-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FTkSQubLrxTPzAhnSEkKGT8kc9PZof3NQ91f7NbOsIpOtu9D6sP9TQsxyat1cdf1 EvWYNoJak/12RGti3iegKQ== 0000891618-96-000182.txt : 19960402 0000891618-96-000182.hdr.sgml : 19960402 ACCESSION NUMBER: 0000891618-96-000182 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960401 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL INSURANCE GROUP /CA/ CENTRAL INDEX KEY: 0000815555 STANDARD INDUSTRIAL CLASSIFICATION: INSURANCE AGENTS BROKERS & SERVICES [6411] IRS NUMBER: 943031790 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-16332 FILM NUMBER: 96542993 BUSINESS ADDRESS: STREET 1: 395 OYSTER POINT BLVD STE 500 CITY: SAN FRANCISCO STATE: CA ZIP: 94080 BUSINESS PHONE: 4158726772 MAIL ADDRESS: STREET 1: 395 OYSTER POINT BLVD STREET 2: SUITE 500 CITY: SAN FRANCISCO STATE: CA ZIP: 94080 10-K405 1 FORM 10-K 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------------- FORM 10-K (MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER: 0-16332 NATIONAL INSURANCE GROUP (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 94-3031790 (STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER IDENTIFICATION NO.) ORGANIZATION)
395 OYSTER POINT BLVD., SUITE 500, SO. SAN FRANCISCO, CALIFORNIA 94080 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (415) 872-6772 ------------------------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK (TITLE OF CLASS) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve (12) months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety (90) days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value of voting stock held by nonaffiliates of the Registrant, based upon the closing sale price of the Common Stock on March 1, 1996 on the NASDAQ National Market System was approximately $11,472,299. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of shares outstanding of the registrant's Common Stock as of March 1, 1996 was 4,679,697. DOCUMENTS INCORPORATED BY REFERENCE LISTED BELOW ARE THOSE DOCUMENTS INCORPORATED BY REFERENCE AND THE PART OF THE FORM 10-K INTO WHICH THE DOCUMENT IS INCORPORATED: PROXY STATEMENT FOR 1996 ANNUAL PART III MEETING OF SHAREHOLDERS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS 1. The Business section and other parts of this Report contain forward-looking statements that involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that may cause such a difference include, but are not limited to, those discussed in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Factors Affecting Future Operating Results" 2. INTRODUCTION National Insurance Group ("National" and, collectively with its subsidiaries, the "Company") provides specialized information services and related insurance products to mortgage bankers and other financial institutions located throughout the United States. Utilizing sophisticated computer applications, the Company has developed special-purpose, proprietary software and data base systems which provide information services on an outsourced, remote computer or manual access basis, enabling these institutions to: - determine if the residential or commercial real estate, which is collateral for loans being financed or serviced by such institutions, is located within a federally-designated flood zone (the "Flood Zone Determination Services"); and - monitor the insurance coverage on collateral securing residential mortgages (predominantly one-to-four unit family dwellings), automobile and other consumer loans and leases and, to a lesser extent, commercial mortgages (collectively, the "Tracking Services"). When the Tracking Services indicate that insurance coverage has lapsed, the financial institution may contract with the Company to provide specialized, short-term fire, allied peril or physical damage insurance (generally referred to as "force-placed" insurance), which the Company provides through its wholly-owned subsidiary, Great Pacific Insurance Company (the "Insurance Subsidiary") in certain states and through nonaffiliated insurance companies in the remainder of the United States. In addition, the Company provides flood insurance, for which the risk is assumed by the U. S. Government under the National Flood Insurance Program ("NFIP"). The Insurance Subsidiary is rated "A+" ("Superior") by A.M. Best, a nationally recognized insurance statistical and rating service. The Company began operations in 1972 as an independent general insurance agency (the "Agency") selling shortterm fire and related insurance products written by nonaffiliated companies to financial institutions. In 1977, the Company formed the Insurance Subsidiary to underwrite the business being generated by the Agency. During the mid-1980s, the Company developed computer software systems to provide financial institutions with an economic and efficient alternative to the time-consuming and labor-intensive processes traditionally associated with monitoring and obtaining insurance coverage on collateral securing mortgages, consumer loans and leases and foreclosed properties. In 1991, the Company acquired certain assets of Fastrac Systems, Inc. ("Fastrac") which expanded the Company's Tracking Services to provide outsourcing capabilities. Beginning in the late 1980s, the Company developed and test-marketed its Flood Zone Determination Services which assist a financial institution that is financing improved real estate in meeting its obligation to advise potential borrowers if such property is located within a federally-designated flood zone. Federal law and certain secondary markets require: (i) that regulated real estate lenders and users of such markets determine and disclose to each mortgage loan applicant if the property securing such loan is located in a federally- designated flood zone; and (ii) that borrowers maintain flood insurance as long as the mortgaged property is included within a federally-designated flood zone. To enhance its entry into and penetration of the flood zone determination market, in 1990, the Company purchased certain assets of a flood zone determination competitor. 1 3 The Company's information services and insurance products are marketed nationwide by its direct sales force to mortgage bankers and other financial institutions (including mortgage origination/servicing companies, commercial banks, savings and loans, credit unions and automobile leasing firms). Additional sales are made, on an indirect basis, through independent sales representatives and insurance agents and brokers. MARKET OVERVIEW Flood Zone Determination Services Market The Company markets its Flood Zone Determination Services and, in certain cases, flood insurance, to mortgage lenders, including mortgage bankers, commercial banks and savings and loans. In the late 1980s, the Company utilized its proprietary technology to develop a data base which enables it to determine whether or not a specific street address is located in a Special Flood Hazard Area ("SFHA"), as defined by the Federal Emergency Management Agency ("FEMA"). The Company's data base was developed by merging about 65,000 of the approximately 90,000 flood maps which have been developed by FEMA under the NFIP, which do not contain address-specific information, with a geographic data base which contains address-specific information. In addition, for those addresses not in the Company's data base, the Company makes these determinations manually using the FEMA flood maps, census maps, parcel maps, subdivision maps, tract maps, as well as aerial photographs and other available information. The National Flood Insurance Reform Act of 1994, signed into law by the President on September 23, 1994 ("Flood Reform Act"), affirmed existing requirements that borrowers must be informed prior to loan closing whether or not their property is located in an SFHA and, if so located, flood insurance must be purchased for all loans made by federally regulated institutions and loans purchased by Federal agencies, such as Fannie Mae and Freddie Mac. The Flood Reform Act expanded existing law by requiring that those lenders review loans secured by real property located in areas which have been subject to remapping by FEMA and, in certain instances, requiring borrowers to place in force flood insurance if their property is determined to be located in an SFHA. The Flood Reform Act further allows a lender to charge a borrower a reasonable fee for such flood zone determination services and requires that the provider of such services guarantee the accuracy of its flood zone determinations. Insurance Tracking Services Market The Company markets its Tracking Services to mortgage bankers and financial institutions that own or service loan and lease portfolios ("Servicers"). In many cases, the Company also sells force-placed insurance to customers that use its insurance tracking services. See "Specialized Insurance Market". Servicers generally have a need to monitor whether insurance is maintained on the real property or collateral for the loan or lease. The Company has developed special-purpose, proprietary systems which track insurance information on all types of loan and lease portfolios. The Company primarily focuses its marketing efforts on Servicers with mortgage loan, consumer loan (primarily automobile) or automobile lease portfolios. Specialized Insurance Market The Company markets its specialized insurance including force-placed and, in certain cases, flood insurance, to mortgage bankers and financial institutions that own or service loan portfolios. Servicers generally monitor whether insurance is maintained on the real property or collateral for the loan. In the event a borrower allows insurance to lapse, Servicers may order force-placed insurance from the Company. The Company sells force-placed insurance to customers that use its Tracking Services and to customers which track their own loans and manually order such insurance. The Company primarily sells flood insurance to customers that also use its Flood Zone Determination Services. See "Flood Zone Determination Services Market" and "Insurance Tracking Services Market". 2 4 INFORMATION SERVICES Tracking Services The Company, through its wholly-owned subsidiary, Fastrac, provides its Tracking Services to financial institutions located throughout the United States. The system utilizes Company-developed special-purpose, proprietary software and database systems to provide multiple tracking features for mortgages, automobile and personal property loan and automobile lease portfolios, as well as for portfolios of properties which have been foreclosed upon by financial institutions ("Real Estate Owned" or "REO"). The Tracking Services may be customized to meet the specific needs of each customer and provide automated insurance tracking and data processing services, such as tracking of whether or not insurance is in force, processing correspondence, ordering and canceling insurance coverage and accounting for multiple premium transactions. These processes have traditionally been paper and labor intensive. The Company will either process a customer's insurance transactions at the Company's facilities ("outsourcing"), or furnish to the customer remote computer access to the Company's central system. The Company believes its Tracking Services enable financial institutions to track insurance coverage more efficiently and accurately and to reduce their internal labor costs. Flood Zone Determination Services The use of the Company's on-line computerized Flood Zone Determination Services system is offered nationwide to financial institutions, through the Company's wholly-owned subsidiary, Pinnacle Data Corporation. The proprietary system is an address-specific database which determines whether or not a particular property address is located in an SFHA and enables users to access the Company's database using computer time share, batch processing or electronic data interface services. In the event an address is not in the database, the Company manually renders the determination. In addition, customers may submit their determination requests by fax. The Flood Zone Determination Services system also prints flood zone certificates, certain disclosure notices, flood insurance policy rating information and, for some customers, flood insurance policies. In addition, the Company introduced life of loan service in 1991, whereby the Company will automatically notify financial institutions of changes in the SFHA status of properties in their mortgage loan portfolios for the period during which their agreement with the Company is in effect, or throughout the term of the loan, depending upon the fee paid for the life of loan service. Competition The insurance tracking industry is highly competitive. The major competitors in the tracking industry include American Security Insurance Company, American Sterling Insurance Group, Balboa Life and Casualty, Insureco Inc. and numerous other providers. Management believes that the most significant factors affecting competition are speed, accuracy and responsiveness of service, price and financial strength. The Company believes it competes favorably with respect to these factors. The flood zone determination business is also highly competitive. The major competitors known to management include Transamerica Flood Hazard Certification, First American Flood Data Services, Inc., Geotrac, Palma-Lazar & Ulsh, Inc., Lereta Corporation, National Flood Certification Services, Inc., National Flood Information Services, Flood Zones, Inc. and numerous other providers. Management believes that the most significant factors affecting competition are speed and responsiveness of service, accuracy, breadth of area covered, price and financial strength. The Company believes it competes favorably with respect to these factors. INSURANCE PRODUCTS The Company provides the following specialized insurance products to its Tracking Services and Flood Zone Determination Services customers, other financial institutions and insurance agents and brokers. 3 5 Force-placed Insurance Force-placed insurance is purchased by financial institutions when their borrowers, whose loans are secured by real property, fail to provide the financial institutions with adequate evidence of fire and certain allied perils insurance covering improvements to real property. The financial institutions pay insurance premiums directly to the Company and ordinarily are entitled to reimbursement of the premiums paid to the Company from their borrowers in accordance with the terms of their loans. In the Company's experience, approximately 60% of force-placed insurance coverage terminates or is canceled within approximately forty (40) days of the date the policy is issued, but some policies remain in force for periods of up to one (1) year. The Company also offers REO insurance to financial institutions for properties on which they have foreclosed. REO insurance is generally issued for thirty (30) day periods, and provides coverage similar to the coverage provided under force-placed policies. REO insurance premiums may be higher than force-placed premiums because of the higher risks involved in insuring REO property, which is often vacant. Financial institutions ordinarily require immediate coverage for force-placed and REO insurance, but generally do not have readily available underwriting information. Due to the lack of underwriting information, the Company usually calculates its premiums on flat rates, and covers almost all improvements on real properties submitted by financial institutions within predesignated limits and territories. See "Insurance Operations -- Underwriting". This method, while commonly used by force-placed insurers, is unusual in the insurance industry which traditionally underwrites each risk on an individual or class basis. The Company may terminate relationships with financial institutions and insurance agents and brokers which request coverage for properties that have significantly higher-than-average risks or for other reasons. When an insurance policy is canceled for any reason, the Company is required to refund, at a minimum, an unearned premium calculated pursuant to applicable statutes or regulations, unless a minimum earned premium has been established. The Company's primary customers for force-placed and REO insurance are mortgage bankers and financial institutions which provide mortgages on one-to-four unit dwellings, apartment buildings and commercial buildings. The net premiums earned by the Company on one-to-four unit dwellings accounted for approximately 80% of the Company's force-placed and REO business for fiscal years 1991 through 1995. The Company also offers force-placed automobile and personal property physical damage insurance products to financial institutions with loans secured by automobiles or personal property. The insurance and service needs of such financial institutions are similar to the needs of financial institutions with loans secured by real property. These financial institutions are serviced primarily on an outsourcing basis. The Company writes force-placed and REO insurance on a direct basis in numerous states. The Company assumes some of the risk and premium on force-placed and REO insurance in other states by being the primary reinsurer on such business generated by the Agency. See "Insurance Operations -- Agency Operations". Flood Insurance In 1987, the Company entered into an agreement with the Federal Insurance Administration of FEMA enabling the Company to issue flood insurance polices in the Write Your Own Program ("WYO Program"). Under the WYO Program, insurance companies are authorized by FEMA to write flood insurance, and 100% of each risk is ceded to FEMA. The Company receives a commission based upon a percentage of premium for each policy it writes under the WYO Program. The Company provides its flood insurance policies under the WYO Program to customers who utilize its Flood Zone Determination Services and through insurance agents and brokers. Competition The Company's major competitors in the highly competitive force-placed insurance industry include the major competitors the Company confronts in the insurance tracking industry. See "Information Services -- Competition". The flood insurance business is also very competitive and is serviced by approximately 100 WYO carriers and other carriers offering flood insurance products that are underwritten by private carriers, 4 6 many of which competitors have greater financial, marketing and other resources than the Company. Management believes that the most significant factors affecting competition in the specialized insurance industry include speed and responsiveness of service, breadth of insurance coverage and services offered, amount of commissions paid, price and financial strength. The Company believes it competes favorably with respect to these factors. INSURANCE OPERATIONS Agency Operations The Agency, a wholly-owned subsidiary of the Company, is a general insurance agent for the Insurance Subsidiary and other insurance companies. The Agency has entered into agency agreements to sell force-placed and REO insurance in several states where the Company does not write insurance on a direct basis. These insurance companies are not affiliated with the Company. They are Empire Fire and Marine Insurance Company, covering Maine, New Hampshire and West Virginia, and Universal Underwriters Insurance Company, covering New York. Under the agency agreements, the unaffiliated insurance companies pay the Agency commissions for policies sold. These agency agreements allow the Agency to initiate and maintain relationships with customers and to continue these relationships following termination of the agency agreements. The Agency also markets flood insurance policies on behalf of the Company and other WYO Program insurance companies. The Agency is currently licensed and regulated as an insurance agent and broker in California and as a nonresident insurance agent and/or broker in 34 other states and the District of Columbia. See "Regulation". Underwriting Insurance companies traditionally underwrite risks individually or by class. Since financial institutions usually do not have the underwriting information traditionally required by many insurance companies to issue fire or personal property physical damage insurance at the time that financial institutions require insurance coverage, the Company, like many of its force-placed insurance competitors, insures for a flat premium rate almost all property within predesignated limits and territories without the application of underwriting criteria to individual risks. The Company determines its flat premium rate based on its underwriting experience and knowledge of the industry in which it operates. The Company uses actuaries to determine such premium rates, only where mandated by law, regulations or by unaffiliated insurance companies it represents as an agent. Accordingly, the Company may be insuring individual risks that it might not have insured if it had information obtained in the traditional underwriting process. Policies and Endorsements For its force-placed insurance products, the Company uses its own policy language, the policy language of companies it represents as an agent, and the policy language required by applicable law or regulation, together with forms extending coverage and lender loss-payable forms giving financial institutions certain rights. The Company customizes its policy language and forms to meet the specific needs of its customers. The Company has also developed some special endorsements, including one which provides that some force-placed insurance is in excess of other insurance. For flood insurance, the Company uses policy language provided by FEMA. The maximum limit of the Company's insurance coverage overall is generally $3 million per property location for force-placed insurance, $500,000 per location for REO insurance, and $100,000 for force-placed physical damage insurance. In certain cases, the Company grants customers a higher maximum limit and, additionally, the Company may underwrite risks outside of predesignated limits and, in some cases, may use underwriting information furnished by financial institutions, but, to date, such underwritten risks have not represented a material portion of the Company's net premiums earned. For flood insurance, the Company uses coverage limits and rates provided by FEMA. 5 7 Insurance Operating Ratios The underwriting experience of insurance companies is traditionally measured by the statutory "combined ratio". The combined ratio, calculated on a SAP basis, is the sum of: (i) the ratio of losses and LAE incurred to net premiums earned (the "loss ratio"); and (ii) the ratio of the underwriting and operating expenses to net premiums written (the "expense ratio"). The approximate SAP underwriting profit (loss) is reflected by the extent to which the combined ratio is less (or greater) than 100%. The following table shows, for the periods indicated, the Insurance Subsidiary's loss ratio, expense ratio and combined ratio.
FOR THE YEARS ENDED DECEMBER 31, --------------------------------------------- 1991 1992 1993 1994 1995 ----- ----- ----- ----- ----- Loss ratio................................. 33.8% 37.1% 38.5% 37.8% 35.5% Expense ratio.............................. 59.3% 50.5% 53.4% 55.7% 66.6% Combined ratio............................. 93.1% 87.6% 91.9% 93.5% 102.1% Property and casualty industry combined ratio(1)................................. 108.9% 115.7% 106.9% 108.5% 106.4%
- --------------- (1) Based on property and casualty insurance industry statistics published by A.M. Best as of December 31, 1994. Industry statistics for 1995 are preliminary estimates available from A.M. Best as of the date of this report. The Company does not currently write any casualty insurance. The premium-to-surplus ratio of an insurance company measures the relationship of net premiums written in a given period (direct premiums written plus reinsurance assumed less returned premiums and reinsurance ceded to other carriers) to surplus (admitted assets less liabilities), all determined on a SAP basis. There are no regulations in California requiring maintenance of any particular premium-to-surplus ratio. However, regulatory authorities regard this ratio as an important indication of an insurance company's ability to withstand abnormal loss experience and prefer to see a ratio of not more than a ratio of 3-to-1 of net written premium to surplus. The Insurance Subsidiary's premium-to-surplus ratio for the periods indicated are shown in the following table.
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------- 1991 1992 1993 1994 1995 ---- ---- ---- ---- ---- Net premiums written to surplus ratio............. 1.2 1.2 1.0 0.8 0.6 Property and casualty industry average(1)......... 1.4 1.4 1.3 1.3 1.1
- --------------- (1) Based on property and casualty insurance industry statistics published by A.M. Best as of December 31, 1994. Industry statistics for 1995 are preliminary estimates available from A.M. Best as of the date of this report. The Company does not currently write any casualty insurance. Loss and LAE Reserves The Company is required to maintain adequate reserves for the payment of anticipated eventual losses arising from claims which have been reported to it and claims which have been incurred but not yet reported. A loss and LAE reserve is established in an amount estimated by the Company to be sufficient to cover its costs of settling claims. The amount of this reserve is usually based upon management's experience with similar losses and, when available, the report of an outside adjuster. In addition a reserve account is established to cover claims for losses that have been incurred but are not yet reported in an amount estimated by the Company to be sufficient to cover its costs of unreported losses. The amount of this reserve is based upon statistical analyses and historical trends. Reserve amounts are necessarily based on management's informed estimates and judgments using data currently available to them. As additional experience and other data become available and are reviewed, estimates and judgments may be changed which result in adjustments in operating results for the period in which such changes are made. Unlike many other types of losses, such as liability losses, losses relating to force-placed and flood insurance are usually known and reported to an insurance carrier promptly; the amount of the loss is usually easier to determine promptly than other types of insurance losses; and, claims are usually settled without prolonged litigation, meaning that the 6 8 risks are "short-tailed". As a result, more timely information is usually available to calculate and evaluate the adequacy of reserves on known and unreported claims than with many other lines of insurance. The Company's loss and loss adjustment expense reserves are reviewed on an annual basis by unaffiliated actuaries. The Company's most recent actuarial review of such reserves as of December 31, 1995 concluded that the reserves (i) met the requirements of the insurance laws of California, (ii) were computed in accordance with accepted loss reserving standards and principles and (iii) made a reasonable provision for all unpaid loss and loss expense obligations of the Company under the terms of its policies and agreements. There are no differences between reserves determined in accordance with generally accepted accounting principles and the reserves established by the Company based upon accounting principles and practices prescribed or permitted by insurance regulatory authorities. The Company's estimate of loss reserves includes an implicit provision for inflation. The Company does not discount loss reserves. See Note 2 of Notes to Consolidated Financial Statements for the Company's accounting policy. The Company's loss reserves include losses reinsured by other companies. The estimated recoveries from reinsurers are included in net premiums and accounts receivable. See "Reinsurance" and Note 10 of Notes to Consolidated Financial Statements. The following table provides the reconciliation of reserves for losses and LAE for the periods indicated:
FOR THE YEARS ENDED DECEMBER 31, ----------------------------- 1993 1994 1995 ------ ------- ------ Reserves for losses and LAE at beginning of year........ $3,731 $ 5,628 $3,360 ------ ------- ------ Losses and LAE: Provision for losses and LAE for claims occurring in current year....................................... 9,705 7,627 6,378 Increase (decrease) in estimated losses and LAE for claims occurring in prior years.................... (753) 246 (334) ------ ------- ------ 8,952 7,873 6,044 ------ ------- ------ Losses and LAE payments for claims occurring during: Current year.......................................... 4,607 4,664 4,329 Prior years........................................... 2,448 5,477 2,020 ------ ------- ------ 7,055 10,141 6,349 ------ ------- ------ Reserves for losses and LAE at end of year.............. $5,628 $ 3,360 $3,055 ====== ======= ======
The following table shows how reserves for losses and LAE may be re-estimated based on experience in subsequent years. The first line presents the reserves as originally reported at the end of the calendar year. Each calendar year end reserve includes the estimated liabilities for losses and LAE for that year and the re-estimated remaining liabilities for all prior years. The second section sets forth, as of the end of successive years, the cumulative amounts paid for those claims that as of the calendar year-end, were reported but unpaid, or incurred but not reported. The last line, cumulative redundancy (deficiency), compares the latest re-estimated reserve amount to the reserve amount as originally established. A redundancy indicates the 7 9 original estimate was higher than the current estimate; a deficiency indicates the original estimate was lower than the current estimate.
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------------------- 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 ---- ------ ------ ------ ------ ------ ------ ------ ------ ------ Balance sheet reserves for losses and LAE..................................... $888 $1,579 $1,942 $2,195 $1,776 $4,702 $3,731 $5,628 $3,360 $3,055 Cumulative amount paid as of: One year later.......................... $600 $1,117 $1,697 $1,634 $1,336 $4,391 $2,448 $5,477 $2,020 -- Two years later......................... 601 1,307 1,916 1,923 1,837 4,551 2,645 5,822 -- -- Three years later....................... 688 1,323 2,061 2,104 1,917 4,763 2,679 -- -- -- Four years later........................ 667 1,339 2,191 2,157 2,013 4,826 -- -- -- -- Five years later........................ 696 1,376 2,213 2,183 2,013 -- -- -- -- -- Six years later......................... 715 1,386 2,222 2,183 -- -- -- -- -- -- Seven years later....................... 715 1,386 2,222 -- -- -- -- -- -- -- Eight years later....................... 715 1,386 -- -- -- -- -- -- -- -- Nine years later........................ 715 -- -- -- -- -- -- -- -- -- Reserves reestimated as of: One year later.......................... $815 $1,482 $2,159 $1,807 $1,769 $4,817 $2,978 $5,781 $3,026 -- Two years later......................... 698 1,447 2,033 2,060 1,897 4,660 2,652 5,844 -- -- Three years later....................... 754 1,460 2,122 2,120 1,920 4,772 2,672 -- -- -- Four years later........................ 692 1,352 2,191 2,158 2,013 4,838 -- -- -- -- Five years later........................ 710 1,376 2,214 2,183 2,013 -- -- -- -- -- Six years later......................... 715 1,386 2,222 2,183 -- -- -- -- -- -- Seven years later....................... 715 1,386 2,222 -- -- -- -- -- -- -- Eight years later....................... 715 1,386 -- -- -- -- -- -- -- -- Nine years later........................ 715 -- -- -- -- -- -- -- -- -- Cumulative redundancy (deficiency)........ $173 $ 193 $ (280) $ 12 $ (237) $ (136) $1,059 $ (216) $ 334 --
The cumulative redundancies (deficiencies) noted in the above table are a result of the reserving process which, as discussed above, is based upon management judgment and estimates that are subject to adjustment as additional information becomes known. The Company believes that the current reserves adequately represent management's best estimate of liability for foreseeable claims. Investments Insurance company investments must comply with applicable laws and regulations which prescribe the kind, quality and concentration of investments. In general, these laws and regulations permit investments, within specified limits and subject to certain qualifications, in federal, state and municipal obligations, corporate bonds, preferred and common equity securities, real estate mortgages and real estate. As of December 31, 1995, the Company had $37 million of investment assets. The Insurance Subsidiary held approximately $34 million of those investments. The Company's investment policy is determined by the Company's Board of Directors and is reviewed on a quarterly basis. Pursuant to its investment policy, the Company concentrates its investments in certificates of deposit, treasury securities and state and municipal issued securities. At the time of purchase, the Company has the ability and the intent to hold these securities to maturity. The Company also maintains a large portion of its investments in short-term instruments in order to maintain the ability to fund large losses of the Company's insureds, should they occur. The following tables reflect the investments of the Company (dollars in thousands). The table set forth below reflects the average amount of investments, income earned and annualized yield thereon for the three (3) years ended December 31, 1995.
FOR THE YEARS ENDED DECEMBER 31, ------------------------------- 1993 1994 1995 ------- ------- ------- Average investment.................................... $37,202 $40,982 $38,080 Net investment income................................. 1,797 1,836 2,042 Average annualized yield.............................. 4.8% 4.5% 5.4%
8 10 The following table summarizes by type, the investments of the Company as of December 31, 1995 (dollars in thousands). The Company's investments are either insured by the Federal Deposit Insurance Corporation or have one of the top two designations from the National Association of Insurance Commissioners ("NAIC"), which correspond to an "investment grade" rating.
PERCENT OF AMOUNT TOTAL ------- ------- Short-term investments............................................ $ 5,426 14.6% Certificates of Deposit........................................... 14,061 37.6% U.S. Government-backed securities................................. 2,655 7.2% Obligations of states and municipalities.......................... 12,735 34.3% Equity securities................................................. 2,271 6.1% Mortgage-backed securities........................................ 54 .2% ------- ----- Total investments....................................... $37,202 100.0% ======= =====
The table set forth below indicates the expected maturity distribution of the Company's fixed income securities and short-term investments as of December 31, 1995 (dollars in thousands).
PERCENT OF AMOUNT PORTFOLIO ------- ---------- One year or less................................................ $17,431 49.9% One year to five years.......................................... 10,153 29.1% Six years to ten years.......................................... 5,929 17.0% More than ten years............................................. 1,382 4.0% ------- ----- Total fixed income securities and short-term investments......................................... $34,895 100.0% ======= =====
REGULATION Regulation in General The Insurance Subsidiary is subject to regulation by government agencies in California, its state of domicile, and in the remaining states in which it does business. The nature and extent of such regulation may vary from jurisdiction to jurisdiction, but typically involves prior approval of the acquisition of "control" of an insurance company or of any company controlling an insurance company, regulation of certain transactions entered into by an insurance company with any of its affiliates, the payment of dividends by an insurance company, approval of premium rates for many lines of insurance, standards of solvency and minimum amounts of capital and surplus which must be maintained, limitations on types and amounts of investments, restrictions on the size of risk which may be insured by a single company, licensing of insurers and their agents, deposits of securities for the benefit of policyholders, approval of policy forms, methods of accounting, establishing reserves for losses and loss adjustment expenses and filing of annual report financial statements and other reports with respect to the financial condition of the insurer and other matters. In addition, state regulatory examiners perform periodic examinations of insurance companies. Such regulation is generally intended for the protection of policyholders rather than shareholders. The following represent the more significant insurance regulatory requirements which are or will be imposed on the Insurance Subsidiary and its affiliates. Licensing in Other Jurisdictions In order to issue policies on a direct basis in a state, the Insurance Subsidiary either: (i) must be licensed by such state and usually must have its rates and policy forms approved by such state's insurance regulator; or (ii) under certain circumstances, such as dealings initiated directly by citizens or placements through licensed surplus lines brokers, it may conduct business without being admitted and without being subject to rate and/or 9 11 policy forms approval. The Insurance Subsidiary currently is licensed to write insurance in the following 45 states and the District of Columbia: Alabama Indiana Missouri Rhode Island Alaska Illinois Montana South Carolina Arizona Iowa Nebraska South Dakota Arkansas Kansas Nevada Tennessee California Kentucky New Jersey Utah Colorado Louisiana New Mexico Virginia Connecticut* Maine* North Carolina Washington Delaware Maryland North Dakota Wisconsin Florida Massachusetts Ohio Wyoming Georgia Michigan Oklahoma Hawaii Minnesota Oregon Idaho Mississippi Pennsylvania
- --------------- * Indicates states in which the Insurance Subsidiary has not had its rates and policy forms approved by such state's insurance regulator. In addition, the Insurance Subsidiary is authorized to write insurance in Texas and Vermont on a surplus lines basis. The Insurance Subsidiary is in the process of obtaining requisite approvals to write insurance on a direct basis in substantially all states in which it is not currently licensed and in compliance with all other regulatory requirements. The Agency (or, as to some states, at least one of the Agency's officers) must be licensed in any state in which it operates. The Agency is currently licensed in California and as a nonresident insurance agent and broker in 31 other states and the District of Columbia. Paulette J. Taylor, the Executive Vice President and General Counsel of the Company, is licensed as a broker and/or agent in 50 states and the District of Columbia. Restrictions on Dividends Payable by the Insurance Subsidiary to the Company As a nonoperating holding company, a principal source of National's liquidity is the cash dividends received from its subsidiaries, principally the Insurance Subsidiary. The Insurance Subsidiary is subject to laws and regulations which restrict its ability to pay dividends. Effective January 1, 1994, the Insurance Subsidiary must report all dividends and other distributions to shareholders within five business days following declaration. No dividend or other distribution to shareholders may be paid until at least ten business days after receipt by the Commissioner. Moreover, the Insurance Subsidiary may not pay any extraordinary dividend or make any other extraordinary distribution to its shareholders until thirty days after receipt by the Commissioner of Notice of Declaration thereof and has not within such period disapproved such payment. The interim period will allow the California Department of Insurance (the "Department") to issue an order stopping payment of the dividend if, in the Department's opinion, the payment would in any way violate the California Insurance Code or be hazardous to the insurer's policyholders, creditors or the public. An extraordinary dividend or distribution, is any dividend or distribution which, together with other dividends or distributions made within the preceding twelve months, exceeds the greater of either: (i) 10 percent of the Insurance Subsidiary's policy holder surplus as of the previous December 31, or (ii) The net income of the Insurance Subsidiary, for the twelve month period ending the previous December 31. California law further prohibits the payment of dividends without prior approval of the Department unless the insurer has available "earned surplus". The term "earned surplus" is defined as unassigned funds (surplus) as reported on the insurer's annual statement. Dividends may not be declared out of: (i) earned surplus derived from the mere net appreciation in the value of the assets not yet realized; and (ii) an exchange of 10 12 assets, unless such earned surplus has been realized or the assets received in exchange are currently realizable in cash. An exception to this prohibition is allowed where the insurer's surplus as regards policyholders is: (i) reasonable in relation to its outstanding liabilities; (ii) adequate to the insurer's financial needs; and (iii) the Department's prior approval is obtained. Restrictions on Transactions Among Affiliates of the Insurance Subsidiary In addition to the dividend payment restrictions set forth above, California law places further restrictions upon the ability of an insurance company to enter into certain transactions with its affiliates. In particular, insurers are generally required to disclose to the Department certain in force agreements, relationships subsisting, and transactions which are deemed "material." These include all sales, purchases, exchanges, loans, extensions of credit, investments or other payments made by or to the insurance company within the immediately preceding twelve (12) months provided such payments involve in the net aggregate one-half of one percent or more of the insurer's admitted assets or 5% or more of the insurer's surplus as to policyholders, determined by whichever is greater, as of December 31 of the preceding year. In addition, prior approval of the Department is necessary with respect to sales, purchases, exchanges, loans or extensions of credit, or investments or other payments made by or to the insurance company within the immediately preceding twelve (12) months, provided such payments involve in the net aggregate more than 5% of the insurer's admitted assets or 25% of the insurer's surplus as to policyholders, determined by whichever is less, as of December 31 of the preceding year. These restrictions will apply to all payments made by the Insurance Subsidiary to any of its affiliates, including National and the Agency, as well as all payments made by any of the affiliates to the Insurance Subsidiary. Risk-Based Capital Rules The National Association of Insurance Commissioners ("NAIC") adopted a formula to calculate Risk Based Capital ("RBC") of property and casualty insurance companies and adopted an RBC model for property and casualty insurance companies. Although the final RBC model for property and casualty insurance companies cannot be predicted with certainty, such model can be expected to measure four major areas of risk facing property and casualty insurers: underwriting, credit, investment, and other off-balance sheet risks. Companies having statutory surplus less than that determined necessary by the RBC model will likely be required to adequately address these three risk factors and will be subject to varying degrees of regulatory intervention, depending upon their level of capital inadequacy. The RBC model for the 1995 annual statement did not impact the Insurance Subsidiary's measurement of capital adequacy. Rate Regulation Under Proposition 103 In November 1988, California voters approved Proposition 103. Proposition 103 requires, in part, a one (1) year 20% rate rollback for substantially all property and casualty insurance written in California with the exception of workers' compensation and reinsurance. In May 1989, the California Supreme Court held that insurers would not be obligated to pay the rate rollback mandated by Proposition 103 if they could demonstrate that application of the rollback would produce confiscatory rates which would deny a fair and reasonable rate of return. The California Supreme Court's decision allowed insurers to file and use rates after November 8, 1989 pending approval by the Department. On February 26, 1993, the trial court in 20th Century Insurance Company v. Garamendi, determined that the regulations which included the rollback formula for rate determination were unlawful. The Department appealed the trial court's determination and on August 25, 1994, the California Supreme Court unanimously held that the California Insurance Commissioner's rollback formula which includes a uniform rate of return was constitutional and complied with the intent of Proposition 103. The California Department of Insurance, by letter dated June 13, 1995, denied the Company's application for an adjustment to the Department's formula for determining the amount of the Company's Proposition 103 rollback liability and assessed the 11 13 liability to be $4.5 million. In order to reserve for the $4.5 million, the Company accrued $4.1 million in the second quarter of 1995 in addition to the 1994 accrual of $433,000. This amount is included on the balance sheet as part of the Reserve for return premiums and on the income statement as Non-recurring expense. On October 25, 1995, the Insurance Subsidiary entered into a stipulation and consent order with the California Insurance Department to resolve the Insurance Subsidiary's rollback obligation. Pursuant to that settlement, the Insurance Subsidiary agreed to pay the sum of approximately $4.1 million as a rollback refund to its policyholders for the rollback year. The Company made the refunds during the first quarter of 1996. The rollback refund was paid to each eligible policyholder in the proportion that the written premium for each policyholder bears to the Insurance Subsidiary's total written premiums in California for policies in Proposition 103 lines issued or renewed during the rollback year. Pursuant to the settlement, the rollback refund constitutes the Insurance Subsidiary's entire rollback obligation and fully discharges the Insurance Subsidiary and extinguishes all of its obligations to rollback rates, make rollback refunds to policyholders, or pay interest to rollback policyholders. The Department has agreed to seek no further rollbacks or interest against the Insurance Subsidiary for the rollback year. Also, the settlement approves all rate filings which received interim approvals for current rate levels made since 1989, and all rates and rate levels charged by the Insurance Subsidiary from time to time between November 8, 1989 and the date the settlements were approved. The amount of any refund checks uncashed after a certain period will be escheated to the State of California in accordance with its laws. Although the Company will incur additional costs for processing the refunds, management believes that its existing reserves are adequate. Finally, Proposition 103 requires insurers to submit for prior approval all proposed California rate changes to the Department prior to implementation. The Department is authorized to assess the proposed rates to determine if they are excessive, inadequate or unfairly discriminatory. Rates which violate any of these standards cannot be implemented. These prior approval requirements could limit the ability of the Insurance Subsidiary to implement California rate changes on a going forward basis. Membership in Insolvency Funds and Associations Most states require property and casualty insurance companies to become members of insolvency funds or associations which generally protect policyholders against the insolvency of insurance companies writing business in the state. Members of the fund or association must contribute to the payment of certain claims made against insolvent insurance companies. The maximum contributions required by law in any one (1) year have varied between 1% and 2% of annual premiums written by a member in that state. Most of these payments are recoverable through future policy surcharges and premium tax reductions. The Insurance Subsidiary is required to participate in such insolvency funds and associations and contributed $0 to such funds and associations in 1994 and 1995. The Insurance Subsidiary is also required to participate in various mandatory insurance facilities or to participate in funding mandatory pools. These include individual state facilities such as the state FAIR Plan Associations. The Insurance Subsidiary made certain significant contributions to the California FAIR Plan Association in 1994 and 1995. See "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations." Insurance Regulation Concerning a Change in or the Acquisition of Control of an Insurance Company The Insurance Subsidiary is a property and casualty insurance company organized under the laws of the State of California. The California Insurance Code provides that any acquisition or change in "control" of a domestic insurer or of any person that controls a domestic insurer cannot be consummated without the prior approval of the Commissioner of Insurance. Control is defined to mean the power to direct or cause the direction of the management and policies of the insurer through the ownership of voting securities or by contract. A presumption of "control" arises from the ownership, control, possession with the power to vote or possession of proxies with respect to 10% or more of the voting securities of a domestic insurer or of a person that controls a domestic insurer. Any person who purchases shares of the common stock of the Company 12 14 which, when combined with all other voting securities owned or otherwise controlled by that person, total 10% or more of the voting securities of the Company, will be deemed to have become a controlling person of the Insurance Subsidiary. Any purchase resulting in such an acquisition of control of the Insurance Subsidiary would require prior action by the California Commissioner of Insurance. Reinsurance In order to limit the maximum losses for which it might otherwise be solely responsible under its policies, the Insurance Subsidiary arranges for the payment of a portion of the premiums it receives to other insurance companies pursuant to a series of treaties of reinsurance in return for reinsurance to protect against losses in excess of certain limits. The amount of potential exposure which is not reinsured is referred to as the insurance company's "retention". The Insurance Subsidiary pays treaty reinsurers a percentage of net premiums written and/or earned to cover reinsurance costs. The Insurance Subsidiary, subject to certain limitations, currently retains the first $750,000 of each risk and reinsures the rest up to a maximum $2.5 million per risk. This excess reinsurance is provided in two layers under which the reinsurer's liability arising out of any one event is in aggregate of $1.5 million and $2.0 million, respectively. Each of these reinsurance contracts have a one (1) year term. The Insurance Subsidiary also purchases catastrophic reinsurance, under which the Insurance Subsidiary is protected against a percentage of all losses arising out of any one event up to $15.0 million in excess of the initial $2.5 million of losses which the Insurance Subsidiary incurs. The first layer of catastrophic reinsurance covers 95% of the first $2.5 million in excess of $2.5 million for each occurrence, with a maximum of 95% of $5.0 million for all losses during the term of the contract. The second layer covers 95% of the next $5.0 million over $5.0 million for each loss occurrence, subject to a maximum of 95% of $10.0 million for all losses during the term. The third layer of catastrophic reinsurance covers 95% of the next $5.0 million in excess of $10.0 million for each loss occurrence, subject to a maximum of 95% of $10.0 million for all losses during the term. Each of the catastrophic reinsurance agreements has a one (1) year term. The Insurance Subsidiary from time to time purchases another form of reinsurance called "facultative reinsurance" for an individual policy or group of policies to protect the Insurance Subsidiary and its treaty reinsurers from certain risks or when the amount of insurance exceeds the maximum amount covered under various reinsurance treaties. The Insurance Subsidiary negotiates the cost of facultative reinsurance on a case-by-case basis, and normally passes on such costs to the insured. The purchase of reinsurance does not relieve the Insurance Subsidiary of liability for the full amount of loss in the event the reinsurer fails or refuses to pay the reinsured portion. To date, the Insurance Subsidiary has collected full reinsurance reimbursement on all claims submitted to its reinsurers. During the period from 1986 through 1991, there were no losses reported to the Insurance Subsidiary which resulted in any liabilities to reinsurers under the Insurance Subsidiary's reinsurance policies. During 1992, 1993, 1994 and 1995, the Insurance Subsidiary ceded losses of $1,267,000, $423,000, $213,000 and $6,600 respectively, to reinsurers for losses which occurred in 1992. In 1994 and 1995, the Insurance Subsidiary paid 5.3% and 5.3%, respectively, of its premiums earned for its excess and catastrophic reinsurance treaties. MARKETING The Company's information services and insurance products are marketed nationwide by its seven-person sales and two-person marketing staff located in California, Florida, Kansas, Pennsylvania, Oregon and Georgia. Additional sales are made, on an indirect basis, through independent sales representatives and insurance agents and brokers. Most of the Company's sales personnel are trained to sell and market the Company's full line of services and products, although most of the Company's sales efforts in recent years have focused on the marketing of the Flood Zone Determination Services. In addition to a base salary, the direct sales personnel are compensated by commissions based on a percentage of revenues generated. Management works closely with its sales personnel to customize its Tracking and Flood Zone Determination Services to meet the needs of its 13 15 financial institution customers. The Company uses direct mail and select advertising to augment its sales efforts. SIGNIFICANT CUSTOMERS During the year ended December 31, 1995, Fleet Financenter ("Fleet") accounted for approximately 13% of the Company's total revenues. Fleet Financenter, as part of the Fleet Financial Group's overall company restructuring, decided not to renew its service agreement with the Company which expired in May 1995. EMPLOYEES As of December 31, 1995, the Company employed approximately 390 persons on a full-time basis, approximately 34 persons on a part-time basis and approximately 78 persons on a temporary basis. The Company has never experienced a work stoppage, and at present, no employee is known by management to be represented by a labor organization. The Company considers its employee relations to be good. ITEM 2. PROPERTIES The Company leases its principal offices, located at 395 Oyster Point Boulevard, South San Francisco, California 94080 pursuant to a lease agreement entered into in November 1992. The lease is for approximately 45,600 rentable square feet at lease payments ranging from approximately $49,400 per month in the first year to $66,500 per month in the seventh year. The Company leases approximately 22,000 square feet in Concord, California at approximately $25,500 per month. The Company relocated its loan tracking operations (excluding its computer operations) from Bellevue, Washington, to South San Francisco, California during 1994. In order to accommodate the Company's computer-related operations remaining in Bellevue, Washington, the Company entered into a new 3-year lease commencing approximately May 1, 1995, for approximately 5,060 square feet at a rental of approximately $7,600 per month. The Company also entered into a new lease for approximately 11,860 square feet of office facilities in Springfield, Ohio at lease payments of approximately $9,920 per month for the period August 1, 1995 through April 30, 1999, which lease may be terminated on July 31, 1997 upon three months prior notice and payment of a $3,000 termination fee. Some of the leases require the Company to pay certain operating expenses in addition to the lease payment. ITEM 3. LEGAL PROCEEDINGS The management of the Company is not aware of any material legal proceedings which have been brought or are threatened against the Company, although the Company is regularly engaged in defense of claims arising in connection with its insurance business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. EXECUTIVE OFFICERS OF THE COMPANY The executive officers of the Company and their ages as of April 1, 1996 are as follows:
NAME AGE POSITION WITH NATIONAL - ------------------------- ---- ----------------------------------------------------- John R. Gaulding......... 50 President and Chief Executive Officer Kevin C. Eichler......... 36 Executive Vice President, Chief Financial Officer and Treasurer Paulette J. Taylor....... 48 Executive Vice President, General Counsel and Secretary Ty Yun................... 41 Executive Vice President and Chief Information Officer
Effective April 1, 1996, Mr. Gaulding assumed the responsibilities of President and Chief Executive Officer of the Company, replacing Mark A. Speizer, a co-founder of the Company, who resigned effective October 19, 1995. Mr. Speizer continues to serve as a Director of the Company. Mr. Gaulding, from 1990 to 14 16 1996, was President and Chief Executive Officer of the Claims Solutions Group of ADP, Inc., a leading provider of computer services. From 1986 to 1990 he was President and Chief Executive Officer of Pacific Bell Directory. Mr. Gaulding has also held senior executive positions with Pacific Telesis, a regional Bell telephone holding company, and The MAC Group, a global strategic consulting firm. From October 19, 1995 through March 31, 1996, the chief executive function of the Company was performed by an Office of the President group comprised of Mr. Eichler, Ms. Taylor and Melvyn D. Croner, Chairman of the Board, who also served as acting President and Chief Executive Officer. Mr. Eichler joined the Company during 1995. From 1990 to 1995, he was Executive Vice President and Chief Financial Officer of Mortgage Quality Management, Inc. Mr. Eichler also held senior positions in the Finance Departments of NeXT, Inc. and Microsoft Corporation. Mr. Eichler began his career as a consultant with Touche Ross & Co. and Campos and Stratis. He is a member of the American Institute of Certified Public Accountants. Ms. Taylor has been Executive Vice President, General Counsel and Secretary of National since 1995. She joined the Company as Legal Counsel in 1990 and from 1993 to 1995 served as Senior Vice President -- General Counsel and Secretary. From 1991 to 1992 she served as Vice President -- Senior Counsel and Secretary. From 1989 to 1990, Ms. Taylor was an associate at the law firm of Farella, Braun & Martel and, from 1975 to 1989, was Counsel of Alumax, Inc. Ms. Taylor is a member of the California bar. Mr. Yun joined the Company during 1995. He served, from 1991 to 1995, as Director of Applications and Components Engineering of DHL Systems, Inc. and held executive positions with Oracle Corporation from 1990 to 1991, and with Arthur Andersen & Company from 1977 to 1990. The executive officers serve at the discretion of the Board of Directors of the Company. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock trades on The Nasdaq Stock Market under the symbol NAIG. The following table sets forth the high and low sale prices for the Common Stock and cash dividends declared for the periods indicated.
COMMON STOCK PRICE CASH DIVIDENDS ------------ DECLARED PER HIGH LOW SHARES ---- --- -------------- 1994 First Quarter.......................................... $13 1/2 $8 3/8 $.08 Second Quarter......................................... 10 3/4 5 .08 Third Quarter.......................................... 7 1/4 4 3/4 .04 Fourth Quarter......................................... 6 4 1/2 .00 1995 First Quarter.......................................... 5 1/2 4 3/4 .00 Second Quarter......................................... 7 3/4 6 1/8 .00 Third Quarter.......................................... 6 3/4 5 3/4 .00 Fourth Quarter......................................... 6 1/8 4 5/8 .00
The last closing price of the Common Stock, as reported on the Nasdaq National Market on March 1, 1996, was $6.50 per share. As of March 1, 1996, there were approximately 700 holders of the Common Stock. The Company's Board of Directors meets quarterly to consider the payment of cash dividends based upon an analysis of the Company's financial performance. As a nonoperating holding company, a principal source of National's liquidity is the cash dividends received from its subsidiaries, including the Insurance Subsidiary. The Insurance Subsidiary, consistent with other insurance companies, is subject to laws and regulations which restrict its ability to pay dividends. Under 15 17 California law, the maximum amount of dividends that the Insurance Subsidiary may pay National in any twelve (12) month period without prior regulatory approval is the greater of either: (i) the net income (excluding capital gains and losses) for the preceding calendar year; or (ii) 10% of policyholder surplus as of the previous December 31. For the year ended December 31, 1995, the maximum dividend permitted to be paid in 1996 by the Insurance Subsidiary to National is limited to approximately $2.5 million. See Note 14 of Notes to Consolidated Financial Statements. In addition, insurers are required to report dividends within five (5) days of declaration and at least ten (10) days prior to payment. The interim period will allow the California Department of Insurance (the "Department") to issue an order stopping payment of the dividend if, in the Department's opinion, the payment would in any way violate the California Insurance Code or be hazardous to the insurer's policyholders, creditors or the public. California law further prohibits the payment of dividends without prior Department approval unless the insurer has available "earned surplus". The term "earned surplus" is defined as unassigned funds (surplus) as reported on the insurer's annual statement, excluding earned surplus derived from: (i) unrealized net appreciation of assets; and (ii) an exchange of assets, unless such earned surplus has been realized or the assets received in exchange are currently realizable in cash. An exception to this prohibition is allowed where the insurer's surplus as regards policyholders: (i) is reasonable in relation to its outstanding liabilities; (ii) is adequate to the insurer's financial needs; and (iii) the Department's prior approval is obtained. The Company believes that the implementation of the modified restrictions on the payment of dividends in California will not significantly affect the Company's ability to pay dividends in accordance with its current dividend policy. In addition, the Company believes that the implementation of the restrictions will not have any significant effect on National's liquidity. 16 18 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth certain historical selected consolidated financial data of the Company which has been derived from the audited consolidated statements of the Company for and as of the end of each of the years ended December 31, 1991, 1992, 1993, 1994 and 1995. The following information should be read in conjunction with the financial statements and related notes and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Report.
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------------------- 1991 1992 1993 1994 1995 ------- ------- ------- ------- ------- STATEMENT OF OPERATIONS DATA Net premiums written................... $21,317 $21,317 $22,549 $20,036 $14,956 ======= ======= ======= ======= ======= Net premiums earned.................... $19,143 $24,100 $23,265 $20,858 $17,020 Flood inquiry fees..................... 2,703 6,767 11,693 7,978 10,593 Tracking fees.......................... 1,041 2,594 2,477 3,012 4,786 Net commission income.................. 1,235 1,526 462 1,103 1,502 Net investment income.................. 2,203 1,811 1,797 1,836 2,042 ------- ------- ------- ------- ------- Total revenues................. 26,235 36,798 39,694 34,787 35,943 ------- ------- ------- ------- ------- Loss and LAE........................... 6,463 8,951 8,952 7,873 6,044 Commissions paid to nonaffiliates...... 5,603 5,862 4,989 4,739 4,079 Personnel expenses..................... 6,845 10,069 12,890 13,677 17,708 All other expenses..................... 4,413 7,236 7,532 9,096 9,231 Non-recurring expense.................. -- -- -- 1,020 6,304 ------- ------- ------- ------- ------- Total expenses................. 23,324 32,118 34,363 36,405 43,366 ------- ------- ------- ------- ------- Income (loss) before provision for income taxes........................ 3,001 4,680 5,331 (1,618) (7,423) Provision for (benefit from) income taxes........................ 843 1,514 1,687 (534) (2,559) ------- ------- ------- ------- ------- Net income (loss)...................... $ 2,158 $ 3,166 $ 3,644 $(1,084) $(4,864) ======= ======= ======= ======= ======= Net income (loss) per share............ $ .52 $ .75 $ .85 $ (.23) $ (1.04) Weighted average common and common equivalent shares outstanding....... 4,156 4,198 4,270 4,679 4,679 Dividends per share.................... $ .21 $ .32 $ .32 $ .20 $ .00 BALANCE SHEET DATA Total investments...................... $32,372 $31,395 $43,008 $38,957 $37,202 Total assets........................... $52,370 $50,718 $63,699 $55,092 $52,096 Total shareholders' equity............. $26,989 $28,893 $41,949 $37,290 $32,881
17 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL National Insurance Group provides specialized information services and related insurance products to mortgage bankers and financial institutions located throughout the United States. The Company's primary sources of revenues are premiums and commissions earned from its specialized insurance products, fees billed to customers who use Flood Zone Determination or Tracking Services and investment income. Net premiums written represent direct and assumed premiums generated by the Insurance Subsidiary, less premiums canceled or ceded to other insurers, and adjusted for changes in the reserve for return premiums. Net premiums earned represent net premiums written adjusted for changes in unearned premium reserves. Flood inquiry fees are generated by Flood Zone Determination Services and are based on the number of flood inquiries rendered. The Company provides either one-time flood determinations or higher fee, life-of-loan services where the Company updates the flood determinations over the periods in which the loans are outstanding. Revenues from flood zone determinations are generally related to the volume of mortgage loan originations, both new and refinanced. Tracking fees are generated by Tracking Services and are usually based on the number of loans and leases tracked. Net commission income represents commissions received from nonaffiliated insurance companies for force-placed insurance produced by the Agency and from the Federal Emergency Management Agency ("FEMA") for flood insurance written by the Company. The Company's insurance products include force-placed insurance policies which have stated terms of either up to ninety (90) days ("short-term policies") or six (6) months to one (1) year ("longer-term policies"), most of which are longer-term policies. Premiums for longer-term policies are recorded as revenues when earned. The Company's policies are canceled at a relatively high rate because they generally remain in effect only until financial institutions receive proof that borrowers have obtained their own insurance. At the time the policies are issued, a reserve is established to provide for return of premiums for anticipated cancellations, which has the effect of decreasing net premiums written. The reserve historically has been established at approximately 64% of premiums. Premiums are written directly by the Insurance Subsidiary or by third party insurance companies in certain states where the Insurance Subsidiary is not licensed or where its products are not approved. Over the periods indicated below, the Company assumed 30% to 100% of premiums directed to third party insurance companies after paying ceding commissions. The following table summarizes premiums written net of cancellations during the periods indicated (in thousands):
FOR YEARS ENDED DECEMBER 31, ------------------------------- 1993 1994 1995 ------- ------- ------- Direct Premiums Written............................... $16,522 $23,984 $17,324 Assumed Premiums...................................... 8,992 (1,259) (197) ------- ------- ------- Gross Premiums Written................................ 25,514 22,725 17,127 Gross Premiums Ceded.................................. (2,965) (2,689) (2,171) ------- ------- ------- Net Premiums Written.................................. $22,549 $20,036 $14,956 ======= ======= =======
The Company's strategy includes expanding its authorization to write premium on a direct basis and to reduce premium ceded to reinsurers. At the present, the Company generally retains the first $750,000 of each risk and reinsures the rest up to a maximum of $2.5 million per risk, pursuant to reinsurance arrangements. See "Business -- Regulation Reinsurance" and Note 10 of Notes to Consolidated Financial Statements for a description of the Company's reinsurance arrangements. The Company remains primarily liable to its policyholders in the event any reinsurer is unable or will not fulfill the obligations assumed under reinsurance. As a result of the cost and availability of reinsurance, in the future the Company may elect to retain a higher portion of the risk historically ceded to reinsurers. If the Company were to retain a higher proportion of insured risks, it would increase its exposure to significant losses relating to properties insured by the Company. This increased exposure could have a material adverse effect on the Company's results of operations. 18 20 From 1986 through 1991, there were no losses reported to the Company which resulted in liability to reinsurers under the Company's reinsurance policies. During 1992, 1993 and 1994, the Company ceded losses of $1,267,000, $423,000 and $213,000, respectively, to reinsurers, for losses occurring in 1992 and for which it has been fully reimbursed. There were no losses ceded in 1995. The Company seeks to limit its exposure with respect to any failure by a reinsurer to fulfill its obligations by evaluating the financial condition and rating of members of its reinsurance pool (the Company's policy is to only purchase reinsurance with U.S. insurers rated "A" or better by A.M. Best) at the time of such purchase and by diversifying the reinsurance pool. Loss and loss adjustment expenses ("LAE") represent losses paid related to force-placed insurance underwritten or reinsured by the Insurance Subsidiary, adjusted for changes in reserves for losses that are in the course of settlement and losses that have been incurred but not yet reported. Commissions paid to nonaffiliates represent amounts paid to third party agents and brokers, and other producers related to sales of the Company's services and products. Personnel expenses represent salaries, wages, sales commissions paid to Company employees and related employee benefits. All other expenses primarily consist of occupancy costs, including office rent and utilities, equipment maintenance and depreciation, amortization of acquisition costs, sales and marketing expenses and expenses related to the delivery of products and services such as postage and printing. The Company's effective income tax rate was 32%, 33% and 34% for 1993, 1994 and 1995, respectively, reflecting the 35% federal statutory income tax rate and the net effect of state taxes, less the beneficial effect of tax-exempt investment income earned during the periods. See Note 7 of Notes to Consolidated Financial Statements. In March 1995, the Financial Accounting Standard Board issued Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of long-lived Assets and for long-lived Assets to be disposed of." This statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In determining the recoverability of an asset's carrying value, the Company would estimate the future cash flow expected to result from the use of the assets and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss would be recognized. Measurement of an impairment loss for long-lived assets and identifiable intangibles that the Company expects to hold and use should be based on the fair value of the assets. SFAS No. 121 applies to financial statements for fiscal years beginning after December 15, 1995. The Company will adopt the requirements of SFAS No. 121 in 1996 and has yet to determine the impact of adoption. In October 1995, the Financial Accounting Standard Board issued Statement on Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." Under the provisions of SFAS No. 123, the Company is encouraged, but not required, to measure compensation costs related to its employee stock compensation plans under the fair value method. Under this method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. If the Company elects not to recognize compensation expense under this method, It is required to disclose the pro forma net income and earnings per share effects based on the SFAS No. 123 fair value methodology. SFAS No. 123 applies to financial statements for fiscal years beginning after December 15, 1995. The Company will implement the requirements of SFAS No. 123 in 1996 and has yet to determine if it will adopt the measurement provision recommended by the statement or if it will adopt only the disclosure provisions of the statement. Accordingly, management has not determined the impact on the financial statements that SFAS No. 123 may have. 19 21 RESULTS OF OPERATIONS The following table sets forth certain items as a percent of total revenues for the periods indicated.
FOR YEARS ENDED DECEMBER 31, ------------------------- 1993 1994 1995 ----- ----- ----- Net premiums earned......................................... 58.6% 60.0% 47.4% Flood inquiry fees.......................................... 29.5 22.9 29.5 Tracking fees............................................... 6.2 8.7 13.3 Net commission income....................................... 1.2 3.2 4.2 Net investment income....................................... 4.5 5.2 5.6 ----- ----- ----- Total revenue..................................... 100.0 100.0 100.0 ----- ----- ----- Loss and LAE................................................ 22.5 22.6 16.8 Commissions paid to nonaffiliates........................... 12.6 13.6 11.3 Personnel expenses.......................................... 32.5 39.3 49.3 All other expenses.......................................... 19.0 26.1 25.7 Restructuring charge........................................ -- 2.9 17.5 ----- ----- ----- Total expenses.................................... 86.6 104.5 120.6 ----- ----- ----- Income (loss) before provision for income taxes............. 13.4 (4.5) (20.6) Provision for income taxes.................................. 4.2 (1.5) (7.1) ----- ----- ----- Net income (loss)........................................... 9.2% (3.0)% (13.5)% ===== ===== =====
YEAR ENDED DECEMBER 31, 1994 VERSUS YEAR ENDED DECEMBER 31, 1995 Revenue Total revenue increased from $34.8 million in 1994 to $35.9 million in 1995, an increase of $1.1 million or 3.2%. Net premiums written decreased from $20.0 million in 1994 to $15.0 million in 1995, a decrease of $5.0 million or 25.0%. The decrease in net premiums was principally due to two factors: (1) approximately $4.3 million less business in 1995 from one customer which ceased writing premiums with the Company in early 1995, and; (2) 1994 premiums written included $1.4 million from a significant customer whose loan processing portfolio was sold by the RTC in late 1994 and therefore, the customer did not contribute to premiums in 1995. These decreases were partially offset by additional business from new customers. Net premiums earned decreased from $20.9 million in 1994 to $17.0 million in 1995, a decrease of $3.9 million or 18.7%. The decrease was primarily related to the same factors which caused the decline in net premiums written during the period. Flood inquiry fees increased from $8.0 million in 1994 to $10.6 million in 1995, an increase of $2.6 million or 32.5%. Flood determinations are performed as part of the mortgage loan origination process and the increase in flood inquiry fee revenues is primarily due to the decline in mortgage interest rates and the addition of new customers. Interest rates began to decline during the first quarter of 1995 contributing to increases in loan origination volumes. In addition, the Company added new customers and converted many of its existing customers to the higher priced life-of-loan product as the industry complies with recent federal regulations. Tracking fees for the period increased from $3.0 million in 1994 to $4.8 million in 1995, an increase of $1.8 million or 60.0%. The increase was due to the addition of several new customers. 20 22 Net investment income for the period increased from $1.8 million in 1994 to $2.0 million in 1995, an increase of $200,000 or 11.1%. The increase is due to a rise in interest rates during 1995 which increased the Company's rate of return on investments. Expenses Loss and LAE was $7.9 million in 1994 (37.7% of net premiums earned) and $6.0 million in 1995 (35.5% of net premiums earned), a decrease of $1.9 million or 24.1%. The decrease was due in part to fewer occurrences of catastrophic events in 1995 as compared to 1994. Commissions paid to nonaffiliates decreased from $4.7 million (22.7% of premiums earned) in 1994 to $4.1 million (24.1% of premiums earned) in 1995, a decrease of $600,000, or 12.8%, due primarily to lower commission rates and the loss of premiums from customers who did not renew with the Company. Personnel expenses increased from $13.7 million in 1994 to $17.7 million in 1995, an increase of $4.0 million or 29.2%. The increase in personnel expenses is due to staff additions in response to the volume increases in the Flood Inquire and Tracking fee based business and staff additions in the information systems departments in an effort to enhance the new systems technology. All other expenses increased from $9.1 million in 1994 to $9.2 million in 1995, an increase of $100,000 or 1.1%. The Company incurred expenses of a non-recurring nature in the amount of $6.3 million during 1995. On June 13, 1995, the California Department of Insurance notified the Company that its application for adjustment of its Proposition 103 return premium liability had been denied and the Company accrued an additional $4.1 million for the constitutionally mandated roll-back of insurance premiums under the Proposition. This amount is included on the balance sheet as Reserve for Prop 103 and on the income statement as non-recurring expense. The Company recorded additional non-recurring charges of $1.6 million in connection with the retirements of Mark Speizer who was the Company's Chief Executive Officer and Howard Herman who was the Company's President. The Company also recorded $600,000 for the write-off of software used to provide its information services products. As a result of the above factors, loss before provision for income taxes increased from $1.6 million in 1994 to $7.4 million in 1995, an increase of $5.8 million. YEAR ENDED DECEMBER 31, 1993 VERSUS YEAR ENDED DECEMBER 31, 1994 Revenue Total revenue decreased from $39.7 million in 1993 to $34.8 million in 1994, a decrease of $4.9 million or 12.4%. Net premiums written decreased from $22.5 million in 1993 to $20.0 million in 1994, a decrease of $2.5 million or 11.1%. Approximately $1.0 million of the decrease was due to the Resolution Trust Corporation's decision to sell a significant customer's loan servicing portfolio and another $450,000 is due to the accrual for the refund of premiums earned in 1989 in response to a California Supreme Court decision in favor of the California Department of Insurance's uniform rate of return formula (see Note 9 of Notes to Consolidated Financial Statements). In 1993, the Company also benefitted from the assumption of books of business which increased premiums written for 1993 by a net amount of $1.3 million over 1994. The balance was due to a reduction in premiums ceded under reinsurance treaties. Net premiums earned decreased from $23.3 million in 1993 to $20.9 million in 1994, a decrease of $2.4 million or 10.3%. The decrease was primarily related to the same factors which caused the decline in net premiums written during the period. Flood inquiry fees decreased from $11.7 million in 1993 to $8.0 million in 1994, a decrease of $3.7 million or 31.8%. Flood zone determinations are preformed as part of the mortgage loan origination process and the decline in flood inquiry fee revenues is consistent with the decline in mortgage loan origination and refinance volumes nationwide of approximately 50% beginning in the second quarter of 1994 in response to the sudden and sharp interest rate increases promulgated by the Federal Reserve Board. 21 23 Tracking fees for the period increased from $2.5 million in 1993 to $3.0 million in 1994, an increase of $500,000 or 21.6%. The increase is due to the addition of eight customers to the fee based outsourcing product line. Net commission income increased from $462,000 in 1993 to $1.1 million in 1994, an increase of $638,000 or 138.7%. The increase in net commission income primarily resulted from an increase in premiums underwritten by non-affiliated insurance companies from which the Company collects commissions and increased flood insurance premiums from which the Company receives a commission. Net investment income for the period remained unchanged at $1.8 million for both 1993 and 1994. Although interest rates increased during 1994, there is a lag between interest rate increases and the effects on the yields of the Company's investment portfolio in interest income. In addition, the Company had a gain on the sale of investments of $85,000 in 1993 versus a loss of $52,000 in 1994. Expenses Loss and LAE was $9.0 million in 1993 (38.4% of net premiums earned) and $7.9 million in 1994 (37.7% of net premiums earned). When losses incurred for both 1993 and 1994 are adjusted for losses assumed from the California FAIR Plan ($750,000 in 1993 for losses arising out of the brush fires in Southern California and $600,000 in 1994 for losses arising out of the earthquake in Southern California) then both years have a loss ratio of approximately 35% to earned premiums. Commissions paid to nonaffiliates decreased from $5.0 million (21.4% of premiums earned) in 1993 to $4.7 million (22.7% of premiums earned) in 1994, a decrease of $300,000, or 5.0%, due primarily to the mix of customers with different commission programs. Personnel expenses increased from $12.9 million in 1993 to $13.7 million in 1994, an increase of $800,000 or 6.1%. The increase in personnel expenses is due primarily to: (1) additional personnel expenses required during the first and second quarters of 1994 to support flood zone determination commitments made during the peak volume periods and prior to the sharp reduction in loan origination volumes, and (2) staffing overlaps (redundancies) during the transition period for the relocation of the Companies loan tracking and customer service operations from Bellevue, Washington to its South San Francisco headquarters. All other expenses increased from $7.5 million in 1993 to $9.1 million in 1994, an increase of $1.6 million or 20.8%. Of the $1.6 million increase: (1) approximately, $400,000 was due to taxes and fees on premiums assumed in 1993 but written on a direct basis in 1994; therefore, in 1994, the Company paid the premium taxes; (2) approximately $525,000 is attributed to printing and postage for fee based business and marketing efforts; (3) approximately $100,000 is due to a benefit to expense the Company received in 1993 when it assumed a book of business; (4) approximately $100,000 is due to miscellaneous charges received from the California FAIR Plan; and (5) the balance is due primarily to the recapture of deferred cost accounts, rent and depreciation expense. In the second quarter of 1994, the Company accrued $1.0 million for restructuring charges in connection with the relocation of the Company's loan tracking and customer service operations from Bellevue, Washington to its South San Francisco headquarters. The relocation commenced in June 1994 and it was completed by year end 1994. Total expenses included approximately $360,000 for termination and/or relocation benefits for approximately 25 staff and approximately 19 key personnel. The balance of the restructuring charges are for facilities expenses and the write-off of capitalized costs. As of year end 1994, the Company has realized $195,000 in expenses for the termination and relocation of personnel and $260,000 in expenses for facility and capital writeoffs, and the Company expects that the balance of the accrual will cover the restructuring expenses anticipated during 1995 related to the relocation. The Company expects that upon its completion, the relocation will reduce expenses for rent, travel, staff redundancies and taxes attributable to the Bellevue, Washington business operations, which the Company believes will enable it to recover these restructuring costs in approximately two years. This paragraph contains forward-looking statements reflecting current expectations. There can be no assurance that the Company's actual future performance will meet the Company's current expectations. Investors are strongly encouraged to review the section entitled "Factors Affecting Future Operating Results" for a discussion of factors that could affect future performance. As a result of the above factors, operating income before provision for income taxes decreased from $5.3 million in 1993 to a $1.6 million loss in 1994, a decrease of $6.9 million or 130.0%. 22 24 LIQUIDITY AND CAPITAL RESOURCES The Insurance Subsidiary collects and invests premiums written in advance of the payments for associated claims. In the absence of a catastrophic loss, this timing difference between premium collection and claims payment, combined with investment income, normally provides short-term funds in excess of normal operating demands for cash. As of December 31, 1995, the Company had cash and short-term investments aggregating $13.9 million. Of the Company's cash and short-term investments, $11.2 million is held by the Insurance Subsidiary. Insurance companies, including the Insurance Subsidiary, are subject to laws and regulations which restrict their ability to pay dividends to parent companies or other shareholders. Under California law, the maximum amount of dividends that the Insurance Subsidiary may pay the Company in any twelve (12) month period without prior regulatory approval is the greater of (i) net investment income for the preceding calendar year, or (ii) 10% of policyholders' surplus (shareholders' equity adjusted to a statutory basis) as of the previous December 31. For the year ended December 31, 1995, the Insurance Subsidiary had net investment income of $1.9 million and as of December 31, 1995, statutory policyholders' surplus of $23.7 million. For the year ended December 31, 1995, the maximum dividend permitted to be paid by the Insurance Subsidiary to National was approximately $2.4 million. See "Market for Registrant's Common Equity and Related Stockholder Matters" and Note 14 of Notes to Consolidated Financial Statements. Industry and regulatory guidelines suggest that a property and casualty insurers' annual statutory net written premium should not exceed approximately three times its policyholders' surplus. The Company's surplus ratio is significantly lower than such guidelines. For the year ended December 31, 1995, the Company's net written premium to policyholder surplus ratio was .60 to 1. See "Business -- Insurance Operations -- Insurance Operating Ratios". The Company is not aware of any trends, requirements, commitments, or events that will or are reasonably likely to have a negative impact on the Company's liquidity during 1996. This paragraph contains forward-looking statements reflecting current expectations. There can be no assurance that the Company's actual future performance will meet the Company's current expectations. Investors are strongly encouraged to review the section entitled "Factors Affecting Future Operating Results" for a discussion of factors that could affect future performance. Inflation generally affects the rate of investment return in the securities and financial markets, and increases and decreases in such investment return rates have a corresponding effect on the Company's investment income. FACTORS AFFECTING FUTURE OPERATING RESULTS Earnings Volatility The Company's financial results can be significantly affected by a number of factors, including the volume of force-placed insurance and the rate of cancellation of insurance policies, the addition or loss of significant customers, significant changes in the number of loans or leases being tracked for major customers and catastrophic loss events. For example, in 1992 the Company incurred net losses relating to the Los Angeles riots and Hurricane Andrew of $612,000 and $527,000, respectively. In November 1993, the Company received claims of approximately $650,000 from policyholders for losses arising out of the October and November 1993 series of fires in Southern California. The Company also received an assessment of $725,000 from the California Fair Plan Association, a mandatory insurance pool for certain California real estate, relating to losses from those fires. In addition, revenues from the Company's Flood Zone Determination Services are directly related to the volume of mortgage loan originations, both new and refinanced, and any change in the level of such activity could have a material impact on the Company's performance. See "Significant Customers", "The Insurance Industry", and "Management's Discussion and Analysis of Financial Condition and Results of Operations". 23 25 The Insurance Industry The Company derives a significant amount of its revenues from insurance premiums and investment income. In the event that, for whatever reason, the Company experiences abnormally high losses, purchases reinsurance from reinsurers who will not or cannot pay losses submitted, or other adverse developments occur, then any such event or combination of events could have a material adverse impact on the Company. In addition, insurance companies and others have often been sued under certain legal theories, such as bad faith handling or settlement of claims, which could subject the Company to liability in excess of policy limits. An adverse outcome of any such lawsuit could have a material negative impact on the Company. Reserve Adequacy The Company is required to maintain reserves to cover its estimated ultimate liability for loss and loss adjustment expenses with respect to reported losses and incurred but not reported claims. These reserves are estimates of what the Company expects the ultimate settlement and administration of claims will cost, and are based on known facts and circumstances, predictions of future events, estimates of future trends in claims severity and other variable, subjective factors. No assurances can be given that such estimates will be adequate to cover actual losses incurred by the Company. Any significant changes in the Company's estimate of ultimate losses on reported claims may materially adversely affect the results of the Company's operations in the period reported. The Company has in the past experienced adverse developments in its loss reserves. The Company's loss and loss adjustment expense reserves are reviewed on an annual basis by unaffiliated actuaries. The Company's most recent actuarial review of such reserves as of December 31, 1995 concluded that the reserves (i) met the requirements of the insurance laws of California; (ii) were computed in accordance with accepted loss reserving standards and principles and (iii) make a reasonable provision for all unpaid loss and loss expense obligations of the Company under the terms of its policies and agreements. The Company also maintains a reserve for return premiums which is based upon the Company's historical experience. As is prevalent in the force-placed insurance industry, a substantial amount of the Company's net premiums written are refunded to policyholders. The amount of such refunds can be affected by, among other things, inaccurate or untimely data submitted by customers, which the Company uses as a basis for recording written premiums or the loss of a significant customer. No assurance can be given that the reserve for return premiums will be adequate to cover actual refunded premiums paid by the Company in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Insurance Operations". Underwriting Risks Traditional insurance companies underwrite risks individually or by class, following an in-depth analysis of such risks. Although the Company applies underwriting techniques to a small portion of insured risks, the immediate coverage required by purchasers of force-placed insurance generally requires the Company to write specialized insurance within predesignated limits and geographic area, at a flat rate, without the application of traditional underwriting criteria to individual risks. Accordingly, the Company may be insuring individual risks that it might not have insured had it applied traditional analysis to such risks and may not have adequate spread of risk in a particular geographic area. See "Insurance Operations -- Underwriting". Reinsurance Considerations The Company's business is partially dependent upon its ability to cede risks insured by the Company to reinsurers. The amount, availability and cost of reinsurance are subject to prevailing market conditions, beyond the control of the Company, which can affect the Company's level of business and profitability. The Company is ultimately liable for the reinsured risk if for any reason the reinsurers do not cover or will not pay the Company for the losses of the insureds. As a result of the increased cost and more limited availability of reinsurance, in the future, the Company may elect to retain a higher portion of the risk historically ceded to reinsurers. If the Company were to retain a higher proportion of insured risks, it would increase its exposure to 24 26 significant losses relating to properties insured by the Company. This increased exposure could have a material adverse effect on the Company's results of operation. See "Regulation -- Reinsurance". Flood Zone Determinations The Company derives a substantial portion of its total revenues from fees for Flood Zone Determination Services. These services are primarily provided to assist lenders in complying with federal laws which in many instances require lenders to determine whether property being financed is located in a federally-designated flood zone and require borrowers to obtain flood insurance. Any significant change in federal legislation or secondary market requirements limiting these requirements on lenders or borrowers, or the development by competitors of significantly enhanced service or delivery systems could have a material adverse effect on the Company's business or operating results. The Company also indemnifies its customers from losses resulting from erroneous flood inquiry determinations, where a borrower was not properly advised whether the collateral was located in or out of a federally-designated flood zone. While to date the Company has experienced no significant losses in this regard and maintains reserves equal to its estimate of incurred but unreported indemnification losses, there can be no assurance such reserves will prove adequate in the future. The Company does not maintain errors and omissions insurance coverage against such losses. Rapid Technological Change and New Products; Product Delays The markets for the Company's information services are highly competitive and characterized by rapidly changing technology. The Company believes that its future success will depend, in part, on its ability to identify, develop, install and support new services in a timely fashion, and on market acceptance of such services. No assurance can be given that the introduction of new technologies will enable the Company to gain market share, realize cost savings or increase revenues. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA This information is incorporated hereby by reference to the financial statements listed in Item 14 of Part IV of this Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 25 27 PART III Certain information required by Part III is omitted from this Report in that the registrant will file a definitive proxy statement within one hundred twenty (120) days after the end of its fiscal year pursuant to Regulation 14A (the "Proxy Statement") for its annual meeting of shareholders to be held in May 1996 and the information therein is incorporated herein by reference. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information concerning the Company's directors required by this item is incorporated by reference to "Election of Directors -- Nominees" in the Company's Proxy Statement. Information regarding executive officers is included in Part I hereof under the caption "Executive Officers of the Company" and is hereby incorporated by reference into this Item 10. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference to "Executive Officer Compensation" in the Company's Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference to "Other Information -- Share Ownership by Principal Shareholders and Management" in the Company's Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated by reference to "Certain Transactions" in the Company's Proxy Statement. 26 28 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Report:
ITEM(S) PAGE(S) - ------- ------ (1) Financial Statements: Report of Independent Accountants............................................ 28 Consolidated Balance Sheets, December 31, 1995 and 1994...................... 29 Consolidated Statements of Operations for the years ended December 31, 1995, 1994 and 1993.............................................................. 30 Consolidated Statement of Changes in Shareholders' Equity for the years ended December 31, 1995, 1994, and 1993.......................................... 31 Consolidated Statement of Cash Flows for the years ended December 31, 1995, 1994 and 1993.............................................................. 32 Notes to Consolidated Financial Statements................................... 33-45 (2) Financial Statement Schedules: Report of Independent Accountants on Financial Statement Schedules........... 46 I Summary of Investments Other than Investments in Related Parties.......... 47 II Condensed Financial Information of Registrant (Parent Company)........... 48-51 III Supplementary Insurance Information Concerning Property Casualty Operations................................................................. 52 VI Reinsurance.............................................................. 53
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. (3) Exhibits The Exhibits listed on the accompanying index immediately following the signature page are filed as part of this Report. (b) Reports on Form 8-K Not applicable. (c) Exhibits See Item 14 (a) (3) above. (d) Financial Statement Schedules See Item 14 (a) (2) above. 27 29 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors National Insurance Group: We have audited the accompanying consolidated balance sheets of National Insurance Group and Subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of operations, retained earnings, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of National Insurance Group and Subsidiaries as of December 31, 1995 and 1994 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in Note 2 to the consolidated financial statements National Insurance Group and subsidiaries changed its method of accounting for investments in debt and equity securities in 1994. /s/ COOPERS & LYBRAND L.L.P. San Francisco, California February 9, 1996 28 30 NATIONAL INSURANCE GROUP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
AS OF DECEMBER 31, ------------------- 1994 1995 ------- ------- ASSETS Investments: Fixed maturities for 1994 at amortized cost (market: $22,648) and 1995 at market (amortized cost: $20,718)................................. $23,067 $21,130 Equity securities...................................................... 2,000 2,271 Short-term investments, at cost (which approximates market)............ 13,890 13,801 ------- ------- Total Investments.............................................. 38,957 37,202 Cash..................................................................... 155 133 Net premiums and accounts receivable..................................... 4,786 4,875 Accrued interest receivable.............................................. 390 344 Net property and equipment............................................... 5,918 4,068 Deferred acquisition costs............................................... 3,573 2,624 Deferred federal income taxes............................................ 298 1,994 Other assets............................................................. 1,015 856 ------- ------- Total Assets................................................... $55,092 $52,096 ======= ======= LIABILITIES Reserve for losses and LAE............................................... $ 3,360 $ 3,055 Unearned premiums........................................................ 7,768 5,703 Commissions payable...................................................... 659 742 Accrued expenses and other liabilities................................... 1,942 2,442 Drafts payable........................................................... 374 421 Reserve for return premiums.............................................. 2,108 1,216 Reserve for Proposition 103.............................................. 434 4,534 Deferred Revenue......................................................... 1,157 1,102 ------- ------- Total liabilities.............................................. 17,802 19,215 ------- ------- Commitments and Contingency (Notes 8 and 9) SHAREHOLDERS' EQUITY Preferred Stock, 5,000,000 shares authorized with no par value; none issued and outstanding................................................. -- -- Common stock: 15,000,000 shares authorized with no par value; issued and outstanding, 4,679,000 and 4,680,000 in 1994 and 1995, respectively.............. 23,065 23,071 Retained earnings........................................................ 14,225 9,810 ------- ------- Total shareholders' equity..................................... 37,290 32,881 ------- ------- Total liabilities and shareholders' equity............................... $55,092 $52,096 ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 29 31 NATIONAL INSURANCE GROUP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------- 1993 1994 1995 --------- --------- --------- Net premiums written...................................... $ 22,549 $ 20,036 $ 14,956 Change in unearned premiums............................... 716 822 2,064 --------- --------- --------- Net premiums earned....................................... 23,265 20,858 17,020 Flood inquiry fees........................................ 11,693 7,978 10,593 Tracking fees............................................. 2,477 3,012 4,786 Net commissions income.................................... 462 1,103 1,502 Net investment income..................................... 1,797 1,836 2,042 --------- --------- --------- Total revenues.................................. 39,694 34,787 35,943 --------- --------- --------- Loss and LAE.............................................. 8,952 7,873 6,044 Commissions paid to nonaffiliates......................... 4,989 4,739 4,079 Personnel expenses........................................ 12,890 13,677 17,708 All other expenses........................................ 7,532 9,096 9,231 Non-recurring charges..................................... -- 1,020 6,304 --------- --------- --------- Total expenses.................................. 34,363 36,405 43,366 --------- --------- --------- Income (loss) before provision for (benefit from) income taxes................................................... 5,331 (1,618) (7,423) Provision for (benefit from) income taxes................. 1,687 (534) (2,559) --------- --------- --------- Net income (loss)......................................... $ 3,644 $ (1,084) $ (4,864) ========= ========= ========= Weighted average common and common equivalent shares outstanding............................................. 4,270,000 4,679,000 4,680,000 ========= ========= ========= Net income (loss) per share..................... $ 0.85 $ (0.23 $ (1.04) ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 30 32 NATIONAL INSURANCE GROUP AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (IN THOUSANDS)
COMMON STOCK TOTAL ------------------ RETAINED SHAREHOLDERS' SHARES AMOUNT EARNINGS EQUITY ------ ------- -------- ------------ Balance, January 1, 1993.......................... $4,136 $14,559 $ 14,334 $ 28,893 Shares issued under public offering............... 890 10,285 -- 10,285 Options exercised................................. 38 423 -- 423 Unrealized gains on equity securities, net of deferred tax.................................... -- -- 33 33 Dividend paid..................................... -- -- (1,329) (1,329) Net Income........................................ -- -- 3,644 3,644 ------ ------- ------- ------- Balance, December 31, 1993........................ 5,064 25,267 16,682 41,949 Shares issued under public offering............... 115 1,408 -- 1,408 Shares repurchased................................ (500) (3,610) -- (3,610) Unrealized loss on equity securities, net of deferred tax.................................... -- -- (171) (171) Dividend paid..................................... -- -- (1,202) (1,202) Net loss.......................................... -- -- (1,084) (1,084) ------ ------- ------- ------- Balance, December 31, 1994........................ 4,679 23,065 14,225 37,290 Unrealized gain on equity securities, net of deferred tax.................................... -- -- 179 179 Unrealized gain on debt securities, net of deferred tax.................................... -- -- 270 270 Options exercised................................. 1 6 -- 6 Net loss.......................................... -- -- (4,864) (4,864) ------ ------- ------- ------- Balance, December 31, 1995........................ $4,680 $23,071 $ 9,810 $ 32,881 ====== ======= ======= =======
Dividends declared per share were $0.32 and $0.20 for the years ended December 31, 1993 and 1994, respectively. There were no dividends declared for the year ended December 31, 1995. The accompanying notes are an integral part of these consolidated financial statements. 31 33 NATIONAL INSURANCE GROUP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------- 1993 1994 1995 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income (loss)........................................ $ 3,644 $ (1,084) $ (4,864) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization......................... 2,006 2,099 2,193 Change in assets and liabilities: Decrease in net premiums receivable and accounts receivable....................................... (917) 4015 (89) (Increase) decrease in deferred acquisition costs... 330 378 949 Increase in insurance liabilities................... 1,685 (4,573) (3,179) Increase in reserve for Prop. 103................... -- 434 4,100 Increase (decrease) in tax assets................... (1,070) (160) (536) Other, net.......................................... (766) 671 (317) ------- ------- ------- Net cash provided (used) by operating activities..................................... 4,912 1,780 (1,743) ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of investments.................................. (26,940) (88,947) (43,518) Maturity of investments.................................. 13,561 92,644 45,543 Sales or calls of fixed maturities....................... 1,813 -- -- Purchase of equipment.................................... (2,442) (2,620) (310) ------- ------- ------- Net cash provided (used) by investing activities..................................... (14,008) 1,077 1,715 ------- ------- ------- CASH FLOW FROM FINANCING ACTIVITIES Principal payments on notes payable...................... (466) -- -- Issuance of common stock................................. 10,285 1,408 -- Repurchase of common stock............................... -- (3,610) -- Stock options exercised.................................. 286 -- 6 Dividends to shareholders................................ (1,329) (1,202) -- ------- ------- ------- Net cash provided (used) by financing activities..................................... 8,776 (3,404) 6 ------- ------- ------- Net decrease in cash....................................... (320) (547) (22) Cash at beginning of year.................................. 1,022 702 155 ------- ------- ------- Cash at end of year........................................ $ 702 $ 155 $ 133 ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 32 34 NATIONAL INSURANCE GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) 1. BASIS OF PRESENTATION AND NATURE OF OPERATIONS The accompanying consolidated financial statements of the Company include the accounts of National Insurance Group ("National") and its subsidiaries ("Subsidiaries"), Great Pacific Insurance Company (the "Insurance Subsidiary"), Pinnacle Data Corporation ("PDC"), and Fastrac Systems, Inc. Insurance Agent and Broker (the "Agency"). The Agency has a wholly-owned subsidiary, Fastrac Systems, Inc. ("Fastrac"). The Subsidiaries have transactions with each other in the ordinary course of business. The Agency receives a commission for business it writes which is insured or reinsured by the Insurance Subsidiary. Certain expenses are shared between the Subsidiaries. All significant intercompany accounts and transactions have been eliminated. The Company provides specialized information services and related insurance products to mortgage bankers and other financial institutions located throughout the United States. Utilizing sophisticated computer applications, the Company has developed special-purpose, proprietary software and data base systems which provide information services on an outsourced, remote computer or manual access basis, enabling these institutions to: - determine if the residential or commercial real estate, which is collateral for loans being financed or services by such institutions, is located within a federally-designated flood zone, and - monitor the insurance coverage on collateral securing residential mortgage (predominantly one-to-four unit family dwellings), automobiles and other consumer loans and leases and, to a lesser extent, commercial mortgages. When the Tracking Services indicate that insurance has lapsed, the financial institution may contact with the Company to provide specialized , short-term fire, allied peril or physical damage insurance (generally referred to as "forced-place" insurance), which the Company provides through its wholly-owned subsidiary, Great Pacific Insurance Company (the "Insurance Subsidiary") in certain states and through nonaffiliated insurance companies in the remainder of the United States. In addition, the Company provides flood insurance, for which the risk is assumed by the U.S. Government under the National Flood Insurance Program ("NFIP"). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following is a description of the significant accounting policies adopted by National and Subsidiaries in the accompanying financial statements: Data processing equipment and purchased software and office furniture and equipment are depreciated over five (5) years, and automobiles are depreciated over three (3) to five (5) years, all using a modified straight-line method. Upon retirement or sale of an asset, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in operations. Maintenance and repairs are charged to income as incurred. Goodwill is the excess of cost over fair market value of the Company's acquired entities. It is amortized on a straight-line basis over a period of twenty years. Costs associated with the research and development of the Company's flood determination products have been expensed as incurred. Commission income is recorded when earned, net of an estimated reserve for cancellation. Contingent commission expense is estimated based on established criteria such as the ratio of losses incurred to earned premiums, and is reflected in commissions paid to nonaffiliates. 33 35 NATIONAL INSURANCE GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Premiums written are earned on a pro rata basis over the periods covered by the policies. Policyholders have the right to cancel a policy at any time and receive a minimum refund as defined by law or regulation. In certain circumstances, the Company grants refunds in excess of the minimum amounts required by regulation. The Company received acceptance from the California Department of Insurance to establish a reserve for return premiums, based upon historical experience, to provide for anticipated cancellations net of written but unbilled premiums. Actual cancellations could differ from management's estimates. Changes in estimates of cancellations resulting from the continuous review process and differences between estimates and actual cancellations are included in income of this period in which the estimates are changed or cancellations occur. Fee income is recognized when earned. Certain contractual agreements for Flood Zone Determination Services provide for some future services by the Company. In these cases revenue is recognized over the estimated period the services are performed. Policy acquisition costs, principally commissions, premium taxes, and variable underwriting and policy issuance expenses, have been deferred. Such costs are recognized on a pro rata basis over the periods covered by the policies. Costs are deferred to the extent that they are recoverable from premium income after providing for all loss-related and maintenance expenses. Anticipated investment income is not considered in the determination of recoverability of this asset. The reserve for unpaid losses and LAE is based on the estimated ultimate cost of settling claims, using past experience adjusted for current trends and any other factors which, in management's judgment, would modify this experience. Changes in estimates of losses resulting from the continuous review process and differences between estimates and payments for claims are included in income of the period in which the estimates are changed or payments are made. Investments in fixed maturities include bonds, U.S. Treasury notes, federal discount notes, mortgage-backed securities and certificate of deposit. Investments in equity securities are common stock and preferred stock. Other than temporary declines in market values of equity securities are charged against income. Short-term investments consist of certificates of deposits and money market accounts at certain financial institutions and are carried at cost which approximates market. Investment income is recognized as earned. Realized gains of losses on sale of investments are determined on the basis of specific identification and are included in income. The preparation of financial statements in conformity with generally accepted accounting principles requires the management to make certain estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of certain revenues and certain expenses during the reporting period. Actual results could differ from those estimates. In May 1993, the Financial Accounting Standards Board ("FASB") issued SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The Company adopted SFAS No. 115 effective January 1, 1994. There was no effect on shareholders' equity as previously reported or current earnings of initially applying the new standard. The Company adopted the requirements of SFAS No. 115 to classify and account for debt and equity securities as follows: HELD-TO-MATURITY. Debt securities that management has the positive intent and ability to hold until maturity are classified as held-to-maturity and are carried at their remaining unpaid principal balance, net of unamortized premiums or unaccreted discounts. Premiums are amortized and discounts are accreted using the level interest yield method over the estimated remaining term of the underlying security. 34 36 NATIONAL INSURANCE GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) TRADING SECURITIES. Debt and equity securities are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at market value, with unrealized gains and losses included in earnings. AVAILABLE-FOR-SALE. Debt and equity securities that will be held for indefinite periods of time, including securities that may be sold in response to changes in market interest or prepayment rates, needs for liquidity and changes in the availability of and the yield of alternative investments are classified as available-for-sale. These assets are carried at market value. Market value is determined using published quotes as of the close of business. Unrealized gains and losses are excluded from earnings and reported net of tax as a separate component of stockholders' equity until realized. Prior to the adoption of SFAS No. 115, the Company accounted for debt and equity securities as follows: HELD-FOR-INVESTMENT. Debt securities classified as held-to-maturity were carried at their remaining unpaid principal balance, net of unamortized premiums or unaccreted discounts. Investments and mortgage-backed securities were classified as held-for-investment when management had the ability and the intent to hold these securities until maturity. HELD-FOR-SALE. Equity securities classified as held-for-sale were carried at lower of cost or market value. Unrealized losses were included in the consolidated statement of retained earnings. On December 29, 1995, the Company transferred securities with an amortized cost basis of $20,718,000 and net unrealized gains of $412,000 from the heldto-maturity portfolio to the available-for-sale portfolio in accordance with the special report issued by the FASB titled "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities." The FASB special report included special transition provisions for the one-time reassessment and reclassification of securities from the held-to- maturity portfolio during the period from November 15, 1995 to December 31, 1995. The Company's investment policies limit concentration of credit risk by diversifying its investment portfolio and by limiting its investments in certificates of deposit to balances insured by the Federal Deposit Insurance Corporation. The Company maintains deposit balances, other than certificates of deposit, with some financial institutions in excess of the amount insured by the Federal Deposit Insurance Corporation. A significant portion of the Company's receivables are from mortgage bankers and financial institutions. In March 1995, the Financial Accounting Standard Board issued Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of long-lived Assets and for long-lived Assets to be disposed of." This statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In determining the recoverability of an asset's carrying value, the Company would estimate the future cash flow expected to result from the use of the assets and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss would be recognized. Measurement of an impairment loss for long-lived assets and identifiable intangibles that the Company expects to hold and use should be based on the fair value of the assets. SFAS No. 121 applies to financial statements for fiscal years beginning after December 15, 1995. The Company will adopt the requirements of SFAS No. 121 in 1996 and has yet to determine the impact of adoption. In October 1995, the Financial Accounting Standard Board issued Statement on Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." Under the provisions of SFAS No. 123, the Company is encouraged, but not required, to measure compensation costs related to its employee stock compensation plans under the fair value method. Under this method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the 35 37 NATIONAL INSURANCE GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) vesting period. If the Company elects not to recognize compensation expense under this method, It is required to disclose the pro forma net income and earnings per share effects based on the SFAS No. 123 fair value methodology. SFAS No. 123 applies to financial statements for fiscal years beginning after December 15, 1995. The Company will implement the requirements of SFAS No. 123 in 1996 and has yet to determine if it will adopt the measurement provision recommended by the statement or if it will adopt only the disclosure provisions of the statement. Accordingly, management has not determined the impact on the financial statements that SFAS No. 123 may have. 3. INVESTMENTS (a) Fixed-maturity Investments (in thousands):
HELD FOR INVESTMENT AVAILABLE FOR SALE AS OF DECEMBER 31, 1994 AS OF DECEMBER 31, 1995 ----------------------------------------------- ----------------------------------------------- ESTIMATED ESTIMATED AMORTIZED UNREALIZED UNREALIZED MARKET AMORTIZED UNREALIZED UNREALIZED MARKET COST GAIN LOSS VALUE COST GAIN LOSS VALUE --------- ---------- ---------- --------- --------- ---------- ---------- --------- U.S. Government securities........ $ 6,370 $ $123 $ 6,247 $ 4,886 $ 57 $ $ 4,943 State and municipal bonds............. 13,355 143 439 13,059 12,380 365 10 12,735 Certificates of deposit........... 3,240 -- 3,240 3,362 -- 3,362 Mortgage-backed securities........ 102 3 102 90 -- -- 90 ------- ---- ---- ------- ------- ---- --- ------- Total........... $23,067 $143 $562 $22,648 $20,718 $422 $ 10 $21,130 ======= ==== ==== ======= ======= ==== === =======
At December 31, 1995, investment securities, at amortized cost and estimated market value, have contractual maturities as presented in the table below; however, other contract terms may allow actual maturities to differ from contractual maturities.
AMORTIZED COST ESTIMATED MARKET VALUE ------------------------------------- ------------------------------------- STATE AND STATE AND MUNICIPAL CERTIFICATES U.S. GOVT. MUNICIPAL CERTIFICATES U.S. GOVT. BONDS OF DEPOSIT SECURITIES BONDS OF DEPOSIT SECURITIES --------- ------------ ---------- --------- ------------ ---------- Within one year........................... $ -- $ -- $2,288 $ -- $ -- $2,288 One through five years.................... 5,397 3,362 2,598 5,479 3,362 2,655 Six through ten years..................... 5,720 -- -- 5,929 -- -- More than ten years....................... 1,263 -- -- 1,327 -- -- Mortgage-backed securities................ -- -- 90 -- -- 90 ------- ------ ------ ------- ------ ------ Total............................ $12,380 $3,362 $4,976 $12,735 $ 3,362 $5,033 ======= ====== ====== ======= ====== ======
There were no sales of fixed-maturity investments in 1995. (b) Equity Securities Available for Sale: At December 31, 1995 the Company had market rate preferred stock with a cost of $2,210,000, an unrealized gain of $61,000 , and a market value of $2,271,000. 36 38 NATIONAL INSURANCE GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. PROPERTY AND EQUIPMENT The components of property and equipment are as follows (in thousands):
AS OF DECEMBER 31, -------------------- 1994 1995 ------- -------- Office furniture and equipment.................................. $ 2,666 $ 3,237 Data processing equipment....................................... 6,779 6,273 Software........................................................ 4,132 4,172 Leasehold improvements.......................................... 766 998 ------ ------- 14,680 14,343 Less accumulated depreciation and amortization.................. (8,425) (10,612) ------ ------- Total................................................. $ 5,918 $ 4,068 ====== =======
Depreciation and amortization expense was $1,850,000, $2,042,000 and $2,160,000, in 1993, 1994 and 1995, respectively. 5. DEFERRED ACQUISITION COSTS Changes in deferred acquisition costs are summarized as follows (in thousands):
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 1993 1994 1995 -------- -------- ------- Deferred acquisition costs, beginning of period..... $ 4,281 $ 3,951 $ 3,573 Additions........................................... 10,980 10,669 8,648 Amortization expense................................ (11,310) (11,047) (9,597) -------- -------- ------- Deferred acquisition costs, end of period........... $ 3,951 $ 3,573 $ 2,624 ======== ======== =======
The net change in deferred acquisition costs are included in the consolidated statements of income as a component of commissions paid to nonaffiliates, personnel expenses and all other expenses. 6. RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSE Activity in the reserve for loss and loss adjustment expenses is summarized as follows:
FOR THE YEARS ENDED DECEMBER 31, ----------------------------- 1993 1994 1995 ------ ------- ------ Reserves for losses and LAE at beginning of year........ $3,731 $ 5,628 $3,360 ------ ------- ------ Losses and LAE: Provision for losses and LAE for claims occurring in current year....................................... 9,705 7,627 6,378 Increase (decrease) in estimated losses and LAE for claims occurring in prior years.................... (753) 246 (334) ------ ------- ------ 8,952 7,873 6,044 ------ ------- ------ Losses and LAE payments for claims occurring during: Current year.......................................... 4,607 4,664 4,329 Prior years........................................... 2,448 5,477 2,020 ------ ------- ------ 7,055 10,141 6,349 ------ ------- ------ Reserves for losses and LAE at end of year.............. $5,628 $ 3,360 $3,055 ====== ======= ======
37 39 NATIONAL INSURANCE GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) During 1993, and 1994, the Company ceded losses of $423,000, and $213,000 respectively, to reinsurers for losses occurring in 1992. There were no losses ceded to reinsurers in 1995. 7. INCOME TAX The components of income tax expense (benefit) are as follows (in thousands):
AS OF DECEMBER 31, ---------------------------- 1993 1994 1995 ------ ----- ------- Federal Current................................................ $1,932 $ (87) $ (954) Deferred............................................... (346) (447) (1,696) ------ ----- ------- 1,586 (534) (2,650) State Current................................................ 101 -0- 91 ------ ----- ------- Total.......................................... $1,687 $(534) $(2,559) ====== ===== =======
The actual tax expense differs from expected tax expense computed by applying the federal statutory tax rate to operating income before provision for income taxes as follows (in thousands):
FOR THE YEARS ENDED DECEMBER 31, ---------------------- 1993 1994 1995 ---- ---- ---- Tax at federal statutory rate................................... 34% 34% 35% Tax-Exempt investment income.................................... (3) (7) (9) Other........................................................... 1 6 8 -- -- -- Total................................................. 32% 33% 34% == == ==
The components of the net deferred tax balance as of December 31, 1993, 1994 and 1995 are as follows (in thousands):
ASSET (LIABILITY) ------------------------------ 1993 1994 1995 ------- ------- ------ Unearned premium reserve............................... $ 584 $ 528 $ 388 Deferred acquisition costs............................. (1,343) (1,215) (892) Write-down of carrying value of equity securities...... 59 78 -- Loss reserve discounting............................... 116 62 70 Prepaid expenses....................................... 118 45 49 Deferred revenue....................................... 120 201 335 Proposition 103 reserve................................ -- 147 1,541 Accrued liabilities.................................... 7 338 334 Other.................................................. 102 114 169 ------- ------- ------ Total........................................ $ (237) $ 298 $1,994 ======= ======= ======
The Company has not established a valuation reserve at December 31, 1995. Realization of deferred tax assets is dependent on the ability to carry back losses to previous years, the likelihood of future income, and the timing of realization of deferred tax assets. Although realization is not assured, Management believes it is more likely than not that all of the deferred tax assets will be realized. The amount of the deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income are reduced or the timing of realization of deferred tax assets changes. 38 40 NATIONAL INSURANCE GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Deferred income taxes were provided on temporary differences in the recognition of income for income tax and financial statement purposes. The source and tax effect of these temporary differences in the provision are as follows (in thousands):
FOR THE YEARS ENDED DECEMBER 31, -------------------------- 1993 1994 1995 ----- ----- ------ Unearned premium reserve.................................. $ 49 $ 56 $ (140) Deferred acquisition costs................................ (112) (128) 323 Write-down of carrying value of equity securities......... -- (19) (78) Loss reserve discounting.................................. (60) 54 8 Prepaid expenses.......................................... (105) 73 4 Deferred revenue.......................................... (92) (81) 134 Prop. 103 reserve......................................... -- -- 1,541 Accrued liabilities....................................... -- (478) (151) Other..................................................... (26) 76 55 ----- ----- ------ Total........................................... $(346) $(447) $1,696 ===== ===== ======
Taxes paid in 1993 and 1994 were $2,625,000 and $195,000, respectively. Tax refunds received in 1994 and 1995 were $675,000 and $627,000 respectively. 8. COMMITMENTS National's subsidiaries have entered into operating leases. The operating leases are for office space for National and Subsidiaries' home office, Fastrac branch offices in Bellevue, Washington and Springfield, Ohio and PDC offices in Concord, California. Rental expense under operating leases was $1,079,000, $1,222,000 and $1,134,000 in 1993, 1994 and 1995, respectively. In the second quarter of 1994, the Company accrued $1.0 million for restructuring charges in connection with the relocation of the Company's loan tracking and customer service operations from Bellevue, Washington to its South San Francisco Headquarters. The relocation commenced in June, 1994 and it was completed by year end 1994. Total expenses included approximately $360,000 for termination and/or relocation benefits for approximately 25 staff and approximately 19 key personnel. The balance of the restructuring charges are for facilities expenses and the write-off of capitalized costs. As of year end 1995, the Company has realized $530,000 in expenses for the termination and relocation of personnel and $355,000 in expenses for facility and capital writeoffs and the Company expects that the balance of the accrual will be sufficient to cover the remaining restructuring costs during 1996 related to the relocation. National has entered into employment contracts with some key employees. Base compensation expense (not including bonus or commission) under employment contracts was $675,000, $425,000 and $264,108 in 1993, 1994 and 1995, respectively. As of December 31, 1995, National had no commitments for such future compensation except for future commissions payable in amounts that cannot now be determined pursuant to the Agreement of Employment Termination between National and Douglas H. Helm. See Exhibit 10.11. 39 41 NATIONAL INSURANCE GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The future minimum payments due under commitments at December 31, 1995 are as follows (in thousands):
FOR THE YEAR ENDING OPERATING DECEMBER 31, LEASES ------------------------------------------------------------------- --------- 1996............................................................. $ 1,197 1997............................................................. $ 1,227 1998............................................................. $ 1,151 1999............................................................. $ 800 ------- Total minimum payments............................................. $ 4,375 =======
9. CONTINGENCY In November 1988, California voters approved Proposition 103. Proposition 103 requires, in part, a one year 20% rate rollback for substantially all property and casualty insurance written in California with the exception of workers' compensation and reinsurance. In May 1989, the California Supreme Court held that insurers would not be obligated to pay the rate rollback mandated by Proposition 103 if they could demonstrate that application of the rollback would produce confiscatory rates which would deny a fair and reasonable rate of return. The California Supreme Court's decision allowed insurers to file and use rates after November 8, 1989 pending approval by the Department. On February 26, 1993, the trial court in 20th Century Insurance Company v. Garamendi, determined that the regulations which included the rollback formula for rate determination were unlawful. The Department appealed the trial court's determination and on August 25, 1994, the California Supreme Court unanimously held that the California Insurance Commissioner's rollback formula which includes a uniform rate of return was constitutional and complied with the intent of Proposition 103. The California Department of Insurance, by letter dated June 13, 1995, denied the Company's application for an adjustment to the Department's formula for determining the amount of the Company's Proposition 103 rollback liability and assessed the liability to be $4.5 million. In order to reserve for the $4.5 million, the Company accrued $4.1 million in the second quarter of 1995 in addition to the 1994 accrual of $433,000. This amount is included on the balance sheet as part of the Reserve for Proposition 103 and on the income statement as Non-recurring expense. On October 25, 1995, the Insurance Subsidiary entered into a stipulation and consent order with the California Insurance Department to resolve the Insurance Subsidiary's rollback obligation. Pursuant to that settlement, the Insurance Subsidiary agreed to pay the sum of approximately $4.1 million as a rollback refund to its policyholders for the rollback year. The Company made the refunds during the first quarter of 1996. The rollback refund was paid to each eligible policyholder in the proportion that the written premium for each policyholder bears to the Insurance Subsidiary's total written premiums in California for policies in Proposition 103 lines issued or renewed during the rollback year. Pursuant to the settlement, the rollback refund constitutes the Insurance Subsidiary's entire rollback obligation and fully discharges the Insurance Subsidiary and extinguishes all of its obligations to rollback rates, make rollback refunds to policyholders, or pay interest to rollback policyholders. The Department has agreed to seek no further rollbacks or interest against the Insurance Subsidiary for the rollback year. Also, the settlement approves all rate filings which received interim approvals for current rate levels made since 1989, and all rates and rate levels charged by the Insurance Subsidiary from time to time between November 8, 1989 and the date the settlements were approved. 40 42 NATIONAL INSURANCE GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The amount of any refund checks uncashed after a certain period will be escheated to the State of California in accordance with its laws. Although the Company will incur additional costs for processing the refunds, management believes that its existing reserves are adequate. 10. REINSURANCE The Insurance Subsidiary, in the ordinary course of its business, seeks to reduce the loss that may arise from catastrophes or other events that may cause unfavorable underwriting results by reinsuring certain levels of risk with other insurance companies. Recoverables under the reinsurance agreements are estimated in a manner consistent with the claim liability associated with the reinsured policy. Risks reinsured would become a liability of the Insurance Subsidiary in the event any reinsurer is unable or will not fulfill the obligations assumed under the agreements. The Insurance Subsidiary limits its credit risk associated with reinsurance recoverables by evaluating the financial condition of members of the reinsurance pool, and diversifying the pool participants. As of December 31, 1993 and 1994, $294,000 and $11,000, respectively, were recorded as receivables under reinsurance treaties. For the year ended December 31, 1995, there was no receivable recorded under reinsurance treaties. For the years ended December 31, 1993, 1994, and 1995, ceded reinsurance premiums were $1,545,000, $1,170,000 and $933,000 , respectively, and there were no ceded reinsurance losses for the respective years. The Insurance Subsidiary is also a "Write Your Own" ("WYO") carrier under the National Flood Insurance Program. The premiums written and the insurance risks under the WYO program are ceded to the Federal Emergency Management Agency ("FEMA"). The form of this treaty is the actual assumption of liability by FEMA and, accordingly, amounts are excluded from net premiums and accounts receivable and reserve for losses and LAE. For the years ended December 31, 1993, 1994, and 1995, ceded reinsurance premiums for this program were $1,420,000, $1,520,000 and $1,234,000, respectively, and ceded unearned premiums for this program were $910,000, $1,061,000 and $971,000, respectively. The Insurance Subsidiary assumes a proportional share of the premiums written and the insurance risks from other insurance companies for force-placed insurance policies produced through the Agency, primarily for business produced outside the states of California and Texas. In accordance with industry practice, reinsurance assumed is presented as an addition to net premiums written in the financial statements. The Insurance Subsidiary assumed net written premiums of $8,992,000, $(1,259,000) and $(197,000) in 1993, 1994, and 1995, respectively. As of December 31, 1993, 1994 and 1995, assumed unearned premiums were $3,004,000, $39,000, and $0 respectively. 11. INVESTMENT INCOME The components of investment income are as follows (in thousands):
FOR THE YEARS ENDED DECEMBER 31, ---------------------------- 1993 1994 1995 ------ ------ ------ Fixed maturities......................................... $1,117 $1,165 $1,181 Short-term investments................................... 671 802 947 ------ ------ ------ 1,788 1,967 2,128 Net realized gains (losses).............................. 85 -- (3) Investment expenses...................................... (76) (131) (83) ------ ------ ------ Net investment income.................................... $1,797 $1,836 $2,042 ====== ====== ======
41 43 NATIONAL INSURANCE GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 12. MAJOR CUSTOMERS During 1993, National and Subsidiaries derived 20% of total revenues from one customer, of which 19% was for insurance services and 1% for fee-based services. During 1994, National and Subsidiaries derived 22% of total revenues from one customer, of which 20% was for insurance services and 2% for fee-based services. During 1995, National and Subsidiaries derived 13% of total revenues from one customer, of which all was for insurance services. 13. EARNINGS PER SHARE The number of shares used in the earnings per share computation is calculated as follows:
1993 1994 1995 --------- --------- --------- Weighted average common shares.................... 4,177,015 -- -- Actual common shares outstanding.................. -- 4,678,729 4,679,697 Common shares issuable under outstanding stock options................................... 93,226 -- -- --------- --------- --------- Total................................... 4,270,241 4,678,729 4,679,697 ========= ========= ========= Net Income (loss)................................. $ 3,644 $ (1,084) $ (4,864) Per share results: Net Income (loss)....................... $ 0.85 $ (0.23) $ (1.04)
The number of shares issuable upon exercise of outstanding options has been calculated using the treasury stock method based on the average market price during the year. In 1995, the Company had a Loss Per Share which is calculated based upon the number of common shares outstanding. There are no differences between primary and fully diluted earnings per share. 14. DIVIDEND RESTRICTION California law limits the payment of dividends to National by the Insurance Subsidiary. The maximum dividend that may be paid without prior approval of the Insurance Commissioner is limited to the greater of 10% of policyholders' surplus (shareholders' equity adjusted to a statutory basis) as of the preceding December 31, or the net income of the preceding calendar year. In 1995, the maximum dividend would be limited to 10% of policyholders' surplus at December 31, 1994. Statutory policyholders' surplus, and net income (loss) of the Insurance Subsidiary is as follows (in thousands):
1993 1994 1995 ------- ------- ------- Statutory policyholders' surplus...................... $23,475 $25,209 $23,687 Net income (loss)..................................... $ 2,578 $ 2,575 $(1,892)
California law further prohibits the payment of dividends without prior approval of the California Department of Insurance unless the insurer has available "earned surplus". The term "earned surplus" is defined as unassigned funds (surplus) as reported on the insurer's annual statement, excluding earned surplus derived from: (i) unrealized net appreciation of assets; and (ii) an exchange of assets, unless such earned surplus has been realized or the assets received in exchange are currently realizable in cash. An exception to this prohibition is allowed where the insurer's surplus as regards policyholders is: (i) reasonable in relation to its outstanding liabilities; (ii) adequate to the insurer's financial needs; and (iii) the Department's prior approval is obtained. There were no cash dividends paid by the Insurance Subsidiary in 1993, 1994 or 1995. 42 44 NATIONAL INSURANCE GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 15. STOCK OPTION PLANS Under the 1986 Stock Option Plan, as amended, participants may be awarded options for shares of National's common stock subject to various restrictions which limit the sale or other transfer of the shares until the expiration of a specified time period. A maximum of 1,006,820 shares may be issued under the plan. The exercise price of options granted under the plan may not be less than 100% of the fair value on the date of the grant. In 1992 and prior years, the exercise price was limited to 110% of the fair value on the date of the grant for shareholders owning more than 10% of the voting power of all shares of stock. Tabular presentation of stock option activity follows.
OPTION EXERCISE NUMBER OF SHARES PRICE PER SHARE ---------------- --------------- Outstanding and exercisable at January 1, 1993........ 374,773 1.26 - 15.25 Granted to employees.................................. 156,500 15.00 - 17.50 Exercised............................................. (38,254) .97 - 13.25 Forfeited or expired.................................. (13,250) 12.00 - 17.50 -------- Outstanding and exercisable at December 31, 1993...... 479,769 1.26 - 15.25 Granted to employees.................................. 187,500 5.12 - 13.00 Forfeited or expired.................................. (174,500) 8.00 - 17.50 -------- Outstanding and exercisable at December 31, 1994...... 492,769 .97 - 17.50 Granted to employees.................................. 183,000 5.13 - 7.25 Forfeited or expired.................................. (219,281) 5.13 - 17.50 Exercised............................................. (968) 3.75 -------- Outstanding and exercisable at December 31, 1995...... 455,520 .97 - 15.25 ========
Under the 1991 Director Option Plan, participants may be awarded options for shares of National's common stock subject to various restrictions which limit the sale or other transfer of the shares until the expiration of a specified time period. A maximum of 325,000 shares may be issued under the plan. The exercise price of options granted under the plan may not be less than 100% of the fair value on the date of the grant. In 1990 the Company granted 50,000 shares at $6.63, and 175,000 options were granted in 1995 with an option price range between $6.13 and $6.50. For both stock option plans, subject to the discretionary authority of the Board of Directors, the shares subject to option vest 25% at the end of the first twelve (12) calendar months following the date of grant, and the remainder vest ratably in each month over the next three (3) years. Shares are exercisable before vesting has occurred; however, the Company has the right to repurchase shares not vested in the event the employment of the optionee is terminated. Any compensation related to the issuance of options is recognized ratably over the vesting period. Options issued to date have not resulted in any material compensation expense to the Company. However, the Company did receive tax deductions related to the exercise of stock options which reduced taxes payable by $137,000, $0 and $1,000 during 1993, 1994, and 1995, respectively. This amount has been credited directly to common stock. 16. NON-RECURRING EXPENSES The Company incurred expenses of a non-recurring nature in the amount of $6.3 million during 1995. On June 13, 1995, the California Department of Insurance notified the Company that its application for adjustment of its Proposition 103 return premium liability had been denied and the Company accrued an additional $4.1 million for the constitutionally mandated roll-back of insurance premiums under the Proposition. This amount is included on the balance sheet as Reserve for Prop 103 and on the income statement as non-recurring expense. The Company recorded additional non-recurring charges of $1.6 million 43 45 NATIONAL INSURANCE GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) in connection with the retirements of Mark Speizer who was the Company's Chief Executive Officer and Howard Herman who was the Company's President. The Company also recorded $600,000 for the write-off of software used to provide its information services products. 17. RELATED PARTY TRANSACTIONS The former Chief Executive Officer and the former President of the Company own a controlling interest in another entity (which ceased doing business in 1994) with which the Company had the following business activities: (1) assumption in 1993 of a lease of the financial institution's principal office located at 395 Oyster Point Boulevard, South San Francisco, California (which the Company used to expand its corporate headquarters), requiring lease payments of $21,000 per month; and (2) the purchase of certain furniture and equipment for approximately $23,000 in 1993. 18. SEGMENT REPORTING The principal sources of the Company's business are the following. Insurance Products....... The Company provides force-placed insurance for financial institutions when their borrowers/lessees fail to maintain adequate insurance in force. Information Services..... The Company provides contract services, including insurance tracking, outsourcing, and flood zone determinations for financial institutions.
Revenues and income from operations for each of these segments are presented below. Segment revenues and operating income are based upon transactions directly traceable to the segment and after elimination of intersegment revenues and expenses. General corporate expenses benefiting more than one segment, which include compensation of general corporate officers, certain occupancy costs, shareholder reporting expenses, general insurance, legal, sales and marketing and other corporate expenses and fees, are not allocated to segments (in thousands):
CONSOLIDATED REVENUES FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------------------------- 1993 1994 1995 ----------------- ----------------- ----------------- AMOUNT % AMOUNT % AMOUNT % ------- ----- ------- ----- ------- ----- Insurance products........... $26,668 67.2% $24,553 70.5% $20,564 57.2% Information services......... 13,026 32.8% 10,234 29.5% 15,379 42.8% ------- ----- ------- ----- ------- ----- $39,694 100.0% $34,787 100.0% $35,943 100.0% ======= ===== ======= ===== ======= =====
CONSOLIDATED PRE-TAX INCOME (LOSS) FOR THE YEARS ENDED DECEMBER 31, ------------------------------- 1993 1994 1995 ------- ------- ------- Insurance products.................................... $ 8,138 $ 8,590 $ 5,559 Information services.................................. 4,849 (448) 13 General corporate expenses............................ (7,656) (8,740) (6,691) Non-recurring charges................................. -- (1,020) (6,304) ------ ------- ------- $ 5,331 $(1,618) $(7,423) ====== ======= =======
44 46 NATIONAL INSURANCE GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Identifiable assets, capital expenditures, and depreciation and amortization by segment for the years ended as of December 31, 1994 and 1995 are as follows (in thousands):
DECEMBER 31, 1994 DECEMBER 31, 1995 ----------------------------------------- ----------------------------------------- DEPRECIATION DEPRECIATION CAPITAL AND CAPITAL AND ASSETS EXPENDITURES AMORTIZATION ASSETS EXPENDITURES AMORTIZATION ------- ------------ ------------ ------- ------------ ------------ Insurance products........ $34,337 $ 926 $ 850 $45,052 $ 282 $ 605 Information services...... 15,726 1,694 1,249 597 1,069 1,588 Holding company........... 5,029 -- -- 6,447 -- -- ------- ------ ------ ------- ------ ------ $55,092 $2,620 $2,099 $52,096 $1,351 $2,193 ======= ====== ====== ======= ====== ======
19. RESULTS BY QUARTER (UNAUDITED)
QUARTER ENDED ---------------------------------------------------------------------- MARCH JUNE SEPT. DEC. MARCH JUNE SEPT. DEC. 31, 30, 30, 31, 31, 30, 30, 31, 1994 1994 1994 1994 1995 1995 1995 1995 ------ ------- ------ ------ ------ ------- ------ ------ (IN THOUSANDS) Net premiums earned....................... $5,851 $ 5,253 $4,680 $5,074 $4,468 $ 3,930 $3,821 $4,801 Income before provision for income taxes................................... 460 (1,455) (647) 24 (337) (6,376) 105 (815) Net income (loss)......................... 313 (994) (436) 33 (229) (4,336) 71 (370) Net income per share...................... $ 0.06 $ (0.20) $(0.09) $(0.01) $ (.05) $ (0.93) $ 0.02 $(0.08)
45 47 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES Our report on the consolidated financial statements of National Insurance Group and Subsidiaries is included in this Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedules listed in the index of this Form 10-K. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. /s/ COOPERS & LYBRAND L.L.P. San Francisco, California February 9, 1996 46 48 SCHEDULE I NATIONAL INSURANCE GROUP AND SUBSIDIARIES SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 1995
AMOUNT AT WHICH SHOWN NUMBER OF IN THE SHARES OR MARKET BALANCE PRINCIPAL COST VALUE SHEET ----------- ----------- ----------- ----------- Fixed Maturities: Bonds and notes: U.S. Government securities....... $ 4,886,351 $ 4,886,351 $ 4,942,445 $ 4,942,445 Municipalities................... $ 8,835,184 8,835,184 9,098,266 9,098,266 States........................... $ 3,544,442 3,544,442 3,636,779 3,636,779 Certificates of deposit.......... $ 3,362,055 3,362,055 3,362,055 3,362,055 Mortgage-backed securities....... $ 90,171 90,171 90,171 90,171 ----------- ----------- ----------- Total Fixed Maturities...... 20,718,203 21,129,716 21,129,716 ----------- ----------- ----------- Equity Securities: Preferred stock -- Financial institution......... 40,000 996,750 1,001,250 1,001,250 -- Public Utilities.............. 24,000 711,095 750,875 750,875 -- Industrial.................... 20,000 501,950 518,750 518,750 Common stock -- Financial institution......... 27,701 228,405 -- -- ----------- ----------- ----------- Total Equity Securities..... 2,438,200 2,270,875 2,270,875 ----------- ----------- ----------- Short-term Investments................ $13,801,477 13,801,477 13,801,477 13,801,477 ----------- ----------- ----------- Total Investments........... $36,957,880 $37,202,068 $37,202,068 =========== =========== ===========
47 49 SCHEDULE II NATIONAL INSURANCE GROUP AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY) BALANCE SHEETS DECEMBER 31, 1994 AND 1995
1994 1995 ----------- ----------- ASSETS Short-term investments and cash................................... $ 3,525,108 $ 142,732 Investments in subsidiaries....................................... 28,523,374 25,298,919 Other assets...................................................... 6,486,571 8,889,193 ----------- ----------- Total assets............................................ $38,535,053 $34,330,844 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Federal and state income taxes payable............................ $ 1,237,254 $ 267,774 Accrued Liabilities............................................... -0- 527,352 Deferred federal income taxes..................................... 8,269 655,551 ----------- ----------- Total liabilities....................................... 1,245,523 1,450,677 ----------- ----------- Shareholders' equity Common stock.................................................... 23,065,559 23,070,551 Retained earnings............................................... 14,223,971 9,809,616 ----------- ----------- Total shareholders' equity.............................. 37,289,530 32,880,167 ----------- ----------- Total liabilities and shareholders' equity.............. $38,535,053 $34,330,844 =========== ===========
48 50 SCHEDULE II NATIONAL INSURANCE GROUP AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY) STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
1993 1994 1995 ---------- ----------- ----------- Net investment income................................ $ 31,899 $ 225,119 $ 67,979 Operating expenses................................... (381,533) (433,714) (1,141,735) Provision for income taxes........................... 145,712 (14,512) (116,145) Equity in net income of subsidiaries................. 3,880,740 (889,457) (3,674,831) ---------- ----------- ----------- Net income................................. $3,676,818 $(1,083,540) $(4,864,732) ========== =========== ===========
49 51 SCHEDULE II NATIONAL INSURANCE GROUP AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 INCREASE (DECREASE) IN CASH
1993 1994 1995 ----------- ------------ ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income......................................... $ 3,676,818 $ (1,083,540) $(4,864,732) Adjustments to reconcile net income to net cash provided by operating activities: Undistributed equity in net income of subsidiaries.................................. (3,880,740) 889,457 3,674,831 Increase (decrease) in taxes payable............. (83,903) 1,158,488 (322,198) Other............................................ 74,488 (3,655,455) (1,875,270) ----------- ------------ ----------- Net cash used by operating activities.............. $ (213,337) $ (2,691,050) $(3,387,369) =========== ============ =========== CASH FLOWS FROM INVESTING ACTIVITIES Purchase of investments............................ $(9,739,752) $(68,599,619) $ -0- Maturity of investments............................ 665,566 74,877,514 3,221,393 ----------- ------------ ----------- Net cash provided (used) by investing activities... $(9,074,186) $ 6,277,895 $ 3,221,393 =========== ============ ===========
50 52 SCHEDULE II NATIONAL INSURANCE GROUP AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY) STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 INCREASE (DECREASE) IN CASH
1993 1994 1995 ----------- ----------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from capital contributions.................. $10,285,328 $1,408,4838 $ -0- Dividends paid....................................... (1,329,682) (1,202,894) -0- Proceeds from stock options exercised................ 286,109 -0- 4,992 Repurchase of common stock........................... -0- (3,610,000) -0- ----------- ----------- --------- Net cash provided (used) by financing activities..... 9,241,755 (3,404,411) 4,992 ----------- ----------- --------- Net increase (decrease) in cash...................... (45,768) 182,434 (160,984) Cash at beginning of year............................ 24,586 (21,182) 161,252 ----------- ----------- --------- Cash at end of year.................................. $ (21,182) $ 161,252 $ (268) =========== =========== =========
51 53 SCHEDULE III NATIONAL INSURANCE GROUP AND SUBSIDIARIES SUPPLEMENTARY INSURANCE INFORMATION CONCERNING PROPERTY CASUALTY OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
1993 1994 1995 ----------- ----------- ----------- Deferred Policy Acquisition Costs................... $ 3,951,306 $ 3,573,248 $ 2,623,562 Reserves for Unpaid Claims and Claim Adjustment Expenses.......................................... 5,627,795 3,360,438 3,054,710 Less Reserve Discount............................... -- -- -- Unearned Premiums................................... 8,589,795 7,767,930 6,674,877 Earned Premiums..................................... 23,264,977 20,857,424 17,020,440 Net Investment Income............................... 1,609,545 1,615,685 2,042,225 Claims and Claim Adjustment Expenses Incurred Related to: Current Year...................................... 9,704,000 7,627,000 6,378,000 Prior Years....................................... (752,000) 246,000 (334,000) Amortization of Deferred Policy Acquisition Costs... 11,309,409 11,046,985 9,597,252 Paid Claims and Claim Adjustment Expense............ 7,055,000 10,141,000 6,349,000 Premiums Written.................................... 22,548,706 20,035,560 14,955,906
52 54 SCHEDULE VI NATIONAL INSURANCE GROUP AND SUBSIDIARIES REINSURANCE FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
PERCENTAGE CEDED TO ASSUMED OF AMOUNT GROSS OTHER FROM OTHER ASSUMED AMOUNT COMPANIES COMPANIES NET AMOUNT TO NET ----------- ---------- ----------- ----------- ---------- Fire and Allied Lines Insurance Premiums: Year ended December 31, 1995... $15,834,991 $ 922,579 $ (196,996) $14,715,416 (1.3)% =========== ========== =========== =========== ==== Year ended December 31, 1994... $21,442,240 $1,124,481 $(1,270,716) $19,047,043 (6.7)% =========== ========== =========== =========== ==== Year ended December 31, 1993... $14,821,305 $1,524,723 $ 281,946 $21,578,528 38.4% =========== ========== =========== =========== ==== Auto Physical Damage Insurance Premiums: Year ended December 31, 1995... $ 254,462 $ 10,810 $ (11) $ 243,652 -0-% =========== ========== =========== =========== ==== Year ended December 31, 1994... $ 1,022,689 $ 45,235 $ 11,063 $ 988,517 1.1% =========== ========== =========== =========== ==== Year ended December 31, 1993... $ 280,910 $ 20,809 $ 710,076 $ 970,177 73.2% =========== ========== =========== =========== ==== Flood Insurance Premiums: Year ended December 31, 1995... $ 1,234,443 $1,234,443 =========== ========== =========== =========== ==== Year ended December 31, 1994... $ 1,519,063 $1,519,063 =========== ========== =========== =========== ==== Year ended December 31, 1993... $ 1,419,970 $1,419,970 =========== ========== =========== =========== ====
53 55 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of South San Francisco, State of California. NATIONAL INSURANCE GROUP Date: April 1, 1996 By: /s/ JOHN R. GAULDING ------------------------------------ John R. Gaulding President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints John R. Gaulding, his true and lawful attorney-in-fact and agent, with the power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any amendments (including post effective amendments) to this Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange commission, 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 connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or his substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report on Form 10-K has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - --------------------------------------------- --------------------------------- -------------- /s/ JOHN R. GAULDING Chairman of the Board, President April 1, 1996 - --------------------------------------------- and Chief Executive Officer John R. Gaulding (Principal Executive Officer) /s/ MELVYN D. CRONER Director April 1, 1996 - --------------------------------------------- Melvyn D. Croner /s/ HOWARD L. HERMAN Director April 1, 1996 - --------------------------------------------- Howard L. Herman /s/ KENNETH ROSS Director April 1, 1996 - --------------------------------------------- Kenneth Ross /s/ MARK A. SPEIZER Director April 1, 1996 - --------------------------------------------- Mark A. Speizer
54 56 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of National Insurance Group and Subsidiaries on Form S-8 (Files Nos. 33-19203, 33-36803, 33-52356 and 33-88668) of our report dated February 9, 1996, on our audits of the consolidated financial statements and financial statement schedules of National Insurance Group and Subsidiaries as of December 31, 1995 and 1994 and for the years ended December 31, 1995, 1994 and 1993, which report is included in this Annual Report of Form 10-K. /s/ COOPERS & LYBRAND L.L.P. San Francisco, California April 1, 1996 55 57 INDEX TO EXHIBITS
SEQUENTIALLY NUMBERED PAGE ------------ 3.1(3) Articles of Incorporation of Company, as Amended...................... 3.2(1) Bylaws of Company..................................................... 10.1 1986 Stock Option Plan (as amended through February 13, 1996)......... 10.2(6) 1991 Director Option Plan and forms of agreements thereto............. 10.3 1991 Director Option Plan(as amended through May 23, 1995)............ 10.4(1) Financial Assistance/Subsidy Arrangement dated October 1, 1986 between the Federal Emergency Management Agency and Great Pacific Insurance Company............................................................... 10.5(9) Memoranda of Reinsurance as to First and Second Property Per Risk Excess of Loss Reinsurance Agreements and the First, Second and Third Property Catastrophe Excess Reinsurance Agreements (1994)............. 10.6(10) Memoranda of Reinsurance as to First and Second Property Per Risk Excess of Loss Reinsurance Agreements and the First, Second and Third Property Catastrophe Excess Reinsurance Agreements (1995)............. 10.7 Memoranda of Reinsurance as to Property Risk Excess Of Loss Agreement and the First, Second and Third Catastrophe First Excess Of Loss Agreements (1996)..................................................... 10.8(8) Quota Share Reinsurance Agreement, dated May 27, 1993 and effective July 1, 1991, between Great Pacific Insurance Co. and Gulf Insurance Company, et al. and Addendum No. 1 to Quota Share Reinsurance Agreement, dated May 27, 1993 and effective July 1, 1991, between Great Pacific Insurance Co. and Gulf Insurance Company, et al......... 10.9(3) Agreement for Employment dated January 1, 1990 between the Company and Douglas H. Helm....................................................... 10.10(8) Amendment to Agreement for Employment dated March 23, 1992 between the Company and Douglas H. Helm........................................... 10.11 Agreement of Employment Termination and Release dated July 2, 1995 between National Insurance Group, Fastrac Systems, Inc., Fastrac Systems, Inc. Insurance Agent & Broker, Great Pacific Insurance Company, Pinnacle Data Corporation and Douglas Harold Helm............ 10.12(10) Employment Agreement dated January 1, 1995 between the Company and David B. Brody........................................................ 10.13 Consulting Agreement dated January 2, 1996 by and among National Insurance Group, Pinnacle Data Corporation, Fastrac Systems, Inc. Insurance Agent & Broker, Great Pacific Insurance Company and David B. Brody................................................................. 10.14 Severance Agreement and Full Release of All Claims dated May 23, 1995 by and among Howard L. Herman, National Insurance Group and future subsidiaries.......................................................... 10.15 Severance Agreement and Release of Claims dated October 19, 1995 by and among Mark A. Speizer, National Insurance Group and future subsidiaries.......................................................... 10.16 Consulting Agreement dated February 1, 1996 between National Insurance Group and John R. Gaulding............................................
56 58
SEQUENTIALLY NUMBERED PAGE ------------ 10.17 John R. Gaulding At-Will Employment Agreement dated February 25, 1996 by and among John R. Gaulding, National Insurance Group and future subsidiaries.......................................................... 10.18(10) Lease Agreement dated March 20, 1995 between Thomas H. Lagos, James H. Lagos and Fastrac Systems, Inc., Insurance Agent and Broker for the premises located at One South Limestone Street, Springfield, Ohio..... 10.19(7) Lease Agreement dated June 3, 1992 between the Company and Tomoe Investment & Development, Inc. for the premises located at 395 Oyster Point Boulevard, Suite 500, South San Francisco, California........... 10.20(8) Form of First Amendment of Oyster Point Marina Business Park Office Lease (Suite 500) dated September 29, 1993 between Tomoe Investment & Development, Inc. and National Insurance Group........................ 10.21(8) Assignment and Assumption of Lease dated August 1, 1993 between San Mateo Financial Corporation and National Insurance Group for the premises located at 395 Oyster Point Boulevard, Suite 550, South San Francisco, California................................................. 10.22(8) Form of First Amendment of Oyster Point Marina Business Park Office Lease (Suite 550) dated September 29, 1993 between Tomoe Investment & Development, Inc. and National Insurance Group........................ 10.23(8) Amendment to Lease dated August 1, 1993 between Pinnacle Data Corporation and Sierra Pacific Properties, Inc........................ 10.24(10) Sublease Agreement dated March 24, 1995 between the Company and PHH Homequity Corporation for the premises located at 1855 Gateway Boulevard, Concord, California........................................ 10.25(5) Underwriting Administrative Agreement dated July 1, 1991 by and between Fastrac Systems, Inc. Agent & Broker (formerly Mark A. Speizer & Co., Inc.) and Gulf Insurance Company and affiliated insurance companies............................................................. 10.26(8) Form of Indemnification Agreement between Registrant and its officers and directors......................................................... 11.1 Computation of Weighted Average Shares Outstanding and Earnings per Share................................................................. 21.1(5) Subsidiaries of Company............................................... 23.1 Consent of Independent Accountants (included on page 55).............. 24.1 Power of Attorney (included on page 54)............................... 27.1 Financial Data Schedule...............................................
- --------------- (1) Incorporated by reference to exhibits filed with the Company's Registration Statement on Form S-1 (No. 33-14940) which became effective July 21, 1987. (2) Incorporated by reference to exhibits filed with the Company's Form 10-K for the fiscal year ended December 31, 1989. (3) Incorporated by reference to exhibits filed with the Company's Form 10-K for the fiscal year ended December 31, 1990. (4) Incorporated by reference to exhibits filed with the Company's Form 8-K filed on July 15, 1991. (5) Incorporated by reference to exhibits filed with the Company's Form 10-K for the fiscal year ended December 31, 1991. (6) Incorporated by reference to exhibits filed with the Company's Form S-8 filed on September 25, 1992. (7) Incorporated by reference to exhibits filed with the Company's Form 10-K for the fiscal year ended December 31, 1992. 57 59 (8) Incorporated by reference to exhibits filed with the Company's Registration Statement on Form S-2 (No. 33-71290) which became effective December 16, 1993. (9) Incorporated by reference to exhibits filed with the Company's Form 10-K for the fiscal year ended December 31, 1993. (10) Incorporated by reference to exhibits filed with the Company's Form 10-K for the fiscal year ended December 31, 1994. 58 EX-10.1 2 1986 STOCK OPTION PLAN AS AMENDED THROUGH 2/13/96 1 Exhibit 10.1 NATIONAL INSURANCE GROUP 1986 STOCK OPTION PLAN (AS AMENDED THROUGH FEBRUARY 13, 1996) 1. Purposes of the Plan. The purpose of this Stock Option Plan is to provide additional incentive to Employees and Consultants to work to maximize shareholder value. This Stock Option Plan also utilizes vesting periods to encourage key Employees and Consultants to continue in the employ of or service to the Company. The Plan and/or the granting of any option under the Plan to any employee shall not be construed to be any form of employment contract or guarantee of future employment or compensation. Options granted hereunder shall be "nonstatutory stock options." 2. Definitions. As used herein, the following definitions shall apply: (a) "Board" shall mean the Committee, if one has been appointed, or the Board of Directors of the Company, if no Committee is appointed. (b) "Common Stock" shall mean the Common Stock of the Company. (c) "Company" shall mean National Insurance Group, a California corporation. (d) "Committee" shall mean the Committee appointed by the Board of Directors in accordance with paragraph (a) of Section 4 of the Plan, if one is appointed. (e) "Employee" shall mean any person, including officers and directors, employed by the Company or any parent or subsidiary of the Company. The payment of a director's fee by the Company shall not be sufficient to constitute "employment" by the Company. (f) "Consultant" shall mean any person who is engaged by the Company or any subsidiary to render consulting services and is compensated for such consulting services, and any director of the Company whether compensated for such services or not; provided that if and in the event the Company registers any class of any equity security pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the term Consultant shall thereafter not include directors who are not compensated for their services or are paid only a director's fee by the Company. 2 (g) "Option" shall mean a stock option granted pursuant to the Plan. (h) "Optioned Stock" shall mean the Common Stock subject to an Option. (i) "Optionee" shall mean an Employee or Consultant who receives an Option. (j) "Plan" shall mean this 1986 Stock Option Plan. (k) "Share" shall mean a share of the Common Stock, as adjusted in accordance with Section 11 of the Plan. 3. Stock Subject to the Plan. Subject to the provisions of Section 11 of the Plan, the maximum aggregate number of shares which may be optioned and sold under the Plan is 1,006,820 shares of Common Stock. The Shares may be authorized, but unissued, or reacquired Common Stock. If an Option should expire or become unexercisable for any reason without having been exercised in full, the unpurchased Shares which were subject thereto shall, unless the Plan shall have been terminated, become available for future grant under the Plan. 4. Administration of the Plan. (a) Procedure. (i) Multiple Administrative Bodies. If permitted by Rule 16b-3 of the Exchange Act, the Plan may be administered by different bodies with respect to members of the Board of Directors of the Company ("Directors"), officers of the Company, within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder ("Officers"), who are not Directors, and Employees who are neither Directors nor Officers. (ii) Administration With Respect to Directors and Officers Subject to Section 16(b). With respect to Option grants made to Employees who are also Officers or Directors subject to Section 16(b) of the Exchange Act, the Plan shall be administered by (A) the Board of Directors, if the Board of Directors may administer the Plan in compliance with the rules governing a plan intended to qualify as a discretionary plan under Rule 16b-3, or (B) a committee designated by the Board of Directors to administer the Plan, which committee shall be constituted to comply with the rules governing a plan intended to qualify as a discretionary plan under Rule 16b-3 (the "Committee"). Once appointed, such Committee -2- 3 shall continue to serve in its designated capacity until otherwise directed by the Board of Directors. From time to time the Board of Directors may increase the size of the Committee and appoint additional members, remove members (with or without cause) and substitute new members, fill vacancies (however caused), and remove all members of the Committee and thereafter directly administer the Plan, all to the extent permitted by the rules governing a plan intended to qualify as a discretionary plan under Rule 16b-3. (ii) Administration With Respect to Other Persons. With respect to Option grants made to Employees or Consultants who are neither Directors nor Officers of the Company, the Plan shall be administered by (A) the Board of Directors or (B) a committee designated by the Board of Directors, which committee shall be constituted to satisfy the legal requirements relating to the administration of stock option plans under state corporate and securities laws and the Internal Revenue Code of 1986, as amended (the "Applicable Laws"). Once appointed, such Committee shall serve in its designated capacity until otherwise directed by the Board of Directors. The Board of Directors may increase the size of the Committee and appoint additional members, remove members (with or without cause) and substitute new members, fill vacancies (however caused), and remove all members of the Committee and thereafter directly administer the Plan, all to the extent permitted by Applicable Laws. (b) Powers of the Board. Subject to the provisions of the Plan, the Board shall have the authority, in its discretion: (i) to grant "nonstatutory stock options"; (ii) to determine, upon review of relevant information and in accordance with Section 8(b) of the Plan, the fair market value of the Common Stock; (iii) to determine the exercise price per share of Options to be granted, which exercise price shall be determined in accordance with Section 8(a) of the Plan; (iv) to determine the Employees or Consultants to whom, and the time or times at which, Options shall be granted and the number of shares to be represented by each Option; (v) to interpret the Plan; (vi) to prescribe, amend and rescind rules and regulations relating to the Plan; (vii) to determine the terms and provisions of each Option granted (which need not be identical) and, with the consent of the holder thereof, modify or amend each Option; (viii) to accelerate or defer (with the consent of the Optionee) the exercise date of any Option, consistent with the provisions of Section 5 of the Plan; (ix) to authorize any person to execute on behalf of the Company any instrument required to effectuate the grant of an Option previously granted by the Board; and (x) to make all other determinations deemed necessary or advisable for the administration of the Plan. -3- 4 (c) Effect of Board's Decision. All decisions, determinations and interpretations of the Board shall be final and binding on all Optionees and any other holders of any Options granted under the Plan. 5. Eligibility. (a) Options may be granted only to Employees and Consultants. An Employee or Consultant who has been granted an Option may, if he is otherwise eligible, be granted an additional Option or Options. (b) The Plan shall not confer upon any Optionee any right with respect to continuation of employment, compensation or consulting relationship with the Company, nor shall it interfere in any way with his right or the Company's right to terminate his employment or consulting relationship at any time. (c) The following limitations shall apply to grants of Options to Employees: (i) No Employee shall be granted, in any fiscal year of the Company, Options to purchase more than 150,000 Shares. (ii) The foregoing limitations shall be adjusted proportionately in connection with any change in the Company's capitalization as described in Section 11. (iii) If an Option is canceled in the same fiscal year of the Company in which it was granted (other than in connection with a transaction described in Section 11), the cancelled Option will be counted against the limit set forth in Section 5(c). For this purpose, if the exercise price of an Option is reduced, the transaction will be treated as a cancellation of the Option and the grant of a new Option. 6. Term of Plan. The Plan shall become effective upon the earlier to occur of its adoption by the Board of Directors or its approval by the shareholders of the Company as described in Section 17 of the Plan. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 13 of the Plan. 7. Term of Option. The term of each Option shall be ten (10) years from the date of grant thereof or such shorter term as may be provided in the Stock Option Agreement. -4- 5 8. Exercise Price and Consideration. (a) The per Share exercise price for the Shares to be issued pursuant to exercise of an Option shall be such price as is determined by the Board, but shall be no less than 100% of the fair market value per Share on the date of grant. (b) The fair market value shall be determined by the Board in its discretion; provided, however, that where there is a public market for the Common Stock, the fair market value per Share shall be the mean of the bid and asked prices of the Common Stock for the date of grant, as reported in the Wall Street Journal (or, if not so reported, as otherwise reported by the National Association of Securities Dealers Automated Quotation (NASDAQ) System) or, in the event the Common Stock is listed on a stock exchange, the fair market value per Share shall be the closing price on such exchange on the date of grant of the Option, as reported in the Wall Street Journal. (c) The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Board and may consist entirely of either cash or check in United States currency. 9. Exercise of Option. (a) Procedure for Exercise; Rights as a Shareholder. Any Option granted hereunder shall be exercisable at such times and under such conditions as determined by the Board, including performance criteria with respect to the Company and/or the Optionee, and as shall be permissible under the terms of the Plan. An Option may not be exercised for a fraction of a Share. An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may, as authorized by the Board, consist of any consideration and method of payment allowable under Section 8(c) of the Plan. Until the Company receives written notice of such exercise and full payment for the Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to Optioned Stock. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 11 of the Plan. -5- 6 Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter may be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) Termination of Status as an Employee or Consultant. If an Employee or Consultant ceases to serve as an Employee or Consultant, he may, but only within thirty (30) days (or such longer period of time as is determined by the Board, but in no event later than the expiration date of the term of such Option as set forth in the Option Agreement) after the date he ceases to be an Employee or Consultant of the Company, exercise his Option to the extent that he was entitled to exercise it at the date of such termination. To the extent that he was not entitled to exercise the Option at the date of such termination, or if he does not exercise such Option (which he was entitled to exercise) within the time specified herein, the Option shall terminate. (c) Disability of Optionee. Notwithstanding the provisions of Section 9(b) above, in the event an Employee or Consultant is unable to continue his employment or consulting relationship (as the case may be) with the Company as a result of his total and permanent disability (as defined in section 22(e)(3) of the Internal Revenue Code), he may, but only within six (6) months (or such longer period of time as is determined by the Board, but in no event later than the expiration date of the term of such Option as set forth in the Option Agreement) from the date of termination, exercise his Option to the extent he was entitled to exercise it at the date of such termination. To the extent that he was not entitled to exercise the Option at the date of termination, or if he does not exercise such Option (which he was entitled to exercise) within the time specified herein, the Option shall terminate. (d) Death of Optionee. In the event of the death of an Optionee: (i) during the term of the Option who is at the time of his death an Employee or Consultant of the Company and who shall have been in continuous status as an Employee or Consultant since the date of grant of the Option, the Option may be exercised, at any time within twelve (12) months following the date of death (or such longer period of time as is determined by the Board, but in no event later than the expiration date of the term of such Option as set forth in the Option Agreement), by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but -6- 7 only to the extent of the right to exercise that had accrued at the date of the Optionee's death; or (ii) within thirty (30) days (or such longer period of time as is determined by the Board, but in no event later than the expiration date of the term of such Option as set forth in the Option Agreement) after the termination of continuous status as an employee or Consultant, the Option may be exercised, at any time within six (6) months following the date of death (or such longer period of time as is determined by the Board, but in no event later than the expiration date of the term of such Option as set forth in the Option Agreement), by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the date of termination. 10. Non-Transferability of Options. The Option may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. 11. Adjustments Upon Changes in Capitalization or Merger. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, as well as the price per share of Common Stock covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option. -7- 8 In the event of the proposed dissolution or liquidation of the Company, the Option will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Board. The Board may, in the exercise of its sole discretion in such instances, declare that any Option shall terminate as of a date fixed by the Board and give each Optionee the right to exercise his Option as to all or any part of the Optioned Stock, including Shares as to which the Option would not otherwise be exercisable. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, the Option shall be assumed or an equivalent option shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation, unless the Board determines, in the exercise of its sole discretion and in lieu of such assumption or substitution, that the Optionee shall have the right to exercise the Option as to all of the Optioned Stock, including Shares as to which the Option would not otherwise be exercisable. If the Board makes an Option fully exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Board shall notify the Optionee that the Option shall be fully exercisable for a period of thirty (30) days from the date of such notice, and the Option will terminate upon the expiration of such period. 12. Time of Granting Options. The date of grant of an Option shall, for all purposes, be the date on which the Board makes the determination granting such Option. Notice of the determination shall be given to each Employee or Consultant to whom an Option is so granted within a reasonable time after the date of such grant. 13. Amendment and Termination of the Plan. (a) Amendment and Termination. The Board may amend or terminate the Plan from time to time in such respects as the Board may deem advisable; provided, however, that a following revision or amendment shall require approval of the Shareholders of the Company in the manner described in Section 17 of the Plan: (i) if the Company has a class of equity security registered under Section 12 of the Exchange Act at the time of such revision or amendment, any material increase in the benefits accruing to participants under the Plan. (b) Shareholder Approval. If any amendment requiring shareholder approval under Section 13(a) of the Plan is made subsequent to the first registration of any class of equity security by the Company under Section 12 of the Exchange Act, such shareholder -8- 9 approval shall be solicited as described in Section 17(a) of the Plan. (c) Effect of Amendment or Termination. Any such amendment or termination of the Plan shall not affect Options already granted and such Options shall remain in full force and effect as if this Plan had not been amended or terminated, unless mutually agreed otherwise between the Optionee and the Board, which agreement must be in writing and signed by the Optionee and the Company. 14. Conditions Upon Issuance of Shares. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned relevant provisions of law. 15. Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. Inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 16. Option Agreement. Options shall be evidenced by written option agreements in such form as the Board shall approve. 17. Shareholder Approval. If and in the event that the Company registers any class of any equity security pursuant to Section 12 of the Exchange Act, the approval of such shareholders of the Company shall be: -9- 10 (a) (1) solicited substantially in accordance with Section 14(a) of the Exchange Act and the rules and regulations promulgated thereunder, or (2) solicited after the Company has furnished in writing to the holders entitled to vote substantially the same information concerning the Plan as that which would be required by the rules and regulations in effect under Section 14(a) of the Exchange Act at the time such information is furnished; and (b) obtained at or prior to the first annual meeting of shareholders held subsequent to the first registration of any class of equity securities of the Company under Section 12 of the Exchange Act. If such shareholder approval is obtained by written consent, it must be obtained by the unanimous written consent of all shareholders of the Company. 18. Information to Optionees. The Company shall provide to each Optionee, during the period for which such Optionee has one or more Options outstanding, copies of all annual reports and other information which are provided to all shareholders of the Company. The Company shall not be required to provide such information if the issuance of Options under the Plan is limited to key employees whose duties in connection with the Company assure their access to equivalent information. -10- EX-10.3 3 1991 DIRECTORS OPTION PLAN 1 Exhibit 10.3 NATIONAL INSURANCE GROUP 1991 DIRECTOR OPTION PLAN (AS AMENDED THROUGH MAY 23, 1995) 1. Purposes of the Plan. The purposes of this 1991 Director Option Plan are to attract and retain high caliber personnel for service as Directors of the Company, to provide additional incentive to the Outside Directors of the Company to serve as Directors, and to encourage their continued service on the Board. Neither this Plan nor the granting of Options hereunder shall be construed to be any form of employment agreement or a guarantee or commitment of a continuation of directorship of an Optionee. All options granted hereunder shall be "nonstatutory stock options". 2. Definitions. As used herein, the following definitions shall apply: (a) "Board" means the Board of Directors of the Company. (b) "Code" means the Internal Revenue Code of 1986, as amended. (c) "Common Stock" means the Common Stock of the Company. (d) "Company" means National Insurance Group, a California corporation. (e) "Continuous Status as a Director" means the absence of any interruption or termination of service as a Director. (f) "Director" means a member of the Board. (g) "Employee" means any person, including officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. The payment of a Director's fee by the Company shall not be sufficient in and of itself to constitute "employment" by the Company. (h) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (i) "Fair Market Value" means, as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including 2 without limitation the National Market System of the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") System, the Fair Market Value of a Share of Common Stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such system or exchange (or the exchange with the greatest volume of trading in Common Stock) on the date of grant, as reported in the Wall Street Journal or such other source as the Board deems reliable; (ii) If the Common Stock is quoted on the NASDAQ System (but not on the National Market System thereof) or regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock on the date of grant, as reported in the Wall Street Journal or such other source as the Board deems reliable, or; (iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Board. (j) "Option" means a stock option granted pursuant to the Plan. (k) "Optioned Stock" means the Common Stock subject to an Option. (l) "Optionee" means an Outside Director who receives an Option. (m) "Outside Director" means a Director who is not an Employee. (n) "Parent" means a "parent corporation", whether now or hereafter existing, as defined in Section 429(e) of the Internal Revenue Code of 1986. (o) "Plan" means this 1991 Director Option Plan. (p) "Share" means a share of the Common Stock, as adjusted in accordance with Section 10 of the Plan. (q) "Subsidiary" means a "subsidiary corporation", whether now or hereafter existing, as defined in Section 429(f) of the Internal Revenue Code of 1986. -2- 3 3. Stock Subject to the Plan. Subject to the provisions of Section 10 of the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan is 325,000 Shares (the "Pool") of Common Stock. The Shares may be authorized but unissued, or reacquired Common Stock. If an Option should expire or become unexercisable for any reason without having been exercised in full, the unpurchased Shares which were subject thereto shall, unless the Plan shall have been terminated, become available for future grant under the Plan. 4. Administration of and Grants of Options under the Plan. (a) Administrator. Except as otherwise required herein, the Plan shall be administered by the Board. (b) Procedure for Grants. The provisions set forth in this Section 4(b) shall not be amended more than once every six (6) months, other than to comport with changes in the Code, the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder. All grants of Options hereunder shall be automatic and non-discretionary and shall be made strictly in accordance with the following provisions: (i) No person shall have any discretion to select which Outside Directors shall be granted Options or to determine the number of Shares to be covered by Options granted to Outside Directors. (ii) Each Outside Director who is a member of the Board at the close of business on May 24, 1995 and who has been a member of the Board for at least one month prior to such date, shall receive on May 24, 1995 an option to purchase twenty-five thousand (25,000) Shares. Such Option shall become exercisable in installments cumulatively as to twenty-five percent (25%) of the Optioned Stock on May 24, 1996, with one forty-eighth (1/48th) of the Optioned Stock becoming exercisable at the end of each month thereafter. (iii) Each individual who becomes an Outside Director, whether by appointment, election, or ceasing to be an Employee Director, on or after May 23, 1995 shall receive an option to purchase fifty thousand (50,000) Shares on the date such individual becomes an Outside Director. Such Option shall become exercisable in installments cumulatively as to twenty-five percent (25%) of the Optioned Stock on the first anniversary date after the date of grant of such Option, with one forty-eighth (1/48th) of the -3- 4 Optioned Stock becoming exercisable at the end of each month thereafter. (iv) Additional terms of each Option granted hereunder shall be as follows: (A) the term of the Option shall be ten (10) years. (B) the Option shall be exercisable only while the Outside Director remains a Director of the Company, except as set forth in Section 8 hereof. (C) the exercise price per Share shall be 100% of the Fair Market Value per Share on the date of grant of the Option. (v) In the event that any Option granted under the Plan would cause the number of Shares subject to outstanding Options plus the number of Shares previously purchased upon exercise of Options to exceed the Pool, then each such automatic grant shall be for that number of Shares determined by dividing the total number of Shares remaining available for grant by the number of Outside Directors entitled to receive an Option on the automatic grant date. No further grants shall be made until such time, if any, as additional Shares become available for grant under the Plan through an increase in the number of Shares which may be issued under the Plan or through cancellation or expiration of Options previously granted hereunder. Notwithstanding the above, any Option granted hereunder shall be exercisable as follows: (vi) For so long as the Common Stock is listed on an established stock exchange or a national market system, including without limitation the National Market System of the NASDAQ System, in the event that the closing sales price of a Share of Common Stock on any trading day, as reported in the Wall Street Journal or such other source as the Board deems reliable, is equal to or exceeds $20.00 (as adjusted for any stock splits, combinations, consolidations or stock distributions or dividends), the Optionee shall thereafter have the right to exercise such Option as to all of the Optioned Stock, including Shares as to which such Option would not otherwise be exercisable. Notwithstanding the foregoing, in the event the Common Stock is quoted on the NASDAQ System (but not on the National Market System thereof) or regularly quoted by a recognized securities dealer but selling prices are not reported, -4- 5 and in the event that the mean between the high bid and low asked prices for the Common Stock on any trading day, as reported in the Wall Street Journal or such other source as the Board deems reliable, is equal to or exceeds $20.00 (as adjusted for any stock splits, combinations, consolidations or stock distributions or dividends), the Optionee shall thereafter have the right to exercise such Option as to all of the Optioned Stock, including Shares as to which such Option would not otherwise be exercisable. (vii) In the event Mark A. Speizer, the Company's Chairman of the Board and Chief Executive Officer, and Howard L. Herman, the Company's President, shall sell or otherwise transfer beneficial ownership of more than 75% of the aggregate number of Shares controlled by them as of May 23, 1995, the Optionee (except for options granted under the Plan to Messrs. Speizer and/or Herman) shall thereafter have the right to exercise such Option as to all of the Optioned Stock, including Shares as to which such Option would not otherwise be exercisable. As of May 23, 1995, Messrs. Speizer and Herman control an aggregate of 1,772,329 Shares, which number of Shares is subject to adjustment in accordance with Section 10 of the Plan. (c) Powers of the Board. Subject to the provisions and restrictions of the Plan, the Board shall have the authority, in its discretion: (i) to determine, upon review of relevant information and in accordance with Section 2(i) of the Plan, the Fair Market Value of the Common Stock; (ii) to interpret the Plan; (iii) to prescribe, amend and rescind rules and regulations relating to the Plan; (iv) to authorize any person to execute on behalf of the Company any instrument required to effectuate the grant of an Option previously granted hereunder; and (v) to make all other determinations deemed necessary or advisable for the administration of the Plan. (d) Effect of Board's Decision. All decisions, determinations and interpretations of the Board shall be final. 5. Eligibility. Options may be granted only to Outside Directors. All Options shall be automatically granted in accordance with the terms set forth in Section 4(b) hereof. An Outside Director who has been granted an Option may, if he is otherwise eligible, be granted an additional Option or Options in accordance with such provisions. The Plan shall not confer upon any Optionee any right with respect to continuation of service as a Director or nomination to serve as a Director, nor shall it interfere in any way with any -5- 6 rights which the Director or the Company may have to terminate his directorship at any time. 6. Term of Plan. The Plan shall become effective upon the earlier to occur of its adoption by the Board or its approval by the shareholders of the Company as described in Section 16 of the Plan. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 11 of the Plan. 7. Exercise Price and Consideration. (a) Exercise Price. The per Share exercise price for Optioned Stock shall be 100% of the Fair Market Value per Share on the date of grant of the Option. (b) Form of Consideration. The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall consist entirely of (i) cash, (ii) check payable to the Company in United States currency, (iii) other Shares which (x) in the case of Shares acquired upon exercise of an Option have been owned by the Optionee for more than six months on the date of surrender and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised, or (iv) delivery of a properly executed exercise notice together with such other documentation as the Administrator and the broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company of the sale or loan proceeds required to pay the exercise price. 8. Exercise of Option. (a) Procedure for Exercise; Rights as a Shareholder. Any Option granted hereunder shall be exercisable at such times as are set forth in Section 4(b) hereof; provided, however, that no Options shall be exercisable until shareholder approval of the Plan in accordance with Section 16 hereof has been obtained. An Option may not be exercised for a fraction of a Share. An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may consist of any consideration and method of payment allowable under Section 7(b) of the Plan. Until the issuance (as evidenced -6- 7 by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. A share certificate for the number of Shares so acquired shall be issued to the Optionee as soon as practicable after exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 10 of the Plan. Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter may be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) Rule 16b-3. Options granted hereunder to Outside Directors shall be administered in accordance with and must comply with the applicable provisions of Rule 16b-3 promulgated under the Exchange Act or any successor rule thereto and shall contain such additional conditions or restrictions as may be required thereunder to qualify for the maximum exemption from Section 16 of the Exchange Act with respect to Plan transactions. (c) Termination of Continuous Status as a Director. In the event an Optionee's Continuous Status as a Director terminates, the Optionee may exercise his or her Option until the expiration of its ten (10) year term, but only to the extent that the Optionee was entitled to exercise it at the date of such termination. To the extent that the Optionee was not entitled to exercise an Option at the date of such termination, and to the extent that the Optionee does not exercise such Option (to the extent otherwise so entitled) within the time specified herein, the Option shall terminate. (d) Death of Optionee. In the event of the death of an Optionee, the Option may be exercised, at any time until the expiration of its ten (10) year term by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the date of the Optionee's death. 9. Non-Transferability of Options. The Option may not be sold, pledged, assigned, hypothecated, rented, leased, transferred, or disposed of in whole or in part in any manner other than by will -7- 8 or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. 10. Adjustments Upon Changes in Capitalization or Merger. Subject to any required action by the shareholders of the Company, the number of Shares covered by each outstanding Option, and the number of Shares which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, as well as the price per Share covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued Shares resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the aggregate number of issued Shares effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of Shares of stock of any class, or securities convertible into Shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Shares subject to an Option. In the event of the proposed dissolution or liquidation of the Company, all outstanding Options will terminate immediately prior to the consummation of such proposed action. The Board shall declare that any Option shall terminate as of such date and give each Optionee the right to exercise his Option as to all of the Optioned Stock, including Shares as to which the Option would not otherwise be exercisable. In the event of a merger of the Company with or into another corporation, or the sale of all or substantially all of the assets of the Company, or any other corporate reorganization, in which consolidation, merger, sale of assets or reorganization the shareholders of the Company immediately prior to such transaction will not hold (by virtue of the securities issued in such transaction) at least fifty percent (50%) of the voting power of the surviving, continuing or purchasing entity (a "Change in Control"), the Optionee shall have the right to exercise such Option as to all of the Optioned Stock, including Shares as to which such Option would not otherwise be exercisable. The Board shall notify the Optionee at least ten (10) days prior to a Change -9- 9 in Control of such vesting acceleration, after which the Options, to the extent not previously exercised, shall terminate. 11. Amendment and Termination of the Plan. (a) Amendment and Termination. The Board may at any time amend, alter, suspend, or discontinue the Plan, but no amendment, alteration, suspension, or discontinuation shall be made which would impair the rights of any Optionee under any grant theretofore made, without his or her consent. In addition, to the extent necessary and desirable to comply with Rule 16b-3 under the Exchange Act (or any other applicable law or regulation), the Company shall obtain shareholder approval of any Plan amendment in such a manner and to such a degree as is required. (b) Effect of Amendment or Termination. Any such amendment or termination of the Plan shall not affect Options already granted and such Options shall remain in full force and effect as if this Plan had not been amended or terminated. 12. Time of Granting Options. The date of grant of an Option shall, for all purposes, be the date determined in accordance with Section 4(b) hereof. Notice of the determination shall be given to each Outside Director to whom an Option is so granted within a reasonable time after the date of such grant. 13. Conditions Upon Issuance of Shares. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, state securities laws, and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares, if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned relevant provisions of law. Inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by -9- 10 the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 14. Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 15. Option Agreement. Options shall be evidenced by written option agreements in such form as the Board shall approve. 16. Shareholder Approval. Continuance of the Plan shall be subject to approval by the shareholders of the Company at or prior to the first annual meeting of shareholders held subsequent to the first granting of an Option hereunder. Such shareholder approval shall be obtained in the degree and manner required under applicable state and federal law. -10- EX-10.7 4 MEMORANDA OF REINSURANCE 1 Exhibit 10.7 Page 1 of 5 No: 4852-00-0002-00-96-03-00-00 San Francisco, February 15, 1996 Mr. Kevin C. Eichler Executive Vice President and Chief Executive Officer Great Pacific Insurance Company 395 Oyster Point Boulevard, Suite 500 South San Francisco, California 94080-1933 Dear Casey: We are in receipt of confirmation that the following reinsurance has been effected for your account: REASSURED: NATIONAL INSURANCE GROUP COMPANIES GREAT PACIFIC INSURANCE COMPANY TYPE: Property Risk Excess of Loss Treaty BUSINESS COVERED: Business classified as Dwelling Fire, Fire, Extended Perils, Special Form on Interim Coverage policies, Forced Order policies, Real-Estate Owned (REO) policies, Automobile Physical Damage, Personal Article Floaters, Personal Lines; Watercraft and Private Passenger Planes, Force Placed Property and/or Blanket Mortgage Security Insurance produced by Fastrac Systems, Inc. of Bellevue, Washington, and produced by M.A. Speizer & Co,. Inc. or any other of the National Insurance Group Companies of South San Francisco, California on behalf of the Reassured. 2 Page 2 of 5 4852-00-0002-00-96-03-00-00 TERM AND CANCELLATION: The term of this Contract shall be from 12:01 a.m., January 1, 1996 Local Standard Time (Local Standard Time being that time which applies in the area where the risk is located) to 12:01 a.m., December 31, 1996, Pacific Standard Time, for losses occurring on new, renewal and in force policies. TERM AND CANCELLATION: (CONTINUED) In the event of cancellation, all cessions with an effective date prior to the date of termination of this Contract shall remain in full force and shall continue to be covered hereunder for a period of up to one year subsequent to the date of termination. The Reassured shall have the option to waive the run-off provision and the reinsurance premium shall be adjusted on the gross earned premium income as of the date and time of cancellation. In such event, the Reinsurer shall not be liable as respects losses occurring subsequent to the effective date and time of cancellation. TERRITORY: This reinsurance shall cover wherever the Reassured's policy apply. LIMIT: $1,750,000 in excess $750,000 on any one risk, in any one loss occurrence. Subject to maximum recovery of $3,500,000 any one loss occurrence. The Reassured shall be the sole judge as to what constitutes one risk. NET RETAINED LINES: All recoveries received from the Florida Hurricane Fund will be retained net by the Reassured, down to a net occurrence loss to the Reassured of $250,000, after which 3 Page 3 of 5 4852-00-0002-00-96-03-00-00 any additional recoveries will inure to this Agreement by reducing the gross loss subject to this program. ALLOCATED LOSS ADJUSTMENT EXPENSES: Expenses pro rata in addition. REINSTATEMENT: Unlimited reinstatements without additional charge. RATE: Deposit Premium of $150,000 payable quarterly in advance and adjusted annually at .95% Gross Earned Premium Income. Minimum Premium of $120,000. EXCLUSIONS: See attached Exclusion List. GENERAL CONDITIONS: Loss Occurrence Clause to include hours clause as follows: - 72 hours clause tornado, cyclone, hurricane, windstorm and hail - 120 hours clause riots and civil commotion/vandalism and malicious mischief within the area of one municipality or county and the municipalities or counties contiguous thereto - 168 hours Freeze - 168 hours Earthquake and Ensuing Loss - 168 hours for any other physical damage peril Extra Contractual Obligations (100%) Excess of Policy Limits (100%) Net Retained Lines Clause 4 Page 4 of 5 4852-00-0002-00-96-03-00-00 Notice of Loss and Loss Settlement Tax Clause Access to Records Clause Loss Reserve Clause Commutation Clause Errors and Omissions Clause Insolvency Clause Insolvency Funds Exclusion Clause Arbitration Clause Service of Suit Clause Guy Carpenter & Company, Inc. Intermediary Clause WORDING: TBA 5 Page 5 of 5 4852-00-0002-00-96-03-00-00 REINSURERS Allmerica Re, A Division of the Hannover Insurance Company 5.000% Constitution Reinsurance Company 8.000% Continental Casualty Company 5.000% Employers Mutual Casualty Company 1.500% First Excess and Reinsurance Corporation 5.000% Folksamerica Reinsurance Company 5.000% Hartford Re Company for and on behalf of: Hartford Fire Insurance Company 4.000% NAC Reinsurance Corporation 26.000% PMA Reinsurance Corporation 6.000% Republic Western Insurance Company 3.000% Sumitomo Marine Re Management, Inc. 2.000% Sydney Reinsurance Corporation 10.000% United Fire & Casualty Company 1.000% USF Re Insurance Company 8.500% Vesta Fire Insurance Corporation 10.000% ------- 100.000%
6 Page 6 of 5 4852-00-0002-00-96-03-00-00 GUY CARPENTER & COMPANY, INC. SENIOR VICE PRESIDENT 7 Page 7 of 5 4852-00-0002-00-96-03-00-00 GREAT PACIFIC INSURANCE COMPANY PROPERTY RISK EXCESS OF LOSS TREATY EXCLUSIONS A. Business classified as Ocean Marine except for personal lines watercraft physical damage not to exceed $100,000 any one risk; B. Personal Accident, Health, Surety and Fidelity, Workers' Compensation, and all classes of Casualty; C. Financial and Insolvency guarantees; D. Aviation business except for physical damage on private planes not to exceed $100,000 any one risk; E. Automobile business except for automobile physical damage; F. Inland Marine policies covering railroad rolling stock, streamlined trains, negative films, registered mail, jewelers block, animal mortality, offshore drilling rigs; G. Excess of Loss Reinsurance and reinsurance accepted under obligatory reinsurance treaties except for business produced by Fastrac Systems, Inc. of Bellevue, Washington, and by M.A. Speizer & Co., Inc. or any other of the National Insurance Group companies of South San Francisco, California; H. Hail damage to growing/standing crops; I. Flood insurance, when written as such; J. Pools, Association and Syndicates Clause (amended to include coverage for California Fair Plan); K. Insolvency Funds; L. War Exclusion Clause; M. Nuclear Incident as per Nuclear Incident Exclusion Clause Physical Damage - Reinsurance - (USA); N. Seepage and Pollution as per ISO wording, or so deemed. O. Transmission and Distribution Lines. 8 Page 8 of 5 No: 4852-00-0002-00-96-03-00-00 9 Page 1 of 5 No: 4852-00-0001-00-96-03-01-00 San Francisco, February 15, 1996 Mr. Kevin C. Eichler Executive Vice President and Chief Executive Officer Great Pacific Insurance Company 395 Oyster Point Boulevard, Suite 500 South San Francisco, California 94080-1933 Dear Casey: We are in receipt of confirmation that the following reinsurance has been effected for your account: REASSURED: NATIONAL INSURANCE GROUP COMPANIES GREAT PACIFIC INSURANCE COMPANY TYPE: Catastrophe First Excess of Loss Treaty BUSINESS COVERED: Business classified as Dwelling Fire, Fire, Extended Perils, Special Form on Interim Coverage policies, Forced Order policies, Real-Estate Owned (REO) policies, Automobile Physical Damage, Personal Article Floaters, Personal Lines; Watercraft and Private Passenger Planes, Force Placed Property and/or Blanket Mortgage Security Insurance produced by Fastrac Systems, Inc. of Bellevue, Washington, and produced by M.A. Speizer & Co,. Inc. or any other of the National Insurance Group Companies of South San Francisco, California on behalf of the Reassured. 10 Page 2 of 5 4852-00-0001-00-96-03-01-00 TERM AND CANCELLATION: The term of this Contract shall be from 12:01 a.m., January 1, 1996 Local Standard Time (Local Standard Time being that time which applies in the area where the risk is located) to 12:01 a.m., December 31, 1996, Pacific Standard Time, for losses occurring on new, renewal and in force policies. TERM AND CANCELLATION: (Continued) Should this Contract terminate while a loss occurrence is in progress, the Reinsurers shall nevertheless be liable, to the extent of their interest and subject to the other conditions of this Contract, for all losses resulting from such loss occurrence, whether such losses occur before or after such termination. TERRITORY: This reinsurance shall cover wherever the Reassured's policies apply. LIMIT: $2,500,000 Ultimate Net Loss each and every loss occurrence in excess of $2,500,000 Ultimate Net Loss each and every loss occurrence. NET RETAINED LINES: All recoveries received from the Florida Hurricane Fund will be retained net by the Reassured, down to a net occurrence loss to the Reassured of $250,000, after which any additional recoveries will inure to the Catastrophe Excess Program by reducing the gross loss subject to the Catastrophe program. Recoveries from all underlying reinsurance greater than $2,500,000 shall inure to the sole benefit of reinsurers hereunder; subject to a minimum net retention by the Reassured any one loss of no less than $250,000. 11 Page 3 of 5 4852-00-0001-00-96-03-01-00 CO-REINSURANCE: 5% net retained by the Reassured. REINSTATEMENT: One full reinstatement at pro rata additional premium with respect to amount and 100% with respect to time. WARRANTED: Two Risk Minimum RATE: Deposit Premium of $215,000 payable semi-annual in advance adjustable at 1.299% Gross Earned Premium Income. Minimum Premium of $172,000. EXCLUSIONS: As per attached Exclusion List. GENERAL CONDITIONS: Ultimate Net Loss Clause to include Loss Adjustment Expenses (which shall include defense costs including but not limited to expenses incurred in determination of coverage). Loss Occurrence Cause to include definition of hours clause and as follows: - 72 hours clause tornado, cyclone, hurricane, windstorm and hail - 120 hours clause riots and civil commotion/vandalism and malicious mischief within the area of one municipality or county and the municipalities or counties contiguous thereto - 168 hours Freeze - 168 hours Earthquake and Ensuing Loss - 168 hours for any other physical damage peril ECO/XPL - Covered at 100%, subject to a maximum of 25% of the original catastrophe loss. Net Retained Lines Clause Notice of Loss and Loss Settlement 12 Page 4 of 5 4852-00-0001-00-96-03-01-00 Tax Provisions Clause Access to Records Clause Errors and Omissions Clause Insolvency Clause Insolvency Funds Exclusion Clause Arbitration Clause Service of Suit Clause Guy Carpenter & Company, Inc. Intermediary Clause WORDING: TBA 13 Page 5 of 5 4852-00-0001-00-96-03-01-00 REINSURERS Allmerica Re, A Division of the Hannover Insurance Company 5.000% Christiania General Insurance 12.632% Corporation of New York Constitution Reinsurance Company 6.000% Folksamerica Reinsurance Company 6.000% Hartford Re Company 5.000% for and on behalf of: Hartford Fire Insurance Company NAC Reinsurance Corporation 5.000% Nationwide Mutual Insurance 7.368% Company Republic Western Insurance Company 5.000% Sydney Reinsurance Corporation 10.000% USF Re Insurance Company 5.000% Vesta Fire Insurance Corporation 25.000% Winterthur Reinsurance Corporation of America 8.000% ------- 100.000% of 95% =======
14 Page 6 of 5 4852-00-0001-00-96-03-01-00 GUY CARPENTER & COMPANY, INC. Senior Vice President 15 Page 7 of 5 4852-00-0001-00-96-03-01-00 GREAT PACIFIC INSURANCE COMPANY CATASTROPHE EXCESS OF LOSS TREATY EXCLUSIONS A. Business classified as Ocean Marine except for personal lines watercraft physical damage not to exceed $100,000 any one risk; B. Personal Accident, Health, Surety and Fidelity, Workers' Compensation, and all classes of Casualty; C. Financial and Insolvency guarantees; D. Aviation business except for physical damage on private planes not to exceed $100,000 any one risk; E. Automobile business except for automobile physical damage; F. Inland Marine policies covering railroad rolling stock, streamlined trains, negative films, registered mail, jewelers block, animal mortality, offshore drilling rigs; G. Excess of loss Reinsurance and reinsurance accepted under obligatory reinsurance treaties except for business produced by Fastrac Systems, Inc. of Bellevue, Washington, and by M.A. Speizer & Co., Inc. or any other of the National Insurance Group companies of South San Francisco California; H. Hail damage to growing/standing crops; I. Flood insurance, when written as such; J. Pools, Associations and Syndicates Clause (amended to include coverage for California Fair Plan); K. Insolvency Funds Exclusion clause; L. War Exclusion Clause; M. Nuclear Incident as per Nuclear Incident Exclusion Clause Physical Damage - Reinsurance - (USA); N. Seepage and Pollution as per ISO wording, or so deemed, O. Transmission and Distribution Lines. 16 Page 8 of 5 4852-00-0001-00-96-03-01-00 17 Page 1 of 5 No: 4852-00-0001-00-96-03-02-00 San Francisco, February 15, 1996 Mr. Kevin C. Eichler Executive Vice President and Chief Executive Officer Great Pacific Insurance Company 395 Oyster Point Boulevard, Suite 500 South San Francisco, California 94080-1933 Dear Casey: We are in receipt of confirmation that the following reinsurance has been effected for your REASSURED: NATIONAL INSURANCE GROUP COMPANIES GREAT PACIFIC INSURANCE COMPANY TYPE: Catastrophe Second Excess of Loss Treaty BUSINESS COVERED: Business classified as Dwelling Fire, Fire, Extended Perils, Special Form on Interim Coverage policies, Forced Order policies, Real-Estate Owned (REO) policies, Automobile Physical Damage, Personal Article Floaters, Personal Lines; Watercraft and Private Passenger Planes, Force Placed Property and/or Blanket Mortgage Security Insurance produced by Fastrac Systems, Inc. of Bellevue, Washington, and produced by M.A. Speizer & Co,. Inc. or any other of the National Insurance Group Companies of South San Francisco, California on behalf of the Reassured. 18 Page 2 of 5 No: 4852-00-0001-00-96-03-02-00 TERM AND CANCELLATION: The term of this Contract shall be from 12:01 a.m., January 1, 1996 Local Standard Time (Local Standard Time being that time which applies in the area where the risk is located) to 12:01 a.m., December 31, 1996, Pacific Standard Time, for losses occurring on new, renewal and in force policies. TERM AND CANCELLATION: (CONTINUED) Should this Contract terminate while a loss occurrence is in progress, the Reinsurers shall nevertheless be liable, to the extent of their interest and subject to the other conditions of this Contract, for all losses resulting from such loss occurrence, whether such losses occur before or after such termination. TERRITORY: This reinsurance shall cover wherever the Reassured's policies apply. LIMIT: $5,000,000 Ultimate Net Loss each and every loss occurrence in excess of $5,000,000 Ultimate Net Loss each and every loss occurrence. NET RETAINED LINES: All recoveries received from the Florida Hurricane Fund will be retained net by the Reassured, down to a net occurrence loss to the Reassured of $250,000, after which any additional recoveries will inure to the Catastrophe Excess Program by reducing the gross loss subject to the Catastrophe program. Recoveries from all underlying reinsurance greater than $2,500,000 shall inure to the sole benefit of reinsurers hereunder; subject to a minimum net retention by the Reassured any one loss of no less than $250,000. 19 Page 3 of 5 No: 4852-00-0001-00-96-03-02-00 CO-REINSURANCE: 5% net retained by the Reassured. REINSTATEMENT: One full reinstatement at pro rata additional premium with respect to amount and 100% with respect to time. WARRANTED: Two Risk Minimum RATE: Deposit Premium of $300,000 payable semi-annual in advance adjustable at 1.744% Gross Earned Premium Income. Minimum Premium of $240,000. EXCLUSIONS: As per attached Exclusion List. GENERAL CONDITIONS: Ultimate Net Loss Clause to include Loss Adjustment Expenses (which shall include defense costs including but not limited to expenses incurred in determination of coverage). Loss Occurrence Cause to include definition of hours clause and as follows: - 72 hours clause tornado, cyclone, hurricane, windstorm and hail - 120 hours clause riots and civil commotion/vandalism and malicious mischief within the area of one municipality or county and the municipalities or counties contiguous thereto - 168 hours Freeze - 168 hours Earthquake and Ensuing Loss - 168 hours for any other physical damage peril ECO/XPL - Covered at 100%, subject to a maximum of 25% of the original catastrophe loss. Net Retained Lines Clause Notice of Loss and Loss Settlement 20 Page 4 of 5 No: 4852-00-0001-00-96-03-02-00 Tax Provisions Clause Access to Records Clause Errors and Omissions Clause Insolvency Clause Insolvency Funds Exclusion Clause Arbitration Clause Service of Suit Clause Guy Carpenter & Company, Inc. Intermediary Clause WORDING: TBA 21 Page 5 of 5 No: 4852-00-0001-00-96-03-02-00 REINSURERS Allmerica Re, A Division of the Hannover Insurance Company 5.000% Christiania General Insurance Corporation of New York 11.000% Constitution Reinsurance Company 5.000% Continental Casualty Company 10.530% Employers Mutual Casualty Company 2.105% First Excess and Reinsurance Corporation 7.895% Folksamerica Reinsurance Company 5.250% Gerling Global Offices, Incorporated, U.S. Manager for and on behalf of: Gerling Global Reinsurance Corporation, U.S. Branch 9.739% Insurance Company of the West 12.632% Nationwide Mutual Insurance Company 7.368% Reliance Reinsurance Corporation 2.105% United Fire & Casualty Company 0.526% USF Re Insurance Company 1.350% Vesta Fire Insurance Corporation 16.000% Winterthur Reinsurance Corporation of America 3.500% ------- 100.000% of 95% ======= 22 Page 6 of 5 No: 4852-00-0001-00-96-03-02-00 GUY CARPENTER & COMPANY, INC. SENIOR VICE PRESIDENT 23 Page 7 of 5 No: 4852-00-0001-00-96-03-02-00 GREAT PACIFIC INSURANCE COMPANY CATASTROPHE EXCESS OF LOSS TREATY EXCLUSIONS A. Business classified as Ocean Marine except for personal lines watercraft physical damage not to exceed $100,000 any one risk; B. Personal Accident, Health, Surety and Fidelity, Workers' Compensation, and all classes of Casualty; C. Financial and Insolvency guarantees; D. Aviation business except for physical damage on private planes not to exceed $100,000 any one risk; E. Automobile business except for automobile physical damage; F. Inland Marine policies covering railroad rolling stock, streamlined trains, negative films, registered mail, jewelers block, animal mortality, offshore drilling rigs; G. Excess of loss Reinsurance and reinsurance accepted under obligatory reinsurance treaties except for business produced by Fastrac Systems, Inc. of Bellevue, Washington, and by M.A. Speizer & Co., Inc. or any other of the National Insurance Group companies of South San Francisco California; H. Hail damage to growing/standing crops; I. Flood insurance, when written as such; J. Pools, Associations and Syndicates Clause (amended to include coverage for California Fair Plan); K. Insolvency Funds Exclusion clause; L. War Exclusion Clause; M. Nuclear Incident as per Nuclear Incident Exclusion Clause Physical Damage - Reinsurance - (USA); N. Seepage and Pollution as per ISO wording, or so deemed, O. Transmission and Distribution Lines. 24 Page 1 of 5 No: 4852-00-0001-00-96-03-03-00 San Francisco, February 15, 1996 Mr. Kevin C. Eichler Executive Vice President and Chief Executive Officer Great Pacific Insurance Company 395 Oyster Point Boulevard, Suite 500 South San Francisco, California 94080-1933 Dear Casey: We are in receipt of confirmation that the following reinsurance has been effected for your account: REASSURED: NATIONAL INSURANCE GROUP COMPANIES GREAT PACIFIC INSURANCE COMPANY TYPE: Catastrophe Third Excess of Loss Treaty BUSINESS COVERED: Business classified as Dwelling Fire, Fire, Extended Perils, Special Form on Interim Coverage policies, Forced Order policies, Real-Estate Owned (REO) policies, Automobile Physical Damage, Personal Article Floaters, Personal Lines; Watercraft and Private Passenger Planes, Force Placed Property and/or Blanket Mortgage Security Insurance produced by Fastrac Systems, Inc. of Bellevue, Washington, and produced by M.A. Speizer & Co,. Inc. or any other of the National Insurance Group Companies of South San Francisco, California on behalf of the Reassured. 25 Page 2 of 5 No: 4852-00-0001-00-96-03-03-00 TERM AND CANCELLATION: The term of this Contract shall be from 12:01 a.m., January 1, 1996 Local Standard Time (Local Standard Time being that time which applies in the area where the risk is located) to 12:01 a.m., December 31, 1996, Pacific Standard Time, for losses occurring on new, renewal and in force policies. 26 Page 3 of 5 No: 4852-00-0001-00-96-03-03-00 TERM AND CANCELLATION: (CONTINUED) Should this Contract terminate while a loss occurrence is in progress, the Reinsurers shall nevertheless be liable, to the extent of their interest and subject to the other conditions of this Contract, for all losses resulting from such loss occurrence, whether such losses occur before or after such termination. TERRITORY: This reinsurance shall cover wherever the Reassured's policies apply. LIMIT: $5,000,000 Ultimate Net Loss each and every loss occurrence in excess of $10,000,000 Ultimate Net Loss each and every loss occurrence. NET RETAINED LINES: All recoveries received from the Florida Hurricane Fund will be retained net by the Reassured, down to a net occurrence loss to the Reassured of $250,000, after which any additional recoveries will inure to the Catastrophe Excess Program by reducing the gross loss subject to the Catastrophe program. Recoveries from all underlying reinsurance greater than $2,500,000 shall inure to the sole benefit of reinsurers hereunder; subject to a minimum net retention by the Reassured any one loss of no less than $250,000. CO-REINSURANCE: 5% net retained by the Reassured. REINSTATEMENT: One full reinstatement at pro rata additional premium with respect to amount and 100% with respect to time. 27 Page 4 of 5 No: 4852-00-0001-00-96-03-03-00 WARRANTED: Two Risk Minimum RATE: Deposit Premium of $150,000 payable semi-annual in advance adjustable at 0.886% Gross Earned Premium Income. Minimum Premium of $120,000. EXCLUSIONS: As per attached Exclusion List. GENERAL CONDITIONS: Ultimate Net Loss Clause to include Loss Adjustment Expenses (which shall include defense costs including but not limited to expenses incurred in determination of coverage). Loss Occurrence Cause to include definition of hours clause and as follows: - 72 hours clause tornado, cyclone, hurricane, windstorm and hail - 120 hours clause riots and civil commotion/vandalism and malicious mischief within the area of one municipality or county and the municipalities or counties contiguous thereto - 168 hours Freeze - 168 hours Earthquake and Ensuing Loss - 168 hours for any other physical damage peril ECO/XPL - Covered at 100%, subject to a maximum of 25% of the original catastrophe loss. Net Retained Lines Clause Notice of Loss and Loss Settlement Tax Provisions Clause Access to Records Clause Errors and Omissions Clause Insolvency Clause Insolvency Funds Exclusion Clause Arbitration Clause Service of Suit Clause 28 Page 5 of 5 No: 4852-00-0001-00-96-03-03-00 Guy Carpenter & Company, Inc. Intermediary Clause WORDING: TBA 29 Page 6 of 5 No: 4852-00-0001-00-96-03-03-00 REINSURERS Allmerica Re, A Division of the Hannover Insurance Company 7.500% Employers Mutual Casualty Company 2.105% First Excess and Reinsurance Corporation 7.895% Hartford Re Company 4.763% for and on behalf of: Hartford Fire Insurance Company Insurance Company of the West 21.053% Nationwide Mutual Insurance Company 7.368% PMA Reinsurance Corporation 7.000% Republic Western Insurance Company 5.000% Sumitomo Marine Re Management, Inc. 3.158% Sydney Reinsurance Corporation 15.000% United Fire & Casualty Company 3.158% Vesta Fire Insurance Corporation 16.000% ------- 100.000% of 95% ======= 30 Page 7 of 5 No: 4852-00-0001-00-96-03-03-00 GUY CARPENTER & COMPANY, INC. SENIOR VICE PRESIDENT 31 Page 8 of 5 No: 4852-00-0001-00-96-03-03-00 GREAT PACIFIC INSURANCE COMPANY CATASTROPHE EXCESS OF LOSS TREATY EXCLUSIONS A. Business classified as Ocean Marine except for personal lines watercraft physical damage not to exceed $100,000 any one risk; B. Personal Accident, Health, Surety and Fidelity, Workers' Compensation, and all classes of Casualty; C. Financial and Insolvency guarantees; D. Aviation business except for physical damage on private planes not to exceed $100,000 any one risk; E. Automobile business except for automobile physical damage; F. Inland Marine policies covering railroad rolling stock, streamlined trains, negative films, registered mail, jewelers block, animal mortality, offshore drilling rigs; G. Excess of loss Reinsurance and reinsurance accepted under obligatory reinsurance treaties except for business produced by Fastrac Systems, Inc. of Bellevue, Washington, and by M.A. Speizer & Co., Inc. or any other of the National Insurance Group companies of South San Francisco California; H. Hail damage to growing/standing crops; I. Flood insurance, when written as such; J. Pools, Associations and Syndicates Clause (amended to include coverage for California Fair Plan); K. Insolvency Funds Exclusion clause; L. War Exclusion Clause; M. Nuclear Incident as per Nuclear Incident Exclusion Clause Physical Damage - Reinsurance - (USA); N. Seepage and Pollution as per ISO wording, or so deemed, O. Transmission and Distribution Lines. EX-10.11 5 AGREEMENT OF EMPLOYMENT TERMINATION AND RELEASE 1 Exhibit 10.11 AGREEMENT OF EMPLOYMENT TERMINATION AND RELEASE THIS AGREEMENT OF EMPLOYMENT TERMINATION AND RELEASE ("Agreement") is made as of July 2, 1995, by and between NATIONAL INSURANCE GROUP, a California corporation, FASTRAC SYSTEMS, INC., a California corporation, FASTRAC SYSTEMS, INC. INSURANCE AGENT & BROKER, formerly Mark A. Speizer & Co., Inc., a California corporation, GREAT PACIFIC INSURANCE COMPANY, a California corporation and PINNACLE DATA CORPORATION, ("Pinnacle") a California corporation (collectively "Employer") and Douglas Harold Helm, an individual ("Helm"). RECITALS A. Helm and Employer entered into an agreement dated January 1, 1990 ("Employment Agreement") whereby Helm was employed by Employer and appointed its Executive Vice President of Sales and Marketing. B. The Employment Agreement has been terminated in accordance with its terms. C. Certain differences have arisen between the parties regarding the commissions to which Helm should be entitled under the Employment Agreement. D. The parties wish to settle and resolve these as well as any other differences that exist or may arise between them. AGREEMENT NOW, THEREFORE, in consideration of the foregoing and the mutual covenants contained herein, the parties hereto agree as follows: 1. EMPLOYMENT AGREEMENT TERMINATION DATE. Helm acknowledges and agrees that the Employment Agreement was terminated effective as of the close of business December 31, 1994, and that the termination was effected in the following manner: The original Term of the Employment Agreement was automatically renewed for an additional one year period beyond its scheduled expiration date of December 31, 1993. Employer then provided Helm with a Termination Notice pursuant to Section 2.02 of said Agreement. Such Notice was given by Employer and received by Helm in excess of one hundred and eighty (180) days prior to the scheduled expiration date of said renewal period and no new written agreement was executed or substituted between the parties. 2. EXTENDED EMPLOYMENT PERIOD. Employer continued to employ and pay Helm on a full time basis following termination of the Employment Agreement during the period from January 1, 1995 through and including July 1, 1995 ("Extended Employment Period") while new employment terms were being negotiated. 3. CONTINUING COMMISSION COMPENSATION. 3.1 Employment Agreement. Employer confirms the right of Helm to continue to receive commissions on the terms set forth in Section 5.04 of the Employment Agreement and each party acknowledges and agrees that the three year period specified therein commenced on January 1, 1995. The parties agree that commissions payable pursuant to Sections 3.02 and 5.04 of the Employment Agreement on Inquiry Agreements shall be calculated from Net Sales Revenue for all existing, renewal, replacement and new business from the Accounts listed on Schedule A and from the successors, assigns, affiliates, subsidiaries, joint venture partners and parents of the Accounts listed on Schedule A. 3.2 Extended Employment Period. Employer acknowledges that a number of Inquiry Agreements were executed between new customers and Pinnacle during the Extended Employment Period. These new accounts are set forth fully in the list of Extended Period Accounts attached hereto and incorporated herein as Schedule B ("New Accounts"). 3.2.1 Helm acknowledges receipt of payment during the Extended Employment Period of (i) a salary of $4,615 per bi-weekly pay period, and a commission of four percent (4%) of the Net Sales Revenue, as defined in Section 3.02 of the Employment Agreement, for the New Accounts. 3.2.2 Subject to the performance by Helm of his obligations described in Section 5, Employer agrees to pay Helm a commission in the amount of seven percent (7%) of the Net Sales Revenue from Inquiry Agreements received by Employer from New Accounts during the period from July 2, 1995 through December 31, 1995. Such commissions shall be paid on Net Sales Revenues received during the period from July 2, 1995 through December 31, 1995 on such New Accounts. Page 1 of 6 2 4. PAYMENT OF CONTINUING COMMISSIONS. Employer shall pay commissions due pursuant to Section 3 of this Agreement no later than one month following the end of the month during which the relevant commission revenues were received and earned by Employer. 5. POST JULY 1 EMPLOYMENT. During the period from July 2, 1995 through December 31, 1995 ("Post-July Period"), Helm shall continue as an employee of Employer and shall perform services for Employer at the rate, averaged over the entire Post-July Period, of not less than two (2) days per calendar week. The actual schedule for performance shall be established by mutual agreement between Employer and Employee and Helm's outside employment shall be reasonably accommodated. Helm shall be deemed to have performed services on any day during the Post-July Period for which he was scheduled to perform services, but is precluded by bona fide illness or injury, jury duty, witness service in any proceeding where his attendance is compelled by subpoena or other process, legitimate family or personal complications such as illness or death of family members, and any other legitimate reason other than outside employment. Federal holdays shall also be deemed days on which services were performed. During this period: 5.1 Helm shall not be due any salary for this period; 5.2 Helm shall continue to be and to hold the title of Executive Vice President of Employer; 5.3 Unless expressly modified or discontinued by this Agreement, Helm's compensation, benefits and perquisites as set forth in Article III o the Employment Agreement or through other instruments or practices applicable to Helm's employment under the Employment Agreement shall continue unabated for the Post-July Period. Section 3.08 C (Vacation) and D (Relocation) and Section 3.09 A (Automobile) are discontinued, effective July 2, 1995. 5.4 At any time after the Effective Date of this Agreement, Helm may resign at any time for any reason with or without cause upon written notice to Employer. Helm's resignation shall terminate his right under Section 3.2.2. of this Agreement to commissions on Net Sales Revenue received after the date of his resignation. Employer may determine at any tie and for any or no reason to discontinue its acceptance of service from Helm and to cancel his appointment as Executive Vice President; however, Employer shall expressly not have the right to terminate Helm's Employment prior to December 31, 1995, or deny him any consideration or benefits provided by this Agreement or already accrued by the Employment Agreement. In the event of Helm's death, disability or incapacity on or before December 31, 1995 Helm shall be, as of such date, deemed to have performed this Agreement fully through December 31, 1995. 6. CALENDAR YEAR 1996 CONSULTING. To the extent reasonably requested to do so by Employer during the period January 1, 1996 through December 31, 1996, Helm agrees to perform consulting services for Employer relating to matters on which he worked during his employment by Employer. Helm shall be compensated for such services at the rate of Eight Hundred Fifty Dollars ($850) per day. 7. NO NEW WRITTEN AGREEMENT OR SUBSTITUTION. Neither this Agreement nor the provisions hereof relating to the Extended Employment Period and/or the post July 1, 1995 employment and consulting period shall be deemed to be a new written agreement executed or otherwise substituted between the parties for purposes of Sections 2.02 and Article V of the Employment Agreement. 8. GENERAL MUTUAL RELEASE. 8.1 Release by Helm. 8.1.1 Subject to the obligations of Employer set forth in this Agreement of Employment Termination and Release, which are not released hereby, the adequacy of which is hereby acknowledged, Helm, for himself and his heirs, executors, administrators, successors, assigns and legal representatives, hereby fully releases and forever discharges Employer, its current and future affiliate and parent companies, and individually and collectively, personally and professionally, the officers, directors, shareholders, employees, agents, representatives, parents, subsidiaries, affiliates, joint venturers, partners, predecessors, successors, assigns, and all other persons or entities connected with Employer and its current and future affiliate and parent companies, from any and all claims, demands, deficiencies, levies, assessments, executions, costs, expenses, damages, liabilities, debts, rights, contracts, losses, obligations, actions, inactions, causes of action, attorney's fees and benefits, of any kind or character whatsoever (collectively "Claims"), arising in law or in equity, whether known or unknown, suspected or unsuspected, directly or indirectly, that he has ever had, now has or may now have against them, and/or any of them, including, without limitation, all Claims directly or indirectly related to or arising out of Helm's employment as an employee and officer of Employer and/or the termination of that employment, whether arising in tort or contract, including, without limitation, any Claims for breach of express or implied contract, for further monetary compensation by way of additional salary, commissions and/or bonus allegedly due him by reason of that employment, and/or all other Claims, based on common law, federal and/or state statute, including, without limitation, Claims arising under Age Discrimination in Employment Act (29 U.S.C Section 621, et seq.). 8.1.2 Helm further understands and expressly agrees that this Agreement of Employment Termination and Release specifically extends to all Claims, whether known or unknown, and he expressly waives the benefits of Section 1542 of the California Civil Code, which provides: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM, MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." 8.1.3 Helm acknowledges that he will not be able to bring suit against anybody ever again based on any of the Claims being released hereunder after signing this Agreement of Employment Termination and Release and receiving all agreed upon consideration described in Section 3.2 hereof. Page 2 of 6 3 8.1.4 Notwithstanding the foregoing, this Agreement of Employment Termination and Release shall not : (i) release or waive the Employer's obligation to indemnify Helm in accordance with the California Corporations Code, Employer's by-laws and/or any written agreement between Helm and Employer relating to such indemnification obligations dated prior to the Effective Date of this Agreement, or (ii) relieve or limit the provision to Helm of insurance providing such indemnification, defense and costs by any insurance company or facility. 8.2 Release by Employer. Employer, for itself, and its current and future affiliate and parent companies, and the officers, directors, shareholders, employees, agents, representatives, parents, subsidiaries, affiliates, joint venturers, partners, predecessors, successors and assigns, hereby releases and forever discharges Helm, his heirs, executors, administrators, successors, assigns and legal representatives, from all Claims, arising in law or in equity, whether known or unknown, suspected or unsuspected, directly or indirectly, that Employer has ever had, now has or may now have against Helm for any action, inaction, error or omission as an officer and/or employee of Employer, including, without limitation, all Claims directly or indirectly related to or arising out of Helm's employment by Employer as an officer and employee and/or the termination of that employment, whether arising in tort or contract. Employer acknowledges that after signing this Agreement of Employment Termination and Release, it will not be able to bring suit against Helm based on any of the Claims being released hereunder. Employer further understands and expressly agrees that this Agreement of Employment Termination and Release specifically extends to all Claims, whether known or unknown, and he expressly waives the benefits of Section 1542 of the California Civil Code, which provides: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM, MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." 9. COVENANT NOT TO SUE. Helm represents that he has not filed any complaints, claims and/or actions against Employer, its officers, agents, directors, supervisors, employees and/or representatives with any state, federal, or local agency or court. Employer represents that it has not filed any complaints, claims and/or actions against Helm with any state, federal, or local agency or court. Employer and Helm each covenant and agree that they will not bring, commence, institute, maintain, prosecute or voluntarily aid any action at law or proceeding in equity, or otherwise prosecute or sue the other party, either affirmatively or by way of cross-complaint, defense or counterclaim or in any other manner, or at all, on any alleged Claims being released hereunder. In the event of any breach of this Section 9, a cause of action shall be deemed to have accrued immediately upon the commencement of any action or other proceeding described herein, and in such event, this Agreement of Employment Termination and Release may be pled as a full and complete defense thereto, as the basis for abatement of or injunction against said action or other proceeding, and as a basis of a cross complaint for damages therein. 10. HELM'S REPRESENTATIONS. 10.1 Helm agrees that the payments described in Section 3 of this Agreement of Employment Termination and Release, as well as any compensation for consulting services pursuant to Section 6 hereof shall constitute the entire amount of financial and other consideration provided to him under this Agreement of Employment Termination and Release and that, except for the indemnification and right to insurance pursuant to Section 8.1.4 hereof, he will not seek, and shall not be entitled to seek, any further compensation for any other claimed damage, costs and/or attorneys' fees in connection with the matters encompassed in this Agreement of Employment Termination and Release. 10.2 Helm acknowledges and agrees that Employer has made no representations to him regarding the tax consequences of any amounts received by him pursuant to this Agreement of Employment Termination and Release and/or the tax treatment of this Agreement of Employment Termination and Release. 10.3 Helm acknowledges that Employer has specifically advised him to consult with an attorney in order to review this Agreement of Employment Termination and Release and advise Helm of his rights concerning it, and that he has done so. 10.4 Helm expressly acknowledges and warrants that he has read and fully understands this Agreement of Employment Termination and Release; that he has had the opportunity to consult with legal counsel of his own choosing in order to have the terms and conditions of this Agreement of Employment Termination and Release fully explained to him; that he is not executing this Agreement of Employment Termination and Release in reliance on any promises, representations or inducements other than those set forth herein; that he understands he is giving up legal rights by signing this Agreement of Employment Termination and Release; and that he is executing it voluntarily, free of any duress or coercion, after due deliberation and with a full understanding of what it means to do so. 10.5 Helm represents and warrants that he has not assigned, transferred, sold, hypothecated, mortgaged, rented, leased, joint ventured, encumbered, converted or in any other way conveyed, in whole or in part, any of the Claims released by him herein. 11. COSTS OF ENFORCEMENT. It is further understood and agreed that if, at any time, a violation of any term of this Agreement of Employment Termination and Release is asserted by any party hereto, that party shall have the right to seek specific performance of that term and/or any other necessary and proper relief, including, but not limited to, damages, from any court of competent jurisdiction. The parties agree that if either one of them initiates legal action to enforce any of the terms, conditions or provisions of this Agreement of Employment Termination and Release, or for any breach of it, the prevailing party in that action will be entitled to his or its reasonable costs and attorneys' fees incurred in pursuing that action. 12. RELIANCE; INTERPRETATION. The parties hereto represent and acknowledge that in executing this Agreement of Employment Termination and Release they do not rely and have not relied upon any representation or statement made by any of the other parties or by any of the other parties' agents, attorneys or representative with regard to the subject matter, basis, or effect of this Agreement of Employment Termination and Release or otherwise, other than those specifically stated in this written Agreement of Employment Termination Page 3 of 6 4 and Release. This Agreement of Employment Termination and Release shall be interpreted in accordance with the plain meaning of its terms and not strictly for or against any of the parties hereto. This Agreement of Employment Termination and Release shall be construed as if each party hereto was its author and each party hereby adopts the language of this Agreement of Employment Termination and Release as if it were his, her or its own. The captions to this Agreement and its sections, subsections, tables and exhibits are inserted only for convenience and shall not be construed as part of this Agreement or as a limitation on or broadening of the scope of this Agreement or any section, subsection table or exhibit. Should any provision of this Agreement of Employment Termination and Release be declared or be determined by any court of competent jurisdiction to be wholly or partially illegal, invalid, or unenforceable, the legality, validity and enforceability of the remaining parts, terms and provisions shall not be affected thereby and said illegal, unenforceable or invalid part, term, or provision shall be deemed not to be a part of this Agreement of Employment Termination and Release. 13. COVENANT TO NOT COMPETE WITH EMPLOYER. Helm agrees to refrain from directly or indirectly competing with and/or assisting others in competing with Employer and/or soliciting and/or accepting business with respect to products and/or services competitive with those of Employer in the greater Los Angeles, Orange County, San Diego, San Francisco and Sacramento metropolitan ares of California; Harris and Garland counties in Texas; Broward County, Florida; Cook County, Illinois; Cherokee County, Georgia; New York, New York; Boston, Massachusetts; Detroit, Michigan; Philadelphia, Pennsylvania and Cincinnati, Ohio for a period ending December 31, 1996. Helm further agrees that he will not hire, or attempt to hire any employees of Employer during such period without Employer's prior written consent. 14. MISCELLANEOUS. 14.1 Assignment. Neither party shall have the right to assign this Agreement or any rights or obligations hereunder without the written consent of the other party; provided, however, that upon the sale of all or substantially all of the assets, business and goodwill of Employer to another corporation, partnership or person ("Entity"), or upon the merger or consolidation of Employer with another Entity, this Agreement shall inure to the benefit of, and be binding upon, both Helm and the Entity purchasing such assets, business, or goodwill, or surviving such merger or resulting from such consolidation, as the case may be, in the same manner and to the same extent as though such other Entity were the Employer. 14.2 Governing Law. All matters concerning the validity and interpretation of and performance under this Agreement, in law and equity, shall be governed by the laws of the State of California, including without limitation, those relating to conflict of laws. Any lawsuit or action brought by any of the parties hereto, shall be filed and adjudicated in San Mateo County, California. 14.3 Effect of Death. In the event of the death of Helm during the term of this Agreement, Helm designates his Spouse by marriage to be entitled to receive any compensation paid under this Agreement. Helm may change such designation at any time, but such change must be in writing executed by the parties to this Agreement. 14.4 Agreement to Be Bound. This Agreement shall be binding not only upon the parties hereto, but also upon their successors or assigns; and the parties hereto agree, for themselves and their successors or assigns, to execute any instrument and to perform any acts which may be necessary or proper to carry out the purpose of this Agreement. Nothing in this Section 14.4 shall be construed to change or nullify Section 14.1 of this Agreement. 14.5 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, and all of which shall be deemed an original, and all of which together shall be one and the same instrument. 14.6 Notices. All communications required or permitted to be made under this Agreement of Employment Termination and Release shall be in writing and either shall be delivered personally or sent by United States Postal Service certified or registered mail, postage prepaid and return receipt requested, to the address or addresses set forth below, or to such other address or addresses as a party may notify another party pursuant to this Section. Any such communication shall be deemed to be properly given (i) if delivered personally, upon written acknowledgement of receipt after delivery to the address specified; or (ii) if posted, the earlier of the actual date of delivery, as set forth in the return receipt, or three (3) days from the date posted pursuant to the foregoing. The address for each party is as follows: To Employer: National Insurance Group 395 Oyster Point Boulevard Suite 500 South San Francisco, California 94080-1933 Attention: Chief Executive Officer To Helm: Mr. Douglas Harold Helm 565 Hayne Road Hillsborough, California 94010 14.7 Entire Agreement. This Agreement contains the entire understanding of the parties with respect to the subject matter hereof, supersedes any prior written or oral agreement between the parties, and may not be changed, extended or terminated orally. No change, extension, termination or attempted waiver of any part of the provisions hereof shall be binding unless in writing and signed by the parties against whom the same is sought to be enforced. Page 4 of 6 5 IN WITNESS WHEREOF, the parties hereto have executed this Agreement of Employment Termination and Release and agree to enter into and be bound by the provisions hereof as of the Effective Date. WITNESS: By: By: /s/ Douglas H. Helm ---------------------------- ------------------------------- Douglas H. Helm NATIONAL INSURANCE GROUP WITNESS: By: By: /s/ Mark A. Speizer ---------------------------- ------------------------------- Mark A. Speizer President FASTRAC SYSTEMS, INC. WITNESS: By: By: /s/ Mark A. Speizer ---------------------------- ------------------------------- Mark A. Speizer President FASTRAC SYSTEMS, INC. INSURANCE AGENT & BROKER WITNESS: By: By: /s/ Mark A. Speizer ---------------------------- ------------------------------- Mark A. Speizer President GREAT PACIFIC INSURANCE COMPANY WITNESS: By: By: /s/ Mark A. Speizer ---------------------------- ------------------------------- Mark A. Speizer President PINNACLE DATA CORPORATION WITNESS: By: By: /s/ Mark A. Speizer ---------------------------- ------------------------------- Mark A. Speizer President Page 5 of 6 6 Colleen Helm signs this Agreement of Employment Termination and Release for the purpose of waiving her community property interest in the Claims being released and agrees that she herself is to be personally bound by the terms and conditions of this Agreement of Employment Termination and Release in accordance with its terms and conditions, including, without limitation the Release set forth in Section 13.1 and the Covenant not to Sue set forth in Section 9. By: /s/ Colleen Helm -------------------------------- Colleen Helm Page 6 of 11 EX-10.13 6 CONSULTING AGREEMENT 1 Exhibit 10.13 CONSULTING AGREEMENT THIS CONSULTING AGREEMENT ("Agreement"), is made as of the 2nd day of January, 1996 ("Effective Date"), by and among NATIONAL INSURANCE GROUP, a California corporation, for itself and its current and future subsidiaries, including, without limitation, PINNACLE DATA CORPORATION, a California corporation ("Pinnacle"), FASTRAC SYSTEMS, INC. INSURANCE AGENT & BROKER, a California corporation ("Fastrac"), and GREAT PACIFIC INSURANCE COMPANY ("Great Pacific"), a California corporation (collectively the "Company") and DAVID B. BRODY, an individual ("Consultant"). Recitals A. Consultant desires to furnish certain operations and management Consulting Services to the Company. B. The Company desires that Consultant furnish such Consulting Services, subject to the terms and conditions of this Agreement. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants contained herein, the parties hereto agree as follows: 1. Description of Consulting Services. Consultant agrees to furnish operations and management Consulting Services, to the extent requested to do so in writing by the Company. The foregoing shall hereinafter be referred to as the "Consulting Services". The scope and specific description of Consulting Services shall be set forth in written addendum to this Agreement that may be executed by Consultant and duly authorized officers of Company ("Addendum") from time to time during the Term, as defined in Section 13.1. Consultant shall not perform any Consulting Services, and the Company shall have no obligation to Consultant for any Consulting Services, except pursuant to a duly executed Addendum, except for the first ninety (90) days from the Effective Date, Consultant shall perform Consulting Services on an hourly basis and without an Addendum to the extent requested by the Company. Consultant shall report to Gerry Gauer or other persons as may be directed by the Chief Executive Officer in connection with the performance of Consulting Services. 2. Description of Materials. Consultant further agrees to furnish such written documentation and materials ("Materials") as may be specified in an Addendum. 3. Schedule for Performance of the Consulting Services. The schedule for performing Consulting Services shall be as set forth in the Addendum for the particular Consulting Services. Initials ____ Initials ____ 2 4. Place of Performance. The Consulting Services shall be conducted at such locations in our outside the San Francisco Bay Area as may be agreed upon by Consultant and the Company and set forth in the Addendum. 5. Expenses. Consultant shall be responsible for Consultant's expenses in the performance of the Consulting Services, except that the Company agrees to pay reasonable and necessary out-of pocket travel expenses relating to travel by Consultant on behalf of the Company that is approved in advance in writing by the Company and to reimburse Consultant for reasonable and necessary long distance telephone charges incurred by Consultant in the performance of Consulting Services. 6. Price and Payment for Consulting Services. 6.1 The Company shall pay Consultant the amount set forth in the Addendum for the Consulting Services performed by Consultant and Materials prepared and delivered by Consultant, as more particularly described in the Addendum. Consultant's hourly rate shall be Two Hundred Dollars ($200) per hour, except as may be otherwise set forth in an Addendum hereto. 6.2 Consultant shall render monthly invoices to the Company for Consulting Services requested by the Company and performed by Consultant in the immediately preceding month, and the Materials furnished by Consultant to the Company in the immediately preceding month. Invoices shall be paid by the Company within twenty (20) days of receipt thereof from Consultant. 6.3 If this Agreement is terminated prior to completion of performance of the Consulting Services, the Company shall not be obligated to pay for any Consulting Services not performed or Materials not delivered to the Company prior to the termination of this Agreement, unless otherwise agreed upon by the parties in writing. 7. Warranty. Consultant represents and warrants that the Consulting Services shall be performed in a skillful, diligent, expeditious, workmanlike and professional manner, with the usual thoroughness and competence of an operations and management consultant and in accordance with the best practices of that industry. Time is of the essence hereof. 8. Use of Pinnacle Flood System and Services by Consultant. 8.1 Description of Pinnacle Flood System. The Company owns all proprietary rights, title and interest to certain computer software ("Pinnacle Flood System") which, among other things, can (i) ascertain whether or not a proper, correct and complete property address located in a state or territory of the United States ("PCCPA") is located in a Special Flood Hazard Area ("SFHA"), (ii) generate Initials ____ Initials ____ 2. 3 a certificate stating whether or not a PCCPA, identified by the Pinnacle Flood System, is in a SFHA, (iii) generate a premium quotation and print an application for a Standard Flood Insurance Policy, as authorized under the National Flood Insurance Act, which under no circumstances will be binding upon or create any insurance coverage by or through the Company or create any obligation for any insurance company. The Pinnacle Flood System includes, but is not limited to, its source codes, access codes, password(s), data, screens, menus, instructions, documentation and any revisions, improvements, updates or modifications thereof. 8.2 License to Use Pinnacle Flood System. The Company hereby grants to Consultant and Consultant agrees to accept a personal, nontransferable, nonassignable and nonexclusive limited license to use the Pinnacle Flood System in machine readable form, solely and exclusively for the purpose of performing the Consulting Services, at no cost to Consultant for such use, in accordance with the provisions of this Agreement and for no other use or purpose. Consultant may use the Pinnacle Flood System in performance of the Consulting Services by inputting a PCCPA into the Pinnacle Flood System ("Individual Inquiry"). 8.3 Description of the Services. In addition to the Pinnacle Flood System, the Company offers certain services currently comprised of the Fax Service, the Reverification Service, the Batch Individual Inquiry Service and the Life of Loan Service. Fastrac owns (i) an automated, on-line system which tracks, among other things, expiration dates of property insurance on real estate loan portfolios and has the capability of both receiving and sending data via telecommunications or via tape-to-tape, and (ii) an outsourcing service which, through Fastrac's employees, monitors and processes, among other things, the expiration of a customer's property insurance policies. The foregoing services of the Company shall hereinafter be referred to individually as a "Service" and collectively as the "Services". 8.4 Right to Use Services. The Company hereby agree to permit Consultant to use the Services, solely and exclusively for the purpose of performing the Services, at no cost to Consultant for such use, in accordance with the provisions of this Agreement and for no other use or purpose. 8.5 Proper Use by Consultant. Use of the Pinnacle Flood System and Services shall be limited to Consultant. Consultant hereby agrees and warrants that Consultant will use and operate the Pinnacle Flood System and Services solely for the purposes specified in this Agreement and only in the manner described in operational manuals, screens, menus and instructions of the Company. Consultant shall not (i) copy, use, market, sell, rent, resell, transfer, hypothecate, mortgage, joint venture, convert, franchise, distribute, encumber, modify, add on to, delete from, transport, destroy, alter or otherwise make available the use of (herein collectively referred to as "Use, Transfer, Encumber or Modify") the Pinnacle Flood System and Services or any part thereof, or (ii) enter Initials ____ Initials ____ 3. 4 into any agreement with or grant any right or permission to any person, partnership, entity, group, organization, firm, company, government or governmental body or agency, or otherwise (collectively "Third Party") to Use, Transfer, Encumber or Modify the Pinnacle Flood System or Services, or any part thereof. 8.6 Payments. All costs of making an Individual Inquiry, i.e., telephone charges, courier fees, postage, etc., shall be borne by Consultant, excluding the normal and ordinary costs incurred by the Company in responding to an Individual Inquiry. 8.7 No Liability. The Company shall have no liability or responsibility to Consultant or any Third Party in connection with any matter or thing relating to an Individual Inquiry made by Consultant or a response thereto by the Pinnacle Flood System, the Services or the Company. 8.8 Prohibition on Sale, Transfer and Use. Consultant shall not sell, assign, transfer, hypothecate, mortgage, joint venture, encumber, convert or in any other way convey to any Third Party any information derived pursuant to its use of the Pinnacle Flood System or any of the Services, including, without limitation any response by Pinnacle to an Individual Inquiry. The Pinnacle Flood System and the Services shall not be used by Consultant for the purpose of obtaining a response by Pinnacle to an Individual Inquiry that will be used by any person or entity for any reason other than the purpose of performing the Consulting Services. Any breach of the foregoing by Consultant shall be deemed a material breach of this Agreement which is subject to the provisions of Section 13.2.3. 8.9 Disclaimer of any Warranty. NEITHER PINNACLE NOR FASTRAC MAKES AND CONSULTANT RECEIVES NO WARRANTY ON THE PINNACLE FLOOD SYSTEM, SERVICES, PRODUCTS AND/OR OTHER SERVICES BEING PROVIDED TO CONSULTANT PURSUANT TO THIS AGREEMENT, EXPRESS, IMPLIED, STATUTORY, OR IN ANY OTHER PROVISION OF THIS AGREEMENT OR COMMUNICATION WITH CONSULTANT, AND THE COMPANY SPECIFICALLY DISCLAIM ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. NEITHER PINNACLE NOR FASTRAC WARRANTS THAT THE PINNACLE FLOOD SYSTEM OR SERVICES WILL BE UNINTERRUPTED OR ERROR FREE. 9. Proprietary Rights. 9.1 Title. The Company hereby retains all right, title and interest in and to the Pinnacle Flood System and Services and all the Company trademarks, tradenames servicemarks and logos, including, but not limited to, all trademark, copyright, patent and other intellectual property rights. At any time the Company may, in its sole discretion, in whole or in part and without permission from or Initials ____ Initials ____ 4. 5 notice to Consultant, use, transfer, license, lease, encumber or modify any of the rights, title and/or interest in or to the Pinnacle Flood System, the Services and/or all parts thereof; provided that any such action shall not preclude Pinnacle from performing its duties and obligations under this Agreement. All proprietary notices incorporated in, marked on, or affixed to the Pinnacle Flood System shall not be removed, covered over, obliterated, altered or substituted by Consultant, or by another with Consultant's consent or knowledge, without the prior written approval of Pinnacle. The Company reserves the sole right, but is not obligated, to copyright and/or patent the Pinnacle Flood System or the Services in its own name and/or in the name of another chosen solely by Pinnacle and/or Fastrac. 10. Confidential Information of the Company. 10.1 During and subsequent to the Term, Consultant acknowledges, agrees, and covenants that (i) the Pinnacle Flood System and Services, and any and all parts thereof, (ii) any confidential or proprietary information belonging to the Company, including, without limitation, Pinnacle and/or Fastrac, and (iii) any confidential or proprietary information belonging to a Third Party (collectively "Confidential Information") which is disclosed to Consultant constitute important, material and confidential trade secrets and proprietary products, properties and assets of the Company or the Third Party which owns it and materially affect the successful conduct of the Company's business and the Company's goodwill, and the value of the Company's tangible and intangible assets. 10.2 Consultant expressly agrees that at all times, whether during or subsequent to the Term, Consultant will protect and will instruct and use every reasonable effort to cause Consultant's Employees and Associates to protect the confidentiality of the Confidential Information. 10.2.1 Except as permitted in this Agreement or in writing by the Company, (i) Consultant shall not disclose, divulge, communicate or otherwise make available Confidential Information to any of Consultant's Employees and Associates, except on a need to know basis and only in connection with the performance of Consultant's duties hereunder; and (ii) Consultant shall not and shall not allow any of Consultant's Employees and Associates to disclose, divulge, communicate or otherwise make available Confidential Information to any Third Party whatsoever. 10.2.2 Consultant shall not personally, and shall not knowingly allow, any other person or entity to attempt to reverse engineer, decompile or otherwise attempt to derive source code of any Confidential Information. Any use or attempted use of Confidential Information in violation of the restrictions set forth in this section will cause irreparable harm to the Company entitling the Company to injunctive relief in addition to all legal remedies. Initials ____ Initials ____ 5. 6 11. Ownership. If Consultant conceives or make any inventions or improvements, relating to the Confidential Information and/or other property or assets of the Company, arising out of or as a result of performance of Consulting Services, such inventions or improvements shall be disclosed to the Company and shall be the property of the Company. All the documents, workpapers and other material created by Consultant during the performance of Consulting Services, including, without limitation the Materials, shall be the property of the Company and shall be furnished to the Company upon termination of this Agreement. Consultant may keep copies of such documents, workpapers and other material as he/she may desire, subject to the provisions of Section 10. 12. Insurance to be Furnished. Consultant agrees to maintain in force during the Term an auto liability insurance policy which includes coverage of not less than $500,000 for personal injury and $100,000 for property damage. 13. Term and Termination. 13.1 Term. The term of this Agreement shall commence on the Effective Date and shall remain in force until terminated by either party, for any reason, with or without cause, upon written notice to the other party ("Term"). 13.2 Survival. Sections 1, 2, 3, 4, 5, 6, 7, 8.1, 8.3, 8.5, 8.7, 8.8, 8.9, 9, 10, 11, 13.2, 14, 15 and 16 shall survive any expiration or termination of this Agreement. 14. Relationship. Consultant is not, and shall not be deemed to be an employee, director, agent, partner, owner or joint venturer of the Company for any purpose whatsoever, but shall act as an independent contractor, and nothing contained herein shall be construed to be inconsistent with this relationship. Consultant shall not have and shall not be deemed to have any interest whatsoever in any tangible or intangible property belonging to the Company, including, without limitation, the Pinnacle Flood System, the Services, any license or service agreement associated therewith, any software, the Company trademarks, tradenames, servicemarks, logos, or other intellectual property or any data or other real or personal property of the Company. 14.1 Consultant's Obligation. Consultant shall be solely responsible for all health, medical, life, travel, accident and other insurance and benefits for Consultant and the Company shall not have any responsibility or liability therefor. 15. Indemnification. Consultant agrees to indemnify, defend and hold harmless the Company from all claims, liability, damages or expenses, including reasonable attorneys' fees and costs incurred in defending against same arising from (i) its failure to perform any of its obligations under this Agreement, or (ii) any act or Initials ____ Initials ____ 6. 7 omission of Consultant, excluding only those claims, liability, damages or expenses to the extent they are caused by the gross negligence or wilful misconduct of the Company, its agents or employees. 16. Miscellaneous. 16.1 Assignment. This Agreement is to be performed solely by Consultant. Consultant may not, without the prior written consent of the Company, assign, market, license, sell, lease, rent, transfer, hypothecate, franchise, mortgage, joint venture, distribute, encumber, convert or in any other way convey Consultant's rights, duties or obligations under this Agreement either in whole or in part. 16.2 Interpretation of Agreement. This Agreement is additional to prior agreements between Consultant and the Company. This Agreement may be amended only in a writing that has been executed by Consultant and a duly authorized officer of the Company. 16.3 Governing Law. This Agreement shall be governed by, and construed in accordance with the laws of the State of California, including, without limitation, those relating to conflict of laws. Any lawsuit or action brought by any of the parties hereto, shall be filed and adjudicated in San Mateo County, California. 16.4 Attorney's Fees. If litigation occurs between the parties arising under or related to this Agreement, whether sounding in tort, contract or otherwise, the prevailing party shall be entitled to its reasonable attorneys' fees, expert witness fees and costs of suit. The prevailing party will be determined by the court based upon an assessment of which party's major arguments or positions taken in the proceedings could fairly be said to have prevailed over the other party's major arguments or positions on significant disputed issues addressed in the court's decision. 16.5 Notices. All other communications required or permitted to be made under this Agreement shall be in writing and either shall be delivered personally or sent by United States Postal Service certified or registered mail, postage prepaid and return receipt requested, to the address or addresses set forth below, or to such other address or addresses as a party may notify another party pursuant to this Section. Any such communication shall be deemed to be properly given (i) if delivered personally, upon written acknowledgment of receipt after delivery to the address specified; or (ii) if posted, the earlier of the actual date of delivery, as set forth in the return receipt, or three (3) business days from the date posted pursuant to the foregoing. The address for each party is as follows: Initials ____ Initials ____ 7. 8 To the Company: National Insurance Group 395 Oyster Point Boulevard Suite 500 South San Francisco, California 94080 Attention: Chief Executive Officer To Consultant: David B. Brody 162 Carl Street San Francisco, California 94117 16.6 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto, their permitted successors and assigns, and any corporate successors by a merger, consolidation or other corporate reorganization without limitation. Nothing contained in this Section 16.6 shall be construed to delete, modify or amend Section 16.1 of this Agreement. 16.7 Further Actions. The parties hereto agree, for themselves and for their successors or assigns, to execute any instrument and to perform any act which may be necessary to carry out the purpose of this Agreement. 16.8 Third Party Beneficiaries. Except as otherwise expressly provided in this Agreement, nothing in this Agreement shall confer any rights upon any person or entity, which is not a party to this Agreement. 16.9 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 16.10 No Waiver. No failure, delay or omission of or by any party in exercising any right, power or remedy upon any breach or default of any other party shall impair any such right, power or remedy of the party not in breach or default, nor shall it be construed to be a waiver of any such right, power or remedy, or an acquiescence in or to any such breach or default, or a waiver of or acquiescence in any similar breach or default. Nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any party of any provision of this Agreement must be in writing and be executed by all the parties to this Agreement and shall be effective only to the extent specifically set forth in such writing. Initials ____ Initials ____ 8. 9 16.11 Construction. The captions to this Agreement and its sections, subsections, tables, addendums and exhibits are inserted only for convenience and shall not be construed as part of this Agreement or as a limitation on or broadening of the scope of this Agreement or any section, subsection table or exhibit. This Agreement shall be construed as if each party hereto was its author and each party hereby adopts the language of this Agreement as if it were his, her or its own. If there is a conflict or inconsistency between the terms of this Agreement and any exhibit attached hereto, the terms of this Agreement shall govern. 16.12 Authority. Consultant warrants that he has sufficient authority to execute this Agreement and perform hereunder, that his execution of this Agreement will not constitute a breach of any other agreement or license to which he is a party, or a violation of any authority granted to him; and that when this Agreement is signed by Consultant, it will be enforceable against him in accordance with its terms and conditions. 16.13 Impairment. Any provision or part of this Agreement which shall prove to be invalid, void or illegal, shall in no way affect, impair or invalidate any of the other provisions and parts hereof which shall remain in full force and effect. 16.14 Addition, Change or Discontinuation of Services. The Company may add to, change, or discontinue the Pinnacle Flood System and/or the Services or any other Services furnished pursuant to this Agreement, in whole or in part, or may discontinue furnishing any part of the Pinnacle Flood System and Services or any other such Services to any person, entity or group, including, but not limited to, any group in any area, for any reason, with or without cause and without any liability to Consultant. 16.15 No Enforcement. During and after the Term, the Company may, but is not obligated to enforce or not enforce any terms or conditions of this Agreement or any other agreement relating hereto. 16.16 Remedies Cumulative. All remedies provided in this Agreement, by law or otherwise, shall be cumulative and not alternative. IN WITNESS WHEREOF, the parties hereto have executed this Agreement and agree to enter into and be bound by the provisions hereof as of the Effective Date. CONSULTANT WITNESS: By: /s/ Elizabeth Paulsen By: /s/ David B. Brody ------------------------------ ------------------------------ David B. Brody (Signatures Continued) 9. 10 NATIONAL INSURANCE GROUP WITNESS: By: /s/ Elizabeth Paulsen By: /s/ Paulette J. Taylor ------------------------------ ------------------------------ Paulette J. Taylor, Esq. Executive Vice President 10. EX-10.14 7 SEVERANCE AGREEMENT AND FULL RELEASE OF ALL CLAIMS 1 Exhibit 10.14 SEVERANCE AGREEMENT AND FULL RELEASE OF ALL CLAIMS THIS SEVERANCE AGREEMENT AND FULL RELEASE OF ALL CLAIMS ("Severance Agreement and Release") is entered into and made effective as of May 23, 1995 ("Effective Date"), by and among, Howard L. Herman ("Herman"), on the one hand, and NATIONAL INSURANCE GROUP, a California corporation, for itself and its current and future subsidiaries (collectively the "Company"), on the other hand. RECITALS A. Herman was a co-founder of the Company and one of its predecessor companies and has been employed by the Company for more than seven years and by one of the Company's predecessor companies for approximately twenty years; B. Herman claims that the disagreements leading up to the termination of Herman's employment have caused him psychological, physical and emotional distress damage and trauma, leading him to obtain the services of a therapist; C. Although the Company claims that it is entitled to terminate Herman's employment, Herman claims that the Company has no such right; D. Herman claims that termination of his employment will result in substantial financial loss, including, but not limited to, loss of earnings and benefits, as well as the likely continuation of his psychological, physical and emotional distress damage and trauma; E. Herman does not have pending against the Company or any employee, agent, officer or director of the Company any claim, charge or action in or with any federal, state or local court or administrative agency; F. On the terms set forth in this Severance Agreement and Release, Herman will tender his voluntary resignation as an officer and employee of the Company; G. Herman and the Company desire to settle fully and finally all differences between them, including, but not limited to, the differences described above. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants contained herein and other good and valuable consideration, receipt of which is hereby acknowledged, and to avoid litigation, the parties hereto agree as follows: 1. RESIGNATION. Herman hereby willingly tenders his voluntary resignation as an employee and officer of the Company effective on May 31, 1995 ("Resignation Date"). The Company hereby accepts the resignation of Herman to be effective on the Resignation Date. Herman agrees that he shall vacate his offices at the Company by May 4, 1995. The Company agrees that Herman shall be on paid leave from May 6, 1995 through May 31, 1995. 2. NO ADMISSION BY THE COMPANY. This Severance Agreement and Release and compliance with this Severance Agreement and Release shall not be construed as an admission by the Company of any liability whatsoever, or as an admission by the Company of any violation of the rights of Herman and/or any person, and/or violation of any order, law, statute, duty or contract whatsoever with or against Herman or any person. The Company specifically disclaims any liability to Herman and/or any other person for any alleged violation of the rights of Herman and/or any person, and for any alleged violation of any order law, statute, duty or contract on the part of the Company, its officers, directors, shareholders, employees, agents and/or representatives. Herman claims that the Company has liability for the matters referred to in the Recitals and the Company disclaims any liability to Herman therefor. This Severance Agreement and Release is being entered into to buy peace and for no other reason. Page 1 of 8 2 3. SEVERANCE AND OTHER BENEFITS. Herman and the Company agree that the Company has no policy or practice which entitles Herman to severance pay or other benefits. In exchange for Herman's resignation and the promises and releases given by him in this Severance Agreement and Release, the Company agrees to provide severance and other benefits to Herman as follows: 3.1 Severance Pay. Herman understands and agrees that he has not executed this Severance Agreement and Release without first having considered it for a full twenty-one (21) days from receipt of this Severance Agreement and Release and that he did not execute this Severance Agreement and Release without first being advised by the Company in writing to consult with an attorney. The Company shall deliver to Herman two (2) checks made payable to Howard L. Herman which are described in Sections 3.1.1 and 3.1.2 below on the later of (i) May 31, 1995, or (ii) the expiration of the seven (7) day period in which Herman may revoke this Severance Agreement and Release, as more particularly described in Section 7.4 below. 3.1.1 The first check shall be in the gross amount of Two Hundred Forty-Five Thousand Seven Hundred Fifty-Four Dollars and Eight Cents ($245,754.08) minus all monies advanced and/or lent to Herman during the month of April, 1995, which in gross amount total Twenty-Five Thousand Dollars ($25,000), together with all appropriate withholdings and deductions for sums which are paid in lieu of wages. This check represents the settlement of Herman's claims against the Company for wages lost in connection with his separation from employment. The parties have agreed that this amount shall constitute a full and complete settlement of this aspect of Herman's claim. 3.1.2 The second check to be paid to Herman is in the total amount of Five Hundred Thousand Dollars ($500,000). This amount shall not be subject to any withholding or deduction and is in full and complete settlement for Herman's claims for emotional distress damages. 3.2 Health Insurance Payment; Counselling Payment; Legal Fees Payment. 3.2.1 For the period from the Effective Date of this Severance Agreement and Release until the Resignation Date, Herman shall continue to receive the Company's health insurance benefits. The Company agrees to pay Herman a lump sum amount of Thirty Thousand Dollars ($30,000) ("Health Insurance Payment") which Herman may use for any purpose, it being the Company's intention that Herman will use this amount to purchase health insurance benefits for a period of three (3) years from the Resignation Date. Herman shall be solely responsible for obtaining and paying for the costs of his health insurance, if any, after the Resignation Date. The Company's sole duty with respect to Herman's health insurance to make the Health Insurance Payment provided in this Section. 3.2.2 The Company agrees to pay Herman a lump sum amount of Four Thousand Five Hundred Dollars ($4,500) ("Counselling Payment") which Herman may use for any purpose, it being the Company's intention that Herman will use this amount to purchase psychological consultation. Herman shall be solely responsible for obtaining and paying for the costs of his psychological consultation, if any, after the Resignation Date. The Company's sole duty with respect to Herman's psychological counselling is to make the Counselling Payment provided in this Section. 3.2.3 The Company agrees to pay Herman a lump sum amount of Two Thousand Five Hundred Dollars ($2,500) ("Legal Fees Payment") which Herman may use for any purpose, it being the Company's intention that Herman will use this amount to defray the cost of his legal expenses associated with the negotiation, drafting and execution of this Severance Agreement and Release. Herman shall be solely responsible for obtaining and paying for the costs of his attorney and all other costs and expenses associated with the negotiation of this Severance Agreement and Release. The Company's sole duty with respect to Herman's legal expenses is to make the Legal Fees Payment provided in this Section. 3.2.4 Payment of amounts due pursuant to this Section 3.2 shall be due and payable on the later of (i) May 31, 1995, or (ii) the expiration of the seven (7) day period in which Herman may revoke this Severance Agreement and Release, as more particularly described in Section 7.4 below. Page 2 of 8 3 3.3 Extension of Exercise Provisions of Stock Options. Herman is presently the holder of certain vested but unexercised stock options in the Company's common stock. The Company's 1986 Stock Option Plan, as amended ("Plan"), and the various stock option agreements between Herman and the Company under which these options were issued ("Option Agreements") provide that all options must be exercised within thirty (30) days after termination of employment. The Company agrees to extend the exercise period of Herman's unexercised options so that they may be exercised at any time until the date on which they would have expired had Herman continued to be an employee of the Company through that date. Herman's unexercised stock options shall continue to be subject to all the terms and conditions of the Plan and Option Agreements pursuant to which such options were granted, including, without limitation, any requirements concerning payment for the stock upon exercise of options and any forfeiture or termination provisions for stock options set forth in the Plan and/or Option Agreements. The foregoing obligation of the Company is contingent upon the approval of the Company's shareholders at the Company's next annual meeting of an amendment of the Plan permitting such extension, which amendment has been disclosed to the Company's shareholders in the Company's Proxy Statement which was mailed to the shareholders and filed with the Securities and Exchange Commission on April 28, 1995. Herman acknowledges that Herman's stock options shall stop vesting of May 31, 1995 as provided by the Plan and his Option Agreements. 3.4 Vacation. The parties acknowledge that there was a dispute regarding the amount of vacation days due to Herman and that the parties have agreed that the Company shall pay Herman for twenty-nine (29) days of vacation in resolution of such dispute. Payment of amounts due for vacation shall be due and payable on the later of (i) May 31, 1995, or (ii) the expiration of the seven (7) day period in which Herman may revoke this Severance Agreement and Release, as more particularly described in Section 7.4 below. 3.5 Consultation. To the extent reasonably requested to do so by the Company, Herman agrees to perform consulting services for the Company relating to matters on which he worked during his employment by the Company, subject to the execution of a mutually acceptable written consulting agreement between Herman and the Company. 3.6 Tax Reporting. The Company has been advised by its accountants that the payments to be made by the Company to Herman pursuant to this Severance Agreement and Release are deductible to the Company and Herman has been advised that the amounts payable pursuant to Section 3.1.2 are not includible in his income. The Company agrees that it shall file income tax returns and all other documents including, without limitation, all Forms W-2 and 1099, with taxing authorities having jurisdiction over the Company which are consistent with the provisions of this Section 3 and shall not amend any such tax returns and/or other documents unless (i) any such taxing authority recalculates amounts due by the Company pursuant to such tax returns and/or orders that such tax returns be changed by the Company, or (ii) upon the written advice of the Company's accountants that the payments made pursuant to this Severance Agreement and Release are not deductible to the Company. 4. PROPRIETARY INFORMATION AGREEMENT. In exchange for the consideration provided in Section 3 above, the adequacy of which is hereby acknowledged, Herman agrees to execute and perform the Proprietary Information Agreement in the form described in Exhibit A attached hereto and incorporated herein by this reference. 5. GENERAL MUTUAL RELEASE. 5.1 Release by Herman. Subject to the obligations of the Company set forth in this Severance Agreement and Release which are not released hereby, and in exchange for the consideration provided in Section 3 above, the adequacy of which is hereby acknowledged, Herman, for himself and his heirs, executors, administrators, successors, assigns and legal representatives, hereby fully releases and forever discharges the Company, its current and future affiliate and parent companies, and individually and collectively, personally and professionally, the officers, directors, shareholders, employees, agents, representatives, parents, subsidiaries, affiliates, joint venturers, partners, predecessors, successors, assigns, and all other persons or entities connected with the Company and its current and future affiliate and parent companies, from any and all claims, demands, deficiencies, levies, assessments, executions, costs, expenses, damages, liabilities, debts, rights, contracts, losses, obligations, actions, inactions, causes of action, attorney's fees and benefits, of any kind or character whatsoever (collectively "Claims"), arising in law or in equity, whether known or unknown, suspected or unsuspected, directly Page 3 of 8 4 or indirectly, that he has ever had, now has or may now have against them, and/or any of them, including, without limitation, all Claims directly or indirectly related to or arising out of Herman's employment as an employee and officer of the Company and/or the termination of that employment, whether arising in tort or contract, including, without limitation, any Claims for breach of express or implied contract, for further monetary compensation by way of additional salary and/or bonus allegedly due him by reason of that employment, and/or all other Claims, based on common law, federal and/or state statute, including, without limitation, Claims arising under Age Discrimination in Employment Act (29 U.S.C Section 621, et seq.). Herman further understands and expressly agrees that this Severance Agreement and Release specifically extends to all Claims, whether known or unknown, and he expressly waives the benefits of Section 1542 of the California Civil Code, which provides: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM, MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." Herman acknowledges that he will not be able to bring suit against anybody ever again based on any of the Claims being released hereunder after signing this Severance Agreement and Release and receiving all agreed upon consideration described in Sections 3.1, 3.2 and 3.4, and, subject to the approval by the requisite number of shareholders of the amendment to the Plan, the consideration described in Section 3.3. 5.2 Release by the Company. The Company, for itself, and its current and future affiliate and parent companies, and the officers, directors, shareholders, employees, agents, representatives, parents, subsidiaries, affiliates, joint venturers, partners, predecessors, successors and assigns, hereby releases and forever discharges Herman, his heirs, executors, administrators, successors, assigns and legal representatives, from all Claims, arising in law or in equity, whether known or unknown, suspected or unsuspected, directly or indirectly, that the Company has ever had, now has or may now have against Herman for any action, inaction, error or omission as an officer and/or employee of the Company, including, without limitation, all Claims directly or indirectly related to or arising out of Herman's employment by the Company as an officer and employee and/or the termination of that employment, whether arising in tort or contract. The Company acknowledges that after signing this Severance Agreement and Release, it will not be able to bring suit against Herman based on any of the Claims being released hereunder. The Company further understands and expressly agrees that this Severance Agreement and Release specifically extends to all Claims, whether known or unknown, and he expressly waives the benefits of Section 1542 of the California Civil Code, which provides: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM, MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." 6. COVENANT NOT TO SUE. Herman represents that he has not filed any complaints, claims and/or actions against the Company, its officers, agents, directors, supervisors, employees and/or representatives with any state, federal, or local agency or court. The Company represents that it has not filed any complaints, claims and/or actions against Herman with any state, federal, or local agency or court. The Company and Herman each covenant and agree that they will not bring, commence, institute, maintain, prosecute or voluntarily aid any action at law or proceeding in equity, or otherwise prosecute or sue the other party, either affirmatively or by way of cross-complaint, defense or counterclaim or in any other manner, or at all, on any alleged Claims being released hereunder. In the event of any breach of this Section 6, a cause of action shall be deemed to have accrued immediately upon the commencement of any action or other proceeding described herein, and in such event, this Severance Agreement and Release may be pled as a full and complete defense thereto, as the basis for abatement of or injunction against said action or other proceeding, and as a basis of a cross complaint for damages therein. Page 4 of 8 5 7. HERMAN'S REPRESENTATIONS. 7.1 Herman agrees that the payments and benefits described in Section 3 of this Severance Agreement and Release shall constitute the entire amount of financial and other consideration provided to him under this Severance Agreement and Release and that he will not seek, and shall not be entitled to seek, any further compensation for any other claimed damage, costs and/or attorneys' fees in connection with the matters encompassed in this Severance Agreement and Release. 7.2 Herman acknowledges and agrees that the Company has made no representations to him regarding the tax consequences of any amounts received by him pursuant to this Severance Agreement and Release and/or the tax treatment of this Severance Agreement and Release. Herman agrees to pay federal and/or state taxes, if any, which are required by law to be paid with respect to this settlement. Subject to the Company's compliance with the provisions of Section 3.1 hereof, Herman further agrees to indemnify and hold the Company harmless from and against Claims, deficiencies, levies, assessments and/or recoveries by any governmental entity against the Company for any amounts claimed due on account of this Severance Agreement and Release or pursuant to claims made under any federal and/or state tax laws, and any costs, expenses and/or damages sustained by the Company by reason of any such claims, including, without limitation, any amounts paid by the Company as taxes, attorneys' fees, deficiencies, levies, assessments, fines, penalties, interest and/or otherwise. 7.3 Herman agrees that he will not seek nor accept employment with the Company in the future and that the Company is entitled to reject without cause any application for employment with the Company made by him, and not hire him, and that Herman shall have no cause of action against the Company arising out of any such rejection. The foregoing shall not be construed to prevent Herman from serving as an outside director of the Company and the parties acknowledge that Herman has been nominated as an outside director by the Company's board of directors to stand for election at the Company's next annual shareholders meeting. If Herman in any other manner becomes an employee of the Company, Herman shall be obligated to return all amounts paid to him pursuant to this Agreement. 7.4 Herman acknowledges that the Company has specifically advised him to consult with an attorney in order to review this Severance Agreement and Release and advise Herman of his rights concerning it, and that he has done so. Herman further acknowledges that the Company has further advised him that he has twenty-one (21) days from the date this Severance Agreement and Release was originally presented to him in which to consider whether to sign it, and that if he chooses to sign it, he will be given seven (7) additional days from the date he signs it in which to revoke it and that this Severance Agreement and Release shall not become effective or enforceable until the revocation period has expired. 7.5 Herman expressly acknowledges and warrants that he has read and fully understands this Severance Agreement and Release; that he has had the opportunity to consult with legal counsel of his own choosing in order to have the terms and conditions of this Severance Agreement and Release fully explained to him; that he is not executing this Severance Agreement and Release in reliance on any promises, representations or inducements other than those set forth herein; that he understands he is giving up legal rights by signing this Severance Agreement and Release; and that he is executing it voluntarily, free of any duress or coercion, after due deliberation and with a full understanding of what it means to do so. 7.6 Herman understands that rights or claims under the Age Discrimination in Employment Act (29 U.S.C Section 621, et seq.) that may arise after the date this Severance Agreement and Release is executed are not waived. 7.7 Herman represents and warrants that he has not assigned, transferred, sold, hypothecated, mortgaged, rented, leased, joint ventured, encumbered, converted or in any other way conveyed, in whole or in part, any of the Claims released by him herein. 8. COSTS OF ENFORCEMENT. It is further understood and agreed that if, at any time, a violation of any term of this Severance Agreement and Release is asserted by any party hereto, that party shall have the right to seek specific performance of that term and/or any other necessary and proper relief, including, but not Page 5 of 8 6 limited to, damages, from any court of competent jurisdiction. The parties agree that if either one of them initiates legal action to enforce any of the terms, conditions or provisions of this Severance Agreement and Release, or for any breach of it, the prevailing party in that action will be entitled to his or its reasonable costs and attorneys' fees incurred in pursuing that action. 9. RELIANCE; INTERPRETATION. The parties hereto represent and acknowledge that in executing this Severance Agreement and Release they do not rely and have not relied upon any representation or statement made by any of the other parties or by any of the other parties' agents, attorneys or representative with regard to the subject matter, basis, or effect of this Severance Agreement and Release or otherwise, other than those specifically stated in this written Severance Agreement and Release. This Severance Agreement and Release shall be interpreted in accordance with the plain meaning of its terms and not strictly for or against any of the parties hereto. This Severance Agreement and Release shall be construed as if each party hereto was its author and each party hereby adopts the language of this Severance Agreement and Release as if it were his, her or its own. The captions to this Agreement and its sections, subsections, tables and exhibits are inserted only for convenience and shall not be construed as part of this Agreement or as a limitation on or broadening of the scope of this Agreement or any section, subsection table or exhibit. Should any provision of this Severance Agreement and Release be declared or be determined by any court of competent jurisdiction to be wholly or partially illegal, invalid, or unenforceable, the legality, validity and enforceability of the remaining parts, terms and provisions shall not be affected thereby and said illegal, unenforceable or invalid part, term, or provision shall be deemed not to be a part of this Severance Agreement and Release. 10. COVENANT TO NOT COMPETE WITH THE COMPANY. Herman agrees to refrain from directly or indirectly competing with and/or assisting others in competing with the Company and/or soliciting and/or accepting business with respect to products and/or services competitive with those of the Company in the greater Los Angeles, Orange County, San Diego, San Francisco and Sacramento metropolitan ares of California; Harris and Garland counties in Texas; Broward County, Florida; Cook County, Illinois; Cherokee County, Georgia; New York, New York; and Boston, Massachusetts for a period of one (1) year from the Effective Date of this Severance Agreement and Release. Herman further agrees that he will not hire, or attempt to hire any employees of the Company during such one (1) year period without the Company's prior written consent. 11. MISCELLANEOUS. 11.1 Unless otherwise agreed upon in writing by a duly authorized officer of the Company, Herman may not assign, sell, transfer, hypothecate, mortgage, joint venture, encumber, convert, lease, rent or in any other way convey Herman's rights, duties or obligations under this Severance Agreement and Release, either in whole or in part. 11.2 This Severance Agreement and Release constitutes the entire agreement between the parties relating to the subject matter hereof. All prior and/or contemporaneous agreements, proposals, understandings and/or communications between or involving the parties, whether oral or written, are void and are replaced in their entirety by this Severance Agreement and Release. This Severance Agreement and Release may be amended only in a writing that has been executed by duly authorized officers of the parties and shall not be amended or deemed amended by subsequent conduct of either party or any course of dealings between the parties. The parties agree that (i) there shall be no oral agreements between the parties, whether or not related to this Severance Agreement and Release or the subject matter hereof, and whether or not allegedly entered into prior, during or subsequent to the term of this Agreement; and (ii) in order for any agreement to be effective between the parties, whether during or subsequent to the term of this Agreement, it shall be set forth in writing and executed by duly authorized representatives of the parties. 11.3 All communications required or permitted to be made under this Severance Agreement and Release shall be in writing and either shall be delivered personally or sent by United States Postal Service certified or registered mail, postage prepaid and return receipt requested, to the address or addresses set forth below, or to such other address or addresses as a party may notify another party pursuant to this Section. Any such communication shall be deemed to be properly given (i) if delivered personally, upon written Page 6 of 8 7 acknowledgement of receipt after delivery to the address specified; or (ii) if posted, the earlier of the actual date of delivery, as set forth in the return receipt, or three (3) days from the date posted pursuant to the foregoing. The address for each party is as follows: To the Company: National Insurance Group 395 Oyster Point Boulevard Suite 500 South San Francisco, California 94080-1933 Attention: Chief Executive Officer To Herman: Howard L. Herman 3511 Clay Street San Francisco, California 94118 With a Copy to: Barry Reder Coblentz, Cahen, McCabe & Breyer 222 Kearny Street, 7th Flood San Francisco, California 94108 11.4 This Severance Agreement and Release shall be governed by, and construed in accordance with the laws of the State of California, including without limitation, those relating to conflict of laws. Any lawsuit or action brought by any of the parties hereto, shall be filed and adjudicated in San Mateo County, California. 11.5 The failure of either party to enforce any provision of this Severance Agreement and Release shall not be construed as a waiver of or an acquiescence in or to such provision. 11.6 The parties hereto agree, for themselves and for their successors or assigns, to execute any instrument and to perform any act which may be necessary to carry out the purpose of this Severance Agreement and Release. 11.7 This Severance Agreement and Release shall be binding upon the parties hereto and upon their heirs, administrators, representatives, executors, successors and assigns, and shall inure to the benefit of said parties and each of them and to their heirs, administrators, representatives, executors, successors and assigns. 11.8 This Severance Agreement and Release may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Severance Agreement and Release and agree to enter into and be bound by the provisions hereof as of the Effective Date. WITNESS: By: /s/ By: /s/ Howard L. Herman ---------------------------- -------------------------------- Howard L. Herman (Signatures Continued) Page 7 of 8 8 NATIONAL INSURANCE GROUP a California corporation, for itself and its current and future subsidiaries WITNESS: By: /s/ By: /s/ Mark A. Speizer ----------------------------- ----------------------------------- Mark A. Speizer Chief Executive Officer Marcia Herman signs this Severance Agreement and Release for the purpose of waiving her community property interest in the Claims being released and agrees that she herself is to be personally bound by the terms and conditions of this Severance Agreement and Release in accordance with its terms and conditions, including, without limitation the Release set forth in Section 5.1 and the Covenant not to Sue set forth in Section 6. By: /s/ Marcia Herman --------------------------- Marcia Herman The undersigned, who is the attorney for Herman and Marcia Herman, hereby executes this Severance Agreement and Release solely for the purpose of acknowledging that he has consulted with Herman and Marcia Herman, explained the meaning of this Severance Agreement and Release to them and believes that they understand the meaning and significance of the terms and conditions of this Severance Agreement and Release. COBLENTZ, CAHEN, MCCABE & BREYER By: -------------------------- Barry Reder, for the Firm Page 8 of 8 9 EXHIBIT A PROPRIETARY INFORMATION AGREEMENT THIS PROPRIETARY INFORMATION AGREEMENT made as of May 23, 1995 ("Effective Date"), by and between Howard L. Herman ("Employee") and National Insurance Group ("National") for itself and its current and future subsidiaries (collectively the "Company"). The current and future subsidiaries of National are sometimes referred to herein collectively as the "Subsidiaries". In consideration of the compensation now and hereafter paid to Employee by the Company and/or Subsidiaries, Employee agrees to the following: 1. Maintaining Confidential Information. 1.1 Company and Subsidiary Information. Employee agrees at all times, during the term of his/her employment with the Company and the Subsidiaries and thereafter, to hold in strictest confidence, and not to use, except for the benefit of the Company or the Subsidiaries, or to disclose to any person, firm or corporation without written authorization of the Board of Directors of the Company, any trade secrets, confidential knowledge, data or other proprietary information relating to products, processes, know-how, designs, formulas, developmental or experimental work, computer programs, data bases, source codes, passwords, other original works of authorship, customer lists, business plans, financial information or other subject matter pertaining to any business of the Company or the Subsidiaries or any of their clients, consultants or licensees. 1.2 Former Employer Information. Employee agrees that he/she will not, during his/her employment with the Company and the Subsidiaries, improperly use or disclose any proprietary information or trade secrets of his/her former or concurrent employers or companies, if any, and that he/she will not bring onto the premises of the Company or the Subsidiaries any unpublished document or any property belonging to his/her former or concurrent employers or companies, if any, unless consented to in writing by said employers or companies. 1.3 Third Party Information. Employee recognizes that the Company and/or the Subsidiaries have received and in the future will receive from third parties their confidential or proprietary information subject to a duty on the Company's and the Subsidiaries' part to maintain the confidentiality of such information and to use it only for certain limited purposes. Employee agrees that he/she owes the Company and the Subsidiaries and such third parties, during the term of his/her employment with the Company and the Subsidiaries and thereafter, a duty to hold all such confidential or proprietary information in the strictest confidence and not to disclose it to any person, firm or corporation (except as necessary in carrying out his/her work for the Company and the Subsidiaries consistent with the Company's and the Subsidiaries' agreement with such third party) or to use it for the benefit of anyone other than for the Company or such third party (consistent with the Company's and/or Subsidiaries agreement with such third party) without the express written authorization of the Board of Directors of the Company. 2. Retaining and Assigning Inventions and Original Works. 2.1 Inventions and Original Works Retained by Employee. Employee has attached hereto, as Schedule 1, a list describing all inventions, original works of authorship, developments, improvements, and trade secrets which were made by him/her prior to his/her employment with the Company and the Subsidiaries, which belong to him/her, which relate to the Company's and the Subsidiaries' proposed business and products, and which are not assigned to the Company or the Subsidiaries; or, if no such list is attached, Employee represents that there are no such inventions. 2.2 Inventions and Original Works Assigned to the Company and the Subsidiaries. Employee agrees that he/she will promptly make full written disclosure to the Company and/or the Subsidiaries, will hold in trust for the sole right and benefit of the Company and the Subsidiaries, and will assign to the Company and the Subsidiaries all his/her rights, title, and interest in and to any and all inventions, original works of authorship, developments, improvements or trade secrets which Employee may solely or jointly conceive or develop or reduce Page 1 of 4 10 to practice, or cause to be conceived or developed or reduced to practice, during the period of time he/she is in the employ of the Company and the Subsidiaries. Employee recognizes, however, that Section 2870 of the California Labor Code (as set forth in Schedule 2 attached hereto) exempts from assignment under this provision any invention as to which he/she can prove the following: 2.2.1 It was developed entirely on his/her own time; and 2.2.2 No equipment, supplies, facilities or trade secrets of the Company or the Subsidiaries were used in its development; and 2.2.3 It did not relate, at the time of its conception or its reduction to practice, to the business of the Company or the Subsidiaries or to the Company's or Subsidiaries' actual or demonstrably anticipated research and development; and 2.2.4 It did not result from any work performed by Employee for the Company and/or the Subsidiaries. Employee acknowledges that all original works of authorship which are made by him/her (solely or jointly with others) within the scope of his/her employment and which are protectable by copyright are "works made for hire," as that term is defined in the United States Copyright Act (17 USCA, Section 101). 2.3 Maintenance of Records. Employee agrees to keep and maintain adequate and current written records of all inventions and original works of authorship made by him/her (solely or jointly with others) during the term of his/her employment with the Company and the Subsidiaries. The records will be in the form of notes, sketches, drawings, and any other format that may be specified from time to time by the Company or the Subsidiaries. The records will be available to and remain the sole property of the Company and the Subsidiaries at all times. 2.4 Inventions Assigned to the United States. Employee agrees to assign to the United States government all his/her right, title, and interest in and to any and all inventions, original works of authorship, developments, improvements or trade secrets whenever such full title is required to be in the United States by a contract between the Company and/or the Subsidiaries and the United States or any of its agencies. 2.5 Obtaining Letters Patent, Copyrights, and Mask Work Rights. Employee agrees that his/her obligation to assist the Company and the Subsidiaries to obtain United States or foreign letters patent, copyrights, or mask work rights covering inventions, works of authorship, and mask works, respectively, assigned hereunder to the Company and/or Subsidiaries shall continue beyond the termination of his/her employment, but the Company and/or the Subsidiaries shall compensate him/her at a reasonable rate for time actually spent by him/her at the Company's and/or the Subsidiaries' request on such assistance. If the Company is unable because of Employee's mental or physical incapacity or for any other reason to secure Employee's signature to apply for or to pursue any application for any United States or foreign letters patent, copyrights, or mask work rights covering inventions or other rights assigned to the Company and/or the Subsidiaries as above, then, then Employee hereby irrevocably designates and appoints the Company and the Subsidiaries and their duly authorized officers, and agents as his/her agent and attorney in fact, to act for and in his/her behalf and stead to execute and file any such applications and to do all other lawfully permitted acts to further the prosecution and issuance of letters patent, copyrights, and mask work rights with the same legal force and effect as if executed by Employee. Employee hereby waives and quitclaims to the Company and the Subsidiaries any and all claims, of any nature whatsoever which he/she now or may hereafter have for infringement of any patents, copyrights, or mask work rights resulting from any such application assigned hereunder to the Company. 2.6 Exception to Assignments. Employee understands that the provisions of this Agreement requiring assignment to the Company and the Subsidiaries do not apply to any invention which qualifies fully under the provisions of Section 2870 of the California Labor Code, a copy of which is attached hereto as Schedule 2. Employee will advise the Company and/or the Subsidiaries promptly in writing, receipt of which will be signed by the Chief Executive Officer of the Company and/or the Subsidiaries, of an inventions, original works of authorship, developments, improvements or trade secrets that he/she believes meet the criteria in Subparagraphs 2.2.1 through 2.2.4 above; and Employee will at that time provide to the Company and/or the Subsidiaries in Page 2 of 4 11 writing all evidence necessary to substantiate that belief. Employee understands that the Company and the Subsidiaries will keep in confidence and will not disclose to third parties without Employee's consent any confidential information disclosed in writing to the Company or the Subsidiaries relating to inventions that qualify fully under the provisions of Section 2870 of the California Labor Code. Items not fully covered by Section 2870 of the California Labor Code may be submitted to the Company for consideration and any exceptions to Section 2870 of the California Labor Code shall be noted in said submission. 3. Conflicting Employment. Employee agrees that, during the term of his/her employment with the Company and the Subsidiaries, he will not engage in any other employment, occupation, consulting or other business activity directly related to the business in which the Company or the Subsidiaries are now involved or become involved during the term of his/her employment, nor will Employee engage in any other activities that conflict with his/her obligations to the Company and/or the Subsidiaries. 4. Returning Company's and Subsidiaries' Document. Employee agrees that, at the time of leaving the employ of the Company and the Subsidiaries, he/she will deliver to the Company and/or the Subsidiaries (and will not keep in his/her possession or deliver to anyone else) any and all devices, records, data, source codes, passwords, notes, reports, proposals, lists, correspondence, specifications, drawings, blueprints, sketches, materials, equipment, other documents or property, or reproductions of any aforementioned items belonging to the Company or the Subsidiaries, its successors or assigns. In the event of the termination of Employee's employment, Employee agrees to sign and deliver the "Termination Certification" attached hereto as Schedule 3. 5. Representations. Employee agrees to execute any proper oath or verify any proper document required to carry out the terms of this Agreement. Employee represents that his/her performance of all the terms of this Agreement will not breach any agreement to keep in confidence proprietary information acquired by him/her in confidence or in trust prior to his/her employment by the Company and the Subsidiaries. Employee has not entered into, and Employee agrees he/she will not enter into, any oral or written agreement in conflict herewith. 6. Miscellaneous. 6.1 Governing Law. This Agreement will be governed by the Laws of the State of California. 6.2 Entire Agreement. This Agreement sets forth the entire agreement and understanding among the Company and the Subsidiaries and Employee relating to the subject matter herein and merges all prior discussions and agreements with respect to matters herein among the parties hereto. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, will be effective unless in writing signed by the party to be charged. Any subsequent change or changes in Employee's duties, salary or compensation will not affect the validity or scope of this Agreement. 6.3 Severability. If one or more of the provisions in this Agreement are deemed void by law, then the remaining provisions will continue in full force and effect. 6.4 Successors and Assigns. This Agreement will be binding upon Employee's heirs, executors, administrators and other legal representatives and will be for the benefit of the Company and the Subsidiaries, their successors, and their assigns. IN WITNESS WHEREOF, the parties hereto have executed this Agreement and agree to enter into and be bound by the terms hereof, as of the Agreement Date. EMPLOYEE WITNESS: By: /s/ By: /s/ Howard L. Herman --------------------------- -------------------------------- Name: Howard L. Herman ------------------------------ (Signatures Continued) Page 3 of 4 12 NATIONAL INSURANCE GROUP, WITNESS: for itself and its current and future subsidiaries By: /s/ By: /s/ Mark A. Speizer -------------------------- -------------------------------- Mark A. Speizer Chief Executive Officer Page 4 of 4 13 SCHEDULE 1 LIST OF PRIOR INVENTIONS AND ORIGINAL WORKS OF AUTHORSHIP
Identifying Number Title Date or Brief Description ----- ---- -------------------- None n/a n/a
14 SCHEDULE 2 CALIFORNIA LABOR CODE SECTION 2870 EMPLOYMENT AGREEMENTS; ASSIGNMENT OF RIGHTS "(a) Any provision in an employment agreement which provides that an employee shall assign, or offer to assign, any of his or her rights in an invention to his or her employer shall not apply to an invention that the employee developed entirely on his or her own time without using the employer's equipment, supplies, facilities, or trade secret information except for those inventions that either: (1) Relate at the time of conception or reduction to practice of the invention to the employer's business, or actual or demonstrably anticipated research or development of the employer. (2) Result from any work performed by the employee for the employer. (b) To the extent a provision in an employment agreement purports to require an employee to assign an invention otherwise excluded from being required to be assigned under subdivision (a), the provision is against the public policy of this state and is unenforceable." 15 SCHEDULE 3 NATIONAL INSURANCE GROUP TERMINATION CERTIFICATION This is to certify that I do not have in my possession, nor have I failed to return, any devices, records, data, source codes, passwords, notes, reports, proposals, lists, correspondence, specifications, drawings, blueprints, sketches, materials, equipment, other documents or property, or reproductions of any aforementioned items belonging to National Insurance Group (the "Company"), Great Pacific Insurance Company ("GPIC") or Fastrac Systems, Inc. Insurance Agent & Broker ("Fastrac"), and Pinnacle Data Corporation ("PDC") or any subsidiary or affiliate of the Company. (For purposes hereof, GPIC, Fastrac, PDC and other subsidiaries or affiliates of the Company are referred to collectively as the "Subsidiaries".) I further certify that I have complied with all the terms of the Company's and Subsidiaries' Employee Proprietary Information Agreement signed by me, including the reporting of any inventions and original works of authorship (as defined therein), conceived or made by me (solely or jointly with others) covered by that Agreement. I further agree that, in compliance with the Employee Proprietary Information Agreement, I will preserve as confidential all trade secrets, confidential knowledge, data or other proprietary information relating to products, processes, know-how, designs, formulas, developmental or experimental work, computer programs, data bases, source codes, passwords, other original works of authorship, customer lists, business plans, financial information or other subject matter pertaining to any business of the Company, the Subsidiaries, or any of their clients, consultants or licensees. Date: May 31, 1995 EMPLOYEE --------------------------- /s/ Howard L. Herman ------------------------------------ Howard L. Herman ------------------------------------ (Print Name) (To be signed by Employee upon termination) 16 NATIONAL INSURANCE GROUP a California corporation, for itself and its current and future subsidiaries WITNESS: By: /s/ By: /s/ Mark A. Speizer ----------------------------- ----------------------------------- Mark A. Speizer Chief Executive Officer Marcia Herman signs this Severance Agreement and Release for the purpose of waiving her community property interest in the Claims being released and agrees that she herself is to be personally bound by the terms and conditions of this Severance Agreement and Release in accordance with its terms and conditions, including, without limitation the Release set forth in Section 5.1 and the Covenant not to Sue set forth in Section 6. By: --------------------------- Marcia Herman The undersigned, who is the attorney for Herman and Marcia Herman, hereby executes this Severance Agreement and Release solely for the purpose of acknowledging that he has consulted with Herman and Marcia Herman, explained the meaning of this Severance Agreement and Release to them and believes that they understand the meaning and significance of the terms and conditions of this Severance Agreement and Release. COBLENTZ, CAHEN, MCCABE & BREYER By: /s/ Barry Reder -------------------------- Barry Reder, for the Firm Page 8 of 8 EX-10.15 8 SERVICE AGREEMENT AND RELEASE OF CLAIMS 1 Exhibit 10.15 SEVERANCE AGREEMENT AND RELEASE OF CLAIMS THIS SEVERANCE AGREEMENT AND RELEASE OF CLAIMS ("Severance Agreement and Release") is entered into and made effective as of October 19, 1995 ("Effective Date"), by and among, Mark A. Speizer ("Speizer"), on the one hand, and NATIONAL INSURANCE GROUP, a California corporation, for itself and its current, past, and future subsidiaries (collectively the "Company"), on the other hand. RECITALS A. Speizer was a co-founder of the Company and both of its predecessor companies and has been employed by the Company for more than seven years and by one of the Company's predecessor companies for approximately twenty-three years, another predecessor company for approximately eighteen years and other subsidiary companies for more than five years; B. Speizer claims that the disagreements leading up to the termination of his employment have caused him psychological, physical and emotional distress damage and trauma; C. Although the Company claims that it is entitled to terminate Speizer's employment, Speizer claims that the Company has no such right; D. Nevertheless, Speizer's employment with the Company was terminated effective October 19, 1995; E. Speizer claims that termination of his employment has and will result in substantial financial loss, including, but not limited to, loss of earnings and benefits, as well as psychological, physical and emotional distress, damage and trauma; F. Speizer does not have pending against the Company or any employee, agent, officer or director of the Company any claim, charge or action in or with any federal, state or local court or administrative agency; and G. Speizer and the Company desire to settle fully and finally all differences between them, including, but not limited to, the differences described above. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants contained herein and other good and valuable consideration, receipt of which is hereby acknowledged, and to avoid litigation, the parties hereto agree as follows: 1. RESIGNATION. Speizer hereby confirms that the resignation submitted to the Company by Speizer on October 19, 1995 is valid. October 19, 1995 shall be considered the effective date of Speizer's termination of employment. 1 of 12 2 2. NO ADMISSION BY THE PARTIES. This Severance Agreement and Release and compliance with this Severance Agreement and Release shall not be construed as an admission by either party or its shareholders, directors, officers, employees, agents or representatives of any liability whatsoever, or as an admission by either party or its shareholders, directors, officers, employees, agents or representatives of any past, present, or prospective violation of the rights of the other party and/or any person, and/or violation of any order, law, statute, duty or contract whatsoever with or against either party or any person. Each party and its shareholders, directors, officers, employees, agents and representatives specifically disclaims any liability to the other party and/or any other person for any alleged violation of the rights of the other party and/or any person, and for any alleged violation of any order law, statute, duty or contract. 3. SEVERANCE AND OTHER BENEFITS 3.1 In exchange for Speizer's resignation and the promises and releases given by him in this Severance Agreement and Release, the Company agrees to provide severance and other benefits to Speizer as follows. 3.2 The Company shall provide Speizer severance pay by delivering to Speizer two (2) checks made payable to Mark A. Speizer which are described in Sections 3.2.1 and 3.2.2 below on the expiration of the seven (7) day period in which Speizer may revoke this Severance Agreement and Release, as more particularly described in Section 7.4 below. 3.2.1 The first check shall be in the gross amount of Two Hundred Eighty-Five Thousand Dollars ($285,000), less all appropriate tax withholdings and deductions for sums which are paid in lieu of wages. This check represents the settlement of Speizer's claims against the Company for lost wages and other taxable damages allegedly incurred in connection with his separation from employment. Ten Thousand Dollars ($10,000) of this amount is allocated to Speizer's claims of age discrimination. The parties have agreed that this amount shall constitute a full and complete settlement of the taxable aspects of Speizer's claims and shall also provide compensation for Speizer's consulting services pursuant to Section 11 of this Severance Agreement and Release. 3.2.2 The second check to be paid to Speizer is in the total amount of Five Hundred Seventy Thousand Dollars ($570,000). This amount shall not be subject to any withholding or deduction and is in full and complete settlement for Speizer's claims for emotional distress damages. 3.3 The Company will also provide the following severance benefits: 3.3.1 A health insurance payment of Thirty Thousand Dollars ($30,000) ("Health Insurance Payment") which Speizer may sue for any purpose, it being the Company's intention that Speizer will use this amount to purchase health insurance benefits. Speizer may, at his election, use the Health Insurance Payment to pay for health insurance that the Company makes available to its former employees pursuant to any federal or state law, rule or regulation. 2 of 12 3 This health insurance payment shall be subject to all appropriate tax withholdings and deductions for sums which are paid in lieu of wages. 3.3.2 Speizer may use his existing office for a period of thirty (30) days from the effective date of his termination free of charge. The Company agrees to forward all personal mail and telephone calls of Speizer to him at such address as he may specify for a period of two years. Speizer agrees promptly to give notice of change of address and telephone numbers for all his personal mail and telephone calls. Speizer agrees that the Company may open all mail to Speizer which is not specifically marked "personal" or on which the Company is not named. 3.3.3 Speizer may, after his termination, purchase for One Dollar ($1) all of the furniture, equipment and art work located in his office on May 23, 1995, excluding the framed oil painting by H. Rhomberg which is owned by the Company. The painting may be purchased by Speizer from the Company for its fair market value as of the effective date of Speizer's termination. If there is any dispute regarding the painting's fair market value, Speizer and the Company shall each appoint an appraiser who shall confer in an attempt to resolve the painting's value. If the two appraisers cannot agree, then they shall select a third appraiser whose opinion shall be final and binding over all parties regarding the painting's value. Speizer's election to purchase the furniture and/or painting must be exercised by written notice given within thirty (30) days from the effective date of his termination. The furniture must be removed at Speizer's expense and risk within forty-five (45) days from the effective date of his termination. The painting may be removed by Speizer from the Company's premises within fifteen (15) days after Speizer's payment of its fair market value. 3.3.4 The Company agrees to extend the exercise period of Speizer's unexercised options which have vested (vesting stops upon termination of employment as defined in the Plan) so such options may be exercised at any time until the date on which they would have expired had Speizer continued to be an employee of the Company through that date. Speizer's unexercised stock options shall continue to be subject to all the terms and conditions of the Plan and Option Agreements pursuant to which such options were granted, including without limitation, any requirements concerning payment for the stock upon exercise of options and any forfeiture or termination provisions for stock options set forth in the Plan and/or Option Agreements. 3.3.5 The parties recognize that Speizer's status, if any, as a Director of the Company is not dependent upon his continued employment with the Company. 3.3.6 The Company has been advised by its accountants that the payments to be made by the Company to Speizer pursuant to this Severance Agreement and Release are deductible to the Company and Speizer has been advised by his counsel that the amounts payable pursuant to Section 3.2.2 are not includible in his income. The Company agrees that it shall file income tax returns and all other documents including, without limitation, all Forms W-2 and 1099, with taxing authorities having jurisdiction over the Company which are consistent with the provisions of this Section 3 and shall not amend any tax returns and/or other documents unless (i) any such taxing authority recalculates amounts due by the Company pursuant to such tax returns and/or orders that such tax returns be changed by the Company, or (ii) upon the 3 of 12 4 written advice of the Company's accountants that the payments made pursuant to this Severance Agreement and Release are not deductible to the Company. 4. PROPRIETARY INFORMATION AGREEMENT. In exchange for the consideration provided in Section 3 above, the adequacy of which is hereby acknowledged, Speizer agrees to execute and perform the Proprietary Information Agreement in the form described in Exhibit A attached hereto and incorporated herein by this reference. Speizer's agreement to execute and perform the Proprietary Information Agreement in the form described in Exhibit A shall not relieve Speizer of any obligation arising under any earlier Proprietary Information Agreement between Speizer and the Company. 5. GENERAL MUTUAL RELEASE. 5.1 Speizer provides the following release to the Company. 5.1.1 Subject to the obligations of the Company set forth in this Severance Agreement and Release which are not released hereby, and in exchange for the payment to Speizer of Severance and Other Benefits and for the consideration provided in Section 3 above, the adequacy of which is hereby acknowledged, Speizer, for himself and his heirs, executors, administrators, successors, assigns and legal representatives, hereby fully releases and forever discharges the Company, its current and future affiliate and parent companies, and individually and collectively, personally and professionally, the officers, directors, shareholders, employees, agents, representatives, parents, subsidiaries, affiliates, joint venturers, partners, predecessors, successors, assigns, and all other persons or entities connected with the Company and its current and future affiliate and parent companies, from any and all claims, demands, deficiencies, levies, assessments, executions, costs, expenses, damages, liabilities, debts, rights, contracts, losses, obligations, actions, inactions, causes of action, attorney's fees and benefits, of any kind or character whatsoever (collectively "Claims"), arising in law or in equity, as a shareholder, director, officer, or employee, whether known or unknown, suspected or unsuspected, directly or indirectly, that he has ever had, now has or may now have against them, and/or any of them, including, without limitation, all Claims directly or indirectly related to or arising out of Speizer's employment as an employee and officer of the Company and/or the termination of that employment, engagement as a Director or possession of shares of stock, whether arising in tort or contract, including, without limitation, any Claims for breach of express or implied contract, for further monetary compensation by way of additional salary and/or bonus allegedly due him by reason of that employment, and/or all other Claims, based on common law, federal and/or state statute, including, without limitation, Claims arising under Age Discrimination in Employment Act (29 U.S.C. Section 621, et seq.). Speizer specifically acknowledges that the consideration payable pursuant to this Agreement comprises new and sufficient consideration for Speizer's release of each and every one of these claims. 5.1.2 This release shall not relieve or limit the Company's obligation to indemnify Speizer in accordance with California Corporations Code section 317, as it may be amended, modified, superseded or replaced from time to time, the Bylaws of the Company, or 4 of 12 5 the written Indemnity Agreement between the Company and Speizer, a copy of which is attached hereto as Exhibit B, as such Bylaws or Indemnity Agreement may from time to time be amended by the Shareholders of the Company, for claims or actions filed against Speizer which are indemnified pursuant to any of the foregoing. This Release shall not relieve or limit the provisions of indemnity, defense, insurance, costs or any other coverages or benefits by any insurance company or facility to any of the officers, directors or employees of the Company, including Speizer. Nothing herein shall broaden, modify, extend or in any manner change or alter the benefits provided by the Company's life, health, medical vision and/or disability insurances, and/or any termination thereof. 5.1.3 Speizer further understands and expressly agrees that this Severance Agreement and Release specifically extends to all Claims, whether known or unknown, and he expressly waives the benefits of Section 1542 of the California Civil Code, which provides: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM, MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." 5.1.4 Company acknowledges that this release does not relieve it of any or all of its post-termination-of-employment obligations to Speizer, including those set out in Section 3 of this Severance Agreement and Release. 5.2 The Company provides the following release to Speizer. 5.2.1 The Company, for itself, and its current and future affiliate and parent companies, and the officers, directors, shareholders, employees, agents, representatives, parents, subsidiaries, affiliates, joint ventures, partners, predecessors, successors and assigns, hereby releases and forever discharges Speizer, his heirs, executors, administrators, successors, assigns and legal representatives, from all Claims, arising in law or in equity, whether known or unknown, suspected or unsuspected, directly or indirectly, that the Company has ever had, now has or may now have against Speizer for any action, inaction, error or omission as an officer and/or employee of the Company, including, without limitation, all Claims directly or indirectly related to or arising out of Speizer's employment by the Company as an officer and employee and/or the termination of that employment, whether arising in tort or contract. The Company acknowledges that after signing this Severance Agreement and Release, it will not be able to bring suit against Speizer based on any of the Claims being released hereunder. The Company further understands and expressly agrees that this Severance Agreement and Release specifically extends to all Claims, whether known or unknown, and it expressly waives the benefits of Section 1542 of the California Civil Code, which provides: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE 5 of 12 6 RELEASE, WHICH IF KNOWN BY HIM, MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." 5.2.2 Speizer acknowledges that this release does not relieve him of any or all of his post-termination-of employment obligations to the Company, including, but not limited to, those set out in Sections 4, 7, 11, and 12 of this Release, and those set forth in the, Proprietary Information Agreement. 6. COVENANT NOT TO SUE. Speizer represents that he has not filed any complaints, claims and/or actions against the Company, its officers, agents, directors, supervisors, employees and/or representatives with any state, federal, or local agency or court. The Company represents that it has not filed any complaints, claims and/or actions against Speizer with any state, federal, or local agency or court. The Company and Speizer each covenant and agree that they will not bring, commence, institute, maintain, prosecute or voluntarily aid any action at law or proceeding in equity, or otherwise prosecute or sue the other party, either affirmatively or by way of cross-complaint, defense or counterclaim or in any other manner, or at all, on any alleged Claims being released hereunder. In the event of any breach of this Section 6, a cause of action shall be deemed to have accrued immediately upon the commencement of any action or other proceeding described herein, and in such event, this Severance Agreement and Release may be pled as a full and complete defense thereto, as the basis for abatement of or injunction against said action or other proceeding, and as a basis of a cross complaint for damages therein. In the event of any breach by Speizer of this Section 6, Speizer shall, by suing, relinquish all rights, if any, to each and every Severance Benefit and shall be obligated to refund any part of the sum previously paid. 7. SPEIZER'S REPRESENTATIONS. 7.1 Speizer agrees that the payments and benefits described in this Severance Agreement and Release shall constitute the entire amount of financial and other consideration provided to him under this Severance Agreement and Release and that he will not seek, and shall not be entitled to seek, any further compensation for any other claimed damage, costs and/or attorneys' fees in connection with the matters encompassed in this Severance Agreement and Release. 7.2 Speizer acknowledges and agrees that the Company has made no representations to him regarding the tax consequences of any amounts received by him pursuant to this Severance Agreement and Release and/or the tax treatment of this Severance Agreement and Release. Speizer agrees to pay federal and/or state taxes, if any, which are required by law to be paid with respect to this settlement. Subject to the Company's compliance with the provisions of this Severance Agreement and Release, Speizer further agrees to indemnify and hold the Company harmless from and against Claims, deficiencies, levies, assessments and/or recoveries by any governmental entity against the Company for any amounts claimed due on account of this Severance Agreement and Release or pursuant to claims made under any federal 6 of 12 7 and/or state tax laws, and any costs, expenses and/or damages sustained by the Company by reason of any such claims, including, without limitation, any amounts paid by the Company as taxes, attorneys' fees, deficiencies, levies, assessments, fines, penalties, interest and/or otherwise. 7.3 Speizer agrees that he will not seek nor accept employment with the Company in the future and that the Company is entitled to reject without cause any application for employment with the Company made by him, and not hire him, and that Speizer shall have no cause of action against the Company arising out of any such rejection. The foregoing shall not be construed to prevent Speizer from serving as an outside director of the Company and the parties acknowledge that Speizer has been nominated as an outside director by the Company's board of directors to stand for election at the Company's next annual shareholders meeting. If Speizer in any other manner becomes an employee of the Company, Speizer shall be obligated to return all amounts paid to him pursuant to this Severance Agreement and Release unless otherwise agreed in writing by the parties hereto. 7.4 Speizer acknowledges that the Company has specifically advised him to consult with an attorney in order to review this Severance Agreement and Release and advise Speizer of his rights concerning it, and that he has done so. Speizer further acknowledges that the Company has further advised him that he and his spouse have twenty-one (21) days from the date that this Severance Agreement and Release was originally presented to Speizer and his spouse in which to consider whether to sign it, and should they choose to sign it, they will be given seven (7) additional days from the date on which they have both signed it in which to revoke it and that this Severance Agreement and Release shall not become effective or enforceable until the revocation period has expired. The Effective Date of this Release shall be the eighth day following its execution by both Speizer and his spouse provided that the Release has not been revoked by either of them. Any revocation must be in writing and received by the Company's General Counsel at the General Counsel's office on or before the seventh day following execution of this Release in order for the revocation to be valid. 7.5 Speizer expressly acknowledges and warrants that he has read and fully understands this Severance Agreement and Release; that he has had the opportunity to consult with legal counsel of his own choosing in order to have the terms and conditions of this Severance Agreement and Release fully explained to him; that he is not executing this Severance Agreement and Release in reliance on any promises, representations or inducements other than those set forth herein; that he understands he is giving up legal rights by signing this Severance Agreement and Release; and that he is executing it voluntarily, free of any duress or coercion, after due deliberation and with a full understanding of what it means to do so. 7.6 Speizer understands that rights or claims under the Age Discrimination in Employment Act (29 U.S.C Section 621, et seq.) that may arise after the date this Severance Agreement and Release is executed are not waived. 7.7 Speizer represents and warrants that he has not assigned, transferred, sold, hypothecated, mortgaged, rented, leased, joint ventured, encumbered, converted or in any other way conveyed, in whole or in part, any of the Claims released by him herein. 7 of 12 8 8. GOVERNING LAW. This Release and performance under it, and any suits or special proceedings brought under it, shall be construed in accordance with the laws of the United States of America and the State of California and any arbitration, mediation or other proceeding arising hereunder shall be filed and adjudicated in San Mateo County, California. 9. ARBITRATION AND MEDIATION. 9.1 This section shall only apply if Speizer is paid the Severance and Other Benefits described in Section 3 of this Severance Agreement and Release and shall apply whether or not the Severance Compensation is treated by the Company as taxable wages. 9.2 In the event there is any dispute arising out of Speizer's employment with the Company, the termination of that employment, this Severance Agreement and Release or the Exhibits hereto, whether such dispute gives rise or may give rise to a cause of action in contract or tort or based on any theory or statute, including, without limitation, for employment discrimination or wrongful discharge in violation of public policy or breach of the implied covenant of good faith and fair dealing, Speizer and the Company agree that the exclusive recourse shall be to submit any such dispute to final and binding arbitration pursuant to the provisions of the Federal Arbitration Act (9 U.S.C. Section 1, et seq.) if applicable to Speizer's employment hereunder, or any successor or replacement statute or the provisions of Title 9 of Part III of the California Code of Civil Procedure, commencing at section 1280, or any successor or replacement statute, or the provisions of Title 9 of Part III of the California Code of Civil Procedure, commencing at section 1280, or any successor or replacement statute if the Federal Arbitration Act does not apply to Employee's employment. Any request for arbitration must be submitted in writing to the other party to this Severance Agreement and Release within six (6) months of the date the dispute arose. The failure to timely request arbitration hereunder shall constitute a complete waiver of all rights to raise any claims in any forum arising out of any dispute described herein. The six (6) months limitations period within which to request arbitration shall not be subject to tolling, equitable or otherwise. The arbitrator shall have the power to determine the arbitrability of any dispute but shall not have the power to alter, amend or modify any of the provisions of this Release. If the parties are unable to agree on an arbitrator, a list of arbitrators from the California State Mediation and Conciliation Service will be obtained by the Company, and first Speizer and then the Company will alternatively strike names on the list until only one remains, who shall be the arbitrator. Any arbitration hereunder shall be conducted in manner consistent with the commercial arbitration rules used by the American Arbitration Association. This arbitration provision shall not bar a court from entering a temporary restraining order, preliminary injunction or other provisional relief pending arbitration of any dispute. 9.3 Prior to the Arbitration, the parties must agree to mediate their dispute before a professional mediator, mutually agreed to. 8 of 12 9 9.4 The prevailing party in any dispute with respect to this Severance Agreement and Release and/or Speizer's employment and/or termination shall be entitled to all reasonable costs and attorneys' fees expended in and for mediation and/or arbitration. 10. RELIANCE, INTERPRETATION, INVALIDITY. 10.1 The parties hereto represent and acknowledge that in executing this Severance Agreement and Release they do not rely and have not relied upon any representation or statement made by any of the other parties or by any of the other parties' agents, attorneys or representatives with regard to the subject matter, basis, or effect of this Severance Agreement and Release or otherwise, other than those specifically stated in this written Severance Agreement and Release. 10.2 This Severance Agreement and Release shall be interpreted in accordance with the plain meaning of its terms and not strictly for or against any of the parties hereto. This Severance Agreement and Release shall be construed as if each party hereto was its author and each party hereby adopts the language of this Severance Agreement and Release as if it were his, her or its own. 10.3 Each term, clause and provision of this Severance Agreement and Release is separate and independent, and should any term, clause or provision of this Severance Agreement and Release be found to be invalid, the validity of the remaining terms, clauses and provisions shall not be affected. 11. CONSULTATION. Speizer agrees to perform consulting services for the Company up to a maximum of seven (7) hours per week from the date of his termination to a date one year from the date of his termination of employment. Speizer further agrees to make himself reasonably available as a consultant and/or witness for the Company in connection with any pending or threatened litigation in which the Company is involved for a period of seven (7) years from the termination date of his employment. 12. COVENANT TO NOT COMPETE WITH THE COMPANY. Speizer agrees to refrain from directly or indirectly competing with and/or assisting others in competing with the Company and/or soliciting and/or accepting business with respect to products and/or services competitive with those of the Company in the greater Los Angeles, Orange County, San Diego, San Francisco and Sacramento metropolitan areas of California; Harris and Garland counties in Texas; Broward County, Florida; Cook County, Illinois; Cherokee County, Georgia; New York, New York; and Boston, Massachusetts for a period of one (1) year from the date of this termination. Speizer further agrees that he will not hire, or attempt to hire any employees of the Company during such one (1) year period without the Company's prior written consent. 9 of 12 10 13. MISCELLANEOUS. 13.1 Unless otherwise agreed upon in writing by a duly authorized officer of the Company, and Speizer, neither party may assign, sell, transfer, hypothecate, mortgage, joint venture, encumber, convert, lease, rent or in any other way convey its or his rights, duties or obligations under this Severance Agreement and Release, either in whole or in part. 13.2 This Severance Agreement and Release constitutes the entire agreement between the parties relating to the subject matter hereof. All prior and/or contemporaneous agreements, proposals, understandings and/or communications between or involving the parties, whether oral or written, are void and are replaced in its entirety by this Severance Agreement and Release. This Severance Agreement and Release may be amended only in a writing that has been executed by Speizer and a duly authorized officer of the Company and shall not be amended or deemed amended by subsequent conduct of either party or any course of dealings between the parties. The parties agree that (i) there shall be no oral agreements between the parties, whether or not related to this Severance Agreement and Release or the subject matter hereof, and whether or not allegedly entered into prior, during or subsequent to the term of this Release; and (ii) in order for any agreement relating to the subject matter hereof to be effective between the parties, whether contemporaneous with or subsequent to the Effective date of this Release, it shall be set forth in writing and executed by duly authorized representatives of the parties. 13.3 All communications required or permitted to be made under this Severance Agreement and Release shall be in writing and either shall be delivered personally or sent by United States Postal Service certified or registered mail, postage prepaid and return receipt requested, to the address or addresses set forth below, or to such other address or addresses as a party may notify another party pursuant to this Section. Any such communication shall be deemed to be properly given (i) if delivered personally, upon written acknowledgment of receipt after delivery to the address specified; or (ii) if posted, the earlier of the actual date of delivery, as set forth in the return receipt, or three (3) days from the date posted pursuant to the foregoing. The address for each party is as follows: To the Company To Speizer National Insurance Group 514 Roehampton 395 Oyster Point Blvd. Hillsborough, CA 94010 Suite 500 Attention: Mark A. Speizer South San Francisco, CA 94080-1933 Attention: General Counsel 13.4 The failure of either party to enforce any provision of this Severance Agreement and Release shall not be construed as a waiver of or an acquiescence in or to such provision. 10 of 12 11 13.5 The parties hereto agree, for themselves and for their successors or assigns, to execute any instrument and to perform any act which may be necessary to carry out the purpose of this Severance Agreement and Release. 13.6 The Severance Agreement and Release shall be binding upon the parties hereto and upon their heirs, administrators, representatives, executors, successors and assigns, and shall inure to the benefit of said parties and each of them and to their heirs, administrators, representatives, executors, successors and assigns. 13.7 The Severance Agreement and Release may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Severance Agreement and Release and agree to enter into and be bound by the provisions hereof as of the Effective Date. WITNESS: By: /s/ Linda B. Speigel By: /s/ Mark A. Speizer ------------------------------ ------------------------------ Mark A. Speizer Date: November 3, 1995 ---------------------------- National Insurance Group, a California WITNESS: corporation, for itself and its current and future subsidiaries By: /s/ Paulette J. Tyler ------------------------------ By: /s/ Mel Croner ------------------------------ Name: Mel Croner ---------------------------- Title: President ---------------------------- [Signatures continued on next page] 11 of 12 12 The undersigned, who is the attorney for Mark Speizer, hereby executes this Release solely for the purpose of acknowledging that he has consulted with Mark Speizer, explained the meaning of this Release to him and believes that he understands the meaning and significance of the terms and conditions of this Release. Attorneys for Mark Speizer By: Kenneth J. Philpot ----------------------------------- Name: Kenneth J. Philpot --------------------------------- Linda Speizer signs this Release for the purpose of waiving her community property interest in the Claims being released and agrees that she herself is to be personally bound by the terms and conditions of this Severance Agreement and Release in accordance with its terms and conditions, including, without limitation the Release set forth in Section 5 and the Covenant not to Sue set forth in Section 6. By: /s/ Linda B. Speizer ----------------------------------- Date: November 3, 1995 Name: Linda B. Speizer ---------------------- --------------------------------- The undersigned, who is the attorney for Linda Speizer, hereby executes this Severance Agreement and Release solely for the purpose of acknowledging that she has consulted with Linda Speizer, explained the meaning of this Severance Agreement and Release to her and believes that she understands the meaning and significance of the terms and conditions of this Severance Agreement and Release. Attorneys for Linda Speizer By: /s/ Jeffrey C. Miller ------------------------------ Name: Jeffrey C. Miller ---------------------------- 12 of 12 13 The undersigned, who is the attorney for Mark Speizer, hereby executes this Release solely for the purpose of acknowledging that he has consulted with Mark Speizer, explained the meaning of this Release to him and believes that he understands the meaning and significance of the terms and conditions of this Release. Attorneys for Mark Speizer By: ________________________________ Name: ______________________________ Linda Speizer signs this Release for the purpose of waiving her community property interest in the Claims being released and agrees that she herself is to be personally bound by the terms and conditions of this Severance Agreement and Release in accordance with its terms and conditions, including, without limitation the Release set forth in Section 5 and the Covenant not to Sue set forth in Section 6. By: /s/ Linda B. Speizer --------------------------------- Date: November 3, 1995 Name: Linda B. Speizer ----------------------------- ------------------------------- The undersigned, who is the attorney for Linda Speizer, hereby executes this Severance Agreement and Release solely for the purpose of acknowledging that she has consulted with Linda Speizer, explained the meaning of this Severance Agreement and Release to her and believes that she understands the meaning and significance of the terms and conditions of this Severance Agreement and Release. Attorneys for Linda Speizer By: /s/ Jeffrey C. Miller ---------------------------------- Name: Jeffrey C. Miller -------------------------------- 12 of 12 14 EXHIBIT A PROPRIETARY INFORMATION AGREEMENT THIS PROPRIETARY INFORMATION AGREEMENT made as of October 19, 1995 ("Effective Date"), by and between Mark A. Speizer ("Employee") and National Insurance Group ("National") for itself and its current and future subsidiaries (collectively the "Company"). The current and future subsidiaries of National are sometimes referred to herein collectively as the "Subsidiaries". In consideration of the compensation now and hereafter paid to Employee by the Company and/or Subsidiaries, Employee agrees to the following: 1. Maintaining Confidential Information. 1.1 Company and Subsidiary Information. Employee agrees at all times, during the term of his/her employment with the Company and the Subsidiaries and thereafter, to hold in strictest confidence, and not to use, except for the benefit of the Company or the Subsidiaries, or to disclose to any person, firm or corporation without written authorization of the Board of Directors of the Company, any trade secrets, confidential knowledge, data or other proprietary information relating to products, processes, know-how, designs, formulas, developmental or experimental work, computer programs, data bases, source codes, passwords, other original works of authorship, customer lists, business plans, financial information or other subject matter pertaining to any business of the Company or the Subsidiaries or any of their clients, consultants or licensees. 1.2 Former Employer Information. Employee agrees that he/she will not, during his/her employment with the Company and the Subsidiaries, improperly use or disclose any proprietary information or trade secrets of his/her former or concurrent employers or companies, if any, and that he/she will not bring onto the premises of the Company or the Subsidiaries any unpublished document or any property belonging to his/her former or concurrent employers or companies, if any, unless consented to in writing by said employers or companies. 1.3 Third Party Information. Employee recognizes that the Company and/or the Subsidiaries have received and in the future will receive from third parties their confidential or proprietary information subject to a duty on the Company's and the Subsidiaries' part to maintain the confidentiality of such information and to use it only for certain limited purposes. Employee agrees that he/she owes the Company and the Subsidiaries and such third parties, during the term of his/her employment with the Company and the Subsidiaries and thereafter, a duty to hold all such confidential or proprietary information in the strictest confidence and not to disclose it to any person, firm or corporation (except as necessary in carrying out his/her work for the Company and the Subsidiaries consistent with the Company's and the Subsidiaries' agreement with such third party) or to use it for the benefit of anyone other than for the Company or such third party (consistent with the Company's and/or Subsidiaries agreement with such third party) without the express written authorization of the Board of Directors of the Company. 2. Retaining and Assigning Inventions and Original Works. 2.1 Inventions and Original Works Retained by Employee. Employee has attached hereto, as Schedule 1, a list describing all inventions, original works of authorship, developments, improvements, and trade secrets which were made by him/her prior to his/her employment with the Company and the Subsidiaries, which belong to him/her, which relate to the Company's and the Subsidiaries' proposed business and products, and which are not assigned to the Company or the Subsidiaries; or, if no such list is attached, Employee represents that there are no such inventions. 2.2 Inventions and Original Works Assigned to the Company and the Subsidiaries. Employee agrees that he/she will promptly make full written disclosure to the Company and/or the Subsidiaries, will hold in trust for the sole right and benefit of the Company and the Subsidiaries, and will assign to the Company and the Subsidiaries all his/her rights, title, and interest in and to any and all inventions, original works of authorship, developments, improvements or trade secrets which Employee may solely or jointly conceive Page 1 of 4 15 or develop or reduce to practice, or cause to be conceived or developed or reduced to practice, during the period of time he/she is in the employ of the Company and the Subsidiaries. Employee recognizes, however, that Section 2870 of the California Labor Code (as set forth in Schedule 2 attached hereto) exempts from assignment under this provision any invention as to which he/she can prove the following: 2.2.1 It was developed entirely on his/her own time; and 2.2.2 No equipment, supplies, facilities or trade secrets of the Company or the Subsidiaries were used in its development; and 2.2.3 It did not relate, at the time of its conception or its reduction to practice, to the business of the Company or the Subsidiaries or to the Company's or Subsidiaries' actual or demonstrably anticipated research and development; and 2.2.4 It did not result from any work performed by Employee for the Company and/or the Subsidiaries. Employee acknowledges that all original works of authorship which are made by him/her (solely or jointly with others) within the scope of his/her employment and which are protectable by copyright are "works made for hire," as that term is defined in the United States Copyright Act (17 USCA, Section 101). 2.3 Maintenance of Records. Employee agrees to keep and maintain adequate and current written records of all inventions and original works of authorship made by him/her (solely or jointly with others) during the term of his/her employment with the Company and the Subsidiaries. The records will be in the form of notes, sketches, drawings, and any other format that may be specified from time to time by the Company or the Subsidiaries. The records will be available to and remain the sole property of the Company and the Subsidiaries at all times. 2.4 Inventions Assigned to the United States. Employee agrees to assign to the United States government all his/her right, title, and interest in and to any and all inventions, original works of authorship, developments, improvements or trade secrets whenever such full title is required to be in the United States by a contract between the Company and/or the Subsidiaries and the United States or any of its agencies. 2.5 Obtaining Letters Patent, Copyrights, and Mask Work Rights. Employee agrees that his/her obligation to assist the Company and the Subsidiaries to obtain United States or foreign letters patent, copyrights, or mask work rights covering inventions, works of authorship, and mask works, respectively, assigned hereunder to the Company and/or Subsidiaries shall continue beyond the termination of his/her employment, but the Company and/or the Subsidiaries shall compensate him/her at a reasonable rate for time actually spent by him/her at the Company's and/or the Subsidiaries' request on such assistance. If the Company is unable because of Employee's mental or physical incapacity or for any other reason to secure Employee's signature to apply for or to pursue any application for any United States or foreign letters patent, copyrights, or mask work rights covering inventions or other rights assigned to the Company and/or the Subsidiaries as above, then, then Employee hereby irrevocably designates and appoints the Company and the Subsidiaries and their duly authorized officers, and agents as his/her agent and attorney in fact, to act for and in his/her behalf and stead to execute and file any such applications and to do all other lawfully permitted acts to further the prosecution and issuance of letters patent, copyrights, and mask work rights with the same legal force and effect as if executed by Employee. Employee hereby waives and quitclaims to the Company and the Subsidiaries any and all claims, of any nature whatsoever which he/she now or may hereafter have for infringement of any patents, copyrights, or mask work rights resulting from any such application assigned hereunder to the Company. 2.6 Exception to Assignments. Employee understands that the provisions of this Agreement requiring assignment to the Company and the Subsidiaries do not apply to any invention which qualifies fully under the provisions of Section 2870 of the California Labor Code, a copy of which is attached hereto as Schedule 2. Employee will advise the Company and/or the Subsidiaries promptly in writing, receipt of which will be signed by the Chief Executive Officer of the Company and/or the Subsidiaries, of an inventions, original works of authorship, developments, improvements or trade secrets that he/she believes meet the criteria in Subparagraphs 2.2.1 through 2.2.4 above; and Employee will at that time provide to the Company and/or the Subsidiaries in writing all evidence necessary to substantiate that belief. Employee understands that the Page 2 of 4 16 Company and the Subsidiaries will keep in confidence and will not disclose to third parties without Employee's consent any confidential information disclosed in writing to the Company or the Subsidiaries relating to inventions that qualify fully under the provisions of Section 2870 of the California Labor Code. Items not fully covered by Section 2870 of the California Labor Code may be submitted to the Company for consideration and any exceptions to Section 2870 of the California Labor Code shall be noted in said submission. 3. Conflicting Employment. Employee agrees that, during the term of his/her employment with the Company and the Subsidiaries, he will not engage in any other employment, occupation, consulting or other business activity directly related to the business in which the Company or the Subsidiaries are now involved or become involved during the term of his/her employment, nor will Employee engage in any other activities that conflict with his/her obligations to the Company and/or the Subsidiaries. 4. Returning Company's and Subsidiaries' Document. Employee agrees that, at the time of leaving the employ of the Company and the Subsidiaries, he/she will deliver to the Company and/or the Subsidiaries (and will not keep in his/her possession or deliver to anyone else) any and all devices, records, data, source codes, passwords, notes, reports, proposals, lists, correspondence, specifications, drawings, blueprints, sketches, materials, equipment, other documents or property, or reproductions of any aforementioned items belonging to the Company or the Subsidiaries, its successors or assigns. In the event of the termination of Employee's employment, Employee agrees to sign and deliver the "Termination Certification" attached hereto as Schedule 3. 5. Representations. Employee agrees to execute any proper oath or verify any proper document required to carry out the terms of this Agreement. Employee represents that his/her performance of all the terms of this Agreement will not breach any agreement to keep in confidence proprietary information acquired by him/her in confidence or in trust prior to his/her employment by the Company and the Subsidiaries. Employee has not entered into, and Employee agrees he/she will not enter into, any oral or written agreement in conflict herewith. 6. Miscellaneous. 6.1 Governing Law. This Agreement will be governed by the Laws of the State of California. 6.2 Entire Agreement. This Agreement sets forth the entire agreement and understanding among the Company and the Subsidiaries and Employee relating to the subject matter herein and merges all prior discussions and agreements with respect to matters herein among the parties hereto. No modification of Page 3 of 4 17 or amendment to this Agreement, nor any waiver of any rights under this Agreement, will be effective unless in writing signed by the party to be charged. Any subsequent change or changes in Employee's duties, salary or compensation will not affect the validity or scope of this Agreement. 6.3 Severability. If one or more of the provisions in this Agreement are deemed void by law, then the remaining provisions will continue in full force and effect. 6.4 Successors and Assigns. This Agreement will be binding upon Employee's heirs, executors, administrators and other legal representatives and will be for the benefit of the Company and the Subsidiaries, their successors, and their assigns. IN WITNESS WHEREOF, the parties hereto have executed this Agreement and agree to enter into and be bound by the terms hereof, as of the Agreement Date. EMPLOYEE WITNESS: By: /s/ By: /s/ Mark A. Speizer -------------------------- --------------------------------------- Name: Mark A. Speizer ------------------------------------- NATIONAL INSURANCE GROUP, WITNESS: for itself and its current and future subsidiaries By: By: /s/ Paulette J. Taylor -------------------------- --------------------------------------- Paulette J. Taylor Senior Vice President and General Counsel Page 4 of 4 18 SCHEDULE 1 LIST OF PRIOR INVENTIONS AND ORIGINAL WORKS OF AUTHORSHIP
Identifying Number Title Date or Brief Description ----- ---- -------------------- None n/a n/a
19 SCHEDULE 2 CALIFORNIA LABOR CODE SECTION 2870 EMPLOYMENT AGREEMENTS; ASSIGNMENT OF RIGHTS "(a) Any provision in an employment agreement which provides that an employee shall assign, or offer to assign, any of his or her rights in an invention to his or her employer shall not apply to an invention that the employee developed entirely on his or her own time without using the employer's equipment, supplies, facilities, or trade secret information except for those inventions that either: (1) Relate at the time of conception or reduction to practice of the invention to the employer's business, or actual or demonstrably anticipated research or development of the employer. (2) Result from any work performed by the employee for the employer. (b) To the extent a provision in an employment agreement purports to require an employee to assign an invention otherwise excluded from being required to be assigned under subdivision (a), the provision is against the public policy of this state and is unenforceable." 20 SCHEDULE 3 NATIONAL INSURANCE GROUP TERMINATION CERTIFICATION This is to certify that I do not have in my possession, nor have I failed to return, any devices, records, data, source codes, passwords, notes, reports, proposals, lists, correspondence, specifications, drawings, blueprints, sketches, materials, equipment, other documents or property, or reproductions of any aforementioned items belonging to National Insurance Group (the "Company"), Great Pacific Insurance Company ("GPIC") or Fastrac Systems, Inc. Insurance Agent & Broker ("Fastrac"), and Pinnacle Data Corporation ("PDC") or any subsidiary or affiliate of the Company. (For purposes hereof, GPIC, Fastrac, PDC and other subsidiaries or affiliates of the Company are referred to collectively as the "Subsidiaries".) I further certify that I have complied with all the terms of the Company's and Subsidiaries' Employee Proprietary Information Agreement signed by me, including the reporting of any inventions and original works of authorship (as defined therein), conceived or made by me (solely or jointly with others) covered by that Agreement. I further agree that, in compliance with the Employee Proprietary Information Agreement, I will preserve as confidential all trade secrets, confidential knowledge, data or other proprietary information relating to products, processes, know-how, designs, formulas, developmental or experimental work, computer programs, data bases, source codes, passwords, other original works of authorship, customer lists, business plans, financial information or other subject matter pertaining to any business of the Company, the Subsidiaries, or any of their clients, consultants or licensees. Date: October 19, 1995 EMPLOYEE: /s/ Mark A. Speizer --------------------------------- Mark A. Speizer --------------------------------- (Print Name) (To be signed by Employee upon termination) EX-10.16 9 CONSULTING AGREEMENT 1 Exhibit 10.16 CONSULTING AGREEMENT THIS CONSULTING AGREEMENT ("Agreement"), is made as of February 1, 1996 ("Effective Date"), by and between NATIONAL INSURANCE GROUP, a California corporation, for itself and its current and future subsidiaries ("Company"), and John R. Gaulding, an individual ("Consultant"). RECITALS A. Consultant desires to furnish to Company certain executive consulting services (the "Services"). B. Company desires that Consultant furnish the Services, subject to the terms and conditions of this Agreement. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants contained herein, the parties hereto agree as follows: 1. DESCRIPTION OF SERVICES. Consultant agrees to furnish the Services in accordance with the terms and conditions of this Agreement. Consultant shall report to Mel Croner of Company in connection with the performance of the Services, or such other person whom Mel Croner or the Board of Directors may specify. 2. SCHEDULE FOR PERFORMANCE OF THE SERVICES. The schedule for performing the Services shall be as mutually agreed between Consultant and Mel Croner. 3. PLACE OF PERFORMANCE. The Services shall be conducted at locations and in areas as may be mutually agreed upon in writing by Company and Consultant. Generally, the Services shall be conducted at the Company's offices. 4. EXPENSES. Consultant shall be responsible for Consultant's expenses in the performance of the Services, except that Company agrees to pay reasonable and necessary travel and lodging expenses which are reasonably incurred in the performance of the Services. 5. PRICE AND PAYMENT FOR SERVICES. 5.1 Company shall pay Consultant the rate of $25,000 per month for the months of February and March, 1996, as full and complete payment for the Services. 5.2 Consultant shall render monthly invoices to Company for Services requested by and performed by Consultant in the immediately preceding month. Invoices shall be paid by Company within thirty (30) days of receipt thereof from Consultant. 5.3 If this Agreement is terminated prior to completion of performance of the Services, Company shall not be obligated to pay for any Services not performed prior to the termination of this Agreement. 6. WARRANTY. Consultant represents and warrants that the Services shall be performed in a skillful, diligent, expeditious, workmanlike and professional manner, with the usual thoroughness and competence of the executive consulting profession and in accordance with the best practices of such profession. Time is of the essence hereof. Page 1 of 5 2 7. CONFIDENTIAL INFORMATION OF COMPANY. 7.1 During and subsequent to the Term, Consultant acknowledges, agrees, and covenants that any confidential or proprietary information belonging to Company, and any confidential or proprietary information belonging to a third party (collectively "Confidential Information") which is disclosed to Consultant or any of Consultant's directors, officers, partners, employees, agents, contract or temporary employees, computer or other consultants, other advisors or any other person or entity acting on behalf of Consultant (sometimes herein collectively referred to as "Consultant's Employees and Associates") constitute important, material and confidential trade secrets and proprietary products, properties and assets of Company or the Third Party which owns it and materially affect the successful conduct of Company's business and Company's goodwill, and the value of Company's tangible and intangible assets. 7.2 Consultant expressly agrees that at all times, whether during or subsequent to the Term, Consultant will protect and will instruct and use every reasonable effort to cause Consultant's Employees and Associates to protect the confidentiality of the Confidential Information. 7.2.1 Except as permitted in this Agreement or in writing by Company, (i) Consultant shall not disclose, divulge, communicate or otherwise make available Confidential Information to any of Consultant's Employees and Associates, except on a need to know basis and only in connection with the performance of Consultant's duties hereunder; and (ii) Consultant shall not and shall not allow any of Consultant's Employees and Associates to disclose, divulge, communicate or otherwise make available Confidential Information to any Third Party whatsoever. 7.2.2 Consultant shall not personally, and shall not knowingly allow, any other person or entity to attempt to reverse engineer, decompile or otherwise attempt to derive source code of any Confidential Information. Any use or attempted use of Confidential Information in violation of the restrictions set forth in this section will cause irreparable harm to Company entitling Company to injunctive relief in addition to all legal remedies. 8. OWNERSHIP. Consultant shall disclose promptly and fully to the Company all products and works of the Services hereunder, including, without limitation, any drawings, specifications, explanations, inventions and/or improvements, relating to the Confidential Information and/or other property or assets of Company, arising out of or as a result of performance of Services (collectively "Works"). All Works shall be the sole property of Company, and for purposes of copyright, all Works shall be considered works made for hire for Company. Company shall have the sole right to obtain and to hold in its own name patents, copyrights, registrations and/or any other such legal protections as may be appropriate to the Works, and any extensions and/or renewals thereof. Consultant agrees to attach any necessary or desirable notices to the Works and to give the Company and/or any person or entity designated by the Company, all assistance reasonably required to protect any rights of the Company in such Works. All the documents, workpapers and other material created by Consultant during the performance of Services, including, without limitation the Materials, shall be the property of Company and shall be furnished to Company upon termination of this Agreement. Consultant may keep copies of such documents, workpapers and other material as he may desire, subject to the provisions of Section 7. 9. INSURANCE TO BE FURNISHED. [Intentionally Omitted.] 10. TERM AND TERMINATION. 10.1 Term. The term of this Agreement shall commence on the Effective Date and shall terminate on March 31, 1996 ("Term"). 10.2 Termination. Notwithstanding the foregoing, this Agreement may be terminated as follows: 10.2.1 by mutual consent in writing at any time; or Page 2 of 5 3 10.2.2 by either party, upon a material breach of this Agreement by the other party, which continues for a period of fifteen (15) days from written notice thereof from the party not in breach; or 10.2.3 by either party, if the other party becomes insolvent or a trustee or receiver of the party's business or assets is appointed by any court; or 10.2.4 by either party, if the other party shall make an assignment for the benefit of creditors; or 10.2.5 by either party, if reasonable grounds for insecurity arise with respect to the other party's performance and the party fails to provide adequate and satisfactory assurance, documented in writing, within five (5) business days of a written request therefor. 10.3 Survival. Sections 1, 7, 8, 10.3, 11, 12 and 13 shall survive any expiration or termination of this Agreement. 11. RELATIONSHIP AND CONSULTANT'S OBLIGATIONS. 11.1 Relationship. Consultant and Consultant's Employees and Associates are not, and shall not be deemed to be employees, directors, agents, partners, owners or joint venturers of Company for any purpose whatsoever, but shall act as independent contractors, and nothing contained herein shall be construed to be inconsistent with this relationship. Consultant and Consultant's Employees and Associates shall not have and shall not be deemed to have any interest whatsoever in any tangible or intangible property belonging to Company, including, without limitation, any software, trademarks, tradenames, servicemarks, logos, or intellectual property or any data or other real or personal property of Company. 11.2 Consultant's Obligation. Consultant shall be solely responsible for all health, medical, life, travel, accident and other insurance and benefits for Consultant or any of Consultant's Employees and Associates and Company shall not have any responsibility or liability therefor. 12. INDEMNIFICATION. Consultant agrees to indemnify, defend and hold harmless Company from all claims, liability, damages or expenses, including reasonable attorneys' fees and costs incurred in defending against same arising from (i) its failure to perform any of its obligations under this Agreement, or (ii) any act or omission of Consultant or any of Consultant's Employees and Associates, excluding only those claims, liability, damages or expenses to the extent they are caused by the gross negligence or wilful misconduct of Company, its agents or employees. 13. MISCELLANEOUS. 13.1 Assignment. This Agreement is to be performed solely by Consultant. Consultant may not, without the prior written consent of Company, assign, market, license, sell, lease, rent, transfer, hypothecate, franchise, mortgage, joint venture, distribute, encumber, convert or in any other way convey Consultant's rights, duties or obligations under this Agreement either in whole or in part. 13.2 Entire Agreement. This Agreement and the At-Will Employment Agreement between the parties constitute the entire agreement between Company and Consultant relating to the subject matter hereof. All prior or contemporaneous agreements, proposals, understandings and communications between or involving Company and Consultant, whether oral or written are void and are replaced in their entirety by this Agreement. This Agreement may be amended only in a writing that has been executed by Consultant and a duly authorized officer of Company and shall not be amended or deemed amended by subsequent conduct of either party or any course of dealings between the parties. The parties agree that (i) there shall be no oral agreements between the parties, whether or not related to this Agreement or the subject matter hereof, and whether or not allegedly entered into prior, during or subsequent to the Term; and (ii) in order for any agreement to be effective between the parties, whether prior, during or subsequent to the Term, it shall be set forth in writing and executed by duly authorized representatives of the parties. Page 3 of 5 4 13.3 Governing Law. This Agreement shall be governed by, and construed in accordance with the laws of the State of California, including without limitation, those relating to conflict of laws. Any lawsuit or action brought by any of the parties hereto, shall be filed and adjudicated in San Mateo County, California. 13.4 Attorney's Fees. If litigation occurs between the parties arising under or related to this Agreement, whether sounding in tort, contract or otherwise, the prevailing party shall be entitled to its reasonable attorneys' fees, expert witness fees and costs of suit. The prevailing party will be determined by the court based upon an assessment of which party's major arguments or positions taken in the proceedings could fairly be said to have prevailed over the other party's major arguments or positions on significant disputed issues addressed in the court's decision. 13.5 Notices. All other communications required or permitted to be made under this Agreement shall be in writing and either shall be delivered personally or sent by United States Postal Service certified or registered mail, postage prepaid and return receipt requested, to the address or addresses set forth below, or to such other address or addresses as a party may notify another party pursuant to this Section. Any such communication shall be deemed to be properly given (i) if delivered personally, upon written acknowledgment of receipt after delivery to the address specified; or (ii) if posted, the earlier of the actual date of delivery, as set forth in the return receipt, or three (3) business days from the date posted pursuant to the foregoing. The address for each party is as follows: To Company: National Insurance Group 395 Oyster Point Boulevard Suite 500 South San Francisco, California 94080 Attention: Chief Executive Officer To Consultant: John R. Gaulding 115 Margarita Drive San Rafael, CA 94901 13.6 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto, their permitted successors and assigns, and any corporate successors by a merger, consolidation or other corporate reorganization without limitation. Nothing contained in this Section 13.6 shall be construed to delete, modify or amend Section 13.1 of this Agreement. 13.7 Further Actions. The parties hereto agree, for themselves and for their successors or assigns, to execute any instrument and to perform any act which may be necessary to carry out the purpose of this Agreement. 13.8 Third Party Beneficiaries. Except as otherwise expressly provided in this Agreement, nothing in this Agreement shall confer any rights upon any person or entity, which is not a party to this Agreement. 13.9 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 13.10 No Waiver. No failure, delay or omission of or by any party in exercising any right, power or remedy upon any breach or default of any other party shall impair any such right, power or remedy of the party not in breach or default, nor shall it be construed to be a waiver of any such right, power or remedy, or an acquiescence in or to any such breach or default, or a waiver of or acquiescence in any similar breach or default. Nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character Page 4 of 5 5 on the part of any party of any provision of this Agreement must be in writing and be executed by all the parties to this Agreement and shall be effective only to the extent specifically set forth in such writing. 13.11 Construction. The captions to this Agreement and its sections, subsections, tables and exhibits are inserted only for convenience and shall not be construed as part of this Agreement or as a limitation on or broadening of the scope of this Agreement or any section, subsection table or exhibit. This Agreement shall be construed as if each party hereto was its author and each party hereby adopts the language of this Agreement as if it were his, her or its own. If there is a conflict or inconsistency between the terms of this Agreement and any exhibit attached hereto, the terms of this Agreement shall govern. 13.12 Authority. Consultant warrants that he has sufficient authority to execute this Agreement and perform hereunder, that his execution of this Agreement will not constitute a breach of any other agreement or license to which he is a party, or a violation of any authority granted to him; and that when this Agreement is signed by Consultant, it will be enforceable against him in accordance with its terms. 13.13 Impairment. Any provision or part of this Agreement which shall prove to be invalid, void or illegal, shall in no way affect, impair or invalidate any of the other provisions and parts hereof which shall remain in full force and effect. 13.14 No Enforcement. During and after the Term, Company may, but is not obligated to enforce or not enforce any terms or conditions of this Agreement or any other agreement relating hereto. 13.15 Compliance with Law. Consultant warrants that it will comply with all federal state, and local laws, ordinances, rules, and regulations, including, without limitation the Fair Labor Standards Act of 1938, as amended, the Equal Employment Opportunity clause prescribed by Executive Order 11246 dated September 24, 1965 as amended, and any rules, regulations or orders issued or promulgated under such Act or Order. Any clause required by any law, ordinance, rule or regulation to be included in an agreement of this type shall be deemed to be incorporated herein. 13.16 Remedies Cumulative. All remedies provided in this Agreement, by law or otherwise, shall be cumulative and not alternative. IN WITNESS WHEREOF, the parties hereto have executed this Agreement and agree to enter into and be bound by the provisions hereof as of the Effective Date. WITNESS: By: /s/ By: /s/ John R. Gaulding --------------------------- -------------------------------------- John R. Gaulding NATIONAL INSURANCE GROUP, a California corporation, for itself and its current and future subsidiaries WITNESS: By: /s/ By: /s/ Mel Croner --------------------------- -------------------------------------- Mel Croner Chief Executive Officer Page 5 of 5 EX-10.17 10 JOHN R. GAULDING AT-WILL EMPLOYMENT AGREEMENT 1 Exhibit 10.17 JOHN R. GAULDING AT-WILL EMPLOYMENT AGREEMENT THIS AT-WILL EMPLOYMENT AGREEMENT ("Agreement") is entered into and made effective as of February 25, 1996 ("Effective Date") by and among, John R. Gaulding ("Gaulding"), on the one hand, and NATIONAL INSURANCE GROUP, a California corporation, for itself and its current and future subsidiaries (collectively the "Company"), on the other hand. BACKGROUND The Company wishes to employ Gaulding as an employee at-will, and Gaulding wishes to be so employed, to serve as the President and Chief Executive Officer of the Company, subject to the terms and conditions of this Agreement. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants contained herein and other good and valuable consideration, receipt of which is hereby acknowledged, the parties hereto agree as follows: 1. POSITION AND RESPONSIBILITIES; TITLE AND REPORTING RELATIONSHIP(S). The Company employs Gaulding as an employee at-will under this Agreement to serve as Chief Executive Officer and President of the Company and each of its subsidiaries commencing April 1, 1996. Between the Effective Date of this Agreement and April 1, 1996, Gaulding shall act in a consulting capacity to the Company, but not as an officer or director, in accordance with the terms and conditions of a Consulting Agreement between Gaulding and the Company. Gaulding will report to the Board of Directors of the Company. The Company's at-will employment policy to which the parties agree is more particularly described in the memorandum attached as Exhibit A and incorporated herein by this reference. 1.1 Description of Duties. Gaulding shall have the executive duties and responsibilities as assigned to him from time to time by the Board of Directors of the Company. The Board of Directors, in its sole discretion and from time to time, may set, modify and eliminate reasonable performance goals which Gaulding shall be required to meet. The creation or attainment of such reasonable performance goals shall not affect the terminable-at-will nature of the employment relationship. 1.2 Attention to Duties; Time Applied to the Business of the Company. Gaulding will devote all of his full time and attention to the business of the Company and perform his duties and services in a faithful and diligent manner and to the best of his abilities. Gaulding shall not invest in any company or business which competes in any manner with the Company, except those companies whose securities are listed on national securities exchanges or quoted daily in the Nasdaq National Market listing of the Wall Street Journal. Gaulding may serve as a member of the Board of Directors of unaffiliated companies and organizations so long as (i) such a company or organization is not engaged in the same or similar business as that of the Company and/or is not competitive and/or does not otherwise conflict with the business of the Company, (ii) the activities of Gaulding as director shall not interfere with Gaulding's duties and/or time and attention to duties pursuant to this Agreement unless otherwise agreed to in writing by the parties, and (iii) the Board of Directors approves in Page 1 of 11 2 advance each service not listed below. The Company hereby approves the following services Gaulding is currently furnishing to other companies: 1.2.1 Consulting services to ADP, Gaulding's former employer, which Gaulding estimates will require not more than one day per month of his time. 1.2.2 Director services to the Board of Visitors of the Graduate Business School of the University of Southern California, which Gaulding estimates will not require more than two half days per year of his time. 1.2.3 Trustee and director services to the Capital Campaign Committee of Dominican College, which Gaulding estimates will not require more than 8 days per year of his time. 1.2.4 Advisory services to the Advisory Board of Braxton Associates, the strategy consulting division of Deloitte & Touche, which Gaulding estimates will not require more than four days per year of his time. 1.2.5 Director services for TMP Worldwide, which Gaulding estimates will not require more than three days per month of his time. 2. BASE SALARY The Company shall pay, and Gaulding shall accept, a bi-weekly salary of Eleven Thousand Five Hundred Thirty-Eight Dollars and Forty-Six Cents ($11,538.46), as may be adjusted from time to time based upon recommendations and approved by the Company's Board of Directors. 3. INCENTIVE COMPENSATION 3.1 The Company shall give Gaulding performance incentives in accordance with an incentive performance program recommended by the Compensation Committee and approved by the Board of Directors. This program shall provide performance criteria and targets for calendar years 1996 and 1997 ("Incentive Plan Criteria and Targets"). An annual incentive award of up to $150,000 shall be paid for achieving the "at-target" goal of the Incentive Plan Criteria and Targets, with an incentive award of up to $90,000 for achieving an "acceptable-but-not-at-target goal" and $300,000 for achieving an "exceptional-above-target goal", as these goals are specified in the Incentive Plan Criteria and Targets. The annual incentive compensation for 1996 shall be pro rated based upon the months Gaulding is a full-time employee and officer of the Company. The incentive award will be paid within 90 days after the completion of NAIG's fiscal year. 3.2 The details of Gaulding's performance program for calendar years 1996 and 1997 and the Incentive Plan Criteria and Targets for calendar years 1996 and 1997 shall be developed by the Compensation Committee in discussions with Gaulding by March 15, 1996, and approved by the Board of Directors by written resolution prior to April 1, 1996. Page 2 of 11 3 3.3 The Compensation Committee and the Board of Directors will define new goals and incentives for calendar years subsequent to 1997, but in no event will Gaulding's "at-target" incentive award be less than $100,000 per year after 1997. 4. STOCK OPTIONS. Gaulding shall be granted the following options to purchase shares of the Company's common stock at the closing price of the Company's stock on the Effective Date of this Agreement pursuant to the Company's current 1986 Stock Option Plan for Employees, as amended ("Stock Option Plan"): (1) 150,000 shares, and (2) 100,000 shares, which grant shall be subject to approval by the Company's shareholders of an amendment of the Stock Option Plan to remove the provision prohibiting a grant of more than 150,000 shares of stock to an employee in a fiscal year. The Company agrees to include such proposed amendment in its Proxy Statement and recommend its approval to the shareholders. If the shareholders do not approve such amendment, Gaulding and the Company agree to negotiate in good faith fair and reasonable compensation to be paid Gaulding in lieu of such 100,000 share stock option grant. Each such stock option grant shall vest on March 31, 1998, which means that no options will vest prior to that date except as provided in Section 7 below. 5. OTHER BENEFITS. 5.1 Signing Bonus. The Company shall pay Gaulding, subject to Section 6.3, a nonrefundable signing bonus of $100,000 ("Signing Bonus") which shall be payable in three installments as follows: $50,000 on April 1, 1996; $25,000 on October 1, 1996; and, $25,000 on January 1, 1997. 5.2 Club Dues and Professional Associations. The Company shall reimburse Gaulding for his membership dues for the Jonathan Club in Los Angeles and the Banker's Club in San Francisco. The Company shall pay the cost of or reimburse Gaulding for Gaulding's membership and participation in professional associations relevant to the Company's business. 5.3 Automobile Allowance. The Company shall pay Gaulding $1,000 per month as a reimbursement for automobile expenses, which is intended to include any mileage allowance. 5.4 Insurance Benefits. 5.4.1 So long as Gaulding is employed, he shall be entitled to the same Company- provided and paid group health insurance coverage, including dependents' coverage, under any such policies and group policies purchased by the Company for its employees, and a senior officer group disability insurance program which may be purchased from time to time by the Company for certain of its employees. The Company shall pay for the cost of providing coverage to Gaulding's dependents. In lieu of electing coverage under the Company's group health insurance coverage for himself and his dependents, Gaulding may elect to be reimbursed $800 per month for COBRA expenses for up to 18 months from the Effective Date so that he and his dependents may continue to receive the benefits under his current health plan. 5.4.2 The Company shall reimburse Gaulding for the actual premium cost of a $1.3 million term life insurance policy for the period April 1, 1996 through March 31, 1998 up to a maximum premium amount of $10,000 per year. 5.5 Expense Reimbursements. The Company shall reimburse Gaulding for reasonable and necessary travel and out-of-pocket expenses incurred by Gaulding on behalf of the Company in performing Page 3 of 11 4 his duties hereunder. Gaulding shall comply with the Company Policies in force from time to time relating to such travel and out-of-pocket expenses. 5.6 Vacation. Vacation will accrue in accordance with Company's Policies and Procedures at an the rate of .077 of a vacation day for each day worked at the Company by Gaulding and such vacation is subject to the accrual cap set forth in the Company's Personnel Policies and Procedures. 5.7 Credit Card for Business Expenses. The Company shall provide Gaulding with a Company-billed credit card, such as a corporate American Express card or comparable national credit card of the Company's choice which may be changed by the Company from time to time, so that Gaulding may charge the substantial majority of his authorized business travel and entertainment expenses directly to the Company in accordance with this Agreement the Company Policies relating thereto in force from time to time. 5.8 Spousal Travel. Gaulding shall be reimbursed for business-related travel expenses for his spouse. It is agreed that such trips shall be for business in which the social setting is such that fellow officers, customers and/or business peers would normally be accompanied by their spouses. 5.9 Sick Time. 5.9.1 If Gaulding does not work because of illness, sickness, disease, accident or disability, at the Company's option, Gaulding may be required to bring a written notice from his doctor, addressed to the Company, on the day he returns to work (i) stating that he was unable to work on the days that he missed work, and (ii) stating that Gaulding is now able to resume the duties he performed and work the number of hours he was employed to work prior to such absence. Gaulding consents to the disclosure by his doctor to the Company of such medical information as the Company may be legally entitled to obtain regarding his ability to perform his job. 5.9.2 So long as Gaulding is employed by Company, sick time pay ("Sick Time") shall be provided by the Company, but is only payable to Gaulding for the times when Gaulding is too ill, sick, diseased, injured or disabled to do the work which he is employed by the Company to do. 5.9.3 The Company will provide Gaulding six (6) Sick Time days during Gaulding's working year, the first of which begins on the Effective Date of this Agreement ("Working Year"). The Sick Time accrues at one-half day per each two consecutive pay periods up to a maximum of six (6) days per Working Year. At the end of any Working Year, all accrued unused Sick Time is transferred to the next concurrent Working Year. The transfer of Sick Time days from one Working Year to the next shall not increase the maximum number of six (6) Sick Time days which can be accrued at any time. No more than six (6) Sick Time days may be used in any Working Year. 5.10 Review. The Compensation Committee and the Board of Directors shall review Gaulding's performance, salary and other benefits on or about March 31st of 1997 and 1998. Page 4 of 11 5 6. TERM AND TERMINATION OF EMPLOYMENT. 6.1 Employment by the Company. Gaulding shall be employed under this Agreement on its Effective Date and shall remain employed for an indefinite period thereafter, until the relationship is terminated at the will of either Gaulding or the Employer upon written notice to the other. The use of any period of time to describe any compensation, benefit. Review, stock option or other aspect of employment shall not give rise to any implied term to this Agreement. 6.2 Termination of Employment by the Company. It is expressly understood that the Board of Directors of the Company (or its designee) may terminate Gaulding's employment with the Company upon written notice for any reason, with or without Cause. For purposes of this Agreement, "Cause" shall mean gross negligence or engaging in gross misconduct. Gaulding may terminate his employment with the Company for any reason, with or without Cause, upon written notice to the Company. 6.3 Severance Benefits. Regardless of which party terminates Gaulding's employment with the Company, and provided that Gaulding's employment by the Company is not terminated or terminable for Cause and that Gaulding complies with each and every term and condition of this Agreement, Gaulding shall be entitled to the following severance benefits and only the following severance benefits ("Severance Benefits"): 6.3.1 Termination by the Company for Convenience. If the Company terminates Gaulding's employment without Cause, Gaulding will be entitled to receive the following severance compensation: 6.3.1.1 12 months of base pay, i.e., $300,000, plus a pro rata share of the short-term incentive award earned, if any, based upon the Incentive Plan Criteria and Targets, if such termination occurs within a period of 9-months from the Effective Date of this Agreement; 6.3.1.2 9 months of base pay, i.e., $225,000, plus a pro rata share of the short-term incentive award earned, if any, based upon the Incentive Plan Criteria and Targets, if such termination occurs within a period of more than 9-months but less than 18-months from the Effective Date of this Agreement. 6.3.1.3 6 months of base pay, i.e., $150,000, plus a pro rata share of the short-term incentive award earned, if any, based upon the Incentive Plan Criteria and Targets, if such termination occurs within a period of more than 18-months but less than 24-months from the date of the Effective Date of this Agreement; and 6.3.1.4 any installment of the Signing Bonus not paid to Gaulding at the time of such termination. After 24-months there will be no severance compensation. The Compensation Committee and the Board of Directors will make the determination of the amount of the short term performance incentive award to which Gaulding may be entitled in the event of a severance. Page 5 of 11 6 6.3.2 Termination for Change in Control. For purposes of this Agreement the terms "Change in Control" and "Adverse Change in the Board of Directors" shall have the meaning developed in discussions with Gaulding and approved in writing by the Compensation Committee and Board of Directors by March 15, 1996. These definitions shall be attached to this Agreement as Exhibit B and are incorporated herein by this reference. If Gaulding's employment is terminated or if he elects to terminate his employment as a result of a Change in Control or an Adverse Change in the Board of Directors, Gaulding's stock option grant described in Section 4 shall vest in its entirety and he additionally shall receive any installment of the Signing Bonus not paid to him at the time of such termination. 6.3.3 Voluntary Termination by Gaulding. If Gaulding is terminated by the Company for Cause or if he voluntarily terminates his employment other than as a result of Change in Control, he shall not be entitled to receive any severance benefits, including, but not limited to, any severance compensation, automatic vesting of stock options or any installment of the Signing Bonus not paid to him at the time of such termination. Gaulding agrees that the severance compensation set forth in this letter is the only sum the Company will owe him (other than items required by law, e.g. accrued vacation pay, if any) in the event of a termination other than for Cause. 6.3.4 Director. The parties recognize that Gaulding's status as a Director of the Company is dependent upon his continued employment with the Company and, unless otherwise agreed upon by the parties, shall terminate upon his termination of employment by the Company. 6.3.5 No Future Employment by the Company. Unless otherwise agreed upon in writing by the parties, Gaulding, after termination of any employment, shall not seek nor accept employment with the Company in the future and the Company is entitled to reject without Cause any application for employment with the Company made by him, and not hire him. Gaulding agrees that he shall have no Cause of action against the Company arising out of any such rejection. 7. PROPRIETARY INFORMATION. Gaulding's execution of this Agreement shall also comprise his assent to be bound by the Proprietary Information Agreement in the form which is attached hereto as Exhibit C. Gaulding agrees to execute Exhibit C contemporaneously with this Agreement. 8. SEPARATE AND SEVERABLE. Each term, clause and provision of this Agreement is separate and independent, and should any term, clause or provision of this Agreement be found to be invalid, the validity of the remaining terms, clauses and provisions shall not be affected. 9. WAIVER OR MODIFICATION INEFFECTIVE UNLESS IN WRITING. No waiver or modification of this Agreement shall be valid unless in writing and executed by duly authorized officers of the Company and Gaulding. Furthermore, no evidence of any waiver or modification shall be offered or received in evidence in any proceeding, arbitration or litigation between the parties arising out of or affecting this Agreement, unless such waiver or modification is in writing and executed by duly authorized officers of the Company and Gaulding. The terminable-at-will nature of the employment relationship with Gaulding can only be altered by a written Page 6 of 11 7 resolution approved by the Company's Board of Directors. No individual Director, Officer or employee has any authority to enter into any express or implied agreement of employment with Gaulding. 10. GOVERNING LAW. This Agreement and performance under it, and any suits or special proceedings brought under it, shall be construed in accordance with the laws of the United States of America and the State of California and any arbitration, mediation or other proceeding arising hereunder shall be filed and adjudicated in San Mateo County, California. 11. ARBITRATION AND MEDIATION. 11.1 In the event there is any dispute arising out of Gaulding's employment with the Company, the termination of that employment, this Agreement or the Exhibits to this Agreement, whether such dispute gives rise or may give rise to a Cause of action in contract or tort or based on any theory or statute, including, without limitation, for employment discrimination or wrongful discharge in violation of public policy or breach of the implied covenant of good faith and fair dealing, Gaulding and the Company agree that the exclusive recourse shall be to submit any such dispute to final and binding arbitration pursuant to the provisions of the Federal Arbitration Act (9 U.S.C. Section 1, et seq.) if applicable to Gaulding's employment hereunder, or any successor or replacement statute, or the provisions of Title 9 of Part III of the California Code of Civil Procedure, commencing at section 1280, or any successor or replacement statute if the Federal Arbitration Act does not apply to Gaulding's employment. Any request for arbitration must be submitted in writing to the other party to this Agreement within six (6) months of the date the dispute arose. The failure to timely request arbitration hereunder shall constitute a complete waiver of all rights to raise any claims in any forum arising out of any dispute described herein. The six (6) months limitations period within which to request arbitration shall not be subject to tolling, equitable or otherwise. The arbitrator shall have the power to determine the arbitrability of any dispute but shall not have the power to alter, amend or modify any of the provisions of this Agreement. If the parties are unable to agree on an arbitrator, a list of arbitrators from the California State Mediation and Conciliation Service will be obtained by the Company, and first Gaulding and then the Company will alternatively strike names on the list until only one remains, who shall be the arbitrator. Any arbitration hereunder shall be conducted in a manner consistent with the commercial arbitration rules used by the American Arbitration Association. This arbitration provision shall not bar a court from entering a temporary restraining order, preliminary injunction or other provisional relief pending arbitration of any dispute. 11.2 Prior to the Arbitration, the parties must first agree to mediate their dispute before a professional mediator, mutually agreed upon. 11.3 The prevailing party in any dispute with respect to this Agreement and/or Gaulding's employment and/or termination shall be entitled to all reasonable costs and attorneys' fees expended in and for mediation and/or arbitration. 12. RELIANCE; INTERPRETATION. The parties hereto represent and acknowledge that in executing this Agreement they do not rely and have not relied upon any representation or statement made by any of the other parties or by any of the other parties' agents, attorneys or representatives with regard to the subject matter, basis, or effect of this Agreement or otherwise, other than those specifically stated in this written Agreement. This Agreement shall be interpreted in accordance with the plain meaning of its terms and not strictly for or Page 7 of 11 8 against any of the parties hereto. This Agreement shall be construed as if each party hereto was its author and each party hereby adopts the language of this Agreement as if it were his, her or its own. The captions to this Agreement and its sections, subsections, tables and exhibits are inserted only for convenience and shall not be construed as part of this Agreement or as a limitation on or broadening of the scope of this Agreement or any section, subsection, table or exhibit. 13. PERSONNEL POLICY MANUAL AND RELATIONSHIP TO THIS AGREEMENT. The provisions of this Agreement shall prevail over any inconsistent provision of the Company's Employee Manual. The following provisions of the Employee Manual shall not apply to Gaulding regardless of the existence of any inconsistent provision in this Agreement: Performance Evaluation, 105; Corrective Action, 106; Termination of Employment, 107; Internal Transfer and Placement 109; Employee Benefits 200; Sick Time, 205; Compensation, 300; Hours of Work and Time Reporting, 301; Overtime Pay, 302; Tardiness and Absenteeism Standards, 304; Automobile Mileage Allowance, 504. With respect to any provision of the current or future Employee Manual which applies to Gaulding's employment, any reference in such a provision to permission, assent or approval being granted by the Chief Executive Officer and/or President shall mean permission, assent or approval by the Board of Directors. No provision of the Employee Handbook as it is presently comprised or subsequently amended shall affect Gaulding's terminable-at-will status or confer on Gaulding any pecuniary benefits other than those described in this Agreement. 14. MISCELLANEOUS. 14.1 Assignment. This Agreement shall be assigned to any purchaser of substantially all of the Company's assets or stock, but shall not be assigned upon the purchase of all or substantially all of the assets or stock of any subsidiary. In no case shall the assignment of this Agreement result in any duplicate or additional payment to Gaulding. The sale of the Company's assets or its stock, or one or more of the Company's subsidiaries' assets or their stock or the sale of less than substantially all of any of their assets shall not comprise a termination of employment under this Agreement. This Agreement shall not otherwise be assigned without the prior written consent of both parties. 14.2 Entire Agreement. This Agreement, including all exhibits attached hereto, and the Consulting Agreement between the parties, constitute the entire Agreement between the parties relating to the subject matter hereof. All prior and/or contemporaneous agreements, proposals, understandings and/or communications between or involving the parties relating to the subject matter hereof, whether oral or written, are void and are replaced in their entirety by this Agreement. The parties agree that (i) there shall be no oral agreements between the parties, whether or not allegedly entered into prior, during or subsequent to the term of this Agreement, and (ii) in order for any agreement to be effective between the parties, whether contemporaneous with or subsequent to the Effective Date of this Agreement, it shall be set forth in writing and executed by duly authorized officers of the Company and Gaulding. Any subsequent change or changes in Gaulding's duties, salary or compensation will not affect the validity or scope of this Agreement. 14.3 Waiver. The failure of either party to enforce any provision of this Agreement shall not be construed as a waiver of or an acquiescence in or to such provision. Page 8 of 11 9 14.4 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 14.5 No Promises. Except as otherwise specified in this Agreement, among other things not promised, no promises have been made to Gaulding of: 14.5.1 A career opportunity with the Company; or 14.5.2 Future increases in and/or additional salary, benefits or other compensation from the Company, except as otherwise expressly set forth in this Agreement; or 14.5.3 The ownership or equity interest in or ability to obtain ownership or equity interest in the Company, except as otherwise set forth in Section 4 of this Agreement; 14.5.4 Profits of the Company, except as otherwise provided by this Agreement and/or any other bonus program approved by the Compensation Committee of the Company's Board of Directors; or 14.5.5 Advancement with or within the Company; or 14.5.6 Continued employment; or 14.5.7 A review of Gaulding's work and/or performance, except as otherwise provided in this Agreement, but the Company reserves the right to do so at any time and from time-to-time; or 14.5.8 References of any kind. 14.6 No Inconsistent Obligations. Gaulding represents that he is not aware of any obligations, legal or otherwise, inconsistent with the terms of this Agreement or his undertakings under this Agreement. 14.7 Death of Employee. On the occasion of the death of Gaulding, while this Agreement is in effect, his estate shall be Employee's named beneficiary to receive any benefits or compensation paid under this Agreement. Gaulding may change such named beneficiary at any time, but such change of named beneficiary shall be in writing and executed by all parties to this Agreement. 14.8 Notices. All communications required or permitted to be made under this Release shall be in writing and either shall be delivered personally or sent by receipted private mail courier or United States Postal Service certified or registered mail, postage prepaid and return receipt requested, to the address or addresses set forth below, or to such other address or addresses as a party may notify another party pursuant to this Section. Any such communication shall be deemed to be properly given (i) if delivered personally or by courier, upon written acknowledgement of receipt after delivery to the address specified; or (ii) if posted, the earlier of the actual date of delivery, as set forth in the return receipt, or three (3) days from the date posted pursuant to the foregoing. The address for each party is as follows: Page 9 of 11 10 To the Company: National Insurance Group 395 Oyster Point Boulevard Suite 500 South San Francisco, California 94080-1933 Attention: General Counsel To Gaulding: 115 Margarita Drive San Rafael, CA 94901 Attention: John R. Gaulding IN WITNESS WHEREOF, the parties hereto have executed this Agreement and agree to enter into and be bound by the provisions hereof, as of the Effective Date. WITNESS: By:/s/ By: /s/ John R. Gaulding ---------------------------- ------------------------------------ John R. Gaulding NATIONAL INSURANCE GROUP a California corporation, for itself and its current and future subsidiaries WITNESS: By:/s/ By: /s/ Mel Croner ---------------------------- ------------------------------------ Mel Croner President (Signatures Continued) Page 10 of 11 11 The undersigned, who is the attorney for John R. Gaulding, hereby executes this Agreement solely for the purpose of acknowledging that he has consulted with John R. Gaulding, explained the meaning of this Agreement to him and believes that he understands the meaning and significance of the terms and conditions of this Agreement. Firm: Cook & Roos PLC -------------------------------- By: /s/ John C. Cook ---------------------------------- Print Name: /s/ John C. Cook -------------------------- Page 11 of 11 12 EXHIBIT A M E M O R A N D U M TO: John Gaulding FROM: Human Resources DATE: March 29, 1996 RE: EXPLANATION OF EMPLOYMENT "AT-WILL". National Insurance Group and its subsidiaries ("National") is an "at-will" employer. This means that National may terminate your employment at any time, with or without cause and without notice, and that you may terminate your employment at any time, with or without cause and without notice. There is no promise that your employment will continue for a set period of time, nor is there any promise that it will be terminated only under particular circumstances. No raise or bonus or other action or inaction of the Company, if any, shall alter your status as an "at-will" employee or create any implied contract of employment. Discussion of possible or potential benefits in future years is not an express or implied promise of continued employment. No manager, supervisor, officer or director of National has the authority to change your status as an "at-will" employee. No position within National is considered permanent. 13 EXHIBIT B DEFINITIONS For purposes of this Agreement, the following terms shall have the following meanings: "Change of Control" means the acquisition by one or more persons or entities, acting in concert, of control of ____% or more of the Company's common stock. "Adverse Change in Board of Directors" means the replacement of at least ____% of the current directors with new directors who are not duly-elected heirs, administrators, successors or assigns of the current directors. 14 EXHIBIT C PROPRIETARY INFORMATION AGREEMENT THIS PROPRIETARY INFORMATION AGREEMENT made as of _____________, 1996 ("Agreement Date"), by and between John R. Gaulding ("Employee") and National Insurance Group ("National") for itself and its current and future subsidiaries (collectively the "Company"). The past, current and future subsidiaries of National are sometimes referred to herein collectively as the "Subsidiaries". As used herein, "Company" includes predecessors of the Company. In consideration of the compensation now and hereafter paid to Employee by the Company and/or Subsidiaries, and other good and sufficient consideration, receipt of which is hereby acknowledged, Employee agrees to the following: 1. Maintaining Confidential Information. 1.1 Company and Subsidiary Information. Employee agrees at all times, during the term of his/her employment with the Company and the Subsidiaries and thereafter, to hold in strictest confidence, and not to use, except for the benefit of the Company or the Subsidiaries, or to disclose to any person, firm or corporation without written authorization of the Board of Directors of the Company, any trade secrets, confidential knowledge, data or other proprietary information relating to products, processes, know-how, designs, formulas, developmental or experimental work, computer programs, data bases, source codes, passwords, other original works of authorship, customer lists, business plans, financial information or other subject matter pertaining to any business of the Company or the Subsidiaries or any of their clients, consultants or licensees. 1.2 Former Employer Information. Employee agrees that he/she will not, during his/her employment with the Company and the Subsidiaries, improperly use or disclose any proprietary information or trade secrets of his/her former or concurrent employers or companies, if any, and that he/she will not bring onto the premises of the Company or the Subsidiaries any unpublished document or any property belonging to his/her former or concurrent employers or companies, if any, unless consented to in writing by said employers or companies. 1.3 Third Party Information. Employee recognizes that the Company and/or the Subsidiaries have received and in the future will receive from third parties their confidential or proprietary information subject to a duty on the Company's and the Subsidiaries' part to maintain the confidentiality of such information and to use it only for certain limited purposes. Employee agrees that he/she owes the Company and the Subsidiaries and such third parties, during the term of his/her employment with the Company and the Subsidiaries and thereafter, a duty to hold all such confidential or proprietary information in the strictest confidence and not to disclose it to any person, firm or corporation (except as necessary in carrying out his/her work for the Company and the Subsidiaries consistent with the Company's and the Subsidiaries' agreement with such third party) or to use it for the benefit of anyone other than for the Company or such third party (consistent with the Company's and/or Subsidiaries agreement with such third party) without the express written authorization of the Board of Directors of the Company. 2. Retaining and Assigning Inventions and Original Works. 2.1 Inventions and Original Works Retained by Employee. Employee has attached hereto, as Schedule 1, a list describing all inventions, original works of authorship, developments, improvements, and Page 1 of 5 15 trade secrets which were made by him/her prior to the Agreement Date which belong to him/her, which relate to the Company's and the Subsidiaries' proposed business and products, and which are not assigned to the Company or the Subsidiaries; or, if no such list is attached, Employee represents that there are no such inventions. 2.2 Inventions and Original Works Assigned to the Company and the Subsidiaries. Employee agrees that he/she will promptly make full written disclosure to the Company and/or the Subsidiaries, will hold in trust for the sole right and benefit of the Company and the Subsidiaries, and will assign to the Company and the Subsidiaries all his/her rights, title, and interest in and to any and all inventions, original works of authorship, developments, improvements or trade secrets which Employee may solely or jointly conceive or develop or reduce to practice, or cause to be conceived or developed or reduced to practice, during the period of time he/she is in the employ of the Company and the Subsidiaries. Employee recognizes, however, that Section 2870 of the California Labor Code (as set forth in Schedule 2 attached hereto) exempts from assignment under this provision any invention as to which he/she can prove the following: 2.2.1 It was developed entirely on his/her own time; and 2.2.2 No equipment, supplies, facilities or trade secrets of the Company or the Subsidiaries were used in its development; and 2.2.3 It did not relate, at the time of its conception or its reduction to practice, to the business of the Company or the Subsidiaries or to the Company's or Subsidiaries' actual or demonstrably anticipated research and development; and 2.2.4 It did not result from any work performed by Employee for the Company and/or the Subsidiaries. Employee acknowledges that all original works of authorship which are made by him/her (solely or jointly with others) within the scope of his/her employment and which are protectable by copyright are "works made for hire," as that term is defined in the United States Copyright Act (17 USCA, Section 101). 2.3 Maintenance of Records. Employee agrees to keep and maintain adequate and current written records of all inventions and original works of authorship made by him/her (solely or jointly with others) during the term of his/her employment with the Company and the Subsidiaries. The records will be in the form of notes, sketches, drawings, and any other format that may be specified from time to time by the Company or the Subsidiaries. The records will be available to and remain the sole property of the Company and the Subsidiaries at all times. 2.4 Inventions Assigned to the United States. Employee agrees to assign to the United States government all his/her right, title, and interest in and to any and all inventions, original works of authorship, developments, improvements or trade secrets whenever such full title is required to be in the United States by a contract between the Company and/or the Subsidiaries and the United States or any of its agencies. 2.5 Obtaining Letters Patent, Copyrights, and Mask Work Rights. Employee agrees that his/her obligation to assist the Company and the Subsidiaries to obtain United States or foreign letters patent, copyrights, or mask work rights covering inventions, works of authorship, and mask works, respectively, assigned hereunder to the Company and/or Subsidiaries shall continue beyond the termination of his/her employment, but the Company Page 2 of 5 16 and/or the Subsidiaries shall compensate him/her at a reasonable rate for time actually spent by him/her at the Company's and/or the Subsidiaries' request on such assistance. If the Company is unable because of Employee's mental or physical incapacity or for any other reason to secure Employee's signature to apply for or to pursue any application for any United States or foreign letters patent, copyrights, or mask work rights covering inventions or other rights assigned to the Company and/or the Subsidiaries as above, then, then Employee hereby irrevocably designates and appoints the Company and the Subsidiaries and their duly authorized officers, and agents as his/her agent and attorney in fact, to act for and in his/her behalf and stead to execute and file any such applications and to do all other lawfully permitted acts to further the prosecution and issuance of letters patent, copyrights, and mask work rights with the same legal force and effect as if executed by Employee. Employee hereby waives and quitclaims to the Company and the Subsidiaries any and all claims, of any nature whatsoever which he/she now or may hereafter have for infringement of any patents, copyrights, or mask work rights resulting from any such application assigned hereunder to the Company. 2.6 Exception to Assignments. Employee understands that the provisions of this Agreement requiring assignment to the Company and the Subsidiaries do not apply to any invention which qualifies fully under the provisions of Section 2870 of the California Labor Code, a copy of which is attached hereto as Schedule 2. Employee will advise the Company and/or the Subsidiaries promptly in writing, receipt of which will be signed by the Chief Executive Officer of the Company and/or the Subsidiaries, of an inventions, original works of authorship, developments, improvements or trade secrets that he/she believes meet the criteria in Subparagraphs 2.2.1 through 2.2.4 above; and Employee will at that time provide to the Company and/or the Subsidiaries in writing all evidence necessary to substantiate that belief. Employee understands that the Company and the Subsidiaries will keep in confidence and will not disclose to third parties without Employee's consent any confidential information disclosed in writing to the Company or the Subsidiaries relating to inventions that qualify fully under the provisions of Section 2870 of the California Labor Code. Items not fully covered by Section 2870 of the California Labor Code may be submitted to the Company for consideration and any exceptions to Section 2870 of the California Labor Code shall be noted in said submission. 3. Conflicting Employment. Employee agrees that, during the term of his/her employment with the Company and the Subsidiaries, he will not engage in any other employment, occupation, consulting or other business activity directly related to the business in which the Company or the Subsidiaries are now involved or become involved during the term of his/her employment, nor will Employee engage in any other activities that conflict with his/her obligations to the Company and/or the Subsidiaries. 4. Returning Company's and Subsidiaries' Document. Employee agrees that, at the time of leaving the employ of the Company and the Subsidiaries, he/she will deliver to the Company and/or the Subsidiaries (and will not keep in his/her possession or deliver to anyone else) any and all devices, records, data, source codes, passwords, notes, reports, proposals, lists, correspondence, specifications, drawings, blueprints, sketches, materials, equipment, other documents or property, or reproductions of any aforementioned items belonging to the Company or the Subsidiaries, its successors or assigns. In the event of the termination of Employee's employment, Employee agrees to sign and deliver the "Termination Certification" attached hereto as Schedule 3. 5. Representations. Employee agrees to execute any proper oath or verify any proper document required to carry out the terms of this Agreement. Employee represents that his/her performance of all the terms of this Agreement will not breach any agreement to keep in confidence proprietary information acquired by him/her in confidence or in trust prior to his/her employment by the Company and the Subsidiaries. Employee has not entered into, and Employee agrees he/she will not enter into, any oral or written agreement in conflict herewith. Page 3 of 5 17 6. Miscellaneous. 6.1 Governing Law. This Agreement will be governed by the Laws of the State of California. 6.2 Entire Agreement. This Agreement sets forth the entire agreement and understanding among the Company and the Subsidiaries and Employee relating to the subject matter herein and merges all prior discussions and agreements with respect to matters herein among the parties hereto. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, will be effective unless in writing signed by the party to be charged. Any subsequent change or changes in Employee's duties, salary or compensation will not affect the validity or scope of this Agreement. The obligations arising under this Agreement as an employee of the Company shall apply to Employee regardless of whether such employment was prior to or after the Agreement Date and whether such employment was with the Company or a Subsidiary of the Company. 6.3 Severability. If one or more of the terms, phrases, clauses or provisions in this Agreement are deemed void by law, then the remaining terms, phrases, clauses and provisions will continue in full force and effect. 6.4 Successors and Assigns. This Agreement will be binding upon Employee's heirs, executors, administrators and other legal representatives and will be for the benefit of the Company and the Subsidiaries, their successors, and their assigns. IN WITNESS WHEREOF, the parties hereto have executed this Agreement and agree to enter into and be bound by the terms hereof, as of the Agreement Date. EMPLOYEE WITNESS: By: /s/ By: /s/ John R. Gaulding ------------------------------ --------------------------------- Name: John R. Gaulding ------------------------------- WITNESS: NATIONAL INSURANCE GROUP, for itself and its current and future subsidiaries By: /s/ By: /s/ Mel Croner ------------------------------ --------------------------------- Mel Croner President Page 4 of 5 18 SCHEDULE 1 LIST OF PRIOR INVENTIONS AND ORIGINAL WORKS OF AUTHORSHIP
Identifying Number Title Date or Brief Description ----- ---- -------------------- None n/a n/a
19 SCHEDULE 2 CALIFORNIA LABOR CODE SECTION 2870 EMPLOYMENT AGREEMENTS; ASSIGNMENT OF RIGHTS "(a) Any provision in an employment agreement which provides that an employee shall assign, or offer to assign, any of his or her rights in an invention to his or her employer shall not apply to an invention that the employee developed entirely on his or her own time without using the employer's equipment, supplies, facilities, or trade secret information except for those inventions that either: (1) Relate at the time of conception or reduction to practice of the invention to the employer's business, or actual or demonstrably anticipated research or development of the employer. (2) Result from any work performed by the employee for the employer. (b) To the extent a provision in an employment agreement purports to require an employee to assign an invention otherwise excluded from being required to be assigned under subdivision (a), the provision is against the public policy of this state and is unenforceable." 20 SCHEDULE 3 NATIONAL INSURANCE GROUP TERMINATION CERTIFICATION This is to certify that I do not have in my possession, nor have I failed to return, any devices, records, data, source codes, passwords, notes, reports, proposals, lists, correspondence, specifications, drawings, blueprints, sketches, materials, equipment, other documents or property, or reproductions of any aforementioned items belonging to National Insurance Group (the "Company"), Great Pacific Insurance Company ("GPIC") or Fastrac Systems, Inc. Insurance Agent & Broker ("Fastrac"), and Pinnacle Data Corporation ("PDC") or any subsidiary or affiliate of the Company. (For purposes hereof, GPIC, Fastrac, PDC and other subsidiaries or affiliates of the Company are referred to collectively as the "Subsidiaries".) I further certify that I have complied with all the terms of the Company's and Subsidiaries' Employee Proprietary Information Agreement signed by me, including the reporting of any inventions and original works of authorship (as defined therein), conceived or made by me (solely or jointly with others) covered by that Agreement. I further agree that, in compliance with the Employee Proprietary Information Agreement, I will preserve as confidential all trade secrets, confidential knowledge, data or other proprietary information relating to products, processes, know-how, designs, formulas, developmental or experimental work, computer programs, data bases, source codes, passwords, other original works of authorship, customer lists, business plans, financial information or other subject matter pertaining to any business of the Company, the Subsidiaries, or any of their clients, consultants or licensees. Date: EMPLOYEE -------------------------- (Print Name) (To be signed by Employee upon termination) EX-11.1 11 COMPUTATION OF WEIGHTED AVERAGE SHARES 1 Exhibit 11.1 NATIONAL INSURANCE GROUP AND SUBSIDIARIES COMPUTATION OF WEIGHTED AVERAGE SHARES OUTSTANDING AND EARNINGS PER SHARE for the year ended December 31, 1993, 1994 and 1995 There are no differences between primary and fully diluted earnings per share.
(in thousands, except share amounts) 1993 1994 1995 ---------- ----------- ----------- Weighted average common 4,177,015 -- -- shares Actual common shares outstanding -- 4,678,729 4,679,697 Common shares issuable under outstanding stock options 93,226 -- -- ---------- ----------- ----------- Total 4,270,241 4,678,729 4,679,697 ========== =========== =========== Net Income $ 3,644 $ (1,084) $ (4,864) Per share results: Net Income $ 0.85 $ (0.23) $ (1.04)
See Note 13 of "Notes to Consolidated Financial Statements" for explanation of method of computation. EX-27.1 12 FINANCIAL DATA SCHEDULE
7 0000815555 NATIONAL INSURANCE GROUP 1,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 15,444 0 0 2,271 36 0 37,202 133 11 2,624 52,096 3,055 5,703 0 0 0 0 0 23,071 9,810 52,096 17,020 2,042 0 16,881 6,044 9,597 24,762 (7,423) (2,559) (1,119) 0 (6,304) 0 (4,864) (1.04) (1.04) 3,360 6,378 (334) 4,329 2,020 3,055 (334)
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