchaser, including shares of Common Stock issuable
on the conversion of other securities or the exercise of options acquired by
the Purchasers pursuant to Section 8 or otherwise; PROVIDED, HOWEVER, that
such securities shall cease to be Registrable Securities if and when (x) a
Registration Statement with respect to the disposition of such securities
shall have become Effective under the Securities Act and such securities
shall have been
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disposed of pursuant to such Effective Registration Statement, (y) such
securities shall have been otherwise transferred, if new certificates or other
evidences of ownership for such securities not bearing a legend restricting
further transfer and not subject to any stop transfer order or other
restrictions on transfer shall have been delivered by the Company, and
subsequent disposition of such securities shall not require registration or
qualification of such securities under the Securities Act, or (z) such
securities shall have ceased to be outstanding.
"Registration Expenses" shall mean all expenses incident to the Company's
performance of or compliance with its obligations under Section 7 of this
Agreement, including, without limitation, all Commission and stock exchange
or NASD registration and filing fees and expenses, fees and expenses of
compliance with applicable state securities or "blue sky" laws (including,
without limitation, reasonable fees and disbursements of counsel for the
underwriters in connection with "blue sky" qualifications of the Registrable
Securities), printing expenses, messenger and delivery expenses, the fees and
expenses incurred in connection with the listing of the securities to be
registered in a public offering on each securities exchange or national
market system on which such securities are to be so listed and, following
such initial public offering, the fees and expenses incurred in connection
with the listing of such securities to be registered on each securities
exchange or national market system on which such securities are listed, fees
and disbursements of counsel for the Company and all independent certified
public accountants (including the expenses of any annual audit and "cold
comfort" letters required by or incident to such performance and compliance),
the fees and disbursements of underwriters customarily paid by issuers or
sellers of securities (including the fees and expenses of any "qualified
independent underwriter" required by the NASD), the reasonable fees of one
counsel retained in connection with each such registration by the holders of
51% of the Registrable Securities being registered so long as such fees do
not exceed $25,000, the reasonable fees and expenses of any special experts
retained by the Company in connection with such registration, and fees and
expenses of other persons retained by the Company (but not including any
underwriting discounts or commissions or transfer taxes, if any, attributable
to the sale of Registrable Securities by holders of such Registrable
Securities).
"Registration Statement" shall mean any disclosure document that the
Company is required to file under the Securities Act in connection with a
public offering of Registrable Securities.
"Related Agreements" shall mean the Voting Agreement, the Shareholders
Agreement and the Escrow Agreement, including all amendments, modifications
or supplements thereto.
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"SAP" shall mean the statutory accounting procedures required by the
insurance statutes and regulations of the state in which any Subsidiary is
subject to regulation.
"Schnider Agreement" shall mean the Stock Purchase Agreement
dated as of July 26, 1994 among the Company, Norman J. Schnider and Elizabeth J.
Schnider, as trustees of The Schnider Family Trust, Norman J. Schnider and
Elizabeth J. Schnider, as individuals, which evidences the obligation of
the Company to repurchase 76,100 shares of Common Stock from The Schnider
Family Trust.
"Securities Act" shall mean the Securities Act of 1933, as amended from
time to time or any successor federal act and all rules or regulations
thereunder.
"Series A Preferred Stock" shall have the meaning assigned to such term
in Section 1.01.
"Shareholders Agreement" shall have the meaning assigned to
such term in Section 4.11.
"Shares" shall have the meaning assigned to such term in Section
1.02.
"Snider Options" shall have the meaning assigned to such term in
Section 2.03.
"Stock Option Plan" shall mean the 1994 Stock Incentive Plan of
the Company, including all amendments, supplements or modifications
thereto.
"Subsidiary" shall mean any corporation or other entity of which at least
a majority of the securities or other ownership interest having ordinary
voting power (absolutely or contingently) for the election of directors or
other persons performing similar functions are at the time owned directly or
indirectly by the Company and/or any of its other Subsidiaries.
"Tender Offer" shall mean the irrevocable offer by the Company to
repurchase 178,900 shares of Common Stock from its shareholders under that
certain offer letter dated July 27, 1994 and the related transmittal letter.
"Voting Agreement" shall have the meaning assigned to such term in
Section 4.12.
9.02. ACCOUNTING TERMS. All accounting terms not specifically defined
herein shall be construed in accordance with GAAP consistently applied, and
all financial data submitted
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pursuant to this Agreement, unless otherwise specified, shall be prepared in
accordance with GAAP.
10. INDEMNIFICATION
10.01. GENERAL INDEMNITY. The Company agrees to indemnify and save
harmless the Purchasers (and their respective directors, officers,
affiliates, agents, successors and assigns) from and against any and all
losses, liabilities, deficiencies, costs, damages and expenses (including,
without limitation, reasonable attorneys' fees, charges and
disbursements) incurred by the Purchasers as a result of any inaccuracy
in or breach of the representations, warranties or covenants made by the
Company herein or in any of the Related Agreements. Each Purchaser severally
but not jointly agrees to indemnify and save harmless the Company and its
directors, officers, affiliates, agents, successors and assigns from and
against any and all losses, liabilities, deficiencies, costs, damages and
expenses (including, without limitation, reasonable attorneys' fees,
charges and disbursements) incurred by any of the Company as a result of any
inaccuracy in or breach of the representations, warranties or covenants made
by the Purchasers herein.
10.02. INDEMNIFICATION PROCEDURE. Any party entitled to indemnification
under this Section 10 (an "indemnified party") will give written notice to
the indemnifying party of any claim with respect to which it seeks
indemnification promptly after the discovery by such party of any matters
giving rise to a claim for indemnification; provided that the failure of any
party entitled to indemnification hereunder to give notice as provided herein
shall not relieve the indemnifying party of its obligations under this
Section 10 except to the extent that the indemnifying party is actually
prejudiced by such failure to give notice. In case any action, proceeding or
claim is brought against an indemnified party in respect of which
indemnification is sought hereunder, the indemnifying party shall be entitled
to participate in and, unless in the reasonable judgment of the indemnified
party a conflict of interest between it and the indemnifying party may exist
in respect of such action, proceeding or claim, to assume the defense
thereof, with counsel reasonably satisfactory to the indemnified party. In
the event that the indemnifying party advises an indemnified party that it
will contest such a claim for indemnification hereunder, or fails, within
thirty (30) days of receipt of any indemnification notice to notify, in
writing, such person of its election to defend, settle or compromise, at its
sole cost and expense, any action, proceeding or claim (or discontinues its
defense at any time after it commences such defense), then the indemnified
party may, at its option, defend, settle or otherwise compromise or pay such
action or claim. In any event, unless and until the indemnifying party elects
in writing to assume and does so assume the defense of any such claim,
proceeding or action, the
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indemnified party's costs and expenses arising out of the defense, settlement
or compromise of any such action, claim or proceeding shall be losses subject
to indemnification hereunder. The indemnified party shall cooperate fully
with the indemnifying party in connection with any negotiation or defense of
any such action or claim by the indemnifying party and shall furnish to the
indemnifying party all information reasonably available to the indemnified
party which relates to such action or claim. The indemnifying party shall
keep the indemnified party fully apprised at all times as to the status of
the defense or any settlement negotiations with respect thereto. If the
indemnifying party elects to defend any such action or claim, then the
indemnified party shall be entitled to participate in such defense with
counsel of its choice at its sole cost and expense. The indemnifying party
shall not be liable for any settlement of any action, claim or proceeding
effected without its written consent, provided, however, that the
indemnifying party shall not unreasonably withhold, delay or condition its
consent. Anything in this Section 10 to the contrary notwithstanding, the
indemnifying party shall not, without the indemnified party's prior written
consent, settle or compromise any claim or consent to entry of any judgment
in respect thereof which imposes any future obligation on the indemnified
party or which does not include, as an unconditional term thereof, the giving
by the claimant or the plaintiff to the indemnified party, a release from all
liability in respect of such claim. The indemnification required by this
Section 10 shall be made by periodic payments of the amount thereof during
the course of the investigation or defense, as and when bills are received or
expense, loss, damage or liability is incurred so long as the indemnified
party irrevocably agrees to refund such moneys if it is ultimately determined
by a court of competent jurisdiction that such party was not entitled to
indemnification. The indemnity agreements contained herein shall be in
addition to (a) any cause of action or similar right of the indemnified party
against the indemnifying party or others, and (b) any liabilities the
indemnifying party may be subject to pursuant to the law.
11. MISCELLANEOUS
11.01. NO WAIVER; CUMULATIVE REMEDIES. No failure or delay on the part of
any party to this Agreement in exercising any right, power or remedy
hereunder shall operate as a waiver thereof; nor shall any single or partial
exercise of any such right, power or remedy preclude any other or further
exercise thereof or the exercise of any other right, power or remedy
hereunder. The remedies herein provided are cumulative and not exclusive of
any remedies provided by law.
11.02. AMENDMENTS, WAIVERS AND CONSENTS. Any provision in the Agreement
to the contrary notwithstanding, and except as hereinafter provided, changes
in, termination or amendments of or
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additions to this Agreement or any Related Agreement may be made, and
compliance with any covenant or provision set forth herein may be omitted or
waived, if the Company (a) shall obtain consent thereto in writing from the
holders of at least 66 2/3% of the Shares, and (b) shall deliver copies of
such consent in writing to any holders who did not execute such consent;
provided that no consents shall be effective to reduce the percentage in
interest of the Shares the consent of the holders of which is required under
this Section 11.02. Any waiver or consent may be given subject to
satisfaction of conditions stated therein and any waiver or consent shall be
effective only in the specific instance and for the specific purpose for
which given.
11.03. ADDRESSES FOR NOTICES. Any notice, demand, request, waiver or
other communication under this Agreement or any Related Agreement shall be in
writing and shall be deemed to have been duly given on the date of service if
personally served, on the date of transmission if sent by telecopier or on
the third day after mailing if mailed to the party to whom notice is to be
given, by first class mail, registered, return receipt requested, postage
prepaid and addressed as follows:
To the Company: Paula Financial
300 North Lake Avenue
Suite 300
Pasadena, California 91101
Attention: President
Telecopier No.: (818) 304-1056
With a copy to: Gibson, Dunn & Crutcher
333 South Grand Avenue
Los Angeles, California 90067
Attention: Jonathan K. Layne, Esq.
Telecopier No.: (213) 229-7520
To any Purchaser: At its address specified on Schedule
1.01 hereto
With a copy to: LeBoeuf, Lamb, Greene & MacRae
Cityplace II
185 Asylum Street
Hartford, Connecticut 06103
Attention: Edward A. Reilly, Jr., Esq.
Telecopier No.: (213) 293-3555
11.04. COSTS, EXPENSES AND TAXES. As a condition precedent to the
closing, the Company agrees to pay at the Closing in connection with the
preparation, execution and delivery of this Agreement and the Related
Agreements and the issuance of the Preferred Shares at the Closing, the
reasonable fees and other out-of-pocket expenses
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of Messrs. LeBoeuf, Lamb, Greene & MacRae and the out-of-pocket expenses of
the Purchasers up to but not exceeding $70,000 in the aggregate. In
addition, the prevailing party shall be entitled to the reasonable fees and
out-of-pocket expenses of legal counsel, independent public accountants,
consultants and other outside experts retained by such party in connection
with the successful enforcement of this Agreement or any Related
Agreement. In addition, the Company shall pay any and all stamp, or other
similar taxes payable or determined to be payable in connection with the
execution and delivery of this Agreement, the issuance of the Preferred
Shares and the other instruments and documents to be delivered hereunder or
thereunder, and agrees to save the Purchasers harmless from and against
any and all liabilities with respect to or resulting from any delay in paying
or omission to pay such taxes.
11.05. BINDING EFFECT: ASSIGNMENT. This Agreement and each Related
Agreement to which it is a party shall be binding upon and inure to the
benefit of each of the Company and the Purchasers and their respective heirs,
successors and assigns, except that the Company shall not have the right
to delegate its obligations hereunder or to assign its rights hereunder or
any interest herein without the prior written consent of the holders of at
least 66 2/3% of the Shares and the Purchasers shall not have the right to
assign their rights hereunder or any interest herein (including, without
limitation, by the sale of their Shares) without the prior written consent of
the Company; provided that the Purchasers may assign their rights, without
such prior written consent, to any other Purchaser, or any entity
controlling, controlled by or under common control with such Purchaser, or to
any general or limited partner or stockholder of a Purchaser. For the
purposes of this Section 11.05, "control" shall mean any Purchaser
beneficially owns more than 50% of the voting securities of such entity or
more than 50% of the voting securities of such Purchaser is directly or
indirectly beneficially owned or held by such entity or such
Purchaser is a partnership in which such entity is a general partner.
11.06. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All
representations and warranties made in this Agreement, each Related
Agreement, the Shares, or any other instrument or document delivered
in connection herewith or therewith, shall survive the execution and delivery
hereof or thereof until February 3, 1996; provided that the representations
and warranties shall survive such date to the extent written notice of any
breach thereof is given on or prior to such date and representations and
warranties relating to taxes shall survive for the applicable statute of
limitation.
11.07. PRIOR AGREEMENTS. This Agreement, each Related
Agreement, the terms of the Series A Preferred Stock, and the other
agreements executed and delivered herewith constitute the entire
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agreement between the parties and supersedes any prior understandings or
agreements concerning the subject matter hereof.
11.08. SEVERABILITY. The provisions of this Agreement, each Related
Agreement and the terms of the Series A Preferred Stock are severable and, in
the event that any court of competent jurisdiction shall determine that any
one or more of the provisions or part of a provision contained in this
Agreement, any Related Agreement or the terms of the Series A Preferred Stock
shall, for any reason, be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
other provision or part of a provision of this Agreement, any Related
Agreement or the terms of the Series A Preferred Stock, but this Agreement,
each Related Agreement and the terms of the Series A Preferred Stock shall be
reformed and construed as if such invalid or illegal or unenforceable
provision, or part of a provision, had never been contained herein, and such
provisions or part reformed so that it would be valid, legal and enforceable
to the maximum extent possible.
11.09. CONFIDENTIALITY. Each Purchaser agrees that it will keep
confidential and will not disclose or divulge any confidential,
proprietary or secret information which such Purchaser may obtain
from the Company pursuant to financial statements, reports and other
materials submitted by the Company to such Purchaser pursuant to this
Agreement, or pursuant to visitation or inspection rights granted
hereunder, unless such information is known, or until such information
becomes known other than through a breach of this Section 11.09, to
the public; provided, however, that a Purchaser may disclose such
information (a) on a confidential basis to its attorneys, accountants,
consultants and other professionals to the extent necessary to obtain their
services in connection with its investment in the Company, (b) to any
prospective purchaser of any Preferred Shares or Conversion Shares from
such Purchaser as long as such prospective purchaser agrees in
writing to be bound by the provisions of this Section 11.09, (c) to any
entity controlling, controlled by or under common control with such
Purchaser, or to any general or limited partner or stockholder of a Purchaser
which is a partnership or corporation, or (d) as required by applicable law.
11.10. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA, AND WITHOUT
GIVING EFFECT TO CHOICE OF LAW PROVISIONS.
11.11. HEADINGS. Article, section and subsection headings in this
Agreement are included herein for convenience of reference only and shall not
constitute a part of this Agreement for any other purpose.
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11.12. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the
same instrument, and any of the parties hereto may execute this Agreement by
signing any such counterpart.
11.13. FURTHER ASSURANCES. From and after the date of this Agreement,
upon the request of any Purchaser or the Company, each of the Company and the
Purchasers shall execute and deliver such instruments, documents and other
writings as may be reasonably necessary or desirable to confirm and carry out
and to effectuate fully the intent and purposes of this Agreement, each
Related Agreement and the Shares.
11.14. WAIVER. At any time prior to the Closing Date, any party hereto
may (a) extend the time for the performance of any of the obligations or
other acts of any other party hereto, (b) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto, and (c) waive compliance with any of the agreements or
conditions contained herein. Any agreement on the part of a party hereto to
any such extension or waiver shall be valid only if set forth in an
instrument in writing signed by the party granting such waiver but such
waiver or failure to insist upon strict compliance with such obligation,
covenant, agreement or condition shall not operate as a waiver of, or
estoppel with respect to, any subsequent or future failure.
11.15. SPECIFIC ENFORCEMENT. Each of the Purchasers and the Company
acknowledge and agree that irreparable damage would occur in the event that
any of the provisions of this Agreement and each Related Agreement were not
performed in accordance with their specific terms or were otherwise breached.
It is accordingly agreed that the parties shall be entitled to an injunction
or injunctions to prevent breaches of the provisions of this Agreement, each
Related Agreement and to enforce specifically the terms and provisions hereof
in any court of the United States or any state thereof having jurisdiction,
this being in addition to any other remedy to which they may be entitled at
law or equity.
11.16. RESTRICTIONS ON FURTHER ACQUISITIONS. Notwithstanding anything
contained herein to the contrary, no Purchaser, without the prior written
consent of the Board of Directors, shall be entitled to acquire any
additional shares of Common Stock, or any additional rights, options,
warrants or convertible or exchangeable securities entitling the holders
thereof to subscribe for or purchase or otherwise acquire shares of Common
Stock, if, after giving effect to such acquisition, the aggregate amount of
such shares of Common Stock (including all shares of Common Stock which could
be acquired at such time pursuant to all rights, options, warrants or
convertible or exchangeable securities then outstanding) held by all
Purchasers would exceed 49% of the Fully Diluted Outstanding Common Stock.
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11.17. REDEMPTION NOTES. While any Redemption Notes are outstanding, the
Company may not take any of the actions described in Section 2(a) of the
Certificate of Designation or fail to observe any of the covenants set forth
in Article 6 of this Agreement without the prior approval from the holders of
at least 66 2/3% of the then outstanding Redemption Notes.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed as of the date and year first above written.
PAULA FINANCIAL
By: /s/ Roger G. Teig
----------------------------------
Name:
Title:
PURCHASERS:
CONNING INSURANCE CAPITAL LIMITED
PARTNERSHIP II
By: /s/ Gerard Vecchio
----------------------------------
General Partner
CONNING INSURANCE CAPITAL
INTERNATIONAL PARTNERS II
By: /s/ Gerard Vecchio
----------------------------------
General Partner
CONNING INSURANCE CAPITAL LIMITED
PARTNERSHIP III
By: /s/ Gerard Vecchio
----------------------------------
General Partner
CONNING INSURANCE CAPITAL
INTERNATIONAL PARTNERS III, L.P.
By: /s/ Gerard Vecchio
----------------------------------
General Partner
[SIGNATURE PAGE TO SERIES A PREFERRED STOCK PURCHASE AGREEMENT]
<PAGE>
SAUGATUCK CAPITAL COMPANY
By: /s/ Owen S. Crihfield
---------------------------------
RFE INVESTMENT PARTNERS IV, L.P.
By RFE Associates IV, L.P., its
General Partner
By:
---------------------------------
[SIGNATURE PAGE TO SERIES A PREFERRED STOCK PURCHASE AGREEMENT]
<PAGE>
WARRANT AGREEMENT
WARRANT AGREEMENT (including all amendments, modifications or
supplements thereto, this "Agreement"), dated as of August 3, 1994, among
PAULA FINANCIAL, a California corporation (the "Company") and each of the
Persons listed on Annex 1 hereto (collectively the "Placement Agents").
RECITALS:
A. In consideration of services rendered by the Placement Agents in
connection with the issuance and sale of the Company's Series A Preferred
Stock, no par value (the "Series A Preferred Stock") to the Persons listed on
Schedule 1.01 (collectively the "Purchasers") to that certain Series A
Preferred Stock Purchase Agreement dated as of even date herewith (the
"Series A Preferred Stock Purchase Agreement") among the Company and the
Purchasers, the Company has agreed to issue to the Placement Agents
an aggregate number of 82,353 warrants of the Company, each such warrant
representing the right to purchase one share of Common Stock upon the terms
and subject to the conditions hereinafter set forth (individually a "Warrant"
and collectively the "Warrants").
B. The capitalized terms used in this Agreement have the respective
meanings ascribed to them in Section 6.
AGREEMENT:
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties to this Agreement hereby agree as
follows:
1. FORM, EXECUTION AND TRANSFER OF WARRANT CERTIFICATES
1.01. FORM OF WARRANT CERTIFICATES. The warrant certificates
(individually a "Warrant Certificate" and collectively the "Warrant
Certificates") evidencing the Warrants, and the forms of assignment and of
election to purchase shares to be attached thereto, shall be substantially in
the form set forth in EXHIBIT A hereto and may have such letters, numbers or
other marks of identification or designation as the Company may deem
appropriate and as are not inconsistent with the provisions of this
Agreement, or as may be required to comply with any law or with any rule or
regulation made pursuant thereto or to conform to usage. The Warrant
Certificates shall be dated as of the date of issuance thereof by the
Company, either upon initial issuance or upon transfer or exchange, and on
their face shall initially entitle the holders thereof to purchase the number
of shares of Common Stock equal to the number of Warrants represented by such
Certificate (which number may be a fractional number) at the price of $17.00
per share (the "Purchase Price"), but the number of such shares and
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the Purchase Price shall be subject to adjustment as provided herein.
1.02. EXECUTION OF WARRANT CERTIFICATES; REGISTRATION BOOKS;
PLACEMENT AGENT REPRESENTATIONS.
(a) EXECUTION OF WARRANT CERTIFICATES. The Warrant Certificates
shall be executed on behalf of the Company by its President, one of its Vice
Presidents or any other officer of the Company authorized by the Board of
Directors, which execution shall be attested by the Secretary or an Assistant
Secretary of the Company. In case any officer of the Company who shall have
signed any Warrant Certificate shall cease to be such officer of the Company
before issuance and delivery by the Company of such Warrant Certificate, such
Warrant Certificate, nevertheless, may be issued and delivered with the same
force and effect as though the individual who signed such Warrant Certificate
may be signed on behalf of the Company by any individual who, at the actual
date of the execution of such Warrant Certificate, shall be a proper officer
of the Company to sign such Warrant Certificate, although at the date of the
execution of this Agreement any such individual was not such an officer.
(b) REGISTRATION BOOKS. The Company will keep or cause to be kept
at its office maintained at the address of the Company set forth in Section
7.02 hereof, or at such other office of the Company in the United States of
America of which the Company shall have given notice to each holder of
Warrant Certificates, books for registration and transfer of the Warrant
Certificates issued hereunder. Such books shall show the names and addresses
of the respective holders of the Warrant Certificates, the registration
number and the number of Warrants evidenced on its face by each of the
Warrant Certificates and the date of each of the Warrant Certificates.
(c) PLACEMENT ACCENT REPRESENTATIONS. Each Placement Agent is an
"accredited investor" as defined in Regulation D under the Securities Act,
and is acquiring the Warrants solely for its own account for the purpose of
investment and not with a view to or for sale in connection with any
distribution thereof, and it has no present intention or plan to effect any
distribution of the Warrants. Each Placement Agent acknowledges that it is
able to bear the financial risks associated with an investment in the
Warrants and that it has been given full access to such records of
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the Company and the Subsidiaries and to the officers of the Company and the
Subsidiaries as it has deemed necessary and appropriate to conducting its due
diligence investigation. The Warrants will bear a legend to the following
effect:
"The securities represented by this certificate have not been registered
under the Securities Act of 1933, as amended, or the laws of the State of
California or elsewhere, and may not be sold or transferred except in
compliance with that Act and such laws."
1.03. TRANSFER, SPLIT UP, COMBINATION AND EXCHANGE OF WARRANT
CERTIFICATES; LOST OR STOLEN WARRANT CERTIFICATES; ETC.
(a) TRANSFER, SPLIT UP, ETC. Any Warrant Certificate, with or
without other Warrant Certificates, may be transferred, split up, combined or
exchanged for another Warrant Certificate or Warrant Certificates, entitling
the registered holder or transferee thereof to purchase a like number of
shares of Common Stock as the Warrant Certificate or Warrant Certificates
surrendered then entitled such registered holder to purchase. Any registered
holder desiring to transfer, split up, combine or exchange any Warrant
Certificate shall make such request in writing delivered to the Company, and
shall surrender the Warrant Certificate or Warrant Certificates to be
transferred, split up, combined or exchanged at the office of the Company
referred to in Section 1.02(b) hereof. Thereupon the Company shall deliver
promptly to the Person entitled thereto a Warrant Certificate or Warrant
Certificates, as the case may be, as so requested.
(b) LOSS, THEFT, ETC. Upon receipt by the Company of evidence
reasonably satisfactory to it of the ownership of and the loss, theft,
destruction or mutilation of any Warrant Certificate and (i) in the case of
loss, theft or destruction, of indemnity reasonably satisfactory to it, or
(ii) in the case of mutilation, upon surrender and cancellation thereof, the
Company at its own expense will execute and deliver, in lieu thereof, a new
Warrant Certificate of like tenor to the registered owner in lieu of the
Warrant Certificate so lost, stolen, destroyed or mutilated.
1.04. SUBSEQUENT ISSUANCE OF WARRANT CERTIFICATES. Subsequent to
their original issuance, no Warrant Certificates shall be issued except (a)
Warrant Certificates issued upon any transfer, combination, split up or
exchange of Warrants pursuant to Section 1.03(a) hereof, (b) Warrant
Certificates issued in replacement of mutilated, destroyed, lost or stolen
Warrant Certificates pursuant to Section 1.03(b) hereof and (c) Warrant
Certificates issued pursuant to Section 2.03 hereof upon the partial exercise
of any Warrant Certificate to evidence the unexercised portion of such
Warrant Certificate.
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2. EXERCISE OF WARRANTS; PURCHASE PRICE
2.01. EXERCISE OF WARRANTS. At any time on or after the Closing Date
and prior to the Expiration Date, the holder of any Warrant Certificate may
exercise the Warrants evidenced thereby in whole or in part, by surrender of
such Warrant Certificate, with an election to purchase (a form of which is
attached hereto as part of the form of Warrant Certificate attached as
Exhibit A) attached thereto duly executed, to the Company at its office
referred to in Section 1.02(b) hereof, together with payment of the Purchase
Price (payable as set forth below) for each share of Common Stock as to which
the Warrants are exercised. The Purchase Price shall be payable (a) in cash
or by certified or official bank check payable to the order of the Company or
by wire transfer of immediately available funds to the account of the Company
or (b) by delivery of Warrant Certificates to the Company for cancellation in
accordance with the following formula: in exchange for each share of Common
Stock issuable on exercise of each Warrant represented by any Warrant
Certificate any holder thereof so delivers for cancellation, such holder
shall receive such number of shares of Common Stock as is equal to the
product of (i) the number of shares of Common Stock issuable upon exercise of
such Warrant at such time multiplied by (ii) a fraction, the numerator of
which is the Fair Market Value per share of Common Stock at such time minus
the Purchase Price per share of Common Stock at such time, and the
denominator of which is the Fair Market Value per share of Common Stock at
such time.
2.02. ISSUANCE OF COMMON STOCK. Upon timely receipt of a Warrant
Certificate, with the form of election to purchase duly executed,
accompanied by payment of the Purchase Price for each of the share to be
purchased in the manner provided in Section 2.01 and an amount equal to any
applicable transfer tax (if not payable by the Company as provided in
Section 3.03 hereof), the Company shall thereupon promptly cause
certificates for the number of shares (including any fractional shares)
of Common Stock then being purchased to be delivered to or upon the order
of the registered holder of such Warrant Certificate.
2.03. UNEXERCISED WARRANTS. In case the registered holder
of any Warrant Certificate shall exercise less than all the
Warrants evidenced thereby, a new Warrant Certificate evidencing Warrants
equal in number to the number of Warrants remaining unexercised
shall be issued by the Company to the registered holder of such Warrant
Certificate or to its duly authorized assigns.
2.04. CANCELLATION AND DESTRUCTION OF WARRANT CERTIFICATES. All
Warrant Certificates surrendered to the Company for the purpose of exercise,
exchange, substitution or transfer shall be cancelled by it, and no Warrant
Certificates shall be issued in lieu thereof except as expressly permitted by
any of the
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provisions of this Agreement. The Company shall cancel and return any other
Warrant Certificates purchased or acquired by the Company otherwise than upon
the exercise thereof.
3. RESERVATION AND AVAILABILITY OF SHARES OF COMMON STOCK; TRANSFER
TAXES; REPRESENTATIONS.
3.01. RESERVATION OF COMMON STOCK. The Company shall at all times
reserve and keep available out of its authorized but unissued shares of
Common Stock, solely for the purpose of effecting the exercise of the
Warrants, such number of its shares of Common Stock as shall from time to
time be sufficient to effect the exercise of all outstanding Warrants, and if
at any time the number of authorized but unissued shares of Common Stock
shall not be sufficient to effect the exercise of all then outstanding
Warrants, the Company shall take such action as may be necessary to increase
its authorized but unissued shares of Common Stock to such number of shares
as shall be sufficient for such purpose.
3.02. COMMON STOCK TO BE DULY AUTHORIZED AND ISSUED, FULLY PAID AND
NONASSESSABLE. The Company covenants and agrees that it will take all such
action as may be necessary to ensure that all shares of Common Stock
delivered upon the exercise of any Warrants, at the time of delivery of the
certificates for such shares, shall be duly and validly authorized and issued
and fully paid and nonassessable and the issuance of such shares will not be
subject to preemptive or other similar contractual rights of any other
stockholder of the Company.
3.03. TRANSFER TAXES. The Company further covenants and agrees that
it will pay when due and payable any and all federal and state transfer taxes
and charges that may be payable in respect of the initial issuance or deliver
of (a) each Warrant Certificate and (b) each share of Common Stock issued
upon the exercise of any Warrant. The Company shall not, however, be required
to (y) pay any transfer tax that may be payable in respect of the transfer or
delivery of Warrant Certificates or the issuance or delivery of certificates
for shares of Common Stock in a name other than that of the registered holder
of the Warrant Certificates evidencing any Warrant surrendered for exercise
or (z) issue or deliver any such certificates for shares of Common Stock upon
the exercise of any Warrant until any such tax shall have been paid (any such
tax being payable by the holder of such Warrant Certificate at the time of
surrender).
3.04. COMMON STOCK RECORD DATE. Each Person in whose name any
certificate for shares of Common Stock is issued upon the exercise of
Warrants shall for all purposes be deemed to have become the holder of record
of the Common Stock represented thereby on, and such certificate shall be
dated, the date upon which the Warrant Certificate evidencing such Warrants
was duly surrendered
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<PAGE>
with an election to purchase attached thereto duly executed and payment of
the aggregate Purchase Price (and any applicable transfer taxes, if payable
by such Person) was made in accordance with the terms thereof. Prior to the
exercise of the Warrants evidenced thereby, the holder of a Warrant
Certificate shall not be entitled to any rights of a stockholder in the
Company with respect to shares for which the Warrants shall be exercisable,
including, without limitation, the right to vote, to receive dividends or
other distributions, and shall not be entitled to receive any notice of any
proceedings of the Company, except as provided herein or in any other
applicable agreement between the Company and such holder.
3.05. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
hereby represents and warrants to the Placement Agents as of the Closing Date
as follows:
(a) ORGANIZATION, STANDING AND POWER OF THE COMPANY. Each of the
Company and the Subsidiaries is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation. Each of the Company and the Subsidiaries has all requisite
power and authority to own, lease and operate its properties and assets and
to conduct its business as now being conducted and is duly qualified to do
business in good standing in those foreign jurisdictions in which such
qualification is required.
(b) AUTHORITY; ENFORCEABILITY; NO CONFLICT. The Company has all
requisite corporate power and authority to enter into this Agreement, to
issue and sell the Warrants, and to carry out its obligations hereunder. The
execution, delivery and performance of this Agreement by the Company and the
issuance and sale of the Warrants by the Company have been duly and validly
authorized by all requisite corporate proceedings on the part of the Company.
This Agreement is a valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms, except that (i) such
enforcement may be subject to bankruptcy, insolvency, reorganization,
moratorium, rehabilitation, liquidation, conservatorship, receivership or
other similar laws now or hereafter in effect relating to creditors' rights
generally and (ii) the remedy of specific performance and injunctive and
other forms of equitable relief may be subject to equitable defenses and to
the discretion of the court before which any proceeding therefor may be
brought. The execution and delivery of this Agreement by the Company does
not, and the consummation by the Company of the transactions contemplated
hereby, will not result in or constitute: (a) a default, breach or violation
of or under the Articles of Incorporation or the By-Laws, (b) a default,
breach or violation of or under any mortgage, deed of trust, indenture, note,
bond, license, lease agreement or other instrument or obligation to which the
Company or any Subsidiary is a party or by which any of
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<PAGE>
their respective properties or assets are bound if such default, breach or
violation could reasonably be expected to have a Material Adverse Effect, (c)
a violation of any statute, rule, regulation, order, judgment or decree of
any court, public body or authority by which the Company, any Subsidiary or
any of their respective properties or assets are bound if such violation
could reasonably be expected to have a Material Adverse Effect, (d) an event
which (with notice or lapse of time or both) would permit any Person to
terminate, accelerate the performance required by, or accelerate the maturity
of any indebtedness or obligation of the Company or any Subsidiary under any
agreement or commitment to which the Company or any Subsidiary is a party or
by which the Company or any Subsidiary is bound or by which any of their
respective properties or assets are bound if such termination or acceleration
could reasonably be expected to have a Material Adverse Effect, (e) the
creation or imposition of any lien, charge or encumbrance on any property of
the Company or any Subsidiary under any agreement or commitment to which the
Company or any Subsidiary is a party or by which the Company or any
Subsidiary is bound or by which any of their respective properties or assets
are bound if such creation or imposition could reasonably be expected to have
a Material Adverse Effect, or (f) an event which would require any consent
under any agreement to which the Company or any Subsidiary is a party or by
which the Company or any Subsidiary is bound or by which any of their
respective properties or assets are bound if the failure to obtain such
consent could reasonably be expected to have a Material Adverse Effect (other
than the consent of Wells Fargo Bank which is not expected to be obtained due
to the repayment of all obligations owed to Wells Fargo Bank).
(c) CAPITALIZATION. The authorized capital stock of the Company
consists of (a) 10,000,000 shares of Common Stock, of which 1,795,419 shares
are outstanding, 941,177 are reserved for issuance upon conversion of the
Company's Series A Preferred Stock, 275,000 are reserved for issuance under
the Stock Option Plan, 82,353 are reserved for issuance upon the exercise of
the Warrants and 30,000 are reserved for issuance upon the exercise of
options issued to Jeffrey A. Snider (the "Snider Options") and (b) 5,000,000
shares of Preferred Stock, no par value, of which 941,777 have been
designated as Series A Preferred Stock, 941,777 of which shall be issued and
outstanding on the Closing Date. All of the outstanding shares of Common
Stock have been duly authorized and validly issued, and are fully paid and
non-assessable. Except for the options issued or to be issued under the
Stock Option Plan, the Warrants, the Snider Options or as provided in the
Series A Preferred Stock Purchase Agreement, there are no outstanding
preemptive, conversion or other rights, options, warrants or agreements
granted or issued by or binding upon the Company for the purchase or
acquisition by any other Person of any shares of capital stock of the Company
or any other securities convertible into, exchangeable for or evidencing the
right to subscribe for any
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<PAGE>
shares of such capital stock. Except for the Company's obligations under the
ESOP, the Tender Offer, the Schnider Agreement and the Certificate of
Designation, the Company is not subject to any obligation (contingent or
otherwise) to repurchase or otherwise acquire or retire any shares of its
capital stock or any convertible securities, rights or options of the type
described in the preceding sentence. Except as provided in the Series A
Preferred Stock Purchase Agreement, the Company is not a party to any
agreement granting registration rights to any person with respect to any of
its equity or debt securities. Except as set forth in the Voting Agreement
and the Shareholders Agreement, the Company is not a party to, and it has no
Knowledge of, any agreement restricting the voting or transfer of any shares
of the capital stock of the Company. Except as set forth on Schedule 3.05(c),
the offer and sale of all capital stock, convertible securities, rights or
options of the Company issued prior to the Closing Date complied with or were
exempt from all applicable federal and state securities laws and no
stockholder has a right of rescission or damages with respect thereto.
4. ADJUSTMENT OF PURCHASE PRICE AND NUMBER OF WARRANT SHARES; FRACTIONAL
SHARES
4.01. ADJUSTMENT UPON EXTRAORDINARY COMMON STOCK EVENT. Upon the
happening of an Extraordinary Common Stock Event, the Purchase Price shall,
simultaneously with the happening of such Extraordinary Common Stock Event,
be adjusted by multiplying the purchase Price by a fraction, the numerator of
which shall be the number of shares of Common Stock outstanding immediately
prior to such Extraordinary Common Stock Event and the denominator of which
shall be the number of shares of Common Stock outstanding immediately after
such Extraordinary Common Stock Event, and the product so obtained shall
thereafter be the Purchase Price. The Purchase Price, as so adjusted, shall
be readjusted in the same manner upon the happening of any successive
Extraordinary Common Stock Event or Events.
4.02. DIVIDENDS. In the event the Company shall make or issue, or
shall fix a record date for the determination of holders of Common Stock
entitled to receive (and shall thereafter make or issue), a dividend or other
distribution with respect to the Common Stock payable in (i) securities of
the Company other than shares of Common Stock, or (ii) other assets
(excluding cash dividends or distributions), then and in each such event
provision shall be made so that the holders of the Warrants shall receive
upon exercise thereof in addition to the number of shares of Common Stock
receivable thereupon, the number of securities or such other assets of the
Company which they would have received had their Warrants been exercised into
Common Stock on the date of such event and had they thereafter, during the
period from the date of such event to and including the date of exercise of
the Warrants, retained such
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securities or such other assets receivable by them during such period, giving
application to all other adjustments called for during such period under this
Section 4 with respect to the rights of the holders of the Warrants.
4.03. CAPITAL REORGANIZATION OR RECLASSIFICATION. If the Common
Stock issuable upon the exercise of the Warrants shall be changed into the
same or different number of shares of any class or classes of capital stock,
whether by capital reorganization, recapitalization, reclassification or
otherwise (other than a subdivision or combination of shares or stock
dividend provided for elsewhere in this Section 4, or the sale of all or
substantially all of the Company's capital stock or assets to any other
person), then and in each such event the holders of the Warrants shall have
the right thereafter to exercise such Warrants into the kind and amount of
shares of capital stock and other securities and property receivable upon
such reorganization, recapitalization, reclassification or other change by
the holders of the number of shares of Common Stock into which such Warrants
might have been exercised immediately prior to such reorganization,
recapitalization, reclassification or change, all subject to further
adjustment as provided herein.
4.04. DE MINIMIS CHANGES IN PURCHASE PRICE. No adjustment in the
Purchase Price shall be required unless such adjustment would require an
increase or decrease of at least one percent (1%) of the Purchase Price;
provided, however, that any adjustments that, at the time of the calculation
thereof, are less than one percent (1%) of the Purchase Price at such time
and by reason of this Section 4.04 are not required to be made at such time
shall be carried forward and added to any subsequent adjustment or
adjustments for purposes of determining whether such subsequent adjustments,
as so supplemented, exceed the one percent (1%) amount, all adjustments
deferred prior thereto and not previously made shall then be made. In any
case, all such adjustments being carried forward pursuant to this Section
4.04 shall be given effect upon the exercise of any Warrant by any holder
thereof for purposes of determining the Purchase Price thereof.
4.05. ADJUSTMENT OF NUMBER OF SHARES ISSUABLE PURSUANT TO WARRANTS.
Upon each adjustment of the Purchase Price as a result of the calculations
made in this Section 4, each Warrant outstanding immediately prior to the
making of such adjustment shall thereafter evidence the right to purchase, at
the adjusted Purchase Price, that number of shares of Common Stock obtained
by (i) multiplying the number of shares of Common Stock covered by such
Warrant immediately prior to such adjustment by the Purchase Price in effect
immediately prior to such adjustment and (ii) dividing the product so
obtained by the Purchase Price in effect immediately after such adjustment.
All Warrants originally issued by the Company hereunder shall, subsequent to
any adjustment made
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<PAGE>
to the Purchase Price hereunder, evidence the right to purchase, at the
adjusted Purchase Price, the number of shares of Common Stock determined to
be purchasable from time to time hereunder upon exercise of such Warrants,
all subject to further adjustment as provided herein. Irrespective of any
adjustment or change in the Purchase Price or the number of shares of Common
Stock issuable upon the exercise of Warrants, the Warrant Certificates
theretofore and thereafter issued may continue to express the Purchase Price
per share of Common Stock and the number of shares of Common Stock that were
expressed upon the initial Warrant Certificates issued hereunder.
4.06. CERTIFICATE AS TO ADJUSTMENTS; NOTICE BY COMPANY. In each case
of an adjustment or readjustment of the Purchase Price, the Company at its
expense will furnish each holder of Warrants so affected with a certificate
prepared by the Treasurer or Chief Financial Officer of the Company, showing
such adjustment or readjustment, and stating in detail the facts upon which
such adjustment or readjustment is based. Within 90 days of the end of each
fiscal year of the Company, the Company at its expense will furnish each
holder of Warrants so affected with a certificate prepared by the independent
public accountants to the Company, showing such adjustment or readjustment,
and stating in detail the facts upon which such adjustment or readjustment is
based.
4.07. CASH IN LIEU OF FRACTIONAL SHARES. No fractional shares of
Common Stock or scrip representing fractional shares shall be issued upon the
exercise of the Warrants. Instead of any fractional shares of Common Stock
which would otherwise be issuable upon exercise of the Warrants, the Company
shall pay to the holder of the Warrants which were exercised a cash
adjustment in respect of such fractional shares in an amount equal to the
same fraction of the fair market value per share of the Common Stock (as
determined in a reasonable manner prescribed by the Board of Directors) at
the close of business on the date of exercise of the Warrants. The
determination as to whether or not any fractional shares are issuable shall
be based upon the aggregate number of Warrants being exercised at any one
time by any holder thereof, not upon each Warrant being exercised.
5. REGISTRATION RIGHTS
The Placement Agents shall have the right to register their Registrable
Securities in accordance with the following provisions:
5.01. INCIDENTAL REGISTRATION.
(a) If the Company at any time proposes to register any of its equity
securities under the Securities Act (other than a registration (i) relating to
shares of Common Stock issuable upon exercise of employee stock options or
in connection with any
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employee benefit or similar plan of the Company or (ii) in connection with an
acquisition by the Company of another company) in a manner which would permit
registration of Registrable Securities for sale to the public under the
Securities Act, it shall each such time, subject to the provisions of Section
5.01(b), give prompt written notice to all holders of record of Registrable
Securities of its intention to do so and of such holders' rights under this
Section 5.01, at least 30 days prior to the anticipated filing date of the
Registration Statement relating to such registration. Such notice shall offer
all such holders the opportunity to include in such Registration Statement
such number of Registrable Securities as each such holder may request. Upon
the written request of any such holder made within 20 days after the receipt
of the Company's notice (which request shall specify the number of
Registrable Securities intended to be disposed of by such holder and the
intended method of disposition thereof), the Company will use its best
efforts to effect the registration under the Securities Act of all
Registrable Securities which the Company has been so requested to register by
the holders thereof; PROVIDED, that (x) if such registration involves an
underwritten offering, all holders of Registrable Securities requesting to be
included in the Company's registration must sell their Registrable Securities
to the underwriters selected by the Company on the same terms and conditions
as apply to the Company; and (y) if, at any time after giving written notice
of its intention to register any securities pursuant to this Section 5.01(a)
and prior to the Effective Date of the Registration Statement filed in
connection with such registration, the Company shall determine for any reason
not to register such securities, the Company shall give written notice to all
holders of Registrable Securities and shall thereupon be relieved of its
obligation to register any Registrable Securities in connection with such
registration. If a registration pursuant to this Section 5.01(a) involves an
underwritten public offering, any holder of Registrable Securities requesting
to be included in such registration may elect, in writing prior to the date
of the final "preliminary prospectus" circulated in connection with the
offering of the Registration Statement filed in connection with such
registration, not to register such Registrable Securities in connection with
such registration. The Company shall pay all Registration Expenses in
connection with each registration of Registrable Securities requested
pursuant to this Section 5.01. However, each holder of Registrable Securities
shall pay all underwriting discounts and commissions and transfer taxes, if
any, relating to the sale or disposition of such holder's Registrable
Securities pursuant to a Registration Statement effected pursuant to this
Section 5.01.
(b) PRIORITY IN INCIDENTAL REGISTRATIONS. If a registration
pursuant to this Section 5.01 involves an underwritten offering and the
managing underwriter advises the Company in writing that, in its good faith
view, the number of equity
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securities (including all Registrable Securities) which the Company, the
holders of Registrable Securities and any other persons intend to include in
such registration exceeds the largest number of securities which can be sold
without having a material adverse effect on such offering, including the
price at which such Registrable Securities can be sold, the Company will
include in such registration (x) if such registration is initiated by the
holders of Preferred Registrable Securities, (i) FIRST, Preferred Registrable
Securities proposed to be registered by the holders thereof, pro rata based
on the number of securities proposed to be registered by each such Person,
(ii) SECOND, securities that the Company proposes to issue and sell for its
own account and (iii) THIRD, Registrable Securities and all other securities
proposed to be registered by the holders thereof, pro rata based on the
number of securities proposed to be registered by each such Person and (y) if
such registration is initiated by the Company or any other holder of
securities, (i) FIRST, securities that the Company proposes to issue and sell
for its own account, (ii) SECOND, Preferred Registrable Securities proposed
to be registered by the holders thereof, pro rata based on the number of
securities proposed to be registered by each such Person and (iii) THIRD,
Registrable Securities and all other securities proposed to be registered by
the holders thereof, pro rata based on the number of securities proposed to
be registered by each such Person.
5.02. HOLDBACK AGREEMENTS.
(a) If any registration of Registrable Securities shall be in
connection with an underwritten public offering, each holder of Registrable
Securities agrees not to effect any sale or distribution, including any
private placement or any sale pursuant to Rule 144 or any successor
provision, under the Securities Act, of any Registrable Securities, and not
to effect any such sale or distribution of any other equity security of the
Company or of any security convertible into or exchangeable or exercisable
for any equity security of the Company (in each case, other than as part of
such underwritten public offering) during the seven days prior to, and during
the 90 day period which begins on the Effective Date of such Registration
Statement (except as part of such registration) provided that each holder of
Registrable Securities has received written notice of such registration at
least two Business Days prior to the anticipated beginning of the seven day
period referred to above.
(b) If any registration of Registrable Securities shall be in
connection with an underwritten public offering, the Company agrees (i) not
to effect any sale or distribution of any of its equity securities or of any
security convertible into or exchangeable or exercisable for any equity
security of the Company (other than any such sale or distribution of such
securities in connection with any merger or consolidation by the Company or
any
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Affiliate or the acquisition by the Company or an Affiliate of the Company of
the capital stock or substantially all the assets of any other Person or in
connection with an employee stock ownership or other benefit plan) during the
seven days prior to, and during the 90 day period which begins on, the
Effective Date of such Registration Statement (except as part of such
registration) and (ii) that any agreement entered into after the date hereof
pursuant to which the Company issues or agrees to issue any privately placed
equity securities shall contain a provision under which the holders of such
securities agree not to effect any sale or distribution of any such
securities during the period referred to in the foregoing clause (i),
including any sale pursuant to Rule 144 under the Securities Act (except as
part of such registration, if permitted).
5.03. REGISTRATION PROCEDURES. In connection with any offering of
Registrable Securities registered pursuant to this Section 5, the Company
shall:
(a) Prepare and file with the Commission within 90 days after
receipt of a request for registration, a Registration Statement on any form
for which the Company then qualifies or which counsel for the Company shall
deem appropriate, and which form shall be available for the sale of the
Registrable Securities in accordance with the intended methods of
distribution thereof, and use its best efforts to cause such Registration
Statement to become and remain Effective as provided herein, PROVIDED that
before filing with the Commission a Registration Statement or disclosure
document constituting part of a Registration Statement or any amendments or
supplements thereto, the Company will (x) furnish to one counsel selected by
the holders of 67% of the Registrable Securities covered by such Registration
Statement copies of all such documents proposed to be filed for said
counsel's review and comment and (y) notify each holder of Registrable
Securities covered by such Registration Statement of any stop order issued or
threatened by the Commission and take all reasonable actions required to
prevent the entry of such stop order or to remove it if entered.
(b) Prepare and file with the Commission such amendments and
supplements to such Registration Statement and any disclosure document
constituting part of such Registration Statement used in connection therewith
as may be necessary to keep Effective such Registration Statement for a
period of not less than 90 days or such shorter period which will terminate
when all Registrable Securities covered by such Registration Statement have
been sold (but not before the expiration of the applicable prospectus
delivery period, if applicable, referred to in Section 4(3) of the Securities
Act and Rule 174, or any successor thereto, if applicable), and comply with
the provisions of the Securities Act with respect to the disposition of all
securities covered by such Registration Statement during such period in
accordance with the
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intended methods of disposition by the sellers thereof set forth in such
Registration Statement.
(c) Furnish to each holder and each underwriter, if any, of
Registrable Securities covered by such Registration Statement such number of
copies of such Registration Statement, each amendment and supplement thereto
(in each case including all exhibits thereto), and the disclosure document
included in such Registration Statement (including each preliminary
disclosure document), in conformity with the requirements of the Securities
Act, and such other documents as any holder of Registrable Securities may
reasonably request in order to facilitate the disposition of the Registrable
Securities owned by such holder.
(d) Use its best efforts to register or qualify such Registrable
Securities under such other state securities or "blue sky" laws of such
jurisdictions as any holder, and underwriter, if any, of Registrable
Securities covered by such Registration Statement reasonably requests and do
any and all other acts and things which may be reasonably necessary or
advisable to enable such holder and each underwriter, if any, to consummate
the disposition in such jurisdictions of the Registrable Securities owned by
such holder; PROVIDED that the Company will not be required to (x) qualify
generally to do business in any jurisdiction where it would not otherwise be
required to qualify but for this Section 5.03(d), (y) subject itself to
taxation in any such jurisdiction or (z) consent to general service of
process in any such jurisdiction.
(e) Use its best efforts to cause the Registrable Securities
covered by such Registration Statement to be registered with or approved by
such other governmental agencies or authorities as may be necessary by virtue
of the business and operations of the Company to enable the holder or holders
thereof to consummate the disposition of such Registrable Securities.
(f) Immediately notify each holder of such Registrable Securities
at any time when a disclosure document relating thereto is required to be
delivered under the Securities Act of the happening of any event which comes
to the Company's attention if as a result of such event the disclosure
document included in such Registration Statement contains an untrue statement
of a material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, and the
Company will promptly prepare and furnish to such holder a supplement or
amendment to such disclosure document so that, as thereafter delivered to the
purchasers of such Registrable Securities, such disclosure document will not
contain an untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements
therein not misleading.
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(g) Use its best efforts to cause all such Registrable Securities
to be listed on a national securities exchange (including NASDAQ) and on each
securities exchange on which similar securities issued by the Company may
then be listed, and enter into such customary agreements including a listing
application and indemnification agreement in customary form, and to provide a
transfer agent and registrar for such Registrable Securities covered by such
Registration Statement no later than the Effective Date of such Registration
Statement.
(h) Enter into such customary agreements (including an
underwriting agreement in customary form) and take all such other actions as
the holders of at least 51% of the Registrable Securities being covered by
such Registration Statement or the underwriters retained by such holders, if
any, reasonably request in order to expedite or facilitate the disposition of
such Registrable Securities, including customary representations, warranties,
indemnities and agreements.
(i) Make available for inspection by any holder of Registrable
Securities covered by such Registration Statement, any underwriter
participating in any disposition pursuant to such Registration Statement, and
any attorney, accountant or other agent retained by any such holder or
underwriter (collectively, the "Inspectors"), all financial and other records,
pertinent corporate documents and properties of the Company (collectively,
"Records"), if any, as shall be reasonably necessary to enable them to
exercise their due diligence responsibility, and cause the Company's and its
Affiliates' officers, directors and employees to supply all information and
respond during normal business hours to all inquiries reasonably requested by
any such Inspector in connection with such Registration Statement.
(j) Use its best efforts to obtain a "cold comfort" letter from
the Company's independent public accountants in customary form and covering
such matters of the type customarily covered by "cold comfort" letters as the
holders of least 51% of the Registrable Securities being sold reasonably
request.
(k) Otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission, and make available to the holders of
Registrable Securities, as soon as reasonably practicable, an earnings
statement covering a period of at least twelve months, beginning with the
first quarter after the Effective Date of the Registration Statement, which
earnings statement shall satisfy the provisions of Section 11(a) of the
Securities Act and Rule 158 thereunder.
It shall be a condition precedent to the obligation of the Company to take
any action with respect to securities of a holder of Registrable Securities
that such holder shall furnish to
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the Company such information regarding the securities held by such holder and
the intended method of disposition thereof as the Company shall reasonably
request and as shall be required in connection with the action taken by the
Company.
Each holder of Registrable Securities agrees that, upon receipt of any notice
from the Company of the happening of any event of the kind described in
Section 5.03(f), such holder will forthwith discontinue disposition of
Registrable Securities until such holder's receipt of the copies of the
supplemented or amended disclosure document contemplated by Section 5.03(f)
hereof, and, if so directed by the Company, such holder will deliver to the
Company (at the Company's expense) all copies (including, without limitation,
any and all drafts), other than permanent file copies, then in such holder's
possession, of the disclosure document covering such Registrable Securities
current at the time of receipt of such notice. In the event the Company shall
give any such notice, the period mentioned in Section 5.03(b) shall be
extended by the greater of the number of days during the period from and
including the date of the giving of such notice pursuant to Section 5.03(f)
hereof to and including the date when each holder of Registrable Securities
covered by such Registration Statement shall have received the copies of the
supplemented or amended disclosure document contemplated by Section 5.03
hereof.
5.04. INDEMNIFICATION.
(a) INDEMNIFICATION BY THE COMPANY. In the event of any
registration of any securities of the Company under the Securities Act
pursuant to this Agreement, the Company will indemnify and hold harmless, to
the full extent permitted by law, each of the holders of any Registrable
Securities covered by such Registration Statement, their respective directors
and officers, general partners, limited partners and managing directors, each
other person who participates as an underwriter in the offering or sale of
such securities and each other person, if any, who controls, is controlled by
or is under common control with any such holder or any such underwriter
within the meaning of the Securities Act (and directors, officers,
controlling persons, partners and managing directors of any of the
foregoing), against any and all losses, claims, damages or liabilities, joint
or several, and expenses (including any amounts paid in any settlement
effected with the Company's consent, which consent will not be unreasonably
withheld) to which such holder, any such director or officer or general or
limited partner or managing director or any such underwriter or controlling
person may become subject under the Securities Act, state securities or "blue
sky" laws, common law or otherwise, insofar as such losses, claims, damages
or liabilities (or actions or proceedings in respect thereof) or expenses
arise out of or are based upon (i) any untrue statement or alleged untrue
statement of any material fact contained, on the Effective Date thereof, in
any
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Registration Statement under which such securities were registered under the
Securities Act, any preliminary, final or summary disclosure document
contained therein, or any amendment or supplement thereto, (ii) any omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, or (iii)
any violation or alleged violation by the Company of any federal, state or
common law rule or regulation applicable to the Company and relating to
action required of or inaction by the Company in connection with any such
registration. The Company shall reimburse each such holder and each such
director, officer, general partner, limited partner, managing director or
underwriter and controlling person for any legal or any other expenses
reasonably incurred by them in connection with investigating or defending
such loss, claim, liability, action or proceeding, PROVIDED, that the Company
shall not be liable in any such case to the extent that any such loss, claim,
damage, liability (or action or proceeding in respect thereof) or expense
arises out of or is based upon any untrue statement or alleged untrue
statement or omission or alleged omission made in such Registration Statement
or amendment or supplement thereto or in any such preliminary, final or
summary disclosure document in reliance upon and in conformity with written
information furnished to the Company through an instrument duly executed by
such holder in its capacity as a holder of Registrable Securities in the
Company or any such director, officer, general or limited partner, managing
director or underwriter specifically stating that it is for use in the
preparation thereof; and, PROVIDED FURTHER, that the Company shall not be
liable to any holder of Registrable Securities, any person who participates
as an underwriter in the offering or sale of Registrable Securities, if any,
or any other person, if any, who controls such underwriter within the meaning
of the Securities Act, pursuant to this Section with respect to any
preliminary disclosure document or the final disclosure document or the final
disclosure document as amended or supplemented as the case may be, to the
extent that any such loss, claim, damage or liability of such underwriter or
controlling person results from the fact that such underwriter sold
Registrable Securities to a person to whom there was not sent or given, at or
prior to the written confirmation of such sale, a copy of the final
disclosure document or of the final disclosure document as then amended or
supplemented, whichever is most recent, if the Company has previously
furnished copies thereof to such underwriter and such final disclosure
document, as then amended or supplemented, had corrected any such
misstatement or omission. The indemnity provided for herein shall remain in
full force and effect regardless of any investigation made by or on behalf of
such holder or any such director, officer, general partner, limited partner,
managing director, underwriter or controlling person and shall survive the
transfer of such securities by such holder.
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(b) INDEMNIFICATION BY THE HOLDERS OF REGISTRABLE SECURITIES AND
UNDERWRITERS. The Company may require, as a condition to including any
Registrable Securities in any Registration Statement filed in accordance with
the provisions hereof, that the Company shall have received an undertaking
reasonably satisfactory to it from the holders of such Registrable Securities
or any underwriter, to indemnify and hold harmless (in the same manner and to
the same extent as set forth in paragraph (a) above) the Company and its
directors, officers, controlling persons and all other prospective sellers
and their respective directors, officers, general and limited partners,
managing directors, and their respective controlling persons with respect to
any statement or alleged statement in or omission or alleged omission from
such Registration Statement, any preliminary, final or summary disclosure
document contained therein, or any amendment or supplement, if such statement
or alleged statement or omission or alleged omission was made in reliance
upon and in conformity with written information furnished to the Company or
its representatives through an instrument duly executed by or on behalf of
such holder or underwriter specifically stating that it is for use in the
preparation of such Registration Statement, preliminary, final or summary
disclosure document or amendment or supplement, or a document incorporated by
reference into any of the foregoing. Such indemnity shall remain in full
force and effect regardless of any investigation made by or on behalf of the
Company or any of the holders of Registrable Securities, underwriters or any
of their respective directors, officers, general or limited partners,
managing directors or controlling persons and shall survive the transfer of
such securities by such holder, PROVIDED, HOWEVER, that no such holder shall
be liable in the aggregate for any amounts exceeding the product of the sale
price per Registrable Security and the number of Registrable Securities being
sold pursuant to such Registration Statement or disclosure document by such
holder.
(c) NOTICES OF CLAIMS, ETC. Promptly after receipt by an
indemnified party hereunder of written notice of the commencement of any
action or proceeding with respect to which a claim for indemnification may be
made pursuant to this Section 5.04, such indemnified party will, if a claim
in respect thereof is to be made against an indemnified party, promptly give
written notice to the indemnifying party of the commencement of such action,
PROVIDED that the failure of any indemnified party to give notice as provided
herein shall not relieve the indemnifying party of its obligations under the
preceding subsections of this Section, except to the extent that the
indemnifying party is actually materially prejudiced by such failure to give
notice. In case any such action is brought against an indemnified party,
unless in such indemnified party's counsel's reasonable professional judgment
a conflict of interest between such indemnified and indemnifying parties may
exist in respect of such claim, the indemnifying party will be entitled to
participate in and, jointly with any other
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indemnifying party similarly notified, to assume the defense thereof, to the
extent that it may wish, with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party for any legal
or other expenses subsequently incurred by the latter in connection with the
defense thereof, unless in such indemnified party's counsel's reasonable
professional judgment a conflict of interest between such indemnified and
indemnifying parties arises in respect of such claim after the assumption of
the defense thereof, and the indemnifying party will not be subject to any
liability for any settlement made without its consent (which consent shall
not be unreasonably withheld). No indemnifying party will consent to entry of
any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
indemnified party of a release from all liability in respect to such claim or
litigation. An indemnifying party who is not entitled to, or elects not to,
assume the defense of a claim will not be obligated to pay the fees and
expenses of more than one counsel in any single jurisdiction for all parties
indemnified by such indemnifying party with respect to such claim.
Notwithstanding anything to the contrary set forth herein, and without
limiting any of the rights set forth above, in any event any party will have
the right to retain, at its own expense, counsel with respect to the defense
of a claim.
(d) OTHER INDEMNIFICATION. Indemnification similar to that
specified in the preceding subsections of this Section 5.06 (with appropriate
modifications) shall be given by the Company and each holder of Registrable
Securities with respect to any registration or other qualification of
securities which is provided for in this Agreement or is otherwise provided
for by the Company under any federal or state law or regulation or
governmental authority other than the Securities Act.
(e) CONTRIBUTION. In order to provide for just and equitable
contribution in circumstances in which the indemnity agreement provided for
in this Section is for any reason held to be unenforceable although
applicable in accordance with its terms, the Company, the holders of
Registrable Securities and the underwriters shall contribute to the aggregate
losses, liabilities, claims, damages and expenses of the nature contemplated
by such indemnity agreement incurred by the Company, the holders of
Registrable Securities and the underwriters, in such proportions that the
underwriters are responsible for that portion represented by the percentage
that the underwriting discount appearing in the disclosure document bears to
the initial public offering price appearing therein and the Company and the
holders of Registrable Securities are responsible for the balance; PROVIDED,
HOWEVER, that no person guilty of fraudulent misrepresentation (within the
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meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. As between the Company and the holders of Registrable
Securities, such parties shall contribute to the aggregate losses,
liabilities, claims, damages and expenses of the nature contemplated by such
indemnity agreement in such proportion as shall be appropriate to reflect (x)
the relative benefits received by the Company, on the one hand, and the
holders of the Registrable Securities included in the offering on the other
hand, from the offering of the Registrable Securities and any other
securities included in such offering, and (y) the relative fault of the
Company, on the one hand, and the holders of the Registrable Securities
included in the offering, on the other, with respect to the statements or
omissions which resulted in such loss, liability, claim, damage or expense,
or action in respect thereof, as well as any other relevant equitable
considerations. The relative benefits received by the Company, on the one
hand, and the holders of the Registrable Securities on the other, with
respect to such offering shall be deemed to be in the same proportion as the
sum of the total purchase price paid to the Company in respect of the
Registrable Securities plus the total net proceeds from the offering of any
securities included in such offering (before deducting expenses) received by
the Company bears to the amount by which the total net proceeds from the
offering of Registrable Securities (before deducting expenses) received by
the holders of the Registrable Securities with respect to such offering
exceeds the purchase price paid to the Company in respect of the Registrable
Securities, and in each case the net proceeds received from such offering
shall be determined as set forth in the disclosure document. The relative
fault shall be determined by reference to, among other things, whether
theuntrue or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact relates to information supplied by
the Company or the holders of the Registrable Securities, the intent of the
parties and their relative knowledge, access to information and opportunity
to correct or prevent such statement or omission. The Company and the holders
of the Registrable Securities agree that it would not be just and equitable
if contribution pursuant to this Section were to be determined by pro rata
allocation or by any other method of allocation which does not take into
account the equitable considerations referred to herein. Notwithstanding
anything to the contrary contained herein, the Company and the holders of
Registrable Securities agree that any contribution required to be made by
such holder pursuant to this Section 5.04(e) shall not exceed the net
proceeds from the offering of Registrable Securities (before deducting
expenses) received by such holder with respect to such offering. For purposes
of this Section, each Person, if any, who controls a holder of Registrable
Securities or an Underwriter within the meaning of Section 15 of the
Securities Act shall have the same rights to contribution as such holder or
Underwriter, and each director of the Company, each officer of the
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Company who signed the Registration Statement, and each person, if any, who
controls the Company within the meaning of Section 15 of the Securities Act
shall have the same rights to contribution as the Company.
5.05. RULE 144. At all times after a public offering of any of the
Company's equity securities, the Company agrees that it will file in a timely
manner all reports required to be filed by it pursuant to the Exchange Act,
and, if at any time the Company is not required to file such reports, it will
make available to the public, to the extent required to permit the sale of
Warrant Shares by any holder of Registrable Securities pursuant to Rule 144,
current information about itself and its activities as contemplated by Rule
144 under the Securities Act, as such Rule may be amended from time to time.
Notwithstanding the foregoing, the Company may deregister any class of its
equity securities under Section 12 of the Exchange Act or suspend its duty to
file reports with respect to any class of its securities pursuant to Section
15(d) of the Exchange Act if it is then permitted to do so pursuant to the
Exchange Act and the rules and regulations thereunder.
6. DEFINITIONS AND ACCOUNTING TERMS
As used in this Agreement, the following terms shall have the following
meanings:
"Affiliate" shall mean any officer or director of the Company or
any Subsidiary or holder of five percent (5%) or more of any class of capital
stock of the Company or any Subsidiary, or any member of their respective
immediate families or any corporation or other entity directly or indirectly
controlled by one or more of such officers, directors or 5% stockholders or
members of their immediate families.
"Agreement" shall have the meaning assigned to such term in the
introductory sentence hereof.
"Articles of Incorporation" shall mean the Articles of
Incorporation of the Company, including all amendments, modifications or
supplements thereto.
"Board of Directors" shall mean the board of directors of the
Company as constituted from time to time.
"Business Day" shall mean any day except a Saturday, Sunday or
other day on which commercial banks in the State of California are authorized
by law or executive order to close.
"By-Laws" shall mean the By-Laws of the Company, including all
amendments, modifications or supplements thereto.
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"Certificate of Designation" shall mean the Certificate of
Designation of Series A Preferred Stock of the Company.
"Closing Date" shall mean the time and date scheduled for the
closing of the initial sale of the Series A Preferred Stock.
"Commission" shall mean the Securities and Exchange Commission or
any other federal agency then administering the Securities Act or Exchange
Act.
"Common Stock" shall mean (a) the Company's Common Stock, no par
value, as authorized on the date of this Agreement, (b) any other capital
stock of any class or classes (however designated) of the Company, authorized
on or after the date hereof, the holders of which shall have the right,
without limitation as to amount, either to all or to a share of the balance
of current dividends and liquidating dividends after the payment of dividends
and distributions on any shares entitled to preference, and the holders of
which shall ordinarily, in the absence of contingencies or in the absence of
any provision to the contrary in the Articles of Incorporation, be entitled
to vote for the election of a majority of directors of the Company (even
though the right so to vote has been suspended by the happening of such a
contingency or provision), and (c) any other securities into which or for
which any of the securities described in (a) or (b) may be converted or
exchanged pursuant to a plan of recapitalization, reorganization, merger,
sale of assets or otherwise.
"Company" shall have the meaning assigned to such term in the
introductory sentence hereof.
"Effective" shall mean that all requirements under the Securities
Act with respect to a Registration Statement have been satisfied and that the
Commission has officially approved the public distribution or circulation of
the Registration Statement in connection with a public offering of
Registrable Securities.
"Effective Date" shall mean the date on which a Registration
Statement is declared to be Effective.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended.
"ESOP" shall mean the PAULA Financial and Subsidiaries Employee
Stock Ownership Plan (including, without limitation, the PAULA Financial and
Subsidiaries Employee Stock Ownership Trust), including all amendments,
supplements or modifications thereto.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated pursuant thereto.
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"Expiration Date" shall mean the earlier to occur of (a) August 3,
1999 and (b) the date of a Reorganization.
"Extraordinary Common Stock Event" shall mean (i) the issue of
additional shares of Common Stock as a dividend or other distribution on
outstanding shares of Common Stock, (ii) a subdivision of outstanding shares
of Common Stock into a greater number of shares of Common Stock, or (iii) a
combination or reverse stock split of outstanding shares of Common Stock into
a smaller number of shares of the Common Stock.
"Fair Market Value" shall mean, at any time, per share of Common
Stock (a) the arithmetic average of the daily last sale prices of the Common
Stock for twenty consecutive trading days ending immediately prior to such
time or, if no such sale takes place on such dates, the average of the
closing bid and asked prices on such dates, in each case as officially
reported on the principal national securities exchange on which the Common
Stock is then listed or admitted to trading, (b) if such Common Stock is not
then listed or admitted to trading on any national securities exchange, but
is designated as a national market system security by the NASD, the
arithmetic average of the daily last trading prices of the Common Stock for
twenty consecutive trading days ending immediately prior to such time, or if
there shall have been not trading on such date or if such stock is not so
designated, the average of the reported closing bid and asked prices on such
dates as shown by the NASDAQ, (c) if the Common Stock is being offered in an
initial public offering at such time, the average price of such Common Stock
per share, net of underwriter's discount and expenses, sold in-such initial
public offering and (d) if the Common Stock is not then listed or admitted to
trading on any national exchange or quoted in the over-the-counter market and
not then being offered in the initial public offering, the fair market value
of the Common Stock as determined in good faith by the Board of Directors
(after giving due consideration to the latest ESOP valuation).
"Material Adverse Effect" means any material adverse effect on (a)
the business, profits, properties or condition of the Company and the
Subsidiaries, taken as a whole, (b) the ability of the Company to perform its
obligations under the Agreement and (c) the binding nature, validity or
enforceability of this Agreement, which, in each case, arises from, or
reasonably could be expected to arise from, any action or omission of action
on the part of the Company or any Subsidiary or the occurrence of any event
or the existence of any fact or condition in respect of the Company or any
Subsidiary or any of their respective properties.
"NASD" shall mean the National Association of Securities Dealers,
Inc.
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"NASDAQ" shall mean the National Association of Securities Dealers
Automated Quotations System.
"Person" shall mean an individual, corporation, partnership, joint
venture, trust, university, or unincorporated organization, or a government
or any agency or political subdivision thereof.
"Placement Agents" shall have the meaning assigned to such term in
the introductory paragraph hereof.
"Preferred Registrable Securities" shall have the meaning assigned
to the term "Registrable Securities" in the Series A Preferred Stock Purchase
Agreement.
"Purchase Price" shall have the meaning assigned to such term in
Section 1.01.
"Purchasers" shall have the meaning assigned to such term in
Recital A.
"Registrable Securities" shall mean any shares of Common Stock that
have been issued or are issuable upon the exercise of any Warrant; PROVIDED,
HOWEVER, that such securities shall cease to be Registrable Securities if and
when (x) a Registration Statement with respect to the disposition of such
securities shall have become Effective under the Securities Act and such
securities shall have been disposed of pursuant to such Effective
Registration Statement, (y) such securities shall have been otherwise
transferred, if new certificates or other evidences of ownership for such
securities not bearing a legend restricting further transfer and not subject
to any stop transfer order or other restrictions on transfer shall have bean
delivered by the Company, and subsequent disposition of such securities shall
not require registration or qualification of such securities under the
Securities Act, or (z) such securities shall have ceased to be outstanding.
"Registration Expenses" shall mean all expenses incident to the
Company's performance of or compliance with its obligations under Section 5
of this Agreement, including, without limitation, all Commission and stock
exchange or NASD registration and filing fees and expenses, fees and expenses
of compliance with applicable state securities or "blue sky" laws (including,
without limitation, reasonable fees and disbursements of counsel for the
underwriters in connection with "blue sky" qualifications of the Registrable
Securities), printing expenses, messenger and delivery expenses, the fees and
expenses incurred in connection with the listing of the securities to be
registered in a public offering on each securities exchange or national
market system on which such securities are to be so listed and, following
such initial public
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offering, the fees and expenses incurred in connection with the listing of
such securities to be registered on each securities exchange or national
market system on which such securities are listed, fees and disbursements of
counsel for the Company and all independent certified public accountants
(including the expenses of any annual audit and "cold comfort" letters
required by or incident to such performance and compliance), the fees and
disbursements of underwriters customarily paid by issuers or sellers of
securities (including the fees and expenses of any "qualified independent
underwriter" required by the NASD), the reasonable fees and expenses of any
special experts retained by the Company in connection with such registration,
and fees and expenses of other persons retained by the Company (but not
including any underwriting discounts or commissions or transfer taxes, if
any, attributable to the sale of Registrable Securities by holders of such
Registrable Securities).
"Registration Statement" shall mean any disclosure document that
the Company is required to file under the Securities Act in connection with a
public offering of Registrable Securities.
"Reorganization" shall mean a capital reorganization of the Common
Stock, or a merger or consolidation of the Company with or into another
corporation unless the Company is the surviving corporation, or the sale of
all or substantially all of the Company's capital stock or assets to any
other person or entity, or any other form of business combination or
reorganization in which control of the Company is transferred.
"Schnider Agreement" shall mean the Stock Purchase Agreement dated
as of July 26, 1994 among the Company, Norman J. Schnider and Elizabeth J.
Schnider, as trustees of The Schnider Family Trust, Norman J. Schnider and
Elizabeth J. Schnider, as individuals, which evidences the obligation of the
Company to repurchase 76,100 shares of Common Stock from The Schnider Family
Trust.
"Securities Act" shall mean the Securities Act of 1933, as amended
from time to time or any successor federal act and all rules or regulations
thereunder.
"Series A Preferred Stock" shall have the meaning assigned to such
term in Recital A.
"Series A Preferred Stock Purchase Agreement" shall have the
meaning assigned to such term in Recital A.
"Shareholders Agreement" shall mean the Shareholders Agreement,
dated as of the date hereof, among the Company, the "Shareholders" named
therein and the Purchasers.
25
<PAGE>
"Snider Options" shall have the meaning assigned to such term in
Section 3.05(c).
"Stock Option Plan" shall mean the 1994 Stock Incentive Plan of the
Company, including all amendments, supplements or modifications thereto.
"Subsidiary" shall mean any corporation or other entity of which at
least a majority of the securities or other ownership interest having
ordinary voting power (absolutely or contingently) for the election of
directors or other persons performing similar functions are at the time owned
directly or indirectly by the Company and/or any of its other Subsidiaries.
"Tender Offer" shall mean the irrevocable offer by the Company to
repurchase 178,900 shares of Common Stock from its shareholders under that
certain offer letter dated July 27, 1994 and the related transmittal letter.
"Voting Agreement" shall mean the Voting Agreement, dated as of the
date hereof, among the Company, the "Shareholders" named therein and the
Purchasers.
"Warrant" shall have the meaning assigned to such term in Recital A.
"Warrant Certificate" shall have the meaning assigned to such term
in Section 1.01.
"Warrant Shares" shall mean (a) all Warrants then outstanding and
(b) all shares of Common Stock issued by the Company upon the exercise of the
Warrants.
7. MISCELLANEOUS
7.01. NO WAIVER; CUMULATIVE REMEDIES. No failure or delay on the
part of any party to this Agreement in exercising any right, power or remedy
hereunder shall operate as a waiver thereof; nor shall any single or partial
exercise of any such right, power or remedy preclude any other or further
exercise thereof or the exercise of any other right, power or remedy
hereunder. The remedies herein provided are cumulative and not exclusive of
any remedies provided by law.
7.02. AMENDMENTS, WAIVERS AND CONSENTS. Any provision in the
Agreement to the contrary notwithstanding, and except as hereinafter
provided, changes in, termination or amendments of or additions to this
Agreement may be made, and compliance with any covenant or provision set
forth herein may be omitted or waived, if the Company (a) shall obtain
consent thereto in writing from the holders of at least 67% of the Warrant
Shares, and (b) shall
26
<PAGE>
deliver copies of such consent in writing to any holders who did not execute
such consent; provided that no consents shall be effective (i) to amend any
of the provisions of this Agreement pertaining to the Purchase Price or the
number of shares of Common Stock purchasable upon the exercise of any Warrant
or (ii) to reduce the percentage in interest of the Warrant Shares the
consent of the holders of which is required under this Section 7.02. Any
waiver or consent may be given subject to satisfaction of conditions stated
therein and any waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given.
7.03. ADDRESSES FOR NOTICES. Any notice, demand, request, waiver or
other communication under this Agreement shall be in writing and shall be
deemed to have been duly given on the date of service if personally served,
on the date of transmission if sent by telecopier or on the third day after
mailing if mailed to the party to whom notice is to be given, by first class
mail, registered, return receipt requested, postage prepaid and addressed as
follows:
To the Company: Paula Financial
300 North Lake Avenue
Suite 300
Pasadena, California 91101
Attention: President
Telecopier No.: (818) 304-1056
With a copy to: Gibson, Dunn & Crutcher
333 South Grand Avenue
Los Angeles, California 90067
Attention: Jonathan K. Layne, Esq.
Telecopier No.: (213) 229-7520
To any Placement Agent: At its address specified on
Annex 1 hereto
7.04. COSTS, EXPENSES AND TAXES. As a condition precedent to the
Closing, the Company agrees to pay at the Closing in connection with the
preparation, execution and delivery of this Agreement and the issuance of the
Warrants at the Closing, the reasonable fees and other out-of-pocket expenses
of Messrs. LeBoeuf, Lamb, Greene & MacRae; provided that all such expenses,
together with all similar fees and expenses incurred in preparation of the
Series A Preferred Stock Purchase Agreement, do not exceed $70,000 in the
aggregate. In addition, the prevailing party shall be entitled to the
reasonable fees and out-of-pocket expenses of legal counsel, independent
public accountants, consultants and other outside experts retained by such
party in connection with the successful enforcement of this Agreement or any
Related Agreement.
27
<PAGE>
In addition, the Company shall pay any and all stamp, or other similar taxes
payable or determined to be payable in connection with the execution and
delivery of this Agreement, the issuance of the Warrants and the other
instruments and documents to be delivered hereunder or thereunder, and agrees
to save the Purchasers harmless from and against any and all liabilities with
respect to or resulting from any delay in paying or omission to pay such
taxes.
7.05. BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding
upon and inure to the benefit of each of the Company and the Placement Agents
and their respective heirs, successors and assigns, except that the Company
shall not have the right to delegate its obligations hereunder or to assign
its rights hereunder or any interest herein other than in connection with a
Reorganization without the prior written consent of the holders of at least
67% of the Warrant Shares.
7.06. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All
representations and warranties made in this Agreement, the Warrants, or any
other instrument or document delivered in connection herewith or therewith,
shall survive the execution and delivery hereof or thereof until February 3,
1996; provided that the representations and warranties shall survive such
date to the extent written notice of any breach thereof is given on or prior
to such date.
7.07. PRIOR AGREEMENTS. This Agreement, the terms of the Warrants,
and the other agreements executed and delivered herewith constitute the
entire agreement between the parties and supersedes any prior understandings
or agreements concerning the subject matter hereof.
7.08. SEVERABILITY. The provisions of this Agreement and the terms
of the Warrants are severable and, in the event that any court of competent
jurisdiction shall determine that any one or more of the provisions or part
of a provision contained in this Agreement or the terms of the Warrants
shall, for any reason, be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
other provision or part of a provision of this Agreement or the terms of the
Warrants; but this Agreement and the terms of the Warrants shall be reformed
and construed as if such invalid or illegal or unenforceable provision, or
part of a provision, had never been contained herein, and such provisions or
part reformed so that it would be valid, legal and enforceable to the maximum
extent possible.
28
<PAGE>
7.09. CONFIDENTIALITY. Each Placement Agent agrees that it will keep
confidential and will not disclose or divulge any confidential, proprietary
or secret information which such Placement Agent may obtain from the Company
pursuant to financial statements, reports and other materials submitted by
the Company to such Placement Agent pursuant to this Agreement, or pursuant
to visitation or inspection rights granted hereunder, unless such information
is known, or until such information becomes known other than through a breach
of this Section 7.09, to the public; provided, however, that a Placement
Agent may disclose such information (a) on a confidential basis to its
attorneys, accountants, consultants and other professionals to the extent
necessary to obtain their services in connection with its investment in the
Company, (b) to any prospective purchaser of any Warrant Shares from such
Placement Agent as long as such prospective purchaser agrees in writing to be
bound by the provisions of this Section 7.09, (c) to any entity controlling,
controlled by or under common control with such Placement Agent, or to any
partner or stockholder of a Placement Agent which is a partnership or
corporation, or (d) as required by applicable law.
7.10. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA,
AND WITHOUT GIVING EFFECT TO CHOICE OF LAW PROVISIONS.
7.11. HEADINGS. Article, section and subsection headings
in this Agreement are included herein for convenience of reference only and
shall not constitute a part of this Agreement for any other purpose.
7.12. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument, and any of the parties hereto may execute this Agreement by
signing any such counterpart.
7.13. FURTHER ASSURANCES. From and after the date of this
Agreement, upon the request of any Placement Agent or the Company, each of
the Company and the Placement Agents shall execute and deliver such
instruments, documents and other writings as may be reasonably necessary or
desirable to confirm and carry out and to effectuate fully the intent and
purposes of this Agreement and the Warrants.
7.14. WAIVER. At any time prior to the Closing Date, any party
hereto may (a) extend the time for the performance of any of the obligations
or other acts of any other party hereto, (b) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto, and (c) waive compliance with any of the agreements or
conditions contained herein. Any agreement on the part of a party hereto to
any such extension or waiver shall be valid only if set forth in an
29
<PAGE>
instrument in writing signed by the party granting such waiver but such
waiver or failure to insist upon strict compliance with such obligation,
covenant, agreement or condition shall not operate as a waiver of, or
estoppel with respect to, any subsequent or future failure.
7.15. SPECIFIC ENFORCEMENT. Each of the Placement Agents and the
Company acknowledge and agree that irreparable damage would occur in the
event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of the provisions of this Agreement and to
enforce specifically the terms and provisions hereof in any court of the
United States or any state thereof having jurisdiction, this being in
addition to any other remedy to which they may be entitled at law or equity.
7.16. NOTICES OF RECORD DATE. In the event of
(a) any taking by the Company of a record of the holders of any
class of securities for the purpose of determining the holders thereof who
are entitled to receive any dividend or other distribution, or any right to
subscribe for, purchase or otherwise acquire any shares of capital stock of
any class or any other securities or property, or to receive any other right,
or
(b) any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the Company, any
merger or consolidation of the Company, or any transfer of all or
substantially all of the assets of the Company to any other Company, or any
other entity or person, or
(c) any voluntary or involuntary dissolution, liquidation or
winding up of the Company,
then and in each such event the Company shall mail or cause to be mailed to
each holder of Warrants a notice specifying (i) the date on which any such
record is to be taken for the purpose of such dividend, distribution or right
and a description of such dividend, distribution or right, (ii) the date on
which any such reorganization, reclassification, recapitalization, transfer,
consolidation, merger, dissolution, liquidation or winding up is expected to
become effective, and (iii) the time, if any, that is to be fixed, as to when
the holders of record of Common Stock (or other securities) shall be entitled
to exchange their shares of Common Stock (or other securities) for securities
or other property deliverable upon such reorganization, reclassification,
recapitalization, transfer, consolidation, merger, dissolution, liquidation
or winding up. Such notice shall be mailed by first class mail, postage
prepaid, at least twenty (20) days prior to the date specified in such notice
on which such action is to be taken.
30
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the date and year first above written.
PAULA FINANCIAL
By: /s/ [ILLEGIBLE]
-------------------------------
Name:
Title:
PLACEMENT AGENTS:
PRUDENTIAL SECURITIES INCORPORATED
By: /s/ [ILLEGIBLE]
-------------------------------
Name:
Title: Vice President
CONNING & COMPANY
By: /s/ HAROLD SANDSTROM
-------------------------------
Name: Harold Sandstrom
Title: Senior Vice President
[SIGNATURE PAGE TO WARRANT AGREEMENT]
<PAGE>
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE TERMS AND
CONDITIONS SET FORTH IN A WARRANT AGREEMENT DATED AS OF AUGUST 3, 1994, AMONG
THE COMPANY AND CERTAIN PERSONS NAMED THEREIN, A COPY OF WHICH MAY BE
OBTAINED FROM THE COMPANY.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR THE LAWS OF THE STATE OF
CALIFORNIA OR ELSEWHERE AND MAY NOT BE SOLD OR TRANSFERRED EXCEPT IN
COMPLIANCE WITH THAT ACT AND SUCH LAWS.
No.WR-1 27,451 Warrants
Date: August 3, 1994
WARRANT CERTIFICATE
PAULA FINANCIAL
This Warrant Certificate certifies that CONNING & COMPANY, or registered
assigns, is the registered holder of Twenty Seven Thousand Four Hundred and
Fifty One (27,451) Warrants. Each Warrant entitles the owner thereof to
purchase at any time on or after the date hereof and prior to 5:00 p.m. (Los
Angeles, California time) on the earlier to occur of (a) August 3, 1999 and
(b) the date of a Reorganization (as defined in the Warrant Agreement
referred to below) at the office referred to in Section 1.02(b) of the
Warrant Agreement referred to below or such other office of which Paula
Financial, a California corporation (the "Company"), shall have given notice
to each holder of Warrants, one fully paid and nonassessable share of Common
Stock (as defined in the Warrant Agreement referred to below) of the Company,
at a purchase price of $17.00 per share of Common Stock (the "Purchase
Price") upon (i) presentation and surrender of this Warrant Certificate with
the Form of Election to Purchase duly executed and (ii) delivery to the
Company of the payment of the Purchase Price in the manner set forth in the
Warrant Agreement. The number of shares of Common Stock that may be purchased
upon exercise of this Warrant Certificate set forth above, and the Purchase
Price per share of Common Stock set forth above, are the number and the
Purchase Price as of the date hereof and are subject to adjustment as
referred to below.
The Warrants are issued pursuant to the Warrant Agreement dated as of
August 3, 1994 (as amended, modified or supplemented from time to time, the
"Warrant Agreement"), among the Company and certain Persons named therein,
and are subject to all of the terms, provisions and conditions thereof, which
Warrant Agreement is hereby incorporated herein by reference and made a part
hereof and to which Warrant Agreement reference is hereby made for a full
description of the rights, obligations, duties and immunities of the Company
and the holders of the Warrant Certificates. Capitalized terms used, but not
defined, herein have the meanings
<PAGE>
assigned to them in the Warrant Agreement. Copies of the Warrant Agreement
are on file at the office of the Company referred to above.
As provided in the Warrant Agreement, the Purchase Price and the number
of shares of Common Stock that may be purchased upon the exercise of the
Warrants evidenced by this Warrant Certificate are, upon the happening of
certain events, subject to modification and adjustment.
This Warrant Certificate shall be exercisable, at the election of the
holder, either as an entirety or in part from time to time. If this Warrant
Certificate shall be exercised in part, the holder shall be entitled to
receive upon surrender hereof, another Warrant Certificate or Warrant
Certificates for the number of Warrants not exercised. This Warrant
Certificate, with or without other Warrant Certificates, upon surrender at
the office of the Company referred to above, may be exchanged for another
Warrant Certificate or Warrant Certificates of like tenor and date evidencing
Warrants entitling the holder to purchase a like aggregate number of shares
of Common Stock as the Warrants evidenced by the Warrant Certificate or
Warrant Certificates surrendered shall have entitled such holder to purchase.
Except as expressly set forth in the Warrant Agreement, no holder of
this Warrant Certificate shall be entitled to vote or receive dividends or be
deemed for any purpose the holder of shares of Common Stock or of any other
securities of the Company that may at any time be issued upon the exercise
hereof, nor shall anything contained in the Warrant Agreement or herein be
construed to confer upon the holder hereof, as such, any of the rights of a
holder of a share of Common Stock in the Company or any right to vote upon
any matter submitted to holders of shares of Common Stock in the Company at
any meeting thereof, or to give or withhold consent to any corporate action
(whether upon any recapitalization, issue of stock, reclassification of
Securities, change of par value, consolidation, merger, conveyance, or
otherwise) or, except as provided in the Warrant Agreement, to receive notice
of meetings, or to receive dividends or subscription rights, or otherwise,
until the Warrant or Warrants evidenced by this Warrant Certificate shall
have been exercised as provided in the Warrant Agreement.
2
<PAGE>
WITNESS the signature of the proper officer of the Company as of the date first
above written.
PAULA FINANCIAL
By /s/ [ILLEGIBLE]
------------------------
Name:
Title:
ATTEST:
/s/ Teresita E. Matos
- -------------------------------
[Assistant] Secretary
3
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder desires to
transfer the Warrant Certificate)
FOR VALUE RECEIVED,--------------------------------- hereby
sells, assigns and transfers unto
- ------------------------------------------------------------------the
accompanying Warrant Certificate, together with all right, title and
interest therein, and does hereby irrevocably constitute
and appoint
-----------------------------------------------------------
attorney, to transfer the accompanying Warrant Certificate on the books of
the Company of such Warrant Certificate, with full power of substitution.
Dated:
------------------------
[HOLDER OF CERTIFICATE]
By
--------------------------------------
NOTICE
The signature to the foregoing Assignment must correspond to the name as
written upon the face of the accompanying Warrant Certificate or any prior
assignment thereof in every particular, without alteration or enlargement or
any change whatsoever.
<PAGE>
[FORM OF ELECTION TO PURCHASE]
(To be executed by the registered holder if such holder desires to
transfer the Warrant Certificate)
To PAULA FINANCIAL:
The undersigned hereby irrevocably elects to exercise Warrants
represented by the accompanying Warrant Certificate to purchase the share of
Common Stock issuable upon the exercise of such Warrants and requests that
certificates for such shares be issued in the name of:
- ----------------------------------------------------------------------------
(Please print name and address)
- ----------------------------------------------------------------------------
(Please insert social security number or other identifying number)
If such number of Warrants shall not be all the Warrants evidenced by the
accompanying Warrant Certificate, a new Warrant Certificate for the balance
remaining of such Warrants shall be registered in the name of and delivered
to:
- ----------------------------------------------------------------------------
(Please print name and address)
- ----------------------------------------------------------------------------
(Please insert social security number or other identifying number)
Dated:
--------------------,-----------------.
[HOLDER OF CERTIFICATE]
By
-------------------------------------
NOTICE
The signature to the foregoing Assignment must correspond to the name as
written upon the face of the accompanying Warrant Certificate or any prior
assignment thereof in every particular, without alteration or enlargement or
any change whatsoever.
<PAGE>
VOTING AGREEMENT
VOTING AGREEMENT (this "Agreement"), dated as of August 3, 1994, by and
among Paula Financial, a California corporation (the "Corporation"); Roger
G. Teig, Jeffrey A. Snider, James A. Nicholson, Leroy J. Combs and Victor
Gloria III (individually a "Shareholder" and collectively the
"Shareholders"); and each of the Purchasers (individually an "Investor" and
collectively the "Investors") listed on Schedule 1.01 to the Series A
Preferred Stock Purchase Agreement dated as of the date hereof among the
Corporation and the Purchasers (the "Stock Purchase Agreement").
WHEREAS, the Shareholders beneficially own an aggregate of 386,419 shares
of Common Stock, no par value, of the Corporation (the "Common Stock");
WHEREAS, the Investors are acquiring an aggregate of 941,177 shares of
Series A Preferred Stock, no par value, of the Corporation (the "Series A
Preferred Stock") pursuant to the terms of the Stock Purchase Agreement;
and
WHEREAS, one of the conditions to the investment by the Investors is the
execution of a voting agreement relating to the election of members to the
Corporation's Board of Directors (the "Board of Directors") and any
committees thereof.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein and the investment by the Investors under the Stock
Purchase Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties
hereto agree as follows:
ARTICLE 1.
ELECTION OF DIRECTORS
Section 1.01. ELECTION OF DIRECTORS. At any time at which stockholders
of the Corporation will have the right to or will vote for or consent in
writing to the election of directors of the Corporation, the Investors and
the Shareholders hereby agree to vote all shares of capital stock of the
Corporation presently owned or hereafter acquired by them, or over which
they have voting control, in favor of the following actions, and the Corporation
<PAGE>
shall use its best efforts to nominate for election to the Board of
Directors those persons set forth below:
(a) to cause and maintain the election to the Board of Directors
of two (2) Qualified Representatives of the Conning Funds, initially John B.
Clinton and Gerard Vecchio (the Conning Directors");
(b) to cause and maintain the election to the Board of Directors
of one (1) Qualified Representative of the Investors other than the Conning
Funds, initially Owen Stevenson Crihfield (the "Non-Conning Director", and
together with the Conning Directors, the "Investor Directors");
(c) to cause and maintain the election to the Board of Directors
of two (2) Qualified Representatives who are not at the time of their
election or during their tenure on the Board of Directors officers,
employees, representatives or agents of the Corporation or any of its
subsidiaries or affiliates and not otherwise affiliated with any party
hereto, selected by a majority of the Shareholders, initially Ronald W.
Waisner and Jerry M. Miller (the "Independent Directors");
(d) to cause and maintain the election to the Board of Directors
of four (4) persons each of whom is an employee or officer of the
Corporation selected by a majority of the Shareholders, initially Roger G.
Teig, James A. Nicholson, Leroy J. Combs and Jeffrey A. Snider (the
"Management Directors");
(e) to fix the number of directors of the Corporation at nine (9);
and
(f) to fix the term of each director at one (1) year.
Section 1.02. COMMITTEES. The Board of Directors shall establish an
Executive Committee, an Executive Compensation and Stock Option Committee and
an Audit Committee. The Corporation, the Investors and the Shareholders
agree to cause the Board of Directors to ensure that the Executive
Compensation and Stock Option Committee shall consist of not more than three
(3) members, and to nominate and appoint thereto, and maintain as a member
thereof, at least one Investor Director selected by the holders of at least
51% of the outstanding shares of Series A Preferred Stock and at least one
Independent Director. The Corporation, the Investors and the
Shareholders agree to cause the Board of Directors to ensure that the
Audit Committee shall consist of not more than three (3) members, and to
nominate and appoint thereto, and maintain as a member thereof, one Investor
Director selected by the holders of at least 51% of the outstanding shares of
Series A Preferred Stock and two Independent Directors.
2
<PAGE>
In the event that the Corporation is (i) unable to redeem the Series A
Preferred Stock on the Redemption Date set forth in Section 7 of the
Certificate of Designation or (ii) unable to make each and every payment
under the Redemption Notes issued pursuant to Section 7(b) of the Certificate
of Designation on the due date thereof, the Corporation, the Investors and
the Shareholders agree to cause the Board of Directors to establish a
Recapitalization Committee and to nominate and appoint to, and maintain as
members of, the Recapitalization Committee, two Investor Directors
(including one Conning Director who shall be chairperson of the
Recapitalization Committee and one Non-Conning Director) and one Management
Director. The Recapitalization Committee shall be responsible for
formulating proposals for submission to the Board of Directors to
recapitalize or reorganize the Corporation (including, but not limited to,
a sale of the Corporation, an initial public offering of Common Stock or
a private sale of securities of the Corporation) in a manner which will
enable the Corporation to effect the transactions required to be effectuated
pursuant to Section 7 of the Certificate of Designation; provided that the
Board of Directors, and not the Recapitalization Committee, shall be
responsible for adopting and implementing proposals formulated by the
Recapitalization Committee but shall have no obligation hereunder to adopt
such proposals.
Section 1.03. VACANCIES AND REMOVAL. Each of the directors designated
in Section 1.01 shall be elected at any annual or special meeting of
stockholders (or by written consent in lieu of a meeting of stockholders)
and shall serve until his successor is elected and qualified or until his
earlier resignation or removal.
Any Conning Director may be removed during his term of office, without
cause, by and only by the affirmative vote or written consent of the holders
of at least 51% of the outstanding shares of Series A Preferred Stock then
held by the Conning Funds.
The Non-Conning Director may be removed during his term of office,
without cause, by and only by the affirmative vote or written consent of the
holders of at least 51% of the outstanding shares of Series A Preferred Stock
then held by the Investors other than the Conning Funds.
Any Management Director may be removed during his term of office,
without cause, by and only by the affirmative vote or written consent of a
majority of the Shareholders.
Any Independent Director may be removed during his term of office,
without cause, by and only by the affirmative vote or written consent of a
majority of the Shareholders subject to the reasonable acceptance of the
holders of at least 51% of the outstanding shares of Series A Preferred
Stock then held by the Investors.
3
<PAGE>
Any vacancy in the office of a Conning Director may be filled by and
only by the affirmative vote or written consent of the holders of at least
51% of the outstanding shares of Series A Preferred Stock then held by the
Conning Funds.
Any vacancy in the office of a Non-Conning Director may filled by and
only by the affirmative vote or written consent of the holders of at least
51% of the outstanding shares of Series A Preferred Stock then held by the
Investors other than the Conning Funds.
Any vacancy in the office of the Management Director may be filled by
and only by the vote or written consent of a majority of the Shareholders.
Any vacancy in the office of the Independent Director may be filled by
and only by such person as may be approved by a majority of the Shareholders
subject to the reasonable acceptance of the holders of at least 51% of the
outstanding shares of Series A Preferred Stock then held by Investors.
Pending any vote or written consent of holders of capital stock provided
for in this Section, any vacancy in the office of a Conning Director may be
filled by and only by a nominee of the Conning Funds and elected by the
vote of the other Conning Director, any vacancy in the office of a
Non-Conning Director may be filled by and only by a nominee of the Investors
other than the Conning Funds and elected by the vote of the Conning
Directors, any vacancy in the office of a Management Directors may be filled
by and only by the vote of the other Management Directors, and any vacancy in
the office of an Independent Director may be filled by and only by the vote
of a majority of the Management Directors subject to the reasonable
acceptance of a majority of the Investor Directors.
Section 1.04. QUALIFIED REPRESENTATIVE. The term "Qualified
Representative" shall mean an individual nominated in good faith who by
virtue of his or her business experience and reputation will be expected to
add value to the Corporation and, in the case of the Independent Directors,
shall be acceptable to the holders of at least 51% of outstanding shares of
Series A Preferred Stock, such acceptance not to be unreasonably withheld,
and, in the case of the Investor Directors, shall be acceptable to a
majority of the Shareholders, such acceptance not to be unreasonably
withheld. The Shareholders acknowledge and agree that any officer or partner
of Conning & Company, Saugatuck Capital Company and RFE Associates IV, L.P.
shall satisfy the requirements to serve as a Qualified Representative.
4
<PAGE>
ARTICLE 2.
MISCELLANEOUS
Section 2.01. DURATION OF AGREEMENT. This Agreement shall terminate on
the earliest to occur of the following: (a) the time immediately prior to the
time of a Qualified Public Offering, (b) the sixth anniversary of the
effective date of this Agreement, (c) the date upon which each share of
Series A Preferred Stock is redeemed in cash or, with respect to shares
redeemed in exchange for Redemption Notes (as defined in the
Certificate of Designation), the date payment in full is made on such
Redemption Notes and (d) with respect to any Share, the date upon which such
Share is sold free and clear of the restrictions imposed by the Shareholders
Agreement.
Section 2.02. LEGEND. Each certificate representing shares of capital
stock of the Corporation subject to this Agreement shall bear a legend in
substantially the following form, until such time as the shares of capital
stock represented thereby are no longer subject to the provisions hereof:
"The securities represented by this certificate are subject to the
terms and conditions of a certain Voting Agreement, dated as of August
3, 1994, as amended from time to time, among the Corporation and certain
holders of its capital stock. Copies of such Agreement may be obtained
at, no cost by written request made by the holder of record of this
certificate to the Secretary of the Corporation."
Section 2.03. SEVERABILITY: GOVERNING LAW. If any provisions of this
Agreement shall be determined to be illegal or unenforceable by any
court of law, the remaining provisions shall be severable and this Agreement
shall be reformed and construed to the maximum extent possible in
accordance with the essential purposes and intent of this Agreement. This
Agreement shall be governed by, and construed in accordance with, the laws of
the State of California.
Section 2.04. INJUNCTIVE RELIEF. The Shareholders and the Investors
acknowledge and agree that irreparable damage would occur in the event that
any of the provisions of this Agreement were not performed in accordance with
their specific terms or were otherwise breached. It is accordingly agreed
that the parties shall be entitled to an injunction or injunctions to prevent
breaches of the provisions of this Agreement and to enforce specifically the
terms and provisions hereof in any court of the United States or any state
thereof having jurisdiction, this being in addition to any other remedy to
which they may be entitled at law or equity.
5
<PAGE>
Section 2.05. MODIFICATION OR AMENDMENT. This Agreement
constitutes the entire agreement of the parties with respect to the subject
matter hereof and neither this Agreement nor any provision hereof may be
waived, modified, amended or terminated except by a written agreement signed
by (a) a majority of the Shareholders and (b) Investors holding at least 51%
of the outstanding shares of Series A Preferred Stock.
Section 2.06. COUNTERPARTS. This Agreement may be executed in one or
more counterparts, each of which shall be deemed to be an original, but all
of which taken together shall constitute one and the same instrument.
Section 2.07. NOTICES. All notices to be given or otherwise made to
any party to this Agreement shall be deemed to be sufficient if
contained in a written instrument, delivered by hand in person, or by
express overnight courier service, or by electronic facsimile
transmission (with a confirming copy sent by U.S. mail, registered or
certified, return receipt requested), or by registered or certified mail,
postage prepaid, return receipt requested, addressed to such party at the
address set forth on Exhibit A hereto or at such other address as may
hereafter be designated in writing by the addressee to the addressor listing
all parties.
All such notices provided in accordance with this Section shall be
deemed delivered upon personal delivery, upon transmission if sent by
telecopier or three (3) days after deposit in the mail or with the courier.
Section 2.08. FURTHER ASSURANCES. From and after the date of this
Agreement, upon the request of any Investor, Shareholder or the Corporation,
the Corporation, the Shareholders and the Investors shall execute and
deliver such instruments, documents and other writings as may be reasonably
necessary or desirable to confirm and carry out and to effectuate
fully the intent and purposes of this Agreement.
Section 2.09. ADDITIONAL PARTIES. The Corporation, Investors, and
Shareholders shall cause the following to occur:
(a) Any person or entity who acquires Series A Preferred Stock
shall become an Investor hereunder, unless at the time of such purchase
such person or entity was a Shareholder or an employee of the
Corporation, in which case such person or entity still remains or becomes
(as the case may be) a Shareholder hereunder; or
(b) Excluding capital stock transferred by the Corporation on its
books not as an issuer, buyer or seller but solely in its capacity as
registrar or transfer agent, prior to the issuance or transfer of any voting
capital stock by any party
6
<PAGE>
hereto to any person or entity who at such time, after giving effect to such
issuance or transfer, owns five percent (5%) or more of the outstanding
shares of voting capital stock through any transactions whatsoever such
person or entity shall become a Shareholder hereunder, unless at the
time such person or entity was an Investor.
For the purposes of this Section 2.09 in determining whether a
Shareholder owns, or owns options to acquire, at least 5% of the voting
capital stock of the Corporation, such Shareholder shall be deemed to hold
those shares of voting capital stock transferred by them to, and continued to
be held by, their respective spouses, brothers, sisters, ancestors and lineal
descendants or trusts for their benefit.
Execution by such persons or entities and the Corporation of a
counterpart of a signature page of this Agreement and an amendment
adding their names hereto shall be a condition of any acquisition of such
shares by such person or entity.
Section 2.11. BINDING EFFECT. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and assigns, legal representatives and heirs.
Section 2.12. DEFINED TERMS. The terms used herein and not defined
herein shall have the meanings assigned to such terms in the Stock Purchase
Agreement.
Section 2.13. ERISA LIMITATIONS. The obligations of the
Shareholders under this Agreement are personal to them and shall not be
construed as extending to their capacities as representatives of
the ESOP advisory committee or as fiduciaries of the ESOP.
Section 2. 14. CUMULATIVE VOTING LIMITATIONS. Notwithstanding anything
to the contrary contained herein, the holders of the Series A Preferred
Stock shall not be entitled to elect a majority of the directors of the
Corporation through the use of cumulative voting as prescribed under Section
708 of the California General Corporation Code or any successor thereto.
[Remainder of page intentionally left blank]
7
<PAGE>
IN WITNESS WHEREOF, this Voting Agreement has been executed as of the
date and year first above written.
PAULA FINANCIAL
By: /s/ Roger G. Teig
-----------------
Name:
Title:
SHAREHOLDERS:
The Teig Family Partnership
By: /s/ Gail P. Teig
----------------
By: /s/ Roger G. Teig
-----------------
/s/
----------------------
Jeffrey A. Snider
/s/
----------------------
James A. Nicholson
/s/
----------------------
Leroy J. Combs
/s/
----------------------
Victor Gloria III
IN WITNESS WHEREOF, this Voting Agreement has been executed as of the
date and year first above written.
PAULA FINANCIAL
By: /s/ Roger G. Teig
-----------------
Name:
Title:
SHAREHOLDERS:
The Teig Family Partnership
By: /s/ Gail P. Teig
----------------
Gail P. Teig
By: /s/ Roger G. Teig
-----------------
Roger G. Teig
/s/ Jeffrey A. Snider
----------------------
Jeffrey A. Snider
/s/ James A. Nicholson
----------------------
James A. Nicholson
/s/
----------------------
Leroy J. Combs
/s/
----------------------
Victor Gloria III
(SIGNATURE PAGE TO VOTING AGREEMENT)
<PAGE>
CONSENT OF SPOUSES:
Each of us acknowledges that we have read the foregoing
Agreement and each of us knows its contents. Each of us is aware that by its
provisions that all or part of the shares of the Corporation held of record
by any of us and/or our spouses, including our community property
interests in such shares, if any, are subject to certain voting obligations
and restrictions. Each of us hereby agrees that those shares and each of our
interests in them, if any, are subject to the provisions of the Agreement and
that each of us will take no action at any time to hinder the operation of,
or violate, the Agreement.
/s/ Valerie A. Snider
-----------------------
Valerie A. Snider
/s/ Cecilia E. Nicholson
------------------------
Cecilia E. Nicholson
/s/ Corinne Combs
-----------------------
Corinne Combs
/s/ Lily A. Gloria
-----------------------
Lily A. Gloria
[SIGNATURE PAGE TO VOTING AGREEMENT]
<PAGE>
PURCHASERS:
CONNING INSURANCE CAPITAL LIMITED
PARTNERSHIP II
By: /s/ Gerald Vecchio
-----------------------
General Partner
CONNING INSURANCE CAPITAL LIMITED
PARTNERSHIP II
By: /s/ Gerald Vecchio
-----------------------
General Partner
CONNING INSURANCE CAPITAL LIMITED
PARTNERSHIP II
By: /s/ Gerald Vecchio
-----------------------
General Partner
CONNING INSURANCE CAPITAL LIMITED
PARTNERSHIP II
By: /s/ Gerald Vecchio
-----------------------
General Partner
SAUGATUCK CAPITAL COMPANY
By:/s/ Owen Crihfield
------------------------
Owen Crihfield
RFE INVESTMENT PARTNERS IV, L.P.
By RFE Associates IV, L.P., its
General Partner
By:/s/ A. Dean Davis
------------------------
A. Dean Davis
[SIGNATURE PAGE TO VOTING AGREEMENT]
<PAGE>
EXHIBIT A
Paula Financial Conning Insurance Capital
300 North Lake Avenue Limited Partnership II
Suite 300 c/o Conning & Company
Pasadena, California 91101 CityPlace II
Attention: President Hartford, CT 06103-4105
Attn: Gerard Vecchio
Roger G. Teig Conning Insurance Capital
c/o Paula Financial International Partners II
300 North Lake Avenue c/o Conning & Company
Suite 300 CityPlace II
Pasadena, California 91101 185 Asylum Street
Hartford, CT 06103-4105
Jeffrey A. Snider Conning Insurance Capital
c/o Paula Financial Limited Partnership III
300 North Lake Avenue c/o Conning & Company
Suite 300 CityPlace II
Pasadena, California 91101 185 Asylum Street
Hartford, CT 06103-4105
Attn: Gerard Vecchio
James A. Nicholson Conning Insurance Capital
c/o Paula Financial International Partners III
300 North Lake Avenue c/o Conning & Company
Suite 300 CityPlace II
Pasadena, California 91101 185 Asylum Street
Hartford, CT 06103-4105
Leroy J. Combs RFE Investment Partners IV, L.P.
c/o Paula Financial 36 Grove Street
300 North Lake Avenue New Canaan, Ct 06840
Suite 300 Attn: A. Dean Davis
Pasadena, California 91101
Victor Gloria III Saugatuck Capital Company
c/o Paula Financial One Canterbury Green
300 North Lake Avenue Stamford, CT 06901
Suite 300 Attn: Owen Stevenson Crihfield
Pasadena, California 91101
<PAGE>
ASSET MANAGEMENT AGREEMENT
THIS AGREEMENT made as of this 1st day of February, 1995, between PAULA
Insurance Company (hereinafter referred to as the "Client") and CONNING &
COMPANY, a Connecticut corporation (hereinafter referred to as "Conning").
WHEREAS, the Client wishes to engage Conning to provide the services
hereinafter specified; and
WHEREAS, Conning is an investment research, securities brokerage and
insurance advisory firm with special expertise in the areas of asset and
investment management, financial services and developing and implementing
business plans relating to the insurance industry.
NOW, THEREFORE, in consideration of the mutual promises contained herein,
and for other good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, the parties hereto agree as follows:
1. APPOINTMENT. The Client appoints Conning as investment manager to
invest and reinvest the assets of the Investment Account (as defined in
Paragraph 4) as fully as the Client could do individually. Conning hereby
accepts this appointment, and in connection therewith, in its full discretion
and without obligation on its part to give prior notice to the Client, or the
custodians of the Client's assets in the Investment Account (the "Custodian")
Conning shall invest or reinvest the assets of the Investment Account in such
securities or other property or part interest therein as it, in its
discretion, shall select in accordance with the "Investment Guidelines." The
Investment Guidelines shall be separately communicated to Conning in writing.
The management of the Client shall be responsible to advise Conning promptly
in writing of any changes in the Investment Guidelines. This authorization
shall be a continuing one and shall remain in effect until Conning has
received written notice of revocation thereof or until Conning shall have
notified the Client in writing of its resignation.
2. DUTIES. Conning shall manage the Investment Account beginning March
1, 1995 subject to the Investment Guidelines, and shall perform and provide
such other investment advisory services to the Client as shall be reasonably
requested by the Client and as agreed to by Conning, which agreement will not
be unreasonably withheld. Conning shall supply the Client with a written
statement of the Investment Account at the end of each month, or at such
other reasonable times as shall be mutually agreed upon by Conning and the
Client, describing all transactions during the period covered by the
statement, and after each calendar quarter showing the profits and losses
therefrom. In addition, Conning shall confirm or cause to be confirmed in
writing to the Client each security transaction executed for the Investment
Account.
3. TERM. This Agreement will commence on the effective date specified on
the Execution Page of this Agreement and shall continue in force until
terminated by Conning or the Client upon 90 days prior written notice.
<PAGE>
4. INVESTMENT ACCOUNT. The Investment Account will consist of the cash
and investments of the Client from time to time held by the Custodian(s) in a
segregated account for management by Conning in accordance with this
Agreement and the Investment Guidelines (said account being referred to for
purposes of this Agreement as the "Investment Account"). The Client may
withdraw any or all of the cash and investments in the Investment Account at
any time, but will notify, in advance, Conning of any additions to, or any
withdrawals from, the Investment Account.
5. CUSTODY OF ASSETS. Conning shall not act as Custodian of the assets
in the Investtment Account. The Client shall be responsible for all fees and
other costs associated with maintenance of a custodial account.
6. COMPENSATION. For services rendered hereunder, the fee will be
calculated based on the mean asset value of the total investable asset under
management by Conning with a minimum annual fee of $35,000. For the purpose
of calculating the value of the assets upon which such fee is to be based,
the market value of the assets shall be determined as Of the last day of each
calendar quarter during the term of this Agreement. Such fee will be set at
an annual rate as stated below, but paid quarterly, and will be calculated
based on the average of the last day of the two proceeding quarters. Conning
shall be responsible for determining the market value of the assets at the
times required for purposes of this Agreement and shall make such
determinations in accordance with its normal practices and procedures and
deliver reports of such determinations to the parties hereto. The valuations
so determined by Conning shall be final and binding upon the parties hereto
in the absence of bad faith or clear error. The fee determined as set forth
in this Section 6 plus any out-of-pocket expenses directly related to the
provision of investment services specifically requested by the Client (such
investment services as listed in Appendix A attached) will be billed
quarterly in arrears:
18 basis points on the first $100 million
15 basis points thereafter
7. INDEPENDENT CONTRACTOR. Conning is retained and employed as an
advisor by the Client under this Agreement only for the purposes and to the
extent set forth herein, and the relation of Conning to the Client is and
shall remain, during the term or terms hereof, that of an independent
contractor.
8. CONFIDENTIALITY. In furtherance of this Agreement, the Client and
Conning shall be providing the other with financial and other relevant
information reasonably necessary for the services contemplated herein. All
such information of a non-public or confidential nature furnished by one
party to this Agreement to the other and labeled as confidential shall be
treated as confidential by the recipient thereof.
9. ABSENCE OF OTHER CONSIDERATION. Except as provided herein neither
Conning nor any of its officers, affiliates, or employees shall act as
principal or receive any compensation
2
<PAGE>
from the Client in connection with the purchase or sale of investments for
the from the Client in connection with the purchase or sale of investments
for the Investment. Account, other than the fee referred to in Paragraph 6
hereof.
10. NON-EXCLUSIVITY. Conning and its officers may act and continue to act
as investment managers for others, and nothing in this Agreement will in any
way be deemed to restrict Conning's right to perform investment management or
other services for any other person or entity, and the performance of such
services for others shall not be deemed to violate or give rise to any duty
or obligation to the Client not specifically undertaken by Conning hereunder.
11. BROKERAGE. Conning shall use its reasonable efforts to seek to execute
Investment Account transactions at prices which are advantageous to the Client
and at commission rates that are reasonable for the industry. In selecting
brokers or dealers qualified to execute a particular transaction, brokers or
dealers may be selected by Conning who also provide brokerage and research
services (as those terms are defined in Section 28(e) of the Securities Act of
1934) to Conning, on behalf of its clients and/or accounts over which it
exercises investment discretion, including the account of the Client. Conning is
authorized to pay a broker or dealer who provides such brokerage and research
services a commission for executing a portfolio transaction for the Client which
is in excess of the amount of commission another broker or dealer would have
charged for effecting that transaction, if Conning determines in good faith that
such amount of commission is reasonable in relation to the value of the
brokerage and research services provided by such broker or dealer. This
determination may be viewed in terms o f either that particular transaction or
the overall responsibilities which Conning has with respect to accounts over
which it exercises investment discretion.
12. EXPENSES OF INVESTMENT ACCOUNT. All expenses incurred in connection
with investments of the Investment Account, including, without limitation,
any brokerage commissions or fees in connection with the acquisition or
disposition of investments of the Investment Account, interest on any
borrowings if any, and taxes, shall be the responsibility of the Client. In
addition, the Client shall reimburse Conning for reasonable incurred
out-of-pocket expenses directly related to the provision of investment
services specifically requested by the Client (such investment services as
listed in Appendix A attached) under this agreement.
13. LIMITATION OF LIABILITY: INDEMNIFICATION. Neither Conning nor any of
its shareholders, officers, directors or employees shall be liable to the
Client, or to the Board of Directors of the Client for (i) mistakes of
judgment, mistakes of law or any act or omission suffered or taken by any
such person, or for losses due to any such mistakes, act or omission
(including, without limitation, any losses that may be sustained in
connection with the purchase, holding, redemption or sale of any security on
behalf of the Client), except to the extent such liability or losses result
from the (A) willful misconduct, bad faith or negligence of such person or
(B) reckless disregard by Conning of its fiduciary obligations and duties
under this Agreement; or (ii) the willful misconduct, negligence or bad faith
of any independent representative, consultant, independent contractor,
broker, agent or other person who is selected, engaged or retained by Conning
on behalf of the Client in the performance of this Agreement or
3
<PAGE>
in connection herewith, unless such person was in a negligent manner
selected, engaged or retained by Conning This Agreement does not waive rights
of the Client under the Investment Advisors Act of 1940, as amended, or other
applicable federal and state securities laws and the lawful regulations in
effect from time to time thereunder.
14. NON-ASSIGNABILITY. This Agreement shall be binding upon and shall
inure to the benefit of the parties hereto, and their respective successors
and assigns Neither party thereto shall assign (as that term is defined under
the Investment Advisors Act of 1940, as amended) its rights or obligations
under this Agreement without the prior written consent of the other. This
Agreement may be modified only by written amendment signed by both parties
hereto.
15. ACKNOWLEDGMENT OF DISCLOSURE. The Client acknowledges receipt from
Conning of a copy of its Form ADV, Part II, at least forty-eight hours prior
to entering into this Agreement.
l6. REGISTRATION AS INVESTMENT ADVISOR. Conning represents that it is a
registered investment advisor under the Investment Advisors Act of 1940, as
amended.
17. CLIENT AUTHORIZATION. The Client represents and warrants that the
appointment of Conning as investment manager-has been duly and properly
authorized by the Client in compliance with its charter, by-laws and other
documents relevant to such matters (the "Corporate Documents"). To the best
of the Client's knowledge, the investment guidelines relating to the
Investment Account do not violate any of the Corporate Documents or any legal
or regulatory restriction applicable to the Client's investment portfolio.
18. PRIOR PROPOSALS. This Agreement supersedes any prior agreement or
understanding between the Client and Conning with respect to the Investment
Account.
19. RELIANCE ON INFORMATION. Conning shall be entitled to rely, without
independent verification, on the accuracy and completeness of all information
furnished to it by the Client in furtherance of this Agreement, and on all
information obtained by Conning from third parties believed by Conning to be
reliable.
20. GOVERNING LAWS. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
21. NOTICES. All notices and other communications required or permitted
to be given pursuant to this Agreement shall be in writing and shall be
considered as property given or made if delivered personally or mailed,
postage prepaid or sent by overnight delivery or equivalent service or
telecopy, or prepaid telegram addressed to the respective address of such
party set forth on the execution page of this Agreement. All notices will be
deemed effective upon receipt if delivered personally or sent by overnight
delivery or equivalent service or telecopy or telegram and, if sent by
regular mail, effective five business days after mailing. Any party hereto
may.
4
<PAGE>
change its address for giving of notices by like notice stating the new
address to the other parties hereto.
22. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original and all of
which together shall be deemed to be one and the same instrument.
23. ATTORNEY FEES. In the event litigation is instituted for the
enforcement of this Agreement, the party prevailing in such litigation
shall be entitled to reasonable attorney's fee, in addition to other
costs otherwise allowable in such proceeding.
REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK
5
<PAGE>
APPENDIX A
Out-of Pocket Expenses Directly Related to the Provision of Investment Services
1. NAIC Interfacing and Valuation
2. Mortgage Backed Factor Processing and Pricing
3. Market Pricing of Assets
4. Federal Express Charges
5. Travel and Lodging - effective with the fifth client visit in one
calendar year.
6
<PAGE>
EXECUTION PAGE
A. All notices are to be addressed:
(i) To the Client:
PAULA Insurance Company
Attn: James A. Nicholson
Senior Vice President
300 North Lake Avenue, Suite 300
Pasadena, CA 91101
(ii) To Conning:
Conning & Company
City Place II
185 Asylum Street
Hartford, CT 06103
B. Custodian: See Exhibit 1
C. Effective Date: March 1, 1995
D. EXECUTION
PAULA INSURANCE COMPANY CONNING & COMPANY
/s/ James A. Nicholson /s/ William C. Shenton
---------------------- ----------------------
James A. Nicholson William C. Shenton
Senior Vice President Senior Vice President
7
<PAGE>
PAN AMERICAN UNDERWRITERS, INC.
AND
PAN AMERICAN UNDERWRITERS INSURANCE AGENTS AND BROKERS
AGENCY AND AFFILIATES
COST ALLOCATION AND REIMBURSEMENT AGREEMENT
MARCH 1, 1992
EXHIBIT B
<PAGE>
AGENCY AND AFFILIATES
COST ALLOCATION AND REIMBURSEMENT AGREEMENT
This AGENCY AND AFFILIATES COST ALLOCATION AND REIMBURSEMENT AGREEMENT (this
"Agreement") is entered into effective as of March 1, 1992 (the "Effective
Date"), by and among Pan American Underwriters, Pan American Underwriters
Insurance Agents and Brokers (the "Agency"), and the following entities,
hereinafter referred to collectively as the "Affiliates," and each,
individually, as an "Affiliate": Paula Insurance Company, Paula Assurance
Company, and Pan Pacific Benefit Administrators.
RECITALS
(A) The Agency, Paula Insurance Company and Pan Pacific Benefit
Administrators are a wholly-owned subsidiaries of Paula Financial.
(B) Paula Assurance Company is a wholly-owned subsidiary of Paula
Insurance Company.
(C) As described herein, the Agency desires to provide certain
equipment and perform certain services for each of the Affiliates. In
connection with providing such equipment and performing such
services, the Agency will incur certain costs and expenses that are
allocable among the Affiliates.
<PAGE>
(D) The Agency desires to be reimbursed by the Affiliates for the
costs and expenses that the Agency incurs in providing such
equipment and performing such services, and the Affiliates desire
to reimburse the Agency for their allocable share the same.
NOW, THEREFORE, in consideration of the mutual promises and
covenants contained in this Agreement and other good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. SERVICES PROVIDED
A. The Agency desires to perform certain services and provide
certain equipment to the Affiliates, including, but not limited to,
equipment and services relating to the use of office equipment,
office space and other functions related thereto.
B. All services rendered and equipment provided to the Affiliates
hereunder will be provided in compliance with all applicable laws,
regulations and rulings issued by the California Department of Insurance and
governmental authorities in all other jurisdictions in which the Agency and
the Affiliates transact business.
2
<PAGE>
2. COST ALLOCATION/REIMBURSEMENT BASIS
A. During the term of this Agreement, the equipment and services
referred to in Section 1 hereof shall be made available to the Affiliates on
a cost allocation/reimbursement basis in accordance with generally accepted
accounting principles, as follows:
SERVICES BASIS/METHOD
-------- ------------
Cleaning Proportionate employee population
Depreciation Proportionate employee population
Insurance (corporate) Proportionate employee population
Machine rent Proportionate employee population
Postage Proportionate employee population
Printing (all except
direct charges) Proportionate employee population
Rent Proportionate employee population
Repairs & maintenance Proportionate employee population
Supplies (all except
direct charges) Proportionate employee population
Telephone Proportionate employee population
Utilities Proportionate employee population
3
<PAGE>
Additionally, an Affiliate shall reimburse the Agency within
thirty (30) days after the receipt by such Affiliate an invoice for any
direct costs or expenses paid to any third party by the Agency in connection
with the equipment or services provided to that Affiliate under this
Agreement. Such amounts shall not be included in determining the allocations
contemplated by Section 2.A. hereof.
C. Payment for the services contemplated by this Agreement shall
commence as of the Effective Date and shall be paid to the Agency as mutually
agreed upon by the parties hereto; however, no less frequently than quarterly
after the Effective Date.
D. The basis for the cost allocation and reimbursements made
hereunder shall be reviewed by the parties hereto from time to time, but no
less frequently than annually, and, if required in order to comply with
applicable law, this Agreement shall be appropriately amended so as to ensure
that the allocations provided for hereunder are made in accordance with
generally accepted accounting principles. In addition, the books, accounts
and records of each party hereto shall be maintained in such a manner so as
to evidence the reasonableness of the cost allocation and reimbursements made
hereunder.
4
<PAGE>
E. The Agency and Affiliates agree that the Insurance Departments
of the State of California and Arizona may examine, audit and inspect the
books, accounts and records of each party hereto with regard to the equipment
and services provided hereunder.
3. BOOKS AND RECORDS
A. All books of accounts, documents, vouchers, letters and all
other papers and records in the possession of the Agency and relating to the
business transacted under this Agreement shall be deemed to be the property
of the party to whom such items relate and shall be delivered, where
practical, to the home office of the appropriate Affiliate upon such
Affiliate ceasing to be a party to this Agreement.
B. Copies of purchases and sales invoices shall be retained by the
Agency at its home office in California.
C. Upon the request of any of an Affiliate, the Agency will provide
the requesting Affiliate (or any third party authorized by such Affiliate)
with any documentation or information regarding the equipment and services
provided to such Affiliate by the Agency hereunder.
5
<PAGE>
4. TERM
A. The term of this Agreement shall be for a one year period
commencing immediately upon the Effective Date. This Agreement shall
automatically renew thereafter for successive like periods.
B. This Agreement may be terminated as follows: (1) at any time by
the mutual written consent of each of the parties hereto; (2) by the Agency
upon ninety (90) days' written notice to each of the Affiliates; and (3) any
Affiliate may terminate its participation in this Agreement at any time upon
ninety (90) days' written notice to each of the other parties hereto.
5. GENERAL PROVISIONS
(a) This Agreement constitutes an integration, (b) any amendment
hereto must be in writing, (c) in the event of any dispute hereunder, the
prevailing party shall be entitled to attorneys' fees, (d) this Agreement
shall inure to the benefit of and be binding upon the parties and their
successors and assigns, (e) California law shall apply to the interpretation
of the provisions hereof, and (f) this Agreement and the documents referred
to herein constitute the entire understanding and agreement of the parties,
and supersede all prior or
6
<PAGE>
contemporaneous agreements.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date and year first above written.
Agency: Affiliates:
Pan American Underwriters, Inc. Paula Insurance Company
By: /s/ Norman J. Schnider By: /s/ Norman J. Schnider
---------------------------- -------------------------
Title: President and CEO Title: President and CEO
------------------------- ----------------------
Pan American Underwriters,
Insurance Agents & Brokers Paula Assurance Company
By: /s/ Norman J. Schnider By: /s/ Norman J. Schnider
-------------------------- -------------------------
Title: President and CEO Title: President and CEO
------------------------- ----------------------
Pan Pacific Benefit
Administrators
Attest: /s/ Teresita E. Matos By: /s/ Norman J. Schnider
------------------------- --------------------------
Title: President and CEO
-----------------------
7
<PAGE>
[Logo] PEAT MARWICK
Certified Public Accountants
725 South Figueroa Street Telephone 213 972 4000 Telefax 213 622 1217
Los Angeles, CA 90017 Telex 6831572 PMMLA
Cable Address VERITATEM
November 13, 1992
The Board of Directors
Paula Financial:
Paula Financial (the Company) is a holding company with five wholly
owned subsidiaries: Paula Insurance Company (PICO), Paula Assurance
Company (PACO), Pan American Underwriters, Inc. and Pan American
Underwriters Insurance Agents and Brokers (collectively PAU), and
Pan Pacific Benefit Administrators (PPBA).
The Company is primarily involved in writing workers compensation
insurance for the agricultural industry in California and Arizona.
This coverage is written by PICO. PACO writes both accident &
health and life coverages. PACO's premium volume has traditionally
been insignificant as the Company chooses to emphasize workers
compensation coverages and only writes the additional lines to
provide a comprehensive package of insurance. PAU is the
underwriting agent which generates the business for PICO and PACO.
All PICO and PACO business is generated through PAU, but PAU also
produces business for outside carriers. PPBA is a third party
administrator which began operations in late 1991.
Prior to March 1, 1992, expenses were allocated between these
subsidiaries based on a Managing General Agent (MGA) agreement
between PAU and the other affiliates. In accordance with the MGA
agreement, PAU employed all Company personnel, paid most
operational expenses and received reimbursement based on the terms
of the agreement.
Effective March 1, 1992, the MGA agreement was terminated.
Concurrent with the termination, all Company personnel were
assigned to specific affiliates and new agreements were executed
intending to modify the Company's cost allocation process. Under
the revised process, each subsidiary pays the expenses directly
related to its operations, while expenses related to all
subsidiaries are allocated based on newly executed cost allocation
agreements.
The Company has asked us to review the newly proposed cost
allocation process to ensure that each subsidiary has been
allocated its appropriate share of expenses and that the overall
cost allocation methodology is reasonable under the circumstances.
COST ALLOCATION METHODOLOGY
In the process of refining their cost allocation methodology, the
Company identified two categories of expenses: direct and
allocated. Direct costs are those directly associated with a
particular affiliate. These expenses are paid by the related
affiliate. Allocated costs are expenses in which more than one
affiliate derives the benefit. These costs are allocated using one
of two methods: proportionate employee population or utilization.
<PAGE>
KPMG Peat Marwick
The Board of Directors
Paula Financial
November 13, 1992
2
Under the proportionate employee population method, expenses are
allocated based on an affiliates' percentage of assigned employees
at a particular location. This method was used to allocate costs
when the expense could be associated with employee use.
The utilization method is driven by the level of activity related
to the business of a particular affiliate as determined by inquiry
and analytical reviews of related factors.
Costs related to facilities, office space and equipment are paid by
PAU and allocated to the other affiliates based on their
proportionate employee population. Services in this category
include, but are not limited to, cleaning, depreciation, corporate
insurance, machine rent, postage, printing, rent, repairs and
maintenance, supplies, telephone, and utilities.
Services associated with human resources, management information
systems and data processing (MIS), and administration are initially
paid by PICO and then allocated to the other subsidiaries. Costs
related to the human resource function are allocated based on each
affiliates proportionate employee population. Administration and
MIS expenses are allocated based on utilization.
PROCEDURES PERFORMED
We read the cost allocation agreements and noted that the terms of
these agreements are consistent with the methodology discussed
above.
Additionally, we read the chart of accounts for each subsidiary and
noted that each expense account had been identified as being a
direct or allocated cost. It is the Company's intent that expenses,
as reported in accordance with generally accepted accounting
principles, are to be allocated. We noted that the Company's
classification as to direct or allocated expense appeared
consistent with the nature of the expense and the operations of the
subsidiary.
Under the new agreements, expenses relating to facilities, office
space, equipment and human resources are to be allocated based on
proportionate employee population. We reviewed the Company's
assignment of personnel to each affiliate noting that the
distribution of employees was consistent with the nature of
operations and related employee functions.
Administration and MIS expenses are allocated based on utilization.
Administration expenses relate primarily to executive officers
Utilization of these expenses was determined based on premium
volume and investment income, which is intended to estimate the
relative time spent on each affiliate's operations.
MIS expenses include both systems related expenses and personnel
expenses for the MIS department. Systems expenses are allocated
based on estimates of usage and personnel expenses are allocated
based on estimates of time spent on related functions.
<PAGE>
KPMG Peat Marwick
The Board of Directors
Paula Financial
November 13, 1992
3
While establishing a cost allocation process involves a selection among
various acceptable methodologies, we believe that the Company's cost
allocation methodology described above is appropriate and reasonable
under the circumstances.
We understand that the Company has implemented procedures to more
precisely track certain usage factors. We recommend that the Company use
these results to continue to refine the cost allocation process.
Additionally, we recommend that the Company perform regular reviews of
the allocation process to insure that the methodologies and factors used
remain appropriate under the circumstances.
Very truly yours,
/s/ KPMG Peat Marwick
<PAGE>
AMENDMENT NO. 1
Attached to and made a part of
Agency and Affiliates
Cost Allocation and Reimbursement Agreement
This Amendment No. l is entered into effective as of December 9, 1994, by and
among the parties to that certain Agency and Affiliates Cost Allocation and
Reimbursement Agreement dated as of March l, 1992 (the "Agreement").
WHEREAS, on December 8, 1994 Oregon Risk Management, Inc., an Oregon
corporation ("ORM"), a wholly-owned subsidiary of Paula Financial, purchased
substantially all of the assets of three Oregon corporations involved in the
business of placing workers' compensation and other insurance coverage with
insurance carriers and commenced business as an insurance agency;
WHEREAS, it is anticipated that ORM will from time to time provide equipment
and perform services for each of the Affiliates (as defined in the Agreement);
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree that
the Agreement shall be amended as follows:
1. The term "Agency," as defined in the introductory paragraph of the
Agreement, shall henceforth include ORM as well as Pan American Underwriters,
Inc. and Pan American Underwriters Insurance Agents and Brokers, Inc.
2. Paragraph 2. E. shall be amended and restated to read in full as
follows.
"E. The Agency and Affiliates agree that the Insurance Departments
of the States of California, Arizona and Oregon may examine, audit
and inspect the books, accounts and records of each party hereto
with regard to the equipment and services provided hereunder."
IN WITNESS WHEREOF, the parties hereto have executed this
Amendment as of the first date written above.
Agency: Affiliates:
PAN AMERICAN UNDERWRITERS, INC. PAULA INSURANCE COMPANY
By: /s/ [ILLEGIBLE] By: /s/ [ILLEGIBLE]
---------------------------- ----------------------
Its: President/CEO Its: President/CEO
--------------------------- --------------------
PAN AMERICAN INSURANCE PAULA ASSURANCE COMPANY
AGENTS A BROKERS, INC.
By: /s/ [ILLEGIBLE] By: /s/ [ILLEGIBLE]
----------------------------- ----------------------
Its: President/CEO Its: President/CEO
--------------------------- --------------------
(Signatures Continue on Next Page)
EXHIBIT B
<PAGE>
OREGON RISK MANAGEMENT, INC. PAN PACIFIC BENEFIT
ADMINISTRATORS, INC.
By: /s/ [ILLEGIBLE] By: /s/ [ILLEGIBLE]
----------------------------- ----------------------
Its: President/CEO Its: President/CEO
--------------------------- --------------------
<PAGE>
AMENDMENT NO. 2
ATTACHED TO AND MADE A PART OF
AGENCY AND AFFILIATES
COST ALLOCATION AND REIMBURSEMENT AGREEMENT
This Amendment No. 2 is entered into effective as of December I, 1996 by and
among the parties to that certain Agency and Affiliates Cost Allocation and
Reimbursement Agreement dated as of March 1, 1992, as amended by Amendment No
1 thereto dated as of December 9, 1994 (collectively, the "Agreement"). All
capitalized terms used herein without definition shall have the meanings
ascribed to them in the Agreement.
WHEREAS, the parties to the Agreement have concluded that it is in the best
interests of the Affiliates that the Agency provide additional services on
behalf of the Affiliates in addition to those contemplated by the Agreement;
and
WHEREAS, the parties deem it advisable to document the parties' intention
with respect to the provision of those services and to clarify the method to
be used by the Affiliates to determine the amount of the payment for such
services;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree that
the Agreement shall be amended as follows:
1. Paragraph 1. A. of the Agreement is amended by adding the following at the
end thereof:
"The services provided hereunder shall include, without limitation, the
rendering of general marketing functions on behalf of the Affiliates by
Agency employees in connection with (i) larger employers insured by the
Affiliates for which the Agency does not serve as the broker or agent of
record and (ii) insurance agents and brokers other than the Agency. Such
services are designed to increase the flow of high quality insurance premiums
to the Affiliates using Agency personnel to support the provision of
Affiliate services provided to insureds and brokers and agents appointed by
the Affiliates. The parties acknowledge that the actual value of such
services is difficult to ascertain and, accordingly, the method of
reimbursement by the Affiliates for the rendering of such services must be
flexible in order that the Affiliate not be required to reimburse the Agency
for unproductive services."
2. The list of services provided and the basis/method of
allocation/reimbursements in Paragraph 2.A. of the Agreement is amended by
adding the following at the end thereof under the headings "Services" and
"Basis/Method," respectively:
Unallocated Marketing Services Discretionary. The amount of the
reimbursement to be
determined by the
<PAGE>
applicable Affiliate in its sole
discretion based on the amount of
premiums generated by such services
and the benefit to the Affiliate's
reputation and standing in its
marketplace from such services.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the
first date written above:
Agency: Affiliates:
PAN AMERICAN UNDERWRITERS, INC. PAULA INSURANCE COMPANY
By: /s/ [ILLEGIBLE] By: /s/ [ILLEGIBLE]
---------------------------- ----------------------
President President
PAN AMERICAN UNDERWRITERS PAULA ASSURANCE COMPANY
INSURANCE AGENTS & BROKERS, INC.
By: /s/ [ILLEGIBLE] By: /s/ [ILLEGIBLE]
---------------------------- ----------------------
President President
AGRI-COMP INSURANCE AGENCY, INC. PAN PACIFIC BENEFIT
(formerly Oregon Risk Management, Inc.) ADMINISTRATORS, INC.
By: /s/ [ILLEGIBLE] By: /s/ [ILLEGIBLE]
---------------------------- ----------------------
President President
<PAGE>
PAULA INSURANCE COMPANY
INSURANCE CARRIER AND AFFILIATES
COST ALLOCATlON AND REIMBURSEMENT AGREEMENT
MARCH 1, 1992
EXHIBIT C
<PAGE>
INSURANCE CARRIER AND AFFILIATES
COST ALLOCATION AND REIMBURSEMENT AGREEMENT
This INSURANCE CARRIER AND AFFILIATES COST ALLOCATION AND
REIMBURSEMENT AGREEMENT (this "Agreement") is entered into effective
as of March 1, 1992 ( the "Effective Date" ), by and among Paula Insurance
Company ( the "Carrier" ), and the following entities, hereinafter referred
to collectively as the "Affiliates," and each, individually, as an
"Affiliate": Paula Assurance Company, Pan American Underwriters, Inc.,
Pan American Underwriters Insurance Agents and Brokers, and Pan
Pacific Benefit Administrators.
RECITALS
(A) Pan American Underwriters, Inc., Pan American Underwriters
Insurance Agents and Brokers, the Carrier and Pan Pacific Benefit
Administrators are a wholly-owned subsidiaries of Paula Financial.
(B) Paula Assurance Company is a wholly-owned subsidiary of the Carrier.
(C) As described herein, the Carrier desires to perform certain
functions on behalf of and provide certain services to each of the
Affiliates. In connection with performing such functions and providing such
services, the Carrier will incur certain costs and
<PAGE>
expenses that are allocable among the Affiliates.
(D) The Carrier desires to be reimbursed by the Affiliates for the costs
and expenses that the Carrier incurs in performing such functions and
services, and the Affiliates desire to reimburse the Carrier for their
allocable share of the same.
NOW, THEREFORE, in consideration of the mutual promises and
covenants contained in this Agreement and other good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. SERVICES PROVIDED
A. As described herein, the Carrier desires to perform certain
functions on behalf of and provide certain services to the Affiliates,
including, but not limited to, services relating to such matters as general
office administration, human resources, data processing through its
Management Information Services ("MIS"), and other related services.
B. All services rendered to the Affiliates hereunder will be provided
in compliance with all applicable laws, regulations and rulings issued by the
California Department of Insurance and governmental authorities in all other
jurisdictions
2
<PAGE>
in which the Carrier and the Affiliates transact business.
C. Notwithstanding the services provided hereunder, each of the Affiliates
shall retain the ultimate responsibility for their own general office
administration, employees and other related matters.
2. COST ALLOCATION/REIMBURSEMENT BASIS
A. During the term of this Agreement, the services described in
Section 1 hereof shall be made available to the Affiliates on a cost
allocation/reimbursement basis, in accordance with generally accepted accounting
principles, as follows:
SERVICES BASIS/METHOD
-------- ------------
Administration Utilization
Human resources Proportionate employee population
MIS Utilization
B. Additionally, an Affiliate shall reimburse the Carrier within
thirty (30) days after the receipt by such Affiliate of an invoice for any
direct costs or expenses paid to any third party by the Carrier in connection
with services provided to that Affiliate under this Agreement. Such amounts
shall not be included
3
<PAGE>
in determining the allocations contemplated by Section 2.A. hereof.
C. Payment for the services contemplated by this Agreement shall
commence as of the Effective Date and shall be paid to the Carrier as
mutually agreed upon by the parties hereto; however, no less frequently than
quarterly after the Effective Date.
D. The basis for the cost allocation and reimbursements made
hereunder shall be reviewed by the parties hereto from time to time, but no
less frequently than annually, and, if required in order to comply with
applicable law, this Agreement shall be appropriately amended so as to ensure
that the cost allocation and reimbursements provided for hereunder are made
in accordance with generally accepted accounting principles. In addition, the
books, accounts and records of each of the parties hereto shall be maintained
in such a manner so as to evidence the reasonableness of the cost allocation
and reimbursements made hereunder.
E. The Carrier and Affiliates agree that the Insurance Departments
of the State of California and Arizona may examine, audit and inspect the
books accounts and records of each of the parties hereto with regard to the
services provided hereunder.
4
<PAGE>
3. BOOKS AND RECORDS
A. All books of accounts, documents, vouchers, letters and all other
papers and records in the possession of the Carrier and relating to the
business transacted under this Agreement shall be deemed to be the property
of the party to whom such items relate and shall be delivered, where
practical, to the home office of the appropriate Affiliate upon such
affiliate ceasing to be a party to this Agreement.
B. Copies of purchases and sales invoices shall be retained by
the Carrier at its home office in California.
C. Upon the request of an Affiliate, the Carrier will provide the
requesting Affiliate (or any third party authorized by such parties ) with
any documentation or information regarding the services provided to such
Affiliate by the Carrier hereunder.
4. TERM
A. The term of this Agreement shall be for a one year period
commencing immediately upon the Effective Date. This Agreement shall
automatically renew thereafter for successive like periods.
5
<PAGE>
B. This Agreement may be terminated as follows. (1) at any time by the
mutual written consent of each of the parties hereto; (2) by the Carrier
upon ninety (90) days' written notice to each of the Affiliates; (3)
any Affiliate may terminate its participation in this Agreement at any
time upon ninety (90) days' written notice to the other parties hereto.
5. GENERAL PROVISIONS
(a) This Agreement constitutes an integration, (b) any amendment
hereto must be in writing, (c) in the event of any dispute hereunder, the
prevailing party shall be entitled to attorneys' fees, (d) this Agreement
shall inure to the benefit of and be binding upon the parties and their
successors and assigns, (e) California law shall apply to the interpretation
of the provisions hereof, and (f) this Agreement and the documents referred
to herein constitute the entire understanding and agreement of the
parties, and supersede all prior or contemporaneous agreements.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year first above written.
6
<PAGE>
Carrier: Affiliates:
Paula Insurance Company Pan American Underwriters, Inc
By: /s/ Norman J. Schnider By: /s/ Norman J. Schnider
------------------------ -----------------------
Title: President & CEO Title: President & CEO
------------------- ---------------------
Pan American Underwriters,
Insurance Agents & Brokers
By: /s/ Norman J. Schnider
-----------------------
Title: President & CEO
---------------------
Paula Assurance Company
By: /s/ Norman J. Schnider
-----------------------
Title: President & CEO
---------------------
Pan Pacific Benefit Administrator
Attest: /s/ Teresita E. Matos By: /s/ Norman J. Schnider
---------------------- -----------------------
Title: President & CEO
---------------------
7
<PAGE>
AMENDMENT NO. 1
Attached to and made a part of
PAULA INSURANCE COMPANY
INSURANCE CARRIER AND AFFILIATES
COST ALLOCATION AND REIMBURSEMENT AGREEMENT
Dated March 1, 1992
IT IS MUTUALLY AGREED that effective January 1, 1993 this Agreement is
amended to read:
SECTION 1 - SERVICES PROVIDED
A. As described herein, the Carrier desires to perform certain functions
on behalf of and provide certain services to the Affiliates, including,
but not limited to, services relating to data processing through its
Management Information Services ("MIS"), and other related services.
SECTION 2 - COST ALLOCATION/REIMBURSEMENT BASIS
A. During the term of this Agreement, the services described in Section 1
hereof shall be made available to the Affiliates on a cost
allocation/reimbursement basis, in accordance with generally accepted
accounting principles, as follows:
SERVICES BASIS/METHOD
-------- ------------
MIS Utilization
1
<PAGE>
Carrier: Affiliates:
PAULA Insurance Company Pan American Underwriters, Inc.
By: /s/ Norman J. Schnider By: /s/ [ILLEGIBLE]
------------------------ -----------------------
Title: President Title: President
------------------- ---------------------
Pan American Underwriters
Insurance Agents & Brokers, Inc.
By: /s/ [ILLEGIBLE]
-----------------------
Title: President
---------------------
PAULA Assurance Company
By: /s/ Norman J. Schnider
-----------------------
Title: President
---------------------
Pan Pacific Benefit Administrators
Attest: /s/ Dorothy J. Neubauer By: /s/ [ILLEGIBLE]
------------------------- -----------------------
Title: /s/ [ILLEGIBLE]
---------------------
2
<PAGE>
AMENDMENT NO. 2
Attached to and made a part of
PAULA INSURANCE COMPANY
INSURANCE CARRIER AND AFFILIATES
COST ALLOCATION AND REIMBURSEMENT AGREEMENT
Dated March 1, 1992
IT IS MUTUALLY AGREED that effective May 1, 1993 this Agreement
is amended to read:
"Affiliates" is hereinafter referred to collectively and each,
individually, as an "Affiliate": PAULA Assurance Company, Pan
American Underwriters, Inc., Pan American Underwriters Insurance
Agents & Brokers, Inc., and Pan Pacific Benefit Administrators,
and the parent PAULA Financial.
SECTION 1 - SERVICES PROVIDED
A. As described herein, the Carrier desires to perform certain
functions on behalf of and provide certain services to the
Affiliates, including, but not limited to, services relating to
data processing through its Management Information Services
("MIS" ), office space and other functions related thereto, and
other related services.
1
<PAGE>
SECTION 2 - COST ALLOCATION/REIMBURSEMENT BASIS
A. During the term of this Agreement, the services described in
Section 1 hereof shall be made available to the Affiliates on a
cost allocation/reimbursement basis, in accordance with
generally accepted accounting principles, as follows:
SERVICES BASIS/METHOD
-------- ------------
MIS Utilization
Rent Proportionate Employee Population
Telephone Proportionate Employee Population
Utilities Proportionate Employee Population
2
<PAGE>
Carrier Affiliates:
PAULA Insurance Company Pan American Underwriters, Inc.
By: /s/ Norman J. Schnider By: /s/ [ILLEGIBLE]
------------------------ -----------------------
Title: President Title: President
------------------- ---------------------
Pan American Underwriters
Insurance Agents & Brokers, Inc.
By: /s/ [ILLEGIBLE]
-----------------------
Title: President
---------------------
PAULA Assurance Company
By: /s/ Norman J. Schnider
-----------------------
Title: President
---------------------
Pan Pacific Benefit Administrators
By: /s/ [ILLEGIBLE]
-----------------------
Title: President
---------------------
PAULA Financial
Attest: /s/ Dorothy J. Neubauer By: /s/ [ILLEGIBLE]
------------------------ ------------------------
Title: President
---------------------
3
<PAGE>
[Letterhead]
November 13, 1992
The Board of Directors
Paula Financial:
Paula Financial (the Company) is a holding company with five wholly owned
subsidiaries: Paula Insurance Company (PICO), Paula Assurance Company
(PACO), Pan American Underwriters, Inc. and Pan American Underwriters
Insurance Agents and Brokers (collectively PAU), and Pan Pacific Benefit
Administrators (PPBA).
The Company is primarily involved in writing workers compensation insurance
for the agricultural industry in California and Arizona. This coverage is
written by PICO. PACO writes both accident A health and life coverages.
PACO's premium volume has traditionally been insignificant as the Company
chooses to emphasize workers compensation coverages and only writes the
additional lines to provide a comprehensive package of insurance. PAU is
the underwriting agent which generates the business for PICO and PACO. All
PICO and PACO business is generated through PAU, but PAU also produces
business for outside carriers. PPBA is a third party administrator which
began operations in late 1991.
Prior to March 1, 1992, expenses were allocated between these subsidiaries
based on a Managing General Agent (MGA) agreement between PAU and the other
affiliates. In accordance with the MGA agreement, PAU employed all Company
personnel, paid most operational expenses and received reimbursement based
on the terms of the agreement.
Effective March 1, 1992, the MGA agreement was terminated. Concurrent with
the termination, all Company personnel were assigned to specific affiliates
and new agreements were executed intending to modify the Company's cost
allocation process. Under the revised process, each subsidiary pays the
expenses directly related to its operations, while expenses related to all
subsidiaries are allocated based on newly executed cost allocation
agreements.
The Company has asked us to review the newly proposed cost allocation
process to ensue that each subsidiary has been allocated its appropriate
share of expenses and that the overall cost allocation methodology is
reasonable under the circumstances.
COST ALLOCATION METHODOLOGY
In the process of refining their cost allocation methodology, the Company
identified two categories of expenses: direct and allocated. Direct costs
are those directly associated with a particular affiliate. These expenses
are paid by the related affiliate. Allocated costs are expenses in which
more than one affiliate derives the benefit. These costs are allocated
using one of two methods: proportionate employee population or utilization.
<PAGE>
[Logo]
The Board of Directors
Paula Financial
November 13, 1992
2
Under the proportionate employee population method, expenses are
allocated based on an affiliates' percentage of assigned employees at
a particular location. This method was used to allocate costs when the
expense could be associated with employee use.
The utilization method is driven by the level of activity related to
the business of a particular affiliate as determined by inquiry and
analytical reviews of related factors.
Costs related to facilities, office space and equipment are paid by
PAU and allocated to the other affiliates based on their proportionate
employee population. Services in this category include, but are not
limited to, cleaning, depreciation, corporate insurance, machine rent,
postage, printing, rent, repairs and maintenance, supplies, telephone,
and utilities.
Services associated with human resources, management information
systems and data processing (MIS), and administration are initially
paid by PICO and then allocated to the other subsidiaries. Costs
related to the human resource function are allocated based on each
affiliates proportionate employee population. Administration and MIS
expenses are allocated based on utilization.
PROCEDURES PERFORMED
We read the cost allocation agreements and noted that the terms of these
agreements are consistent with the methodology discussed above.
Additionally, we read the chart of accounts for each subsidiary and noted that
each expense account had been identified as being a direct or allocated cost. It
is the Company's intent that expenses, as reported in accordance with generally
accepted accounting principles, are to be allocated. We noted that the Company's
classification as to direct or allocated expense appeared consistent with the
nature of the expense and the operations of the subsidiary.
Under the new agreements, expenses relating to facilities, office space,
equipment and human resources are to be allocated based on proportionate
employee population. We reviewed the Company's assignment of personnel to each
affiliate noting that the distribution of employees was consistent with the
nature of operations and related employee functions.
Administration and MIS expenses are allocated based on utilization.
Administration expenses relate primarily to executive officers. Utilization of
these expenses was determined based on premium volume and investment income,
which is intended to estimate the relative time spent on each affiliate's
operations.
MIS expenses include both systems related expenses and personnel expenses for
the MIS department. Systems expenses are allocated based on estimates of usage
and personnel expenses are allocated based on estimates of time spent on related
functions.
<PAGE>
[Logo]
The Board of Directors
Paula Financial
November 13, 1992
3
While establishing a cost allocation process involves a selection among
various acceptable methodologies, we believe that the Company's cost
allocation methodology described above is appropriate and reasonable under
the circumstances.
We understand that the Company has implemented procedures to more precisely
track certain usage factors. We recommend that the Company use these
results to continue to refine the cost allocation process. Additionally, we
recommend that the Company perform regular reviews of the allocation
process to insure that the methodologies and factors used remain
appropriate under the circumstances.
Very truly yours,
/s/ KPMG Peat Marwick
<PAGE>
AMENDMENT NO. 3
Attached to and made a part of
Insurance Carrier and Affiliates
Cost Allocation and Reimbursement Agreement
This Amendment No 3 is entered into effective as of December 9, 1994, by
and among the parties to that certain Insurance Carrier and Affiliates Cost
Allocation and Reimbursement Agreement dated as of March 1, 1992, as amended
by that certain Amendment No. l thereto dated as of January 1, 1993 and that
certain Amendment No.2 dated as of May 1, 1993 (as amended, the "Agreement").
WHEREAS, on December 8, 1994 Oregon Risk Management, Inc., an Oregon
corporation ("ORM"), a wholly-owned subsidiary of Paula Financial,
purchased substantially all of the assets of three Oregon corporations
involved in the business of placing workers' compensation and other
insurance coverage with insurance carriers and commenced business as an
insurance agency;
WHEREAS, it is anticipated that the Carrier will from time to time perform
certain functions on behalf of and provide certain services to ORM;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree
that-the Agreement shall be amended as follows:
1. The terms "Affiliates" and "Affiliate," as defined in the introductory
paragraph of the Agreement, shall henceforth include ORM as well as Paula
Assurance Company, Pan American Underwriters, Inc., Pan American Underwriters
Insurance Agents and Brokers, Inc., Pan Pacific Benefit Administrators, Inc.
and the parent Paula Financial.
2. Paragraph 2. E. shall be amended and restated to read in full as follows:
"E. The Carrier and Affiliates agree that the Instance Departments of the
States of California, Arizona and Oregon may examine, audit and inspect the
books, accounts and records of each party hereto with regard to the
services provided hereunder."
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the first date written above.
Affiliates: Carrier:
PAN AMERICAN UNDERWRITERS, INC. PAULA INSURANCE COMPANY
By: /s/ [ILLEGIBLE] By: /s/ [ILLEGIBLE]
--------------------------- ---------------------
Its: President/CEO Its: President/CEO
--------------------------- ---------------------
PAN AMERICAN INSURANCE
AGENTS BROKERS, INC.
By: /s/ [ILLEGIBLE]
---------------------------
Its: President/CEO
---------------------------
(Signatures Continue on Next Page)
EXHIBIT C
<PAGE>
OREGON RISK MANAGEMENT, INC.
By: /s/ [ILLEGIBLE]
---------------------------
Its: President/CEO
---------------------------
PAULA ASSURANCE COMPANY
By: /s/ [ILLEGIBLE]
---------------------------
Its: President/CEO
---------------------------
PAN PACIFIC BENEFIT
ADMINISTATORS, INC.
By: /s/ [ILLEGIBLE]
---------------------------
Its: President/CEO
---------------------------
<PAGE>
PAULA FINANCIAL
PARENT AND AFFILIATES
COST ALLOCATION AND REIMBURSEMENT AGREEMENT
JANUARY 1, 1993
<PAGE>
PARENT AND AFFILIATES
COST ALLOCATION AND REIMBURSEMENT AGREEMENT
This PARENT AND AFFILIATES COST ALLOCATION AND REIMBURSEMENT AGREEMENT (this
"Agreement") is entered into effective as of January 1, 1993 (the "Effective
Date"), by and among PAULA Financial (the "Parent"), and the following
entities, hereinafter referred to collectively as the "Affiliates," and each,
individually, as an "Affiliate": Paula Insurance Company, Paula Assurance
Company, Pan American Underwriters, Inc., Pan American Underwriters Insurance
Agents and Brokers, and Pan Pacific Benefit Administrators.
RECITALS
(A) Paula Insurance Company, Pan American Underwriters, Inc., Pan American
Underwriters Insurance Agents and Brokers, and Pan Pacific Benefit
Administrators are a wholly-owned subsidiaries of PAULA Financial.
(B) Paula Assurance Company is a wholly-owned subsidiary of Paula
Insurance Company.
(C) As described herein, the Parent desires to perform certain functions
on behalf of and provide certain services to each of the Affiliates. In
connection with performing such functions and providing such services, the
Parent will incur certain costs and
<PAGE>
expenses that are allocable among the Affiliates.
(D) The Parent desires to be reimbursed by the Affiliates for the costs
and expenses that the Parent incurs in performing such functions and services,
and the Affiliates desire to reimburse the Parent for their allocable share of
the same.
NOW, THEREFORE, in consideration of the mutual promises and covenants contained
in this Agreement and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. SERVICES PROVIDED
A. As described herein, the Parent desires to perform certain
functions on behalf of and provide certain services to the Affiliates,
including, but not limited to, services relating to such matters as general
office and corporate administration, human resources, auto rent, and other
related services.
B. All services rendered to the Affiliates hereunder will be
provided in compliance with all applicable laws, regulations and rulings issued
by the California Department of Insurance and governmental authorities in all
other jurisdictions in which the Parent and the Affiliates transact business.
2
<PAGE>
C. Notwithstanding the services provided hereunder, each of the
Affiliates shall retain the ultimate responsibility for their own general
office administration, employees and other related matters.
2. COST ALLOCATION/REIMBURSEMENT BASIS
A. During the term of this Agreement, the services described in
Section 1 hereof shall be made available to the Affiliates on a cost
allocation/reimbursement basis, in accordance with generally accepted accounting
principles, as follows:
Services Basis/Method
Administration Proportionate employee population
Human resources Proportionate employee population
Auto Rent Purchase cost and related expenses
B. Additionally, an Affiliate shall reimburse the Parent within
thirty (30) days after the receipt by such Affiliate of an invoice for any
direct costs or expenses paid to any third party by the Parent in connection
with services provided to that Affiliate under this Agreement. Such amounts
shall not be included in determining the allocations contemplated by Section
2.A. hereof.
C. Payment for the services contemplated by this
3
<PAGE>
Agreement shall commence as of the Effective Date and shall be paid to the
Parent as mutually agreed upon by the parties hereto; however, no less
frequently than quarterly after the Effective Date.
D. The basis for the cost allocation and reimbursements made
hereunder shall be reviewed by the parties hereto from time to time, but no less
frequently than annually, and, if required in order to comply with applicable
law, this Agreement shall be appropriately amended so as to ensure that the cost
allocation and reimbursements provided for hereunder are made in accordance with
generally accepted accounting principles. In addition, the books, accounts and
records of each of the parties hereto shall be maintained in such a manner so as
to evidence the reasonableness of the cost allocation and reimbursements made
hereunder.
E. The Parent and Affiliates agree that the Insurance Departments of
the State of California and Arizona may examine, audit and inspect the books
accounts and records of each of the parties hereto with regard to the services
provided hereunder
3. BOOKS AND RECORDS
A. All books of accounts, documents, vouchers, letters
4
<PAGE>
and all other papers and records in the possession of the Parent and relating to
the business transacted under this Agreement shall be deemed to be the property
of the party to whom such items relate and shall be delivered, where practical,
to the home office of the appropriate Affiliate upon such affiliate ceasing to
be a party to this Agreement.
B. Copies of purchases and sales invoices shall be retained by the
Parent at its home office in California.
C. Upon the request of an Affiliate, the Parent will provide the
requesting Affiliate (or any third party-authorized by such parties) with any
documentation or information regarding the services provided to such Affiliate
by the Parent hereunder.
4. TERM
A. The term of this Agreement shall be for a one year period
commencing immediately upon the Effective Date. This Agreement shall
automatically renew thereafter for successive like periods.
B. This Agreement may be terminated as follows: (1) at any time by
the mutual written consent of each of the parties hereto; (2) by the Parent
upon ninety (90) days' written notice to
5
<PAGE>
each of the Affiliates; (3) any Affiliate may terminate its participation in
this Agreement at any time upon ninety (90) days' written notice to the other
parties hereto.
5. GENERAL PROVISIONS
(a) This Agreement constitutes an integration, (b) any amendment
hereto must be in writing, (c) in the event of any dispute hereunder, the
prevailing party shall be entitled to attorneys' fees, (d) this Agreement shall
inure to the benefit of and be binding upon the parties and their successors and
assigns, (e) California law shall apply to the interpretation of the provisions
hereof, and (f) this Agreement and the documents referred to herein constitute
the entire understanding and agreement of the parties, and supersede all prior
or contemporaneous agreements.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year first above written.
6
<PAGE>
Parent; Affiliates
PAULA Financial Pan American Underwriters, Inc
By:/s/ Roger G. Teig By:/s/ Leroy J. Combs
--------------------------- -------------------------------
Title: Chairman/CEO Title: President
------------------------ ----------------------------
Pan American Underwriters
Insurance Agents & Brokers
By: /s/ Leroy J. Combs
-------------------------------
Title: President
----------------------------
Paula Insurance Company
By: /s/ Norman Schnider
-------------------------------
Title: President
----------------------------
Paula Assurance Company
By: /s/ Norman Schnider
-------------------------------
Title: President
----------------------------
Attest: Pan Pacific Benefit Administrators
/s/ Dorothy J. Neubauer By: /s/ Leroy J. Combs
- ------------------------------ -------------------------------
Title: President
----------------------------
7
<PAGE>
AMENDMENT NO 1
Attached to and made a part of
Parent and Affiliates
Cost Allocation and Reimbursement Agreement
This Amendment No. l is entered into effective as of December 9, 1994, by and
among the parties to that certain Parent and Affiliates Cost Allocation and
Reimbursement Agreement dated as of January 1, 1993 (the "Agreement").
WHEREAS, on December 8, 1994 Oregon Risk Management, Inc., an Oregon corporation
("ORM"), a wholly-owned subsidiary of Paula Financial, purchased substantially
all of the assets of three Oregon corporations involved in the business of
placing workers' compensation and other insurance coverage with insurance
carriers and commenced business as an insurance agency;
WHEREAS, it is anticipated that the Parent (as defined in the Agreement) will
from time to time perform certain functions on behalf of and provide certain
services to ORM;
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, the parties hereto agree that the Agreement
shall be amended as follows:
1. The terms "Affiliates" and "Affiliate" as defined in the introductory
paragraph of the Agreement, shall henceforth include ORM as well as Paula
Insurance Company, Paula Assurance Company, Pan American Underwriters, Inc. Pan
American Underwriters Insurance Agents and Brokers, Inc. and Pan Pacific Benefit
Administrators, Inc.
2. Paragraph 2. E. shall be amended and restated to read in full as follows:
"E. The Parent and Affiliates agree that the Insurance Departments of the
States of California, Arizona and Oregon may examine, audit and inspect the
books, accounts and records of each party hereto with regard to the services
provided hereunder."
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the
first date written above.
Affiliates: Parent:
PAULA INSURANCE COMPANY PAULA FINANCIAL
By: /s/ [ILLEGIBLE] By: /s/ [ILLEGIBLE]
--------------------------- --------------------------------
Its: President/CEO Its: President/CEO
-------------------------- -------------------------------
PAN AMERICAN INSURANCE
AGENTS AND BROKERS, INC.
By: /s/ [ILLEGIBLE]
---------------------------
Its: President/CEO
--------------------------
(Signatures Continue on Next Page)
<PAGE>
OREGON RISK MANAGEMENT, INC.
By: /s/ [ILLEGIBLE]
---------------------------
Its: President/CEO
--------------------------
PAULA ASSURANCE COMPANY
By /s/ [ILLEGIBLE]
---------------------------
Its: President/CEO
--------------------------
PAN PACIFIC BENEFIT
ADMINISTRATORS, INC.
By: /s/ [ILLEGIBLE]
---------------------------
Its: President/CEO
--------------------------
PAN AMERICAN UNDERWRITERS, INC.
By: /s/ [ILLEGIBLE]
---------------------------
Its: President/CEO
--------------------------
<PAGE>
MANAGING AGREEMENT
BETWEEN
PAULA ASSURANCE COMPANY
AND
PAN PACIFIC BENEFIT ADMINISTRATORS, INC.
1993
EXHIBIT E
<PAGE>
MANAGING AGREEMENT
This Agreement is effective this 1st day of January, 1993, by and between PAULA
ASSURANCE COMPANY (hereinafter referred to as COMPANY), and PAN PACIFIC BENEFIT
ADMINISTRATORS, INC. (hereinafter referred to as MANAGER).
I
APPOINTMENT AND ACCEPTANCE
COMPANY does hereby appoint MANAGER, as its representative with authority to act
for it in the conduct of its insurance business, all to the extent herein
limited and provided.
MANAGER does hereby accept such appointment and agrees that it will perform the
functions of Manager and Administrator for COMPANY to the extent herein limited
and provided.
MANAGER may act as Administrator for other insurance companies provided such
activity creates no conflict of interest with respect to COMPANY.
II
SCOPE OF APPOINTMENT
This Agreement is limited to the transaction of life and group disability
insurance in the State of California. Additional classes or lines of insurance
and additional territories may, from time to time, be added to the foregoing by
Addendum to this Agreement. Such additions shall only be operative if MANAGER is
properly licensed to administer such classes of insurance in the States
involved.
If MANAGER is not so licensed, COMPANY may procure other Administrators
therefore. Such additions shall, further, only be operative if COMPANY holds the
necessary Certificate(s) of Authority permitting it to transact such classes in
said State(s).
This Agreement is to address the administrative and management processes
involved with the continuing Group Life business and conversion policies and the
run off of the canceled Group Accident and Health (Disability) Insurance (the
"Subject Business").
Except for Life claims which should be referred to the COMPANY for processing,
with respect to the Subject Business, MANAGER is responsible for complete claims
adjudication and processing for all policies including those on waiver of
premium during total disability and extension of benefits, premium billing and
Group Life policy issuance and administration.
<PAGE>
III
UNDERWRITING OF GROUP LIFE INSURANCE BUSINESS
Within the scope of this Agreement, MANAGER shall have the authority to
underwrite and effect insurance on the Subject Business on the COMPANY's
behalf, including the issuance of COMPANY's life insurance policies, riders, and
endorsements. It shall also have authority, acting for COMPANY, to reject,
cancel, and refuse to renew insurance where permitted by law and the insurance
policy. The authority granted herein shall be exercised in compliance with such
underwriting standards as COMPANY may, from time to time, prescribe and in
compliance with usual and customary insurance industry practices. A copy of the
underwriting standards of COMPANY applicable to the Subject Business as of the
date of this Agreement has been provided to MANAGER. COMPANY shall promptly
provide to MANAGER notice and copies of any changes to the underwriting
standards applicable to the Subject Business.
COMPANY has the right to reject any risk or to require cancellation, or to
require MANAGER to renew any risk.
IV
RATING OF GROUP LIFE
MANAGER shall have no authority to make rates. Rates will be provided by
COMPANY where needed.
MANAGER shall compile and furnish COMPANY with such statistics pertaining to the
establishment of rates for COMPANY as may be required.
MANAGER shall fairly and properly apply such rates to the policies of COMPANY
issued by it, and shall, where required by a final adjudication of any rate
regulatory authority, make such adjustments in rates as may be necessary.
V
PREMIUMS
MANAGER shall bill, collect and receive, in the name of COMPANY, all premiums
and any other remuneration on policies of COMPANY administered by it, in a
manner acceptable to, or prescribed by, COMPANY.
The payment to MANAGER of premium or any other insurance charge due or otherwise
owing to COMPANY by or on behalf of an insured of COMPANY shall be deemed
received by COMPANY. The payment of return premium or claims
2
<PAGE>
by Company to MANAGER shall not be deemed payment to the insured or claimant
until such payment is received by the insured or claimant. Nothing in this
Section V shall in any way limit any right of COMPANY against MANAGER resulting
from MANAGER's failure to make payment to COMPANY or insured or claimants of
COMPANY when due.
MANAGER shall cancel or otherwise terminate any coverage not paid by an
insured, in accordance with the terms of the applicable policy, unless such
cancellation or termination is specifically waived by COMPANY.
MANAGER shall issue and deliver billings, statements, and/or other documents
necessary to collect premium and, where necessary under policy terms or
required by good insurance practice, make such audits of insureds' records as
may be necessary, or required by COMPANY.
All insurance charges or premiums collected by MANAGER on behalf of or for
COMPANY and all return premium received from COMPANY shall be held by MANAGER in
a fiduciary capacity. Such funds shall be immediately remitted to the person or
persons entitled thereto, or shall be deposited promptly in a fiduciary bank
account established and maintained by MANAGER for the benefit of COMPANY. If
such fiduciary account contains charges or premiums collected on behalf of any
insurer other than COMPANY, MANAGER shall keep records clearly recording the
deposits in and withdrawals from such fiduciary account on behalf of COMPANY and
on behalf of each other insurer. MANAGER shall keep copies of all such records
and, such records pertaining to deposits and withdrawals from such fiduciary
account.
MANAGER shall not pay any claim on behalf of or for COMPANY or any other
insurer by withdrawals from the fiduciary account. Withdrawals from the
fiduciary account shall be made solely for the following purposes: (1)
remittance to COMPANY or to such other insurer entitled thereto; (2) deposit
into an account maintained by COMPANY or such other applicable insurer; (3)
transfer to and deposit into a claims paying account maintained by COMPANY or
such other applicable insurer, provided that payments by MANAGER from such
claims paying account shall in all cases be on checks or drafts of and as
authorized by COMPANY or such other applicable insurer; (4) payment to a
group policyholder for remittance to COMPANY or other applicable insurer;
(5) payment to MANAGER of its fees or other charges as determined pursuant to
Article XIII of this Agreement: or (6) remittance of return premium to the
person or persons entitled thereto. Funds maintained within the fiduciary
account on behalf of COMPANY or any other insurer may not be put to any other
purpose or use.
VI
CLAIMS
MANAGER shall investigate, adjudicate, and appropriately pay or deny, all
3
<PAGE>
claims presented or reported on policies subject to this Agreement Such
investigation and adjudication shall be in accordance with the terms and
conditions of the specific policy(ies) involved, procedures and rules as
prescribed by COMPANY, and applicable statutes
MANAGER shall immediately advise COMPANY of any and all complaints to regulatory
authorities, correspondence from and to such regulatory authorities in response
to such complaints, and notices of intent to litigate. All such correspondence
shall be sent to COMPANY at 300 N. Lake Avenue, Suite 300, Pasadena, California
91101.
MANAGER shall pay appropriate claims, and any necessary claim expense, from
funds furnished by COMPANY. COMPANY shall establish claim accounts, and give
MANAGER authority to draw on such accounts.
Payment of claims by MANAGER on behalf of COMPANY shall, without exception, be
on checks or drafts of COMPANY and as authorized by COMPANY.
VII
FORMS
In the conduct of its activity on behalf of COMPANY, MANAGER shall only use
forms provided by the COMPANY. Such use shall be in accordance with instructions
provided by COMPANY. In the absence of explicit instructions, such use shall be
in accordance with usual and customary insurance industry practice and in
compliance with legal and regulatory requirements. COMPANY shall have sole
authority to file and/or secure approval of all forms intended for use on its
behalf.
VIII
REPORTS
MANAGER shall transmit to COMPANY, on a monthly basis, reports specifically
covering life business written and canceled, life and conversion premiums
collected and return premiums paid, claims received and paid, COMPANY's funds
received and expended.
IX
RECORDS
Throughout the term of this Agreement and for a period extending five years
after any expiration or other termination of this Agreement,
4
<PAGE>
MANAGER shall maintain at its principal administrative office in such form as
COMPANY and any regulatory authority or institution may require, complete books
and records of all business administered by MANAGER, including underwriting and
claim files, and all transactions between or among MANAGER, COMPANY and persons
or entities insured by COMPANY. Such books and records shall be maintained in
accordance with prudent standards of insurance record keeping as determined by
COMPANY, regulatory authorities and institutions, and by usual and customary
industry practices. Such books and records shall be the sole and exclusive
property of COMPANY.
MANAGER shall maintain books and records applicable to the Subject Business
separate and apart from the records of MANAGER or any other entity for whom
MANAGER provides services. Such books and records shall be available to
COMPANY for inspection and copying at any and all times. COMPANY shall
maintain the right to continuing access to such books and records sufficient
to permit COMPANY to fulfill all its contractual obligations to persons
insured by COMPANY. In the event MANAGER fails to prepare and maintain books
and records as required by this Article IX, COMPANY may, at its option and
without termination of this Agreement, secure the necessary personnel to
compile and maintain such books and records at the expense of, MANAGER.
COMPANY shall retain the right to conduct periodic audits of the books and
records and of the fiduciary bank accounts of MANAGER during normal business
hours at the office of MANAGER. COMPANY's right to audit such books and
records and fiduciary bank accounts shall include the right to inspect and
copy any and all books and records relating to the performance by MANAGER of
its obligations under this Agreement.
MANAGER shall make available to the California Commissioner of Insurance and
to his/her representatives for the purpose of examination, audit and
inspection all books and records applicable to the Subject Business of
COMPANY as administered by MANAGER pursuant to this Agreement. MANAGER
understands and acknowledges that any failure to keep and maintain the books
and records required by this Article IX shall, pursuant to California
Insurance Code 1759 4(d), be grounds for suspension or revocation of the
certificate of registration of MANAGER.
COMPANY has the obligation, at its own expense, to maintain its own general
ledger, investment records, stock records, corporate minute books,
reinsurance records, and all other records and accounts which do not pertain
to the obligations assumed by MANAGER under the terms of this Agreement.
X
MISCELLANEOUS OBLIGATIONS OF THE PARTIES
A. SUBROGATION AND SALVAGE. If the payment of any claim under the terms of
this Agreement creates a right of subrogation or salvage,
5
<PAGE>
such right; is the property of COMPANY, and all recovery therefrom is
COMPANY's.
MANAGER shall furnish COMPANY with full information and cooperate with it
to the fullest possible extent to enable COMPANY to proceed with salvage or
subrogation.
B. REINSURANCE. MANAGER shall make COMPANY aware of any claim that is likely
to involve the reinsurer by using the over $20,000 notice form and by
providing Weekly Report #4000, "High Dollar Claims" to the COMPANY who will
be responsible to advise the reinsurer.
C. NOTICE TO INSUREDS. MANAGER shall provide written notice in a form
approved by COMPANY to each insured of COMPANY advising them of the
identity of and relationship of MANAGER, COMPANY and the insured. In
addition, in all circumstances in which MANAGER collects premium or any
other charges for insurance coverage from an insured of COMPANY, MANAGER
must identify and state separately in writing to the insured the amount of
any such charge or premium specified by COMPANY for such insurance
coverage.
XI
COMPANY CONTROL -- SPECIFIC ITEMS
A. REGULATORY RELATIONSHIPS. COMPANY shall make its routine filings and
secure routine approvals as are provided for in this Agreement, and control
over COMPANY's relationships with governmental authorities, rating bureaus
and similar official or quasi-official organizations shall remain with
COMPANY.
MANAGER shall immediately refer any matters of controversy to COMPANY and
proceed in accordance with COMPANY's direction.
B. ADVERTISING. MANAGER shall not engage in any advertising or issue any
circular or other writing referring to COMPANY, or in COMPANY's name,
without COMPANY's prior approval.
C. LITIGATION. COMPANY shall have the right to control any litigation
to which it is a party.
MANAGER shall immediately inform COMPANY of the commencement of such
litigation if COMPANY is named as a defendant, and shall secure advance
approval of commencement of any litigation to which COMPANY is to be a
plaintiff.
MANAGER shall follow COMPANY's direction with respect to all phases of any
litigation proceedings.
6
<PAGE>
XII
COMPANY CONTROL -- GENERAL
It is recognized by the parties to this Agreement that COMPANY has an obligation
to the public and to the insurance regulatory authorities to comply with all
statutes and requirements imposing obligations on it and upon insurance
companies generally. It is, therefore, the intent of the parties that all
provisions of this Agreement be interpreted to permit it to satisfy these
obligations.
MANAGER agrees to follow this principle in performing its obligations hereunder
This principle applies generally to the entire Agreement and, not in any way
limiting this general application, it applies specifically to underwriting;
rating; use of State Insurance Department forms where required; furnishing and
maintaining of reports, records, and files; collection and transmission of
premium; and, the prompt and equitable adjudication of claims.
XIII
COMPENSATION
COMPANY will pay to the MANAGER at the first of each month based on the
following Fee Schedule to cover expense of administering the run-off business
and on-going Life business:
JAN 1993 $73,600
FEB 1993 $38,200
MAR 1993 $11,300
APR 1993 $ 7,100
MAY 1993 $ 2,800
JUN 1993 $ 8,500
Runoff payments stated herein are GAAP based cost allocations.
Other than the run-off business, starting with July 1, 1993, MANAGER will bill
COMPANY for the actual costs incurred in the performance of its duties and
responsibilities under the terms of this Agreement, providing appropriate
documentation. The determination of such actual costs shall be a reasonable
allocation of actual costs, which allocation shall comply with California
insurance laws and regulations relating to such cost allocations and shall be in
compliance with generally accepted accounting principles. This billing shall
constitute full and complete compensation for administration of COMPANY'S
business.
7
<PAGE>
XIV
INDEMNITY
MANAGER shall indemnify COMPANY and its employees and agents and hold COMPANY
harmless against any and all claims, actions and expenses, including court costs
and attorneys fees, and against all liabilities, losses, damages, judgments or
awards, whether compensatory or punitive, that COMPANY may sustain or be put to
by reason of any failure on the part of MANAGER to use its best efforts in good
faith to carry out the terms of this Agreement, the provisions of the plan, or
any policies, procedures or decisions of MANAGER.
COMPANY shall indemnify MANAGER and its employees and agents and hold MANAGER
harmless against any and all claims, actions and expenses, including court
costs and attorneys fees, and against all liabilities, losses, damages,
judgments or awards, whether compensatory or punitive, that MANAGER may
sustain or be put to by reason of any failure on the part of COMPANY to use
its best efforts in good faith to carry out the terms of this Agreement, the
provisions of the plan, or any policies, procedures or decisions of COMPANY.
If a claim is made by a party which would give rise to a right of
indemnification under this paragraph, the party entitled to indemnification
(the "Indemnified Party") will promptly cause notice thereof to be delivered
to the party required to provide indemnification (the "Indemnifying Party").
The Indemnified Party will permit the Indemnifying Party to assume the
defense of any such claim or any litigation resulting therefrom. Counsel for
the Indemnifying Party, which will conduct the defense of such claim or
litigation, must be approved by the Indemnified Party, whose approval will
not be unreasonably withheld, and the Indemnified Party may participate in
such defense at the Indemnified Party's expense. Neither Party will consent
to entry of any judgment or enter into any settlement without the written
consent of the other Party, which consent will not be unreasonably withheld.
The Indemnified Party shall cooperate fully with the Indemnifying Party and
make available to the Indemnifying Party all pertinent information under its
control.
XV
DISPUTES AND ARBITRATION
All disputes arising out of this Agreement shall be submitted to the decision
of a Board of Arbitration composed of two arbiters and an umpire, meeting in
Los Angeles County, California, unless otherwise agreed.
8
<PAGE>
The members of the Board of Arbitration shall be active or former,
disinterested officials of companies within the insurance industry and
domiciled in the United States of America or of governmental insurance
regulatory agencies. Each party shall appoint its arbiter and two arbiters
shall choose an umpire before instituting the hearing. If the respondent
fails to appoint its arbiter within thirty (30) days after being requested to
do so by the complainant, the latter shall also appoint the second arbiter.
The complainant shall submit its initial brief within twenty (20) days from the
appointment of the umpire. The respondent shall submit its brief within twenty
(20) days thereafter, and the complainant may submit a reply brief within ten
(10) days after filing of the respondent's brief.
The Board shall make its decision with regard to the custom and usage of the
insurance business. The Board is relieved from all judicial formalities and may
abstain from the strict rules of procedural law. The Board shall make its
decision within sixty (60) days following the termination of the hearings unless
the parties consent to an extension.
The majority decision of the Board shall be final and binding upon all parties
to the proceeding. Judgement may be entered upon the final decision of the
arbiters in any court of proper jurisdiction. By agreement between any two of
the members of the Hoard, the time intervals contained in the Article may be
extended.
Each party shall bear the expense of its own arbiter and shall jointly and
equally bear with the other party the expenses of the umpire. The remaining
costs of the arbitration proceedings shall be allocated by the Board.
If the arbiters find that any party has failed to comply with any provision of
this Agreement, the arbiters shall limit remedial actions to those reasonably
determined to be needed to place the parties in the same position as if the
failure to comply had not occurred. It is expressly agreed that the jurisdiction
of the arbiters to make or render any decision or award shall be limited to what
is needed to equitably enforce the terms of this Agreement, and that the
arbitrators shall not have jurisdiction to make any decision or render any award
not reasonably consistent with the intent, scope and provisions of this
Agreement.
This Article shall survive the termination of this Agreement.
XVI
ASSIGNMENT
This is a personal service contract, and the duties and obligations thereof may
not be assigned by one party without the specific written agreement of the
other.
9
<PAGE>
XVII
TERMINATION OF AGREEMENT
A. This Agreement shall remain in force and effect to and until cancellation
which may be effected in one of the following ways:
1. At any time by mutual consent.
2. By either party on written notice if there be a substantial and
material breach or inability to perform by the other party. Such
written notice shall specify, with particularity, the grounds for
termination.
3. By ninety (90) days written notice from one party to the other.
B. If the relationship between the parties at or before the termination is of
such a nature as to preclude the carrying out by MANAGER of its further
obligations, COMPANY upon notice to MANAGER may perform such services
itself or produce their performance by a third party, in which event
MANAGER shall be liable for the cost thereof.
C. MANAGER shall complete the processing of all claims received prior to the
date of termination unless the provision of XVII B above is invoked
specifically with respect to claims in process.
D. MANAGER shall make available for inspection or copying by the COMPANY all
records created or maintained by MANAGER in connection with the
performance of its obligations under this Agreement without the written
consent of COMPANY. MANAGER shall not use information, acquired by it
through its duties on behalf of COMPANY pursuant to the Agreement, for any
purpose other than to advance the interests of COMPANY.
XVIII
AMENDMENT
This Agreement may only be amended by a writing executed by both parties and
specifically referring to it. No verbal change, or changes by course of conduct,
inconsistent herewith is valid although such may be used to interpret any
provision which is ambiguous. Failure by either party to take action because of
a breach by the other shall not be a waiver of the right to take action because
of a subsequent breach. Where, pursuant to any provision hereof, COMPANY
establishes standards or procedures for the conduct of business, such shall not
be deemed an amendment or change of this Agreement.
10
<PAGE>
XIX
ENTIRE AGREEMENT
This Agreement constitutes the entire Agreement and supersedes any and all prior
agreements and understandings, both written and oral, among the parties, with
respect to the subject matter hereof.
In witness whereof the parties hereto have executed this Agreement as of the
date above written, and by such execution certify that the same has been
approved by their respective Boards of Directors.
PAULA ASSURANCE COMPANY
/s/ Norman J. Schnider
----------------------------------
NORMAN J. SCHNIDER
President
PAN PACIFIC BENEFIT ADMINISTRATORS, INC.
/s/ Leroy J. Combs
----------------------------------
LEROY J. COMBS
President
11
<PAGE>
AMENDMENT NO. 1 TO MANAGING AGREEMENT
This Amendment No. 1 to Managing Agreement (the "Agreement") dated as of January
1, 1993 between Paula Assurance Company (the "Company") and Pan Pacific Benefit
Administrators, Inc. ("Manager") is entered into as of this 28th day of April,
1995 (this "Amendment").
WHEREAS, the Agreement was entered into, among other reasons, to provide for the
management of the run-off of group accident and health (disability) insurance
coverage which had been cancelled by the Company;
WHEREAS, the Company has chosen to begin to underwrite new group accident and
health (disability) insurance and desires that Manager provide services to and
on behalf of the Company in connection therewith pursuant to the terms of the
Agreement;
NOW, THEREFORE, the Company and the Manager agree that the term "Subject
Business" as defined in the Agreement shall include any and all new accident and
health (disability) insurance underwritten BY the Company during the term of the
Agreement.
IN WITNESS WHEREOF, parties hereto have executed this Amendment as of the 28th
day of April, 1995.
PAULA ASSURANCE COMPANY
By: /s/ [ILLEGIBLE]
-------------------
Title: President/CEO
----------------
PAN PACIFIC BENEFIT ADMINISTRATORS, INC
By: /s/ [ILLEGIBLE]
-------------------
Title: President/CEO
----------------
<PAGE>
FEDERAL INCOME TAX ALLOCATION AGREEMENT
PAULA FINANCIAL & SUBSIDIARIES
Effective January 1, l997, the Federal Income Tax filing is to be consolidated
with the following entities:
PAULA FINANCIAL
PAN AMERICAN UNDERWRITERS, INC.
PAY AMERICAN UNDERWRITERS INSURANCE AGENTS & BROKERS, INC.
PAULA TRADING COMPANY INSURANCE AGENTS & BROKERS, INC.
AGRI-COMP INSURANCE AGENCY, INC.
PAN PACIFIC BENEFIT ADMINISTRATORS, INC.
PAULA INSURANCE COMPANY
PAULA ASSURANCE COMPANY
PAULA MEXICO, S.A. de C.V.
In consideration of filing a consolidated Federal Income Tax return it is
agreed as follows:
The allocation of the consolidated Federal Income Tax provisions/credits
for PAULA Insurance Company and PAULA Assurance Company are to be based upon
their separate Federal Income Tax return calculations. The other entities are to
share the remaining Federal Income Tax provisions/credits upon their
proportionate share of taxable income/loss or any other reasonable allocation
method approved by the Audit Committee.
All inter-company balances are to be settled within sixty (60) days
following the filing of the consolidated Federal Income Tax return or receipt of
any applicable share of Income Tax recovery, whichever is later.
Dated: 4/10/97
PAULA FINANCIAL PAULA TRADING COMPANY INSURANCE
AGENTS & BROKERS, INC.
/s/ [ILLEGIBLE] /s/ [ILLEGIBLE]
- ----------------------- ----------------------------
President/CEO President/CEO
PAN AMERICAN UNDERWRITERS, INC. AGRI-COMP INSURANCE AGENCY, INC.
/s/ [ILLEGIBLE] /s/ [ILLEGIBLE]
- ----------------------- ----------------------------
President/CEO President/CEO
PAN AMERICAN UNDERWRITERS INSURANCE PAN PACIFIC BENEFIT ADMINISTRATORS INC.
AGENTS & BROKERS, INC.
/s/ [ILLEGIBLE] /s/ [ILLEGIBLE]
- ----------------------- ----------------------------
President/CEO President/CEO
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PAULA INSURANCE COMPANY PAULA MEXICO, S.A. DE C.V.
/s/ [ILLEGIBLE] /s/ [ILLEGIBLE]
- ----------------------- ----------------------------
President/CEO President/CEO
PAULA ASSURANCE COMPANY
/s/ [ILLEGIBLE]
- -----------------------
President/CEO
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AGENCY AGREEMENT
This AGENCY AGREEMENT ("Agreement") is entered into effective as of March 1,
1992, (the "Effective Date") by and between PAN AMERICAN UNDERWRITERS, INC., a
NEVADA corporation, ("Agent") and PAULA INSURANCE COMPANY, a CALIFORNIA
corporation, ("Company"), with reference to the following facts:
RECITAL
A. Company desires to appoint Agent to solicit applicants for certain of
Company's insurance products and to perform additional services with respect to
Policies (as defined in paragraph 2.2) issued to such applicants.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained in this Agreement and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
l. APPOINTMENT OF AGENT: AUTHORITY
1.1 APPOINTMENT OF AGENT. Company hereby appoints Agent as Company's
nonexclusive soliciting agent and Agent accepts a nonexclusive appointment as a
soliciting agent of Company for the lines and limits of insurance as set forth
in SCHEDULE A attached hereto and incorporated herein by this reference. Such
appointment is made pursuant to the Company's published rates and underwriting
guidelines. At any time and from time to time Company may, in its sole
discretion, change its published rates or underwriting guidelines and withdraw
from or add to the lines and limits of insurance set forth in SCHEDULE A.
1.2 AUTHORITY. Agent's appointment and authority for such lines and
limits of insurance shall extend only to any and all states in which Company and
Agent shall both be licensed as required by prevailing regulatory requirements
and in which Company's applicable forms and rates are approved for use. Agent
shall supply Company with copies of all certificates of qualification or
licenses required of Agent to act under this Agreement.
2. AGENT'S DUTIES AND RESPONSIBILITIES
Commencing on the Effective Date, Agent will faithfully perform all of
Agent's duties with the scope of the agency relationship created under this
Agreement to the best of the Agent's professional knowledge, skill and judgment,
which duties shall include but not be limited to the following:
2.1 SOLICITATION. Agent will actively solicit and present applicants
to Company for acceptance, which applicants will meet the Company's underwriting
standards and which applications in connection therewith will be within the
limits authorized.
2.2 POLICY ISSUANCE. With respect to applications for coverage
submitted to and accept by Company, Agent will timely and properly deliver and
execute or countersign, if necessary, contracts of insurance, policies,
certificate, endorsements, memoranda and binders (collectively, "Policies") as
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directed by Company. Such Policies shall not, however, be delivered by Agent
unless Agent has collected the initial premium as required by Company.
2.3 PREMIUM RATES. Agent will ensure that accurate and proper
premiums and rates for all Policies are quoted and charged in full compliance
with approved rating system of Company.
2.4 COLLECTION OF PREMIUMS. Agent will collect premiums due on all
Policies and will timely account for and pay Company on such business in
accordance with the requirements set forth in SCHEDULE 8 attached hereto and
incorporated herein by this reference. Company may at any time and from time to
time amend the procedures set forth in SCHEDULE B.
2.5 FIDUCIARY CAPACITY. Agent will hold all premiums collected and
received on Policies for Company in a fiduciary capacity, separate and apart on
its books from all other funds of Agent, in a bank account or other media or
investment approved IN advance in writing by Company. Agent's books and records
with respect to such funds shall be maintained in such a manner so as to
establish clearly that Agent is holding such funds and acting as trustee for
Company with respect to the same.
2.6 COMPLIANCE WITH MANUALS. Agent will comply fully and timely with
all instructions, rules, bulletins, manuals and underwriting guides issued in
writing by Company to Agent promptly upon receipt thereof.
2.7 COMPANY PROPERTY. Agent will safeguard, maintain and account for
all Policies, forms, manuals, equipment and supplies furnished Agent by Company,
all of which shall remain the property of Company, and will return the same to
Company promptly upon demand.
2.8 AGENT EXPENSES. Agent will pay, assume the obligation and be
fully responsible for all costs and expenses associated with an in respect of
the performance by Agent of its duties under this Agreement, including but not
limited to rentals, office facilities, travel expenses, transportation
facilities, employee and clerical salaries, benefits and expenses, counter
signature fees and expenses, postage, advertising and local license fees.
2.9 LEGAL COMPLIANCE. Agent will comply fully with all regulations,
bulletins, rulings, circular letter, proclamations and statutes, federal, state
or local, now or hereafter in force, and which are applicable to Agent's
appointment and status hereunder.
2.10 ACCURATE RECORDS - AUDIT. Agent will keep identifiable and
accurate records and accounts of all business and transactions effected pursuant
to this Agreement. Upon reasonable notice and at reasonable time, Agent will
permit Company to visit, inspect, examine, audit and verify, at Agent's offices
or elsewhere, any of the properties, accounts, files, documents, books, reports,
work papers and other records (other than documents subject to an
attorney-client privilege and bank examination reports) belonging to or in the
possession or control of Agent relating to the business covered by this
Agreement and at Company's expense, to make copies thereof and extracts
therefrom, provided that such audit shall not unreasonably interfere with
Agent's normal course of business.
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2.11 APPOINT PRODUCERS. Agent may appoint Producers, subject to the
provisions of paragraph 4 hereof.
2.12 ERRORS AND OMISSIONS. The Company requires that Errors and
Omissions insurance be maintained by the Agent with a limit of liability of one
million dollars ($1,000,000). The Company may request evidence of such coverage
at any time.
3. LIMITATIONS ON AGENT'S AUTHORITY
Agent shall have no authority nor shall it represent itself as having
such authority other than as is specifically set forth in this Agreement.
Without limiting the generality of the foregoing sentence, Agent agrees that it
will not do any of the following:
3.1 BIND COVERAGE. Bind coverage without prior approval of Company.
Written application must follow within three (3) working days. Binder may not
be extended without Company approval.
3.2 ALTERATIONS. Make, waive, alter or change any term, rate or
condition stated in any Company contract or Company approved form, or discharge
any contract in the name of Company.
3.3 FORFEITURE. Waive a forfeiture.
3.4 EXTENSION OF TIME. Extend the time for the payment of premiums
or other monies due under the Policies or to Company.
3.5 LITIGATION. Institute, prosecute or maintain any legal
proceedings in connection with any matter pertaining to the Company's business
nor accept service of process on behalf of Company.
3.6 TRANSACTION OF BUSINESS. Transact business in contravention of
the rules and regulations of any insurance department and/or other governmental
authorities having jurisdiction of any or all subject matters embraced by this
Agreement.
3.7 ENDORSEMENT. Except as otherwise contemplated by other
provisions of this Agreement or as may be specifically authorized by Company,
make, accept or endorse notes, or endorse checks payable to Company otherwise
incur any expense or liability on behalf of Company.
3.8 MISREPRESENTATION. Misrepresent or compare incompletely for the
purpose of inducing a policyholder in any other company to lapse, forfeit or
surrender his/her/its insurance therein.
4. APPOINTMENT OF PRODUCERS
4.1 APPOINTMENT. Agent may appoint Producers only with the written
consent of Company. All such Producers shall enter into a written contract with
Agent, but not with Company, on forms approved by Company, without modification
thereof. For the purposes of this Agreement a "Producer" is a
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licenses person, firm or corporation who, with the approval of Company, enters
into an agreement with Agent, as an insurance agent or brokers. A copy of each
such executed agreement shall be immediately furnished to Company by Agent.
4.2 REJECTION AND TERMINATION OF PRODUCERS. Company may, in its sole
discretion and without liability to Agent, approve or reject each request by
Agent for consent to its appointment of any Producer. Agent shall, when
requested by Company, immediately dismiss any Producer.
4.3 RESPONSIBILITY. Agent shall save Company harmless from all loss,
expense, cost and liability resulting from unauthorized acts or transactions by
Producers for whom Agent is responsible, and any other persons engaged by Agent
or acting on its behalf. Agent shall be responsible for each Producer with whom
Agent has executed a Producer's Agreement until such agreement is terminated,
and for each Producer who has been assigned to Agent for supervision unti1 such
supervision is terminated.
4.4 PAYMENTS TO PRODUCERS. Company will pay commissions to Producers
in accordance with the Schedule of Commissions included in or attached to the
Producers' agreements which Company may from time to time authorize Agent to
enter into, on its own behalf and not on behalf of Company. Company may at its
option, pay such Producers' commissions by either:
(i) Paying directly to one or more Producers the commissions
to which they may be entitled under agreements between any of them and Agent, or
(ii) Paying their commissions directly to Agent.
In making such payment, Company may rely fully upon the agreements delivered to
it by Agent. Company shall not be bound by an assignment or pledge of, or lien
on, any Producer's commissions due from Agent, unless it has received specific
and timely written notice of and has agreed in writing to honor such assignment,
pledge or lien. Payment pursuant to either (i) or (ii) above shall fully
discharge Company's obligation to Agent to the extent of such payments.
5. DUTIES AND OBLIGATIONS OF COMPANY
Commencing on the Effective Date, Company will faithfully perform all
of Company's duties within the scope of the agency relationship created under
this Agreement to the best of the Company's professional knowledge, skill and
judgment, which duties shall include but not be limited to the following:
5.1 MATERIALS. Company will provide Agent with such marketing and
training support materials, supplies, manuals and brochures for use by Agent as
it deems appropriate; and
5.2 PROCESSING OF APPLICATIONS. Company will promptly process upon
receipt al1 applications received from Agent.
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6. AGENT'S COMPENSATION
Agent shall be entitled to receive as compensation under this
Agreement a percentage of the premium written, paid for and received by Company
under this Agreement, subject to offset, at the rate shown on the Company's
current "Commission Schedule," a copy of which Commission Schedule is attached
hereto as SCHEDULE C. Agent shall pay a return commission at the same rates on
any return premiums, including return premiums on cancellations effected by
Company. Company may change the commission rates set forth in SCHEDULE C upon
sixty (60) days prior written notice to Agent.
7. COMPANY'S RIGHT TO REJECT APPLICATIONS AND CANCEL OR RESCIND
POLICIES
Company reserves the right, in its sole discretion to (i) disapprove or
reject any application for a policy submitted to it by Agent, (ii) limit or
restrict the amount or plan of any policy it shall issue, (iii) require a high
premium than that applied for, (iv) cancel or rescind any existing policy, (v)
alter or withdraw policies offered from time to time, and (vi) introduce new
policies.
8. TERM
Unless sooner terminated pursuant to paragraph 12 hereof, the term of
this Agreement shall be for a one-year period commencing immediately upon the
Effective Date (the "Term"). This Agreement shall automatically renew thereafter
for successive like period (each, a "Renewal Period") unless either party (i)
notifies the other party within sixty (60) days of the expiration of the Term or
of any Renewal Period of the intention not to renew or (ii) otherwise terminates
the Agreement pursuant to the terms hereof.
9. ADVERTISING
Agent shall not make, publish, issue or insert or cause to have made,
published, issued or inserted any advertisement, letter, circular, pamphlet or
other publication or statement, written or through electronic media
("Advertisement"), referring Company or the insurance written under this
Agreement without the express prior written approval and consent of Company.
Agent will cease use of any such Advertisement upon receipt of written notice
from Company.
10. NAME, LOGO, TRADEMARK, SERVICE MARK OR SYMBOL
Neither Company nor Agent will use the other's name nor any other
name, logo, trademark, service mark or symbol that is now or may hereafter be
owned by the other party, a parent or an affiliate or subsidiary thereof, except
in the manner and to the extent that the other party may specifically authorize
in writingUpon termination of this Agreement, each party will immediately
discontinue the use of such name, logo, trademark, service mark or symbol
belonging to the other party or the parent, affiliate or subsidiary thereof.
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11. INDEMNIFICATION
11.1 INDEMNIFICATION OF COMPANY. Agent shall indemnify, defend and
hold harmless Company from and against any and all claims, suits, hearings
actions, damages, liabilities, fines, penalties, costs, losses or expenses,
including reasonable attorney's fees, caused by or resulting from any breach of
this Agreement, misconduct, error, omission, or other unauthorized act by Agent
or by Agent's employees or representatives, including but not limited to the
Producers and any independent contractors engaged by Agent to perform any of
Agent's duties under this Agreement.
11.2 INDEMNIFICATION OF AGENT. Company shall indemnify, defend and
hold harmless Agent, its affiliates, sub-agents, brokers, representatives and
holding company, as well as their respective employees, officers and directors,
from and against any and a11 claims, suits, actions, liabilities, penalties,
losses, fines and expenses, including reasonable attorney's fees, which they or
any of them may sustain or incur, directly or indirectly, as the result of any
misconduct, act, error, misrepresentation, inaccurate or misleading
Advertisement, omission or failure to act attributable to Company or any
officer, employee, director, agent or representative of Company, except to the
extent such alleged misconduct, act, error, omission or failure to act is
primarily attributable to Agent.
11.3 SURVIVAL OF INDEMNIFICATION. The indemnification provided under
this paragraph 11 shall survive the termination of this Agreement.
12. TERMINATION OF AGREEMENT
12.1 TERMINATION WITHOUT CAUSE. Either party may terminate this
Agreement without cause upon one hundred-twenty (120) days prior written notice
to the other party.
12.2 TERMINATION FOR CAUSE. At any time during the Term or any
Renewal Period, either party may terminate this Agreement immediately for cause
upon written notification to the other party of such termination. Such written
notice shall state the "cause" with specificity. As used in this paragraph
12.2, the term "cause" shall include, without limitation, any one or more of the
following events:
A. CONVICTION. A party's indictment for or conviction of any
felony, fraud or any crime involving dishonesty;
B. MISAPPROPRIATION OF FUNDS. The intentional misappropriation
by a party of funds or property of the other party or funds received for it or
Policyholders by such other party, including but not limited to the intentional
failure by Agent to remit to Company or Policyholders funds due promptly after
written demand therefore by Company; and
C. LICENSE SUSPENSION OR REVOCATION. The expiration or
cancellation of or refusal to renew by the issuing insurance regulatory
authority any license, certificate or other regulatory approval required in
order for a party to perform its duties under this Agreement.
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12.3 RIGHTS AND DUTIES UPON TERMINATION. If, upon termination of this
Agreement, Agent has promptly and properly accounted for and paid over to
Company, premiums and all other amounts due as provided for hereunder for which
Agent may be liable, Agent's records, use and control of policy expirations
shall remain the property of Agent. Otherwise, no such ownership rights shall
vest in Agent.
13. INDEPENDENT CONTRACTOR
This Agreement is not a contract of employment. Nothing contained in
this Agreement shall be construed to create the relationship of joint venture,
partnership or employer and employee between Company and Agent. Each party is
an independent contractor and shall be free, subject to the terms and conditions
of this Agreement, to exercise judgment and discretion with regard to the
conduct of its business. Agent shall be solely responsible with respect to, and
will promptly pay or withhold, as required, all taxes and sums due to the
federal, state and/or local taxing authorities with respect to Agent and
Agent's employees and licensees.
14. CONFIDENTIALITY
During the Term of this Agreement, and any Renewal Period thereafter,
Company and Agent may acquire access to confidential or proprietary information
of one another, including, but not limited to, the identities of one another's
respective clients, customers, prospective client and customer lists, marketing
surveys, cost analyses and procedures (collectively, "Confidential
Information"). Such Confidential Information constitutes proprietary information
and/or trade secrets and is the sole and exclusive property of the party
generating such information. The parties agree that:
(a) Each party shall use the Confidential Information of the other
only for the purposes of carrying out its obligations under this Agreement;
(b) All Confidential Information of a party and any physical and
electronic embodiments thereof to which the other party acquires access will be
held by such other party in strict confidence; and
(c) Neither party will reveal, disclose, publish or use such
Confidential Information of the other party except as provided hereunder.
The provisions of this paragraph 14 shall survive the termination of
this Agreement.
15. GENERAL PROVISIONS
15.1 OFFSET. All amounts due Agent under this Agreement shall be
subject to the right of offset.
15.2 ASSIGNMENT. This Agreement and the rights, duties and
obligations of the parties hereto shall not be assignable by either party hereto
without the prior written consent of the other party and any purported
assignment in the absence of such consent shall be void.
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15.3 FURTHER INSTRUMENTS. Each party shall execute and deliver all
further instruments, documents and papers, and shall perform any and all acts
necessary, to give full force and effect to all of the terms and provisions of
this Agreement.
15.4 SEVERABILITY. If any provision of this Agreement, as applied to
any party or to ANY circumstance, shall be found by a court of competent
jurisdiction to be void, invalid or unenforceable, the same shall in no way
affect any other provision of this Agreement, the application of any such
provision in any other circumstance, or the validity or enforceability of this
Agreement.
15.5 NOTICES. All notices which are required to be given or submitted
pursuant to this Agreement shall be made in writing and shall be deemed given
when deposited with the United States Postal Service, postage prepaid,
registered or certified mail, return receipt requested, or when deposited with
an overnight mail delivery service, to the last address of record of each party
being notified which is maintained by the other party in the ordinary course of
business.
Any notice or demand required to be made under this Agreement to Agent
shall be given to:
Leroy J. Combs
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440 Airport Boulevard
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Salinas, California 93905-3302
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Any notice or demand required to be made under this Agreement to Company
shall be given to:
Norman J. Schnider
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300 N. Lake Avenue, Suite 300
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Pasadena, California 91101
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Any party may, by virtue of written notice in compliance with this
paragraph, alter or change the address or the identity of the person to whom any
notice, or copy thereof, is to be sent.
15.6 WAIVERS. A waiver by any party of any of the terms and
conditions of this Agreement in any one instance shall not be deemed or
construed to be a waiver of such term or condition for the future, or of any
subsequent breach thereof, nor shall it be deemed a waiver of performance of any
other obligation hereunder.
15.7 ENTIRE AGREEMENT. This Agreement contains the entire
understanding of the parties hereto relating to the subject matter hereof and
supersedes all prior and collateral agreements, understandings, statements and
negotiations of the parties. Each party acknowledges that no representations,
inducements, promises or agreements, oral or written, with reference to the
subject matter hereof have been made other than as expressly set forth herein.
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15.8 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of California.
15.9 GENDER AND NUMBER. In all matters of interpretation, whenever
necessary to give effect to any provision of this Agreement, each gender shall
include the other, the singular shall include the plural and the plural shall
include the singular.
15.10 PARAGRAPH AND SUBPARAGRAPH HEADINGS. The titles of the
paragraphs of this Agreement are for convenience only and shall not in any way
affect the interpretation of any provision or condition of this Agreement.
15.11 THIRD PARTIES. Except as may be expressly set forth herein, the
parties hereto do not intend to confer any rights or remedies upon any person
other than the parties hereto.
15.12 LEGAL ACTION. In the event of any litigation between or among
the parties hereto respecting or arising out of this Agreement, the prevailing
party or parties shall be entitled to recover reasonable attorneys' fees and
costs, whether or not such litigation proceeds to final judgment or
determination.
15.13 AMENDMENT. This Agreement may not be amended except by a writing
signed by both parties.
15.14 COUNTERPARTS. This Agreement may be executed in counterparts
which, taken together, shall constitute the whole of the Agreement as between
the parties.
IN WITNESS WHEREOF, the parties have executed this Agreement effective as
of the day and year first above written.
COMPANY: PAULA INSURANCE COMPANY
By: /s/ Norman J. Schnider
--------------------------
NORMAN J SCHNIDER
Title: President/CEO
--------------------------
AGENT: PAN AMERICAN UNDERWRITERS, INC.
By: /s/ Leroy J. Combs
--------------------------
LEROY J. COMBS
Title: President/CEO
--------------------------
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SHEDULE A
POLICIES
Workers' Compensation and Employers Liability Insurance
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SCHEDULE B
COLLECTION OF PREMIUMS
A. Agent shall be liable to Company for the full amount of premiums
earned on all insurance contracts, regardless of the collectability or
collection status of the accounts by the Agent except as outlined in paragraph B
of this Schedule. Agent shall collect and receive, in the name of Company, all
premiums and any other remuneration on policies, binders, or endorsements of
Company written by or through it. Such premiums shall be collected from insureds
in accordance with the following general standards:
(1) Deposit Premiums - at or no later than fifteen (15) days from the
policy inception date or the billing date.
(2) Installment, Endorsement or Any Other Premium Billings - promptly and,
in no event, not more than thirty (30) days after the billing date.
(3) Interim Voluntary Payroll Report - promptly and, in no event, not more
than thirty (30) days after the end of the monthly, quarterly or semi-annual
reporting period.
(4) Annual, Interim and Cancellation Audits - promptly and, in no event,
not more than thirty (30) days after the billing date.
B. By mutual agreement between both parties, the Agent may return to the
Company for direct collections a particular premium billing provided:
(1) The Agent notifies the Company in writing within thirty (30) days from
the billing date.
(2) No commissions shall be payable to the Agent on any premiums returned
to the Company for direct collection whether collected or not.
C. The above standards may from time to time be altered and new and
different standards adopted by Company. Company's decision with respect thereto
shall be final and an amendment of this Agreement shall not be necessary in
order to effectuate new standards.
D. Where return premium is due an insured, Agent shall promptly transmit
the net return premium from Company funds, adding thereto the return commission
from its own funds at the same rate at which such commissions were originally
retained.
E. Premium monies received by Agent are held by Agent in its fiduciary
capacity and shall be transmitted to Company within two (2) business days unless
paid to one of Agent's branch offices, in which case, within five (5) business
days, deducting therefrom only Agent's commission as provided in paragraph 6
hereof and such funds as may be necessary to pay net return premiums as set
forth above.
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SCHEDULE C
COMMISSIONS
Workers' Compensation - 13.5%
Special Commission rates on individual policies or groups may be
negotiated by mutual agreements of the parties.
No commission shall be paid or returned on additional or return premiums
resulting from retrospective rating plan computations.
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AMENDMENT NO. 1
TO
AGENCY AGREEMENT
This Amendment No. 1 to Agency Agreement (this "Amendment") is entered into
as of the fifteenth day of June, 1996 with reference to that certain Agency
Agreement between Paula Insurance Company and Pan American Underwriters, Inc.
dated as of March 1, 1992 (the "Agreement"). All capitalized terms used herein
without definition shall have the meaning ascribed to them in the Agreement.
In consideration of the mutual covenants set forth herein and other good
and valuable consideration the receipt and sufficiency of which are hereby
acknowledged, the Agent and the Company agree to amend the Agreement as follows:
1. Schedule C to the Agreement is hereby amended and restated to read in
full as follows:
"Workers' Compensation - 10%, effective January 1, 1996
Special Commission rates on individual policies or groups may be negotiated
by mutual agreements of the parties.
The Company agrees to pay to the Agent the following bonus commission for
the 1996 calendar year contingent upon the Agent meeting the following premium
volume thresholds:
Invoiced 1996 Premium Volume Bonus Commission
- ---------------------------- ----------------
$3,000,000 1% of Invoiced Premium
$6,000,000 Additional 1% of Invoiced Premium
$9,000,000 Additional 1% of Invoiced Premium
The foregoing bonus will be paid quarterly based on invoiced premium
written prior to the end of the applicable quarter. The bonus will apply to all
premium written, not merely the amount of premium over the premium threshold.
The bonus will be subject to offset to the same extent as commissions payable
under this Agreement."
2. In all other respects, the Agreement shall continue in full force and
effect.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the
date first written above:
PAULA INSURANCE COMPANY PAN AMERICAN UNDERWRITERS, INC.
By:/s/ [ILLEGIBLE] By:/s/ James A. Nicholson
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AMENDMENT NO. 2
TO
AGENCY AGREEMENT
This Amendment No. 2 to Agency Agreement(this "Amendment") is entered into
as of the first day of April, 1997 with reference to that certain Agency
Agreement between Paula Insurance Company and Pan American Underwriters, Inc.
dated as of March 1, 1992, as amended (the "Agreement"). All capitalized terms
used herein without definition shall have the meaning ascribed to them in the
Agreement.
In consideration of the mutual covenants set forth herein and other good
and valuable consideration the receipt and sufficiency of which are hereby
acknowledged, the Agent and the Company agree to amend the Agreement as follows:
1. The relevant provisions of Schedule C to the Agreement are hereby
amended as follows:
"The Company agrees to pay to the Agent the following bonus commission
during the 1997 calendar year contingent upon the Agent meeting the following
quarterly premium volume thresholds:
Invoiced Quarterly 1997 Premium Volume Bonus Commission
- -------------------------------------- ----------------
$ 750,000 1% of Invoiced Premium
$1,500,000 Additional 1% of Invoiced Premium
$2,250,000 Additional 1% of Invoiced Premium
The foregoing bonus will be paid quarterly based on invoiced premium
written prior to the end of the applicable quarter. The bonus will apply to all
premium written, not merely the amount of premium over the premium threshold.
The bonus will be subject to offset to the same extent as commissions payable
under this Agreement."
2. In all other respects, the Agreement (including the unamended provisions
of Schedule C) shall continue in full force and effect.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the
date first written above:
PAULA INSURANCE COMPANY PAN AMERICAN UNDERWRITERS, INC.
By:/s/ James A. Nicholson By:/s/ [ILLEGIBLE]
----------------------- ------------------------
<PAGE>
AGENCY AGREEMENT
This AGENCY AGREEMENT ("Agreement") is entered into effective as of
March 1, 1992, (the "Effective Date") by and between PAN AMERICAN UNDERWRITERS
INSURANCE AGENTS & BROKERS, INC., an ARIZONA corporation, ("Agent") and PAULA
INSURANCE COMPANY, a CALIFORNIA corporation, ("Company"), with reference to the
following facts:
RECITAL
A. Company desires to appoint Agent to solicit applicants for
certain of Company's insurance products and to perform additional services with
respect to Policies (as defined in paragraph 2.2) issued to such applicants.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained in this Agreement and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
l. APPOINTMENT OF AGENT; AUTHORITY
1.1 APPOINTMENT OF AGENT. Company hereby appoints Agent as
Company's nonexclusive soliciting agent and Agent accepts a nonexclusive
appointment as a soliciting agent of Company for the lines and limits of
insurance as set forth in SCHEDULE A attached hereto and incorporated herein by
this reference. Such appointment is made pursuant to the Company's published
rates and, underwriting guidelines. At any time and from time to time Company
may, in its sole discretion, change its published rates or underwriting
guidelines and withdraw from or add to the lines and limits of insurance set
forth in SCHEDULE A.
1.2 AUTHORITY. Agent's appointment and authority for such
lines and limits of insurance shall extend only to any and all states in which
Company and Agent shall both be licensed as required by prevailing regulatory
requirements and in which Company's applicable forms and rates are approved for
use. Agent shall supply Company with copies of all certificates of
qualification or licenses required of Agent to act under this Agreement.
2. AGENT'S DUTIES AND RESPONSIBILITIES
Commencing on the Effective Date, Agent will faithfully perform
all of Agent's duties with the scope of the agency relationship created under
this Agreement to the best of the Agent's professional knowledge, skill and
judgment, which duties shall include but not be limited to the following:
2.1 SOLICITATION. Agent will actively solicit and present
applicants to Company for acceptance, which applicants will meet the Company's
underwriting standards and which applications in connection therewith will be
within the limits authorized.
2.2 POLICY ISSUANCE. With respect to applications for coverage
submitted to and accept by Company, Agent will timely and properly deliver and
execute or countersign, if necessary, contracts of insurance, policies,
certificate, endorsements, memoranda and binders (collectively, "Policies") as
<PAGE>
directed by Company. Such Policies shall not, however, be delivered by Agent
unless Agent has collected the initial premium as required by Company.
2.3 PREMIUM RATES. Agent will ensure that accurate and proper
premiums and rates for all Policies are quoted and charged in full compliance
with approved rating system of Company.
2.4 COLLECTION OF PREMIUMS. Agent will collect premiums due on
all Policies and will timely account for and pay Company on such business in
accordance with the requirements set forth in SCHEDULE B attached hereto and
incorporated herein by this reference. Company may at any time and from time to
time amend the procedures set forth in SCHEDULE 8.
2.5 FIDUCIARY CAPACITY. Agent will hold all premiums collected
and received on Policies for Company in a fiduciary capacity, separate and apart
on its books from all other funds of Agent, in a bank account or other media or
investment approved in advance in writing by Company. Agent's books and records
with respect to such funds shall be maintained in such a manner so as to
establish clearly that Agent is holding such funds and acting as trustee for
Company with respect to the same.
2.6 COMPLIANCE WITH MANUALS. Agent will comply fully and timely
with all instructions, rules, bulletins, manuals and underwriting guides issued
in writing by Company to Agent promptly upon receipt thereof.
2.7 COMPANY PROPERTY. Agent will safeguard, maintain and
account for all Policies, forms, manuals, equipment and supplies furnished Agent
by Company, all of which shall remain the property of Company, and will return
the same to Company promptly upon demand.
2.8 AGENT EXPENSES. Agent will pay, assume the obligation and
be fully responsible for all costs and expenses associated with an in respect of
the performance by Agent of its duties under this Agreement, including but not
limited to rentals, office facilities, travel expenses, transportation
facilities, employee and clerical salaries, benefits and expenses,
countersignature fees and expenses, postage, advertising and local license fees.
2.9 LEGAL COMPLIANCE. Agent will comply fully with all
regulations, bulletins, rulings, circular letter, proclamations and statutes,
federal, state or local, now or hereafter in force, and which are applicable to
Agent's appointment and status hereunder.
2.10 ACCURATE RECORDS - AUDIT. Agent will keep identifiable and
accurate records and accounts of all business and transactions effected pursuant
to this Agreement. Upon reasonable notice and at reasonable time, Agent will
permit Company to visit, inspect, examine, audit and verify, at Agent's offices
or elsewhere, any of the properties, accounts, files, documents, books, reports,
work papers and other records (other than documents subject to an
attorney-client privilege and bank examination reports) belonging to or in the
possession or control of Agent relating to the business covered by this
Agreement and at Company's expense, to make copies thereof and extracts
therefrom, provided that such audit shall not unreasonably interfere with
Agent's normal course of business.
2
<PAGE>
2.11 APPOINT PRODUCERS. Agent may appoint Producers, subject to
the provisions of paragraph 4 hereof.
2.12 ERRORS AND OMISSIONS. The Company requires that Errors and
Omissions insurance be maintained by the Agent with a limit of liability of one
million dollars ($1,000,000). The Company may request evidence of such coverage
at any time.
3. LIMITATIONS ON AGENT'S AUTHORITY
Agent shall have no authority nor shall it represent itself as
having such authority other than as is specifically set forth in this Agreement.
Without limiting the generality of the foregoing sentence, Agent agrees that it
will not do any of the following:
3.1 BIND COVERAGE. Bind coverage without prior approval of
Company. Written application must follow within three (3) working days. Binder
may not be extended without Company approval.
3.2 ALTERATIONS. Make, waive, alter or change any term, rate or
condition stated in any Company contract or Company approved form, or discharge
any contract in the name of Company.
3.3 FORFEITURE. Waive a forfeiture.
3.4 EXTENSION OF TIME. Extend the time for the payment of
premiums or other monies due under the Policies or to Company.
3.5 LITIGATION. Institute, prosecute or maintain any legal
proceedings in connection with any matter pertaining to the Company's business
nor accept service of process on behalf of Company.
3.6 TRANSACTION OF BUSINESS. Transact business in contravention
of the rules and regulations of any insurance department and/or other
governmental authorities having jurisdiction of any or all subject matters
embraced by this Agreement.
3.7 ENDORSEMENT. Except as otherwise contemplated by other
provisions of this Agreement or as may be specifically authorized by Company,
make, accept or endorse notes, or endorse checks payable to Company otherwise
incur any expense or liability on behalf of Company.
3.8 MISREPRESENTATION. Misrepresent or compare incompletely for
the purpose of inducing a policyholder in any other company to lapse, forfeit or
surrender his/her/its insurance therein.
4. APPOINTMENT OF PRODUCERS
4.1 APPOINTMENT. Agent may appoint Producers only with the
written consent of Company. All such Producers shall enter into a written
contract with Agent, but not with Company, on forms approved by Company, without
modification thereof. For the purposes of this Agreement a "Producer" is a
3
<PAGE>
licenses person, firm or corporation who, with the approval of Company, enters
into an agreement with Agent, as an insurance agent or brokers. A copy of each
such executed agreement shall be immediately furnished to Company by Agent.
4.2 REJECTION AND TERMINATION OF PRODUCERS. Company may, in its
sole discretion and without liability to Agent, approve or reject each request
by Agent for consent to its appointment of any Producer Agent shall, when
requested by Company, immediately dismiss any Producer.
4.3 RESPONSIBILITY. Agent shall save Company harmless from all
loss, expense, cost and liability resulting from unauthorized acts or
transactions by Producers for whom Agent is responsible, and any other persons
engaged by Agent or acting on its behalf. Agent shall be responsible for each
Producer with whom Agent has executed a Producer's Agreement until such
agreement is terminated, and for each Producer who has been assigned to Agent
for supervision until such supervision is terminated.
4.4 PAYMENTS TO PRODUCERS. Company will pay commissions to
Producers in accordance with the Schedule of Commissions included in or attached
to the Producers' agreements which Company may from time to time authorize Agent
to enter into, on its own behalf and not on behalf of Company. Company may at
its option, pay such Producers' commissions by either:
(i) Paying directly to one or more Producers the commissions
to which they may be entitled under agreements between any of them and Agent, or
(ii) Paying their commissions directly to Agent.
In making such payment, Company may rely fully upon the agreements delivered to
it by Agent. Company shall not be bound by an assignment or pledge of, or lien
on, any Producer's commissions due from Agent, unless it has received specific
and timely written notice of and has agreed in writing to honor such assignment,
pledge or lien. Payment pursuant to either (i) or (ii) above shall fully
discharge Company's obligation to Agent to the extent of such payments.
5. DUTIES AND OBLIGATIONS OF COMPANY
Commencing on the Effective Date, Company will faithfully perform
all of Company's duties within the scope of the agency relationship created
under this Agreement to the best of the Company's professional knowledge, skill
and judgment, which duties shall include but not be limited to the following:
5.1 MATERIALS. Company will provide Agent with such marketing
and training support materials, supplies, manuals and brochures for use by Agent
as it deems appropriate; and
5.2 PROCESSING OF APPLICATIONS. Company will promptly process
upon receipt all applications received from Agent.
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<PAGE>
6. AGENT'S COMPENSATION
Agent shall be entitled to receive as compensation under this
Agreement a percentage of the premium written, paid for and received by Company
under this Agreement, subject to offset, at the rate shown on the Company's
current "Commission Schedule," a copy of which Commission Schedule is attached
hereto as SCHEDULE C. Agent shall pay a return commission at the same rates on
any return premiums, including return premiums on cancellations effected by
Company. Company may change the commission rates set forth in SCHEDULE C upon
sixty (60) days prior written notice to Agent.
7. COMPANY'S RIGHT TO REJECT APPLICATIONS AND CANCEL OR RESCIND
POLICIES
Company reserves the right, in its sole discretion to (i)
disapprove or reject any application for a policy submitted to it by Agent, (ii)
limit or restrict the amount or plan of any policy it shall issue, (iii) require
a high premium than that applied for, (iv) cancel or rescind any existing
policy, (v) alter or withdraw policies offered from time to time, and (vi)
introduce new policies.
8. TERM
Unless sooner terminated pursuant to paragraph 12 hereof, the
term of this Agreement shall be for a one-year period commencing immediately
upon the Effective Date (the "Term"). This Agreement shall automatically renew
thereafter for successive like period (each, a "Renewal Period") unless either
party (i) notifies the other party within sixty (60) days of the expiration of
the Term or of any Renewal Period of the intention not to renew or (ii)
otherwise terminates the Agreement pursuant to the terms hereof.
9. ADVERTISING
Agent shall not make, publish, issue or insert or cause to have
made, published, issued or inserted any advertisement, letter, circular,
pamphlet or other publications or statement written or through electronic media
("Advertisement"), referring to Company or the insurance written under this
Agreement without the express prior written approval and consent of Company
Agent will cease use of any such Advertisement upon receipt of written notice
from Company.
10. NAME, LOGO, TRADEMARK, SERVICE MARK OR SYMBOL
Neither Company nor Agent will use the other's name nor any other
name, logo, trademark, service mark or symbol that is now or may hereafter be
owned by the other party, a parent or an affiliate or subsidiary thereof, except
in the manner and to the extent that the other party may specifically authorize
in writing. Upon termination of this Agreement, each party will immediately
discontinue the use of such name, logo, trademark, service mark or symbol
belonging to the other party or the parent, affiliate or subsidiary thereof.
5
<PAGE>
ll. INDEMNIFICATION
11.1 INDEMNIFICATION OF COMPANY. Agent shall indemnify, defend
and hold harmless Company from and against any and all claims, suits, hearings,
actions, damages, liabilities, fines, penalties, costs, losses or expenses,
including reasonable attorney's fees, caused by or resulting from any breach of
this Agreement, misconduct, error, omission, or other unauthorized act by Agent
or by Agent's employees or representatives, including but not limited to the
Producers and any independent contractors engaged by Agent to perform any of
Agent's duties under this Agreement.
11.2 INDEMNIFICATION OF AGENT. Company shall indemnify, defend
and hold harmless Agent, its affiliates, sub-agents, brokers, representatives
and holding company, as well as their respective employees, officers and
directors, from and against any and all claims, suits, actions, liabilities,
penalties, losses, fines and expenses, including reasonable attorney's fees,
which they or any of them may sustain or incur, directly or indirectly, as the
result of any misconduct, act, error, misrepresentation, inaccurate or
misleading Advertisement, omission or failure to act attributable to Company or
any officer, employee, director, agent or representative of Company, except to
the extent such alleged misconduct, act, error, omission or failure to act is
primarily attributable to Agent.
11.3 SURVIVAL OF INDEMNIFICATION. The indemnification provided
under this paragraph 11 shall survive the termination of this Agreement.
12. TERMINATION OF AGREEMENT
12.1 TERMINATION WITHOUT CAUSE. Either party may terminate this
Agreement without cause upon one hundred-twenty (120) days prior written notice
to the other party.
12.2 TERMINATION FOR CAUSE. At any time during the Term or any
Renewal Period, either party may terminate this Agreement immediately for cause
upon written notification to the other party of such termination. Such written
notice shall state the "cause" with specificity. As used in this paragraph
12.2, the term "cause" shall include, without limitation, any one or more of the
following events:
A. CONVICTION. A party's indictment for or conviction of
any felony, fraud or any crime involving dishonesty;
B. MISAPPROPRIATION OF FUNDS. The intentional
misappropriation by a party of funds or property of the other party or funds
received for it or Policyholders by such other party, including but not limited
to the intentional failure by Agent to remit to Company or Policyholders funds
due promptly after written demand therefore by Company; and
C. LICENSE SUSPENSION OR REVOCATION. The expiration or
cancellation of or refusal to renew by the issuing insurance regulatory
authority any license, certificate or other regulatory approval required in
order for a party to perform its duties under this Agreement.
6
<PAGE>
12.3 RIGHTS AND DUTIES UPON TERMINATION. If, upon termination of
this Agreement, Agent has promptly and properly accounted for and paid over to
Company, premiums and all other amounts due as provided for hereunder for which
Agent may be liable, Agent's records, use and control of policy explorations
shall remain the property of Agent. Otherwise, no such ownership rights shall
vest in Agent.
13. INDEPENDENT CONTRACTOR
This Agreement is not a contract of employment. Nothing
contained in this Agreement shall be construed to create the relationship of
joint venture, partnership or employer and employee between Company and Agent.
Each party is an independent contractor and shall be free, subject to the terms
and conditions of this Agreement, to exercise judgment and discretion with
regard to the conduct of its business. Agent shall be solely responsible with
respect to, and will promptly pay or withhold, as required, all taxes and sums
due to the federal, state and/or local taxing authorities with respect to Agent
and Agent's employees and licensees.
14. CONFIDENTIALITY
During the Term of this Agreement, and any Renewal Period
thereafter, Company and Agent may acquire access to confidential or proprietary
information of one another, including, but not limited to, the identities of one
another's respective clients, customers, prospective client and customer lists,
marketing surveys, cost analyses and procedures (collectively, "Confidential
Information"). Such Confidential Information constitutes proprietary information
and/or trade secrets and is the sole and exclusive property of the party
generating such information. The parties agree that:
(a) Each party shall use the Confidential Information of the
other only for the purposes of carrying out its obligations under this
Agreement;
(b) All Confidential Information of a party and any physical and
electronic embodiments thereof to which the other party acquires access will be
held by such other party in strict confidence; and
(c) Neither party will reveal, disclose, publish or use such
Confidential Information of the other party except as provided hereunder.
The provisions of this paragraph 14 shall survive the termination
of this Agreement.
15. GENERAL PROVISIONS
15.1 OFFSET. All amounts due Agent under this Agreement shall be
subject to the right of offset.
15.2 ASSIGNMENT. This Agreement and the rights, duties and
obligations of the parties hereto shall not be assignable by either party hereto
without the prior written consent of the other party and any purported
assignment in the absence of such consent shall be void.
7
<PAGE>
15.3 FURTHER INSTRUMENTS. Each party shall execute and deliver
all further instruments, documents and papers, and shall perform any and all
acts necessary, to give full force and effect to all of the terms and provisions
of this Agreement.
15.4 SEVERABILITY. If any provision of this Agreement, as
applied to any party or to any circumstance, shall be found by a court of
competent jurisdiction to be void, invalid or unenforceable, the same shall in
no way affect any other provision of this Agreement, the application of any
such provision in any other circumstance, or the validity or enforceability of
this Agreement.
15.5 NOTICES. All notices which are required to be given or
submitted pursuant to this Agreement shall be made in writing and shall be
deemed given when deposited with the United States Postal Service, postage
prepaid, registered or certified mail, return receipt requested, or when
deposited with an overnight mail delivery service, to the last address of record
of each party being notified which is maintained by the other party in the
ordinary course of business.
Any notice or demand required to be made under this Agreement to Agent
shall be given to:
Leroy J. Combs
440 Airport Boulevard
Salinas, California 93905-3302
Any notice or demand required to be made under this Agreement to
Company shall be given to:
Norman J. Schnider
300 N. Lake Avenue, Suite 300
Pasadena, California 91101
Any party may, by virtue of written notice in compliance with this
paragraph, alter or change the address or the identity of the person to whom any
notice, or copy thereof, is to be sent.
15.6 WAIVERS. A waiver by any party of any of the terms and
conditions of this Agreement in any one instance shall not be deemed or
construed to be a waiver of such term or condition for the future, or of any
subsequent breach thereof, nor shall it be deemed a waiver of performance of any
other obligation hereunder.
15.7 ENTIRE AGREEMENT. This Agreement contains the entire
understanding of the parties hereto relating to the subject matter hereof and
supersedes all prior and collateral agreements, understandings, statements and
negotiations of the parties. Each party acknowledges that no representations,
inducements, promises or agreements, oral or written, with reference to the
subject matter hereof have been made other than as expressly set forth herein.
8
<PAGE>
15.8 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of California.
15.9 GENDER AND NUMBER. In all matters of interpretation,
whenever necessary to give effect to any provision of this Agreement, each
gender shall include the other, the singular shall include the plural and the
plural shall include the singular.
15.10 PARAGRAPH AND SUBPARAGRAPH HEADINGS. The titles of the
paragraphs of this Agreement are for convenience only and shall not in any way
affect the interpretation of any provision or condition of this Agreement.
15.11 THIRD PARTIES. Except as may be expressly set forth
herein, the parties hereto do not intend to confer any rights or remedies upon
any person other than the parties hereto.
15.12 LEGAL ACTION. In the event of any litigation between or
among the parties hereto respecting or arising out of this Agreement, the
prevailing party or parties shall be entitled to recover reasonable attorneys'
fees and costs, whether or not such litigation proceeds to final judgment or
determination.
15.13 AMENDMENT. This Agreement may not be amended except by a
writing signed by both parties.
15.14 COUNTERPARTS. This Agreement may be executed in
counterparts which, taken together, shall constitute the whole of the Agreement
as between the parties.
IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of the day and year first above written.
COMPANY: PAULA Insurance Company
By: /s/ Norman J. Schnider
------------------------------------
NORMAN J. SCHNIDER
Title: President/CEO
------------------------------------
AGENT: Pan American Underwriters Insurance Agents & Broker, Inc.
By: /s/ Leroy J. Combs
------------------------------------
LEROY J. COMBS
Title President/CEO
------------------------------------
9
<PAGE>
SCHEDULE A
POLICIES
Workers' Compensation and Employers Liability Insurance
10
<PAGE>
SCHEDULE B
COLLECTION OF PREMIUMS
A. Agent shall be liable to Company for the full amount of premiums
earned on all insurance contracts, regardless of the collectability or
collection status of the accounts by the Agent except as outlined in paragraph B
of this Schedule. Agent shall collect and receive, in the name of Company, all
premiums and any other remuneration on policies, binders, or endorsements of
Company written by or through it. Such premiums shall be collected from insures
in accordance with the following general standards:
(1) Deposit Premiums - at or no later than fifteen (15) days from the
policy inception date or the billing date.
(2) Installment, Endorsement or Any Other Premium Billings - promptly
and, in no event, not more than thirty (30) days after the billing date.
(3) Interim Voluntary Payroll Report - promptly and, in no event, not
more than thirty (30) days after the end of the monthly, quarterly or
semi-annual reporting period.
(4) Annual, Interim and Cancellation Audits - promptly and, in no
event, not more than thirty (30) days after the billing date.
B. By mutual agreement between both parties, the Agent may return to
the Company for direct collections a particular premium billing provided:
(1) The Agent notifies the Company in writing within thirty (30) days
from the billing date.
(2) No commissions shall be payable to the Agent on any premiums
returned to the Company for direct collection whether collected or not.
C. The above standards may from time to time be altered and new and
different standards adopted by Company. Company's decision with respect thereto
shall be final and an amendment of this Agreement shall not be necessary in
order to effectuate new standards.
D. Where return premium is due an insured, Agent shall promptly
transmit the net return premium from Company funds, adding thereto the return
commission from its own funds at the same rate at which such commissions were
originally retained.
E. Premium monies received by Agent are held by Agent in its
fiduciary capacity and shall be transmitted to Company within two (2) business
days unless paid to one of Agent's branch offices, in which case, within five
(5) business days, deducting therefrom only Agent's commission as provided in
paragraph 6 hereof and such funds as may be necessary to pay net return premiums
as set forth above.
11
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SCHEDULE C
COMMISSIONS
Workers' Compensation - 13.5%
Special Commission rates on individual policies or groups may be
negotiated by mutual agreements of the parties.
No commission shall be paid or returned on additional or return
premiums resulting from retrospective rating plan computations.
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AMENDMENT NO. 1
TO
AGENCY AGREEMENT
This Amendment No. 1 to Agency Agreement (this "Amendment") is entered into
as of the fifteenth day of June, 1996 with reference to that certain Agency
Agreement between Paula Insurance Company and Pan American Underwriters
Insurance Agents & Brokers, Inc. dated as of March 1, 1992 (the "Agreement").
All capitalized terms used herein without definition shall have the meaning
ascribed to them in the Agreement.
In consideration of the mutual covenants set forth herein and other good
and valuable consideration the receipt and sufficiency of which are hereby
acknowledged, the Agent and the Company agree to amend the Agreement as follows:
1. Schedule C to the Agreement is hereby amended and restated to read in
full as follows:
"Workers' Compensation - 11%, effective January 1, 1996
Special Commission rates on individual policies or groups may be negotiated
by mutual agreements of the parties.
The Company agrees to pay to the Agent the following bonus commission for
the 1996 calendar year contingent upon the Agent meeting the following premium
volume thresholds:
INVOICED 1996 PREMIUM VOLUME BONUS COMMISSION
$2,000,000 1% of Invoiced Premium
$4,000,000 Additional 1% of Invoiced Premium
$6,000,000 Additional l% of Invoiced Premium
The foregoing bonus will be paid quarterly based on invoiced premium
written prior to the end of the applicable quarter. The bonus will apply to all
premium written, not merely the amount of premium over the premium threshold.
The bonus will be subject to offset to the same extent as commissions payable
under this Agreement."
2. In all other respects, the Agreement shall continue in full force and
effect.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the
date first written above:
PAULA INSURANCE COMPANY PAN AMERICAN UNDERWRITERS
INSURANCE AGENTS &
BROKERS, INC.
By: /s/ Bradley L. Serwin By: /s/ James A. Nicholson
--------------------------- --------------------------------
<PAGE>
AMENDMENT NO. 2
TO
AGENCY AGREEMENT
This Amendment No. 2 to Agency Agreement (this "Amendment") is entered into
as of the first day of April, 1997 with reference to that certain Agency
Agreement between Paula Insurance Company and Pan American Underwriters
Insurance Agents & Brokers, Inc. dated as of March 1, 1992, as amended (the
"Agreement"). All capitalized terms used herein without definition shall have
the meaning ascribed to them in the Agreement.
In consideration of the mutual covenants set forth herein and other good
and valuable consideration the receipt and sufficiency of which are hereby
acknowledged, the Agent and the Company agree to amend the Agreement as follows:
1. The relevant provisions of Schedule C to the Agreement are hereby
amended as follows:
"The Company agrees to pay to the Agent the following bonus commission
during the 1997 calendar year contingent upon the Agent meeting the following
quarterly premium volume thresholds:
INVOICED QUARTERLY 1997 PREMIUM VOLUME BONUS COMMISSION
$500,000 1% of Invoiced Premium
$1,000,000 Additional 1% of Invoiced Premium
$1,500,000 Additional 1% of Invoiced Premium
The foregoing bonus will be paid quarterly based on invoiced premium
written prior to the end of the applicable quarter. The bonus will apply to all
premium written, not merely the amount of premium over the premium threshold.
The bonus will be subject to offset to the same extent as commissions payable
under this Agreement."
2. In all other respects, the Agreement (including the unamended
provisions of Schedule C) shall continue in full force and effect.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the
date first written above:
PAULA INSURANCE COMPANY PAN AMERICAN UNDERWRITERS
INSURANCE AGENTS &
BROKERS, INC.
By: /s/ James A. Nicholson By: /s/ Bradley K. Serwin
--------------------------- --------------------------------
<PAGE>
AGENCY AGREEMENT
This AGENCY AGREEMENT ("Agreement") is entered into effective as of
December 8 1994, (the "Effective Date") by and between OREGON RISK MANAGEMENT,
INC., an Oregon corporation, ("Agent") and PAULA INSURANCE COMPANY, a CALIFORNIA
corporation doing business as Agri-Comp Insurance Company, ("Company"), with
reference to the following facts:
A. Company desires to appoint Agent to solicit applicants for certain of
Company's insurance products and to perform additional services with respect to
Policies (as defined in paragraph 2.2) issued to such applicants.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained in this Agreement and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. APPOINTMENT OF AGENT; AUTHORITY.
1.1 APPOINTMENT OF AGENT. Company hereby appoints Agent as Company's
nonexclusive soliciting agent and Agent accepts a nonexclusive appointment as
a soliciting agent of Company for the lines and limits of insurance as set
forth in SCHEDULE A attached hereto and incorporated herein by this
reference. Such appointment is made pursuant to the Company's published rates
and underwriting guidelines. At any time and from time to time Company, may,
in its sole discretion, change its published rates or underwriting guidelines
and withdraw from or add to the lines and limits of insurance set forth in
SCHEDULE A.
1.2 AUTHORITY. Agent's appointment and authority for such lines and
limits of insurance shall extend only to any and all states in which Company
and Agent shall both be licensed as required by prevailing regulatory
requirements and in which Company's applicable forms and rates are approved
for use. Agent shall supply Company with copies of all certificates of
qualification or licenses required of Agent to act under this Agreement.
2. AGENT'S DUTIES AND RESPONSIBILITIES.
Commencing on the Effective Date, Agent will faithfully perform all of
Agent's duties within the scope of the agency relationship created under this
Agreement to, the best of the Agent's professional knowledge, skill and
judgment, which duties shall include but not be limited to the following:
2.1 SOLICITATION. Agent will actively solicit and present applicants to
Company for acceptance, which applicants will meet the Company's underwriting
standards and which applications in connection therewith will be within the
limits authorized.
2.2 POLICY ISSUANCE. With respect to applications for coverage submitted to
and accept by Company, Agent will timely and properly deliver and execute or
countersign, if necessary, contracts of insurance, policies, certificates,
endorsements, memoranda and binders (collectively, "Policies") as directed by
Company. Such Policies shall not, however, be delivered by Agent unless Agent
has collected the initial premium as required by Company.
2.3 PREMIUM RATES. Agent will ensure that accurate and proper premiums and
rates for all Policies are quoted and charged in full compliance with approved
rating system of Company.
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2.4 COLLECTION OF PREMIUMS. Agent will collect premiums due on all Policies
and will timely account for and pay Company on such business in accordance with
the requirements set forth in SCHEDULE B attached hereto and incorporated herein
by this reference. Company may at any time and from time to time amend the
procedures set forth in SCHEDULE B.
2.5 FIDUCIARY CAPACITY. Agent will hold all premiums collected and received
on Policies for Company in a fiduciary capacity, separate and apart on its books
from all other funds of Agent, in a bank account or other media or investment
approved in advance in writing by Company. Agent's books and records with
respect to such funds shall be maintained in such a manner so as to establish
clearly that Agent is holding such funds and acting as trustee for Company with
respect to the same.
2.6 COMPLIANCE WITH MANUALS. Agent will comply fully and timely with all
instructions, rules, bulletins, manuals and underwriting guides issued in
writing by Company to Agent promptly upon receipt thereof.
2.7 COMPANY PROPERTY. Agent will safeguard, maintain and account for all
Policies, forms, manuals, equipment and supplies furnished Agent by Company,
all of which shall remain the property of Company, and will return the same
to Company promptly upon demand.
2.8 AGENT EXPENSES. Agent will pay, assume the obligation and be fully
responsible for all costs and expenses associated with and in respect of the
performance by Agent of its duties under this Agreement, including but not
limited to rentals, office facilities, travel expenses, transportation
facilities, employee and clerical salaries, benefits and expenses,
countersignature fees and expenses, postage, advertising and local license fees.
2.9 LEGAL COMPLIANCE. Agent will comply fully with all regulations,
bulletins, rulings, circular letter, proclamations and statutes, federal, state
or local, now or hereafter in force, and which are applicable to Agent's
appointment and status hereunder.
2.10 ACCURATE RECORDS - AUDIT. Agent will keep identifiable and accurate
records and accounts of all business and transactions effected pursuant to
this Agreement. Upon reasonable notice and at reasonable times, Agent will
permit Company to visit, inspect, examine, audit and verify, at Agent's
offices or elsewhere, any of the properties, accounts, files, documents,
books, reports, work papers and other records (other than documents subject
to an attorney-client privilege and bank examination reports) belonging to
our in the possession or control of Agent relating to the business covered by
this Agreement and, at Company's expense, to make copies thereof and extracts
therefrom, provided that such audit shall not unreasonably interfere with
Agent's normal course of business.
2.11 APPOINT PRODUCERS. Agent may appoint Producers, subject to the
provisions of paragraph 4 hereof.
2.12 ERRORS AND OMISSIONS. The Company requires that Errors and Omissions
insurance be maintained by the Agent with a limit of liability of one million
dollars ($1,000,000) The Company may request evidence of such coverage at any
time.
3. LIMITATIONS ON AGENT'S AUTHORITY
Agent shall have no authority nor shall it represent itself as having such
authority other than as is
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specifically set forth in this Agreement. Without limiting the generality of
the foregoing sentence, Agent agrees that it will not do any of the following:
3.1 BIND COVERAGE. Bind coverage without prior approval of Company.
Written application must follow within three (3) working days. Binder may not be
extended without Company approval.
3.2 ALTERATIONS. Make, waive, alter or change any term; rate or condition
stated in any Company contract or Company approved form, or discharge any
contract in the name of Company.
3.3 FORFEITURE. Waive a forfeiture.
3.4 EXTENSION OF TIME. Extend the time for the payment of premiums or other
monies due under the Policies or to Company.
3.5 LITIGATION. Institute, prosecute or maintain any legal proceedings in
connection with any matter pertaining to the Company's business nor accept
service of process on behalf of Company.
3.6 TRANSACTION OF BUSINESS. Transact business in contravention of the
rules and regulations of any insurance department and/or other governmental
authorities having jurisdiction of any or all subject matters embraced by this
Agreement.
3.7 ENDORSEMENT. Except as otherwise contemplated by other provisions of
this Agreement or as may be specifically authorized by Company, make, accept or
endorse notes, or endorse checks payable to Company otherwise incur any expense
or liability on behalf of Company.
3.8 MISREPRESENTATION. Misrepresent or compare incompletely for the purpose
of inducing a policyholder in any other company to lapse, forfeit or surrender
his/her/its insurance therein.
4. APPOINTMENT OF PRODUCERS
4.1 APPOINTMENT. Agent may appoint Producers (as defined below) only with
the written consent of Company. All such Producers shall enter into a written
contract with Agent, but not with Company, on forms approved by Company, without
modification thereof. For the purposes of this Agreement a Producer is a
licensed person, firm or corporation who, with the approval of Company, enters
into an agreement with Agent, as an insurance agent or broker. A copy of each
such executed agreement shall be immediately furnished to Company by Agent.
4.2 REJECTION AND TERMINATION OF PRODUCERS. Company may, in its sole
discretion and without liability to Agent, approve or reject each request by
Agent for consent to its appointment of any Producer. Agent shall, when
requested by Company, immediately dismiss any Producer.
4.3 RESPONSIBILITY. Agent shall save Company harmless from all loss,
expense, cost and liability resulting from unauthorized acts or transactions by
Producers for whom Agent is responsible, and any other persons engaged by Agent
or acting on its behalf. Agent shall be responsible for each Producer with whom
Agent has executed a Producer's agreement until such agreement is terminated,
and for each Producer who has been assigned to Agent for supervision until such
supervision is terminated.
4.4 PAYMENTS TO PRODUCERS. Company will pay commissions to Producers in
accordance with the Schedule of Commissions included in or attached to the
Producers' agreements which Company may from
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time to time authorize Agent to enter into, on its own behalf and not on behalf
of Company. Company may at its option, pay such Producers' commissions by
either:
(i) Paying directly to one or more Producers the commissions to which
they may be entitled under agreements between any of them and Agent, or
(ii) Paying their commissions directly to Agent.
In making such payment, Company may rely fully upon the agreements
delivered to it by Agent. Company shall not be bound by an assignment or pledge
of, or lien on, any Producer's commissions due from Agent, unless it has
received specific and timely written notice of and has agreed in writing to
honor such assignment, pledge or lien. Payment pursuant to either (i) or (ii)
above shall fully discharge Company's obligation to Agent to the extent of such
payments.
5. DUTIES AND OBLIGATIONS OF COMPANY
Commencing on the Effective Date, Company will faithfully perform all of
Company's duties within the scope of the agency relationship created under this
Agreement to the best of the Company's professional knowledge, skill and
judgment, which duties shall include BUT not be limited to the following:
5.1 MATERIALS. Company will provide Agent with such marketing and training
support materials, supplies, manuals and brochures forage by Agent as it deems
appropriate; and
5.2 PROCESSING OF APPLICATIONS. Company will promptly process upon receipt
all applications received from Agent.
6. AGENT'S COMPENSATION
Agent shall be entitled to receive as compensation under this Agreement
a percentage of the premium written, paid for and received by Company under this
Agreement, subject to offset, at the rate shown on the Company's current
"Commission Schedule," a copy of which Commission Schedule is attached hereto as
SCHEDULE C. Agent shall pay a return commission at the same rates on any return
premiums, including return premiums on cancellations effected by Company.
Company may change the commission rates set forth in SCHEDULE C upon sixty (60)
days prior written notice to Agent.
7. COMPANY'S RIGHT TO REJECT APPLICATIONS AND CANCEL OR RESCIND POLICIES
Company reserves the right, in its sole discretion to (i) disapprove or
reject any application for a policy submitted to it by Agent, (ii) limit or
restrict the amount or plan of any policy it shall issue, (iii) require a higher
premium than that applied for, (iv) cancel or rescind any existing policy, (v)
alter or withdraw policies offered from time to time, and (vi) introduce new
policies
8. TERM
Unless sooner terminated pursuant to paragraph 12 hereof, the term of this
Agreement shall be for a one-year period commencing immediately upon the
Effective Date (the "Term"). This Agreement shall automatically renew thereafter
for successive like periods (each, a "Renewal Period") unless either party {i)
notifies the other party within sixty (60) days of the expiration of the Term or
of any Renewal Period of (he intention not to renew or (ii) otherwise terminates
the Agreement pursuant to the terms hereof.
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9. ADVERTISING
Agent shall not make, publish issue or insert or cause to have made,
published, issued or inserts any advertisement, letter, circular, pamphlet or
other publication or statement, written or through electronic media
("Advertisement"), referring to Company or the insurance written under this
Agreement without the express prior written approval and consent of Company.
Agent will cease use of any such Advertisement upon receipt of written notice
from Company.
10. NAME: LOGO; TRADEMARK; SERVICE MARK; OR SYMBOL
Neither Company nor Agent will use the other's name nor any other name,
logo, trademark, service mark or symbol that is now or may hereafter be owned by
the other party, a parent or an affiliate or subsidiary thereof, except in the
manner and to the extent that the other party may specifically authorize in
writing. Upon termination of this Agreement, each party will immediately
discontinue the use of such name, logo, trademark, service mark or symbol
belonging to the other party or the parent, affiliate or subsidiary thereof.
ll. INDEMNIFICATION
11.1 INDEMNIFICATION OF COMPANY. Agent shall indemnify, defend and hold
harmless Company, as well as its employees, officers, directors arid agents,
from and against any and all claims, suits, hearings, actions, damages,
liabilities, fines, penalties, costs, losses or expenses, including reasonable
attorneys' fees, which they or any of them may sustain or incur, directly or
indirectly, as the result of any misconduct, act, error, misrepresentation,
inaccurate or misleading Advertising, omission or failure to act attributable to
Agent, any Producer or other employee or representative of Agent, or resulting
from any breach of this Agreement by Agent or by Agent's employees or
representatives, including but not limited to the Producers and any independent
contractors engaged by Agent to perform any of Agent's duties under this
Agreement.
11.2 INDEMNIFICATION OF AGENT. Company shall indemnify, defend and hold
harmless Agent, its affiliates sub-agents brokers, representatives and holding
company, as well as their respective employees, officers and directors, from and
against any and all claims, suits, actions, liabilities, penalties, losses,
fines and expenses, including reasonable attorney's fees, which they or any of
them may sustain or incur, directly or indirectly, as the result of any
misconduct, act, error, misrepresentation, inaccurate or misleading
Advertisement, omission or failure to act attributable to Company or any
officer, employee, director, agent or representative of Company, except to the
extent such alleged misconduct, act, error, omission or failure to act is
primarily attributable to Agent.
11.3 SURVIVAL OF INDEMNIFICATION. The indemnification provided under this
paragraph 1 1 shall survive the termination of this Agreement.
12. TERMINATION OF AGREEMENT
12.1 TERMINATION WITHOUT CAUSE. Either party may terminate this Agreement
without cause upon one hundred-twenty (120) days prior written notice to the
other party.
12.2 TERMINATION FOR CAUSE. At any time during the Term or any Renewal
Period, either party may terminate this Agreement immediately for cause upon
written notification to the other party of such
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termination. Such written notice shall state the "cause" with specificity. As
used in (his paragraph 12.2, the term "cause" shall include, without
limitation, any one or more of the following events:
A. CONVICTION. A party's indictment for or conviction of any felony, fraud
or any crime involving dishonesty;
B. MISAPPROPRIATION OF FUNDS. The intentional misappropriation by a party
of funds or property of the other party or funds received for it or
Policyholders by such other party, including but not limited to the intentional
failure by Agent to remit to Company or Policyholders funds due promptly after
written demand therefore by Company; and
C. LICENSE SUSPENSION OR REVOCATION. The expiration or cancellation of or
refusal to renew by the issuing insurance regulatory authority any license,
certificate or other regulatory approval required in order for a party to
perform its duties under this Agreement.
12.3 RIGHTS AND DUTIES UPON TERMINATION. If, upon termination of this
Agreement, Agent has promptly and properly accounted for and paid over to
Company, premiums and all other amounts due as provided for hereunder for which
Agent may be liable, Agent's records, use and control of policy expirations
shall remain the property of Agent. Otherwise, no such ownership rights shall
vest in Agent.
13. INDEPENDENT CONTRACTOR
This Agreement is not a contract of employment. Nothing contained in this
Agreement shall be construed to create the relationship of joint venture,
partnership or employer and employee between Company and Agent. Each party is an
independent contractor and shall be free, subject to the terms and conditions of
this Agreement, to exercise judgment and discretion with regard to the conduct
of its business. Agent shall be solely responsible with respect to, and will
promptly pay or withhold, as required, all taxes and sums due to the federal,
state and/or local taxing authorities with respect to Agent and Agent's
employees and licensees.
14. CONFIDENTIALITY
During the Term of this Agreement, and any Renewal Period thereafter,
Company and Agent may acquire access to confidential or proprietary information
of one another, including, but not limited to, the identities of one another's
respective clients, customers, prospective client and customer lists, marketing
surveys, cost analyses and procedures (collectively, "Confidential
Information"). Such Confidential Information constitutes proprietary information
and/or trade secrets and is the sole and exclusive property of the party
generating such information. The parties agree that:
(a) Each party shall use the Confidential Information of the other only
for the purposes of carrying out its obligations under this Agreement;
(b) All Confidential Information of a party and any physical and
electronic embodiments thereof to which the other party acquires access will
be held by such other party in strict confidence; and
(c) Neither party will reveal, disclose, publish or use such Confidential
Information of the other party except as provided hereunder.
The provisions of this paragraph 14 shall survive the termination of this
Agreement.
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15. GENERAL PROVISIONS
15.1 OFFSET. All amounts due Agent under this Agreement shall be subject
to the right of offset.
15.2 ASSIGNMENT. This Agreement and the rights, duties and obligations of
the parties hereto shall not be assignable by either party hereto without the
prior written consent of the other party and any purported assignment in the
absence of such consent shall be void.
15.3 FURTHER INSTRUMENTS. Each party shall execute and deliver all further
instruments, documents and papers, and shall perform any and all acts necessary,
to give full force and effect to all of the terms and provisions of this
Agreement.
15.4 SEVERABILITY. If any provision of this Agreement, as applied to any
party or to any circumstance, shall be found by a court of competent
jurisdiction to be void, invalid or unenforceable, the same shall in no way
affect any other provision of this Agreement, the application of any such
provision in any other circumstance, or the validity or enforceability of this
Agreement.
15.5 NOTICES. All notices which are required to be given or submitted
pursuant to this Agreement shall be made in writing and shall be deemed given
when deposited with the United States Postal Service, postage prepaid,
registered or certified mail, return receipt requested, or when deposited with
an overnight mail delivery service, to the last address of record of each party
being notified which is maintained by the other party in the ordinary course of
business.
Any notice or demand required to be made under this Agreement to Agent
shall be given to:
Oregon Risk Management, Inc.
960 S.E. Liberty S.E., Ste. 250
Salem, Oregon 97302
Attention: President
Any notice or demand required to be made under this Agreement to Company
shall be given to:
Paula Insurance Company, DBA
Agri-Comp Insurance Company
300 N. Lake Avenue, Suite 300
Pasadena California 91101
Attention: President
Any party may, by virtue of written notice in compliance with this
paragraph, alter or change the address or the identity of the person to whom any
notice, or copy thereof, is to be sent.
15.6 WAIVERS. A waiver by any party of any of the terms and conditions of
this Agreement in any one instance shall not be deemed or construed to be a
waiver of such term or condition for the future, or of any subsequent breach
thereof, nor shall it be deemed a waiver of performance of any other obligation
hereunder.
15.7 ENTIRE AGREEMENT. This Agreement contains the entire understanding
of the parties hereto relating to the subject matter hereof and supersedes
ail prior and collateral agreements, understandings, statements and
negotiations of the parties. Each party acknowledges that no representations,
inducements,
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promises or agreements, oral or written, with reference to the subject matter
hereof have been made other than as expressly set forth herein.
15.8 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
15.9 GENDER AND NUMBER. In all matters of interpretation, whenever
necessary to give effect to any provision of this Agreement, each gender shall
include the other, the singular shall include the plural and (he plural shall
include the singular.
15.10 PARAGRAPH AND SUB-PARAGRAPH HEADINGS. The titles of the paragraphs of
this Agreement are for convenience only and shall not in any way affect the
interpretation of any provision or condition of this Agreement.
15.11 THIRD PARTIES. Except as may be expressly set forth herein, the
parties hereto do not intend to confer any rights or remedies upon any person
other than the parties hereto.
15.12 LEGAL ACTION. In the event of any litigation between or among the
parties hereto respecting or arising out of this Agreement, the prevailing party
or parties shall be entitled to recover reasonable attorneys' fees and costs,
whether or not such litigation proceeds to final judgment or determination.
15.13 AMENDMENT. This Agreement may not be amended except by a writing
signed by both parties.
15.14 COUNTERPARTS. This Agreement may be executed in counterparts which,
taken together, shall constitute the whole of the Agreement as between the
parties.
IN WITNESS WHEREOF, the parties have executed this Agreement effective as
of the day and year first abave written.
COMPANY: PAULA Insurance Company
DBA Agri-Comp Insurance Company
By: /s/ [ILLEGIBLE]
--------------------------------
Title: President/CEO
AGENT: Oregon Risk Management, Inc.
By: /s/ [ILLEGIBLE]
--------------------------------
Title: President
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SCHEDULE A
POLICIES
Workers' Compensation and Employers Liability insurance
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SCHEDULE B
COLLECTION OF PREMIUMS
A. Agent shall be liable to Company for the full amount of premiums earned
on all insurance contracts, regardless of the collectability or collection
status of the accounts by the Agent except as outlined in paragraph B of this
Schedule. Agent shall collect and receive, in the name of Company, all premiums
and any other remuneration on policies, binders, or endorsements of Company
written by or through it Such premiums shall be collected from insureds in
accordance with the following general standards:
(1) Deposit Premiums - at or no later than fifteen (15) days from the
policy inception date or the billing date.
(2) Installment, Endorsement or Any Other Premium Billings - promptly and,
in no event, not more than thirty (30) days after the billing date.
(3) Interim Voluntary Payroll Report - promptly and, in no event, not more
than thirty (30) days after the end of the monthly, quarterly or semi-annual
reporting period.
(4) Annual, Interim and Cancellation Audits - promptly and, in no event,
not more than thirty (30) days after the billing date.
B. By mutual agreement between both parties, the Agent may return to the
Company for direct collections a particular premium billing provided:
(1) The Agent notifies the Company in writing within thirty (30) days from
the billing date.
(2) No commissions shall be payable to the Agent on any premiums returned
to the Company for direct collection whether collected or not.
C. The above standards may from time to time be altered and new and
different standards adopted by Company Company's decision with respect thereto
shall be final and an amendment of this Agreement shall not be necessary in
order to effectuate new standards.
D. Where return premium is due an insured, Agent shall promptly transmit
the net return premium from Company funds, adding thereto the return commission
from its own funds at the same rate at which such commissions were originally
retained.
E. Premium monies received by Agent are held by Agent in its fiduciary
capacity and shall be transmitted to Company within two (2) business days unless
paid to one of Agent's branch offices, in which case, within five (5) business
days, deducting therefrom only Agent's commission as provided in paragraph 6
hereof and such funds as may be necessary to pay net return premiums as set
forth above.
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SCHEDULE C
COMMISSIONS
Workers' Compensation - 11.4%
Special Commission rates on individual policies or groups may be negotiated
by mutual agreements of the parties.
No commission shall be paid or returned on additional or return premiums
resulting from retrospective rating plan computations.
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AMENDMENT NO. 1
TO
AGENCY AGREEMENT
This Amendment No. I to Agency Agreement (this "Amendment") is entered into
as of the first day of September, 1995 with reference to that certain Agency
Agreement between Paula Insurance Company and Oregon Risk Management, Inc. dated
as of December 8,1994 (the "Agreement"). All capitalized terms used herein
without definition shall have the meaning ascribed to them in the Agreement.
In consideration of the mutual covenants set forth herein and other good
and valuable consideration the receipt and sufficiency of which are hereby
acknowledged, the Agent and the Company agree to amend the Agreement as follows:
1. Section 2 of the Agreement is hereby amended by adding a new paragraph
2.13 to read in full as follows:
"2.13 BILLING, COLLECTION AND COMMISSION PAYMENT DELEGATION. The Company
has sold and will sell insurance policies to insureds in the States of Oregon
and Idaho through agencies directly appointed by the Company and which are and
will be handled on a "direct bill" basis. Agent agrees to issue invoices,
voluntary reports and other billing materials to such insureds on behalf of the
Company. Agent agrees to collect and hold all funds due and payable as a result
of such billing activities on behalf of the Company. Agent agrees to pay to any
agencies which placed such policies with the Company, on behalf of the Company
and out of Company funds held by the Agent, any and all commissions due to them
pursuant to the terms of the respective agreements between such agencies and the
Company. Agent agrees to promptly remit to the Company all remaining funds which
the Agent so collects on behalf of the Company. The Company agrees to reimburse
the Agent for its out of pocket expenses incurred while performing these tasks.
The Company reserves the right to cause the Agent to cease such activities
immediately upon written notice from the Company. The Company and the Agent
agree that from time to time, as they mutually agree, the Company may delegate
additional duties to the Agent with respect to the same policies for which the
Agent has hereby assumed billing and collection responsibilities. In the event
of such delegation, the Company will reimburse the Agent for its out of pocket
expenses relating thereto.
2. This Amendment is made effective as of the date of the Agreement, namely
December 8, 1994.
3. In all other respects, the Agreement shall continue in full force and
effect.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the
date first written above:
PAULA INSURANCE COMPANY OREGON RISK MANAGEMENT, INC.
By: /s/ James A. Nicholson By: /s/ James A. Nicholson
------------------------------ ---------------------------
<PAGE>
AMENDMENT NO. 2
TO
AGENCY AGREEMENT
This Amendment No. 2 to Agency Agreement (this "Amendment") is entered into
as of the fifteenth day of June, 1996 with reference to that certain Agency
Agreement between Paula Insurance Company and Agri-Comp Insurance Agency, Inc.
(fka Oregon Risk Management, Inc.) dated as of December 8,1994 (the
"Agreement"), as amended by Amendment No. 1 thereto dated as of December 8,
1994. All capitalized terms used herein without definition shall have the
meaning ascribed to them in the Agreement.
In consideration of the mutual covenants set forth herein and other good
and valuable consideration the receipt and sufficiency which are hereby
acknowledged, the Agent and the Company agree to amend the Agreement as
follows:
1. Schedule C to the Agreement is hereby amended by adding new paragraphs
thereto to read in full as follows:
"The Company agrees to pay to the Agent the following bonus commission for
the 1996 calendar year contingent upon the Agent meeting the premium volume
thresholds:
Invoiced 1996 Premium Volume Bonus Commission
- ---------------------------- ----------------
$1,000,000 1% of Invoiced Premium
$2,000,000 Additional 1% of Invoiced Premium
$2,500,000 Additional 1% of Invoiced Premium
The foregoing bonus will be paid quarterly based on invoiced premium
written prior to the end of the applicable quarter. The bonus will apply to all
premium written, not merely the amount of premium over the premium threshold.
The bonus will be subject to offset to the same extent as commissions payable
under this Agreement."
2. In all other respects, the Agreement shall continue in full force and
effect.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the
date first written above:
PAULA INSURANCE COMPANY AGRI-COMP INSURANCE
dba AGRI-COMP INSURANCE AGENCY, INC.
COMPANY
By: /s/ [ILLEGIBLE] By: /s/ James A. Nicholson
--------------------------- ---------------------------
<PAGE>
AMENDMENT NO. 3
TO
AGENCY AGREEMENT
This Amendment No. 3 to Agency Agreement (this "Amendment") is entered into
as of the first day of April, 1997 with reference to that certain Agency
Agreement between Paula Insurance Company and Agri-Comp Insurance Agency, Inc.
(fka Oregon Risk Management, Inc.) dated as of December 8, 1994, as amended (the
"Agreement"). All capitalized terms used herein without definition shall have
the meaning ascribed to them in the Agreement.
In consideration of the mutual covenants set forth herein and other good
and valuable consideration the receipt and sufficiency of which are hereby
acknowledged, the Agent and the Company agree to amend the Agreement as follows:
1. The relevant provisions of Schedule C to the Agreement are hereby
amended as follows:
"The Company agrees to pay to the Agent the following bonus commission for
the 1997 calendar year contingent upon the Agent meeting the following quarterly
premium volume thresholds:
Invoiced Quarterly 1997 Premium Volume Bonus Commission
- -------------------------------------- ----------------
$250,000 1% of Invoiced Premium
$500,000 Additional 1% of Invoiced Premium
$625 000 Additional 1%"of Invoiced Premium
The foregoing bonus will be paid quarterly based on invoiced premium
written prior to the end of the applicable quarter. The bonus will apply to all
premium written, not merely the amount of premium over the premium threshold.
The bonus will be subject to offset to the same extent as commissions payable
under this Agreement."
2. In all other respects, the Agreement (including the unamended provisions
of Schedule C) shall continue in full force and effect.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the
date first written above:
PAULA INSURANCE COMPANY AGRI-COMP INSURANCE
dba AGRI-COMP INSURANCE AGENCY, INC.
COMPANY
By: /s/ James A. Nicholson By: /s/ [ILLEGIBLE]
----------------------------- -----------------------
<PAGE>
EXHIBIT 10.30
EXECUTION COPY
PURCHASE OPTION
This Purchase Option and Pre-Initial Public Offering Option (this "Option") is
made and entered into as of the 11th day of March, 1997 by and between PAULA
Financial, a California corporation ("PAULA") and CAPAX Management & Insurance
Services, a California corporation ("CAPAX"). This Option is entered into in
connection with, and as a condition to, that certain Series A Preferred Stock
Purchase Agreement (the "Purchase Agreement"), of even date herewith, by and
between CAPAX and PAULA Insurance Company, a wholly-owned subsidiary of PAULA
("PICO"). All capitalized terms used herein without definition shall have the
meaning ascribed to them in the Purchase Agreement.
R E C I T A L S
WHEREAS, PICO and CAPAX have entered into the Purchase Agreement, a condition
of which is that PAULA and CAPAX enter into this Option;
WHEREAS, it is the intent of the parties that CAPAX provide PAULA with an
option to purchase all of the equity securities of CAPAX on the terms set
forth herein; and
WHEREAS, PAULA would not have permitted PICO to enter into the Purchase
Agreement except in the event that CAPAX entered into this Option with the
full intent to cooperate in the consummation of the transaction contemplated
herein in the event that PAULA chooses to exercise its rights hereunder;
A G R E E M E N T
NOW, THEREFORE, in consideration of the recitals and mutual covenants set
forth herein and for other good and valuable consideration the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
1. GRANT OF OPTION. CAPAX hereby grants to PAULA an option (the
"Option") to purchase (the "Purchase") for cash and/or PAULA Common Stock, no
par value, all outstanding equity securities of CAPAX, and securities
convertible into, or which give the holder the right to purchase, equity
securities of CAPAX (collectively "Convertible Securities").
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EXECUTION COPY
The parties agree that PAULA may attach any conditions to the Purchase which
it deems appropriate so long as such conditions are delivered to CAPAX in
writing, are included in the Option exercise notice discussed below and are
reasonably deemed economically sound by CAPAX. In the event CAPAX reasonably
determines a condition economically unsound, PAULA shall be entitled to
condition exercise of the Option upon satisfaction of such condition if PAULA
agrees to pay the cost of satisfaction of the condition in excess of the
portion deemed reasonably economically sound.
2. OPTION EXERCISE PERIOD; EXPIRATION. The Option can be exercised
by PAULA at any time after the date hereof but no later than the third
anniversary of the date hereof. The Option will expire if not exercised by
the third anniversary hereof. In the event that the Option is exercised
prior to the third anniversary hereof but the Purchase does not close prior
to such date, PAULA shall continue to have the right to close the Purchase
pursuant to such exercise of the Option for so long as PAULA shall continue
to pursue, in good faith, the closing of the Purchase but in no event will
this extension exceed three months.
The Option must be exercised by the delivery to CAPAX of a written notice of
such exercise, which notice shall specify the expected closing date of the
Purchase and any and all conditions which must be met by CAPAX in order for
the consummation of the Purchase. The exercise notice cannot be given more
than 180 days prior to the expected closing date of the Purchase and no later
than 30 days prior to such closing date.
3. OPTION EXERCISE CONSIDERATION. The consideration to be paid to
the holders of CAPAX equity securities in exchange for the Purchase will be
cash and/or PAULA Shares in an aggregate amount determined based on the
following formula:
(i) The Multiple (as defined) multiplied by (A) the CAPAX budgeted revenues
for 1997 if the Option is exercised before December 31, 1997 or (B)
otherwise, the actual revenue of CAPAX for the four quarter period ending
immediately prior to the closing of the Purchase; less
(ii) (A) revenue from interest income, contingency income from insurance
carriers and from insurance or management business owned, to the extent of
such ownership, by producers or affiliates of CAPAX or its subsidiaries or
other third parties and (B)
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EXECUTION COPY
revenue from distinct portions of CAPAX' business which, while included in
the Budget or the results of the four quarter period, as the case may be, are
not reasonably expected to generate revenue for CAPAX following the period
being measured; multiplied by
(iii) the percentage of the outstanding equity securities of CAPAX which
PAULA and/or its subsidiaries do not own at the time immediately prior to the
closing of the Purchase.
(iii) the "Multiple" is defined by the following formula:
(A) CAPAX' pre-tax return according to GAAP, consistently applied,
for the measurement period, expressed as a percentage of the
revenues used to calculate the Option exercise consideration is
defined herein as the "Pre-Tax Return."
(B) The Multiple equals (y) 0.8 plus (z) (the Pre-Tax Return x .02).
(C) For example, if the Pre-Tax Return is 7%, the Multiple equals
0.8 + (7 x 0.02), which equals 0.94.
In the event that the Purchase closes prior to the time that CAPAX' Pre-Tax
Return for the measurement period has been determined, the consideration for
the Option exercise will be paid using .8x as the estimated Multiple at
closing until the actual multiple has been determined, with make-whole
arrangements designed to return overpayments to PAULA and underpayments to
the CAPAX shareholders as soon as possible following the determination of the
final exercise price. It is the intent of the parties that the make-whole
arrangements be designed to place the party whose consideration was held back
or overpaid, as the case may be, in the same position that such party would
have been in if the correct consideration had been paid at the time of the
closing of the option exercise. The consideration held back, if the
consideration is both cash and stock, will be held back proportionately in
cash and stock.
The determination of ratio of the exercise consideration which will be cash
and which will be PAULA Shares will be made by PAULA in its sole discretion
with the following qualification. PAULA cannot choose a percentage of stock
consideration which will, by itself, cause the Purchase to fail to qualify
for tax-free reorganization
3
<PAGE>
EXECUTION COPY
treatment under the Internal Revenue Code. The valuation of the PAULA Shares
paid in consideration of the exercise of the Option will be the average
closing price of the trading price of the PAULA Shares on the NASDAQ National
Market System during the 20 trading days prior to the date the Option
exercise is given; PROVIDED, HOWEVER, that if PAULA exercises the Option
prior to its initial public offering ("IPO"), but with the same closing date
as the IPO, then the valuation of the PAULA Shares will be the price of such
shares in the IPO; PROVIDED, FURTHER, HOWEVER, that if PAULA exercises the
Option prior to its IPO and not as part of the IPO, then the valuation of the
PAULA Shares will be at a price agreed upon by the Boards of Directors of
each of PAULA and CAPAX and stock will only be a component of the
consideration if such an agreement is reached.
4. PIGGYBACK REGISTRATIONS.
(a). RIGHT TO PIGGYBACK. Whenever PAULA proposes to register any of its
Common Stock under the Securities Act of 1933 for sale by PAULA (other than
its initial public offering or a registration on Form S-8 or Form S-4) which
represents at least 5.0% (after giving effect to the proposed sale) of the
number of shares of outstanding PAULA Common Stock and the registration form
to be used by PAULA may be used for the registration of PAULA Shares, if any,
paid to CAPAX upon exercise of the Option (a "Piggyback Registration"), PAULA
shall give prompt written notice to the original holders of PAULA Shares
issued upon exercise of the Option of its intention to effect such
registration. Such notice shall not be sent less than twenty-five (25) days
prior to the filing of any such registration statement, and, subject to the
terms of this Agreement, PAULA shall include in such registration all PAULA
Shares with respect to which PAULA has received written requests for
inclusion therein within twenty (20) days after the delivery of PAULA's
notice.
(b) PRIORITY ON PIGGYBACK REGISTRATIONS. If a Piggyback Registration
relates to an underwritten public offering and the managing underwriter(s)
advise PAULA in writing that in their opinion the number of shares of Common
Stock requested to be included in such registration exceeds the number which
can be sold in such offering without causing diminution in the offering
price, PAULA shall include in such registration:
(i) FIRST, all shares of Common Stock which PAULA proposes to sell;
4
<PAGE>
EXECUTION COPY
(ii) SECOND, the PAULA Shares requested to be included in such
registration, PROVIDED, that if less than all such PAULA Shares requested
to be included may be included in the opinion of such underwriters, then
the allocation of shares to be included shall be determined PRO RATA among
the respective CAPAX holders requesting inclusion and by third-party
holders of other "piggyback" registration rights, on the basis of the
number of shares requested by such holders to be included therein.
5. PURCHASE AGREEMENT. Upon the giving of notice of the exercise of the
Option, the parties will cooperate in the preparation of an agreement setting
forth the definitive terms of the Purchase. Such agreement will contain
representations and warranties of CAPAX and the holders of the CAPAX equity
securities and Convertible Securities which shall be reasonably acceptable to
PAULA and which shall be at least as extensive as those set forth in the
Purchase Agreement. Such agreement shall provide PAULA with a right to
complete any due diligence prior to closing which it believes is reasonably
necessary and to receive any and all documentation prior to closing which
PAULA believes to be reasonably necessary. Such agreement shall also provide
PAULA with the right to terminate the Purchase in its sole discretion prior
to closing. Such termination shall be without liability of PAULA or its
subsidiaries to CAPAX or its equity holders.
6. MAINTENANCE OF ABILITY TO CONSUMMATE THE PURCHASE. CAPAX shall not take
any corporate action or otherwise amend its Articles of Incorporation or
By-laws, or permit any of its subsidiaries to do so, without the approval of
PAULA if such corporate action or amendment would have the effect of
preventing PAULA from exercising the Option and closing the Purchase upon the
terms set forth herein. In addition, CAPAX shall not enter into any
management or employee compensation agreements which cannot be terminated by
CAPAX or its successor upon 90 days notice following the closing of the
Purchase.
6. NOTICES. All notices required to be given hereunder shall be given in
the manner set forth in the Purchase Agreement as if PAULA were party thereto
instead of PICO.
7. NO DUTY TO EXERCISE. Notwithstanding the grant of the Option to PAULA,
PAULA shall be under no duty to exercise this Option. PAULA shall not be
liable to
5
<PAGE>
EXECUTION COPY
CAPAX or its equity holders for the consequences of any of their actions
which may be taken in anticipation of the exercise of the Option.
8. GOVERNING LAW. This Option shall be governed by, and enforced in
accordance with, the laws of the State of California.
9. ATTORNEYS' FEES. In the event of a dispute with respect to the terms
of this Agreement, the prevailing party shall be entitled to recover its
reasonable attorneys' fees and related costs from the other party.
10. AMENDMENTS. This Agreement may not be amended except by a writing
executed by each party hereto and no course of dealing or circumstances shall
be deemed to have caused an amendment hereto.
11. FURTHER ASSURANCES. The parties hereto agree to cooperate and work
together to negotiate, execute and deliver any and all additional documents
or agreements necessary or desirable in order to further the transactions
contemplated herein and to more fully vest in PAULA the rights granted
hereby. Each party shall also prepare and file any and all documents required
by any governmental entity exercise authority over any of the parties or
their affiliates in connection with this Option.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the first date written above:
PAULA FINANCIAL CAPAX MANAGEMENT & SERVICES
INSURANCE
By: By:
--------------------------- ------------------------
6
<PAGE>
EXHIBIT 11
PAULA FINANCIAL AND SUBSIDIARIES
COMPUTATION OF PRIMARY AND FULLY DILUTED EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------ -------------------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Income 4,705 300 3,923 2,062 2,294
===== ===== ===== ===== =====
Weighted average shares outstanding
during the period 1,529 925 948 946 951
Common stock equivalents - primary 443 1,014 1,059 1,023 1,055
----- ----- ----- ----- -----
Common and common stock equivalent shares
outstanding for purpose of calculating
primary net earnings per share 1,972 1,940 2,007 1,970 2,006
Incremental shares to reflect full dilution 5 - - 28 31
----- ----- ----- ----- -----
Total shares for purposes of calculating
fully diluted net earnings per share 1,977 1,940 2,007 1,998 2,037
===== ===== ===== ===== =====
Primary earnings per share 2.39 0.15 1.95 1.05 1.14
===== ===== ===== ===== =====
Fully diluted net earnings per share 2.38 0.15 1.95 1.03 1.13
===== ===== ===== ===== =====
</TABLE>
<PAGE>
PAULA FINANCIAL
300 N. Lake Avenue
Suite 300
Pasadena, California 91101
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
April 23, 1997
INTRODUCTION
The following information is furnished in connection with the solicitation
of proxies by the Board of Directors for use at the Annual Meeting of
Shareholders of PAULA Financial (the "Company") to be held at The Pasadena
Hilton Hotel, 150 South Los Robles Avenue, Pasadena, California 91101 at 10:00
a.m., California time, on Wednesday, April 23, 1997, and postponements and
adjournments thereof (the "Meeting"), for the purposes stated in the Notice of
Annual Meeting of Shareholders preceding this Proxy Statement.
MATTERS TO BE CONSIDERED
The matters to be considered and voted upon at the Meeting will be:
1. ELECTION OF DIRECTORS. To elect a Board of Directors of nine persons
to serve until the next Annual Meeting of Shareholders and until their
successors are elected and have qualified.
2. APPROVAL OF 1997 STOCK INCENTIVE PLAN. To approve and adopt the
Company's proposed 1997 Stock Incentive Plan providing for the grant of stock
options and other stock based awards to employees and non-employee directors
and consultants to the Company.
3. APPROVAL OF REINCORPORATION PROPOSAL. To approve a plan of
Reorganization and Agreement of Merger pursuant to which the Company will
merge with and into a new wholly-owned Delaware subsidiary to be named "PAULA
Financial" causing the Company to change its domicile from California to
Delaware.
4. OTHER BUSINESS. To transact such other business as properly may come
before the Meeting and at any and all adjournments thereof.
REVOCABILITY OF PROXIES
A proxy for use at the Meeting is enclosed. Any shareholder who executes
and delivers such proxy has the right to revoke it at any time before it is
exercised by filing with the Secretary of the Company either written
instructions revoking it or a duly executed proxy bearing a later date. Written
notice of the death of the person executing the proxy is tantamount to
revocation. The proxy may also be revoked by attendance at the Meeting and
election to vote thereat. Subject to such revocation, all shares represented by
a properly
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executed proxy, received in time for the Meeting, will be voted by the proxy
holders in accordance with the instructions on the proxy. If no instructions
are specified, the shares represented by the proxy will be voted (i) "FOR"
election of the nine nominees for director set forth herein, (ii) "FOR" the
approval and adoption of the 1997 Stock Incentive Plan and (iii) "FOR" the
approval and adoption of the Reincorporation Proposal. It is not anticipated
that any matters will be presented at the Meeting other than as set forth in
the accompanying Notice of the Annual Meeting of Shareholders. If, however,
any other matters properly are presented at the Meeting, the proxy will be
voted in accordance with the best judgment and in the discretion of the proxy
holders.
COSTS OF SOLICITATION OF PROXIES
This proxy solicitation is made by the Board of Directors of the Company
and the Company will bear the costs of solicitation. The expenses of preparing,
assembling, printing and mailing this Proxy Statement and the materials used in
this solicitation of proxies will also be borne by the Company. It is
contemplated that proxies will be solicited through the mails, but directors,
officers and regular employees of the Company may also solicit proxies
personally or by telephone.
OUTSTANDING SECURITIES AND VOTING RIGHTS
1,084,356 shares of the Company's common stock, ("Common Stock") and
941,177 shares of the Company's Series A Preferred Stock, were issued and
outstanding at the close of business on March 21, 1997 (the "Record Date"),
which has been set as the record date for the purpose of determining
shareholders entitled to notice of and to vote at the Meeting.
Holders of the Common Stock and the Preferred Stock vote as a single class
on all matters except the election of three of the nine directors of the Company
and on certain other matters requiring a class vote as a matter of law. Holders
of the Preferred Stock, voting as a separate class are entitled to elect three
of the Company's directors. When the holders of the Common Stock and the
Preferred Stock vote together as a single class (i) the holders of Common Stock
are entitled to one vote per share for each share standing in his or her name on
the books of the Company as of the Record Date and (ii) the holders of the
Preferred Stock are entitled to the number of votes per share equal to the
number of shares of Common Stock issuable upon conversion of each share of
Preferred Stock standing in its name on the books of the Company as of the
Record Date. Each share of the Preferred Stock is currently convertible into one
share of Common Stock. Subject to certain exceptions specified below,
shareholders of record on the Record Date are entitled to cumulate their votes
in the election of the Company's directors (i.e., they are entitled to the
number of votes determined by multiplying the number of shares held by them
times the number of directors to be elected) and may cast all of their votes so
determined for one person, or spread their votes among two or more persons as
they see fit. No shareholder shall be entitled to cumulate votes for a given
candidate for director unless such candidate's name has been placed in
nomination prior to the vote and the shareholder has given notice at the
Meeting, prior to voting, of the shareholders intention to cumulate his or her
votes. If any one shareholder has given such notice, all shareholders may
cumulate their votes for candidates in nomination. Discretionary authority to
cumulate votes is hereby solicited by the Board of Directors.
2
<PAGE>
PRINCIPAL SHAREHOLDERS
The Board of Directors knows of no person who beneficially owns more than
five percent of the Company's Common Stock or Preferred Stock as of March 21,
1997, except as provided below.
<TABLE>
<CAPTION>
COMMON STOCK OWNED PREFERRED STOCK OWNED
BENEFICIALLY(1) BENEFICIALLY
----------------------------- -----------------------
NAME AND ADDRESS OF NUMBER OF PERCENT OF NUMBER OF PERCENT OF
BENEFICIAL OWNER SHARES CLASS SHARES CLASS
--------- ---------- -------- ----------
<S> <C> <C> <C> <C>
PAULA Financial & Subsidiaries 547,063 50.5% -- --
Employee Stock Ownership Plan (2)
The Teig Family Limited
Partnership (3) 177,677 16.4% -- --
1974 Foothill Road
Minden, NV 89423
Jeffrey A. Snider 230,000 (includes 17.9% -- --
300 N. Lake Ave., Ste. 300 options to purchase
Pasadena, CA 91101 200,000 shares)
Andrew M. Slavitt 68,500 (includes 6.0% -- --
300 N. Lake Ave., Ste. 300 options to purchase
Pasadena, CA 91101 67,000 shares)
James A. Nicholson 63,680 (includes 5.7% -- --
300 N. Lake Ave., Ste. 300 options to purchase
Pasadena, CA 91101 31,500 shares)
Barkley Charitable Remainder Unitrust 53,000 5.1% -- --
155 South "G" Street
Oxnard, CA 93030
Conning & Company 498,040 (4) (5) 31.5% 498,040 50.0%
CityPlace II (includes warrants to
185 Asylum Street purchase 27,451
Hartford, CT 06103 shares)
RFE Investment Partners IV, L.P. 235,294 (4) 17.8% 235,294 25.0%
36 Grove Street
New Canaan, CT 06840
Saugatuck Capitol Company 235,294 (4) 17.8% 235,294 25.0%
One Canterbury Green
Stamford, CT 06901
</TABLE>
- -------------------
(Footnotes on following page).
(1) Such holder directly or indirectly has sole voting and investment power with
respect to the shares listed. Does not include shares held in the PAULA
Financial and Subsidiaries Employee Stock Ownership Plan (the "ESOP").
3
<PAGE>
(2) Pursuant to the terms of the ESOP, shares of the ESOP are voted by the
Trustee pursuant to instructions from the PAULA Financial and Subsidiaries
Employee Stock Ownership Plan Administrative Committee. Participants have
limited voting power concerning specified issues set forth in the ESOP with
respect to the shares held in the ESOP.
(3) The Company has agreed to repurchase 132,098 of the shares held by the
Partnership over the next year. On April 10, 1997, 66,049 of the 132,098 Shares
are expected to be repurchased. In connection with such repurchase, the
Partnership has granted the Company a proxy over these shares allowing the
Company to vote these shares on all matters presented to the shareholders.
(4) Assumes that the Preferred Stock is converted into Common Stock. Each share
of Preferred Stock is currently convertible into one share of Common Stock.
(5) Conning Insurance Capital Limited Partnership II is the owner of 110,588
shares of Preferred Stock, Conning Insurance Capital International Partners II
is the owner of 124,706 shares of Preferred Stock, Conning Insurance Capital
Limited Partnership III is the owner of 193,271 shares of Preferred Stock and
Conning Insurance Capital International Partners III, L.P. is the owner 42,024
shares of Preferred Stock and Conning Corporation is the owner of warrants to
purchase 27,451 shares of Common Stock. Each of the foregoing entities is an
affiliate of Conning & Company.
NOMINATION AND ELECTION OF DIRECTORS
The Company's directors are to be elected at each annual meeting of
shareholders. At this Meeting, nine directors are to be elected to serve until
the next annual meeting of shareholders and until their successors are elected
and qualify. Six nominees will be elected by the holders of the Common Stock and
the Preferred Stock voting together as a class and three nominees will be
elected by the holders of the Preferred Stock voting separately as a class. The
authorized number of directors of the Company is nine.
The nominees for election as directors at this Meeting set forth in the
table below are all recommended by the existing Board of Directors of the
Company. All nominees were last elected as directors at the Annual Meeting of
Shareholders held on April 25, 1996.
In the event that any of the nominees for director should become unable to
serve if elected, it is intended that shares represented by proxies which are
executed and returned will be voted for such substitute nominee(s) as may be
recommended by the Company's existing Board of Directors.
The six nominees for director receiving the highest number of votes cast at
the Annual Meeting by the holders of the Common Stock and Preferred Stock voting
together as a class, and the three nominees for director receiving at least 51%
of the votes which are possible to be cast at the meeting by the holders of the
Preferred Stock voting separately as a class, will be elected as the Company's
directors to serve until the next annual meeting of shareholders and until their
successors are elected and qualify.
4
<PAGE>
The nominees of the Board of Directors for election by the holders of the
Common Stock and the Preferred Stock voting together as a class are as follows:
<TABLE>
<CAPTION>
YEAR FIRST
PRINCIPAL OCCUPATION FOR PAST ELECTED AS COMMON STOCK OWNED
NAME FIVE YEARS A DIRECTOR BENEFICIALLY
- ----------------- ----------------------------- ---------- -------------------------------
PERCENT
NUMBER OF CLASS
--------- --------
<S> <C> <C> <C> <C>
Jeffrey A. Snider Chairman/President/CEO 12/94- 1992 230,000 17.9%
present (including options to
PAULA Financial and all subsidiaries purchase 200,000
shares)
PAULA Insurance Company
PAULA Assurance Company
President/CEO 12/93 - 12/94
Executive V.P./Chief Operations Officer
Habitat for Humanity International
Americus, Georgia
1988 - 12/93
President/CEO
PAULA Financial and Subsidiaries
1984-1988
Andrew M. Slavitt COO 11/95 to present 1995 68,500 (including 6.0%
Sr. V.P. 7/95 to 11/95 options to purchase
67,000 shares)
Associate McKinsey & Company
10/93 - 7/95
James A. Nicholson Sr. V.P./CFO 4/88 - present 1986 63,680 (including 5.7%
PAULA Financial and all subsidiaries options to purchase
31,500 shares)
Bradley K. Serwin General Counsel/Corporate Secretary 1995 29,500 (including 2.7%
3/95 - present options to purchase
28,500 shares)
Attorney
Gibson, Dunn & Crutcher
1986 - 3/95
Jerry M. Miller Adjunct Instructor, 1992 8,500 (including *
University of Oregon options to purchase
Eugene, Oregon 7,500 shares)
1991 - 1994 (retired)
Certified Public Account (CPA)
Audit Partner (retired)
KPMG Peat Marwick
1961 - 1991
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
YEAR FIRST
PRINCIPAL OCCUPATION FOR PAST ELECTED AS COMMON STOCK OWNED
NAME FIVE YEARS A DIRECTOR BENEFICIALLY
- ----------------- ----------------------------- ---------- -------------------------------
PERCENT
NUMBER OF CLASS
--------- --------
<S> <C> <C> <C> <C>
Ronald W. Waisner Regional Vice President 1992 7,500 *
Continental Insurance Company (consisting of options
1959 - 1991 (retired) to purchase 7,500
shares)
</TABLE>
- -----------------
*Less than 1%.
The nominees of the Board of Directors for election by the holders of the
Preferred Stock voting separately as a class are as follows:
<TABLE>
<S> <C> <C> <C> <C>
John B. Clinton Senior Vice President 1994 2,000 (consisting of *
Conning & Company options to purchase
2/92 - present 2,000 shares)
CFO, KCP Holding Company and
National American Insurance Company
of California
1987 - 12/91
Gerard Vecchio Vice President 1994 2,000 (consisting of *
Conning & Company options to purchase
10/92 - present 2,000 shares)
Vice President
Firemark, Inc.
01/92 - 10/92
Senior Associate
Nesbitt Thomson Securities, Inc.
1987 - 12/91
O. Stevenson Managing Director 1994 2,000 (consisting of *
Crihfield Saugatuck Capital Company options to purchase
1986 - present 2,000 shares)
</TABLE>
- -----------------
*Less than 1%
As of March 21, 1997, directors and executive officers of the Company as
a group (9 persons) beneficially owned 413,680 shares (including options to
purchase 348,000 shares) constituting approximately 28.9% of the Company's
outstanding Common Stock. None of the nominees for director or any executive
officer beneficially owns shares of the Preferred Stock.
6
<PAGE>
APPROVAL OF 1997 STOCK INCENTIVE PLAN
GENERAL
The Board of Directors of the Company has adopted the 1997 Stock
Incentive Plan (the "1997 Plan") pursuant to which officers, directors, key
non-employee consultants and employees of the Company are eligible to receive
options to purchase Common Stock and other stock-based awards. The following
is a description of the material features of the 1997 Plan. The term
"employees" in the following discussion is used to refer to officers and
directors, consultants and other employees of the Company.
The purpose of the 1997 Plan is to enable the Company to attract, retain
and motivate employees by providing for or increasing their proprietary
interests in the Company and, in the case of non-employee directors and
consultants, to attract such persons and further align their interests with
those of the Company's shareholders by providing for or increasing their
proprietary interests in the Company. Designated employees of the Company
will be eligible to be considered for the grant of awards under the 1997 Plan.
The maximum number of shares of Common Stock that may be issued pursuant
to awards granted under the 1997 Plan is 100,000 (subject to adjustments to
prevent dilution).
The 1997 Plan will be administered by the Executive Compensation
Committee of the Board of Directors of the Company (the "Committee), each
member of which is a non-employee director of the Company. The Committee
consists of three directors of the Company. The Committee has full and final
authority to select the employees to receive awards and to grant such awards.
Subject to the provisions of the 1997 Plan, the Committee has a wide degree
of flexibility in determining the terms and conditions of awards and the
number of shares to be issued pursuant thereto, including conditioning the
receipt or vesting of awards upon achievement by the Company of specified
performance criteria. The expenses of administering the 1997 Plan will be
borne by the Company.
The 1997 Plan authorizes the Committee to enter into any type of
arrangement with an eligible employee that, by its terms, involves the
issuance of Common Stock or any other security or benefit with a value
derived from the value of Common Stock. Awards to employees are not
restricted to any specified form or structure and may include, without
limitation, sales or bonuses of stock, restricted stock, stock options,
reload stock options, stock purchase warrants, other rights to acquire stock,
securities convertible into or redeemable for stock, stock appreciation
rights, limited stock appreciation rights, phantom stock, dividend
equivalents, performance units or performance shares. An award to an employee
may consist of one such security or benefit or two or more of them in tandem
or in the alternative.
An award granted under the 1997 Plan to an employee may include a
provision accelerating the receipt of benefits upon the occurrence of
specified events, such as a change of control of the Company or a
dissolution, liquidation, merger, reclassification, sale of substantially all
of the property and assets of the Company or other significant corporate
transaction. Options granted to non-employee directors and consultants must
be exercised within 90 days after the grantee ceases to be a director of the
Company except by reason of death, total disability or retirement in
accordance with the Company's retirement policy, in
7
<PAGE>
which event such period is extended to one year. Any stock option granted to
any employee may be a tax-benefited incentive stock option or a non-qualified
stock option that is not tax-benefited. Awards to non-employee directors and
consultants may be only non-qualified stock options.
An award to an employee may permit the employee to pay all or part of the
purchase price of the shares or other property issuable pursuant thereto and/or
pay all or part of such employee's tax withholding obligation with respect to
such issuance, by (i) delivering previously owned shares of capital stock of the
Company or other property, (ii) reducing the amount of shares or other property
otherwise issuable pursuant to the award or (iii) delivering a promissory note,
the terms and conditions of which will be determined by the Committee. If an
option granted to an employee permits the employee to pay for the shares
issuable pursuant thereto with previously owned shares, the employee would be
able to exercise the option in successive transactions, starting with a
relatively small number of shares and, by a series of exercises using shares
acquired from each such transaction to pay the purchase price of the shares
acquired in the following transaction, to exercise an option for a large number
of shares with no more investment than the original share or shares delivered.
Pursuant to Section 16(b) of the Securities Exchange Act of 1934,
directors, certain officers and 10% stockholders of companies whose
securities are publicly-held are generally liable to such companies for
repayment of any "short-swing" profits realized from any nonexempt purchase and
sale of common stock and derivative securities occurring within a six-month
period. Rule 16b-3, promulgated under the Exchange Act, provides an exemption
from Section 16(b) liability for certain transactions by an officer or director
pursuant to an employee benefit plan that complies with such Rule.
Specifically, the grant of an option under an employee benefit plan that
complies with Rule 16b-3 will not be deemed a purchase of a security for
Section 16(b) purposes. The 1997 Plan is designed to comply with Rule 16b-3.
The 1997 Plan will become effective as of March 10, 1997, the date of its
adoption by the Board of Directors. Awards may not be granted under the 1997
Plan after the tenth anniversary of the 1997 Plan. Although any award that
was duly granted on or prior to such date may thereafter by exercised or
settled in accordance with its terms, no shares of Common Stock may be issued
pursuant to any award after the twentieth anniversary of the adoption of the
1997 Plan by the Board of Directors.
Subject to limitations imposed by law, the Board of Directors of the
Company may amend or terminate the 1997 Plan at any time and in any matter.
However, no such amendment or termination may deprive the recipient of any
award previously granted under the 1997 Plan or any rights thereunder without
his consent.
VOTE REQUIRED FOR APPROVAL OF THE 1997 STOCK INCENTIVE PLAN
Approval of the 1997 Stock Incentive Plan will require the affirmative
vote of a majority of (i) the shares of the Company's Common Stock and the
Preferred Stock, voting together as a class, and (ii) the shares of the
Company's Preferred Stock, voting separately as a class, in each case
represented and voted at the Meeting whether in person or by proxy.
The form of the 1997 Stock Incentive Plan is attached hereto as Appendix A.
8
<PAGE>
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE 1997 STOCK
INCENTIVE PLAN. PROXIES RETURNED TO THE COMPANY WILL BE VOTED "FOR" THE
APPROVAL OF THE 1997 STOCK INCENTIVE PLAN UNLESS OTHERWISE INSTRUCTED.
APPROVAL OF REINCORPORATION PROPOSAL
GENERAL
PAULA Financial, the existing California domiciled company (the
"California Company") proposes to reincorporate in the State of Delaware
under the same name. If this Reincorporation Proposal is approved, the
California Company will form a new wholly-owned subsidiary under the laws of
the State of Delaware (the "Delaware Company") organized solely for purposes
of effecting a merger with the California Company (the "Merger"). As a result
of the Merger, the California Company will be merged into the Delaware
Company, the California Company will disappear, and the Delaware Company will
be the surviving entity and the holding company for each of the California
Company's existing subsidiaries. No changes to any of the existing
subsidiaries will occur as a result of the Merger. When the domicile of the
enterprise is not important to the discussion, the enterprise will be
referred to in the discussion that follows as the "Company" rather than as
the California Company or the Delaware Company.
The Reincorporation Proposal includes the proposed Merger, the adoption
of the proposed Certificate of Incorporation and Bylaws of the Delaware
Company discussed below and, among other things, the adoption through the
Merger of the California Company's existing Stock Incentive Plans and Series
A Preferred Stock by the Delaware Company.
The Reincorporation Proposal specifically provides the Company's Board of
Directors with the right to abandon the consummation of the Reincorporation
Proposal if it concludes that doing so is in the best interests of the
Company and its shareholders. It also specifically provides that the
consummation of the Reincorporation Proposal is conditioned on receipt of all
requisite California Department of Insurance approvals to the transaction.
The reincorporation in Delaware will cause the Company's shareholders to
be stockholders of a company with a different legal domicile and will effect
certain other changes of a legal nature, the most significant of which are
described in this Proxy Statement. However, the proposed reincorporation will
not result in any change in the business, management, location of the
principal executive offices, assets, liabilities or net worth of the Company
(other than due to the costs of the transaction). Although the Certificate of
Incorporation of the Delaware Company will permit the Board of Directors to
change the authorized number of directors from time to time, initially the
authorized number of directors will remain at nine and the composition of the
Company's Board of Directors will remain composed of those persons elected as
directors of the Company at the Annual Meeting. If the Reincorporation
Proposal is approved and the Merger consummated, however, such directors will
be assigned to one of three classes and will serve initial terms of either
one, two or three years, depending on their class.
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Upon the consummation of the Merger, shareholders of the California
Company will become stockholders of the Delaware Company and will receive one
share of Common Stock or Preferred Stock of the Delaware Company in exchange
for each share of Common Stock or Preferred Stock of the California Company
held by them, respectively. As a result of the Merger, the Company's
shareholders rights will become subject to the Certificate of Incorporation
and Bylaws of the Delaware Company, which will be substantially in the forms
of Appendices C and D hereto.
The Reincorporation Proposal provides that the Merger is subject to the
approval of the California Department of Insurance which must approve the
change of control of the Company's two insurance company subsidiaries. The
change of control is expected to be approved because only the domicile of the
owner of the two companies will change as a result of the Merger.
REASONS FOR REINCORPORATION IN DELAWARE
By reincorporating in the State of Delaware, the Company will be able to
avail itself of that state's practice of developing and implementing flexible
corporation laws that are conducive to the operations needs and independence
of corporations domiciled in that state.
REDUCED VULNERABILITY TO TAKEOVERS
If the Reincorporation Proposal is adopted and implemented, the Company's
Certificate of Incorporation and Bylaws would include various features
intended to render more difficult certain unsolicited or hostile
attempts to take over the Company. Although these features are intended to
ensure that stockholders of the Company receive a fair price for their shares
by encouraging any person who might seek to acquire control of the Company
first to consult with the Company's Board of Directors and to negotiate the
terms of any tender offer or proposed business combination, they may also
discourage hostile takeover attempts or tender offers for control of the
Company that might be approved by many or even a majority of the Company's
Stockholders.
VOTE REQUIRED FOR APPROVAL
The affirmative vote of the holders of a majority of (i) the number of
shares of the Company's Common Stock and Preferred Stock, voting together as
a class, and (ii) the number of shares of the Company's Preferred Stock,
voting separately as a class, in each case outstanding on the Record Date, is
required to approve the Reincorporation Proposal.
FEDERAL INCOME TAX CONSEQUENCES
The Merger is intended to be a tax-free reorganization under the internal
Revenue Code of 1986, as amended. Assuming the Merger qualifies as a
reorganization, no gain or loss will be recognized to the holders of Common
or Preferred Stock of the Company as a result of consummation of the
reincorporation, and no gain or loss will be recognized by the
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California Company or the Delaware Company. Each former holder of Common or
Preferred Stock of the California Company will have the same basis in the
stock of the Delaware Company received by such holder pursuant to the Merger
as such holder has in the Common or Preferred Stock, respectively, of the
California Company held by such holder at the time of consummation of the
Merger. Each shareholder's holding period with respect to the Delaware
Company's stock will include the period during which such holder held the
corresponding stock of the California Company, provided the latter was held
by such holder as a capital asset at the time of consummation of the Merger.
The Company has not obtained a ruling from the Internal Revenue Service or an
opinion of legal or tax counsel with respect to the consequences of the
Merger.
THE FOREGOING IS ONLY A SUMMARY OF CERTAIN FEDERAL INCOME TAX
CONSEQUENCES. SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISERS REGARDING
THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING THE
APPLICABILlTY OF THE LAWS OF ANY STATE OR OTHER JURISDICTION.
DISSENTERS' RIGHTS OF APPRAISAL
Dissenters' rights are not available to shareholders of the California
Company with respect to the Merger.
EXCHANGE OF CERTIFICATES
After the Merger, each outstanding certificate representing a share or
shares of the California Company Common Stock and Preferred Stock will
continue to represent the same number of shares of the Delaware Company. It
will not be necessary for shareholders of the California Company to exchange
their existing stock certificates for stock certificates of the Delaware
Company.
GOVERNANCE ISSUES
The Certificate of Incorporation and Bylaws of the Delaware Company
include various features (the "Antitakeover Provisions") intended to render
more difficult certain unsolicited or hostile attempts to take over the
Company. The Board believes that such attempts would disrupt the Company,
divert the attention of the Company's directors, officers and employees and
adversely affect the Company's operations. These features include, among
other things, the establishment of a classified Board of Directors with
staggered terms of office and limitations on the rights of stockholders to
call special stockholders' meetings or to act by written consent. These
matters are described more fully below and in Appendices C and D hereto.
Approval of the Reincorporation Proposal would continue to afford the
directors of the California Company, all of whom would become directors of
the Delaware Company, the protection against certain liability for monetary
damages arising out of certain breaches of their fiduciary duties as
directors which are correctly provided to them as under the California
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Company's Charter documents. The Certificate of Incorporation of the Delaware
Company contains an increase in the authorized capital of the Company as
compared to the California Company. The California Company currently has
10,000,000 authorized common shares. The Delaware Company will have
15,000,000 authorized common shares. The authorized number of preferred
shares will not change from the current authorization of 5,000,000 shares.
After approval of the Reincorporation Proposal, the Board of Directors,
without further stockholder approval, will continue to have the authority to
issue additional authorized shares of Common Stock, from time to time, at
prices the Board deems appropriate and to issue such series and classes of
Preferred Stock with such terms (including dividend and interest rates,
conversion prices, voting rights, redemption prices, maturity dates and
similar matters) as the Board deems appropriate. Such provisions will allow
the Company the flexibility to sell Common Stock, securities convertible into
Common Stock and Preferred Stock to finance operations and future expansion
of director liability. The Delaware authorized capitalization, together with
the Antitakeover Provisions are hereinafter referred to as the "Charter
Provisions." THE REINCORPORATION PROPOSAL AND THE PROPOSED ANTITAKEOVER
PROVISIONS CONSTITUTE ONE PROPOSAL FOR SHAREHOLDER APPROVAL. A VOTE FOR THE
REINCORPORATION PROPOSAL WILL THEREFORE ALSO CONSTITUTE A VOTE FOR THE MERGER
AGREEMENT AND ALL OF THE CHARTER PROVISIONS.
After the Merger, each outstanding certificate representing a share or
shares of the California Company's Common Stock will continue to represent
the same number of shares of the Delaware Company. THUS, IT WILL NOT BE
NECESSARY FOR SHAREHOLDERS OF THE CALIFORNIA COMPANY TO EXCHANGE THEIR
EXISTING STOCK CERTIFICATES FOR STOCK CERTIFICATES OF THE DELAWARE COMPANY. A
par value of $.01 has been established for shares of the Delaware Company
Common Stock for the purpose of reducing certain filing fees in the State of
Delaware. The proposed Antitakeover Provisions are permitted under Delaware
law.
It is possible, of course, that the reincorporation transaction and the
adoption of the Antitakeover Provisions will somewhat discourage hostile
takeover attempts or tender offers for control of the Company that might be
approved by many, or indeed by a majority, of the Company's stockholders.
BOARD OF DIRECTORS RECOMMENDATION
The proposed reincorporation transaction and the adoption of the Charter
Provisions were unanimously approved by the Company's Board of Directors at
its meeting held on March 10, 1997.
ACCORDINGLY, THE BOARD RECOMMENDS A VOTE "FOR" APPROVAL OF THE
REINCORPORATION PROPOSAL. PROXIES RETURNED TO THE COMPANY WILL BE VOTED "FOR"
THE APPROVAL OF THE REINCORPORATION PROPOSAL UNLESS OTHERWISE INDICATED
The discussion contained herein is qualified in its entirety by, and
should be read in conjunction with, the Merger Agreement, the Certificate of
Incorporation and the Bylaws of
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the Delaware Company, copies of which are attached hereto as Appendices B, C
and D, respectively.
DELAWARE CORPORATION LAW
The State of Delaware has long been the leader in adopting, construing
and implementing comprehensive, flexible corporation laws that are conducive
to the operational needs and independence of corporations domiciled in that
state. The corporation law of Delaware is widely regarded as the most
extensive and well-defined body of corporate law in the United States. Both
the legislature and the courts in Delaware have demonstrated an ability and a
willingness to act quickly and effectively to meet changing business needs.
Furthermore, many of the Charter Provisions, including the institution of
a classified Board of Directors, the restrictions to the right of
stockholders to call special meetings of stockholders and the granting of
authority to the Board of Directors, without stockholder approval, to
establish and change the authorized number of directors are permitted under
Delaware law, but are not permitted under California law.
1. REDUCED VULNERABILITY TO TAKEOVERS. The Reincorporation Proposal,
including the Antitakeover Provisions, is intended to reduce the Company's
vulnerability to unsolicited or hostile attempts to obtain control of the
Company and to increase the likelihood that stockholders will receive a fair
price for their shares in transactions relating to such attempts. The Board
of Directors does not know of any pending or contemplated attempt by any
outsider to acquire control of the Company, but is aware that other companies
and their shareholders have been subjected to various tactics that would be
contrary to the best interests of the Company and its shareholders.
The suddenness of a tender or exchange offer or other hostile attempt to
acquire control of the Company may often deprive the shareholders of an
adequate opportunity to evaluate the merits of the proposed transaction.
Shareholders may be tempted or encouraged to act hastily without adequate
evaluation of available alternatives that may maximize the value of their
investments. Forming a considered judgment with respect to such a proposal
requires, among other things, an assessment of its fairness, an analysis of
its tax implications for shareholders and the corporation, and consideration
of the impact of the transaction on the corporation, its shareholders,
employees and others. Takeover bids that have not been approved by the Board
of Directors may be timed to take advantage of temporarily depressed stock
prices or designed to foreclose or minimize the possibility of more favorable
competing bids. It must be noted, of course, that shareholders could still be
subject to similar problems, uncertainties and time pressures with respect to
such a proposal approved by the Board of Directors, but the Board believes
such problems are more likely to be alleviated if such a proposal is first
reviewed and evaluated by the Board of Directors.
The Antitakeover Provisions are designed to encourage any person who
might seek to acquire control of the Company first to consult with the
Company's Board of Directors and to negotiate the terms of any tender offer
or proposed business combination. The Board believes that, for the protection
of the Company's stockholders, any proposed acquisition of control of the
Company, and any proposed business combination in which the Company
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might be involved, should be thoroughly studied by the Company's Board of
Directors to assure that such transaction would be in the best interests of
the Company and its stockholders and that all of the Company's stockholders
be treated fairly.
As noted above, the Reincorporation Proposal, including the adoption of
the Antitakeover Provisions, is not being proposed in response to any present
attempt known to the Board of Directors to acquire control of the Company, to
obtain representation on the Company's Board of Directors or to take
significant corporate action. Rather, the Board of Directors believes that
the Reincorporation Proposal and the Antitakeover Provisions are prudent and
in the best interests of the Company and its shareholders and should be
adopted for their protection. The Board further believes that it is
appropriate to adopt the proposed Antitakeover Provisions at a time when no
such transaction is pending or known by the Board to be contemplated, since
their existence would reduce the likelihood of an unsolicited or hostile
attempt to acquire control of the Company in an unfair or inequitable manner
and thus reduce the likelihood that the Company would be required to incur
significant expense and be subject to substantial disruption in connection
with such an attempt.
The Board of Directors does not have any current plans to propose
amendments to the Company's charter documents that may have "antitakeover"
implications, other than as described in this Proxy Statement. The Articles
of Incorporation and Bylaws of the Company do not currently contain
provisions intended by the Company to have "antitakeover" effects.
2. POSSIBLE DISADVANTAGES. To the extent the Reincorporation Proposal is
effective in discouraging any takeover attempts, it will be to the advantage
of stockholders only to the extent any enhanced power of the Board of
Directors is utilized wisely and for the benefit of all stockholders. In
addition, because tender offers are often made at a substantial premium above
market price stockholders might not be afforded the opportunity to sell their
shares at such premium prices if the proposed Antitakeover Provisions should
discourage such tender offers. The proposed Antitakeover Provisions could
also delay or frustrate the assumption of control by a holder of a large
block of the Company's shares or a change in the composition of the incumbent
Board of Directors, even if many stockholders considered such actions to be
beneficial. Furthermore, adoption of the Antitakeover Provisions will not
necessarily ensure or guarantee that stockholders will receive a price for
their shares in connection with an acquisition of control of the Company that
reflects the value of such shares, or that the price received will be fair or
equitable, although in the opinion of the Board of Directors the likelihood
that the price will reflect such value and be fair and equitable will be
increased by adoption of the Antitakeover Provisions.
The institution of a classified Board of Directors makes it more
difficult for stockholders who do not approve of the policies of the Board to
elect a majority of the members. In addition, the three-year term for
incumbent directors may make directors less responsive to the desires of
individual stockholders.
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SIGNIFICANT DIFFERENCES BETWEEN THE ARTICLES OF INCORPORATION AND BYLAWS OF
THE CALIFORNIA COMPANY AND THE CERTIFICATE OF INCORPORATION AND BYLAWS OF THE
DELAWARE COMPANY
The Certificate of Incorporation and Bylaws the of the Delaware Company
will differ from the Articles of Incorporation and Bylaws of the California
Company in the principal respects described below.
1. CLASSIFIED BOARD OF DIRECTORS, REMOVAL OF DIRECTORS AND RELATED
MATTERS. At present, all directors of the Company are elected annually to
one-year terms. Upon the effectiveness of the Merger, the directors of the
California Company will be the directors of the Delaware Company to serve as
such as classified herein until their terms have expired and successors have
been elected. Article III of the Bylaws of the Delaware Company provides that
the Board of Directors will be divided into three classes, each class to
consist as nearly as possible of one-third of the directors. The term of
office of the Class I directors will expire at the 1998 annual meeting of
stockholders, the term of the Class II directors will expire at the 1999
annual meeting, and the term of the Class III directors will expire at the
2000 annual meeting. At each annual meeting beginning with the 1998 annual
meeting, only one class of directors will be elected, and they will serve for
a three-year term and until their successors are elected. Thus, the regular
term of only one class of directors will expire each year and each director
will stand for election only once in each three-year period. If the
Reincorporation Proposal is approved, the nominees for election as directors
of the Company at the Annual Meeting will be assigned to one of the three
classes of directors of the Delaware Company as set forth below:
Class I Bradley K. Serwin
Gerard Vecchio
Ronald Waisner
Class II James A. Nicholson
O. Stevenson Crihfield
Jerry Miller
Class III John B. Clinton
Jeffrey A. Snider
Andrew M. Slavitt
The Delaware General Corporation Law provides that once the Board is
classified, directors of the Delaware Company may be removed only for cause
by the affirmative vote of holders of a majority of the shares entitled to
vote generally in the election of directors (the "Voting Stock"). Thus this
provision will prevent the removal of a director in mid-term by other
stockholders unless cause exists and the removal is approved by the holders
of a majority of the Voting Stock. This provision is expected to enable and
encourage qualified persons to serve as directors without concern
for.possible arbitrary removal without cause. Subject to the rights of the
holders of the Company's Preferred Stock, directors of the California Company
can be removed with or without cause by a shareholder vote, but only if the
number of shares voted against removal or not voted would be insufficient to
elect the
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director with cumulative voting. Directors of the California Company may be
removed by the Board, upon declaration of the vacancy of the office of a
director declared of unsound mind by an order of court or convicted of a
felony. "Cause" is not defined in the Delaware statute.
The California Company's Bylaws provide that the number of directors will
be not less than five nor more than nine, with the exact number of authorized
directors to be fixed in within that range, from time to time, by the Board
of Directors. Under the California Company's Bylaws, the range of authorized
directors can only be changed with shareholder approval, while Article III of
the Delaware Company's Bylaws provides that the number of directors that
shall constitute the whole Board shall be as specified by the Board of
Directors. The Bylaws of the Delaware Company provide that the initial
number of directors of the Company shall be nine, the same as the number
currently authorized to serve on the California Company's Board.
Section 3.6 of the Bylaws of the Company provides that, subject to the
rights of the holders of the Company's Preferred Stock, a vacancy on the
Board of Directors, whether such vacancy results from death, resignation,
disqualification, an increase in the number of directors or any other cause,
may be filled by vote of the majority of the remaining directors, even though
less than a quorum, or by a sole remaining director.
2. RESTRICTIONS ON SHAREHOLDERS' POWER TO CALL SPECIAL SHAREHOLDERS
MEETINGS AND RIGHT TO ACT WITHOUT A MEETING. Under California law and the
Bylaws of the California Company, a special meeting of shareholders may be
called by the holders of [10%] or more of the Voting Stock of the California
Company and this right may not be removed by the Articles of Incorporation or
the Bylaws. Under Deleware law, a special meeting of stockholders may be
called only by the board of directors or by any other person authorized to do
so in the Company's Certificate of Incorporation or Bylaws. Section 2.03 of
the Bylaws of the Delaware Company provides that a special meeting of
stockholders may be called only by a majority of the members of the Board of
Directors, the Chairman of the Board, the President or the holders of not
less than 20% of the Company's Voting Stock. The principal effect of this
Bylaw would be to prevent smaller stockholders from forcing a special meeting
to consider a proposal opposed by the Board of Directors.
Article XI of the Certificate of Incorporation of the Delaware Company
provides that any action taken by the stockholders of the Company must be
effected at an annual or special meeting of stockholders and may not be taken
by written consent unless the Board of Directors unanimously agrees to permit
such an action by written consent.
Thus, by operation of Section 2.03 and Article XI of the Bylaws and
Certificate of Incorporation of the Delaware Company, respectively, proposals
that currently could be brought before the California Company's shareholders
at a special meeting called by the holders of 10% or more of the California
Company's Common Stock, or that currently could be acted upon by the written
consent of shareholders, could only be considered by the stockholders of the
Delaware Company at the next annual stockholders' meeting (or at a special
meeting of stockholders called by the Board of Directors, the Company's
senior management or significant shareholders) and then only if certain
procedural requirements mandated by law and by the Certificate of
Incorporation (as described below) are fulfilled unless the Board unanimously
agrees to action by written consent.
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It is possible that Section 2.03 and Article XI could delay stockholder
action or acquisition attempts favored by the holders of a majority of the
outstanding shares. The Board of Directors proposes the restriction of
shareholder action by written consent, however, because it believes that
except for certain ministerial changes unanimously approved by the Board of
Directors all shareholders should have an opportunity to participate in any
action requiring shareholder approval.
3. PROCEDURES FOR SHAREHOLDER NOMINATIONS AND PROPOSALS. Section 2.09 of
the Bylaws of the Delaware Company sets forth the procedures that a
stockholder must follow in order to nominate any person for election to the
Board of Directors or to bring any business before an annual meeting of
stockholders. No such procedural requirements exist for shareholders of the
California Company.
Section 2.09 of the Bylaws of the Company provides that, for business to
be properly brought before any meeting of the stockholders by a stockholder,
the stockholder must have given notice thereof in writing to the Secretary of
the Company not less than ninety (90) days in advance of such meeting or, if
later, the seventh day following the first public announcement of the date of
such meeting. Nominations for the election of directors may be made by the
Board of Directors or by any stockholder entitled to vote in the election of
directors; PROVIDED, HOWEVER, that a stockholder may nominate a person for
election as a director at a meeting only if written notice of such
stockholder's intent.to make such nomination has been given to the Secretary
of the Company not less than ninety (90) days in advance of such meeting or,
if later, the seventh day following the first public announcement of the date
of such meeting. Section 2.09(B) of the Bylaws of the Delaware Company
provide that a stockholder's notice with respect to the nomination of
candidates for election to the Board of Directors. must set forth certain
information more fully described in that Section. See Appendix C to this
Proxy Statement.
The procedures set forth in Section 2.09 of the Bylaws prohibit
last-minute attempts by any stockholder to nominate a director or present a
business proposal at an annual stockholders' meeting, even if such a
nomination or proposal might be desired by a majority of the stockholders.
These procedures will enable the Board of Directors of the Company to be
informed in advance of nominations or proposals (including any that may be
made by a person seeking to acquire the Company) to be presented at meetings
of stockholders in order to prepare informed and reasoned positions with
respect to such nominations and proposals. These procedures would also
eliminate the element of surprise that a person seeking to acquire the
Company might otherwise use to advantage in making a stockholder proposal.
Section 2.09 of the Bylaws does not require the inclusion of any information
about any such nominee or proposal in any proxy statement distributed by, at
the direction of or on behalf of the Board of Directors, except as required
to be included pursuant to federal securities laws.
4. AMENDMENT OF CERTAIN CHARTER AND BYLAW PROVISIONS. Subject to the
rights of the holders of the Company's Preferred Stock, the Articles of
Incorporation of the California Company may be amended with the approval of a
majority of the directors present at a meeting at which a quorum is present
and by the affirmative vote of the holders of a majority of the California
Company's Common Stock. Subject to the rights of the holders of the Company's
Preferred Stock, the Bylaws of the California Company may be amended either
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by a majority of the directors or the holders of the California Company's
Common Stock. Article XII of the Certificate of Incorporation of the Delaware
Company provides that any alteration, amendment, repeal or rescission (any
"Change") of any provision contained in the Certificate of Incorporation or
substantially all of the substantive provisions of the Delaware Company's
Bylaws described above other than a proposed Change that relates to Article I
(Name) Article II (registered office in Delaware) or Article V(name and
address of incorporator) must be approved by a majority of the Board of
Directors and the affirmative vote of the holders of not less than 66 2/3% of
the shares of Voting Stock then outstanding.
5. CUMULATIVE VOTING. Adoption of the Certificate of Incorporation of the
Delaware Company will eliminate cumulative voting in connection with the
election of directors. Cumulative voting rights in the election of directors
entitle a stockholder to give one nominee as many votes as is equal to the
number of directors to be elected multiplied by the number of shares owned by
the stockholder, or to distribute such votes on the same principal among two
or more nominees, as the stockholder sees fit. California law requires
cumulative voting in the election of directors upon notice given by a
shareholder at a shareholders meeting. Cumulative voting for directors may
enable the holders of a significant number of the outstanding shares, but
less than a majority, to elect one or more directors at any election. The
elimination of cumulative voting may delay the attainment of representation
on the Board of Directors of the Company by a shareholder as part of a
hostile takeover attempt.
6. AUTHORIZED SHARES OF STOCK. The authorized and outstanding shares of
the capital stock of the California and Delaware Companies will be identical
except that the number of authorized shares of Common Stock will increase
from 10,000,000 to 15,000,000 and the Delaware Company's shares will carry a
par value of $.01 per share and the California Company shares carry no par
value.
7. EMPLOYEE BENEFIT PLANS. As a result of the Merger, each option or
other right to purchase or otherwise acquire shares of Common Stock under the
Company's 1994 Stock Incentive Plan and 1997 Stock Incentive Plan, will be
converted into an option or right to purchase or acquire the same number of
shares of the Delaware Company's Common Stock on the same terms and
conditions in effect immediately prior to the Merger. Each share of the
California Company's Common Stock currently held under such plan, or
underlying such option or right, will be converted into one share of the
Company's Delaware Common Stock. The Delaware Company will deliver the same
number of shares of its Common Stock at the same price per share, and upon
the same terms and subject to the same conditions, as set forth in each of
those plans.
SIGNIFICANT DIFFERENCES BETWEEN THE CORPORATION LAWS OF CALIFORNIA AND
DELAWARE
The corporation laws of California and Delaware differ in a number of
respects, some of which are discussed above. It is impractical to summarize
all of the differences in this Proxy Statement, but significant differences,
not elsewhere discussed, between the corporation laws of California and
Delaware that could materially affect the rights of
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shareholders of Enterprises, as compared to such persons as stockholders of
the Company, are as follows:
1. REMOVAL OF DIRECTORS. Under California law, a director may be removed
without cause by shareholder vote, provided that the shares voted against
such removal would not be sufficient to elect the director under cumulative
voting rules. Under California law, a director may be removed for cause only
(i) by order of a court, sought by shareholders holding at least 10% of the
outstanding shares of any class, if a director commits fraudulent or
dishonest acts or gross abuse of authority or discretion or (ii) by the
Board, if a director has been declared of unsound mind by order of court or
has been convicted of a felony. Under Delaware law, a director of a
corporation with a classified board of directors can be removed only for
cause unless the certificate of incorporation otherwise provides. Since there
is no controlling definition of "cause" under Delaware law, the resolution of
any dispute as to what constitutes "cause" may become a matter for
determination by the courts. The Certificate of Incorporation of the Delaware
Company provides for a classified Board. Accordingly, a director of the
Delaware Company may be removed only for cause and only with the affirmative
vote of holders of a majority of the Voting Stock
2. SHAREHOLDER VOTING IN CERTAIN TRANSACTIONS. Both California and
Delaware law generally require that a majority of the shareholders of both
acquiring and target corporations approve statutory mergers. Delaware law
does not require a stockholder vote of the surviving corporation in a merger
(unless the corporation provides otherwise in its certificate of
incorporation) if (a) the merger agreement does not amend the existing
certificate of incorporation, (b) each share of the surviving corporation
outstanding before the merger is an identical outstanding or treasury share
after the merger, and (c) the number of shares to be issued by the surviving
corporation in the merger does not exceed 20% of the shares outstanding
immediately prior to the merger. California law contains a similar exception
to its voting requirements for reorganizations where shareholders or the
corporation itself, or both, immediately prior to the reorganization will own
immediately after the reorganization equity securities constituting more than
five-sixths of the voting power of the surviving or acquiring corporation or
its parent entity.
Both California and Delaware law also require that a sale of all or
substantially all of the assets of a corporation be approved by a majority of
the voting shares of the corporation transferring such assets unless such a
sale is in the ordinary course of business.
With certain exceptions, California law also requires that mergers,
reorganizations, certain sales of assets and similar transactions be approved
by a majority vote of each class of shares outstanding. In contrast, Delaware
law generally does not require class voting, except in certain transactions
involving an amendment to the certificate of incorporation that adversely
affects a specific class of shares. Should the Company authorize and issue
shares of a new class of capital stock, the holders thereof would vote with
the holders of Company Common Stock on proposals not adversely affecting
Company Common Stock. In such event the holders of Company Common Stock, if
in the minority, would be unable to control the outcome of a vote, and, if in
the majority, would be able to control the outcome of such a vote.
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California law also requires that holders of nonredeemable common stock
receive nonredeemable common stock in a merger of the corporation with the
holder of more than 50% but less than 90% of such common stock or its
affiliate unless all of the holders of such common stock consent to the
transaction. This provision of California law may have the effect of making a
"cash-out" merger by a majority shareholder more difficult to accomplish.
California law also provides that, except in certain circumstances, when a
tender offer or a proposal for a reorganization or for a sale of assets is
made by an interested party (generally a controlling or managing party of the
target corporation), an affirmative opinion in writing as to the fairness of
the consideration to be paid to the shareholders must be delivered to
shareholders. This fairness opinion requirement does not apply to a
corporation which does not have shares held of record by at least 100
persons, or to a transaction which has been qualified under California state
securities laws. Furthermore, if a tender of shares or vote is sought
pursuant to an interested party's proposal and a later proposal is made by
another party at least ten days prior to the date of acceptance of the
interested party proposal, the shareholders must be informed of the later
offer and be afforded a reasonable opportunity to withdraw any vote, consent
or proxy, or to withdraw any tendered shares. Delaware law has no comparable
provision and the stockholders of the Company might, therefore, be deprived
of an opportunity to consider such other proposal.
3. BUSINESS COMBINATIONS. Delaware law prohibits for three years certain
business combinations between a Delaware corporation and an interested
stockholder, defined as a stockholder that owns 15 percent or more of a
corporation's voting stock. Business combinations covered by the Delaware law
include mergers and consolidations, sales, leases, and exchanges of 10
percent or more of a corporation's assets, issuances of stock in a
corporation or its majority-owned subsidiaries, transactions (such as a
reverse stock split) that increase the interested stockholder's percentage
ownership in the corporation, and conferring of financial benefits such
loans, advances and guarantees.
Business combinations with interested stockholders are excluded from the
three year prohibition if: (i) they are approved by the Board before the
other party to a business combination becomes an interested stockholder; (ii)
the acquiror, upon consummation of the transaction that makes it an
interested stockholder, holds at least 85 percent of the corporation's voting
stock that was outstanding when the transaction began (not including voting
shares owned by officers who are also directors or held in employee benefit
plans in which the employees do not have a confidential right to tender or
vote); or (iii) the transaction is approved by the Board and a two-thirds
vote of the voting shares not owned by the interested stockholder.
If a corporation, with the support of a majority of those directors who
were serving as directors before any person became an interested stockholder
during the previous three years, proposes a merger or sale of at least 50% of
the corporation's assets or supports or does not oppose a tender offer for at
least 50% of such corporation's voting stock, all interested stockholders
will be released from the three year prohibition and may compete with the
corporation-sponsored transaction.
To be covered by the Delaware business combination law, a corporation must
have a class of voting stock (i) listed on a national securities exchange,
(ii) authorized for quotation
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on the NASDAQ Stock Market, or (iii) held of record by more than 2,000
stockholders. The Delaware law permits a corporation meeting the coverage
requirements to opt out of coverage and a corporation not meeting the
requirements to opt in to coverage by a provision in such corporation's
certificate of incorporation. The Company does not meet the threshold
requirements for coverage set forth above, and the Delaware Company's
Certificate of Incorporation does not have a provision opting in or out of
the law. Accordingly, the Delaware Company will not be covered by the law
upon consummation of the Merger, but will be covered in the future upon any
class of its voting stock becoming listed on a national securities exchange,
authorized for quotation on the NASDAQ Stock Market, or held of record by
more than 2,000 stockholders. There is no similar provision in California law.
4. DISSENTERS' RIGHTS. Under both California and Delaware law, a
shareholder of a corporation participating in certain major corporate
transactions may, under varying circumstances, be entitled to receive cash
equal to the fair market value of the shares held by such shareholder (as
determined by a court of competent jurisdiction or by agreement of the
shareholder and the corporation) in lieu of the consideration such
shareholder would otherwise receive in the transaction. The laws of
California and Delaware differ with respect to the circumstances under which
dissenters' rights of appraisal are available. Delaware law does not require
dissenters' rights with respect to (a) a sale-of-assets, (b) a merger by a
corporation, if the shares of which are either listed on a national
securities exchange or widely-held (by more than 2,000 shareholders of
record) or if stockholders receive shares of the surviving corporation or of
a listed or widely-held corporation, or (c) a merger in which the corporation
is the surviving corporation, provided that no vote of its stockholders is
required to approve the merger.
California law does, in general, afford dissenters' rights in a
sale-of-assets reorganization, and the exclusions from dissenters' rights in
mergers are somewhat different from those in Delaware. For example, in the
case of a corporation whose shares are listed on a national securities
exchange, dissenters' rights would nevertheless be available in certain
transactions for any shares with respect to which there are certain
restrictions on transfer and for any class with respect to which 5% or more
of such class claims dissenters' rights. Also, under California law,
shareholders of a corporation involved in a reorganization are not entitled
to dissenters' rights if the corporation, or its shareholders immediately
before the reorganization, or both, will own more than five-sixths of the
voting power of the surviving or acquiring corporation or its parent entity.
Shareholders of the California Company will not be entitled to dissenters'
rights in connection with the Reincorporation Proposal.
5. LOANS TO OFFICERS. Under Delaware law, a corporation may make loans
to, guarantee the obligations of, or otherwise assist, its officers or other
employees and those of its subsidiaries when such action, in the judgment of
the corporation's board of directors, may reasonably be expected to benefit
the corporation. Under California law, a corporation may only make such a
loan to, or guarantee for the benefit of, officers if such loan or guarantee
is approved by a majority of the corporation's shareholders or, for a
corporation with 100 or more shareholders of record, by its board of
directors pursuant to a shareholder-approved bylaw. The California Company
currently does not have such a bylaw.
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6. INDEMNIFICATION OF OFFICERS AND DIRECTORS. Both California and Delaware
law state expressly that the indemnification provided for therein shall not be
deemed exclusive of any other rights under any other bylaw, agreement, vote of
stockholders or disinterested directors, or otherwise and provide that expenses
may be advanced to officers and directors in a specific case upon receipt of an
undertaking to repay such amount if it is ultimately determined that such
indemnified party is not entitled to be indemnified. In addition, California and
Delaware permit the determination as to whether an officer or director has met
the applicable standard of conduct to be made in certain circumstances by
independent legal counsel. California law permits indemnification of officers
and directors to an extent which is generally coextensive with that permitted
under the Delaware law. In the event the Reincorporation Proposal is approved,
the Company will be required to indemnify any director or officer to the full
extent authorized or permitted by the Delaware law (as now or hereafter in
effect) and may indemnify any employee or agent in a similar manner. The
Company's Bylaws currently provide that the Company will indemnify any person
who is or was an agent of the Company to the full extent permitted by law.
7. PERSONAL LIABILITY OF DIRECTORS In 1986, the Delaware legislature
enacted amendments to the Delaware law to permit Delaware corporations to
provide directors additional protection from personal liability. To implement
such added protection, shareholders must approve the Reincorporation Proposal,
which will also constitute approval of the Delaware Company's Certificate of
Incorporation. Article VIII of the Delaware Company's Certificate of
Incorporation gives effect to the amendments to Delaware law and is intended to
give to the Company's directors the full protection against personal liability
that is permitted under the amended law.
Delaware law provides that the Board of Directors has the ultimate
responsibility for managing the business and affairs of a corporation. In
discharging this function, the law holds directors to fiduciary duties of care
and loyalty to the corporation and its stockholders. The Delaware Supreme Court
has held that the duty of care requires the exercise of an informed business
judgment. An informed business judgment means that directors have informed
themselves of all material information reasonably available to them. Having
become so informed, they then must act with requisite care in the discharge of
their duties. Liability of directors of a Delaware corporation to the
corporation or its stockholders for breach of the duty of care in some
circumstances requires a finding by a court that the directors were grossly
negligent. Adoption of the Delaware Company's Certificate of Incorporation would
not change the standard of care required of directors. However, as authorized by
statute, the Company's Certificate of Incorporation would eliminate the monetary
liability of each director of the Company for breach of his or her fiduciary
duties, subject to the exceptions set forth in Delaware law. If the
Reincorporation Proposal is adopted, a stockholder will be able to prosecute an
action against a director for monetary damages only if he or she can show a
breach of the duty of loyalty, a failure to act in good faith, intentional
misconduct, a knowing violation of law, an improper personal benefit, or an
illegal dividend or stock repurchase. Stockholders will surrender any cause of
action for "negligence" or "gross negligence" in satisfying the duty of care,
including negligence or gross negligent conduct in the context of a takeover
proposal of the Company.
Directors also have a duty of loyalty to the corporation and its
stockholders. The duty of loyalty requires that, in making a business decision,
directors act in good faith and in the
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honest belief that the action taken was in the best interests of the
corporation. The Delaware Company's Certificate of Incorporation would not
insulate directors of the Company from liability for breach of their duty of
loyalty, nor would it limit the liability of directors for claims arising under
the federal securities laws. The Company's Certificate of Incorporation would
not limit or eliminate the right of the Company or any stockholder to seek an
injunction or other non-monetary relief in the event of a breach of a
director's duty of care, although, in certain situations equitable remedies may
not be as effective as monetary damages, and third parties, such as creditors of
the Company, will not be precluded by such provision from pursuing any claims
they might have. The Company is not aware of any prior or pending litigation
that would have been or would be impacted by Article VIII of the Company's
Certificate of Incorporation.
The Company's Articles of Incorporation and Bylaws currently permit
indemnification of agents of the Company, including directors and officers, to
the fullest extent permitted by California law. Adoption of the Company's
Certificate of Incorporation may reduce the likelihood of derivative litigation
against directors and may discourage or deter stockholders or management from
bringing a lawsuit against directors for breaches of their fiduciary duties,
even though such action, if successful, might otherwise have benefited the
Company and its stockholders.
The Company's primary purpose for eliminating liability of directors for
certain breaches of fiduciary duty is to provide directors with the greatest
protection possible for personal liability while still insuring that directors'
actions are taken in the best interests of the Company and its stockholders. The
Board agrees with the Delaware legislature that a proper balance is achieved by
preserving only the bases for directors' liability discussed above, including
the directors' fiduciary duty of loyalty to the Company. This balance allows
directors to act in the best interests of the Company without undue fear of
financial penalties wholly disproportionate to their remuneration for services
as directors, while still preserving proper disincentives for actions not taken
in the best interests of the Company and its stockholders. In considering the
recommendation of the Board of Directors that Article VIII be included in the
Company's Certificate of Incorporation as part of the Reincorporation Proposal,
it should be noted that because the directors of the Company have a personal
interest in seeing the adoption of Article VIII at the potential expense of
stockholders, there may be an inherent conflict of interest in the Board's
recommendation in favor of the Reincorporation Proposal.
8. INSPECTION OF SHAREHOLDERS' LIST. California law provides for an
absolute right of inspection of a shareholders' list for persons holding 5% or
more of the corporation's voting shares or persons holding 1% or more of such
shares who have filed a Schedule 14A with the Securities and Exchange Commission
relating to the election of directors. (Generally, a Schedule 14A must be filed
by any shareholder engaged in the solicitation of proxies, as such terms are
defined in the federal securities laws, in connection with a contested election
of directors.) Delaware law gives any stockholder of record the right to inspect
the stockholders' list for a purpose reasonably related to such person's
interest as a stockholder and, during the ten days preceding a stockholders'
meeting, for any purpose germane to that meeting. Delaware law contains no
provision comparable to the absolute right of inspection provided by California
law to certain shareholders. Importantly, under California law, California rules
with respect to the inspection of shareholders' lists apply to
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any corporation such as the Company that, although incorporated outside
California, has its principal executive offices in California or customarily
holds meetings of its Board of Directors in California.
9. PAYMENT OF DIVIDENDS. Delaware law permits the payment of dividends out
of surplus or, if there is no surplus, out of net profits for the current and
preceding fiscal years (provided that the amount of capital of the corporation
is not less than the aggregate amount of the capital represented by the issued
and outstanding stock of all classes having a preference upon the distribution
of assets). In addition, Delaware law generally provides that a corporation may
redeem or repurchase its shares only if such redemption or repurchase would not
impair the capital of the corporation. The ability of a Delaware corporation to
pay dividends on, or to make repurchases or redemptions of, its shares is
dependent on the financial status of the corporation standing alone and not on a
consolidated basis. In determining the amount of surplus of a Delaware
corporation, the assets of the corporation, including stock of subsidiaries
owned by the corporation, must be valued at their fair market value as
determined by the board of directors, without regard to their historical book
value.
Under California law, any distributions (including dividends and
repurchases of shares) generally are limited either to retained earnings or to
an amount that would leave the corporation with tangible assets in an amount
equal to at least 125% of its tangible liabilities and with current assets in an
amount at least equal to its current liabilities (or 125% of its current
liabilities if the average pre-tax and pre-interest earnings for the preceding
two fiscal years were less than the average interest expenses for such years).
Such limitations are applied on a consolidated basis and are based upon the book
value of assets determined in accordance with generally accepted accounting
principles then applicable.
The Company has not recently paid cash dividends nor does the Company
intend to do so in the foreseeable future.
10. INTERESTED DIRECTOR TRANSACTIONS. Under both California and Delaware
law, certain contracts or transactions in which one or more of a corporation's
directors has an interest are not void or voidable because of such interest
provided that certain conditions, such as obtaining the required approval and
fulfilling the requirements of good faith and full disclosure, are met. With
certain exceptions, the conditions are similar under California and Delaware
law. Under California and Delaware law, (a) either the shareholders or the board
of directors must approve any such contract or transaction in good faith after
full disclosure of the material facts, and in the case of board approval the
contract or transaction must also be "just and reasonable" (in California) or
"fair" (in Delaware) to the corporation, or (b) the contract or transaction must
have been just and reasonable or fair as to the corporation at the time it was
approved. In the latter case, California law explicitly places the burden of
proof on the interested director. Under California law, if shareholder approval
is sought, the interested director is not entitled to vote his shares at a
shareholder meeting with respect to any action regarding such contract or
transaction. If board approval is sought, the contract or transaction must be
approved by a majority vote of a quorum of the directors, without counting the
vote of any interested directors (except that interested directors may be
counted for purposes of establishing a quorum). Under Delaware law, if board
approval is sought, the contract or transaction must be approved by a majority
of the disinterested directors (even though less than a majority of a quorum).
Therefore, certain transactions
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that the Board of Directors of the Company might not be able to approve
because of the number of interested directors, could be approved by a
majority of the disinterested directors of the Company, although less than a
majority of a quorum. The Company is not aware of any plans to propose any
transaction involving directors of the Company that could not be so approved
under California law but could be so approved under Delaware law.
11. SHAREHOLDER DERIVATIVE SUITS. California law provides that a
shareholder bringing a derivative action on behalf of a corporation need not
have been a shareholder at the time of the transaction in question, provided
that certain tests are met. Under Delaware law, a stockholder may only bring a
derivative action on behalf of the corporation if the stockholder was a
stockholder of the corporation at the time of the transaction in question or his
or her stock thereafter devolved upon him or her by operation of law. California
law also provides that the corporation or the defendant in a derivative suit may
make a motion to the court for an order requiring the plaintiff shareholder to
furnish a security bond. Delaware does not have a similar bonding requirement.
12. DISSOLUTION. Under California law, shareholders holding 50% or
more of the total voting power may authorize a corporation's dissolution, with
or without the approval of the corporation's board of directors, and this right
may not be modified by the articles of incorporation. Under Delaware law, unless
the board of directors approves the proposal to dissolve, the dissolution must
be approved by stockholders holding 100% of the total voting power of the
corporation. Only if the dissolution is initiated by the board of directors may
it be approved by a simple majority of the corporation's stockholders. In the
event of such a board-initiated dissolution, Delaware law allows a Delaware
corporation to include in its certificate of incorporation a supermajority
voting requirement in connection with dissolutions. The Company's Certificate of
Incorporation contains no such supermajority voting requirement, however, and a
majority of shares voting at a meeting at which a quorum is present would be
sufficient to approve a dissolution of the Company that had previously been
approved by its Board of Directors.
APPLICATION OF THE GENERAL CORPORATION LAW OF CALIFORNIA TO DELAWARE
CORPORATIONS
Under Section 2115 of the California General Corporation Law, certain
foreign corporations (i.e., corporations not organized under California law) are
placed in a special category if they have characteristics of ownership and
operation which indicate that they have significant contacts with California. So
long as a Delaware or other foreign corporation is in this special category, and
it does not qualify for one of the statutory exemptions, it is subject to a
number of key provisions of the California General Corporation Law applicable to
corporations incorporated in California. Among the more important provisions are
those relating to the election and removal of directors, cumulative voting,
classified boards of directors, standards of liability and indemnification of
directors, distributions, dividends and repurchases of shares, shareholder
meetings, approval of certain corporation transactions, dissenters and appraisal
rights and inspection of corporate records.
An exemption from Section 2115 is available for corporations if the
holders of a majority of their shares reside outside of California. The Company
will be exempt from
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Section 2115 following the Merger because the holders of a majority of its
outstanding shares reside outside of California.
OTHER BUSINESS
Management knows of no other business which will be presented for
consideration at the Annual Meeting, other than as stated in the notice of
Annual Meeting. If, however, other matters properly are brought before the
Annual Meeting, it is the intention of persons named in the accompanying form of
proxy to vote the shares represented thereby on such matters in accordance with
their best judgement and in their discretion.
PAULA FINANCIAL
By: /s/ Bradley K. Serwin
---------------------
Bradley K. Serwin
Secretary
Dated: March 24, 1997
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APPENDIX A
PAULA FINANCIAL
1997 STOCK INCENTIVE PLAN
Section 1. PURPOSE OF PLAN
The purpose of this 1997 Stock Incentive Plan ("Plan") of PAULA
Financial (the "Company"), is to enable the Company to attract, retain and
motivate its employees by providing for or increasing the proprietary interests
of such employees in the Company, and to enable the Company to attract, retain
and motivate its nonemployee directors and key non-employee consultants
("Consultants") and further align their interest with those of the shareholders
of the Company by providing for or increasing the proprietary interest of such
directors in the Company.
Section 2. PERSONS ELIGIBLE UNDER PLAN
Any person who is an employee or director of, or Consultant to, the
Company or any of its subsidiaries or affiliates (an "Eligible Person") shall be
eligible to be considered for the grant of Awards (as hereinafter defined)
hereunder.
Section 3. AWARDS
(a) The Committee (as hereinafter defined), on behalf of the Company,
is authorized under this Plan to enter into any type of arrangement with an
Eligible Person that is not inconsistent with the provisions of this Plan and
that, by its terms, involves or might involve the issuance of (i) shares of
Common Stock of the Company or of any other class of security of the Company
which is convertible into shares of the Company's Common Stock ("Shares") or
(ii) a right or interest with an exercise or conversion privilege at a price
related to the Shares or with a value derived from the value of the Shares,
which right or interest may, but need not, constitute a "Derivative Security,"
as such term is defined in Rule 16a-1 promulgated under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), as such Rule may be amended from
time to time. The entering into any such arrangement is referred to herein as
the "grant" of an "Award."
(b) Awards are not restricted to any specified form or structure and
may include, without limitation, sales or bonuses of stock, restricted stock,
stock options, reload stock options, stock purchase warrants, other rights to
acquire stock, securities convertible into or redeemable for stock, stock
appreciation rights, limited stock appreciation rights, phantom stock, dividend
equivalents, performance units or performance shares, and an Award may consist
of one such security or benefit, or two or more of them in tandem or in the
alternative. The terms upon which an Award is granted shall be evidenced by a
written agreement executed by the Company and the Eligible Person to whom such
Award is granted.
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(c) Subject to paragraph (d)(ii) below, Awards may be issued, and
Shares may be issued pursuant to an Award, for any lawful consideration as
determined by the Committee, including, without limitation, services rendered by
the Eligible Person.
(d) Subject to the provisions of this Plan, the Committee, in its sole
and absolute discretion, shall determine all of the terms and conditions of each
Award granted under this Plan, which terms and conditions may (but need not)
include, among other things:
(i) provisions permitting the Committee to allow or require the
recipient of such Award, including any Eligible Person who is a director or
ofhcer of the Company, or permitting any such recipient the right, to pay the
purchase price of the Shares or other property issuable pursuant to such Award,
and/or such recipient's tax withholding obligation with respect to such
issuance, in whole or in part, by any one or more of the following means:
(A) the delivery of cash;
(B) the delivery of other property deemed acceptable by the
Committee;
(C) the delivery of previously owned shares of capital stock
of the Company (including "pyramiding") or other property;
(D) a reduction in the amount of Shares or other property
otherwise issuable pursuant to such Award; or
(E) the delivery of a promissory note of the Eligible Person
or of a third party, the terms and conditions of which shall be determined by
the Committee;
(ii) provisions specifying the exercise or settlement price for
any option, stock appreciation right or similar Award, or specifying the method
by which such price is determined, provided that the exercise or settlement
price of any option, stock appreciation right or similar Award that is intended
to qualify as "performance based compensation" for purposes of Section 162(m) of
the Internal Revenue Code of 1986, as amended (the "Code") shall be not less
than the fair market value of a Share on the date such Award is granted;
(iii) provisions relating to the exercisability and/or vesting of
Awards, lapse and non-lapse restrictions upon the Shares obtained or obtainable
under Awards or under the Plan and the termination, expiration and/or forfeiture
of Awards;
(iv) provisions conditioning or accelerating the grant of an
Award or the receipt of benefits pursuant to such Award, either automatically or
in the discretion of the Committee, upon the occurrence of specified events,
including, without limitation, the achievement of performance goals, the
exercise or settlement of a previous Award, the satisfaction of an event or
condition within the control of the recipient of the Award or within the control
of others, a change of control of the Company, an acquisition of a
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specified percentage of the voting power of the Company, the dissolution or
liquidation of the Company, a sale of substantially all of the property and
assets of the Company or an event of the type described in Section 7 hereof;
(v) provisions required in order for such Award to qualify (A) as
an incentive stock option under Section 422 of the Code {an "Incentive Stock
Option"), (B) as "performance based compensation" under Section 162(m) of the
Code, and/or (C) for an exemption from Section 16 of the Exchange Act; and/or
(vi) provisions restricting the transferability of Awards or
Shares issued under Awards.
(e) Unless otherwise provided by the Committee in the written
agreement evidencing an Award, the terms of any stock option granted under the
Plan shall provide:
(i) that the exercise price thereof shall not be less than 100%
of the fair market value of a share of Common Stock on the date the option is
granted;
(ii) that the term of such option shall be ten years from the
date of grant;
(iii) that if the Eligible Person to whom such option was granted
(the "Participant") ceases to be an Eligible Person for any reason other than
death or disability, the option shall not thereafter become exercisable to an
extent greater than it could have been exercised on the date the Participant's
status as an Eligible Person ceased, and that on the death or disability of a
Participant the option shall become fully exercisable;
(iv) that the option shall expire thirty (30) days after the
Participant ceases to be an Eligible Person for any reason other than death or
disability and shall expire one year after the Participant's death or
disability; and
(v) that the option shall not be assignable or otherwise
transferable except by will or by the laws of descent and distribution or
pursuant to a domestic relations order, and during the lifetime of the
Participant, the option shall be exercisable only by the Participant or the
transferee under a domestic relations order.
(f) The Committee may establish the performance criteria and level of
achievement versus these criteria which shall determine the target and maximum
amount payable under an Award, which criteria may be based on financial
performance and/or personal performance evaluations. Notwithstanding anything to
the contrary herein, the performance criteria for any Award that is intended by
the Committee to satisfy the requirements for "performance-based compensation"
under Code Section 162(m) shall be a measure based on one or more Qualifying
Performance Criteria (as defined below) selected by the Committee and specified
at the time the Award is granted. The Committee shall certify the extent to
which any Qualifying Performance Criteria has been satisfied prior to payment or
settlement of any Award
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that is intended by the Committee to satisfy the requirements for
"performance-based compensation "under Code Section 162(m). For purposes of
the Plan, the term "Qualifying Performance Criteria" shall mean any one or
more of the following performance criteria, either individually,
alternatively or in any combination, applied to either the Company as a whole
or to a business unit or subsidiary, either individually, alternatively or in
any combination, and measured either on an absolute basis or relative to a
pre-established target, to previous years' results or to a designated
comparison group, in each case as specified by the Committee in the Award:
(i) cash flow, (ii) earnings per share (including earnings before interest,
taxes and amortization), (iii) return on equity, (iv) total stockholder
return, (v) return on capital, (vi) return on assets or net assets, (vii)
revenue, (viii) income or net income, (ix) operating income or net operating
income, (x) operating profit or net operating profit, (xi) operating margin,
(xii) return on operating revenue, and (xiii) market share.
Section 4. STOCK SUBJECT TO PLAN
(a) Subject to adjustment as provided in Section 7 hereof, at any
time, the aggregate number of Shares issued and issuable pursuant to all Awards
(including all Incentive Stock Options) granted under this Plan shall not exceed
100,000. Such maximum number does not include the number of Shares subject to
the unexercised portion of any Incentive Stock Option granted under this Plan
that expires or is terminated.
(b) Subject to adjustment as provided in Section 7 hereof, the
aggregate number of Shares subject to Awards granted during any calendar year to
any one Eligible Person (including the number of shares involved in Awards
having a value derived from the value of Shares) shall not exceed 50,000.
(c) The aggregate number of Shares issued under this Plan at any time
shall equal only the number of shares actually issued upon exercise or
settlement of an Award and not settled in cash or returned to the Company upon
forfeiture of an Award or in payment or satisfaction of the purchase price,
exercise price or tax withholding obligation of an Award.
Section 5. NATURE AND DURATION OF PLAN
(a) This Plan is intended to constitute an unfunded arrangement for a
select group of management or other key employees. This plan in intended to
qualify as a compensatory benefit plan within the meaning of Rule 701 under the
Securities Act of 1933.
(b) No Awards shall be made under this Plan after the tenth
anniversary of the Effective Date of the Plan (as provided in Section 9).
Although Shares may be issued after the tenth anniversary of the Effective Date
pursuant to Awards made prior to such date, no Shares shall be issued under this
Plan after the twentieth anniversary of the Effective Date.
Section 6. ADMINISTRATION OF PLAN
(a) This Plan shall be administered by one or more committees of the
Board of Directors of the Company (the "Board") (any such committee, the
"Committee"). If no
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persons are designated by the Board to serve on the Committee, the Plan shall
be administered by the Board and all references herein to the Committee shall
refer to the Board. The Board shall have the discretion to appoint, add,
remove or replace members of the Committee, and shall have the sole authority
to fill vacancies on the Committee. Unless otherwise provided by the Board:
(i) with respect to any Award for which such is necessary and desired for
such. Award to be exempted by Rule 16b-3 of the Exchange Act, the Committee
shall consist of the Board of directors or of two or more directors each of
whom is a "non-employee director" (as such term is defined in Rule 16b-3
promulgated under the Exchange Act, as such Rule may be amended from time to
time), (ii) with respect to any Award that is intended to qualify as
"performance based compensation" under Section 162(m) of the Code, the
Committee shall consist of two or more directors, each of whom is an "outside
director" (as such term is defined under Section 162(m) of the Code), and
(iii) with respect to any other Award, the Committee shall consist of one or
more directors (any of whom also may be an employee who has been granted or
is eligible to be granted Awards under the Plan).
(b) Subject to the provisions of this Plan, the Committee shall be
authorized and empowered to do all things necessary or desirable in connection
with the administration of this Plan with respect to the Awards over which such
Committee has authority, including, without limitation, the following:
(i) adopt, amend and rescind rules and regulations relating to this
Plan;
(ii) determine which persons are Eligible Persons (including which
consultants are "key consultants" eligible to receive awards under the Plan) and
to which of such Eligible Persons, if any, and when Awards shall be granted
hereunder;
(iii) grant Awards to Eligible Persons and determine the terms and
conditions thereof, including the number of Shares subject thereto and the
circumstances under which Awards become exercisable or vested or are forfeited
or expire, which terms may but need not be conditioned upon the passage of time,
continued employment, the satisfaction of performance criteria, the occurrence
of certain events (including events which the Board or the Committee determine
constitute a change of control), or other factors;
(iv) at any time cancel an Award, with or without the consent of the
holder thereof, and grant a new Award to such holder in lieu thereof, which new
Award may be the same or a different type of Award, may be for a greater or
lesser number of Shares, may have a higher or lower exercise or settlement price
and otherwise may have similar or dissimilar terms to the cancelled Award;
(v) determine whether, and the extent to which adjustments are
required pursuant to Section 7 hereof; and
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(vi) interpret and construe any terms and conditions of, and define any
terms used in, this Plan, any rules and regulations under the Plan and/or any
Award granted under this Plan.
(vii) determine the terms and conditions of the Nonemployee Director
Options that are automatically granted hereunder, other than the terms and
conditions specified in Section 10 hereof].
All decisions, determinations, and interpretations of the Committee shall bc
final and conclusive upon any Eligible Person to whom an Award has been granted
and to any other person holding an Award.
(c) The Committee may, in the terms of an Award or otherwise, temporarily
suspend the exercisability of an Award and/or the issuance of Shares under an
Award if the Committee determines that securities law or other considerations
so warrant.
Section 7. ADJUSTMENTS
If the outstanding securities of the class then subject to this
Plan are increased, decreased or exchanged for or converted into cash,
property or a different number or kind of i shares or securities, or if cash,
property or shares or securities are distributed in respect of such
outstanding securities, in either case as a result of a reorganization,
merger, consolidation, recapitalization, restructuring, reclassification,
dividend (other than a regular, quarterly cash dividend) or other
distribution, stock split, reverse stock split, spin-off or the like, or if
substantially all of the property and assets of the Company are sold, then,
unless the terms of such transaction shall provide otherwise, the Committee
shall make appropriate and proportionate adjustments in (i) the number and
type of shares or other securities or cash or other property that may be
acquired pursuant to Awards theretofore granted under this Plan other than
Incentive Stock Options and the exercise or settlement price of such Awards,
and (ii) the maximum number and type of shares or other securities that may
be issued pursuant to such Awards thereafter granted under this Plan;
provided, however, that notwithstanding the foregoing, (A) such aggregate
number of Shares shall be subject to adjustment under this Section 7 only to
the extent that such will not affect the status of any Award intended to
qualify as "performance based compensation" under Section 162(m) of the Code;
and (B) the maximum number and type of shares or other securities that may
be acquired pursuant to Incentive Stock Options theretofore granted under
this Plan and that may be subject to Incentive Stock Options thereafter
granted under this Plan (which need not correspond to the maximum number and
type of shares or other securities that may be issued pursuant to such Awards
thereafter granted under this Plan) shall be determined under this Section 7
in a manner consistent with the requirements for Incentive Stock Options.
Section 8. AMENDMENT AND TERMINATION OF PLAN
The Board may amend, alter or discontinue the Plan or any agreement
evidencing an Award made under the Plan, but no amendment or alteration shall be
made which would impair the rights of any Award holder, without such holder's
consent, under any Award
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theretofore granted, provided that no such consent shall be required if the
Committee determines in its sole discretion and prior to the date of any change
of control (as defined, if applicable, in the agreement evidencing such Award)
that such amendment or alteration is not reasonably likely to significantly
diminish the benefits provided under such Award. The Committee may determine
whether or not any amendment to a previously granted Award is, for purposes of
the Plan, deemed to be a cancellation and new grant of the Award.
Notwithstanding the foregoing, if an amendment to the Plan would affect the
ability of Awards granted under the Plan to comply with any law, rule or
regulation (including any rule of a self-regulatory organization), and if the
Committee determines that it is necessary or desirable for any Awards
theretofore or thereafter granted that are intended to comply with any such
provision to so comply, the amendment shall be approved by the Company's
stockholders to the extent required for such Awards to continue to comply with
such law, rule or regulation.
Section 9. EFFECTIVE DATE OF PLAN
The Effective Date of this Plan shall be the date upon which it was
approved by the Board, subject however to approval of the Plan by the
affirmative votes of the holders of a majority of the securities of the Company
present, or represented, and entitled to vote at the Company's annual meeting of
stockholders.
Section 10. COMPLIANCE WITH OTHER LAWS AND REGULATIONS
The Plan, the grant and exercise of Awards thereunder, and the
obligation of the Company to sell and deliver shares under such Awards, shall be
subject to all applicable federal and state laws, rules and regulations and to
such approvals by any governmental or regulatory agency as may be required. The
Company shall not be required to issue or deliver any certificates for shares of
Common Stock prior to the completion of any registration or qualification of
such shares under any federal or state law or issuance of any ruling or
regulation of any government body which the Company shall, in its sole
discretion, determine to be necessary or advisable.
Section 11. NO RIGHT TO COMPANY EMPLOYMENT
Nothing in this Plan or as a result of any Award granted pursuant to
this Plan shall confer on any individual any right to continue in the employ of
the Company or interfere in any way with the right of the Company to terminate
an individual's employment at any time. The agreement evidencing an Award may
contain such provisions as the Committee may approve with respect to the effect
of approved leaves of absence.
Section 12. LIABILITY OF COMPANY
The Company and any affiliate which is in existence or hereafter comes
into existence shall not be liable to an Eligible Person or other persons as to:
(a) The Non-Issuance of Shares. The non-issuance or sale of shares as
to which the Company has been unable to obtain from any regulatory body having
jurisdiction the
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authority deemed by the Company's counsel to be necessary to the lawful issuance
and sale of any shares hereunder; and
(b) Tax Consequences. Any tax consequence expected, but not realized,
by any Eligible Person or other person due to the issuance, exercise,
settlement, cancellation or other transaction involving any Award granted
hereunder.
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APPENDIX B
PLAN OF REORGANIZATION AND AGREEMENT OF MERGER
This Plan of Reorganization and Agreement of Merger (the "Merger
Agreement") is made as of ___________, 1997, by and among PAULA Financial, a
Delaware Corporation ("Surviving Company"), and PAULA Financial, a California
Corporation ("Merging Company"). Surviving Company and Merging Company
together are hereinafter sometimes referred to as "Constituent Corporations."
WHEREAS, Surviving Company has an authorized capital stock consisting of
15,000,000 shares of Common Stock, $.01 par value, of which 100 shares are
issued and outstanding, and 5,000,000 shares of Preferred Stock, $.01 par value,
none of which are issued and outstanding;
WHEREAS, Merging Company has an authorized capital stock consisting of
10,000,000 shares of Common Stock, without par value, of which
[____________] shares are issued and outstanding and 5,000,000 shares of
Preferred Stock, without par value, of which 941,177 shares are designated as
Series A Preferred Stock and are outstanding;
WHEREAS, the respective Boards of Directors of Surviving Company and
Merging Company deem it advisable that Merging Company merge into Surviving
Company upon terms and conditions herein provided (the "Merger") and have each
approved this Merger Agreement.
NOW, THEREFORE, in consideration of the mutual covenants, agreements,
representations and warranties herein contained, the parties hereto agree that
in accordance with the California General Corporation Law, and the Delaware
General Corporation Law, Merging Company shall be merged with and into Surviving
Company in accordance with the following terms and conditions:
1. MERGER. Effective upon the filing of this Merger Agreement, or such other
certificates as may be properly filed in place thereof, under the
California General Corporation Law and the Delaware General Corporation
Law (the "Effective Date"), Merging Company and Surviving Company shall
be merged with and into a single corporation, which shall be Surviving
Company as the surviving corporation. The separate corporate existence
of Merging Company shall cease on the Effective Date.
2. ARTICLES/CERTIFICATE OF INCORPORATION AND BYLAWS. The Certificate of
Incorporation of Surviving Company, as amended and in effect immediately
prior to the Merger, shall continue to be the Certificate of
Incorporation of Surviving Company after the Merger without change or
amendment until further amended in accordance with the provisions thereof
and applicable law.
The Bylaws of Surviving Company, as amended and in effect immediately
prior to the Merger, shall be the Bylaws of Surviving Company after the
Merger,
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without change or amendment until further amended in accordance with the
provisions thereof and applicable law.
3. DIRECTORS AND OFFICERS. The directors and officers of Surviving Company
immediately prior to the Merger shall continue as the directors and
officers, respectively, of the Surviving Company after the Merger to hold
once until the expiration of their current terms, or their prior
resignation, removal or death.
4. SUCCESSION. On the Effective Date, Surviving Company shall succeed to
Merging Company in the manner, of and as more fully set forth, in Section
259 of the Delaware General Corporation Law.
5. FURTHER ASSURANCES. From time to time, as and when required by Surviving
Company or by its successors and assigns, there shall be executed and
delivered on behalf of Merging Company such deeds and other instruments,
and there shall be taken or caused to be taken by it such further and
other action, as shall be appropriate or necessary in order to vest or
perfect in or to confirm of record or otherwise in Surviving Company the
title to and possession of all the property, interests, assets, rights,
privileges, immunities, powers, franchises and authority of Merging
Company, and otherwise to carry out the purposes of this Merger
Agreement, and the officers and directors of Surviving Company are
fully authorized in the name and on behalf of Merging Company or
otherwise to take any and all such action and to execute and deliver any
and all such deeds and other instruments.
6. CAPITAL STOCK OF SURVIVING COMPANY. On the Effective Date, by virtue of
the Merger and without any action on the part of any holder thereof,
each share of the Common Stock without par value, and of the Series A
Preferred Stock without par value, of the Merging Company outstanding
immediately prior thereto shall be changed and converted into one fully
paid and nonassessable share of the Common Stock, par value $.01 per
share or the Series A Preferred Stock, par value $.01
per share, respectively, of the Surviving Company.
7. COMMON STOCK OF MERGING COMPANY. On the Effective Date, by virtue of the
Merger and without any action on the part of the holder thereof, each
share of the Common Stock $.01 per share par value, of the Surviving
Company outstanding immediately prior thereto shall be canceled.
8. STOCK CERTIFICATES. On and after the Effective Date, all of the
outstanding certificates that prior to that time represented shares
of the Common Stock or Series A Preferred Stock of the Merging Company
shall be deemed for all purposes to evidence the same number of shares
of Common Stock or Series A Preferred Stock, respectively, of the
Surviving Company. The registered owner on the books and records of the
Merging Company or its transfer agents of any such stock certificate
shall, until such certificate shall have been surrendered for
transfer or conversion or otherwise accounted for to the Surviving
Company or its transfer agents, have and be entitled to exercise any
voting and other rights with
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respect to, and to receive any dividend and other distributions upon,
the shares of the Surviving Company to which such person is entitled.
9. OPTIONS AND WARRANTS. Upon the Effective Date, all outstanding and
unexercised portions of all options and warrants to buy Common Stock
of the Merging Company shall become options or warrants, respectively,
to buy the same number of shares of Common Stock of the Surviving Company
and, effective upon the Effective Date, the Surviving Company hereby
expressly adopts and assumes all outstanding and unexercised portions of
such options or warrants, respectively, and all obligations of the
Merging Company with respect thereto.
10. ABANDONMENT. At any time before the Effective Date, this Merger Agreement
may be terminated and the Merger may be abandoned at the election of
either of the Boards of Directors of the Merging Company or the Surviving
Company, whether before or after approval of this Merger Agreement by
the shareholders of the Merging Company or the Surviving Company, if
either Board of Directors shall have determined that the Merger is not
in the best interest of the Merging Company or the Surviving Company,
respectively, or their respective shareholders.
11. COUNTERPARTS. This Merger Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original and such
counterparts shall together constitute but one and the same instrument.
12. CONDITION. The consummation of the Merger is conditioned upon the prior
receipt of all requisite approvals of the California Department of
Insurance.
IN WITNESS WHEREOF, this Merger Agreement, having first been duly approved
by the Boards of Directors and shareholders of Surviving Company and Merging
Company, is hereby executed on behalf of each of said corporations by their
respective officers hereunto duly authorized.
PAULA FINANCIAL PAULA FINANCIAL
a California corporation a Delaware corporation
By: By:
--------------------- ---------------------
President President
ATTEST: ATTEST:
--------------------- ---------------------
Secretary Secretary
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APPENDIX D
PAULA FINANCIAL
(A DELAWARE CORPORATION)
BYLAWS
ARTICLE I
OFFICES
SECTION 1.01 REGISTERED OFFICE. The registered office of PAULA
Financial (hereinafter called the Corporation) in the State of Delaware shall be
at 9 East Loockerman Street, Dover, County of Kent, and the name of the
registered agent in charge thereof shall be the National Registered Agents,
Inc.
SECTION 1.02 OTHER OFFICES. The Corporation may also have an office or
offices at such other place or places, either within or without the State of
Delaware, as the Board of Directors (hereinafter called the Board) may from time
to time determine or as the business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 2.01 ANNUAL MEETINGS. Annual meetings of the stockholders of
the Corporation for the purpose of electing directors and for the transaction of
such other proper business as may come before such meetings may be held at such
time, date and place as the Board shall determine by resolution. Unless
otherwise indicated in the notice of the annual meeting of the stockholders, as
provided in accordance with Section 2.04 of this Article II, the annual meeting
of the stockholders shall be held each year at 4:00 PM on the fourth (4th)
Wednesday in April; however, if this falls on a legal holiday, then the annual
meeting shall be held on the next business day at the same time. Notwithstanding
the above, the date so designated shall be within five (5) months after the end
of the fiscal year of the Corporation and within fifteen (15) months after the
last annual meeting of the stockholders. At each annual meeting of the
stockholders, directors shall be elected, and any other proper business may be
transacted.
SECTION 2.02 Place of Meetings. All meetings of the stockholders shall
be held at such places, within or without the State of Delaware, as may from
time to time be designated by the person or persons calling the respective
meeting and specified in the respective notices or waivers of notice thereof. In
the absence of any such designation, such meetings shall be held at the
principal executive offices of the Corporation.
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SECTION 2.03 SPECIAL MEETINGS. A special meeting of the stockholders,
for any purpose or purposes whatsoever, may be called at any time by the Board
of Directors, or by the Chairman of the Board of Directors, or by the President,
or by one or more stockholders holding shares in the aggregate entitled to cast
not less than 20% of the votes at any such meeting.
If a special meeting is called by any person or persons other than the
Board of Directors or the President or the Chairman of the Board, the request
shall be in writing complying with Section 2.09 hereof and specifying the time
of such meeting and the general nature of the business proposed to be
transacted, and shall be delivered personally or sent by registered mail or by
telegraphic or other facsimile transmission to the Chairman of the Board, the
President, any Vice President or the Secretary of the Corporation.
The officer receiving such request forthwith shall cause notice to be
given to the stockholders entitled to vote, in accordance with the provisions
of Section 2.04 of this Article II, that a meeting will be held at the time
requested by the person or persons calling the meeting, not less than
thirty-five (35) nor more than ninety (90) days after the receipt of the
request. If the notice is not given within twenty (20) days after receipt of
the request, the person or persons requesting the meeting may give the
notice. Nothing contained in this paragraph of this Section 2.03 shall be
construed as limiting, fixing or affecting the time when a meeting of
stockholders called by action of the Board of Directors may be held.
SECTION 2.04 NOTICE OF MEETINGS. Except as otherwise required by law or as
set forth in Section 2.03 above, notice of each meeting of the stockholders,
whether annual or special, shall be given not less than ten (10) nor more than
sixty (60) days before the date of the meeting to each stockholder of record
entitled to vote at such meeting by delivering a typewritten or printed notice
thereof to him personally, or by depositing such notice in the United States
mail, in a postage prepaid envelope, directed to him at his post office address
furnished by him to the Secretary of the Corporation for such purpose or, if he
shall not have furnished to the Secretary his address for such purpose, then at
his post office address last known to the Secretary, or by transmitting a notice
thereof to him at such address by telegraph, cable, or wireless. Except as
otherwise expressly required by law, no publication of any notice of a meeting
of the stockholders shall be required. Every notice of a meeting of the
stockholders shall state the place, date and hour of the meeting, and, in the
case of a special meeting, shall also state the purpose or purposes for which
the meeting is called. Notice of any meeting of stockholders shall not be
required to be given to any stockholder who shall have waived such notice and
such notice shall be deemed waived by any stockholder who shall attend such
meeting in person or by proxy, except as a stockholder who shall attend such
meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting is not lawfully called or
convened. Except as otherwise expressly required by law, notice of any adjourned
meeting of the
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stockholders need not be given if the time and place thereof are announced at
the meeting at which the adjournment is taken.
SECTION 2.05 QUORUM. Except in the case of any meeting for the election of
directors summarily ordered as provided by law, the holders of record of a
majority in voting interest of the shares of stock of the Corporation entitled
to be voted thereat, present in person or by proxy, shall constitute a quorum
for the transaction of business at any meeting of the stockholders of the
Corporation or any adjournment thereof. In the absence of a quorum at any
meeting or any adjournment thereof, a majority in voting interest of the
stockholders present in person or by proxy and entitled to vote thereat or, in
the absence therefrom of all the stockholders, any officer entitled to preside
at, or to act as secretary of, such meeting may adjourn such meeting from time
to time. At any such adjourned meeting at which a quorum is present any business
may be transacted which might have been transacted at the meeting as originally
called.
SECTION 2.06 VOTING.
(a) Each stockholder shall, at each meeting of the stockholders, be
entitled to vote in person or by proxy each share or fractional share of the
stock of the Corporation having voting rights on the matter in question and
which shall have been held by him and registered in his name on the books of the
Corporation:
(i) on the date fixed pursuant to Section 6.05 of these Bylaws as the
record date for the determination of stockholders entitled to notice of and
to vote at such meeting, or
(ii) if no such record date shall have been so fixed, then (a) at
the close of business on the day next preceding the day on which notice of
the meeting shall be given or (b) if notice of the meeting shall be waived,
at the close of business on the day next preceding the day on which the
meeting shall be held.
(b) Shares of its own stock belonging to the Corporation or to another
corporation, if a majority of the shares entitled to vote in the election of
directors in such other corporation is held, directly or indirectly, by the
Corporation, shall neither be entitled to vote nor be counted for quorum
purposes. Persons holding stock of the Corporation in a fiduciary capacity shall
be entitled to vote such stock. Persons whose stock is pledged shall be entitled
to vote, unless in the transfer by the pledgor on the books of the Corporation
he shall have expressly empowered the pledgee to vote thereon, in which case
only the pledgee, or his proxy, may represent such stock and vote thereon Stock
having voting power standing of record in the names of two or more persons,
whether fiduciaries, members of a partnership, joint tenants in common, tenants
by entirety or otherwise, or with respect to which two or more persons have the
same fiduciary relationship, shall be voted in accordance with the provisions of
the General Corporation Law of the State of Delaware.
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(c) Any such voting rights may be exercised by the stockholder entitled
thereto in person or by his proxy appointed by an instrument in writing,
subscribed by such stockholder or by his attorney thereunto authorized and
delivered to the secretary of the meeting; provided, however, that no proxy
shall be voted or acted upon after three years from its date unless said
proxy shall provide for a longer period. The attendance at any meeting of a
stockholder who may theretofore have given a proxy shall not have the effect
of revoking the same unless he shall in writing so notify the secretary of
the meeting prior to the voting of the proxy. At any meeting of the
stockholders all matters, except as otherwise provided in the Certificate of
Incorporation, in these Bylaws or by law, shall be decided by the vote of a
majority in voting interest of the stockholders present in person or by proxy
and entitled to vote thereat and thereon, a quorum being present. The vote at
any meeting of the stockholders on any question need not be by ballot, unless
so directed by the chairman of the meeting. On a vote by ballot each ballot
shall be signed by the stockholder voting, or by his proxy, if there be such
proxy, and it shall state the number of shares voted.
SECTION 2.07 LIST OF STOCKHOLDERS. The Secretary of the Corporation shall
prepare and make, at least ten (10) days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any stockholder,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least ten (10) days prior to the meeting, either at a place
within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at the place
where the meeting is to be held. The list shall also be produced and kept at
the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present.
SECTION 2.08 JUDGES. If at any meeting of the stockholders a vote by
written ballot shall be taken on any question, the chairman of such meeting
may appoint a judge or judges to act with respect to such vote. Each judge so
appointed shall first subscribe an oath faithfully to execute the duties of a
judge at such meeting with strict impartiality and according to the best of
his ability. Such judges shall (a) ascertain the number of shares outstanding
and the voting power of each; (b) determine the shares represented at a
meeting and the validity of proxies and ballots; (c) count all votes and
ballots; (d) determine and retain for a reasonable period a record of the
disposition of any challenges made to any determination by the inspectors;
and (e) certify their determination of the number of shares represented at
the meeting, and their count of all votes and ballots. Reports of judges
shall be in writing and subscribed and delivered by them to the Secretary of
the Corporation. The judges need not be stockholders of the Corporation, and
any officer of the Corporation may be a judge on any question other than a
vote for or against a proposal in which he shall have a material interest.
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SECTION 2.09 ADVANCE NOTICE OF STOCKHOLDER PROPOSALS AND OF STOCKHOLDER
NOMINATIONS.
(a) At any meeting of the stockholders, only such business shall be
conducted as shall have been brought before the meeting (i) by or at the
direction of the Board or (ii) by any stockholder of the Corporation who
complies with the notice procedures set forth in this Section 2.09(a). For
business to be properly brought before any meeting of the stockholders by a
stockholder, the stockholder must have given notice thereof in writing to the
Secretary of the Corporation not less than ninety (90) days in advance of
such meeting or, if later, the seventh day following the first public
announcement of the date of such meeting. A stockholder's notice to the
Secretary shall set forth as to each matter the stockholder proposes to bring
before the meeting (A) a brief description of the business desired to be
brought before the meeting and the reasons for conducting such business at
the meeting, (B) the name and address, as they appear on the Corporation's
books, of the stockholder proposing such business, (C) the class and number
of shares of the Corporation that are beneficially owned by the stockholder,
and (D) any material interest of the stockholder in such business. In
addition, the stockholder making such proposal shall promptly provide any
other information reasonably requested by the corporation. Notwithstanding
anything in these Bylaws to the contrary-, no business shall be conducted at
any meeting of the stockholders except in accordance with the procedures set
forth in this Section 2.09. The Chairman of any such meeting shall direct
that any business not properly brought before the meeting shall not be
considered.
(b) Nominations for the election of directors may be made by the Board or
by any stockholder entitled to vote in the election of directors; PROVIDED,
HOWEVER, that a stockholder may nominate a person for election as a director
at a meeting only if written notice of such stockholder's intent to make such
nomination has been given to the Secretary of the Corporation not later than
90 days in advance of such meeting or, if later, the seventh day following
the first public announcement of the date of such meeting. Each such notice
shall set forth: (1) the name and address of the stockholder who intends to
make the nomination and of the person or persons to be nominated; (2) a
representation that the stockholder is a bolder of record of stock of the
Corporation entitled to vote at such meeting and intends to appear in person
or by proxy at the meeting and nominate the person or persons specified in
the notice; (3) a description of all arrangements or understandings between
the stockholder and each nominee and any other person or persons (naming such
person or persons) pursuant to which the nomination or nominations are to be
made by the stockholder; (4) such other information regarding each nominee
proposed by such stockholder as would be required to be included in a proxy
statement filed pursuant to the proxy rules of the United States Securities
and Exchange Commission had the nominee been nominated, or intended to be
nominated, by the Board; and (5) the consent of each nominee to serve as a
director of the Corporation if so elected. In addition, the stockholder
making such nomination shall promptly provide any other information
reasonably requested by the Corporation. No person shall be eligible for
election as a director of the Corporation unless nominated in accordance with
the procedures set forth in this Section 2.09(b). The Chairman of any meeting
of
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stockholders shall direct that any nomination not made in accordance with these
procedures be disregarded.
ARTICLE III
BOARD OF DIRECTORS
SECTION 3.01 GENERAL POWERS. The property, business and affairs of the
Corporation shall be managed by the Board.
SECTION 3.02 NUMBER; ELECTION AND TERM OF OFFICE. The number of
directors of the Corporation shall exclusively be fixed from time to time by
the Board of Directors, except that in the absence of such designation, such
number shall be nine. Each of the directors of the Corporation shall hold
once until his successor shall have been duly elected and shall qualify or
until he shall resign or shall have been removed in the manner hereinafter
provided.
(a) The directors who shall first take office after the filing of the
Certificate of Incorporation of the Corporation ("Incorporation Date") shall
serve until the first annual meeting of stockholders at which directors are
elected following the Incorporation Date ("First Annual Meeting"). Effective
at the First Annual Meeting, the Board shall be divided into three classes:
Class I, Class II and Class III. Such classes shall be as nearly equal in
number of directors as possible. Each director shall serve for a term ending
at the third annual stockholders meeting following the annual meeting at
which such director was elected; PROVIDED, HOWEVER, that the directors first
elected to Class I shall serve for a term ending at the second annual meeting
held after the Incorporation Date, the directors first elected to Class II
shall serve for a term ending at the third annual meeting held after the
Incorporation Date, and the directors first elected to Class III shall serve
for a term ending at the fourth annual meeting held after the Incorporation
Date.
(b) At each annual election held after the First Annual Meeting, the
directors chosen to succeed those whose terms then expire shall be identified
as being of the same class as the directors they succeed, unless, by reason
of any intervening changes in the authorized number of directors, the Board
of Directors shall designate one or more directorships whose term then
expires as directorships of another class in order more nearly to achieve
equality in the number of directors among the classes. When the Board of
Directors fills a vacancy resulting from the death, resignation or removal of
a director, the director chosen to fill that vacancy shall be of the same
class as the director he succeeds, unless, by reason of any previous changes
in the authorized number of directors, the Board of Directors shall designate
the vacant directorship as a directorship of another class in order more
nearly to achieve equality in the number of directors among the classes.
(c) Notwithstanding the rule that the three classes shall be as nearly
equal in number of directors as possible, in the event of any change in the
authorized number of directors each director then continuing to serve as such
will nevertheless continue as a
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director of the class of which he is a member, until the expiration of his
current term or his earlier death, resignation or removal. If any newly
created directorship or vacancy on the Board of Directors, consistent with
the rule that the three classes shall be as nearly equal in number of
directors as possible, may be allocated to one or two or more classes, the
Board of Directors shall allocate it to that of the available class whose
term of office is due to expire at the earliest date following such
allocation.
(d) During any period when the holders of Preferred Stock or any one or
more series thereof, voting as a class, shall be entitled to elect a
specified number of directors by reason of dividend arrearages or other
contingencies giving them the right to do so, then and during such time as
such right continues (1) the then otherwise authorized number of directors
shall be increased by such specified number of directors, and the holders of
the Preferred Stock or such series thereof, voting as a class, shall be
entitled to elect the additional directors as provided for, pursuant to the
provisions of such Preferred Stock or series; (2) the additional directors
shall be members of those respective classes of directors in which vacancies
are created as a result of such increase in the authorized number of
directors; and (3) each such additional director shall serve until the annual
meeting at which the term of office of his class shall expire and until his
successor shall be elected and shall qualify, or until his right to hold such
office terminates pursuant to the provisions of such Preferred Stock or
series, whichever occurs earlier. Whenever the holders of such Preferred
Stock or series thereof are divested of such rights to elect a specified
number of directors, voting as a class, pursuant to the provisions of such
Preferred Stock or series, the terms of office of all directors elected by
the holders of such Preferred Stock or series, voting as a class pursuant to
such provisions, or elected to fill any vacancies resulting from the death,
resignation or removal of directors so elected by the holders of such
Preferred Stock or series, shall forthwith terminate and the authorized
number of directors shall be reduced accordingly.
SECTION 3.03. REMOVAL OF DIRECTORS. Subject to the rights of the
holders of any series of Preferred Stock then outstanding, any director, or
the entire Board of Directors, may be removed from office at any time, but
only with cause, by the affirmative vote of the holders of a majority of the
voting stock of the corporation.
SECTION 3.04 STOCKHOLDER NOMINATIONS. Stockholder nominations for
director shall be made in accordance with Section 2.09(b) hereof.
SECTION 3.05 RESIGNATIONS. Any director of the Corporation may resign
at any time by giving written notice to the Board or to the Secretary of the
Corporation. Any such resignation shall take effect at the time specified
therein, or, if the time be not specified, it shall take effect immediately
upon its receipt; and unless otherwise specified therein, the acceptance of
such resignation shall not be necessary to make it effective.
SECTION 3.06 VACANCIES. Except as otherwise provided in the Certificate
of Incorporation, any vacancy in the Board caused by death, resignation,
disqualification, or any other cause, except as provided in this Section
3.06, may be filled by vote of the
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majority of the remaining directors, although less than a quorum. Each
director so chosen to fill a vacancy shall hold office until his successor
shall have been elected and shall qualify or until he shall resign or shall
have been removed in the manner hereinafter provided. Vacancies and newly
created directorships resulting from any increase in the authorized number of
directors shall be filled exclusively by the affirmative vote of the
majority of the then incumbent directors, although less than a quorum. No
reduction of the authorized number of directors shall have the effect of
removing any director prior to the expiration of such director's term of
office.
SECTION 3.07 PLACE OF MEETING, ETC. The Board may hold any of its
meetings at such place or places within or without the State of Delaware as
the Board may from time to time by resolution designate or as shall be
designated by the person or persons calling the meeting or in the notice or a
waiver o f notice o f any such meeting. Directors may participate in any
regular or special meeting of the Board by means of conference telephone or
similar communications equipment pursuant to which all persons participating
in the meeting of the Board can hear each other, and such participation shall
constitute presence in person at such meeting.
SECTION 3.08 FIRST MEETING. The Board shall meet as soon as practicable
after each annual election of directors and notice of such first meeting
shall not be required.
SECTION 3.09 REGULAR MEETINGS. Regular meetings of the Board may be
held at such times as the Board shall from time to time by resolution
determine. If any day fixed for a regular meeting shall be a legal holiday at
the place where the meeting is to be held, then the meeting shall be held at
the same hour and place on the next succeeding business day not a legal
holiday. Except as provided by law, notice of regular meetings need not be
given.
SECTION 3.10 SPECIAL MEETINGS. Special Meetings of the Board of
Directors for any purpose or purposes may be called at any time by the
Chairman of the Board or the President or any three directors. Except as
otherwise provided by law or by these Bylaws, notice of the time and place of
each such special meeting shall be mailed to each director, addressed to him
at his residence or usual place of business, at least four (4) days before
the day on which the meeting is to be held, or shall be sent to him at such
place by telegraph or cable or be delivered personally not less than
forty-eight (48) hours before the time at which the meeting is to be held.
Any oral notice given personally or by telephone may be communicated to
either the director or to a person at the office of the director who the
person giving the notice has reason to believe will promptly communicate it
to the director. Except where otherwise required by law or by these Bylaws,
notice of the purpose of a special meeting need not be given. Notice of any
meeting of the Board shall not be required to be given to any director who is
present at such meeting, except a director who shall attend such meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened.
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SECTION 3.11 QUORUM AND MANNER OF ACTING. Except as otherwise provided
in these Bylaws or by law, the presence of a majority of the authorized
number of directors shall be required to constitute a quorum for the
transaction of business at any meeting of the Board, and all matters shall be
decided at any such meeting, a quorum being present, by the affirmative votes
of a majority of the directors present. In the absence of a quorum, a
majority of directors present at any meeting may adjourn the same from time
to time until a quorum shall be present. Notice of any adjourned meeting need
not be given. The directors shall act only as a Board, and the individual
directors shall have no power as such.
SECTION 3.12 ACTION BY CONSENT. Any action required or permitted to be
taken at any meeting of the Board or of any committee thereof may be taken
without a meeting if a written consent thereto is signed by all members of
the Board or of such committee, as the case may be, and such written consent
is filed with the minutes of proceedings of the Board or committee.
SECTION 3.13 COMPENSATION. The directors shall receive only such
compensation for their services as directors as may be allowed by resolution
of the Board. The Board may also provide that the Corporation shall reimburse
each such director for any expense incurred by him on account of his
attendance at any meetings of the Board or Committees of the Board. Neither
the payment of such compensation nor the reimbursement of such expenses shall
be construed to preclude any director from serving the Corporation or its
subsidiaries in any other capacity and receiving compensation therefor.
SECTION 3.14 COMMITTEES. The Board may, by resolution passed by a
majority of the whole Board, designate one or more committees, each committee
to consist of one or more of the directors of the Corporation. Any such
committee, to the extent provided in the resolution of the Board and except
as otherwise limited by law, shall have and may exercise all the powers and
authority of the Board in the management of the business and affairs of the
Corporation, and may authorize the seal of the Corporation to be affixed to
all papers which may require it. Any such committee shall keep written
minutes of its meetings and report the same to the Board at the next regular
meeting of the Board. In the absence or disqualification of a member of a
committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board to act at the meeting in the
place of any such absent or disqualified member.
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ARTICLE IV
OFFICERS
SECTION 4.01 NUMBER. The officers of the Corporation shall be a
President, a Secretary and a Chief Financial Officer. The Corporation may
also have, at the discretion of the Board of Directors, a Chairman of the
Board, one or more Vice Presidents, one or more Assistant Secretaries, one or
more Assistant Financial Officers, and such other officers as may be
appointed in accordance with the provisions of Section 4.03 of this Article IV.
SECTION 4.02 ELECTION, TERM OF OFFICE AND QUALIFICATIONS. The officers
of the Corporation, except such officers as may be appointed in accordance
with Section 4.03, shall be elected annually by the Board at the first
meeting thereof held after the election thereof. Each officer shall hold
office until his successor shall have been duly chosen and shall qualify or
until his resignation or removal in the manner hereinafter provided.
SECTION 4.03 ASSISTANTS, AGENTS AND EMPLOYEES, ETC. In addition to the
officers specified in Section 4.01, the Board may appoint other assistants,
agents and employees as it may deem necessary or advisable, including one or
more Assistant Secretaries, and one or more Assistant Financial Officers,
each of whom shall hold office for such period, have such authority, and
perform such duties as the Board may from time to time determine. The Board
may delegate to any officer of the Corporation or any committee of the Board
the power to appoint, remove and prescribe the duties of any such assistants,
agents or employees.
SECTION 4.04 REMOVAL. Any officer, assistant, agent or employee of the
Corporation may be removed, with or without cause, at any time: (i) in the
case of an officer, assistant, agent or employee appointed by the Board, only
by resolution of the Board; and (ii) in the case of an officer, assistant,
agent or employee, by any officer of the Corporation or committee of the
Board upon whom or which such power of removal may be conferred by the Board.
SECTION 4.05 RESIGNATIONS. Any officer or assistant may resign at any
time by giving written notice of his resignation to the Board or the
Secretary of the Corporation. Any such resignation shall take effect at the
time specified therein, or, if the time be not specified, upon receipt
thereof by the Board or the Secretary, as the case may be; and; unless
otherwise specified therein, the acceptance of such resignation shall not be
necessary to make it effective
SECTION 4.06 VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification, or other cause, may be filled for the
unexpired portion of the term thereof in the manner prescribed in these
Bylaws for regular appointments or elections to such office.
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SECTION 4.07 CHAIRMAN OF THE BOARD. The Chairman of the Board, if such
an officer be elected, shall, if present, preside at all meetings of the
stockholders and at all meetings of the Board of Directors and exercise and
perform such other powers and duties as may be from time to time assigned to
him by the board of Directors or prescribed by the Bylaws. If there is no
President, the Chairman of the Board shall in addition be the Chief Executive
Officer of the Corporation and shall have the powers and duties described in
Section 4.08 of this Article IV.
SECTION 4.08 THE PRESIDENT. The President of the Corporation shall be
the chief executive officer of the Corporation and shall have, subject to the
control of the Board, general and active supervision and management over the
business of the Corporation and over its several officers, assistants, agents
and employees.
SECTION 4.09 THE VICE PRESIDENTS. Each Vice President shall have such
powers and perform such duties as the Board may from time to time prescribe.
At 'the request of the President, or in case of the President's absence or
inability to act upon the request of the Board, a Vice President shall
perform the duties of the President and when so acting, shall have all the
powers of, and be subject to all the restrictions upon, the President.
SECTION 4.10 THE SECRETARY. The Secretary shall, if present, record the
proceedings of all meetings of the Board, of the stockholders, and of all
committees of which a secretary shall not have been appointed in one or more
books provided for that purpose; he shall see that all notices are duly given
in accordance with these Bylaws and as required by law; he shall be custodian
of the seal of the Corporation and shall affix and attest the seal to all
documents to be executed on behalf of the Corporation under its seal; and, in
general, he shall perform all the duties incident to the office of Secretary
and such other duties as may from time to time be assigned to him by the
Board.
SECTION 4.11 THE CHIEF FINANCIAL OFFICER. The Chief Financial Officer
shall have the general care and custody of the funds and securities of the
Corporation, and shall deposit all such funds in the name of the Corporation
in such banks, trust companies or other depositories as shall be selected by
the Board. He shall receive, and give receipts for, moneys due and payable to
the Corporation from any source whatsoever. He shall exercise general
supervision over expenditures and disbursements made by officers, agents and
employees of the Corporation and the preparation of such records and reports
in connection therewith as may be necessary or desirable. He shall, in
general, perform all other duties incident to the office of Chief Financial
Officer and such other duties as from time to time may be assigned to him by
the Board. The Chief Financial Officer of this Corporation is, for purposes
of giving reports or executing any certificates or other documents requiring
the signature of the "Treasurer," deemed to be the Treasurer of this
Corporation
SECTION 4.12 COMPENSATION. The compensation of the officers of the
Corporation shall be fixed from time to time by the Board. None of such
officers shall be
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prevented from receiving such compensation by reason of the fact that he is
also a director of the Corporation. Nothing contained herein shall preclude
any officer from serving the Corporation, or any subsidiary corporation, in
any other capacity and receiving such compensation by reason of the fact that
he is also a director of the Corporation. Nothing contained herein shall
preclude any officer from serving the Corporation, or any subsidiary
corporation, in any other capacity and receiving proper compensation therefor.
ARTICLE V
CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC.
SECTION 5.01 EXECUTION OF CONTRACTS. The Board, except as otherwise
provided in these Bylaws, may authorize any officer or officers, agent or
agents, to enter into any contract or execute any instrument in the name of
and on behalf of the Corporation, and such authority may be general or
confined to specific instances; and unless so authorized by the Board or by
these Bylaws, no officer, agent or employee shall have any power or authority
to bind the Corporation by any contract or engagement or to pledge its credit
or to render it liable for any purpose or in any amount.
SECTION 5.02 CHECKS, DRAFTS, ETC. All checks, drafts or other orders
for payment of money, notes or other evidence of indebtedness, issued in the
name of or payable to the Corporation, shall be signed or endorsed by such
person or persons and in such manner as, from time to time shall be
determined by resolution of the Board. Each such officer, assistant, agent or
attorney shall give such bond, if any, as the Board may require.
SECTION 5.03 DEPOSITS. All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the
Corporation in such banks, trust companies or other depositories as the Board
may select, or as may be selected by any officer or officers, assistant or
assistants, agent or agents, or attorney or attorneys of the Corporation to
whom such power shall have been delegated by the Board. For the purpose of
deposit and for the purpose of collection for the account of the Corporation,
the President, any Vice President or the Chief Financial Officer (or any
other officer or officers, assistant or assistants, agent or agents, or
attorney or attorneys of the Corporation who shall from time to time be
determined by the board) may endorse assign and deliver checks, drafts and
other orders for the payment of money which are payable to the order of the
Corporation.
SECTION 5.04 GENERAL AND SPECIAL BANK ACCOUNTS. The Board may from time to
time authorize the opening and keeping of general and special bank accounts with
such banks, trust companies or other depositories as the Board may select or as
may be selected by any officer or officers, assistant or assistants, agent or
agents, or attorney or attorneys of the Corporation to whom such power shall
have been delegated by the Board. The Board may make such special rules and
regulations with respect to such bank accounts, not inconsistent with the
provisions of these Bylaws, as it may deem expedient.
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ARTICLE VI
SHARES AND THEIR TRANSFER
SECTION 6.01 CERTIFICATES FOR STOCK. Every owner of stock of the
Corporation shall be entitled to have a certificate or certificates, to be in
such form as the Board shall prescribe, certifying the number and class of
shares of the stock of the Corporation owned by him. The certificates
representing shares of such stock shall be numbered in the order in which
they shall be issued and shall be signed in the name of the Corporation by
the President or a Vice President, and by the Secretary or an Assistant
Secretary or by the Chief Financial Officer, acting as Treasurer. Any of or
all of the signatures on the certificates may be a facsimile. In case any
officer, transfer agent or registrar who has signed, or whose facsimile
signature has been placed upon, any such certificate, shall have ceased to be
such officer, transfer agent or registrar before such certificate is issued,
such certificate may nevertheless be issued by the Corporation with the same
effect as though the person who signed such certificate, or whose facsimile
signature shall have been placed thereupon, were such officer, transfer agent
or registrar at the date of issue. A record shall be kept of the respective
names of the persons, firms or corporations owning the stock represented by
such certificates, the number and class of shares represented by such
certificates, respectively, and the respective dates thereof, and in case of
cancellation, the respective dates of cancellation. Every certificate
surrendered to the Corporation for exchange or transfer shall be cancelled,
and no new certificate or certificates shall be issued in exchange for any
existing certificate until such existing certificate shall have been so
cancelled, except in cases provided for in Section 6.04.
SECTION 6.02 TRANSFERS OF STOCK. Transfers of shares of stock of the
Corporation shall be made only on the books of the Corporation by the
registered holder thereof, or by his attorney thereunto authorized by power
of attorney duly executed and filed with the Secretary, or with a transfer
clerk or a transfer agent appointed as provided in Section 6.03, and upon
surrender of the certificate or certificates for such shares properly
endorsed and the payment of all taxes thereon. The person in whose name
shares of stock stand on the books of the Corporation shall be deemed the
owner thereof for all purposes as regards the Corporation. Whenever any
transfer of shares shall be made for collateral security, and not absolutely,
such fact shall be so expressed in the entry of transfer if, when the
certificate or certificates shall be presented to the Corporation for
transfer, both the transferor and the transferee request the Corporation to
do so.
SECTION 6.03 REGULATIONS. The Board may make such rules and regulations
as it may deem expedient, not inconsistent with these Bylaws, concerning the
issue, transfer and registration of certificates for shares of the stock of
the Corporation. It may appoint, or authorize any officer or officers to
appoint, one or more transfer clerks or one or more transfer agents and one
or more registrars, and may require all certificates for stock to bear the
signature or signatures of any of them.
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SECTION 6.04 LOST, STOLEN, DESTROYED, AND MUTILATED CERTIFICATES. In
any case of loss, theft, destruction, or mutilation of any certificate of
stock, another may be issued in its place upon proof of such loss, theft,
destruction, or mutilation and upon the giving of a bond of indemnity to the
Corporation in such form and in such sum as the Board may direct; provided,
however, that a new certificate may be issued. without requiring any bond
when, in the judgment of the Board, it is proper so to do.
SECTION 6.05 FIXING DATE FOR DETERMINATION OF STOCKHOLDERS OF RECORD.
In order that the Corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment
thereof, or to express consent to corporate action in writing without a
meeting, or entitled to receive payment of any dividend or other distribution
or allotment of any rights, or entitled to exercise any right in respect of
any other change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board may fix, in advance, a record date, which
shall not be more than 60 nor less than 10 days before the date of such
meeting, nor more than 60 days prior to any other action. If in any case
involving the determination of stockholders for any purpose other than notice
of or voting at a meeting of stockholders or expressing consent to corporate
action without a meeting the Board shall not fix such a record date, the
record date for determining stockholders for such purpose shall be the close
of business on the day on which the Board shall adopt the resolution relating
thereto. A determination of stockholders entitled to notice of or to vote at
a meeting of stockholders shall apply to any adjournment of such meeting;
provided, however, that the Board may fix a new record date for the adjourned
meeting.
ARTICLE VII
INDEMNIFICATION
SECTION 7.01 SCOPE OF INDEMNIFICATION. The Corporation shall indemnify
and shall advance expenses (including attorneys' fees) to, in each case to
the fullest extent permitted by the Delaware General Corporation Law as the
same exists or may hereinafter be amended (the "Delaware Law"), any person
(or the estate of any person) who IS or was a party, or is threatened to be
made a party to, any threatened, pending or completed action, suit or
proceeding, whether or not by or in the right of the Corporation, and whether
civil, criminal, administrative, investigative or otherwise, by reason of the
fact that such person is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise. The indemnification and right to
advancement of expenses provided herein shall not be deemed to limit the
right of the Corporation to indemnify any other person to the fullest extent
permitted by the Delaware Law, nor shall they be deemed exclusive of any
other rights to which any person seeking indemnification from the Corporation
may be entitled under any agreement, vote of stockholders or disinterested
directors, or otherwise, both as to action in such person's official capacity
and as to action in another capacity while holding such office.
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SECTION 7.02 INSURANCE. Upon resolution passed by the Board, the
Corporation may purchase and maintain insurance on behalf of any person who
is or was a director, officer, employee or agent of the Corporation, or is or
was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust
or other enterprise against any. liability asserted against him and incurred
by him in any such capacity, or arising out of his status as such, whether or
not the Corporation would have the power to indemnify him against such
liability under the provisions of this Article.
SECTION 7.03 CONSTITUENT CORPORATIONS. For the purposes of this
Article, references to "the Corporation" include all constituent corporations
absorbed in a consolidation or merger as well as the resulting or surviving
corporation, so that any person who is or was a director, officer, employee
or agent of such a constituent corporation or is or was serving at the
request of such constituent corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise shall stand in the same position under the provisions of this
Article with respect to the resulting or surviving corporation as he would if
he had served the resulting or surviving corporation in the same capacity.
SECTION 7.04 OTHER ENTERPRISES AND SERVING AT CORPORATION'S REQUEST.
For purposes of this Article, references to "other enterprises" shall include
employee benefit plans; and references to "serving at the request of the
Corporation" shall include any service as a director, officer, employee or
agent of the corporation which imposes duties on, or involves services by,
such director, officer, employee, or agent with respect to an employee
benefit plan, its participants, or beneficiaries.
ARTICLE VIII
MISCELLANEOUS
SECTION 8.01 SEAL. The Board shall provide a corporate seal, which
shall be in the form of a circle and shall bear the name of the Corporation
and words and figures showing that the Corporation was incorporated in the
State of Delaware and the year of incorporation.
SECTION 8.02 REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The
Chairman of the Board, the President, or any Vice President, or any other
person authorized by resolution of the Board of Directors by any of the
foregoing designated officers, is authorized to vote on behalf of the
Corporation any and all shares of any other corporation or corporations,
foreign or domestic, standing in the name of the Corporation. The authority
herein granted to said officers to vote or represent on behalf of the
Corporation any and all shares held by the Corporation in any other
corporation or corporations may be exercised by any such officer in person or
by any person authorized to do so by proxy duly executed by said officer.
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SECTION 8.03 WAIVER OF NOTICES. Whenever notice is required to be given
by these Bylaws or the Certificate of Incorporation or by law, the person
entitled to said notice may waive such notice in writing, either before or
after the time stated therein, and such waiver shall be deemed equivalent to
notice.
SECTION 8.04 CONSTRUCTION AND DEFINITIONS. Unless the context requires
otherwise, the general provisions, rules of construction, and definitions in the
General Corporation Law of the State of Delaware shall govern the construction
of the Bylaws. Without limiting the generality of the foregoing, the singular
number includes the plural, the plural number includes the singular, and the
term "person" includes both a corporation and a natural person.
SECTION 8.05 AMENDMENTS. These Bylaws, or any of them, except as
specifically provided herein or in the Certificate of Incorporation, may be
altered, amended or repealed, and new Bylaws may be made, (i) by the Board, by
vote of a majority of the number of directors then in office as directors,
acting at any meeting of the Board, or (ii) by the stockholders, at any annual
meeting of stockholders, without previous notice, or at any special meeting of
stockholders, PROVIDED, that notice of such proposed amendment, modification,
repeal or adoption is given in the notice of special meeting. Any Bylaws made or
altered by the stockholders may be altered or repealed by either the Board or
the stockholders.
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CERTIFICATE OF SECRETARY
The undersigned, being the duly elected Secretary of PAULA Financial, a Delaware
corporation, hereby certifies that the Bylaws to which this Certificate is
attached were duly adopted by the Board of Directors of said Corporation on
___________, 1997.
-----------------
Bradley K. Serwin
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APPENDIX C
CERTIFICATE OF INCORPORATION
OF
PAULA FINANCIAL
ARTICLE I
NAME OF CORPORATION
The name of this Corporation is PAULA Financial.
ARTICLE II
REGISTERED OFFICE
The address of the registered office of the Corporation in the State of
Delaware is 9 East Loockerman Street, Dover, County of Kent, and the name of
its registered agent at that address is National Corporate Research, Ltd.
ARTICLE III
PURPOSE
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of
Delaware.
ARTICLE IV
AUTHORIZED CAPITAL STOCK
(a) The Corporation shall be authorized to issue two classes of shares
of stock to be designated, respectively, "Preferred Stock" and "Common
Stock"; the total number of shares which the Corporation shall have authority
to issue is Twenty Million (20,000,000); the total number of shares of
Preferred Stock shall be Five Million (5,000,000) and each such share shall
have a par value of $.01; and the total number of shares of Common Stock
shall be Fifteen Million (15,000,000) and each such share shall have a par
value of $.01.
(b) The shares of Preferred Stock may be issued from time to time in one
or more series. The board of directors is hereby vested with authority to fix
by resolution or resolutions the designations and the powers, preferences and
relative, participating, optional or other special rights, and
qualifications, limitations or restrictions thereof, including without
limitation the dividend rate, conversion or exchange rights, redemption price
and liquidation preference, of any series of shares of Preferred Stock, and
to fix the number of shares constituting any such series, and to increase or
decrease the number of shares of any such series (but not below the number of
shares thereof then outstanding). In case the number of shares of any such
series shall be so decreased, the shares constituting such decrease shall
resume the status which they had prior to the adoption of the resolution or
resolutions originally fixing the number of shares of such series.
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(c) During any period when the holders of any Preferred Stock or any one
or more series thereof, voting as a class, shall be entitled to elect a
specified number of directors, by reason of dividend arrearages or other
provisions giving them the right to do so, then and during such time as such
right continues, and notwithstanding anything in the Corporation's By-Laws to
the contrary, (1) the then otherwise authorized number of directors shall be
increased by such specified number of directors, and the holders of such
Preferred Stock or such series thereof, voting as a class, shall be entitled
to elect the additional directors so provided for, pursuant to the provisions
of such Preferred Stock or series; (2) each such additional director shall
serve for such term, and have such voting powers, as shall be stated in the
provisions pertaining to such Preferred Stock or series; and (3) whenever the
holders of any such Preferred Stock or series thereof are divested of such
rights to elect a specified number of directors, voting as a class, pursuant
to the provisions of such Preferred Stock or series, the terms of office of
all directors elected by the holders of such Preferred Stock or series,
voting as a class pursuant to such provisions, or elected to fill any
vacancies resulting from the death,resignation or removal of directors so
elected by the holders of such Preferred Stock or series, shall forthwith
terminate and the authorized number of directors shall be reduced accordingly.
(d) The Common Stock of the Corporation shall be issued in one class.
Each share of the Common Stock shall be entitled to one vote on all matters
presented to the stockholders of the Corporation, except when the holders of
any Preferred Stock or any one or more series thereof, voting as a class, are
entitled to elect a specified number of directors, by reason of dividend
arrearages or other provisions giving them the right to do so.
ARTICLE V
INCORPORATOR
The name and mailing address of the incorporator of the Corporation is:
Jeanne Carnahan
Corporate Research, Ltd.
9 East Loockerman Street
Dover, Delaware 19901
ARTICLE VI
BOARD POWER REGARDING BYLAWS
In furtherance and not in limitation of the powers conferred by statute,
the board of directors is expressly authorized to make, repeal, alter, amend
and rescind the bylaws of the Corporation.
ARTICLE VII
DIRECTORS
(a) The number of directors of the Corporation shall be exclusively
fixed from time to time by the Board of Directors, except that in the absence
of such designation, such number shall be nine.
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(b) Elections of directors need not be by written ballot unless the
bylaws of the Corporation shall so provide.
(c) The procedures for the nomination and election of directors, other
than as set forth in Section (b) above, shall be governed by Article III of
the Bylaws of the Corporation.
ARTICLE VIII
LIMITATION OF DIRECTOR LIABILITY AND INDEMNIFICATION
To the fullest extent permitted by the Delaware General Corporation Law,
as the same exists or may hereafter be amended (the "Delaware Law"), a
director of the Corporation shall not be liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as director.
If the Delaware Law is amended after the date of the filing of this
Certificate of Incorporation to authorize corporate action further
eliminating or limiting the personal liability of directors, then the
liability of a director of the Corporation shall be-eliminated or limited to
the fullest extent permitted by the Delaware Law, as so amended from time to
time. The Corporation shall indemnify, in the manner and to the fullest
extent permitted by the Delaware Law (but in the case of any amendment
thereto, only to the extent that such amendment permits the Corporation to
provide broader indemnification rights than permitted prior thereto), any
person (or the estate of any person) who is or was a party to, or is
threatened to be made a party to, any threatened, pending or completed
action, suit or proceeding, whether or not by or in the right of the
Corporation, and whether civil, criminal, administrative, investigative or
otherwise, by reason of the fact that such person is or was a director,
officer, employee or agent of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise.
The Corporation may, to the fullest extent permitted by the Delaware Law,
purchase and maintain insurance on behalf of any such person against any
liability which may be asserted against such person. The Corporation may
create a trust fund, grant a security interest or use other means (including
without limitation a letter of credit) to ensure the payment of such sums as
may become necessary to effect the indemnification as provided herein. To the
fullest extent permitted by the Delaware Law, the indemnification provided
herein shall include expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement and any such expenses shall be paid by the
Corporation in advance of the final disposition of such action, suit or
proceeding. The indemnification provided herein shall not be deemed to limit
the right of the Corporation to indemnify any other person for any such
expenses to the fullest extent permitted by the Delaware Law, nor shall it be
deemed exclusive of any other rights to which any person seeking
indemnification from the Corporation may be entitled under and agreement, vote
of stockholders or disinterested directors, or otherwise, both as to action
in such person's official capacity and as to action in another capacity while
holding such office. No repeal or modification of this Article VIII by the
stockholders shall adversely affect any right or protection of a director of
the Corporation existing by virtue of this Article VIII at the time of such
repeal or modification.
3
<PAGE>
ARTICLE IX
CORPORATE POWER
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, and all rights conferred on stockholders
herein are granted subject to this reservation.
ARTICLE X
CREDITOR COMPROMISE OR ARRANGEMENT
Whenever a compromise or arrangement is proposed between this Corporation
and its creditors or any class of them and/or between this Corporation and
its stockholders or any class of them, any court of equitable jurisdiction
within the State of Delaware may, on the application in a summary way of this
Corporation or of any creditor or stockholder thereof or on the application
of any receiver or receivers appointed for this Corporation under the
provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers
appointed for this Corporation under the provisions of Section 279 of Title 8
of the Delaware Code order a meeting of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of this Corporation, as
the case may be, to be summoned in such manner as the said court directs. If
a majority in number representing three-fourths in value of the creditors or
class of creditors, and/or of the stockholders or class of stockholders of
this Corporation, as the case may be, agree to any compromise or arrangement
and to any reorganization of this Corporation as a consequence of such
compromise or arrangement, the said compromise or arrangement and the said
reorganization shall, if sanctioned by the court to which the said
application has been made, be binding on all the creditors or class of
creditors, and/or on all the stockholders or class of stockholders, of this
Corporation, as the case may be, and also on this Corporation.
ARTICLE XI
STOCKHOLDER ACTION
Subject to the rights of holders of any series of Preferred Stock
relating to the ability of such holders of such Preferred Stock to take
action by a consent or consents in writing, no action required to be taken or
which may be taken at any meeting of the stockholders of the Corporation may
be taken without a meeting and the power of stockholders to consent in
writing without a meeting to the taking of any action is denied; PROVIDED,
that any such action may be taken without a meeting, without prior notice and
without a vote, if a consent or consents in writing, setting forth the action
so taken, shall be signed by all of the members of the Board of Directors
entitled to vote with respect to the subject matter thereof and delivered to
the Corporation in the manner set forth in the bylaws of the Corporation.
ARTICLE XII
AMENDMENT OF CORPORATE DOCUMENTS
(a) CERTIFICATE OF INCORPORATION. In addition to any affirmative vote
required by applicable law or any other provision of this Certificate of
Incorporation or specified in any
4
<PAGE>
agreement, and in addition to any voting rights granted to or held by the
holders of any series of Common Stock or Preferred Stock, any alteration,
amendment, repeal or rescission (any "Change") of any provision of this
Certificate of Incorporation (other than any Change that relates solely to
Articles I, II or V hereof) must be approved by a majority of the directors
of the Corporation then in office and by the affirmative vote of at least
66-2/3% of the outstanding shares of voting stock of the Corporation entitled
to vote generally in the election of directors, considered for the purpose of
this Article XII as one class ("Voting Shares"). Subject to the foregoing,
the Corporation reserves the right to alter, amend, repeal or rescind any
provision contained in this Certificate of Incorporation in any manner now or
hereafter prescribed by law.
(b) BYLAWS. In addition to any affirmative vote required by applicable
law and any voting rights granted to or held by the holders of any series of
Preferred Stock, any Change to Section 2.03, 2.08, 2.09, 3.01, 3.02, 3.03,
3.04, 3.06, 3.10, 4.04, 7.01, 7.02, 7.03 or 8.05 of the Bylaws of the
Corporation which Change is not unanimously approved by the directors of the
Corporation then in office must be approved by the affirmative vote of at
least 66-213% of the Voting Shares. Subject to the foregoing, the Board
shall have the power to make, alter, amend, repeal or rescind the Bylaws of
the Corporation.
THE UNDERSIGNED, being the incorporator hereinbefore named, for the
purpose of forming a corporation to do business both within and without the
State of Delaware, and in pursuance of the Delaware General Corporation Law,
does hereby make and file this certificate.
---------------------------------
Jeanne Carnahan
5
<PAGE>
THIS PAGE INTENTIONALLY LEFT BLANK.
<PAGE>
PAULA FINANCIAL
AND SUBSIDIARIES
[LOGO]-Registered Trademark-
SHAREHOLDER
REPORT
FOR THE
TWELVE MONTHS
ENDED
DECEMBER 31,
1996
<PAGE>
TO OUR SHAREHOLDERS / PAULA FINANCIAL & SUBSIDIARIES
PAULA Financial & Subsidiaries recorded consolidated net income of
$917,000 or $0.49 per share on total revenues of $20.0 million for the
fourth quarter of 1996, compared with net income of $1.531,000 or $0.82
per share on total revenues of $14.7 million for the same quarter last
year. For the twelve months ended December 31, 1996, consolidated net
income was $3.9 million or $2.08 per share on total revenues of $65.8
million, compared with net income of $0.3 million or $0.16 per share on
total revenues of $55.0 million for the same period in 1995.
The Insurance Companies reported earned premiums for the fourth
quarter of 1996 of $17.4 million compared to $12.0 million for the prior
year period, an increase of $5.4 million or 45.0%. Through twelve months
of 1996, net earned premiums were $55.5 million compared to $44.5
million in 1995, an increase of $11.0 million or 24.6%. The Insurance
Companies continue to prosper with the expansion of PAULA Insurance
Company's distribution force via selected independent agents and into
new territories which include Oregon, Idaho and Alaska.
The Insurance Companies' losses and loss adjustment expenses (LAE)
for the fourth quarter of 1996 were $8.4 million compared to $4.2
million in 1995, an increase of $4.2 million or 100.0%. For the twelve
months of 1996, losses and LAE were $28.0 million compared to $23.5
million in 1995, an increase of $4.5 million or 19.0%. The Insurance
Companies reduced prior accident year bulk reserves by $2.4 million
during the twelve months of 1996, compared to a reduction of $4.1
million for the same period in 1995. The reduction for 1996 occurred
throughout the year while the reduction for 1995 occurred in the third
and fourth quarters.
Consolidated expenses, excluding losses and policyholder dividends,
for the fourth quarter of 1996 were $9.9 million compared to $7.3
million in 1995, an increase of $2.6 million or 36.0%. Consolidated
expenses for the twelve months of 1996 were $31.6 million, compared to
$28.5 million, an increase of $3.1 million or 11.1%.
PAULA's expansion into new markets is an on-going process. PAULA
Insurance Company has been approved to write workers' compensation
insurance in the States of Florida, New Mexico and Texas. The Company
believes it will begin writing in Florida and Texas in the first quarter
of 1997, and in New Mexico in the second quarter of 1997. The Company
plans to establish a physical presence in Florida and Texas in 1997 and
to service New Mexico from its Phoenix, Arizona facility.
During 1996 Pan American acquired The Sinclair Company agribusiness
insurance agency located in Fresno, California. Also in 1996, PAULA
Insurance Company entered into joint marketing arrangements with two
large regional insurance agencies and acquired a minority equity stake
in each entity. The two agencies are James G. Parker Insurance
Associates of Fresno, California and CAPAX Management & Insurance
Services of Modesto, California. These transactions strengthen the
insurance company's ties to its distribution network and will allow Pan
American and these two agencies to leverage their combined customers,
markets and production force.
/s/ Jeffrey A. Snider
Jeffrey A. Snider
Chairman
Chief Executive Officer
<PAGE>
SUMMARY OF OPERATIONS
<TABLE>
<CAPTION>
For the three months For the twelve months
(in 000's except ratios) ended December 31 ended December 31
-------------------------- ---------------------------
(Unaudited) 1996 1995 1996 1995
<S> <C> <C> <C> <C>
Earned Premiums
Worker's comp. $ 17,167 $ 11,915 $ 54,563 $ 44,224
Group A&H and Life 258 78 941 307
--------- --------- --------- ---------
Total earned premiums $ 17,425 $ 11,993 $ 55,504 $ 44,531
--------- --------- --------- ---------
--------- --------- --------- ---------
Earned premiums by state:
California 10,989 6,722 35,500 27,664
Arizona 2,989 3,553 11,422 12,553
Oregon 3,239 1,718 8,303 4,314
Idaho 177 - 248 -
Alaska 31 - 31 -
--------- --------- --------- ---------
Total $ 17,425 $ 11,993 $ 55,504 $ 44,531
--------- --------- --------- ---------
--------- --------- --------- ---------
Statutory Ratios:
Losses and ALAE ............................................... 50.2% 52.8%
Operating expenses ............................................ 42.4% 44.5%
Dividends ...................................................... 3.0% 7.8%
Combined ratio .................................................. 95.6% 105.1%
</TABLE>
SHAREHOLDER INFORMATION
CORPORATE OFFICE: SHAREHOLDER SERVICES:
PAULA Financial Mr. Bradley K. Serwin
300 N. Lake Ave., Suite 300 Corporate Secretary
Pasadena, CA 91101 PAULA Financial
(818) 304-0401 Telephone 300 N. Lake Ave., Suite 300
(818) 304-1052 Telefax Pasadena, CA 91101
(818) 304-0401 Telephone
(818) 304-1056 Telefax
PUBLIC ACCOUNTANTS
KPMG Peat Marwick, LLP
725 S. Figueroa Street
Los Angeles, CA 90017
(213) 972-4000 Telephone
<PAGE>
CONSOLIDATED BALANCE SHEET / PAULA FINANCIAL & SUBSIDIARIES
<TABLE>
<CAPTION>
(In thousands) Dec. 31 Dec. 31
1996 1995
(Unaudited) (Audited)
<S> <C> <C>
ASSETS:
Investments:
Fixed maturities, available for sale, at market .. $ 81,371 $ 81,053
Equity securities, available for sale, at market.. 2,513 690
Short-term investments ........................... 3,611 2,248
--------- ---------
Total Investments ............................. 87,495 83,991
Cash and cash equivalents ........................... 7,096 4,411
Accrued investment income ........................... 1,483 1,559
Receivables:
Agent balances ................................... 6,274 5,513
Unfilled premiums due ............................ 5,279 5,234
Reinsurance ...................................... 6,599 6,775
Income tax ...................................... 432 2,051
Other ............................................ 316 197
--------- ---------
Total Receivable .............................. 18,900 19,770
Property and equipment, net of depreciation ......... 2,066 2,287
Cost in excess of net assets purchased .............. 1,883 2,198
Deferred federal income tax receivable .............. 4,830 4,161
Other assets ........................................ 1,374 529
--------- ---------
Total assets ........................................ $125,127 $118,906
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
Dec. 31 Dec. 31
1996 1995
(Unaudited) (Audited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY:
Reserves for losses and loss adjustment expenses .... $ 55,720 $ 57,049
Unearned premiums ................................... 10,655 4,609
Accounts payable and accrued expenses ............... 6,068 7,611
Reserve for policyholder dividends .................. 3,981 5,008
Notes payable ....................................... 11,278 10,824
--------- ---------
Total Liabilities ............................. 87,702 85,101
Shareholders' Equity:
Common stock, no par value, 10,000,000 ........... 1,759 1,425
authorized, 1,083,728 and 1,128,670 shares
issued and outstanding at Dec. 31, 1996 and
Dec. 31, 1995, respectively
Preferred stock, no par value, 5,000,000 .......... 14,905 14,905
authorized, 941,177 shares issued and
outstanding at Dec. 31, 1996 and Dec. 31, 1995
Retained Earnings ................................. 23,176 20,724
Net unrealized appreciation on securities ......... 778 1,528
--------- ---------
40,618 38,582
Less: Treasury stock, at cost (2,972) (4,458)
Guarantee of notes payable of ESOP ............ (221) (319)
--------- ---------
Total liabilities and stockholders' equity .......... $125,127 $118,906
--------- ---------
--------- ---------
</TABLE>
KPMG Peat Marwick, LLP, public accountants for the Company, is
currently in the process of completing the 1996 audit for the Company.
The audited financial information will be included in the Annual
Shareholders' Report to be distributed prior to the Annual Meeting.
Management does not expect any material changes from the information
provided within this document.
CONSOLIDATED STATEMENT OF INCOME / PAULA FINANCIAL & SUBSIDIARIES
<TABLE>
<CAPTION>
(In thousands, except amounts per share) For the three months For the twelve months
(Unaudited) ended December 31 ended December 31
-------------------------- ---------------------------
1996 1995 1996 1995
<S> <C> <C> <C> <C>
REVENUES:
Premiums and other revenues:
Net premiums earned ................. $ 17,425 $ 11,993 $ 55,504 $ 44,531
Commissions ......................... 1,153 1,139 4,213 4,022
Investment income ................... 1,208 1,197 4,701 4,817
Realized investment gain (loss) ..... 5 43 444 37
Service fees ........................ 22 296 386 1,434
Other ............................... 179 14 510 136
--------- --------- --------- ---------
Total revenue .......................... 19,992 14,682 65,758 54,977
EXPENSES:
Net losses and loss adjustment ...... 8,404 4,189 28,022 23,540
Policyholder dividends ............. 556 599 1,628 3,438
Commissions and other variable ...... 1,815 702 4,380 2,979
Fixed expenses ...................... 8,131 6,610 27,260 25,511
--------- --------- --------- ---------
Total expenses ......................... 18,906 12,100 61,290 55,468
Income before income taxes ............. 1,086 2,582 4,468 (491)
Provision for income taxes ............. 169 1,051 545 (791)
--------- --------- --------- ---------
Net income ............................. $ 917 $ 1,531 $ 3,923 $ 300
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income per outstanding share ...... 0.49 0.82 $ 2.08 $ 0.16
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit A [logo]
Organizational Chart
PAULA Financial & Subsidiares
<S><C>
________________________
| |
| PAULA Financial |_______________________________________________________
|________________________| |
| |
| |
100% 90%
| |
__________________________________________________|________________________________________________________ |
| | | | | | | |
| | | | | | | |
________|_______ _______|________ ______|______ ________|________ ________|________ _________|________ _______|_______ |
| || || || || || || | |
| || || || Pan American || PAULA Trading || || Pan Pacific | |
|PAULA Insurance ||PAULA Assurance ||Pan American || Underwriters || Company || Agri-Comp || Benefit | |
| Company || Company ||Underwriters,||Insurance Agents ||Insurance Agents || Insurance Agency,||Administrators,| |
| || || Inc. ||and Brokers, Inc.||and Brokers, Inc.|| Inc. || Inc. | |
|________________||________________||_____________||_________________||_________________||__________________||_______________| |
| |
| |
10% |
| |
_______|_______ |
| | |
| PAULA Mexico |__|
| S.A. de C.V. |
| |
|_______________|
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 JUN-30-1997
<DEBT-HELD-FOR-SALE> 81,371 86,605
<DEBT-CARRYING-VALUE> 0 0
<DEBT-MARKET-VALUE> 0 0
<EQUITIES> 1,810 2,929
<MORTGAGE> 0 0
<REAL-ESTATE> 0 0
<TOTAL-INVEST> 86,792 93,379
<CASH> 7,096 6,642
<RECOVER-REINSURE> 172 61
<DEFERRED-ACQUISITION> 1,330 1,805
<TOTAL-ASSETS> 125,127 141,920
<POLICY-LOSSES> 55,720 64,972
<UNEARNED-PREMIUMS> 10,655 13,364
<POLICY-OTHER> 0 0
<POLICY-HOLDER-FUNDS> 3,981 3,586
<NOTES-PAYABLE> 11,279 11,468
14,905 14,905
0 0
<COMMON> 11 10
<OTHER-SE> 11,060 13,403
<TOTAL-LIABILITY-AND-EQUITY> 125,127 141,920
55,504 41,778
<INVESTMENT-INCOME> 4,701 2,499
<INVESTMENT-GAINS> 444 0
<OTHER-INCOME> 5,109 2,063
<BENEFITS> 33,900 28,447
<UNDERWRITING-AMORTIZATION> 25,480 14,752
<UNDERWRITING-OTHER> 1,628 309
<INCOME-PRETAX> 4,750 2,832
<INCOME-TAX> 827 538
<INCOME-CONTINUING> 3,923 2,294
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3,923 2,294
<EPS-PRIMARY> 1.95 1.14
<EPS-DILUTED> 1.95 1.14
<RESERVE-OPEN> 50,274 49,293
<PROVISION-CURRENT> 36,554 29,245
<PROVISION-PRIOR> (2,654) (798)
<PAYMENTS-CURRENT> 13,143 5,130
<PAYMENTS-PRIOR> 21,738 14,075
<RESERVE-CLOSE> 49,293 58,535
<CUMULATIVE-DEFICIENCY> 0 0
</TABLE>
