-----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, TD+Eg+CbV8W2CBNcpEn62v8tJMznMtH7ieRYhynZKaRx+cMYyQSZiWm+6d2a+rmP d7Co8wZlhUA7GqL5aI1n9A== 0000891618-99-001052.txt : 19990325 0000891618-99-001052.hdr.sgml : 19990325 ACCESSION NUMBER: 0000891618-99-001052 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990323 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL INFORMATION GROUP 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-K SEC ACT: SEC FILE NUMBER: 000-16332 FILM NUMBER: 99570274 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 FORMER COMPANY: FORMER CONFORMED NAME: NATIONAL INSURANCE GROUP /CA/ DATE OF NAME CHANGE: 19920703 10-K 1 FORM 10-K FOR THE PERIOD ENDED DECEMBER 31,1998 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ------------------------ [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________ . COMMISSION FILE NO. 0-16332 NATIONAL INFORMATION GROUP (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 94-3031790 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
395 OYSTER POINT BLVD., SUITE 500, SO. SAN FRANCISCO, CALIFORNIA 94080 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 872-6772 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK (TITLE OF CLASS) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve (12) months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety (90) days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of common stock held by nonaffiliates of the Registrant, based upon the closing price of the Common Stock on March 15, 1999 on the Nasdaq National Market System was approximately $39,484,453. Shares of Common Stock held by each officer and director and by each person who owns 10% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of shares outstanding of the registrant's Common Stock as of March 15, 1999 was 4,248,226. DOCUMENTS INCORPORATED BY REFERENCE NONE - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 FORWARD-LOOKING STATEMENTS In addition to historical information, this Report contains forward-looking statements. Such statements include, but are not limited to, forward-looking statements made in this Report which are identified by the words "believe", "anticipates", "expects", "aware" or similar expressions as they relate to the Company, as defined below, or its management. Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected or inferred in these forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Factors Affecting Future Operating Results." Forward-looking statements reflect management's opinions as of the date of this Report. Undue reliance should not be placed on such forward-looking statements. The Company undertakes no obligation to revise or publicly release the results of any revision to forward-looking statements. Readers should carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission, including, without limitation, the Quarterly Reports on Form 10-Q to be filed by the Company in 1999. MERGER The Board of Directors of National Information Group, a California corporation ("National"), and the Board of Directors of The First American Financial Corporation, a California corporation ("FAFCO"), have approved an agreement (the "Merger Agreement") to merge National with a subsidiary of FAFCO (the "Merger"). As a result of this Merger, National would become a wholly owned subsidiary of FAFCO and FAFCO would issue to National stockholders 0.67 of a share of FAFCO common stock for each share of National common stock that they own in exchange for their shares of National common stock. FAFCO common stock trades on the New York Stock Exchange under the symbol "FAF." The Merger is subject to, among other things, approval of the California Department of Insurance and the approval of a majority of the outstanding shares of National. A special meeting of the shareholders of National is required to be held to obtain the approval of such shareholders. PART I ITEM 1. BUSINESS INTRODUCTION National and its wholly-owned Subsidiaries provide specialized information services through technology, tracking services, outsourcing services and related insurance products to financial institutions located throughout the United States and in Canada. National and its Subsidiaries are referred to in this Report collectively as the "Company". Utilizing sophisticated computer applications, the Company has developed special-purpose, proprietary software and database systems which provide information services on an outsourced, remote computer or manual access basis, enabling the customers of the Company to: - determine if residential or commercial real estate is located inside or outside a federally-designated Special Flood Hazard Area ("SFHA"), with respect to real estate which is collateral for loans being financed or serviced by customers of the Company or for other purposes (the "Flood Zone Determination Services"); - obtain real estate tax data from various local, county and state taxing authorities nationwide with respect to real estate which is collateral for loans being financed or serviced by the customers of the Company, facilitate the payment to such taxing authorities by mortgage lenders and mortgage loan servicing companies from certain escrowed funds collected for real estate taxes from their borrowers with monthly loan payments for real estate taxes to such taxing authorities, and inform mortgage lenders and mortgage servicing companies whether the real estate taxes on property securing real estate loans have been paid and perform certain tasks of the Company's customers on an outsourced basis (the "Real Estate Tax Services"); 1 3 - monitor the insurance coverage on collateral securing motor vehicle and other consumer loans and leases (the "Motor Vehicle Insurance Tracking and Outsourcing Services"); and - monitor the insurance coverage on collateral securing residential mortgages (predominantly one-to-four unit family dwellings), to a lesser extent, commercial mortgages, disburse insurance premiums collected from borrowers with monthly loan payments for insurance coverage on behalf of mortgage lenders and mortgage servicing companies and perform certain tasks of the Company's customers on an outsourced basis (collectively, the "Hazard Insurance Tracking and Outsourcing Services"). When the Hazard Insurance Tracking and Outsourcing Services indicate that hazard insurance coverage on the collateral securing the loan has lapsed, the customer may contract with the Company to provide specialized, fire, allied peril or physical damage insurance (generally referred to as "lender-placed" insurance, formerly referred to by the Company as "force-place" insurance), that generally insures the improvements or personal property on the collateral security. The Company provides this lender-placed insurance through its wholly-owned subsidiary Great Pacific Insurance Company, in 48 states and the District of Columbia and through nonaffiliated insurance companies in the remainder of the United States. The Company also provides flood insurance, for which the risk is assumed by an agency of the U.S. Government under the National Flood Insurance Program ("NFIP"). In addition, the Company provides fire and allied perils insurance with respect to properties on which financial institutions are in the process of or have foreclosed, and physical damage insurance on motor vehicles. Great Pacific Insurance Company is rated "A" ("Excellent") by A.M. Best Company, a nationally recognized insurance statistical and rating service. National's wholly-owned subsidiaries (the "Subsidiaries") are: - Pinnacle Data Corporation, a California corporation ("Pinnacle Data") - Pinnacle Real Estate Tax Services, Inc., a Delaware corporation ("PinTax-VA") - Pinnacle Real Estate Tax Services of New York, Inc., a Delaware corporation ("PinTax-NY", which together with PinTax-VA, are referred to in this Report collectively as "PinTax") - Pinnacle Management Solutions Insurance Services, a California corporation ("PMSIS") - Great Pacific Insurance Company, a California corporation ("GPIC") - Fastrac Systems, Inc., a California corporation ("Fastrac") - New Arts Acquisition, Inc., a Delaware corporation ("New Arts") Pinnacle Data, PinTax and PMSIS are referred to in this Report collectively as the "Pinnacle Companies." The Company began operations in 1972 as an independent general insurance agency (which now operates as a subsidiary of National under the name "Pinnacle Management Solutions Insurance Services"), providing financial institutions with fire and related insurance products written by nonaffiliated companies. In 1977, the Company formed GPIC to underwrite the business being generated by PMSIS. During the mid-1980s, the Company developed computer software systems to provide financial institutions with an economical and efficient alternative to the time-consuming and labor-intensive processes traditionally associated with monitoring and obtaining insurance coverage on collateral securing mortgages, consumer loans and leases and foreclosed properties. In 1991, the Company expanded the Company's tracking services to provide outsourcing capabilities. PMSIS provides the Hazard Insurance Tracking and Outsourcing Services for mortgage lenders and servicers. Fastrac provides the Motor Vehicle Insurance Tracking and Outsourcing Services for motor vehicle leasing companies. Beginning in the late 1980s, the Company developed and test-marketed its Flood Zone Determination Services. Such services assist a financial institution that is financing improved real estate in meeting its federally mandated obligation to advise potential borrowers whether such improvement is located inside or outside of an SFHA. Federal law and certain secondary markets require: (i) that regulated real estate lenders and users of such markets determine and disclose to each mortgage loan applicant whether the property 2 4 securing such loan is located inside or outside of an SFHA; and (ii) that borrowers maintain flood insurance in force as long as the mortgaged property is located within an SFHA. These Flood Zone Determination Services are provided by Pinnacle. In September 1997, two newly formed wholly-owned subsidiaries of National, PinTax-VA and PinTax-NY, acquired substantially all the assets and assumed certain liabilities of American Realty Tax Services, Inc., a Virginia corporation ("ARTS-VA"), and American Realty Tax Services of New York, Inc., a Virginia corporation ("ARTS-NY", which together with ARTS-VA, are referred to in this Report collectively as "ARTS"). The acquisition is referred to in this Report as the "PinTax Acquisition." PinTax provides the customers of the Company with the Real Estate Tax Services. The Company's services and products are marketed nationwide by its direct sales force to mortgage bankers and other financial institutions (including mortgage origination/servicing companies, commercial banks, savings and loans, credit unions, motor vehicle leasing firms and others). In addition, its Motor Vehicle Insurance Tracking and Outsourcing Services are marketed to motor vehicle leasing and lending firms in Canada by its direct sales force. Additional sales are made, on an indirect basis, through independent sales representatives and insurance agents and brokers. INDUSTRY SEGMENTS The principal industry segments in which the Company operates are (i) real estate tracking and outsourcing services, (ii) motor vehicle insurance tracking and outsourcing services, and (iii) insurance products. Information on revenue, operating profit and identifiable assets attributable to each of the industry segments appears in Note 23 of Notes to Consolidated Financial Statements. Real Estate Tracking and Outscourcing Services The Company, through the Pinnacle Companies, provides real estate tracking and outsourcing services to its mortgage lending customers. These services include flood zone determinations, real estate tax services, and hazard insurance tracking and outsourcing. Flood Zone Determination Services The Company markets its Flood Zone Determination Services and, in certain cases, flood insurance, to mortgage lenders, including mortgage bankers, commercial banks, savings and loans, insurance companies, credit bureaus and others. In the late 1980s, the Company utilized its proprietary technology to develop a database which enables it to determine whether or not a specific property address is located inside or outside of an SFHA as defined by the Federal Emergency Management Agency ("FEMA"). The Company's database has been developed by merging about 80,000 of the approximately 120,000 flood maps which have been developed by FEMA under the NFIP, which do not contain address-specific information, with a geographic database which contains address-specific information. In addition, for those addresses not in the Company's database, the Company makes these determinations manually using the FEMA flood maps, census maps, parcel maps, subdivision maps, as well as aerial photographs and other available information. The National Flood Insurance Reform Act of 1994 ("Flood Reform Act") affirmed existing requirements that borrowers must be informed prior to loan closing whether or not the subject property is located inside or outside of an SFHA. If located in an SFHA, flood insurance must be purchased for all loans made by federally regulated institutions and loans purchased by federal agencies, such as Fannie Mae and Freddie Mac. The Flood Reform Act expanded existing law by requiring borrowers to place in force flood insurance if their property is determined to be located in an SFHA. The Flood Reform Act further allows a lender to charge a borrower a reasonable fee for such flood zone determination services and requires that the provider of such services guarantee the accuracy of its flood zone determinations. Through Pinnacle Data, the use of the Company's on-line computerized Flood Zone Determination Services system is offered nationwide to financial institutions and others who originate loans secured by real property. The proprietary system is a relational database of digitized geographical information which 3 5 determines whether or not a particular property address is located inside or outside of an SFHA and enables users to access Pinnacle Data's database using computer time share, batch processing or electronic data interface services. Where it cannot be determined whether a particular property address is located inside or outside of an SFHA through the database, Pinnacle Data manually renders the determination. In addition, customers may submit their determination requests by facsimile. The Flood Zone Determination Services system prints flood zone certificates (which describe, among other things, whether the subject property is located inside or outside of an SFHA), certain disclosure notices, and, for some customers, flood insurance policy rating information for flood insurance policies placed through PMSIS and, in most cases, with GPIC. For an additional fee, Pinnacle Data will automatically notify its customers of changes in the SFHA status of properties in their mortgage loan portfolios. The flood zone determination business is highly competitive. Major competitors known to management include Transamerica Flood Hazard Certification, First American Flood Data Services, Inc., Geotrac, Palma-Lazar & Ulsh, Inc., Lereta Corporation, National Flood Certification Services, Inc., National Flood Information Services and Flood Zones, Inc. Management believes that the most significant factors affecting competition are speed and responsiveness of service, accuracy, breadth of geographical area covered, price and financial strength. The Company believes it competes favorably with respect to these factors. Real Estate Tax Services The Company, through PinTax, markets its Real Estate Tax Services to mortgage bankers and financial institutions in the United States that own or service real estate loan portfolios ("Servicers"). In order to prevent the placement of a lien for unpaid real estate taxes on real property which is the collateral for a loan, Servicers generally have a need to monitor whether real property taxes are paid to the taxing authority when due. In many cases Servicers require borrowers to pay to the Servicer a portion of real property taxes on the subject property with mortgage loan payments ("Escrowed Loans"). The Servicer holds such funds in escrow and then remits them to the appropriate taxing authority when due. The Company provides Servicers with outsourcing for real property tax related tasks usually performed by the Servicers for both Escrowed Loans and non-Escrowed Loans. Such services include identification of applicable taxing authorities, research regarding real estate parcel identification numbers, and in the case of Escrowed Loans, disbursement of funds by check or electronic funds transfer and transmission of electronic data, tax bills and tax listings to taxing authorities, and, in the case of non-Escrowed Loans, searching records of taxing authorities to determine whether taxes are delinquent. The Company also performs, for a fee, certain additional tasks now performed by its customers, referred to as "Tax Outsourcing". The real estate tax services business is also highly competitive. Major competitors in the real estate tax services business include Transamerica Real Estate Tax Service, First American Real Estate Tax Services and Lereta Corporation. Management believes that the most significant factors affecting competition are speed and responsiveness of service, accuracy, breadth of geographical area covered, price and financial strength. The Company believes it competes favorably with respect to these factors. Hazard Insurance Tracking and Outsourcing Services Servicers generally have a need to monitor whether insurance is maintained on the real property or collateral for the loan. In exchange for insurance premiums payable by the Company's customers and/or for fees, the Company provides its customers with access to the Company's database and tracking systems. In other cases, the Company's clients transfer many of their tasks associated with servicing the customer's loan portfolio. Such tasks performed by the Company for its customers is referred to as "Outsourcing". In addition, Servicers will acquire ownership of some property through foreclosure which property is sometimes referred to as Real Estate Owned ("REO"). Servicers need to insure the improvements located on REO for perils such as fire and vandalism. The Company insures certain REO for fire and allied perils ("REO Insurance"). The Company primarily focuses its marketing efforts for Hazard Insurance Tracking and Outsourcing Services on Servicers with mortgage loan portfolios. 4 6 The Company through PMSIS provides its Hazard Insurance Tracking and Outsourcing Services to financial institutions located throughout the United States. The tracking system utilizes Company-developed special-purpose, proprietary software and database systems to provide multiple tracking features for mortgages, as well as for REO properties. The Hazard Insurance Tracking and Outsourcing Services may be customized to meet the specific needs of each customer and provide automated insurance tracking and data processing services, such as tracking of whether or not insurance is in force, ordering and canceling lender-placed and/or REO Insurance coverage, and accounting for multiple premium transactions. Outsourcing includes opening customers' inbound mail, inputting insurance information relating to the tracked collateral into the Company's database and receiving that information from insurance companies by electronic data interchange ("EDI"), making and receiving telephone calls for clients and sending correspondence to customers of the Company's clients, and disbursing Escrowed Loans insurance premiums on behalf of the Company's clients to insurance companies. In addition, the Company's customers have online real-time access to their data and information in the Company's database. Customers who process their own insurance transactions may access the computer system of PMSIS to order lender-placed insurance or REO insurance. See "Business -- Insurance Products". The Company believes its Hazard Insurance Tracking and Outsourcing Services enable financial institutions to track insurance coverage more efficiently and accurately and to reduce their internal labor costs. The insurance tracking and outsourcing industry is also highly competitive. Major competitors in the insurance tracking and outsourcing industry include American Security Insurance Group, ZC Sterling Corporation, Balboa Life and Casualty, Safeco, Cigna and Insureco Inc. Management believes that the most significant factors affecting competition are speed, accuracy and responsiveness of service, price and financial strength. The Company believes it competes favorably with respect to these factors. Motor Vehicle Insurance Tracking and Outsourcing Services Motor vehicle lessors and lenders generally have a need to monitor whether insurance is maintained on collateral for the loan. In exchange for fees payable by the Company's customers, the Company provides its customers with access to the Company's database and tracking systems. The Company through Fastrac provides its Motor Vehicle Insurance Tracking and Outsourcing Services to financial institutions located throughout the United States and Canada. The tracking system utilizes Company-developed special-purpose, proprietary software and database systems to provide multiple tracking features. 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. Outsourcing includes opening customers' inbound mail, inputting insurance information relating to the tracked collateral into the Company's database and receiving that information from insurance companies by EDI, making and receiving telephone calls for clients and sending correspondence to customers of the Company's clients. In addition, the Company's customers have online real-time access to their data and information in the Company's database. The Company believes its Motor Vehicle Insurance Tracking and Outsourcing Services enable financial institutions to track insurance coverage more efficiently and accurately and to reduce their internal labor costs. The motor vehicle insurance tracking and outsourcing industry is also highly competitive. Major competitors include Van Wagenen Company, Balboa Life and Casualty, PDP Group, Inc., USCC/ Progressive Insurance Company and Great American Insurance Company. Management believes that the most significant factors affecting competition are speed, responsiveness and accuracy of service, price and financial strength. The Company believes it competes favorably with respect to these factors. Insurance Products The Company markets its specialized insurance including lender-placed insurance, REO Insurance and, in certain cases, flood insurance, to Servicers through PMSIS in the United States. Servicers generally monitor whether insurance is maintained on the real property or collateral for the loan. In the event a borrower allows insurance to lapse or if the insurance is canceled or otherwise terminated, Servicers may order lender-placed insurance from the Company. The Company markets its lender-placed insurance and REO Insurance to customers that use its Hazard Insurance Tracking and Outsourcing Services and to Servicers which do their 5 7 own tracking and order such insurance. The Company primarily sells flood insurance to customers that also use its Flood Zone Determination Services. See "Business -- Industry Segments -- Real Estate Tracking and Outsourcing Services -- Flood Zone Determination Services" and "-- Hazard Insurance Tracking and Outsourcing Services." Lender-placed insurance is purchased by financial institutions when their borrowers, whose loans are secured by real property or personal property (primarily motor vehicles), fail to provide the financial institutions with adequate evidence of fire and certain allied perils insurance covering improvements to real property or physical damage insurance on personal property, as the case may be. The financial institutions pay insurance premiums to GPIC and ordinarily are entitled to reimbursement of the premiums paid from their borrowers in accordance with the terms of their loans. In the Company's experience, approximately 64% to 68% of lender-placed insurance coverage terminates or is canceled within a year of the date the policy is issued. GPIC also offers REO Insurance to financial institutions for properties on which they are in the process of or have foreclosed. REO Insurance is generally issued for thirty (30) day periods, and provides coverage similar to the coverage provided under lender-placed policies. REO Insurance premiums may be higher than lender-placed premiums because of the higher risks involved in insuring REO property, which is often vacant. Financial institutions ordinarily require immediate coverage for lender-placed and REO Insurance, but generally do not have readily available underwriting information on the subject risk. Due to the lack of underwriting information, GPIC usually calculates its premiums on flat rates, and covers almost all improvements on real properties, vehicles or other personal property, as the case may be, submitted by financial institutions within predesignated limits and territories. See "Business -- Insurance Operations -- Underwriting." This method, while commonly used by lender-placed insurers, is unusual in the property and casualty insurance industry that traditionally underwrites each risk on an individual or class basis. When an insurance policy is canceled for any reason, GPIC is required to refund, at a minimum, an unearned premium calculated pursuant to applicable statutes or regulations. GPIC's primary customers for lender-placed and REO Insurance are mortgage bankers and financial institutions which provide mortgages on one-to-four unit dwellings, apartment buildings and commercial buildings. The net premiums earned by GPIC on one-to-four unit dwellings accounted for approximately 80% of GPIC's lender-placed and REO Insurance for fiscal years 1994 through 1998. GPIC also offers lender-placed motor vehicle and personal property physical damage insurance products to financial institutions with loans secured by motor vehicles or personal property. The insurance and service needs of such financial institutions are similar to the needs of financial institutions with loans secured by real property. These financial institutions are serviced primarily on an outsourcing basis. GPIC also underwrites motor vehicle physical damage insurance through an unaffiliated general insurance agent. These policies are sold to the general public through insurance agents and brokers. The rates charged for this type of insurance are higher than usually charged in the standard automobile insurance market. GPIC writes lender-placed and REO Insurance on a direct basis in 48 states and the District of Columbia and in the past, GPIC assumed some of the risk and premium on lender-placed and REO Insurance in the other states by being the primary reinsurer on such business generated by PMSIS. See "Business -- Insurance Operations -- Insurance Agency Operations." In 1987, the Company entered into an agreement with the Federal Insurance Administration of FEMA enabling GPIC to issue flood insurance polices in the Write Your Own Program ("WYO Program"). Under the WYO Program, insurance companies are authorized by FEMA to write flood insurance, and 100% of each risk is ceded to FEMA. GPIC receives a commission based upon a percentage of premiums for each policy it writes under the WYO Program. GPIC provides its flood insurance policies under the WYO Program to customers who utilize the Flood Zone Determination Services of Pinnacle Data and the Hazard Insurance Tracking and Outsourcing Services of PMSIS and through insurance agents and brokers. 6 8 GPIC's major competitors in the highly competitive lender-placed insurance industry include major competitors of PMSIS in the insurance tracking and outsourcing industry. See "Business -- Industry Segments -- Real Estate Tracking and Outsourcing Services -- Hazard Insurance Tracking and Outsourcing Services." The flood insurance business is also very competitive and is serviced by approximately 100 WYO carriers and other carriers offering flood insurance products that are underwritten by private carriers, many of which competitors have greater financial, marketing and other resources than GPIC. Management believes that the most significant factors affecting competition in the specialized insurance industry include speed and responsiveness of service, breadth of insurance coverage and services offered, amount of commissions paid and price. The Company believes it competes favorably with respect to these factors. INSURANCE OPERATIONS Insurance Agency Operations PMSIS is a general insurance agent for GPIC and other insurance companies. PMSIS has entered into agency agreements to sell lender-placed and REO insurance in the states where GPIC does not write insurance on a direct basis. These other insurance companies are not affiliated with the Company. They are Empire Fire and Marine Insurance Company, covering New Hampshire with respect to hazard insurance, Universal Underwriters Insurance Company covering New York with respect to hazard insurance, South Carolina Insurance Company covering New York, Texas and New Hampshire with respect to flood insurance, and Union Mutual Insurance Company covering Vermont with respect to flood insurance. Under PMSIS' agreement, the unaffiliated insurance company pays PMSIS commissions for policies sold. This agency agreement allows PMSIS to initiate and maintain relationships with customers and to continue these relationships following termination of the agency agreement. PMSIS also markets flood insurance policies on behalf of GPIC and other WYO Program insurance companies. Over 95% of the policies sold by PMSIS are placed with GPIC. PMSIS is currently licensed and regulated as an insurance agent and broker in California and as a nonresident insurance agent and/or broker in 32 other states, and the District of Columbia. In 17 other states, PMSIS transacts insurance services through licensed agents who are officers and employees of PMSIS. See "Business -- Regulation." Underwriting Insurance companies traditionally underwrite risks individually or by class. Since financial institutions usually do not have the underwriting information traditionally required by many insurance companies to issue fire or personal property physical damage insurance at the time that financial institutions require insurance coverage, GPIC, like many of its lender-placed insurance competitors, insures for a flat premium rate coverage for almost all property within predesignated limits and territories without the application of underwriting criteria to individual risks. GPIC determines its flat premium rate based on its underwriting experience and knowledge of the industry in which it operates. GPIC uses actuaries to determine such premium rates only where mandated by law or regulations. Accordingly, GPIC may be insuring individual risks that it might not have insured if it had information obtained in the traditional underwriting process. The motor vehicle physical damage insurance written through an unaffiliated general agent is underwritten using more traditional methods of underwriting. Policies and Endorsements For its lender-placed insurance products, GPIC uses its own policy language, the policy language of companies it represents as an agent, and the policy language required by applicable law or regulation, together with forms extending coverage and lender loss-payable forms giving financial institutions certain rights. In many states the policy forms and rates charged must be filed with the insurance regulatory agency of the state and such filing may be subject to approval or disapproval by that regulator before the form or rate can be used. 7 9 The maximum limit of GPIC's insurance coverage overall is generally $3 million per property location for lender-placed insurance, $500,000 per location for REO Insurance, $100,000 per vehicle for lender-placed physical damage insurance and $50,000 for the motor vehicle physical damage written through an unaffiliated general agent. In certain cases, GPIC grants its customers a higher maximum limit and, additionally, GPIC may underwrite risks outside of predesignated limits and, in some cases, may use underwriting information furnished by financial institutions, but, to date, such underwritten risks have not represented a material portion of GPIC's net premiums earned. For flood insurance, GPIC uses policy language, coverage limits and rates provided by FEMA. Insurance Operating Ratios The underwriting experience of insurance companies is traditionally measured by the statutory "combined ratio." The combined ratio, calculated on a SAP (Statutory Accounting Principles) basis, is the sum of: (i) the ratio of losses and LAE (loss adjustment expenses) incurred to net premiums earned (the "loss ratio"); and (ii) the ratio of the underwriting and operating expenses, exclusive of deferred acquisition costs, to net premiums written (the "expense ratio"). The approximate SAP underwriting profit (loss) is reflected by the extent to which the combined ratio is less (indicating profit) or greater (indicating loss) than 100%. The following table shows, for the periods indicated, GPIC's loss ratio, expense ratio and combined ratio.
FOR THE YEARS ENDED DECEMBER 31, --------------------------------------- 1994 1995 1996 1997 1998 ----- ----- ---- ---- ----- Loss ratio........................................... 37.8% 35.5% 30.0% 34.0% 34.9% Expense ratio........................................ 55.7% 66.6% 61.2% 63.1% 72.7% ----- ----- ---- ---- ----- Combined ratio....................................... 93.5% 102.1% 91.2% 97.1% 107.6% ===== ===== ==== ==== ===== Property and casualty industry Combined ratio (fire)(1).......................................... 109.2% 107.6% 96.5% 99.9% --% ===== ===== ==== ==== =====
- --------------- (1) Based on property and casualty insurance industry statistics (fire) published by A.M. Best Company as of December 31, 1997. Industry statistics for 1998 are not available from A.M. Best Company as of the date of this Report. The Company does not currently write any casualty insurance. The increase in the combined ratio from 1997 to 1998 was primarily due to a decrease in premiums written not being offset by corresponding decreases in expenses. Premiums written were down 30% in 1998 when compared to 1997. The premium-to-surplus ratio of an insurance company measures the relationship of net premiums written in a given period (direct premiums written plus reinsurance assumed less returned premiums and reinsurance ceded to other carriers) to surplus (admitted assets less liabilities), all determined on a SAP basis. There are no regulations in California requiring maintenance of any particular premium-to-surplus ratio. However, regulatory authorities regard this ratio as an important indication of an insurance company's ability to withstand abnormal loss experience and prefer to see a ratio of not more than a ratio of 3-to-1 of net written premium to surplus. GPIC's premium-to-surplus ratio for the periods indicated are shown in the following table.
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------ 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- Net premiums written to surplus ratio..................... 0.8 0.6 0.5 0.8 0.6 Property and casualty industry average(1)................. 1.1 1.0 1.0 0.9 --
- --------------- (1) Based on property and casualty insurance industry statistics published by A.M. Best Company as of December 31, 1997. Industry statistics for 1998 are not available from A.M. Best Company as of the date of this report. The Company does not currently write any casualty insurance. The decrease in net premiums written to surplus ratio from 1997 to 1998 was primarily the result of a decrease in net written premiums in 1998 over 1997. 8 10 Loss and Loss Adjustment Expense (LAE) Reserves GPIC is required to maintain adequate reserves for the payment of anticipated eventual losses arising from claims, which have been reported to it, and claims which have been incurred but not yet reported. A loss and LAE reserve is established in an amount estimated by GPIC to be sufficient to cover its costs of settling claims. The amount of this reserve is usually based upon management's experience with similar losses and, when available, the report of an outside adjuster. In addition, a reserve account is established to cover claims for losses that have been incurred but are not yet reported in an amount estimated by GPIC to be sufficient to cover its costs of unreported losses. The amount of this reserve is based upon statistical analysis and historical trends. Reserve amounts are necessarily based on management's informed estimates and judgments using data currently available to them. As additional experience and other data become available and are reviewed, estimates and judgments may be changed which result in adjustments in operating results for the period in which such changes are made. Unlike many other types of losses, such as liability losses, losses relating to lender-placed, REO, flood and motor vehicle physical damage insurance are usually known and reported to an insurance carrier promptly; the amount of the loss is usually easier to determine promptly than other types of insurance losses, and claims are usually settled without prolonged litigation, meaning that the risks are "short-tailed". As a result, more timely information is usually available to calculate and evaluate the adequacy of reserves for known and unreported claims than with many other lines of insurance. Investments Insurance company investments must comply with applicable laws and regulations, which prescribe the kind, quality and concentration of investments. In general, these laws and regulations permit investments, within specified limits and subject to certain qualifications, in federal, state and municipal obligations, corporate bonds, preferred and common equity securities, deposits in regulated banks, savings and loans and other federally insured institutions, real estate mortgages and real estate. As of December 31, 1998, the Company had $19.6 million of investment assets. GPIC held approximately $19.1 million of those investments. The Company's investment policy is determined by the Company's Board of Directors and is reviewed on a quarterly basis. Pursuant to its investment policy, the Company concentrates, for the most part, its investments in certificates of deposit, treasury securities and state and municipal issued securities. GPIC also maintains a large portion of its investments in short-term instruments in order to maintain the ability to fund large losses of GPIC's insureds, should they occur. The following tables reflect the investments of the Company (dollars in thousands). The table set forth below reflects the average amount of investments, income earned and annualized yield thereon for the three (3) years ended December 31, 1998.
FOR THE YEARS ENDED DECEMBER 31, ----------------------------- 1996 1997 1998 ------- ------- ------- Average investment.................................... $34,888 $30,711 $24,267 Net investment income................................. 1,975 1,839 1,635 Average annualized yield.............................. 5.7% 6.0% 6.7%
9 11 The following table summarizes by type, the investments of the Company as of December 31, 1998 at estimated market value (dollars in thousands). With the exception of equity securities and certain debt securities, the Company's investments are either insured by the Federal Deposit Insurance Corporation or have one of the top three designations from the National Association of Insurance Commissioners ("NAIC"), which correspond to an "investment grade" rating.
PERCENT AMOUNT OF TOTAL ------- -------- Certificates of deposit..................................... $ 6,506 33.1% U.S Government securities................................... 1,158 5.9% State and municipal bonds................................... 5,457 27.7% Corporate bonds............................................. 1,302 6.6% Equity securities........................................... 5,235 26.6% Mortgage-backed securities.................................. 26 0.1% ------- ----- Total investments................................. $19,684 100.0% ======= =====
The table set forth below indicates the expected maturity distribution of GPIC's fixed income securities and short-term investments as of December 31, 1998 (dollars in thousands).
PERCENT AMOUNT OF TOTAL ------- -------- One year or less............................................ $ 5,893 40.8% One year to five years...................................... 5,244 36.3% Six years to ten years...................................... 1,659 11.5% More than ten years......................................... 1,653 11.4% ------- ----- Total fixed income securities and short-term investments.................................... $14,449 100.0% ======= =====
Reinsurance In order to limit the maximum losses for which it might otherwise be solely responsible under its policies, GPIC arranges for the payment of a portion of the premiums it receives to other insurance companies pursuant to a series of treaties of reinsurance in return for reinsurance to protect against losses in excess of certain limits. The amount of potential exposure which is not reinsured is referred to as GPIC's "retention". GPIC pays treaty reinsurers a percentage of net premiums written and/or earned to cover reinsurance costs. Subject to certain limitations, in 1998 GPIC retained on non-flood insurance, and in 1999 retains, the first $500,000 of each risk and reinsures the rest up to a maximum $2.0 million per risk. This per risk excess reinsurance is provided in one layer and is subject to a maximum reinsurer's liability arising out of any one event of $4 million in the aggregate. The reinsurance contract has a one (1) year term. GPIC also purchases catastrophic reinsurance, under which GPIC is protected against an accumulation of losses arising out of any one event up to $12.5 million in excess of the initial $2.5 million of losses which GPIC incurs. The first layer of catastrophic reinsurance covers 95% of the first $2.5 million in excess of $2.5 million for each occurrence, with a maximum of 95% of $5.0 million for all losses during the term of the contract. The second layer covers 95% of the next $5.0 million over $5.0 million for each loss occurrence, subject to a maximum of 95% of $10.0 million for all losses during the term. The third layer of catastrophic reinsurance covers 95% of the next $5.0 million in excess of $10.0 million for each loss occurrence, subject to a maximum of 95% of $15.0 million for all losses during the term. Each of the catastrophic reinsurance agreements has a one (1) year term. GPIC from time to time purchases another form of reinsurance called "facultative reinsurance" for an individual policy or group of policies to protect GPIC and its treaty reinsurers from certain risks or when the amount of insurance exceeds the maximum amount covered under various reinsurance treaties. GPIC negotiates the cost of facultative reinsurance on a case-by-case basis. Flood insurance issued by GPIC is reinsured by an agency of the federal government. The purchase of reinsurance does not relieve GPIC of liability for the full amount of loss in the event the reinsurer fails or refuses to pay the reinsured portion. To date, GPIC has collected full reinsurance 10 12 reimbursement on all claims submitted to its reinsurers. There were no losses ceded to reinsurers in 1996, 1997 or 1998 on non-flood insurance policies. GPIC paid 4.9%, 4.0% and 4.4% of its earned premiums on non-flood insurance policies for its excess and catastrophic reinsurance treaties in 1996, 1997 and 1998 respectively. REGULATION Regulation in General Pinnacle Data's operations are generally not subject to regulation by any government agency. Certain rules relating to issuing flood zone determination certificates are contained in the Code of Federal Regulations. FEMA generally oversees the enforcement of such regulations; however, neither FEMA nor any other government agency directly regulates the activities of Pinnacle Data. The operations of PinTax are generally not subject to regulation by any government agency. PinTax interacts regularly with taxing authorities in various jurisdictions and, in many cases, in order to obtain the information required to carry out its operations, PinTax must comply with the rules and regulations promulgated by such taxing authorities. However, neither such taxing authorities nor any other government agency directly regulates the activities of PinTax. GPIC is subject to regulation by government agencies in California, its state of domicile, and in the remaining states in which it transacts insurance. The nature and extent of such regulation may vary from jurisdiction to jurisdiction, but typically, among other things, involves prior approval of the acquisition of "control" of an insurance company or of any company controlling an insurance company, regulation of certain transactions entered into by an insurance company with any of its affiliates, the payment of dividends by an insurance company, approval of premium rates for many lines of insurance, standards of solvency and minimum amounts of capital and surplus which must be maintained, limitations on types and amounts of investments, restrictions on the size of risk which may be insured by a single company, licensing of insurers and their agents, deposits of securities for the benefit of policyholders, approval of policy forms, methods of accounting, establishing reserves for losses and loss adjustment expenses and filing of annual report financial statements and other reports with respect to the financial condition of the insurer and other matters. In addition, state regulatory examiners perform periodic examinations of insurance companies. Such regulation is generally intended for the protection of policyholders rather than shareholders. The following represent the more significant insurance regulatory requirements, which are or will be imposed on GPIC and its affiliates. Licensing in Other Jurisdictions In order to issue policies on a direct basis in a state, GPIC either: (i) must be licensed by such state and usually must have its rates and policy forms approved by such state's insurance regulator; or (ii) under certain circumstances, such as dealings initiated directly by citizens or placements through licensed surplus lines brokers, it may conduct business without being admitted and without being subject to rate and/or policy forms approval. GPIC currently is licensed to write insurance in the following 46 states and the District of Columbia: Alabama Indiana Missouri Rhode Island Alaska Illinois Montana South Carolina Arizona Iowa Nebraska South Dakota Arkansas Kansas Nevada Tennessee California Kentucky New Jersey Utah Colorado Louisiana New Mexico Virginia Connecticut Maine North Carolina West Virginia Delaware Maryland North Dakota Washington Florida Massachusetts Ohio Wisconsin Georgia Michigan Oklahoma Wyoming Hawaii Minnesota Oregon Idaho Mississippi Pennsylvania
11 13 In addition, GPIC is authorized to write insurance in Texas and Vermont on a surplus lines basis. GPIC is in the process of obtaining requisite approvals to write insurance on a direct basis in New Hampshire. PMSIS (or, as to some states, at least one of PMSIS's officers) must be licensed in any state in which it operates. PMSIS is currently licensed in California and as a nonresident insurance agent and broker in 32 other states and the District of Columbia. PMSIS is subject to laws and regulations and is regulated by the insurance commissioner in each state in which it conducts its insurance agency or brokerage business. Restrictions on Dividends Payable by GPIC to National As a nonoperating holding company, a principal source of National's liquidity is the cash dividends received from its subsidiaries, principally GPIC and Pinnacle Data. GPIC is subject to laws and regulations, which restrict its ability to pay dividends. GPIC must report to the California Department of Insurance (the "Department") all dividends and other distributions to shareholders within five business days following declaration. No dividend or other distribution to shareholders may be paid until at least ten business days after receipt by the California Insurance Commissioner (the "Commissioner") of such notice. Moreover, GPIC may not pay any extraordinary dividend or make any other extraordinary distribution to its shareholders until thirty days after receipt by the Commissioner of a Notice of Declaration thereof and, within such period, the Commissioner has not disapproved such payment. The interim period will allow the Department to issue an order stopping payment of the dividend if, in the Department's opinion, the payment would in any way violate the California Insurance Code or be hazardous to the insurer's policyholders, creditors or the public. An extraordinary dividend or distribution, is any dividend or distribution which, together with other dividends or distributions made within the preceding twelve months, exceeds the greater of either: (i) 10 percent of GPIC's policyholder's surplus as of the previous December 31, or (ii) The net income of GPIC, for the twelve month period ending the previous December 31. California law further prohibits the payment of dividends without prior approval of the Department unless the insurer has available "earned surplus". The term "earned surplus" is defined as unassigned funds (surplus) as reported on the insurer's annual statement. Dividends may not be declared out of: (i) earned surplus derived from the mere net appreciation in the value of the assets not yet realized; and (ii) an exchange of assets, unless such earned surplus has been realized or the assets received in exchange are currently realizable in cash. An exception to this prohibition is allowed where the insurer's surplus as regards policyholders is: (i) reasonable in relation to its outstanding liabilities, (ii) adequate to the insurer's financial needs, and (iii) the Department's prior approval is obtained. Restrictions on Transactions Among Affiliates of GPIC In addition to the dividend payment restrictions set forth above, California law has three additional methods of regulating an insurance company's relationships and transactions with its affiliates. The first is the requirement that an insurer file and keep current a "Form B" registration statement identifying the affiliated members of the insurer's holding company system and disclosing the agreements in force, relationships existing and transactions outstanding between the insurance company and its affiliates. The matters that must be reported in the registration statement include all types of financial transactions, transactions not in the ordinary course, the insurer's guarantee of affiliate obligations, management agreements, service contracts and cost-sharing agreements, tax allocation agreements, reinsurance agreements, stock pledges, dividends and distributions. An insurer's registration statement must be filed annually. In addition, the registration statement must be updated on a monthly basis to disclose any reportable transaction that occurred in the prior monthly period. The second method of regulating transactions between an insurer and its affiliates is the requirement that the insurer give the California Insurance Department not less than thirty days' prior written notice of certain types of transactions, with the Department having the right to disapprove the transaction during the notice period. The third method is the requirement that the Insurance Commissioner be notified within thirty days of any investment by the insurer in another corporation if such would cause the total investments in that company by all members of the insurer's holding company system to exceed ten percent of the other company's voting securities. 12 14 Risk-Based Capital Rules The National Association of Insurance Commissioners ("NAIC") has adopted a formula to calculate Risk Based Capital ("RBC") of property and casualty insurance companies and adopted an RBC model for property and casualty insurance companies. Companies having statutory surplus less than that determined necessary by the RBC model will likely be required to adequately address certain risk factors (underwriting risk, investment risk and other off-balance sheet risk) and will be subject to varying degrees of regulatory intervention, depending upon their level of capital inadequacy. The RBC model for the 1998 annual statement did not indicate an impairment of GPIC's measurement of capital adequacy. Membership in Insolvency Funds and Associations Most states require property and casualty insurance companies to become members of insolvency funds or associations, which generally protect policyholders against the insolvency of insurance companies writing business in the state. Members of the fund or association must contribute to the payment of certain claims made against insolvent insurance companies. The maximum contributions required by law in any one (1) year have varied between 1% and 2% of annual premiums written by a member in that state. Most of these payments are recoverable through future policy surcharges and premium tax reductions. GPIC is required to participate in such insolvency funds and associations and contributed $1,179 in 1997 and $116,113 in 1998 to such funds and associations. GPIC is also required to participate in various mandatory insurance facilities or to participate in funding mandatory pools. These include individual state facilities such as the state FAIR Plan Associations. GPIC made certain significant contributions to the California FAIR Plan Association in 1996 and 1997. No significant contributions were made to the California FAIR Plan Association in 1998. See "Management's Discussion and Analysis of Financial Condition and Results of Operations". Insurance Regulation Concerning a Change in or the Acquisition of Control of an Insurance Company GPIC is a property and casualty insurance company organized under the laws of the State of California. The California Insurance Code provides that any acquisition or change in "control" of a domestic insurer or of any person that controls a domestic insurer cannot be consummated without the prior approval of the Commissioner of Insurance. Control is defined to mean the power to direct or cause the direction of the management and policies of the insurer through the ownership of voting securities or by contract. A presumption of "control" arises from the ownership, control, possession with the power to vote or possession of proxies with respect to 10% or more of the voting securities of a domestic insurer or of a person that controls a domestic insurer. Any person who purchases shares of the common stock of the Company which, when combined with all other voting securities owned or otherwise controlled by that person, total 10% or more of the voting securities of the Company, will be deemed to have become a controlling person of GPIC. Any purchase resulting in such an acquisition of control of GPIC would require prior action by the California Commissioner of Insurance. MARKETING The Company's services and products are marketed nationwide and in Canada by its sales and marketing staff. Additional sales are made, on an indirect basis, through independent sales representatives and insurance agents and brokers. Most of the Company's sales personnel sell and market the Company's full line of services and products, although most of the Company's sales efforts until recently had focused on the marketing of the Flood Zone Determination Services. In addition to a base salary, the direct sales personnel are compensated by commissions based, for the most part, on a percentage of revenues generated. The Company uses direct mail and select advertising to augment its sales efforts. The Company has an Internet site with an address of www.naig.com. 13 15 SIGNIFICANT CUSTOMERS During the year ended December 31, 1998, Ameriquest Mortgage Company accounted for approximately 10% of the Company's consolidated revenues. EMPLOYEES As of December 31, 1998, the Company employed approximately 773 persons. The Company has never experienced a work stoppage, and at present, no employee is known by management to be represented by a labor organization. The Company considers its employee relations to be good. ITEM 2. PROPERTIES The Company leases its principal offices located in South San Francisco, California, which are used as the Company's headquarters and as the primary operations center for GPIC, PMSIS, Fastrac, and Pinnacle Data. In addition the Company leases space in Concord, California, which is used by Pinnacle Data primarily for making manual flood zone determinations. The Company leases space in Springfield, Ohio, which is used by Fastrac with respect to its motor vehicle insurance tracking and outsourcing operations. The Company leases space in Chantilly, Virginia and Warwick, Rhode Island, which is used as the primary operations centers of PinTax. The Company leases space in Tucson, Arizona, which is used by Pinnacle Data, PinTax and Fastrac. The Company also leases other sales and service offices. ITEM 3. LEGAL PROCEEDINGS The Company is routinely a party to litigation incidental to its business, as well as other litigation. While the ultimate results of such litigation cannot presently be determined on the date of this Report, management believes that no individual item of pending litigation or group of similar items of pending litigation is likely to have a material adverse effect on the consolidated financial position of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth fiscal quarter of 1998. 14 16 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS National's Common Stock trades on the Nasdaq Stock Market under the symbol "NAIG". The following table sets forth the high and low sale prices for the Common Stock and cash dividends declared for the periods indicated.
COMMON STOCK PRICE CASH DIVIDENDS --------------- DECLARED PER HIGH LOW SHARE ------ ----- -------------- 1997 First Quarter.............................. $ 8.00 $4.25 $0.00 Second Quarter............................. 10.00 5.88 $1.08 Third Quarter.............................. 11.13 6.13 $0.11 Fourth Quarter............................. 11.00 7.63 $0.11 1998 First Quarter.............................. $11.00 $7.88 $0.11 Second Quarter............................. 15.00 8.06 $0.04 Third Quarter.............................. 11.00 5.50 $0.05 Fourth Quarter............................. 22.00 5.75 $0.11
The closing price of the Common Stock, as reported on the Nasdaq National Market System on March 15, 1999, was $14.875 per share. As of March 16, 1999, there were approximately 550 holders of the Common Stock. The Companies' Boards of Directors meet quarterly to consider the payment of cash dividends based upon, among other things, an analysis of each Companies' financial performance. As a non-operating holding company, a principal source of National's liquidity is the cash dividends received from its subsidiaries, including GPIC. GPIC, consistent with other insurance companies, is subject to laws and regulations, which restrict its ability to pay dividends. Under California law, the maximum amount of dividends that GPIC may pay National in any twelve (12) month period without prior regulatory approval is the greater of either: (i) the net income (excluding capital gains and losses) for the preceding calendar year; or (ii) 10% of policyholder surplus as of the previous December 31. For the year ended December 31, 1998, the maximum dividend permitted to be paid in 1999 by GPIC to National is limited to approximately $2.4 million without prior consent of the Commissioner. See "Business -- Regulation -- Restrictions on Dividends Payable by GPIC to National." In addition, insurers are required to report dividends within five (5) days of declaration and at least ten (10) days prior to payment. The interim period will allow the Commissioner to issue an order stopping payment of the dividend if, in the Commissioner's opinion, the payment would in any way violate the California Insurance Code or be hazardous to the insurer's policyholders, creditors or the public. California law further prohibits the payment of dividends without prior approval of the Commissioner unless the insurer has available "earned surplus." The term "earned surplus" is defined as unassigned funds (surplus) as reported on the insurer's annual statement, excluding earned surplus derived from: (i) unrealized net appreciation of assets; and (ii) an exchange of assets, unless such earned surplus has been realized or the assets received in exchange are currently realizable in cash. An exception to this prohibition is allowed where the insurer's surplus as regards policyholders: (i) is reasonable in relation to its outstanding liabilities; (ii) is adequate to the insurer's financial needs; and (iii) the prior approval of the Commissioner is obtained. The Company believes that the restrictions on the payment of dividends in California will not significantly affect the Company's ability to pay dividends in accordance with its current dividend policy. In addition, the Company believes that the implementation of the restrictions will not have any significant effect on National's liquidity. 15 17 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, 1994, 1995, 1996, 1997 and 1998. 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, --------------------------------------------------- 1994 1995 1996 1997 1998 ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA Net premiums written............................. $20,036 $14,956 $12,636 $20,501 $14,290 ======= ======= ======= ======= ======= Net premiums earned.............................. $20,858 $17,020 $13,585 $19,038 $15,512 Real estate information services(1).............. 7,978 10,593 18,499 23,492 35,978 Tracking fees.................................... 3,012 4,786 5,479 7,543 12,346 Net commission income............................ 1,103 1,502 1,145 1,166 1,081 Net investment income............................ 1,836 2,042 1,975 1,839 1,635 ------- ------- ------- ------- ------- Total revenues................................. 34,787 35,943 40,683 53,078 66,552 ------- ------- ------- ------- ------- Loss and loss adjustment expense................. 7,873 6,044 4,002 6,482 5,415 Commissions paid to nonaffiliates................ 4,739 4,079 1,954 1,837 3,014 Personnel expenses............................... 13,677 16,891 18,948 23,127 31,455 All other expenses............................... 9,096 12,252 14,221 16,930 23,039 Non-recurring expense(3)......................... 1,020 4,100 -- -- -- ------- ------- ------- ------- ------- Total expenses(1).............................. 36,405 43,366 39,125 48,376 62,923 ------- ------- ------- ------- ------- Income (loss) before provision (benefit) for income taxes................................... (1,618) (7,423) 1,558 4,702 3,629 Provision for (benefit from) income taxes........ (534) (2,559) 284 1,436 812 ------- ------- ------- ------- ------- Net income (loss)................................ $(1,084) $(4,864) $ 1,274 $ 3,266 $ 2,817 ======= ======= ======= ======= ======= EARNINGS PER SHARE DATA Basic(2)....................................... $ (0.23) $ (1.04) $ 0.31 $ 0.83 $ 0.69 Diluted(2)..................................... $ (0.23) $ (1.04) $ 0.31 $ 0.79 $ 0.65 BALANCE SHEET DATA Cash and investments............................. $39,112 $37,335 $33,777 $29,962 $25,537 Total assets..................................... $55,092 $52,096 $47,112 $66,742 $67,941 Long-term notes payable.......................... $ -- $ -- $ 333 $ 8,675 $10,031 Total shareholders' equity....................... $37,290 $32,881 $28,552 $27,780 $30,351 OTHER DATA: Cash dividends per share......................... $ 0.20 $ 0.00 $ 0.00 $ 1.30 $ 0.31
- --------------- (1) Revenues for real estate information services include revenues in 1997 from PinTax subsequent to the PinTax Acquisition. Total expenses include expenses from PinTax subsequent to the PinTax Acquisition. (2) Based upon weighted average number of common shares outstanding. (3) Non-recurring expenses consist of $4.1 million in 1995 for Proposition 103 rebates and $1.0 million in 1994 for restructuring charges in connection with relocation of an operation. 16 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL National and its wholly-owned Subsidiaries provide specialized information services through technology, tracking services, outsourcing services and related insurance products to financial institutions located throughout the United States and in Canada. National and its Subsidiaries are referred to in this Report collectively as the "Company". Utilizing sophisticated computer applications, the Company has developed special-purpose, proprietary software and database systems which provide information services on an outsourced, remote computer or manual access basis, enabling the customers of the Company to: - determine if residential or commercial real estate is located inside or outside a federally-designated Special Flood Hazard Area ("SFHA"), with respect to real estate which is collateral for loans being financed or serviced by customers of the Company or for other purposes (the "Flood Zone Determination Services"); - obtain real estate tax data from various local, county and state taxing authorities nationwide with respect to real estate which is collateral for loans being financed or serviced by the customers of the Company, facilitate the payment to such taxing authorities by mortgage lenders and mortgage loan servicing companies from certain escrowed funds collected for real estate taxes from their borrowers with monthly loan payments for real estate taxes to such taxing authorities, and inform mortgage lenders and mortgage servicing companies whether the real estate taxes on property securing real estate loans have been paid and perform certain tasks of the Company's customers on an outsourced basis (the "Real Estate Tax Services"); - monitor the insurance coverage on collateral securing motor vehicle and other consumer loans and leases (the "Motor Vehicle Insurance Tracking and Outsourcing Services"); and - monitor the insurance coverage on collateral securing residential mortgages (predominantly one-to-four unit family dwellings), to a lesser extent, commercial mortgages, disburse insurance premiums collected from borrowers with monthly loan payments for insurance coverage on behalf of mortgage lenders and mortgage servicing companies and perform certain tasks of the Company's customers on an outsourced basis (collectively, the "Hazard Insurance Tracking and Outsourcing Services"). When the Hazard Insurance Tracking and Outsourcing Services indicate that hazard insurance coverage on the collateral securing the loan has lapsed, the customer may contract with the Company to provide specialized, fire, allied peril or physical damage insurance (generally referred to as "lender-placed" insurance, formerly referred to by the Company as "force-place" insurance), that generally insures the improvements or personal property on the collateral security. The Company provides this lender-placed insurance through its wholly-owned subsidiary Great Pacific Insurance Company, in 48 states and the District of Columbia and through nonaffiliated insurance companies in the remainder of the United States. The Company also provides flood insurance, for which the risk is assumed by an agency of the U. S. Government under the National Flood Insurance Program ("NFIP"). In addition, the Company provides fire and allied perils insurance with respect to properties on which financial institutions are in the process of or have foreclosed, and physical damage insurance on motor vehicles. Great Pacific Insurance Company is rated "A" ("Excellent") by A.M. Best Company, a nationally recognized insurance statistical and rating service. The Company's insurance products include lender-placed insurance policies which have stated terms of either up to ninety (90) days ("short-term policies") or six (6) months to one (1) year ("longer-term policies"), most of which are longer-term policies. Premiums for longer-term policies are recorded as revenues when earned. The Company's lender-placed and flood insurance policies are canceled at a relatively high rate because they generally remain in effect only until financial institutions receive proof that borrowers have obtained their own insurance. At the time the lender-placed policies are issued, a reserve is established to provide for return of premiums for anticipated cancellations, which has the effect of decreasing net premiums written and earned premiums. Since 1993, the reserve has been established at approximately 64% to 68% of gross premiums written. Premiums are written directly by GPIC or by third party insurance companies in certain states where GPIC is not licensed or where its products are not approved. The following table 17 19 summarizes premiums written net of cancellations after application of the reserve for return premiums during the periods indicated (in thousands):
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 1996 1997 1998 -------- -------- -------- Gross Premiums Written (net of cancellations)......... $15,594 $24,141 $17,927 Gross Premiums Ceded.................................. (2,958) (3,640) (3,637) ------- ------- ------- Net Premiums Written.................................. $12,636 $20,501 $14,290 ======= ======= =======
The Company's strategy includes expanding its authorization to write premiums on a direct basis. At the present time, the Company generally retains the first $500,000 of each risk and reinsures the rest up to a maximum of $2.0 million per risk, pursuant to reinsurance arrangements. The Company also purchases catastrophic reinsurance, under which the Company is protected against an accumulation of losses arising out of any one event up to 95% of $12.5 million in excess of the initial $2.5 million of losses which the Company incurs. See "Business -- Insurance Operations -- Reinsurance" and Note 17 of Notes to Consolidated Financial Statements for a description of the Company's reinsurance arrangements. The Company remains primarily liable to its policyholders in the event any reinsurer is unable or will not fulfill the obligations assumed under reinsurance. As a result of the cost and availability of reinsurance, in the future the Company may elect to retain a higher portion of the risk historically ceded to reinsurers. If the Company were to retain a higher proportion of insured risks, it would increase its exposure to significant losses relating to properties insured by the Company. This increased exposure could have a material adverse effect on the Company's results of operations. The Company did not cede any losses to reinsurers in 1996, 1997 or 1998 for non-flood insurance losses. The Company seeks to limit its exposure with respect to any failure by a reinsurer to fulfill its obligations by evaluating the financial condition and rating of members of its reinsurance pool (the Company's policy is to purchase reinsurance with U.S. insurers rated in the "A" categories by A.M. Best Company) at the time of such purchase and by diversifying the reinsurance pool. Loss and loss adjustment expenses ("LAE") represent losses paid related to insurance underwritten or reinsured by GPIC, adjusted for changes in reserves for losses that are in the course of settlement and losses that have been incurred but not yet reported. Commissions paid to nonaffiliates represent amounts paid to third party agents and brokers, and other producers related to sales of the Company's services and products. Personnel expenses represent salaries, wages, sales commissions and bonuses paid to Company employees and related employee benefits. All other expenses primarily consist of occupancy costs, including office rent and utilities, insurance expenses, equipment maintenance and depreciation, amortization of acquisition costs, sales and marketing expenses, professional services and expenses related to the delivery of products and services such as postage and printing. The Company's effective income tax rate was 18%, 31%, and 22% for 1996, 1997, and 1998, respectively. See Note 8 of Notes to Consolidated Financial Statements. Effective January 1, 1999, National implemented a change to its revenue recognition accounting policy for real estate tax service contracts. The accounting policy was adopted prospectively and applies to all new loans serviced beginning January 1, 1999. Prior to January 1, 1999, National recognized revenues from real estate tax service contracts over the estimated duration of the contracts as the related servicing costs were estimated to occur. The majority of the servicing costs, approximately 64%, are incurred in the first tax processing cycle, with the remaining 36% incurred over the remaining service life of the contract. This policy results in recognition of approximately 65% of billings as revenue in the first year depending on the month that the contracts are added. The new policy provides for a more ratable recognition of revenues, reducing the amount of revenue and gross profit recognized at the inception of the contract and recognizing it over the expected service period. The amortization rates applied to recognize the revenues are based on a 10 year average contract life and are adjusted to reflect prepayments. The resulting rates by year are 41%, 21%, 13%, 8%, 6%, 4%, 3%, 2%, 1% and 1%. National periodically reviews its tax service contract portfolio to determine if there have been changes in contract lives and/or changes in the number and/or timing of prepayments. 18 20 National may adjust rates to reflect current trends. Assuming a constant rate of billings in 1999 as compared to 1998, revenue recognized from new tax service contracts would be approximately 35% to 40% lower and National's consolidated revenues would be approximately 5% lower. In March 1998, Accounting Standards Executive Committee issued Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. SOP 98-1 provides guidance on accounting by all nongovernmental entities for the costs of computer software developed or obtained for internal use and for determining whether computer software is for internal use. This SOP also provides guidance on when costs incurred for internal-use computer software are and are not capitalized. SOP 98-1 is effective for fiscal years beginning after December 15, 1998. The Company is not currently involved in significant software development projects and does not believe that SOP 98-1 will have a material impact on its financial statements in 1999. In December 1997, Accounting Standards Executive Committee issued Statement of Position (SOP) 97-3, Accounting by Insurance and Other Enterprises for Insurance-Related Assessments. This SOP provides guidance on accounting by insurance and other enterprises for insurance-related assessments. SOP 97-3 is effective for fiscal years beginning after December 15, 1998. The Company does not believe that SOP 97-3 will have a material impact on its financial statements. RESULTS OF OPERATIONS The following table sets forth certain items as a percentage of total revenues for the periods indicated.
1996 1997 1998 ----- ----- ----- Net premiums earned......................................... 33.4% 35.9% 23.3% Real estate information services............................ 45.4 44.2 54.0 Tracking fees............................................... 13.5 14.2 18.6 Net commission income....................................... 2.8 2.2 1.6 Net investment income....................................... 4.9 3.5 2.5 ----- ----- ----- Total revenues.................................... 100.0 100.0 100.0 ----- ----- ----- Loss and loss adjustment expense............................ 9.8 12.2 8.1 Commissions paid to nonaffiliates........................... 4.8 3.4 4.5 Personnel expenses.......................................... 46.6 43.6 47.3 All other expenses.......................................... 35.0 31.9 34.6 ----- ----- ----- Total expenses.................................... 96.2 91.1 94.5 ----- ----- ----- Income before provision for income taxes.................... 3.8 8.9 5.5 Provision for income taxes.................................. .7 2.7 1.3 ----- ----- ----- Net income.................................................. 3.1% 6.2% 4.2% ===== ===== =====
YEAR ENDED DECEMBER 31, 1997 VERSUS YEAR ENDED DECEMBER 31, 1998 The dollar amounts referred to in this section comparing operating results for the year ended December 31, 1997 with December 31, 1998 are approximate amounts stated in millions and are based on the financial statements included elsewhere in this Report, which amounts are stated in thousands. All percentages referred to in this section comparing operating results for the year ended December 31, 1997 with December 31, 1998 are approximate percentages and are based only on dollar amounts set forth in the financial statements contained elsewhere in this Report, which amounts are stated in thousands. Revenue Total revenue increased from $53.1 million in 1997 to $66.6 million in 1998, an increase of $13.5 million or 25.4%. Net premiums written decreased from $20.5 million in 1997 to $14.3 million in 1998, a decrease of $6.2 million or 30.3%. The decrease in net premiums written was principally due to the loss in the third and fourth quarters of 1997 of two hazard insurance tracking and outsourcing customers. There was no material price change related to the Company's insurance products in 1998. 19 21 Net premiums earned decreased from $19.0 million in 1997 to $15.5 million in 1998, a decrease of $3.5 million or 18.5%. The decrease was primarily due to the loss of the hazard insurance tracking and outsourcing customers, as previously described. Real estate information services revenue (consisting of revenue from Pinnacle Data and PinTax) increased from $23.5 million in 1997 to $36.0 million in 1998, an increase of $12.5 million or 53.2%. Approximately $8.6 million of the increase was the result of PinTax, which was acquired in September 1997. PinTax increased fee income in 1998 from new and existing customers. The remainder of the increase was the result of higher flood zone determination volumes from existing and new customers. The Company's overall price level for its real estate information services did not materially change in 1998. Tracking fees increased from $7.5 million in 1997 to $12.3 million in 1998, an increase of $4.8 million or 63.7%. The increase was primarily due to the addition of new motor vehicle insurance tracking and outsourcing customers in 1998 and the growth in the motor vehicle lease portfolios of the Company's customers. Expenses Loss and LAE was $6.5 million in 1997 (34.0% of net premiums earned) and $5.4 million in 1998 (34.9% of net premiums earned), a decrease of $1.1 million or 16.5%. The decrease was primarily due to a decrease in earned premiums and the average size of claims. The average loss per claim reported decreased from $7,693 in 1997 to $5,898 in 1998. Commissions paid to nonaffiliates increased from $1.8 million (9.6% of premiums earned) in 1997 to $3.0 million (19.4% of premiums earned) in 1998, an increase of $1.2 million or 64.1%. The percentage of commissions paid to net premiums earned varies depending upon customer and agent/broker mix. The increase in commission expense, both in amount and as a percentage of net premiums earned, is due to larger percentage of GPIC's commissions being paid to non-affiliated insurance agents and brokers. Personnel expenses increased from $23.1 million in 1997 to $31.5 million in 1998, an increase of $8.4 million or 36.0%. The increase was a result of (i) personnel expenses of PinTax, which was acquired in September 1997; (ii) an increase in the volume of flood zone determination services and motor vehicles being tracked; and (iii) an increase in hiring of corporate and operations personnel to facilitate growth in the Company's customer base. Personnel expenses as a percent of total revenue increased from 43.6% in 1997 to 47.3% in 1998. All other expenses increased from $16.9 million in 1997 to $23.0 million in 1998, an increase of $6.1 million or 36.1%. The increase was partially a result of general, administrative and operating expenses of PinTax, which was acquired in September 1997 and the increase in general, administrative and operating costs of the Company's other subsidiaries resulting from growth in the Company's customer base and the costs to implement new customers. As a result of the above factors, income before provision for income taxes decreased from $4.7 million in 1997 to $3.6 million in 1998, a decrease of $1.1 million, or 22.8%. YEAR ENDED DECEMBER 31, 1996 VERSUS YEAR ENDED DECEMBER 31, 1997 The dollar amounts referred to in this section comparing operating results for the year ended December 31, 1996 with December 31, 1997 are approximate amounts stated in millions and are based on the financial statements included elsewhere in this Report, which amounts are stated in thousands. All percentages referred to in this section comparing operating results for the year ended December 31, 1996 with December 31, 1997 are approximate percentages and are based only on dollar amounts set forth in the financial statements contained elsewhere in this Report, which amounts are stated in thousands. 20 22 Revenue Total revenue increased from $40.7 million in 1996 to $53.1 million in 1997, an increase of $12.4 million or 30.5%. Net premiums written increased from $12.6 million in 1996 to $20.5 million in 1997, an increase of $7.9 million or 62.7%. The increase in net premiums written was principally due to growth in loan portfolios of the Company's existing and former Hazard Insurance Tracking and Outsourcing Services clients. There was no material price change related to the Company's insurance products in 1997. Net premiums earned increased from $13.6 million in 1996 to $19.0 million in 1997, an increase of $5.5 million, or 40.1%. The increase was primarily due to an increase in net written premiums, as previously described. Real estate information services revenue (consisting of revenue from Pinnacle Data and PinTax) increased from $18.5 million in 1996 to $23.5 million in 1997, an increase of $5.0 million, or 27.0%. Approximately $2 million of the increase was the result of PinTax, which was acquired in September 1997. The remainder of the increase was the result of higher flood zone determination volumes from existing customers. The Company's overall price level for its real estate information services did not materially change in 1997. Tracking fees increased from $5.5 million in 1996 to $7.5 million in 1997, an increase of $2.1 million or 37.7%. The increase was primarily due to higher volumes of motor vehicle leases tracked for new and existing Motor Vehicle Insurance Tracking and Outsourcing customers. Expenses Loss and LAE was $4.0 million in 1996 (29.5% of net premiums earned) and $6.5 million in 1997 (34.0% of net premiums earned), an increase of $2.5 million, or 62.0%. The increase was primarily due to an increase in the number and average size of claims. The average loss per new claim reported increased from $5,513 in 1996 to $7,693 in 1997. The number of new claims increased from 726 reported in 1996 to 843 reported in 1997. Commissions paid to nonaffiliates decreased from $2.0 million (14.4% of premiums earned) in 1996 to $1.8 million (9.6% of premiums earned) in 1997, a decrease of $117,000, or 6.0%. The reduction in commissions paid to nonaffiliates was a result of relatively higher growth in net written and earned premiums from clients, which did not earn commissions on the Company's insurance products. Personnel expenses increased from $18.9 million in 1996 to $23.1 million in 1997, an increase of $4.2 million, or 22.1%. The increase in personnel expenses was due to an increase in incentive compensation and staff additions in response to several factors, primarily an increase in the volume of flood zone determinations and loans tracked. To a lesser extent, the PinTax Acquisition contributed to additional personnel costs in 1997. Personnel expenses as a percent of total revenue decreased from 46.6% in 1996 to 43.6% in 1997. All other expenses increased from $14.2 million in 1996 to $16.9 million in 1997, an increase of $2.7 million, or 19.0%. Approximately $1.4 million of the 1996 expenses was as a result of retention agreements entered into with certain executives in June 1996. The purpose of the agreements was to ensure the availability and employment of those executives through the transition following the change of control of the Company, which occurred in July 1996. The remaining increase in all other expenses was due to several factors, including an increase in direct costs related to growth in revenues (e.g., data, telecommunications cost, postage) and an increase in sales, marketing, consulting and advertising costs. As a result of the above factors, income before provision for income taxes increased from $1.6 million in 1996 to $4.7 million in 1997, an increase of $3.1 million, or 202%. LIQUIDITY AND CAPITAL RESOURCES Liquidity is a measure of a company's ability to secure sufficient cash to meet its contractual obligations and operating needs. National is a holding company with no operations and no sources of income itself except 21 23 interest or investment income. The principal assets of National are the stock of its Subsidiaries. National is, and for the foreseeable future will continue to be, dependent on the dividends from its Subsidiaries to meet its liquidity requirements, including debt service obligations. Dividends payable to National by GPIC are subject to certain regulatory restrictions, which are described below. The Company's primary sources of cash are from operating income and lines of credit. In 1998, the Company derived a substantial portion of its operating cash from the operating profits from Pinnacle Data, as well as the net premiums written from GPIC. The Company has reserved certain amounts of the net written premiums it received in 1998 for a variety of purposes, including reserves for return premiums, unearned premiums and loss reserves. The Company believes that its cash flow from operations, existing cash balances and lines of credit will be sufficient to meet its working capital needs for the foreseeable future. GPIC collects and invests premiums written in advance of the payments for associated claims. In the absence of a catastrophic loss, this timing difference between premium collection and claims payment, combined with investment income, normally provides short-term funds in excess of normal operating demands for cash. As of December 31, 1998, the Company had cash and short-term investments aggregating $9.3 million. Of the Company's cash and short-term investments, $7.6 million is held by GPIC. Insurance companies, including GPIC, are subject to laws and regulations, which restrict their ability to pay dividends to parent companies or other shareholders. Under California law, the maximum amount of dividends that GPIC may pay the Company in any twelve (12) month period without prior regulatory approval is the greater of (i) net income for the preceding calendar year, or (ii) 10% of policyholders' surplus (shareholders' equity adjusted to a statutory basis) as of the previous December 31. For the year ended December 31, 1998, GPIC had net income of $0.48 million and as of December 31, 1998, statutory policyholders' surplus of $24.2 million. For the year ended December 31, 1998, the maximum dividend permitted to be paid by GPIC to National was approximately $2.6 million. For 1999, the maximum dividend permitted to be paid by GPIC to National is approximately $2.4 million. See "Market for Registrant's Common Equity and Related Stockholder Matters" and Note 14 of Notes to Consolidated Financial Statements. In connection with the PinTax Acquisition, National and New Arts entered into a term note facility (the "Term Facility") with the Company's primary commercial bank. The Term Facility allows for a maximum borrowing of $11.3 million, including $2 million for any additional consideration ("Additional Consideration") which might have been payable pursuant to the Agreement on or before May 25, 1998. On May 26, 1998, the Company borrowed $1.5 million to pay Additional Consideration. The Term Facility matures in May 2003 and calls for interest payments at the rate of the lending bank's prime rate plus one and one-quarter percent, beginning September 1997. Principal is paid monthly, beginning May 30, 1998, in accordance with a variable amortization schedule. Collateral for the loan includes non-insurance company cash deposits of the Company, the common stock of Pinnacle Data, as well as the stock of PinTax and of New Arts. As of December 31, 1997 and 1998, the outstanding principal balance of the Term Facility was $9.3 million and $10.6 million, respectively. In connection with the PinTax Acquisition, PinTax paid to the sellers of ARTS (the "Sellers") in 1998 approximately $2.5 million of Additional Consideration. Of these amounts, approximately $1.5 million of Additional Consideration was paid in cash using the proceeds from the Term Facility. The remaining $1.0 million of Additional Consideration was paid in the form of an unsecured note to the Sellers (the "Purchaser Note"). The Purchaser Note bears simple interest of 8% per annum. Principal and interest are due in equal quarterly installments over the three (3) years ending May 2001, with the first installment due on June 18, 1998. As of December 31, 1998, the outstanding principal balance of the Purchaser Note was approximately $0.7 million. In May 1998, the Company entered into a $2 million revolving credit facility (the "Credit Facility") with its primary commercial bank. The Credit Facility replaced the Company's previous revolving credit facility dated April 2, 1997. In September 1998, the Credit Facility was increased to $4.275 million and the maturity date of the principal payment was extended to May 31, 1999. The Credit Facility calls for monthly interest payment at the rate of 0.75% per year in excess of the rate of interest, which the financial institution has 22 24 announced as its prime lending rate. Collateral for the loan includes the outstanding capital stock of Pinnacle Data, which consists of 1,000 shares, along with all proceeds and products of Pinnacle Data. As of December 31, 1998, the outstanding principal balance of the Credit Facility was $2 million. Consolidated stockholders' equity at December 31, 1998, totaled $30.4 million or $7.02 per share compared to $27.8 million or $6.73 per share at December 31, 1997. 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, 1998, the Company's net written premium to policyholder surplus ratio was .6 to 1. See "Business -- Insurance Operations -- Insurance Operating Ratios." Inflation or deflation and other factors generally affect the rate of investment return in the securities and financial markets, and increases and decreases in such investment return rates have a corresponding effect on the Company's investment income. There is no public securities market for certain investments held by the Company. As of December 31, 1998, such investments were two limited partnership interests with an original cost of $222,220. One limited partnership interest with a cost basis of $100,000 was sold in January 1999 for $110,000. See "Certain Relationships and Related Transactions." FACTORS AFFECTING FUTURE OPERATING RESULTS These factors, together with statements regarding certain risks and uncertainties contained in other parts of this Report, may affect the Company's operating results. Investors should read this section in connection with any forward-looking statement made in this Report, including, but not limited to, statements preceded or followed by the words "believes", "anticipates", "expects", "aware" or similar expressions as they relate to the Company or its management. Merger with The First American Financial Corporation National has entered into a Merger Agreement with The First American Financial Corporation ("FAFCO"). As a result of such Merger, National would become a wholly owned subsidiary of FAFCO. Since the announcement of the Merger in November 1998, there has been some employee attrition, and additional departures can be expected pending the consummation of the Merger. The Merger is subject to a number of conditions including, without limitation, the approval of the California Department of Insurance and the approval of the shareholders of National. There can be no assurance that all of the conditions of the Merger will be satisfied and that the Merger will be consummated. If the Merger is not consummated, the Company may be required to replace certain departed employees. The effect of the departure of such employees and the need to engage and train their replacements is currently unknown. National has incurred costs totaling $587,000 as of December 31, 1998 in connection with the negotiation of the Merger Agreement and in preparation for the consummation of the Merger, and additional costs will be incurred prior to the consummation of the Merger. All of such costs have been deferred and reported as Other Assets on the Balance Sheet. Such costs are not reflected in the Consolidated Statements of Operations and Comprehensive Income included in this Report. If the Merger is consummated, such costs will be recorded as expense in the future financial statements of National, as a subsidiary of FAFCO. If the Merger is not consummated, such costs will be recorded as expense by National in the quarter in which the Merger transaction is abandoned. If the Merger is abandoned such costs would have a material adverse effect on the net income and earnings per share of National for the quarter and the calendar year in which the Merger is abandoned. Additional Expenses The Company anticipates that it may incur certain costs in 1999 in connection with various new business activities, including building its customer base, reorganizing operations and carrying on its product quality 23 25 improvement programs. The overall goal of these activities is to enhance the long-term value of the Company. The Company has begun to hire additional personnel, purchase new computer and other equipment, lease additional office space and incur other expenses in connection with these business activities. There can be no assurance that such costs will be offset by increases in revenue; and, in any event, the Company expects that any increase in revenue will lag the periods in which expenses are incurred. Furthermore, there can be no assurances that the hiring of additional personnel or the reorganizing of operations will lead to higher profitability. If such increases in expenses are not fully offset by increases in revenue, the Company's financial position and results of operations and earnings could be materially adversely affected. Flood Zone Determinations The Company derives a substantial portion of its total revenues from fees for Flood Zone Determination Services. These services are primarily provided to assist lenders in complying with federal laws which in many instances require lenders to determine whether property being financed is located in a federally-designated Special Flood Hazard Area ("SFHA") and if the property is located in an SFHA require borrowers to obtain flood insurance. Any significant change in federal legislation or secondary market requirements limiting these requirements on lenders or borrowers, or the development by competitors of significantly enhanced service or delivery systems could have a material adverse effect on the Company's business or operating results. Earnings Volatility The Company's financial results can be significantly affected by a number of factors, including, but not limited to, the amount of net written premium and the rate of cancellation of insurance policies, the addition or loss of customers, changes in the number of loans or personal property leases being tracked for customers, increases or decreases in interest rates, and catastrophic loss events. For example, in 1992 GPIC incurred net losses relating to the Los Angeles riots and Hurricane Andrew of $612,000 and $527,000, respectively. In November 1993, GPIC received claims of approximately $650,000 from policyholders for losses arising out of the October and November 1993 series of fires in Southern California. The Company also received an assessment of $725,000 from the California Fair Plan Association, a mandatory insurance pool for certain California real estate, relating to losses from those fires. In addition, revenues from the Company's Flood Zone Determination Services and Real Estate Tax Services are directly related to the volume of mortgage loan originations, both new and refinanced, and any change in the level of such activity could have a material impact on the Company's performance. The Insurance Industry The Company derives a significant amount of its revenues from insurance premiums and investment income. In the event that, for whatever reason, GPIC experiences abnormally high losses, purchases reinsurance from reinsurers who will not or cannot pay losses submitted, or other adverse developments occur, then any such event or combination of events could have a material adverse impact on the Company. In addition, insurance companies and others have often been sued under certain legal theories, such as bad faith handling or settlement of claims, which could subject GPIC to liability in excess of policy limits. An adverse outcome of any such lawsuit could have a material negative impact on the Company. Reserve Adequacy GPIC is required to maintain reserves to cover its estimated ultimate liability for loss and loss adjustment expenses with respect to reported losses and incurred but not reported claims. These reserves are estimates of what GPIC expects the ultimate settlement and administration of claims will cost, and are based on known facts and circumstances, predictions of future events, estimates of future trends in claims severity and other variable, subjective factors. No assurances can be given that such estimates will be adequate to cover actual losses incurred by GPIC. Any significant changes in GPIC's estimate of ultimate losses on reported claims may materially adversely affect the results of GPIC's operations in the period reported. GPIC has in the past experienced adverse developments in its loss reserves. GPIC's loss and loss adjustment expense reserves are reviewed on an annual basis by unaffiliated actuaries. GPIC's most recent actuarial review of such reserves as 24 26 of December 31, 1998 concluded that the reserves (i) met the requirements of the insurance laws of California, (ii) were computed in accordance with accepted loss reserving standards and principles and (iii) make a reasonable provision for all unpaid loss and loss expense obligations of GPIC under the terms of its policies and agreements. GPIC also maintains a reserve for return premiums which is based upon GPIC's historical experience. As is prevalent in the lender-placed insurance industry, a substantial amount of GPIC's net premiums written are refunded to policyholders. The amount of such refunds can be affected by, among other things, inaccurate or untimely data submitted by customers, which GPIC uses as a basis for recording written premiums or the loss of customers. No assurance can be given that the reserve for return premiums will be adequate to cover actual refunded premiums paid by GPIC in the future. See, "Business -- Insurance Operations." Underwriting Risks Traditional insurance companies underwrite risks individually or by class, following an in-depth analysis of such risks. Although GPIC applies underwriting techniques to a small portion of insured risks, the immediate coverage required by purchasers of lender-placed insurance and REO Insurance generally requires GPIC to write specialized insurance within predesignated limits and geographic areas, at a flat rate, without the application of traditional underwriting criteria to individual risks. Accordingly, GPIC may be insuring individual risks that it might not have insured had it applied traditional analysis to such risks. In addition, GPIC may not have adequate spread of risk in a particular geographic area. See "Business -- Insurance Operations -- Underwriting." Reinsurance Considerations GPIC's business is partially dependent upon its ability to cede to reinsurers risks insured by GPIC. The amount, availability and cost of reinsurance are subject to prevailing market conditions, beyond the control of GPIC, which can affect GPIC's level of business and profitability. GPIC is ultimately liable for the reinsured risk if for any reason the reinsurers do not cover or will not pay GPIC for the losses of the insureds. As a result of the anticipated increased cost and more limited availability of reinsurance, in the future, GPIC may elect to retain a higher portion of the risk historically ceded to reinsurers. If GPIC were to retain a higher proportion of insured risks, it would increase its exposure to significant losses relating to properties insured by GPIC. This increased exposure could have a material adverse effect on the Company's results of operations. See "Business -- Insurance Operations -- Reinsurance." Errors and Omissions Pinnacle Data indemnifies its customers for certain losses resulting from erroneous flood inquiry determinations, where a borrower was not properly advised whether the collateral was located in or out of an SFHA. PinTax indemnifies its customers for real estate late-payment penalties, interest on late-paid taxes and loss of tax payment discounts as a result of certain errors or omissions made by PinTax. PMSIS and Fastrac indemnify customers for certain errors and omissions made by either of them. The Company maintains insurance coverage in the maximum aggregate amount of $5 million for certain types of errors and omissions. The policy is on a claims made and occurrence basis. While to date the Company has experienced no significant losses related to errors or omissions and maintains reserves equal to its self insured retention for errors and omissions losses, there can be no assurance such reserves will prove adequate in the future or that the Company's insurance will avert adverse impacts as a result of any errors or omissions. Rapid Technological Change and New Products; Product Delays The markets for the Company's information services are highly competitive and characterized by rapidly changing technology. The Company believes that its future success will depend, in part, on its ability to identify, develop, install and support new services in a timely fashion, and on market acceptance of such services. No assurance can be given that the introduction of new technologies will enable the Company to gain market share, realize cost savings or increase revenues. 25 27 Shortage of Skilled Labor The Company's delivery and upgrade of products and services to its customers is dependent upon, among other factors, the Company's ability to attract and retain key analytical and management professionals, including skilled computer programmers and systems analysts. Businesses located in San Francisco, San Mateo, Contra Costa and Santa Clara counties of California, and in other areas in which the company maintains facilities, are experiencing a tightening of the labor market, which may result in one or more of the following: an increase in personnel costs, a delay in service installations and a reduction in customer service. The Company is unable to predict when the conditions in the local labor market will change. Year 2000 Compliance The Company has considered the potential impact of the year 2000 on its information technology and non-information technology systems. The "Year 2000" problem relates to the fact that many computer systems will be affected in some way by the rollover of the two-digit year value to "00." Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. The "Year 2000" issue creates risk for the Company from unforeseen problems in its own computer and embedded systems and from third parties with whom the Company does business. Failure of the Company's and/or third parties' computer systems and/or failure to be Year 2000 compliant could have a material impact on the Company's ability to conduct its business. Commencing in 1996 the Company initiated a program to address the Year 2000 compliance problem through normal planned enhancements of existing systems, development of new applications, and upgrades to operating systems and databases already covered by maintenance agreements. With respect to the Company's major information technology systems, all operating systems, database engines and tools, and all software applications are Year 2000 compliant and, with respect to the vast majority of them, Company testing thereof to assure compliance is complete. Testing of all such systems was completed in 1998, however, some retesting may occur in 1999 for validation purposes. The Company continues to address Year 2000 compliance issues with respect to various networking systems within the Company, which include but are not limited to various hardware and related software, such as bridges, routers, gateways, hubs, switches, modems, security systems, and their respective operating systems. Most such hardware and software has been obtained from third party vendors, and the Company is working with many of these third party vendors to obtain software upgrades to make such hardware and software Year 2000 compliant. The Company does not anticipate that it will be required to replace any material amount of hardware or acquire any material amount of software to achieve Year 2000 compliance of such hardware and software. All such hardware and software are expected to be Year 2000 compliant by the end of the second quarter of 1999. The Company is aware of issues concerning Year 2000 compliance with non-information technology systems and has commenced a program to address those issues. The full range of such issues is expected to be identified by the end of the second quarter of 1999 and the Company expects to take such action as is necessary, provided the action is within the Company's direct control, to make such non-information technology systems Year 2000 compliant by the end of the third quarter of 1999. Such non-information technology systems include such things as mail metering systems, office security systems, heating, ventilating and air conditioning systems and building elevators. The Company has surveyed certain of its customers to determine the status of their Year 2000 compliance programs. A number of the Company's customers interface electronically with the Company. Therefore, it is critical that such customers' interfaces are Year 2000 compliant in order for such customers to be able to continue to interface with the Company after December 31, 1999. The Company completed such survey in the fourth quarter of 1998 and no significant or material Year 2000 problems were identified. The majority of the Company's customers are in the financial institutions industry. The regulatory agencies that regulate financial institutions have been closely monitoring financial institutions regarding Year 2000 compliance. The Company believes the financial institutions industry is considered to be a leader with respect to Year 2000 preparation efforts. 26 28 Certain of the taxing authorities across the United States provide real estate tax information in electronic format to PinTax, which tax information PinTax uses in performing real estate tax services. There can be no assurance that such taxing authorities will be Year 2000 compliant. If taxing authorities suffer any serious systems failures, they may be unable to provide tax information to PinTax in electronic format. In such case, PinTax may experience difficulty in accessing such information and would likely incur additional expenses in obtaining such tax information, if such information could be obtained. In certain cases, such information may be unavailable until such systems failures are corrected, which, depending on the duration of any such failure, could severely adversely affect the ability of PinTax to provide real estate tax services with respect to such affected jurisdictions. PinTax has attempted to survey its clients and the taxing authorities from which PinTax receives electronic data to determine their respective Year 2000 compliance status. Many such clients and taxing authorities have failed to respond to such survey and PinTax is attempting to follow-up to determine such status. While there can be no assurance that such non-responding clients and taxing authorities are Year 2000 complaint, PinTax does not believe that such failure to respond should be interpreted as a lack of Year 2000 compliance. Nevertheless, PinTax is in the process of developing contingency plans to handle problems that arise as a result of taxing authorities and clients experiencing Year 2000 related failures. There can be no assurance, however, that all contingencies can be identified or that a successful plan related thereto can be developed and implemented. The Company is also surveying certain of its major vendors to determine the status of their Year 2000 compliance programs. Such vendors include, without limitation, public utilities, software vendors, computer hardware manufacturers and distributors, and office supply companies. To the extent vendors respond to the Company's Year 2000 compliance questionnaire, the Company expects such survey to be complete by the end of the second quarter of 1999. If such vendors are found by the Company to be likely to be non-Year 2000 compliant by December 31, 1999, the Company will take reasonable action to replace such vendors with Year 2000 compliant vendors. Since 1996 the Company has incurred approximately $140,000 in costs related directly to Year 2000 compliance and expects to expend an approximately $50,000 more before December 31, 1999 in connection with achieving Year 2000 compliance. Such costs will be paid for from cash from operations. The accounting treatment of costs incurred solely in connection with Year 2000 compliance will be treated as period costs and will be expensed as incurred. Given the current state of the Company's internal preparedness for Year 2000, the Company believes that the risk of problems arising because of internal Year 2000 problems is minimal and any such problems are not anticipated to have any material effect on the Company. However, the Company believes that it is not possible to determine with complete certainty that all Year 2000 problems affecting the Company have been identified or corrected. The number of devices that could be affected and the interactions among these devises are simply too numerous. In addition, one cannot accurately predict how many external Year 2000 problem related failures will occur or the severity, duration or financial consequences of these perhaps inevitable external failures. For instance, failure of public utilities would likely prevent the Company from operating in the location of such failure and/or communicate and/or transact business with others. Likewise if the Company's customers and, in the case of PinTax, the taxing authorities from which it receives tax information are not Year 2000 compliant or if they suffer business interruptions because of external Year 2000 problems, the Company could be adversely impacted and such impact could be substantial. Therefore, the Company considers it possible that the Company or its clients could suffer a significant number of operational inconveniences and inefficiencies that may divert management's time and attention, and other financial and human resources, from the ordinary business activities, and a lesser number of serious systems failures that may require significant efforts by the Company or its clients to prevent or alleviate material business disruptions. The Company has a disaster recovery plan, which is intended for use in connection with extraordinary events such as natural disasters. However, it could be implemented in the case of certain Year 2000 failures such as a public utilities failure. The disaster recovery plan contemplates the operation of certain critical portions of the Company from remote locations for certain limited periods of time. The Company has tested its information technology systems at such remote locations in order to determine that they would be 27 29 functional after December 31, 1999. Nevertheless, if such remote locations were adversely affected by public utilities failures as well, the Company would be severely adversely affected during the continuation of any such failures. The Company intends to consider additional contingency plans during the first half of 1999. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's market risk is limited to interest rate risk. Fluctuations in interest rates would affect the returns on the Company's investment portfolio and interest expense on notes payable. The Company does not use derivative financial instruments to manage interest rate risk. The Company's long-term investment portfolio primarily consists of fixed interest rate debt and preferred stock of high quality corporate and governmental issuers. The Company limits its credit exposure to any one issuer. The Company plans its investment maturities to correspond with its future cash requirements and generally holds its investments until maturity. A 10% change in interest rates on long term bonds and preferred stocks would not change the carrying value of the investments and shareholders' equity by a material amount. The majority of the Company's notes payable has a variable interest rate tied to the prime interest rate of the lending bank. The Company's earnings would be affected by changes in the prime interest rate of the lending bank. A 10% change in such prime rates would not have a material impact on net income. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA This information is incorporated hereby by reference to the financial statements listed in Item 14 of Part IV of this Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS OF THE COMPANY
NAME OF NOMINEE AGE(1) PRINCIPAL OCCUPATION --------------- ------ -------------------- Bard E. Bunaes........... 63 Chairman and Chief Executive Officer of Constitution Reinsurance Corporation Bruce A. Cole............ 51 President of the Company, and of Pinnacle Data, GPIC, PinTax, PMSIS and Fastrac Lawrence M. Goodman...... 55 Principal of LMG Associates Saul B. Jodel............ 48 President and Chairman of the Board of the Original San Francisco Toymakers, Inc. Mark A. Speizer.......... 55 Chairman and Chief Executive Officer of the Company and Pinnacle Data, GPIC, PinTax, PMSIS and Fastrac
- --------------- (1) As of March 15, 1999. Except as set forth below, each of the directors has been engaged in his principal occupation set forth above during the past five (5) years. There is no family relationship between any director or executive officer of the Company, except that Mr. Speizer's and Mr. Cole's paternal grandfathers were brothers. MR. BUNAES is Chairman of the Board and Chief Executive Officer of Constitution Reinsurance Corporation, a position that he has held since November, 1969. Mr. Bunaes serves as chairman of the board and chief executive officer of Constitution Re Corporation and serves as chairman of the board and chief executive officer of Constitution Management Corp. He also serves as president and chief executive officer of Sirius America Insurance Corporation. In addition, Mr. Bunaes serves as vice chairman and director of 28 30 Gerling Global Reinsurance Corporation of America and director of Constitution Re Corporation, Constitution Management Corp and CRC/Corsair, Inc. Mr. Bunaes serves as a director of the affiliated companies, Sirius America Insurance Corporation, Sirius International Insurance Company (Stockholm, Sweden) and ABB Investment Management Corporation (Stamford, CT), which is registered as an investment advisor under the Investment Advisors Act of 1940. Mr. Bunaes is also a director of the Reinsurance Association of America. Constitution Reinsurance Corporation has been a reinsurer of GPIC in excess of 15 years. In 1997 and 1998 premiums paid to Constitution Reinsurance Corporation by GPIC with respect to such reinsurance totaled approximately $70,000 and $64,000, respectively and in 1999 is expected to be approximately $108,000 MR. COLE has served as President of the Company and its subsidiaries since July 1996. From March 1994 through July 1996, Mr. Cole was general counsel and executive vice president of JB Oxford Holdings, Inc. From 1991 through March 1994 Mr. Cole was of counsel to the law firm Rubinstein & Perry, A Professional Corporation, and Rubinstein & Perry, LLP, with an emphasis on business and corporation law with extensive involvement in corporate restructuring and securities industries matters. Mr. Cole also serves as a director of Jinpan International Ltd. MR. GOODMAN was President and Chief Operating Officer of Columbia Manufacturing Corporation from 1983 through 1994. From 1972 to 1983 Mr. Goodman was the managing partner of Triad Leasing, a company which leased heavy industrial equipment. From 1984 to present Mr. Goodman has been the managing partner of CMC, a real estate investment partnership. Since 1997 Mr. Goodman has been a principal of LMG Associates, a firm which provides consulting services. MR. JODEL has been President and Chairman of the Board of The Original San Francisco Toymakers, Inc., since January 1992. From 1984 to October 1991, he served in various executive capacities with Lewis Galoob Toys, most recently as President. MR. SPEIZER, a co-founder of the Company, has served on the Board of Directors of the Company since its inception. Since July 1996, Mr. Speizer has served as Chairman of the Board and Chief Executive Officer of the Company and for the subsidiaries of the Company. Between November 1986 and October 1995, Mr. Speizer served as Chairman of the Board and Chief Executive Officer of the Company, and between June 1995 and October 1995, served as President of the Company. Between 1972 and October 1995, Mr. Speizer also served in various executive level capacities and as a director and Chairman of the Board for the subsidiaries of the Company. EXECUTIVE OFFICERS OF THE COMPANY The executive officers of the Company and their ages as of March 15, 1999, are set forth below. Except for Mr. Gauer the following hold the indicated office with respect to National and each of the Subsidiaries.
NAME AGE POSITION WITH NATIONAL ---- --- ---------------------- Mark A. Speizer................ 55 Chairman of the Board and Chief Executive Officer Bruce A. Cole.................. 51 President Robert P. Barbarowicz.......... 52 Executive Vice President, General Counsel and Secretary Douglas H. Helm................ 57 Executive Vice President, Business Development and Strategic Marketing George R. Jump................. 48 Executive Vice President, Sales Gerry L. Gauer................. 34 Executive Vice President of Pinnacle Data and PMSIS
MR. SPEIZER, a co-founder of the Company, has served on the Board of Directors of the Company since its inception. Since July 1996, Mr. Speizer has served as Chairman of the Board and Chief Executive Officer of the Company and for the subsidiaries of the Company. Between November 1986 and October 1995, Mr. Speizer served as Chairman of the Board and Chief Executive Officer of the Company, and between June 1995 and October 1995, served as President of the Company. Between 1972 and October 1995, Mr. Speizer also served in various executive level capacities and as a director and Chairman of the Board for the subsidiaries of the Company. 29 31 MR. COLE has served as President of the Company and its subsidiaries since July 1996. From March 1994 through July 1996, Mr. Cole was general counsel and executive vice president of JB Oxford Holdings, Inc. From 1991 through March 1994 Mr. Cole was of counsel to the law firm Rubinstein & Perry, A Professional Corporation, and Rubinstein & Perry, LLP, with an emphasis on business and corporation law with extensive involvement in corporate restructuring and securities industries matters. Mr. Cole also serves as a director of Jinpan International Ltd. MR. BARBAROWICZ was elected Executive Vice President, General Counsel and Secretary of the Company in August 1996. From 1993 to 1996, Mr. Barbarowicz was a shareholder in the law firm Rubinstein & Perry, A Professional Corporation. Mr. Barbarowicz was of counsel to Rubinstein & Perry, LLP from 1991 to 1993. From 1983 to 1990, Mr. Barbarowicz was First Vice President and Assistant General Counsel of H.F. Ahmanson & Company and was General Counsel for The Ahmanson Insurance Companies from 1982 to 1989. In 1995, Mr. Barbarowicz commenced voluntary proceedings under the provisions of Chapter 13 of the federal bankruptcy laws, which proceedings were voluntarily withdrawn by Mr. Barbarowicz within sixty days thereafter without any action taken or any debts discharged. MR. HELM was elected Executive Vice President, Business Development and Strategic Marketing in May 1997. From July 1995 to May 1997, Mr. Helm was President and Chief Executive Officer of the Property/Casualty Division of InsWeb Corporation. From 1989 to 1995, Mr. Helm was Executive Vice President, Sales and Marketing of the Company. Mr. Helm held a variety of executive offices and management positions in the insurance industry from 1970 to 1997. MR. JUMP was elected Executive Vice President, Sales in November 1997. Mr. Jump assumed responsibility for the sales area of the Company in February 1998. Mr. Jump joined the Company in 1993 and had served as a Vice President and Senior Vice President of Sales of the Company's subsidiaries from 1993 to 1997. Prior to joining the Company, Mr. Jump was the Vice President, Marketing of American Security Group from 1980 to 1993. MR. GAUER was elected Executive Vice President and General Manager of Pinnacle Data in November 1997 and served as Senior Vice President and General Manager of Pinnacle since July 1996. Mr. Gauer was elected Executive Vice President and General Manager of PMSIS in August 1998. From August 1995 through July 1996, Mr. Gauer was a consultant and temporary employee of Pinnacle Data Corporation. From 1994 through August 1995, Mr. Gauer was self-employed as a financial consultant. Mr. Gauer was Operations Manager for Foster Ousley Conley, a nationwide appraisal firm, from 1992 until 1994, where he managed customer service, production and human resources. In such capacity he managed a staff, including professional appraisers, productions managers, supervisors and processors. The executive officers serve at the discretion of the Board of Directors of the Company. Mr. Speizer and Mr. Cole have each entered into employment agreements with the Company for a three (3) year term commencing July 11, 1996. Mr. Speizer's and Mr. Cole's employment agreements each provide, among other things, that during the term of the employment agreements the Board of Directors may terminate Mr. Speizer's or Mr. Cole's employment only upon written notice for cause. Cause is defined as a conviction of a felony or a finding of liability based on intentional tortious conduct consisting of a breach of fiduciary duty relating to his performance as an officer and/or director of the Company. In addition, Mr. Cole's employment agreement provides that if the Company terminates Mr. Cole for reasons other than for cause, the Company shall pay Mr. Cole, in a single payment payable upon termination, an amount equal to (i) his unpaid base salary for the remainder of the three (3) year term, (ii) the undiscounted remaining costs to provide the benefits provided in the employment agreement for the remainder of the three (3) year term, such as the cost of Mr. Cole's membership and participation in professional associations, a $1,000 per month motor vehicle allowance and premiums for certain insurance, including a $1 million life insurance policy, and (iii) any unpaid bonus from the previous year plus any bonus payable pursuant to any bonus plan then in effect. 30 32 ITEM 11. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table sets forth compensation received in the last three fiscal years by (i) each individual who served as National's Chief Executive Officer during the last fiscal year and (ii) each of the four other most highly compensated executive officers whose salary plus bonus exceeded $100,000 during the last fiscal year who served as executive officers at the end of the fiscal year ended December 31, 1998 (collectively, the "Named Officers"). SUMMARY COMPENSATION TABLE
LONG TERM ANNUAL COMPENSATION COMPENSATION -------------------- AWARDS ALL OTHER SALARY BONUS OPTIONS COMPENSATION NAME AND PRINCIPAL POSITION YEAR ($) ($)(1) (#) ($) --------------------------- ---- ------- ------- ------------ ------------ Mark A. Speizer.......................... 1998 300,000 75,000 30,000 23,291(2) Chairman of the Board and CEO 1997 300,000 325,000 0 24,189(3) 1996 134,601 60,000 75,000 23,828(4) Bruce A. Cole............................ 1998 290,000 25,000 0 44,749(5) President 1997 290,000 165,000 0 31,020(6) 1996 124,923 40,000 75,000 23,490(7) George R. Jump........................... 1998 259,038(8) 0 10,000 4,985(9) Executive Vice President, Sales 1997 266,709(8) 0 0 4,800(9) 1996 365,466(8) 0 0 4,800(9) Douglas H. Helm.......................... 1998 187,951 67,500 0 169,261(10) Executive Vice President, Business 1997 100,288 55,000 25,000 87,462(11) Development and Strategic Marketing 1996 0 0 0 502,895(11) Gerry L. Gauer........................... 1998 183,808 45,000 10,000 0 Executive Vice President, Pinnacle 1997 156,000 35,000 0 0 Data Corporation and PMSIS 1996 153,000 23,000 25,000 0
- --------------- (1) Bonuses for 1998 were paid in 1999 and bonuses for 1997 were paid in 1998. Bonuses for 1996 were paid in 1996. (2) Represents $11,291 of premiums on a term life insurance policy and long term disability insurance paid by the Company for Mr. Speizer's benefit and an automobile allowance of $12,000. (3) Represents $12,189 of premiums on a term life insurance policy and long term disability insurance paid by the Company for Mr. Speizer's benefit and an automobile allowance of $12,000. (4) Represents $12,458 of premiums on a term life insurance policy and long term disability insurance paid by the Company for Mr. Speizer's benefit, an automobile allowance of $5,370 and $6,000 paid to Mr. Speizer while he was a non-employee director of National. (5) Represents $17,124 of premiums on term life insurance policies and long term disability insurance paid by the Company for Mr. Cole's benefit, an automobile allowance of $12,000 and income deemed received upon the exercise of stock options of $15,625. (6) Represents $19,020 of premiums on term life insurance policies and long term disability insurance paid by the Company for Mr. Cole's benefit and an automobile allowance of $12,000. (7) Represents $18,120 of premiums on term life insurance policies and long term disability insurance paid by the Company for Mr. Cole's benefit and an automobile allowance of $5,370. (8) Represents both salary and commission. (9) Represents an automobile allowance. 31 33 (10) Represents an automobile allowance of $6,231 and commissions of $163,030 paid to Mr. Helm which commissions were paid pursuant to a certain Agreement of Employment Termination and Release, dated July 2, 1995 which related to Mr. Helm's prior employment with the Company. See "Certain Transactions." (11) Represents commissions paid to Mr. Helm pursuant to a certain Agreement of Employment Termination and Release, dated July 2, 1995, which related to Mr. Helm's prior employment with the Company. See "Certain Transactions." OPTION GRANTS IN LAST FISCAL YEAR The following tables set forth, as to the Named Officers, certain information relating to stock options granted during fiscal 1998. OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS --------------------------------------------------------- POTENTIAL REALIZABLE NUMBER OF VALUE AT ASSUMED SECURITIES PERCENT OF TOTAL ANNUAL RATES OF STOCK UNDERLYING OPTIONS GRANTED EXERCISE OR FOR OPTION TERM(3) OPTIONS TO EMPLOYEES BASE PRICE EXPIRATION --------------------- NAME GRANTED(#) IN FISCAL YEAR(1) ($/SH) DATE(2) 5%($) 10%($) ---- ---------- ----------------- ----------- ---------- ---------- -------- Mark A. Speizer................... 30,000 19.4% $12.8125 5/1/08 $ 242,156 $611,156 Bruce A. Cole..................... 0 -- -- -- -- -- George Jump....................... 12,500 8.1% $ 13.625 4/15/08 $ 107,297 $270,797 Douglas H. Helm................... 0 -- -- -- -- -- Gerry L. Gauer.................... 10,000 6.5% $ 8.3125 8/6/08 $52,368.75 $132,169
- --------------- (1) The total number of shares subject to options granted to employees and consultants in fiscal 1998 was 154,500. (2) Options may terminate before their expiration upon the termination of optionee's status as an employee or consultant, the optionee's death, disability or an acquisition of National. (3) Potential realizable value assumes that the stock price increases from the date of grant until the end of the option term (10 years) at the annual rate specified (5% and 10%). Annual compounding results in total appreciation of 63% (at 5% per year) and 159% (at 10% per year). If the price of National's Common Stock were to increase at such rates from the price at 1998 fiscal year end ($20.75 per share) over the next 10 years, the resulting stock price at 5% and 10% appreciation would be $33.82 and $53.74, respectively. The assumed annual rates of appreciation are specified in SEC rules and do not represent National's estimate or projection of future stock price growth. National does not necessarily agree that this method can properly determine the value of an option. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES The following table provides information with respect to the value of unexercised options held by the Named Officers at the close of business on December 31, 1998.
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS SHARES OPTIONS AT FISCAL YEAR END(#) AT FISCAL YEAR END($)(2) ACQUIRED ON VALUE ------------------------------ --------------------------- NAME EXERCISE REALIZED EXERCISABLE(1) UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- -------- -------------- ------------- ----------- ------------- Mark A. Speizer............ -- -- 130,833(3) 55,000(4) $1,768,612 $606,094 Bruce A. Cole.............. 2,500 $15,625 57,917 14,583 $ 861,515 $216,922 George R. Jump............. -- -- 0 12,500 0 $ 89,063 Douglas H. Helm............ -- -- 7,813 17,187 $ 77,153 $169,722 Gerry L. Gauer............. -- -- 15,104 19,896 $ 224,672 $291,578
32 34 - --------------- (1) Options granted under National's 1986 Stock Option Plan are fully exercisable from their date of grant, whether or not vested. Unvested shares purchased upon exercise of an option are subject to a repurchase option in favor of National, which repurchase option lapses over time. The options listed as Exercisable are those which could be exercised without being subject to a repurchase option in favor of National. (2) Market value of underlying securities based on the closing price of $20.75 of National's Common Stock on the NASDAQ National Market on December 31, 1998, minus the exercise price. (3) Represents 91,250 under the 1986 Stock Option Plan and 39,583 under the 1991 Director Option Plan. (4) Represents 44,583 under the 1986 Stock Option Plan and 10,417 under the 1991 Director Option Plan. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee of the Company's Board of Directors is composed of three non-employee directors, Lawrence M. Goodman, Bard E. Bunaes and Saul B. Jodel. No interlocking relationship exists between the Company's Board of Directors and the compensation committee of any other company, nor has any such interlocking relationship existed in the past. BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION The Compensation Committee establishes the general compensation plans of the Company, including the Company's 1986 Stock Option Plan. The Committee reviews compensation, evaluates performance, and determines base salary levels for the Company's executives. The Chief Executive Officer ("CEO") of the Company is invited to attend and participate in Committee meetings, except when CEO compensation is being discussed. The CEO may designate the President, General Counsel, another Executive Vice President or the head of the Human Resources function to attend and participate in the CEO's stead. Final decisions regarding executive compensation (excluding stock options) are made by the full Board of Directors based on recommendations of the Committee and decisions regarding stock option grants to executives are made by the Committee. The Company's executive compensation programs are designed to attract and retain executives who will contribute to the Company's long-term success, to reward the achievement of both short-term and long-term strategic goals, and to link executive and shareholder interests through equity-based plans. The three components of the Company's executive compensation program for fiscal 1998 were base salary, short-term incentives in the form of a target bonus and long-term incentives represented by stock option grants. The Committee's policies in these areas are as follows: Base Salary The Committee reviews compensation surveys and the reports of compensation consultants to determine the recommended levels of basic salary. Salaries are established at levels that are competitive for the Company's size, location, type of industry, and the nature of the function to be performed. Incentive Bonus The payment of incentive bonuses is dependent on the performance of the Company and the achievements of each individual executive. Incentive bonuses were paid to certain executive officers of the Company during 1998. See "Executive Compensation -- Summary Compensation Table". Stock Option Grants Under the Company's 1986 Stock Option Plan, stock options may be granted to officers, other employees and consultants of the Company. The size of the stock option awards is based primarily on the individual's 33 35 responsibilities and performance, as well as on an assessment of competitive equity compensation structures. Options are designed to match the interests of officers, employees and consultants with those of the shareholders. Stock options are generally granted with an exercise price equal to the fair market value of the Company's Common Stock on the date of grant. Current grants generally vest over a period of four (4) years. This approach is designed to encourage the growth and preservation of shareholder value. Tax Policy The Committee has considered the impact of Section 162(m) of the Internal Revenue Code, which provides a limit on the deductibility of compensation for certain executive officers in excess of $1,000,000 per year. The Committee has not yet developed a policy with respect to qualifying compensation for deductibility. No Named Officer of the company had taxable compensation for 1998 in excess of the deduction limit. The Committee intends to continue to evaluate the impact of this Internal Revenue Code provision. 1998 Chief Executive Officer Compensation In July 1996, National entered into an employment agreement with Mark A. Speizer pursuant to which Mr. Speizer was engaged as National's Chairman of the Board and Chief Executive Officer (See, "Certain Transactions"). Pursuant to the terms of such agreement Mr. Speizer received compensation in 1998 of $300,000. Mr. Speizer was also granted a bonus of $75,000. Such bonus was paid in 1999. As additional compensation Mr. Speizer received $22,291 which represented the payment of premiums on certain life insurance and long term disability insurance and an automobile allowance. Because Mr. Speizer's compensation is determined pursuant to such employment agreement and no modifications to such agreement have been made or proposed, the Compensation Committee did not address the issue of Mr. Speizer's base annual compensation in 1998. This bonus was based upon earnings per share, revenues, the Company's overall performance in 1998, and his leadership. Notwithstanding, Mr. Speizer has entered into a new employment agreement with National that will be effective only if the merger between National and a subsidiary of The First American Financial Corporation is consummated. Members of the Compensation Committee Larry Goodman, Chair Saul B. Jodel Bard E. Bunaes 34 36 COMPARATIVE STOCK PERFORMANCE The graph below compares the total shareholder return on the Common Stock of the Company for the last five fiscal years with the cumulative total return on the Index for NASDAQ Stock Market (U.S. Companies) and the Index for the NASDAQ Fire, Marine, and Casualty Insurance Group over the same period (assuming the investment of $100 in the Company's Common Stock, the Index for NASDAQ Stock Market (U.S. Companies) and the Index for NASDAQ Fire, Marine, and Casualty Insurance Group on January 1, 1993 and reinvestment of all dividends.) CUMULATIVE SHAREHOLDER RETURN: NATIONAL INFORMATION GROUP VS. INDICES FOR NASDAQ STOCK MARKET (U.S. COMPANIES) AND THE NASDAQ FIRE, MARINE, AND CASUALTY INSURANCE GROUP
NASDAQ STOCK MARKET NASDAQ FIRE, MARINE, AND NATIONAL INFORMATION GROUP (U.S. COMPANIES) CASUALTY INSURANCE GROUP -------------------------- ------------------- ------------------------ '1993' 100.0 100.0 100.0 '1994' 41.6 97.8 96.3 '1995' 44.6 138.3 135.0 '1996' 34.7 170.0 146.3 '1997' 81.9 208.5 222.3 '1998' 201.3 293.8 189.6
35 37 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth the beneficial ownership of Common Stock of National as of March 15, 1999 by (i) each person or entity who is known by National to beneficially own more than 5% of National's Common Stock, (ii) the Named Officers, (iii) each of National's current directors and director nominees, and (iv) all current directors, director nominees and executive officers as a group. A total of 4,248,226 shares of National's Common Stock were issued and outstanding as of March 15, 1999. For the purposes of the following information, any securities not outstanding which are subject to options or other right to acquire within 60 days of March 15, 1999 are deemed to be outstanding for the purposes of computing the percentage of outstanding securities owned by such individual, but are not deemed to be outstanding for the purpose of computing the percentage of outstanding securities owned by any other person. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
NUMBER PERCENT NAME AND ADDRESS OF SHARES(1) OF TOTAL ---------------- ------------- -------- Mark A. Speizer(2).......................................... 1,716,625 39.0% 395 Oyster Point Blvd., Suite 500 South San Francisco, CA 94080 Brinson Partners, Inc. and its affiliated entities(3)....... 345,999 8.1% 209 South LaSalle Street Chicago, IL 60604-1295 Scorpion Acquisition, LLC and its affiliated party(4)....... 300,000 7.1% 505 Park Avenue, 12th Floor New York, NY 10022 Dimensional Fund Advisors Inc.(5)........................... 225,700 5.3% 1299 Ocean Avenue, 11th Floor Santa Monica, CA 90401 Bruce A. Cole(6)............................................ 71,333 1.7% Douglas H. Helm(7).......................................... 11,417 * George R. Jump(8)........................................... 3,125 * Gerry L. Gauer(9)........................................... 17,708 * Saul B. Jodel(10)........................................... 40,417 * Bard E. Bunaes(11).......................................... 38,717 * Lawrence M. Goodman(12)..................................... 19,925 * All current directors and executive officers as a group (8 persons)(13).............................................. 1,919,267 42.0%
- --------------- * Less than 1% (1) The number and percentage of shares beneficially owned is determined under rules of the Securities and Exchange Commission (the "SEC"), and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares as to which the individual has sole or shared voting power or investment power and also any shares which the individual has the right to acquire within 60 days of March 15, 1999 through the exercise of any stock option or other right. Unless otherwise indicated in the footnotes, each person has sole voting and investment power (or shares such powers with his or her spouse) with respect to the shares shown as beneficially owned. (2) Includes: (i) 152,916 shares of Common Stock issuable upon exercise of outstanding options exercisable within 60 days of March 15, 1999, (ii) 12,400 shares held by Mr. Speizer's spouse, Linda Speizer, (iii) 8,400 shares held by Mr. Speizer and his wife for the benefit of each of Mr. Speizer's two daughters (4,200 shares for the benefit of each daughter), (iv) 300,000 shares which have been pledged to Wedbush, Morgan Securities as collateral for loans to Mr. Speizer, and 1,224,295 shares which have been pledged in connection with the Stock Purchase Agreement involving the Herman Shares, as referenced in "Certain Transactions." 36 38 (3) Based on an amendment to Schedule 13G dated February 3, 1999, filed by Brinson Partners, Inc. ("BPI") with the SEC on behalf of itself and UBS AG. BPI is a wholly-owned subsidiary of UBS AG. BPI and UBS AG share voting and dispositive power with respect to 345,999 shares. Both BPI and UBS AG disclaim beneficial ownership of all such shares. (4) Based on Schedule 13D dated February 20, 1998, filed by Scorpion Acquisition, LLC with the SEC on behalf of itself and Paul Caland who, as an 80% member of Scorpion Acquisition, LLC, shares voting and dispositive power with respect to 300,000 shares. (5) Based on an amendment to Schedule 13G dated February 11, 1999 filed by Dimensional Fund Advisors, Inc. ("Dimensional") with the SEC. In addition, Dimensional has advised the Company that Dimensional is a registered investment advisor, furnishes investment advice to four registered investment companies and serves as investment manager to certain other investment vehicles, including commingled group trusts. In its role as investment advisor and investment manager, Dimensional posses both voting and investment power over the securities of the Company that are owned by such investment companies and investment vehicles. Such investment companies and investment vehicles were deemed to have beneficial ownership of 225,700 shares of the Company, as of December 31, 1998. Dimensional disclaims beneficial ownership of all such shares. (6) Includes 68,333 shares of Common Stock issuable upon exercise of outstanding options exercisable within 60 days of March 15, 1999. (7) Includes 10,417 shares of Common Stock issuable upon exercise of outstanding options exercisable within 60 days of March 15, 1999. (8) Represents 3,125 shares of Common Stock issuable upon exercise of outstanding options exercisable within 60 days of March 15, 1999. (9) Represents 17,708 shares of Common Stock issuable upon exercise of outstanding options exercisable within 60 days of March 15, 1999. (10) Includes: (i) 35,417 shares of Common Stock issuable upon exercise of outstanding options exercisable within 60 days of March 15, 1999 and (ii) 1,000 shares held by Mr. Jodel for the benefit of his son. (11) Includes (i) 22,917 shares of Common Stock issuable upon exercise of outstanding options exercisable within 60 days of March 15, 1999 and (ii) 4,800 shares held by Mr. Bunaes for the benefit of his daughter (12) Represents 15,625 shares of Common Stock issuable upon exercise of outstanding options exercisable within 60 days of March 15, 1999. (13) Includes an aggregate of 326,458 shares issuable upon exercise of outstanding options exercisable within 60 days of March 15, 1999. CHANGE IN CONTROL Effective as of November 17, 1998 National and The First American Financial Corporation, a California corporation ("FAFCO"), approved an agreement to merge (the "Merger Agreement") National with a subsidiary of FAFCO (the "Merger"). As a result of this Merger, National would become a wholly owned subsidiary of FAFCO and FAFCO would issue to National stockholders 0.67 of a share of FAFCO common stock for each share of National common stock that they own in exchange for their shares of National common stock. The Merger is subject to, among other things, the approval of the California Department of Insurance and the approval of a majority of the outstanding shares of National. A special meeting of the shareholders of National is required to be held to obtain the approval of such shareholders. During 1996 Mark A. Speizer acquired a number of shares of common stock of the Company through a series of transactions which are described in more detail in "Certain Relationships and Related Transactions." In connection with such transactions, Mr. Speizer pledged 1,224,295 shares of Common Stock, as referenced in "Certain Relationships and Related Transactions". 37 39 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Pursuant to an Option and Stock Purchase Agreement entered into on May 1, 1996, as amended (the "Stock Purchase Agreement"), between Howard L. Herman and Marcia Herman, Bradley Herman, Barbara Herman, and the Joel Franklin Herman Trust (collectively, the "Sellers"), and Mr. Speizer, Mr. Speizer agreed to purchase from the Sellers a total of 824,295 shares of Common Stock of National (the "Herman Shares") for a purchase price of $10.50 per share. 788,795 of the Herman Shares were purchased on May 31, 1996 and the remaining 35,500 Herman Shares were purchased on June 18, 1996. The Herman Shares represented approximately 17.5% of the then outstanding stock of the Company. Mr. Speizer's agreement to purchase the Herman Shares pursuant to the Stock Purchase Agreement was expressly conditioned upon receipt of an approval from the California Insurance Commissioner (the "Commissioner"), or an exemption granted by the Commissioner from the full filing and prior approval requirements set by the Commissioner. On May 23, 1996, the Commissioner granted such exemption. Pursuant to the Stock Purchase Agreement, the purchase price for the Herman Shares was $8,655,098, of which $3,074,805 was paid in cash, and $5,580,293 was paid by promissory notes payable by Mr. Speizer to the Sellers (the "Speizer Notes"). The Speizer Notes are payable over 15 years, shall bear interest at 9% per annum and are payable in monthly installments of principal and interest in the aggregate amount of $56,599 per month. As collateral for the Speizer Notes, Mr. Speizer pledged to the Sellers, pursuant to Security Agreements and Stock Pledges, the Herman Shares and 400,000 additional shares of the Company's Common Stock currently owned by Mr. Speizer (together the "Pledged Shares"). The Pledged Shares are to be held in escrow by City National Bank (of Beverly Hills, California) pursuant to the terms of an Escrow Agreement dated May 31, 1996 between Mr. Speizer, the Sellers and City National Bank as escrow agent. As of March 15, 1999 the outstanding principal under the Speizer Notes totaled approximately $5,050,000. Mr. Speizer obtained from Arabella S.A. ("Arabella"), a Luxembourg company, a line of credit for up to $4.2 million. Advances under the line of credit from Arabella are evidenced by a one (1) year term note bearing interest at 10% per annum (the "Arabella Note"). The Arabella Note was unsecured and no principal or accrued interest was due and payable by Mr. Speizer until May 31, 1997, the end of the term. Such line of credit was available to fund the purchase of the Herman Shares and remained available to fund amounts necessary for Mr. Speizer to make any regularly scheduled payments of principal and interest on the Speizer Notes during the term of the Arabella Note and certain other expenses. In February 1997 Mr. Speizer and Arabella agreed, subject to any required regulatory approvals, that Arabella would accept as payment in full of the obligations owed by Mr. Speizer to Arabella under the Arabella Note on the payment date thereof the sum of $2,000,000 in cash and 300,000 shares of the Company's Common Stock and the term of the Arabella Note was extended. On April 14, 1997, it was determined that no further regulatory approvals were required for such transaction. In July 1997 in repayment of the Arabella Note, Arabella acquired 300,000 shares of the Company's Common Stock from Mr. Speizer and was paid $2,000,000 by Mr. Speizer. In November 1997, such shares were transferred by Arabella to Scorpion Acquisition, LLC ("Scorpion Acquisition") by Arabella in exchange for an 80% interest in Scorpion Acquisition. Nuno Brandolini and Kevin McCarthy each own an 8.4% interest in Scorpion Acquisition as members of Scorpion Acquisition. Mr. Paul Caland owns an 80% interest in Scorpion Acquisition, which interest Mr. Caland acquired from Arabella in December, 1997. Messrs. Brandolini and McCarthy were directors of National and its subsidiaries from July 1996 to July 1997. The foregoing discussion of the interests of Messrs. Brandolini, McCarthy and Caland in Scorpion Acquisition and the transfer of the member interests of Arabella to Mr. Caland are based upon information filed by Scorpion Acquisition and Mr. Caland in a Schedule 13D with the Securities and Exchange Commission on February 27, 1997. In February 1997, Mr. Speizer entered into a Purchase and Sale Agreement (the "Purchase Agreement") with Scorpion Acquisition, pursuant to which Scorpion Acquisition agreed to sell, and Mr. Speizer agreed to purchase, all of the rights and interest conveyed by Mr. Speizer to Scorpion Acquisition under a certain Term Sheet for Option Agreement which required him to negotiate in good faith to enter into an option agreement with Scorpion Acquisition. In July 1997 Scorpion Acquisition sold to Mr. Speizer all such rights previously granted to Scorpion Acquisition by Mr. Speizer to acquire shares of the Company owned by 38 40 Mr. Speizer. In consideration for sale of such rights to Mr. Speizer, Mr. Speizer will pay to Scorpion Acquisition an amount equal to the greater of $4,000,000 or 50% of the notional profits that would have been earned on a notional 924,000 shares of Common Stock with a notional cost of $7.75 per share, each subject to certain defined adjustments. Profits are determined by reference to the average closing price of Common Stock (and the average closing price of securities other than Common Stock paid by dividend, spin-off or otherwise on Common Stock ("Distributed Stock")) during the fifteen business days preceding and the fifteen business days following June 30, 2002, or if Scorpion Acquisition has made an election permitted under its purchase agreement with Mr. Speizer, that date between January 1, 2000 and June 30, 2002 that is so elected. Mr. Speizer may pay the purchase price in cash or in shares of National or shares of Distributed Stock subject to having received any necessary approvals or exemptions from the California Insurance Commissioner as may be required by statute or regulation. In April, 1998, Mr. Speizer obtained a loan from Wedbush Morgan Securities. As collateral for the repayment of such loan Mr. Speizer has pledged 300,000 shares of the Company's Common Stock currently owned by Mr. Speizer. In September 1998 National entered into a consulting agreement with Scorpion Holdings, Inc., a Delaware corporation ("Scorpion"), an affiliate of Scorpion Acquisition, pursuant to which Scorpion agreed to provide certain consulting and advisory services National may from time to time request. The term of the consulting agreement is for one (1) year, which expires on September 10, 1999. Pursuant to the consulting agreement, Scorpion receives an annual fee of $48,000 plus reimbursement for reasonable out-of-pocket costs and expenses. Based upon information furnished to the Company the Company understands that Mr. Brandolini was the sole shareholder, a director and chief executive officer of Scorpion. Mr. McCarthy was a director and president of Scorpion. In May 1997 National entered into an employment agreement (the "New Employment Agreement") with Douglas H. Helm, effective as of May 26, 1997, pursuant to which Mr. Helm was engaged as the Company's Executive Vice President, Business Development and Strategic Marketing. The New Employment Agreement is an at-will employment agreement. Mr. Helm shall be paid a salary of $175,000 per year, a guaranteed bonus of $20,000 per year payable in equal monthly amounts, and an annual bonus of up to $30,000, the exact amount of which is determined with reference to certain performance benchmarks to be agreed upon between the Company and Mr. Helm within 90 days from the commencement of Mr. Helm's employment. Mr. Helm's prior employment with the Company, which was rendered pursuant to a certain Agreement for Employment, dated January 1, 1990 (the "Original Employment Agreement"), was terminated pursuant to a certain Agreement of Employment Termination and Release, dated July 2, 1995 (the "Termination Agreement"). Pursuant to the Original Employment Agreement, as confirmed in the Termination Agreement, Mr. Helm was entitled to receive certain commissions for a three (3) year period commencing January 1, 1995 (the "Commissions"). With respect to the Commissions which would otherwise be earned and payable for the period between May 1, 1997 and December 31, 1997, the New Employment Agreement modified the provisions relating to the payment of such Commissions as follows: a. To the extent the Commissions are earned in any given month, Mr. Helm shall be paid $12,000 of the Commissions each month he is employed by the Company. If the amount of the Commissions earned for a particular month is greater than $12,000, then the Company shall hold such excess amount of Commissions (the "Excess Commissions"). The cumulative amount of such Excess Commissions, which remains unpaid, from time to time, are referred to as "Cumulative Excess Commissions". The Company is not obligated to hold the Cumulative Excess Commissions in a separate account, and is not obligated to pay Mr. Helm any interest on the Cumulative Excess Commissions. b. If the amount of the Commissions earned for a particular month is less than $12,000, then Mr. Helm will be paid (i) the amount of the Commissions earned for such month, plus (ii) an amount equal to the difference between the amount of Commissions earned for such month and $12,000; provided however, the amount payable under (ii) above shall only be paid to Mr. Helm from the Cumulative Excess Commissions in an amount up to, but not in excess of, the total amount of the 39 41 Cumulative Excess Commissions, as it exists at such time. Any amounts so paid from the Cumulative Excess Commissions shall reduce the amount of Cumulative Excess Commissions. c. If Mr. Helm's employment is terminated at any time, the Company shall pay to Mr. Helm promptly the total amount, if any, of the Cumulative Excess Commissions which exist at that time, and if Mr. Helm's employment is terminated prior to December 31, 1997 then any Commissions earned after the date of such termination shall be paid in the same manner as they would have been paid before the execution of the New Employment Agreement. d. If, at any time, while Mr. Helm is employed by the Company, when there exists any Cumulative Excess Commissions, any subsidiary of National makes an initial public offering of its common stock, then, by delivery of a written notice to the Company prior to such initial public offering, Mr. Helm may elect to accelerate the payment of all or a portion of amount of the Cumulative Excess Commissions which exists at that time, which amounts shall be paid by the Company to such subsidiary on Mr. Helm's behalf in exchange for common stock of such subsidiary at a purchase price per share which is equal to seventy-five percent (75%) of the initial public offering price of the stock; provided, however, any such purchase of common stock shall be subject to the approval of the underwriter engaged by the subsidiary with respect to any such initial public offering. On April 15, 1998, National and Mr. Helm entered into an amendment of the New Employment Agreement pursuant to which National agreed to pay Mr. Helm the then existing balance of Cumulative Excess Commissions, which amounted to approximately $127,030, and to delete the provisions set forth in paragraph (d) above. In June 1997 National invested $120,000 for interests as a member of a limited liability company known as BevMed Holdings, L.L.C. ("BevMed"), a Delaware limited liability company, in a private placement offering of $1.8 million. BevMed provides heart monitoring services and devices. The investment was identified to the Company by Mr. Cole, a director and President of National and its subsidiaries. Mr. Cole is an investor in BevMed as a member of the limited liability company. Mr. Cole did not receive any compensation from the Company or BevMed in connection with the private placement offering by BevMed. In August 1997, National invested $100,000 for a limited partnership interest in Pizza Partners, L.P., a Delaware limited partnership. Among other things, such partnership was formed to acquire a number of Pizza Hut restaurants in Northern California, Oregon and Nevada. The investment was identified and recommended to the Company by Scorpion. Effective January 1, 1999 National assigned its entire interest in Pizza Partners, L.P. to Pizza Investments (BVI), Ltd. for $110,000 and withdrew as a partner of Pizza Partners L.P. Scorpion is a financial advisor to Pizza Investments (BVI) Ltd. In November 1997, Mr. Cole assigned to the Company certain interests that he had in an agreement by and among Salomon Brothers Inc., Xinming Mu and Mr. Cole, relating to the payment of certain fees in connection with an engagement of Salomon Brothers Inc. by New Industries Investment Co. LTD. To date no fees have been paid to the Company and the Company believes any rights that Mr. Cole transferred to it represent a contingent right for which payment is not foreseeable. On January 29, 1998, the Compensation Committee of the Board of Directors of National, approved the granting of an option to purchase 37,500 shares of common stock of National to Mr. Brandolini and an option to purchase 37,500 shares of common stock of National to Mr. McCarthy. Both options were granted under the Plan. The options were granted to Messrs. Brandolini and McCarthy in their capacities as consultants to the Company through Scorpion. The option price is $8.31 per share, determined in accordance with the Plan. The options to Messrs. Brandolini and McCarthy permit the exercise of the option as to 25% of the shares for which the option is granted one (1) year following the date of grant, and cumulatively to the extent of 1/48th of the shares subject to the option for each month which has expired thereafter. In accordance with the provisions of the Plan, in the event that the status of Messrs. Brandolini and McCarthy as consultants to the Company terminates, then shares subject to the option must be exercised within 30 days of the date that the optionee ceases to be a consultant to the Company, provided, however, that any such option can only be 40 42 exercised to the extent that such option was exercisable pursuant to the Plan as of the date the optionee ceased to be a consultant. Mr. Bunaes is a director of National and each of its subsidiaries and he was elected as a director of National in July 11, 1997. Mr. Bunaes is the Chairman of the Board and Chief Executive Officer of Constitution Reinsurance Corporation, which is one of the reinsurance companies to whom the Company cedes reinsurance. Constitution Reinsurance Corporation has been a reinsurer to the Company for more than 15 years. In 1997 and 1998, the Company paid to Constitution Reinsurance Corporation reinsurance premiums of $70,000 and $64,000, respectively. The Company expects that reinsurance premiums to be paid to Constitution Reinsurance Corporation in 1999 will be approximately $108,000. In July 1996, National entered into an employment agreement with Mark A. Speizer pursuant to which Mr. Speizer was engaged as National's Chairman of the Board and Chief Executive Officer. The term of such employment agreement is three (3) years. Mr. Speizer served as National's Chairman of the Board and Chief Executive Officer during 1998 pursuant to the terms of such employment agreement. Mr. Speizer's employment agreement provides, among other things, that during the term of the employment agreement the Board of Directors may terminate Mr. Speizer's employment only upon written notice for cause. Cause is defined as a conviction of a felony or a finding of liability based on intentional tortuous conduct consisting of a breach of fiduciary duty relating to his performance as an officer and/or director of the Company. Mr. Speizer is paid a salary of $300,000 per year plus a bonus to be established by National. Mr. Speizer was granted an option to purchase 75,000 shares of Common Stock of National, one-third of which options shall vest after one (1) year with the balance vesting monthly over the next 24 months. The employment agreement further provided for a waiver of the limitation of employment provisions contained in the Severance Agreement and Release of Claims entered into by Mr. Speizer and National on October 19, 1995 (the "Severance Agreement"). The Severance Agreement was entered into in connection with the termination of Mr. Speizer's employment in 1995. Pursuant to that agreement, Mr. Speizer was paid approximately $885,000. Section 7.3 of the Severance Agreement provided that "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. *** 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." The employment agreement provided that the provisions of the Severance Agreement limiting Mr. Speizer's right to accept future employment with National are null and void and that the obligation to repay any amounts paid to Mr. Speizer under the Severance Agreement are waived provided that Mr. Speizer remains employed by National for the three (3) year term of his employment agreement. Section 8 of the employment agreement provides: "WAIVER OF LIMITATION ON REEMPLOYMENT. The parties agree that Section 7.3 of the Severance Agreement and Release of Claims entered into between Speizer and the Company on October 19, 1995, limiting Speizer's right to accept future employment with the Company shall be null and void, and the Company waives any right it may have or may have had under that provision to require Speizer to forfeit sums paid under the Severance and Release Agreement provided that Speizer remains employed by the Company during the Term of this Agreement. Notwithstanding the foregoing, in the event of Speizer's death or disability, Speizer or his estate will not be obligated to forfeit said sums." In July 1996 National entered into an employment agreement with Bruce A. Cole pursuant to which Mr. Cole was engaged as National's President. The term of such employment agreement is three (3) years. Mr. Cole served as President of National during 1998 pursuant to the terms of such employment agreement. Mr. Cole is paid a salary of $290,000 per year plus a bonus to be established by National. Mr. Cole was granted an option to purchase 75,000 shares of Common Stock of National one-third of which options shall vest after one (1) year with the balance vesting monthly over the next 24 months. Mr. Cole's employment agreement provides, among other things, that during the term of the employment agreement the Board of Directors may terminate Mr. Cole's employment only upon written notice for cause. Cause is defined as a conviction of a felony or a finding of liability based on intentional tortuous conduct consisting of a breach of fiduciary duty relating to his performance as an officer and/or director of the Company. In addition, 41 43 Mr. Cole's employment agreement provides that if the Company terminates Mr. Cole for reasons other than for cause, the Company shall pay Mr. Cole, in a single payment payable upon termination, an amount equal to (i) his unpaid base salary for the remainder of the three (3) year term, (ii) the undiscounted remaining costs to provide the benefits provided in the employment agreement for the remainder of the three (3) year term, such as the cost of Mr. Cole's membership and participation in professional associations, a $1,000 per month automobile allowance and premiums for certain insurance, including a $1 million life insurance policy, and (iii) any unpaid bonus from the previous year plus any bonus payable pursuant to any bonus plan then in effect. In November 1998, in connection with the execution of the Merger Agreement, National, FAFCO and Mark A. Speizer entered into an employment agreement. Such employment agreement is effective only upon the consummation of the Merger and, at such time, the July 1996 employment agreement between Mr. Speizer and National shall be terminated if still in force at such time. Under Mr. Speizer's employment agreement, for a period of five (5) years following the consummation of the Merger, First American agrees to employ Mr. Speizer, and Mr. Speizer agrees to serve, as Chairman of the Board and Chief Executive Officer of Fastrac Systems, Inc., Great Pacific Insurance Company and Pinnacle Management Solutions Insurance Services, each of which are subsidiaries of National and, after the Merger, will be subsidiaries of the company surviving the merger. As compensation for his services, FAFCO shall pay Mr. Speizer, in the form of base salary and a fixed bonus, $625,000 per year. Mr. Speizer will also receive a formula bonus, if positive, equal to 10% of Fastrac's adjusted pre-tax earnings. Fastrac's adjusted pre-tax earnings will be calculated by reducing Fastrac's income before provision for income taxes by $2 million and further reducing it by 4% of Fastrac's total revenues. Under this employment agreement, FAFCO also agrees to grant Mr. Speizer an option or options to purchase 30,000 FAFCO common shares at the closing price of a single FAFCO common share on the New York Stock Exchange on the day the Merger is consummated. Mr. Speizer's employment agreement further provides for certain other benefits, including medical and dental health benefits, pension plan participation with 26 years of vesting, participation rights in FAFCO's deferred compensation plan and vacation and sick leave. FAFCO has also agreed to recommend Mr. Speizer to its Nomination Committee for appointment to the board of directors of FAFCO. In November 1998, in connection with the execution of the Merger Agreement, National, FAFCO and Bruce A. Cole entered into an employment agreement. Such employment agreement is effective only upon the consummation of the Merger and, at such time, the July 1996 employment agreement between Mr. Cole and National shall be terminated if still in force at such time. Under Mr. Cole's employment agreement, for a period of three (3) years following the consummation of the Merger, FAFCO agrees to employ Mr. Cole, Mr. Cole agrees to serve, as Executive Vice President of Fastrac Systems, Inc. As compensation for his services, FAFCO shall pay Mr. Cole, in the form of base salary and a fixed bonus, $400,000 per year. Mr. Cole's employment agreement also provides for certain other benefits, including medical and dental health benefits, participation rights in FAFCO's deferred compensation plan and vacation and sick leave. In late December 1998 the Company entered into Retention and Modification of At-Will Employment Agreements with twelve (12) employees. Such agreements seek to provide an incentive to such employees in order to keep the services of such employees available to the Company during the pendency of the Merger, as defined in Note 20, and thereafter. Such agreements provide, among other things, for a retention payment to be made to such employees if they remain employed by the Company on a full-time basis until the expiration of one hundred twenty (120) days after the consummation of the Merger. If the Merger is not consummated no payments are required to be made. Assuming the Merger is consummated and that all such employees remain employees for the required period, the total amount payable to such employees would be $185,573. 42 44 After December 31, 1998 National entered into Retention and Modification of At-Will Employment Agreements with five (5) other employees, including Gerry Gauer, Executive Vice President and General Manager of Pinnacle and PMSIS and George Jump, Executive Vice President, Sales, of the Company. Such agreements provide for, among other things, total retention payments of $310,000. The retention payments with respect to Mr. Gauer and Mr. Jump are $100,000 each. Twenty percent (20%) of such payments were made upon the execution of such agreements and the remaining eighty percent (80%) is payable upon the expiration of a period ranging from thirteen (13) to fifteen (15) months after the date of the execution of the agreements. Except in the case of Mr. Gauer, if the Merger is not consummated no payments are required to be made. The agreement with Mr. Gauer provides that $20,000 was paid upon execution of the agreement and the remaining $80,000 is payable upon the expiration of fifteen (15) months regardless of whether or not the Merger is consummated. All such agreements require that the employee remain an employee until the expiration of the respective 13 or 15 month period. Mr. Gauer's Retention and Modification of At-Will Employment Agreement also provides for a guaranteed bonus of $100,000 for 1999, payable in January 2000 provided Mr. Gauer remains an employee through such time. Such guaranteed bonus is payable regardless of whether the Merger is consummated. In addition, if the Merger is consummated, Mr. Gauer would be paid an additional $25,000 bonus payable in January 2000 provided Mr. Gauer remains an employee through such time. 43 45 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 ------- ---- (1) FINANCIAL STATEMENTS: Report of Independent Accountants...................... 45 Consolidated Balance Sheets, December 31, 1998 and 1997.................................................. 46 Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996................ 47 Consolidated Statement of Changes in Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996.................................................. 48 Consolidated Statement of Cash Flows for the years ended December 31, 1998, 1997 and 1996................ 49 Notes to Consolidated Financial Statements............. 50 (2) FINANCIAL STATEMENT SCHEDULES: Report of Independent Accountants on Financial Statement Schedules................................... 71 I Summary of Investments Other than Investments in Related Parties....................................... 72 II Condensed Financial Information of Registrant (Parent Company)...................................... 73 III Supplementary Insurance Information Concerning Property Casualty Operations.......................... 76 IV Reinsurance........................................ 77
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 National filed a Form 8-K on November 25, 1998 regarding the execution of the Merger Agreement, which included as exhibits an Agreement and Plan of Merger, dated as of November 17, 1998, by and among The First American Financial Corporation, Pea Soup Acquisition Corp. and National Information Group, a Voting Agreement, dated as of November 17, 1998 by and among The First American Financial Corporation, Mark A. Speizer and Bruce A. Cole, and a press release dated November 18, 1998. (c) EXHIBITS See Item 14(a)(3) above. (d) FINANCIAL STATEMENT SCHEDULES See Item 14(a)(2) above. 44 46 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors National Information Group: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and comprehensive income, of changes in shareholders' equity and of cash flows present fairly, in all material respects, the financial position of National Information Group and its subsidiaries (the "Company") at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP February 15, 1999 45 47 NATIONAL INFORMATION GROUP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS
AS OF DECEMBER 31, ------------------ 1997 1998 ------- ------- Investments: Fixed maturities at market................................ $15,359 $11,011 Equity securities at market............................... 4,200 5,235 Short-term investments, at cost (which approximates market)................................................ 9,290 3,438 ------- ------- Total investments................................. 28,849 19,684 Cash........................................................ 1,113 5,853 Net premiums and accounts receivable........................ 8,990 9,437 Accrued interest receivable................................. 449 606 Net property and equipment.................................. 5,424 8,452 Deferred acquisition costs.................................. 2,704 2,198 Deferred income taxes....................................... 3,117 3,465 Intangible assets........................................... 13,178 15,316 Other assets................................................ 2,918 2,930 ------- ------- Total assets...................................... $66,742 $67,941 ======= ======= LIABILITIES Reserve for losses and loss adjustment expense.............. $ 3,232 $ 2,485 Unearned premiums........................................... 6,217 4,995 Commissions payable......................................... 837 265 Accrued expenses and other liabilities...................... 6,125 5,766 Drafts payable.............................................. 832 638 Notes payable............................................... 9,601 13,273 Reserve for return premiums................................. 4,399 1,457 Deferred revenue............................................ 7,719 8,711 ------- ------- Total liabilities................................. 38,962 37,590 ------- ------- Commitments and contingencies (Notes 15, 17 and 21) SHAREHOLDERS' EQUITY Preferred stock, 5,000,000 shares authorized with no par value; none issued and outstanding........................ -- -- Common stock: 15,000,000 shares authorized with no par value; issued and outstanding, 4,032,882 and 4,161,776 in 1997 and 1998, respectively........................................... 18,610 19,749 Retained earnings........................................... 8,935 10,486 Accumulated other comprehensive income...................... 235 116 ------- ------- Total shareholders' equity........................ 27,780 30,351 ------- ------- Total liabilities and shareholders' equity........ $66,742 $67,941 ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 46 48 NATIONAL INFORMATION GROUP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (IN THOUSANDS, EXCEPT SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31, -------------------------------------- 1996 1997 1998 ---------- ---------- ---------- Net premiums written................................... $ 12,636 $ 20,501 $ 14,290 Change in unearned premiums............................ 949 (1,463) 1,222 ---------- ---------- ---------- Net premiums earned.................................... 13,585 19,038 15,512 Real estate information services....................... 18,499 23,492 35,978 Tracking fees.......................................... 5,479 7,543 12,346 Net commissions income................................. 1,145 1,166 1,081 Net investment income.................................. 1,975 1,839 1,635 ---------- ---------- ---------- Total revenues............................... 40,683 53,078 66,552 ---------- ---------- ---------- Loss and loss adjustment expense....................... 4,002 6,482 5,415 Commissions paid to nonaffiliates...................... 1,954 1,837 3,014 Personnel expenses..................................... 18,948 23,127 31,455 All other expenses..................................... 14,221 16,930 23,039 ---------- ---------- ---------- Total expenses............................... 39,125 48,376 62,923 ---------- ---------- ---------- Income before provision for income taxes............... 1,558 4,702 3,629 Provision for income taxes............................. 284 1,436 812 ---------- ---------- ---------- Net income............................................. 1,274 3,266 2,817 Net other comprehensive (loss) income.................. (124) 48 (119) ---------- ---------- ---------- Comprehensive income................................... $ 1,150 $ 3,314 $ 2,698 ========== ========== ========== Earning per share (EPS): Basic: Weighted average shares outstanding.................. 4,109,655 3,946,257 4,095,154 Basic EPS............................................ $ 0.31 $ 0.83 $ 0.69 Diluted: Weighted average shares outstanding.................. 4,141,360 4,127,382 4,325,954 Diluted EPS.......................................... $ 0.31 $ 0.79 $ 0.65
The accompanying notes are an integral part of these consolidated financial statements. 47 49 NATIONAL INFORMATION GROUP AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (IN THOUSANDS EXCEPT PER SHARE DATA)
ACCUMULATED COMMON STOCK OTHER TOTAL ---------------- RETAINED COMPREHENSIVE SHAREHOLDERS' SHARES AMOUNT EARNINGS INCOME (LOSS) EQUITY ------ ------- -------- ------------- ------------- Balance, January 1, 1996................. 4,680 $23,071 $ 9,499 $311 $32,881 Comprehensive income: Net income............................. -- -- 1,274 -- 1,274 Other comprehensive loss, net of tax... -- -- -- (124) (124) ----- ------- ------- ---- ------- Comprehensive income..................... -- -- 1,274 (124) 1,150 Options exercised........................ 22 188 -- -- 188 Shares repurchased....................... (805) (5,667) -- -- (5,667) ----- ------- ------- ---- ------- Balance, December 31, 1996............... 3,897 $17,592 $10,773 $187 $28,552 Comprehensive income: Net income............................. -- -- 3,266 -- 3,266 Other comprehensive income, net of tax................................. -- -- -- 48 48 ----- ------- ------- ---- ------- Comprehensive income..................... -- -- 3,266 48 3,314 Options exercised........................ 136 1,018 -- -- 1,018 Dividends paid........................... -- -- (5,104) -- (5,104) ----- ------- ------- ---- ------- Balance, December 31, 1997............... 4,033 $18,610 $ 8,935 $235 $27,780 Comprehensive income: Net income............................. -- -- 2,817 -- 2,817 Other comprehensive loss, net of tax... -- -- -- (119) (119) ----- ------- ------- ---- ------- Comprehensive income..................... -- -- 2,817 (119) 2,698 Options exercised........................ 129 1,139 -- -- 1,139 Dividends paid........................... -- -- (1,266) -- (1,266) ----- ------- ------- ---- ------- Balance, December 31, 1998............... 4,162 $19,749 $10,486 $116 $30,351 ===== ======= ======= ==== =======
Dividends declared per share were $0.31 and $1.30 for the years ended December 31, 1998 and 1997, respectively. There were no dividends declared for the year ended December 31, 1996. The accompanying notes are an integral part of these consolidated financial statements. 48 50 NATIONAL INFORMATION GROUP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 1996 1997 1998 --------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net income.............................................. $ 1,274 $ 3,266 $ 2,817 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization........................ 1,758 1,536 2,459 Loss on sale of equipment............................ 288 -- -- Change in assets and liabilities net of effects from the purchase of ARTS: Net premiums and accounts receivable, and accrued interest receivable............................. 339 (2,686) (604) Deferred acquisition costs......................... 438 (517) 506 Insurance liabilities.............................. (767) 5,051 (5,105) Reserve for Prop. 103.............................. (2,266) (2,268) -- Deferred tax assets................................ 1,169 123 (348) Other, net......................................... (186) 537 198 --------- -------- -------- Net cash provided (used) by operating activities.................................... 2,047 5,042 (77) --------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of investments................................. (123,509) (56,382) (10,040) Maturity and sale of investments........................ 128,138 60,106 19,085 Purchase of equipment................................... (1,445) (2,969) (4,884) Purchase of ARTS........................................ -- (9,881) (2,609) --------- -------- -------- Net cash provided (used) by investing activities.................................... 3,184 (9,126) 1,552 --------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of notes......................... 2,000 9,268 4,740 Principal payments on notes payable..................... (667) (1,000) (1,068) Repurchase of common stock.............................. (5,667) -- -- Stock options exercised................................. 174 829 859 Dividends to shareholders............................... -- (5,104) (1,266) --------- -------- -------- Net cash (used) provided by financing activities.................................... (4,160) 3,993 3,265 --------- -------- -------- Net change in cash........................................ 1,071 (91) 4,740 Cash at beginning of year................................. 133 1,204 1,113 --------- -------- -------- Cash at end of year....................................... $ 1,204 $ 1,113 $ 5,853 ========= ======== ======== SUPPLEMENTAL DISCLOSURES: Income taxes paid......................................... $ 22 $ 1,573 $ 1,034 Income tax refunds received............................... 798 1,341 1,364 Interest paid............................................. 41 365 1,120
The accompanying notes are an integral part of these consolidated financial statements. 49 51 NATIONAL INFORMATION GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION AND NATURE OF OPERATIONS The accompanying consolidated financial statements of National Information Group ("National") and its subsidiaries (the "Subsidiaries") Pinnacle Data Corporation ("Pinnacle Data"), Pinnacle Real Estate Tax Services, Inc. ("PinTax-VA"), Pinnacle Real Estate Tax Services of New York, Inc. ("PinTax-NY", which together with PinTax-VA are referred to collectively as "PinTax"), Pinnacle Management Solutions Insurance Services ("PMSIS" formerly known as Fastrac Systems, Inc. Insurance Agent and Broker), Great Pacific Insurance Company ("GPIC"), Fastrac Systems, Inc. ("Fastrac") and New Arts Acquisition, Inc. ("New Arts"). National and its Subsidiaries are referred to in this Report collectively as the "Company." Pinnacle Data, PinTax and PMSIS are referred to in this Report collectively as the "Pinnacle Companies." The Subsidiaries have transactions with each other in the ordinary course of business. PMSIS receives a commission for business it writes which is insured or reinsured by GPIC and receives fees from GPIC. Certain expenses are shared among the Subsidiaries for providing insurance Tracking and Outsourcing Services. All significant intercompany accounts and transactions have been eliminated. National and its Subsidiaries provide specialized information services through technology, tracking services, outsourcing services and related insurance products to mortgage bankers and other financial institutions located throughout the United States and in Canada Utilizing sophisticated computer applications, the Company has developed special-purpose, proprietary software and database systems which provide information services on an outsourced, remote computer or manual access basis to its customers. See Note 23 Segment Reporting for discussion of the Company's operating segments. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following is a description of the significant accounting policies adopted by National and its Subsidiaries in the accompanying financial statements. Cash includes balances in demand deposit accounts. Investments in fixed maturities include bonds, U.S. Treasury notes, federal discount notes, mortgage-backed securities and certificates of deposit. Investments in equity securities are common stock, preferred stock and limited partnership interests. Short-term investments consist of certificates of deposits and commercial paper at certain financial institutions and are carried at cost which approximates market. Investment income is recognized as earned. Realized gains or losses on sale of investments are determined on the basis of specific identification and are included in income. The Company's fixed maturity and equity security investments are categorized as available-for-sale and as a result carried at market value or at cost in the event market values are not readily determinable. Market value is determined using published quotes as of the close of business. Unrealized gains and losses are excluded from operations and reported net of tax as a separate component of other comprehensive income until realized. The Company's investment policies are designed to limit concentration of credit risk by diversifying its investment portfolio and by, among other things, limiting its investments in certificates of deposit to balances insured by the Federal Deposit Insurance Corporation. The Company maintains deposit balances, other than certificates of deposit, with some financial institutions in excess of the amount insured by the Federal Deposit Insurance Corporation. A significant portion of the Company's receivables are from mortgage bankers and financial institutions. Data processing equipment and purchased software and office furniture and equipment are depreciated over five (5) years, and motor vehicles are depreciated over three (3) to five (5) years, all using a modified straight-line method. Upon retirement or sale of an asset, the cost and accumulated depreciation are removed 50 52 NATIONAL INFORMATION GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) from the accounts and any resulting gain or loss is included in operations. Maintenance and repairs are charged to operations as incurred. Internal costs associated with software development of the Company's products have been expensed as incurred. Costs associated with software development by third parties are capitalized and depreciated over the estimated useful life of the software. 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 net change in deferred acquisition costs is included in the consolidated statements of operations as a component of commissions paid to nonaffiliates, personnel expenses and all other expenses. Intangible assets include only goodwill, which is the excess of cost over fair market value of the Company's acquired entities. Goodwill is amortized on a straight-line basis over a period of 25 years. The Company evaluates the recoverability of long-lived assets such as goodwill by measuring the carrying amount of the assets against the estimated undiscounted future cash flows associated with them. At the time such evaluations indicate that the future undiscounted cash flows of certain long-lived assets are not sufficient to recover the carrying value of such assets, the assets are adjusted to their fair values. Based on these evaluations, there were no adjustments to the carrying value of long-lived assets in 1997 or 1998. 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 operations of the period in which the estimates are changed or payments are made. Premiums written are earned on a pro rata basis over the periods covered by the policies. Policyholders have the right to cancel a policy at any time and receive a refund as defined by law or regulation. In certain circumstances, the Company grants refunds in excess of the amounts required by regulation. The Company received acceptance from the California Department of Insurance to establish a reserve for return premiums, based upon historical experience, to provide for anticipated cancellations net of written premiums. Actual cancellations could differ from management's estimates. Changes in estimates of cancellations resulting from the continuous review process and differences between estimates and actual cancellations are included in operations of the period in which the estimates are changed or cancellations occur. Revenue for Pinnacle Data is reported as real estate information services revenue in the period in which Flood Zone Determination Services are performed. Certain customers pay an additional up-front fee in exchange for Pinnacle providing assurance that it will automatically notify the customer of changes in the SFHA status of properties in their mortgage loan portfolios. The Company recognizes deferred revenue in proportion to its future servicing obligation for these customers. Deferred revenue is based on historical internal and industry data including the frequency of flood map changes, Pinnacle Data's experience rate for flood map changes and the relative cost of providing the service when required. The Company reviews its estimates on a regular basis. The majority of real estate tax service revenues earned by PinTax are from "life of loan" servicing contracts, which require customers to pay an up-front, one-time fee to receive Real Estate Tax Services over the life of a loan. Through 1998, the revenue from "life of loan" contracts is recognized over the estimated life of the loans in proportion to the amount of expenses incurred to service the real estate property tax tracking on the subject loans. Since the bulk of expenses incurred in providing real estate property tax tracking on the loans occurs in the first year, a majority of the "life of loan" revenue is recognized within the first year of 51 53 NATIONAL INFORMATION GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) servicing. As such, PinTax recognizes 64% of the contract price during the first tax processing cycle. The remainder of the revenue is amortized in accordance with the average estimated life of the portfolio and the estimated rate at which loans are paid off or otherwise are removed from the servicing portfolio using projections of future expected portfolio runoff based on past trends. The Company estimates the average life to be six (6) years. The Company periodically reviews all of its tax service revenue recognition estimates. As a result of this revenue recognition policy, PinTax records a deferred revenue reserve on its balance sheet. As of December 31, 1998, deferred revenue for "life of loan" tax servicing was approximately $7.7 million. Effective January 1, 1999, National will implement a change to its revenue recognition accounting policy or tax service contracts. The accounting policy will be adopted prospectively and applies to all new loans serviced beginning January 1, 1999. The new policy provides for a more ratable recognition of revenues, reducing the amount of revenue and gross profit recognized at the inception of the contract and recognizing it over the expected service period. Tracking fee revenue consists primarily of fees earned in connection with monitoring motor vehicle insurance coverage for Fastrac's customers. Such customers pay a monthly fee based on the number of vehicles being tracked. Tracking fee revenue is recognized in the period in which it is earned. Commission income is recorded when earned, net of an estimated reserve for cancellation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of certain revenues and certain expenses during the reporting period. Actual results could differ from those estimates. In March 1998, Accounting Standards Executive Committee issued Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. SOP 98-1 provides guidance on accounting by all nongovernmental entities for the costs of computer software developed or obtained for internal use and for determining whether computer software is for internal use. This SOP also provides guidance on when costs incurred for internal-use computer software are and are not capitalized. SOP 98-1 is effective for fiscal years beginning after December 15, 1998. The Company is not currently involved in significant software development projects and does not believe that SOP 98-1 will have a material impact on its financial statements in 1999. In December 1997, Accounting Standards Executive Committee issued Statement of Position (SOP) 97-3, Accounting by Insurance and Other Enterprises for Insurance-Related Assessments. This SOP provides guidance on accounting by insurance and other enterprises for insurance-related assessments. SOP 97-3 is effective for fiscal years beginning after December 15, 1998. The Company does not believe that SOP 97-3 will have a material impact on its financial statements. For comparative purposes, certain prior year amounts have been reclassified to conform to the current year presentation. Such reclassifications had no impact on net income or shareholders' equity. 52 54 NATIONAL INFORMATION GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. INVESTMENTS (a) Fixed maturity investments available for sale (in thousands):
AS OF DECEMBER 31, 1997 AS OF DECEMBER 31, 1998 ----------------------------------------------- ----------------------------------------------- ESTIMATED ESTIMATED AMORTIZED UNREALIZED UNREALIZED MARKET AMORTIZED UNREALIZED UNREALIZED MARKET COST GAIN LOSS VALUE COST GAIN LOSS VALUE --------- ---------- ---------- --------- --------- ---------- ---------- --------- U.S. Government securities.......... $ 1,849 $ 11 $1 $ 1,859 $ 1,150 $ 11 $ 3 $ 1,158 State and municipal bonds............... 8,656 251 -- 8,907 5,358 99 -- 5,457 Corporate bonds....... 1,193 -- -- 1,193 1,294 23 15 1,302 Certificates of deposit............. 3,364 -- -- 3,364 3,068 -- -- 3,068 Mortgage-backed securities.......... 36 -- -- 36 26 -- -- 26 ------- ---- -- ------- ------- ---- --- ------- Total........ $15,098 $262 $1 $15,359 $10,896 $133 $18 $11,011 ======= ==== == ======= ======= ==== === =======
At December 31, 1998, 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 (amounts in thousands):
AMORTIZED COST ESTIMATED MARKET VALUE --------------------------------------- --------------------------------------- CORPORATE & CORPORATE & STATE AND U.S. STATE AND U.S. MUNICIPAL CERTIFICATES GOVT. MUNICIPAL CERTIFICATES GOVT. MATURITY BONDS OF DEPOSIT SECURITIES BONDS OF DEPOSIT SECURITIES -------- ----------- ------------ ---------- ----------- ------------ ---------- Within one year........................ $ 850 $ -- $ 200 $ 856 $ -- $ 202 One through five years................. 3,023 3,068 500 3,065 3,068 509 Six through ten years.................. 1,183 -- 450 1,211 -- 447 More than ten years.................... 1,596 -- -- 1,627 -- -- Mortgage-backed securities............. -- -- 26 -- -- 26 ------ ------ ------ ------ ------ ------ Total......................... $6,652 $3,068 $1,176 $6,759 $3,068 $1,184 ====== ====== ====== ====== ====== ======
There were 30 sales of fixed maturity investments in 1998 with proceeds and gross realized gains on sale (in thousands) of $4,537 and $124, respectively. There were no sales of fixed-maturity investments in 1996 or 1997. (b) Equity securities available for sale (in thousands):
AS OF DECEMBER 31, 1997 AS OF DECEMBER 31, 1998 -------------------------------------------- -------------------------------------------- ESTIMATED ESTIMATED UNREALIZED UNREALIZED MARKET UNREALIZED UNREALIZED MARKET COST GAIN LOSS VALUE COST GAIN LOSS VALUE ------ ---------- ---------- --------- ------ ---------- ---------- --------- Preferred Stock............ $3,525 $135 $ 8 $3,652 $4,802 $164 $44 $4,922 Common Stock............... 353 32 57 328 146 -- 55 91 ------ ---- --- ------ ------ ---- --- ------ Total............. $3,878 $167 $65 $3,980 $4,948 $164 $99 $5,013 ====== ==== === ====== ====== ==== === ======
At December 31, 1997 and 1998, the Company had two (2) limited partnership interests with a cost (in thousands) of $220 and $222, respectively. One limited partnership interest with a cost basis of $100 was sold in January 1999 for $110. The unrealized gain or loss on the remaining interest cannot be ascertained, because its market value is not readily determinable. There were 4 sales of equity securities in 1998 with proceeds and gross realized gain (loss) on sale (in thousands) of $253 and $(41), respectively. There were no sales of equity securities in 1996 or 1997. 53 55 NATIONAL INFORMATION GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (c) The components of investment income are as follows (in thousands):
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 1996 1997 1998 -------- -------- -------- Fixed maturities and equity securities................... $1,246 $1,047 $1,152 Short-term investments................................... 739 655 413 Net realized gains....................................... 17 170 95 Investment expenses...................................... (27) (33) (25) ------ ------ ------ Net investment income.................................... $1,975 $1,839 $1,635 ====== ====== ======
4. PROPERTY AND EQUIPMENT The components of property and equipment are as follows (in thousands):
AS OF DECEMBER 31, -------------------- 1997 1998 -------- -------- Office furniture and equipment.............................. $ 3,726 $ 5,322 Data processing equipment................................... 8,360 9,592 Software.................................................... 4,751 5,834 Leasehold improvements...................................... 1,381 2,292 Buildings................................................... -- 239 Other....................................................... 499 248 -------- -------- 18,717 23,527 Less accumulated depreciation and amortization.............. (13,293) (15,075) -------- -------- Total............................................. $ 5,424 $ 8,452 ======== ========
Depreciation and amortization expense (in thousands) was $1,758, $1,536, and $2,459 in 1996, 1997, and 1998, respectively. 5. DEFERRED ACQUISITION COSTS Changes in deferred acquisition costs are summarized as follows (in thousands):
FOR THE YEARS ENDED DECEMBER 31, ----------------------------- 1996 1997 1998 ------- ------- ------- Deferred acquisition costs, beginning of year......... $ 2,624 $ 2,186 $ 2,704 Additions............................................. 5,859 9,161 7,405 Amortization expense.................................. (6,297) (8,643) (7,911) ------- ------- ------- Deferred acquisition costs, end of year............... $ 2,186 $ 2,704 $ 2,198 ======= ======= =======
54 56 NATIONAL INFORMATION GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSE (LAE) Activity in the reserve for loss and LAE is summarized as follows (in thousands):
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 1996 1997 1998 -------- -------- -------- Reserves for losses and LAE, beginning of year........... $3,055 $2,198 $3,232 ------ ------ ------ Losses and LAE: Provision for losses and LAE for claims occurring in current year........................................ 3,971 6,364 6,306 Change in estimated losses and LAE for claims occurring in prior years...................................... 31 119 (891) ------ ------ ------ 4,002 6,483 5,415 ------ ------ ------ Losses and LAE payments for claims occurring during: Current year........................................... 2,487 3,292 3,936 Prior years............................................ 2,372 2,157 2,226 ------ ------ ------ 4,859 5,449 6,162 ------ ------ ------ Reserves for losses and LAE, end of year................. $2,198 $3,232 $2,485 ====== ====== ======
The 1998 change in estimated losses and LAE for claims occurring in prior years is the result of claims settled in 1998 for less than the reserves established in prior years. 7. NOTES PAYABLE In September 1996, a note agreement for $2,000,000 was entered into with the Company's primary commercial bank (the "Term Note"). The Term Note was repaid monthly over a two (2) year period with final payment in October 1998. As of December 31, 1997, the unpaid principal balance of this note was approximately $333,000. The note was paid off in April 1998. In connection with the PinTax Acquisition (the "Acquisition"), National and New Arts entered into a term note facility (the "Term Facility") with the Company's primary commercial bank. The Term Facility allows for a maximum borrowing of $11.3 million, including $2 million for any additional consideration ("Additional Consideration") which may be payable pursuant to the Agreement on or before May 25, 1998. On May 26, 1998, the Company borrowed $1.5 million for Additional Consideration. The Additional Consideration resulted from PinTax receiving cash revenues in excess of certain targets for the twelve-month period ended April 30, 1998. The Term Facility matures in May 2003 and calls for interest payments at the rate of the lending bank's prime plus one and one-quarter percent, beginning September 1997. Principal is payable monthly, beginning August 31, 1998, in accordance with a variable amortization schedule. Collateral for the loan includes non-insurance company cash deposits of the Company, the common stock of Pinnacle Data, as well as the stock of PinTax and of New Arts. As of December 31, 1997 and 1998 the outstanding principal balance of the Term Facility was $9.3 million and $10.6 million, respectively. In connection with the Acquisition, PinTax paid to the sellers of ARTS (the "Sellers") approximately $2.5 million of Additional Consideration in 1998. Of these amounts, approximately $1.5 million of Additional Consideration was paid in cash using the proceeds from the Term Facility. The remaining $1.0 million of Additional Consideration was paid in the form of an unsecured note to the Sellers (the "Purchaser Note"). The Purchaser Note bears simple interest of 8% per annum. Principal and interest are due in equal quarterly installments over the three (3) years ending May 2001, with the first installment due on June 18, 1998. As of December 31, 1998, the outstanding principal balance of the Purchaser Note was approximately $0.7 million. In May 1998, the Company entered into a $2 million revolving credit facility (the "Credit Facility") with its primary commercial bank. The Credit Facility replaced the Company's previous revolving credit facility 55 57 NATIONAL INFORMATION GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) dated April 2, 1997. In September 1998, the Credit Facility was increased to $4.275 million and the maturity date of the principal payment was extended to May 31, 1999. The Credit Facility calls for monthly interest payment at the rate of 0.75% per year in excess of the rate of interest which the financial institution has announced as its prime lending rate. Collateral for the loan includes the outstanding capital stock of Pinnacle Data, which consists of 1,000 shares, along with all proceeds and products of Pinnacle Data. As of December 31, 1998, the outstanding principal balance of the Credit Facility was $2 million. The same financial covenants govern the Term Note, the Term Facility and the Revolving Facility. The primary financial covenants are: (i) a minimum tangible net worth requirement; (ii) a cash flow coverage requirement; and, (iii) a minimum profitability requirement, whereby the Company must be profitable from year-to-year and cannot report net losses for two consecutive quarters. The minimum principal payments due under all of the Company's notes payable as of December 31, 1998 is as follows (in thousands):
PRINCIPAL YEAR PAYMENT ---- --------- 1999............................................... $ 3,242 2000............................................... 1,148 2001............................................... 2,198 2002............................................... 2,868 2003............................................... 3,817 ------- Total.............................................. $13,273 =======
8. INCOME TAX The components of income tax expense (benefit) are as follows (in thousands):
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 1996 1997 1998 -------- -------- -------- Federal Current................................................ $ (829) $1,257 $ 987 Deferred............................................... 1,091 (147) (175) ------ ------ ------ Subtotal............................................ 262 1,110 812 ------ ------ ------ State Current................................................ 22 150 109 Deferred............................................... -- 176 (109) ------ ------ ------ Subtotal............................................ 22 326 -- ------ ------ ------ Total.......................................... $ 284 $1,436 $ 812 ====== ====== ======
56 58 NATIONAL INFORMATION GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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:
FOR THE YEARS ENDED DECEMBER 31, -------------------- 1996 1997 1998 ---- ---- ---- Tax at federal statutory rate............................... 35% 35% 35% Tax-exempt investment income................................ (13) (4) (5) State tax net of federal benefits........................... -- 5 4 Rate differential on net operating loss carryback........... -- (4) -- Income tax reserve reversal................................. -- -- (16) Other....................................................... (4) (1) 4 --- -- --- Total............................................. 18% 31% 22% === == ===
In 1998, the Company reversed an income tax reserve due to the favorable resolution of certain matters related to an Internal Revenue Service examination. The components of the net deferred tax asset (liability) balance as of December 31, 1997 and 1998 are as follows (in thousands):
ASSET (LIABILITY) ------------------ 1997 1998 ------- ------- Unearned premium reserve.................................... $ 423 $ 340 Deferred acquisition costs.................................. (919) (747) Loss reserve discounting.................................... 68 37 Prepaid expenses............................................ 1 (245) Deferred revenue............................................ 3,190 3,625 Accrued liabilities......................................... 412 674 Depreciation................................................ (132) (247) Other....................................................... 74 28 ------ ------ Total............................................. $3,117 $3,465 ====== ======
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. 57 59 NATIONAL INFORMATION 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, -------------------------------- 1996 1997 1998 -------- --------- ------- Unearned premium reserve................................. $ 65 $ (100) $ 83 Deferred acquisition costs............................... (149) 176 (172) Loss reserve discounting................................. (51) 22 31 Prepaid expenses......................................... 39 (135) 246 Deferred revenue......................................... 165 (3,020) (435) Prop. 103 reserve........................................ 1,541 -- -- Accrued liabilities...................................... (432) 201 (262) Depreciation............................................. -- 132 115 Other.................................................... (87) 28 46 ------ ------- ----- Total.......................................... $1,091 $(2,696) $(348) ====== ======= =====
9. EMPLOYEE BENEFIT PLAN The Company adopted a defined contribution 401(k) plan on July 1, 1996. All employees of the Company are eligible to participate in the plan at the beginning of a calendar quarter following completion of ninety days of continuous employment as defined in the 401(k) plan. The Company matches 25% of the employee's contributions up to and including the first 4% of the employee's salary. The Company's contribution was $82,406 for 1997 and $124,333 for 1998. 10. EARNINGS PER SHARE Basic and diluted earnings per share (EPS) are shown in the following table. The number of shares issuable upon exercise of outstanding options has been calculated using the treasury stock method based on the average market price during the year.
1996 1997 1998 --------- --------- --------- BASIC EPS UNDER SFAS NO. 128 Weighted average common shares.................... 4,109,655 3,946,257 4,095,154 Net income (in thousands)......................... $ 1,274 $ 3,266 2,817 Per share results: Net income.............................. $ 0.31 $ 0.83 $ 0.69
1996 1997 1998 --------- --------- --------- DILUTED EPS UNDER SFAS NO. 128 Weighted average common shares.................... 4,109,655 3,946,257 4,095,154 Common shares issuable under outstanding stock options......................................... 31,705 181,125 230,800 --------- --------- --------- Total................................... 4,141,360 4,127,382 4,325,954 ========= ========= ========= Net income (in thousands)......................... $ 1,274 $ 3,266 2,817 Per share results: Net income.............................. $ 0.31 $ 0.79 $ 0.65
58 60 NATIONAL INFORMATION GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) In June 1997, the FASB issued SFAS 130, Reporting Comprehensive Income. SFAS 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. SFAS 130 is effective for fiscal years beginning after December 15, 1997. The adoption of SFAS 130 did not affect results of operations or financial position but did affect the disclosure of comprehensive income information. All other comprehensive income is from unrealized gain (loss) on securities.
TAX BEFORE-TAX (EXPENSE) NET-OF-TAX AMOUNT OR BENEFIT AMOUNT ---------- ---------- ---------- YEAR ENDED DECEMBER 31, 1996 Net unrealized loss on securities: Net unrealized holding loss arising during period........................................ $(165) $ 58 $(107) Less: reclassification adjustment for net gain realized in net income........................ (26) 9 (17) ----- ----- ----- Net unrealized loss.............................. (191) 67 (124) ----- ----- ----- Other comprehensive loss........................... $(191) $ 67 $(124) ===== ===== ===== YEAR ENDED DECEMBER 31, 1997 Net unrealized gain on securities: Net unrealized holding gain arising during period........................................ $ 336 $(118) $ 218 Less: reclassification adjustment for net gain realized in net income........................ (262) 92 (170) ----- ----- ----- Net unrealized gain.............................. 74 (26) 48 ----- ----- ----- Other comprehensive income......................... $ 74 $ (26) $ 48 ===== ===== ===== YEAR ENDED DECEMBER 31, 1998 Net unrealized loss on securities: Net unrealized holding loss arising during period........................................ $ (36) $ 13 $ (23) Less: reclassification adjustment for net gain realized in net income........................ (147) 51 (96) ----- ----- ----- Net unrealized loss.............................. (183) 64 (119) ----- ----- ----- Other comprehensive loss........................... $(183) $ 64 $(119) ===== ===== =====
12. STOCK OPTION PLANS Under the 1986 Stock Option Plan, as amended, participants may be awarded options for shares of National's common stock subject to various restrictions which limit the sale or other transfer of the shares until the expiration of a specified time period. A maximum of 1,106,820 shares may be issued under the plan. The exercise price of options granted under the plan may not be less than 100% of the fair value on the date of the grant. In 1992 and prior years, the exercise price was limited to 110% of the fair value on the date of the grant for shareholders owning more than 10% of the voting power of all shares of stock. Under the 1991 Director Option Plan, as amended, participants may be awarded options for shares of National's common stock subject to various restrictions which limit the sale or other transfer of the shares until the expiration of a specified time period. A maximum of 325,000 shares may be issued under the plan. The exercise price of options granted under the plan may not be less than 100% of the fair value on the date of the grant. 59 61 NATIONAL INFORMATION GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) For both stock option plans, the shares subject to option vest 25% at the end of the first 12 calendar months following the date of grant, and the remainder vest ratably in each month over the next three (3) years. The maximum term of options granted is 10 years from the date of grant. Options issued to date have not resulted in any material compensation expense to the Company. However, the Company did receive tax deductions related to the exercise of stock options which reduced taxes payable by $14,235, $189,032 and $280,633 during 1996, 1997, and 1998, respectively. This amount has been credited directly to common stock. On May 31, 1996, Mr. Speizer purchased 788,795 shares from Mr. Herman, the Company's former President and certain Herman family members and trusts. On June 18, 1996, Mr. Speizer purchased 35,500 shares from Mr. Herman and his spouse. Such purchases constituted the purchase of all shares owned and beneficially owned by Mr. Herman. In 1998 the Company granted 75,000 stock options under the 1986 Stock Option Plan to two former directors in their capacity as consultants to the Company in connection with a consulting agreement. The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its plans. Accordingly, compensation expense has been recognized only for grants to non-employees. Compensation expense recognized in 1998 was $76,800. No compensation expense was recognized in 1997 or 1996. Had compensation expense for the Company's stock options plans been determined based upon the fair value at the grant date for all awards under these plans consistent with the optional expense measurement method described in SFAS No. 123 "Accounting for Stock-Based Compensation", the Company's net income would have been reduced by approximately $356,000 for 1996, $432,000 for 1997 and $604,000 for 1998. Diluted earnings per share would have been $0.22 in 1996, $0.69 in 1997 and $0.51 for 1998. The pro forma effect on net income for 1996, 1997 and 1998 is not representative of the pro forma effect on net income in future years because it does not take into consideration pro forma compensation expense related to grants made prior to 1996. The weighted average fair value on the date of the grant, of options granted during 1996, 1997 and 1998, is estimated at $2.88, $4.37 and $4.45, respectively. Fair value is determined using the modified Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1997 and 1998:
1996 1997 1998 ------------- ------------- ------------- Dividend yield................ 0% 0% 3.0% Expected volatility........... 42.41% 46.30% 57.45% Risk-free interest rates...... 5.11% - 6.77% 5.76% - 6.75% 4.62% - 5.69% Expected life................. 5 years 5 years 5 years
60 62 NATIONAL INFORMATION GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table summarizes option activity during 1997 and 1998 for the 1986 Stock Option Plan, as amended, and 1991 Director Option Plan, as amended.
1996 1997 1998 ---------------------------- ---------------------------- --------------------------- WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE EXERCISE PRICE EXERCISE PRICE EXERCISE PRICE OPTIONS PER SHARE OPTIONS PER SHARE OPTIONS PER SHARE --------- ---------------- --------- ---------------- -------- ---------------- Shares issuable under outstanding options at January 1.............. 771,830 $6.66 1,144,783 $6.65 969,652 $7.32 Options granted.......... 566,000 $6.14 288,000 $8.65 219,500 $9.53 Options exercised........ (22,540) $6.64 (135,945) $6.10 (128,894) $6.66 Options canceled or forfeited.............. (170,507) $5.64 (327,186) $6.67 (148,669) $9.44 --------- --------- -------- Shares issuable under outstanding options at December 31............ 1,144,783 $6.65 969,652 $7.32 911,589 $7.60 ========= ========= ======== Options exercisable at December 31............ 836,970 $6.84 723,297 $7.63 510,632 $6.85 ========= ========= ========
Options may be exercised in whole or part at any time as to shares which have not yet vested under the provisions of the 1986 Stock Option Plan, as amended, provided that the Optionee execute, as a condition to the option, a Restricted Stock Purchase Agreement which gives the Company the right to repurchase at cost the unvested shares in the event of a termination of the optionee's employment or consulting with the Company prior to the date upon which they would have vested under the Option agreement. The following table summarizes information about options outstanding at December 31, 1998.
AVERAGE WEIGHTED AVERAGE RANGE OF NUMBER OF REMAINING LIFE EXERCISE PRICE PER EXERCISE PRICES OUTSTANDING OPTIONS (YEARS) SHARE - --------------- ------------------- -------------- ------------------ $5.13 - $7.30 576,443 6.60 $ 6.07 $8.31 - $13.00 313,802 8.61 $ 9.98 $13.63 - $15.25 21,344 8.04 $13.97 ------- ---- ------ Total: 911,589 7.33 $ 7.60 ======= ==== ======
The following table summarizes information about options exercisable at December 31, 1998.
NUMBER OF WEIGHTED AVERAGE RANGE OF EXERCISABLE EXERCISE PRICE PER EXERCISE PRICES OPTIONS SHARE - --------------- ----------- ------------------ $5.13 - $7.30 439,859 $ 6.03 $8.31 - $13.00 66,929 $11.77 $13.63 - $15.25 3,844 $14.75 ------- ------ Total: 510,632 $ 6.85 ======= ======
13. COMMON STOCK REPURCHASE On September 17, 1996, the Company repurchased 705,300 shares of its common stock for $4.9 million. The shares were acquired through a private transaction with institutional investors at a price of $7 per share. This repurchase represented a reduction of approximately 15% of the Company's outstanding stock. A second repurchase of 100,000 shares was made on October 22, 1996. The shares were acquired through a private transaction at a price of $6.95 per share. The repurchases were funded by cash flows from operations and from proceeds of a bank credit facility. See Note 7 to Notes to Consolidated Financial Statements. 61 63 NATIONAL INFORMATION GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. DIVIDEND RESTRICTION California law limits the payment of dividends to National by GPIC. The maximum dividend that may be paid without prior approval of the California Insurance Commissioner is limited to the greater of 10% of policyholders' surplus (shareholders' equity adjusted to a statutory basis) as of the preceding December 31, or the net income of the preceding calendar year. In 1999, the maximum dividend would be limited to 10% of policyholders' surplus of GPIC at December 31, 1998 or approximately $2.4 million. Statutory policyholders' surplus and net income of GPIC is as follows (in thousands):
1996 1997 1998 ------- ------- ------- Statutory policyholders' surplus...................... $26,765 $25,580 $24,232 Net income............................................ $ 2,758 $ 1,627 $ 913
California law further prohibits the payment of dividends without prior approval of the California Department of Insurance (the "Department") unless the insurer has available "earned surplus". The term "earned surplus" is defined as unassigned funds (surplus) as reported on the insurer's statutory annual statement filed with the Department, excluding earned surplus derived from: (i) unrealized net appreciation of assets; and (ii) an exchange of assets, unless such earned surplus has been realized or the assets received in exchange are currently realizable in cash. An exception to this prohibition is allowed where the insurer's surplus as regards policyholders is: (i) reasonable in relation to its outstanding liabilities; (ii) adequate to the insurer's financial needs; and (iii) the Department's prior approval is obtained. GPIC paid National $2.5 million in dividends in 1998 and in 1997. There were no cash dividends paid by GPIC in 1996. 15. COMMITMENTS The Company leases its principal offices located in South San Francisco, California, which are used as the Company's headquarters and as the primary operations center for GPIC, PMSIS, Fastrac, and Pinnacle Data. In addition the Company leases space in Concord, California, which is used by Pinnacle Data primarily for making manual flood zone determinations. The Company leases space in Springfield, Ohio, which is used by Fastrac with respect to its motor vehicle insurance tracking and outsourcing operations. The Company leases space in Chantilly, Virginia and Warwick, Rhode Island, which is used as the primary operations centers of PinTax. The Company leases space in Tucson, Arizona, which is used by Pinnacle Data, PinTax and Fastrac. The Company also leases other sales and service offices. Rental expense under operating leases was $1,175,000, $1,447,000, and $2,837,000 in 1996, 1997, and 1998, respectively. National has entered into employment contracts with certain key employees which are not at-will employment agreements. Base compensation expense (not including bonus or commission) under such employment contracts was, $286,019, $590,000 and $590,000 in 1996, 1997 and 1998, respectively. In addition, in 1996 National paid $1,328,200 to certain individuals upon a change of control of the Company. As of December 31, 1998, National had commitments for such future compensation with respect to employment contracts with Mark Speizer and Bruce Cole. 62 64 NATIONAL INFORMATION GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The future minimum payments due under commitments at December 31, 1998 are as follows (in thousands):
OPERATING EMPLOYMENT FOR THE YEAR ENDING DECEMBER 31, LEASES AGREEMENTS -------------------------------- --------- ---------- 1999.................................................. $ 3,261 $306 2000.................................................. 2,197 -- 2001.................................................. 1,920 -- 2002.................................................. 1,658 -- 2003.................................................. 1,585 -- ------- ---- Total minimum payments................................ $10,621 $306 ======= ====
In late December 1998 and early 1999 the Company entered into Retention and Modification of At-Will Employment Agreements ("Agreements") with certain employees as an incentive to keep the services of such employees available to the Company during the pendency of the Merger, as defined in Note 20 of Notes to Consolidated Financial Statements, and thereafter. Total potential payments under such agreements are $621,000 subject to certain contingencies. Of the total potential payments, $62,000 was paid in January 1999, $180,000 will be payable in 2000 contingent only upon the individual's continued employment and the remainder is payable in 1999 and 2000 contingent upon consummation of the Merger and the individuals' continued employment. The cost of such agreements will be recorded as expense on a pro rata basis over the respective service periods. 16. PROPOSITION 103 On October 25, 1995, GPIC entered into a stipulation and consent order with the California Insurance Department to resolve GPIC's rollback obligation related to California Proposition 103. Pursuant to that settlement, GPIC agreed to pay the sum of approximately $4.1 million as a rollback refund to its policyholders for the rollback year. The Company issued the refund checks during the first quarter of 1996. The rollback refund was paid to each eligible policyholder in the proportion that the written premium for each policyholder bears to GPIC's total written premiums in California for policies in Proposition 103 lines issued or renewed during the rollback year. Pursuant to the settlement, the rollback refund constitutes GPIC's entire rollback obligation and fully discharges GPIC and extinguishes all of its obligations to rollback rates, make refunds to policyholders, or pay interest to policyholders. The Department has agreed to seek no further rollbacks or interest against GPIC for the rollback year. Also, the settlement approves all rate filings which received interim approvals for current rate levels made since 1989, and all rates and rate levels charged by GPIC from time to time between November 8, 1989 and the date the settlements were approved. In October 1997, the amount of the uncashed refund checks were escheated to the State of California in accordance with its laws. The Company had previously established adequate reserves to cover such payments. 17. REINSURANCE GPIC, in the ordinary course of its business, seeks to reduce the loss that may arise from catastrophes or other events that may cause unfavorable underwriting results by reinsuring certain levels of risk with other insurance companies. Recoverables under the reinsurance agreements are estimated in a manner consistent with the claim liability associated with the reinsured policy. Risks reinsured would become a liability of GPIC in the event any reinsurer is unable or will not fulfill the obligations assumed under the agreements. GPIC limits its credit risk associated with reinsurance recoverables by evaluating the financial condition of members of the reinsurance pool, and diversifying the pool participants. For the years ended December 31, 1996, 1997 and 1998, there were no receivables recorded under reinsurance treaties. 63 65 NATIONAL INFORMATION GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) For the years ended December 31, 1996, 1997, and 1998, ceded reinsurance premiums, exclusive of flood reinsurance premiums, were $691,000, $780,338, and $684,396, respectively, and with respect to losses in such years, there were no ceded reinsurance losses. GPIC is also a "Write Your Own" ("WYO") carrier under the National Flood Insurance Program. The premiums written and the insurance risks under the WYO program are ceded to the Federal Emergency Management Agency ("FEMA"). The form of this treaty is the actual assumption of liability by FEMA and, accordingly, amounts are excluded from net premiums and accounts receivable and reserve for losses and LAE. For the years ended December 31, 1996, 1997, and 1998, ceded reinsurance premiums for this program were $2,268,000, $2,859,438, and $2,952,307, respectively. 18. MAJOR CUSTOMERS During 1996, National and Subsidiaries derived 9% of total revenues from one customer, of which all was for insurance services. During 1997, National and Subsidiaries derived 11.8% of total revenues from one customer, all of which was for insurance services. In the second half of 1997 the Company received notice that such customer and one other customer, which, combined, accounted for 18.8% of consolidated revenues in 1997, would not renew their hazard tracking, outsourcing and lender-placed insurance contracts. During 1998, the Company derived 10% of total revenues from one customer for insurance and flood zone determination services. 19. RELATED PARTY TRANSACTIONS The Chief Executive Officer of the Company previously owned a controlling interest in another entity, which ceased doing business in 1994. The Company assumed, in 1993, a lease of such entity's principal office located at 395 Oyster Point Boulevard, South San Francisco, California (which the Company used to expand its corporate headquarters), requiring lease payments of $21,000 per month. One of the companies which provides reinsurance to the Company is Constitution Reinsurance Corporation. Bard E. Bunaes, a director of the Company, is also Chairman of the Board and Chief Executive Officer of Constitution Reinsurance Corporation. Constitution Reinsurance Corporation has been a reinsurer of the Company in excess of 15 years. In 1996, 1997 and 1998 premiums paid to Constitution Reinsurance Corporation by the Company with respect to such reinsurance totaled approximately $34,000, $70,000 and $64,000, respectively. In September 1998 National entered into a consulting agreement with Scorpion Holdings, Inc., a Delaware corporation ("Scorpion"), an affiliate of Scorpion Acquisition, pursuant to which Scorpion agreed to provide certain consulting and advisory services National may from time to time request. The term of the consulting agreement is for one (1) year, which expires on September 10, 1999. Pursuant to the consulting agreement, Scorpion receives an annual fee of $48,000 plus reimbursement for reasonable out-of-pocket costs and expenses. Based upon information furnished to the Company the Company understands that Mr. Brandolini was the sole shareholder, a director and chief executive officer of Scorpion. Mr. McCarthy was a director and president of Scorpion. In July, 1997, an affiliate of Scorpion, known as Scorpion Acquisition, LLC ("Scorpion Acquisition"), sold to Mark A. Speizer certain rights previously granted to Scorpion Acquisition by Mr. Speizer to acquire shares of National owned by Mr. Speizer. In consideration for sale of such rights to Mr. Speizer, Mr. Speizer will pay to Scorpion Acquisition an amount equal to the greater of $4,000,000 or 50% of the notional profits that would have been earned on a notional 924,000 shares of Common Stock with a notional cost of $7.75 per share, each subject to certain defined adjustments. Profits are determined by reference to the average closing price of Common Stock (and the average closing price of securities other than Common Stock paid by dividend, spin-off or otherwise on Common Stock ["Distributed Stock']) during the fifteen business days 64 66 NATIONAL INFORMATION GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) preceding and the fifteen business days following June 30, 2002, or if Scorpion Acquisition has made an election permitted under its purchase agreement with Mr. Speizer, that date between January 1, 2000 and June 30, 2002 that is so elected. Mr. Speizer may pay the purchase price in cash or in shares of National or shares of Distributed Stock subject to having received any necessary approvals or exemptions from the California Insurance Commissioner as may be required by statute or regulation. In August 1997, National invested $100,000 for a limited partnership interest in Pizza Partners, L.P., a Delaware limited partnership. Among other things, such partnership was formed to acquire a number of Pizza Hut restaurants in Northern California, Oregon and Nevada. The investment was identified and recommended to the Company by Scorpion. Effective January 1, 1999 National assigned its entire interest in Pizza Partners, L.P. to Pizza Investments (BVI), Ltd. for $110,000 and withdrew as a partner of Pizza Partners L.P. Scorpion is a financial advisor to Pizza Investments (BVI) Ltd. In July 1997, Arabella acquired 300,000 shares of the Company's stock from Mr. Speizer and was paid $2 million by Mr. Speizer in repayment of a loan made to Mr. Speizer in May 1996. See Note 20 of Notes to Consolidated Financial Statements. In November 1997, such shares were transferred to Scorpion Acquisition by Arabella in exchange for an 80% interest in Scorpion Acquisition. Mr. Brandolini and Mr. McCarthy each own an 8.4% interest as members of Scorpion Acquisition. Mr. Paul Caland owns an 80% interest in Scorpion Acquisition, which interest Mr. Caland acquired from Arabella in December 1997. The interests of Messrs. Brandolini, McCarthy and Caland in Scorpion Acquisition and the transfer of the member interests of Arabella to Mr. Caland are based upon information filed by Scorpion Acquisition and Mr. Caland in a Schedule 13D with the Securities and Exchange Commission on February 27, 1997. 20. CHANGE IN CONTROL Effective as of November 17, 1998 National and The First American Financial Corporation, a California corporation ("FAFCO"), approved an agreement to merge (the "Merger Agreement") National with a subsidiary of FAFCO (the "Merger"). As a result of this Merger, National would become a wholly owned subsidiary of FAFCO and FAFCO would issue to National stockholders 0.67 of a share of FAFCO common stock for each share of National common stock that they own in exchange for their shares of National common stock. The Merger is subject to, among other things, the approval of the California Department of Insurance and the approval of a majority of the outstanding shares of National. A special meeting of the shareholders of National is required to be held to obtain the approval of such shareholders. National has incurred costs totaling $587,000 as of December 31, 1998 in connection with the negotiation of the Merger Agreement and in preparation for the consummation of the Merger, and additional costs will be incurred prior to the consummation of the Merger. All of such costs have been deferred and reported as Other Assets on the Balance Sheet. Such costs are not reflected in the Consolidated Statements of Operations and Comprehensive Income included in this Report. If the Merger is consummated, such costs will be recorded as expense in the future financial statements of National, as a subsidiary of FAFCO. If the Merger is not consummated, such costs will be recorded as expense by National in the quarter in which the Merger transaction is abandoned. If the Merger is abandoned such costs would have a material adverse effect on the net income and earnings per share of National for the quarter and the calendar year in which the Merger is abandoned. Pursuant to an Option and Stock Purchase Agreement entered into on May 1, 1996, between Howard L. Herman, a founder and former director of the Company, and certain of Mr. Herman's relatives, and Mark A. Speizer, it was agreed that 824,295 shares of Common Stock of the Company (the "Herman shares") would be sold to Mr. Speizer. 788,795 of the Herman Shares were purchased on May 31, 1996 and the remaining shares were purchased on June 18, 1996. At the annual meeting of shareholders held on July 11, 1996, the slate of directors nominated by the Board of Directors was elected. Following the annual meeting, Mr. Speizer was elected Chairman of the Board and Chief Executive Officer of the Company and each of its wholly-owned 65 67 NATIONAL INFORMATION GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) subsidiaries. In June 1996, the Company accrued $1.4 million of expense as a result of retention agreements entered into with certain executives. The purpose of the agreements was to ensure the availability and employment of those executives through the transition following the change of control of the Company which occurred in July 1996. 21. LITIGATION The Company is involved in various routine legal proceedings incident to its business and other litigation. While the ultimate disposition of each proceeding is not determinable, the Company does not believe that any of such current proceedings is likely to have a materially adverse effect on the consolidated financial position of the Company. 22. ACQUISITION On September 18, 1997, two wholly-owned subsidiaries of the Company, Pinnacle American Realty Tax Services, Inc., a Delaware corporation ("PARTS-VA"), and Pinnacle American Realty Tax Services of New York, Inc., a Delaware corporation ("PARTS-NY"), acquired substantially all the assets and assumed certain liabilities of American Realty Tax Services, Inc., a Virginia corporation ("ARTS-VA"), and American Realty Tax Services of New York, Inc., a Virginia corporation ("ARTS-NY") (ARTS-NY and ARTS-VA, collectively "ARTS"). The acquisition agreement, dated August 15, 1997, as amended (the "Agreement"), was entered into by and among ARTS, the shareholders of ARTS, the Company, and New Arts. On October 1, 1997, PARTS-VA changed its name to Pinnacle Real Estate Tax Services, Inc. and PARTS-NY changed its name to Pinnacle Real Estate Tax Services of New York, Inc. The business of PinTax is providing Real Estate Tax Services. As consideration for the acquisition of certain assets of ARTS. New Arts paid $9.8 million in cash and agreed to assume certain liabilities of ARTS. Pursuant to the Agreement, if the cash revenue received by the Company for certain contracts of PinTax exceeded certain targets for the twelve months ended and including April 30, 1998, PinTax was required to pay additional consideration of up to $4 million according to a formula as set forth in the Agreement ("Additional Consideration"). The Company paid $2.5 million of Additional Consideration in 1998, of which $1.5 million was paid in cash and $1.0 million was paid in the form of the Purchaser Note described in Note 7 of Notes to Consolidated Financial Statements. The Additional Consideration was recorded as goodwill. The PinTax Acquisition was accounted for as a purchase of assets. The fair market value of the assets acquired from ARTS was approximately $4.4 million. The fair market value of liabilities assumed was approximately $7.3 million, including approximately $7 million of deferred revenue related to ARTS' then existing portfolio of loans. The amount of goodwill recorded as of the date of PinTax Acquisition was $12.7 million, which is being amortized over a 25 year period as a result of long standing vendor and customer relationships. 66 68 NATIONAL INFORMATION GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following pro forma financial statements reflect the results of operations for 1996 and 1997 as though the PinTax Acquisition had occurred at the beginning of the respective periods. The pro forma figures include the following adjustments: (i) goodwill amortization expense of $510,000 in 1996 and $379,000 in 1997; (ii) a reduction in investment income on investments not purchased as part of the PinTax Acquisition of $635,000 and $11,000 in 1996 and 1997, respectively, which had been credited to ARTS' expenses; and, (iii) interest on the debt incurred in connections with the PinTax Acquisition of $868,000 in 1996 and $590,000 in 1997. STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 (FIGURES IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
COMBINED PRO FORMA (UNAUDITED) ------------------ AUDITED 1996 1997 1998 ------- ------- ------- Revenues.............................................. $49,082 $58,648 $66,552 Expenses.............................................. 48,029 54,361 62,923 ------- ------- ------- Income before taxes................................... 1,053 4,287 3,629 Tax provision......................................... 77 1,266 812 ------- ------- ------- Net income............................................ $ 976 $ 3,021 $ 2,817 ======= ======= ======= Net income per share: Basic............................................... $ 0.24 $ 0.77 $ 0.69 ======= ======= ======= Diluted............................................. $ 0.24 $ 0.73 $ 0.65 ======= ======= =======
23. SEGMENT REPORTING In 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) 131, Disclosures about Segments of an Enterprise and Related Information. SFAS 131 supersedes SFAS 14, Financial Reporting for Segments of a Business Enterprise, replacing the "industry segment" approach with the "management" approach. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. SFAS 131 also requires disclosures about products and services, geographic areas, and major customers. The adoption of SFAS 131 did not affect results of operations or financial position but did affect the disclosure of segment information. The principal segments of the Company are the following: Real Estate Tracking and Outsourcing Services.......... The Company, through the Pinnacle Companies, provides real estate tracking and outsourcing services to its mortgage lending customers. These services include flood zone determinations, real estate tax tracking and outsourcing and hazard insurance tracking and outsourcing. Motor Vehicle Insurance Tracking and Outsourcing Services...................... The Company, through its Fastrac subsidiary, provides multiple tracking features for motor vehicle and other consumer loans and lease portfolios of its clients and performs certain of the client tasks on an outsourced basis. 67 69 NATIONAL INFORMATION GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Insurance Products............ The Company, through its wholly-owned subsidiary Great Pacific Insurance Company ("GPIC") provides specialized, fire, allied peril or physical damage insurance (generally referred to as "lender-placed" insurance) in 48 states and the District of Columbia and through nonaffiliated insurance companies in the remainder of the United States. The Company also provides flood insurance, for which the risk is assumed by an agency of the U.S. Government under the National Flood Insurance Program ("NFIP"). In addition, the Company provides fire and allied peril insurance with respect to properties on which financial institutions have foreclosed, and physical damage insurance on motor vehicles. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Segment data includes intersegment revenues. The Company evaluates the performance of its segments based on profit or loss from operations before income taxes. The Company's reportable segments are strategic business units that offer different services. They are managed separately because each business requires different technology and marketing strategies. In 1998, the Company changed the structure of its internal organization in a manner that caused the composition of its reportable segments to change. All information services were combined as one segment prior to 1998. The Company has determined that it is impracticable to restate segment information for earlier periods based on the reportable segments in 1998. The table below presents information about reported segments for the years ending December 31 (in thousands). Asset information by reportable segment for the new segments is not reported for 1998 since the Company does not produce such information internally:
MOTOR VEHICLE REAL ESTATE INSURANCE TRACKING TRACKING AND OUTSOURCING AND OUTSOURCING INSURANCE SERVICES SERVICES PRODUCTS TOTALS --------------- --------------- --------- ------- 1998: Operating revenues........................... $40,701 $12,101 $16,520 $69,322 Interest and investment revenue.............. $ 24 $ 3 $ 1,608 $ 1,635 Interest expense............................. $ 1,074 $ -- $ -- $ 1,074 Depreciation and amortization................ $ 1,354 $ 495 $ 494 $ 2,343 Segment profit (loss)........................ $ 4,155 $(1,316) $ 906 $ 3,745
68 70 NATIONAL INFORMATION GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INFORMATION INSURANCE SERVICES PRODUCTS TOTALS ----------- --------- ------- 1998: Operating revenues.......................................... $52,802 $16,520 $69,322 Interest and investment revenue............................. $ 27 $ 1,608 $ 1,635 Interest expense............................................ $ 1,074 $ -- $ 1,074 Depreciation and amortization............................... $ 1,849 $ 494 $ 2,343 Segment profit.............................................. $ 2,839 $ 906 $ 3,745 Total assets................................................ $25,613 $37,454 $63,067 1997: Operating revenues.......................................... $37,204 $20,001 $57,205 Interest and investment revenue............................. $ 110 $ 1,635 $ 1,745 Interest expense............................................ $ 277 $ -- $ 277 Depreciation and amortization............................... $ 1,102 $ 336 $ 1,438 Segment profit.............................................. $ 2,296 $ 2,233 $ 4,529 Total assets................................................ $25,686 $44,776 $70,462 1996: Operating revenues.......................................... $26,698 $14,432 $41,130 Interest and investment revenue............................. $ 140 $ 1,821 $ 1,961 Interest expense............................................ $ -- $ -- $ -- Depreciation and amortization............................... $ 1,278 $ 467 $ 1,745 Segment profit.............................................. $ 352 $ 3,146 $ 3,498 Total assets................................................ $ 8,618 $43,445 $52,063
69 71 NATIONAL INFORMATION GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Reconciliations of the above segment totals to the consolidated totals for the years ended December 31 are as follows (in thousands):
1996 1997 1998 ------- ------- ------- REVENUES Total operating revenues for reportable segments............ $41,130 $57,205 $69,322 Total interest and investment revenues from reportable segments.................................................. 1,961 1,745 1,635 Elimination of intersegment revenue......................... (2,422) (5,966) (4,405) Other revenues.............................................. 14 94 -- ------- ------- ------- Consolidated totals............................... $40,683 $53,078 $66,552 ======= ======= ======= PROFIT Total profit for reportable segments........................ $ 3,498 $ 4,529 $ 3,745 Corporate income (expenses)................................. (1,940) 173 (116) ------- ------- ------- Income before income taxes........................ $ 1,558 $ 4,702 $ 3,629 ======= ======= ======= ASSETS Total assets for reportable segments........................ $52,063 $70,462 $63,067 Eliminations................................................ (8,493) (7,789) (5,770) Corporate assets............................................ 3,542 4,069 10,644 ------- ------- ------- Consolidated totals............................... $47,112 $66,742 $67,941 ======= ======= ======= OTHER SIGNIFICANT ITEMS Interest and investment revenue -- segment totals........... $ 1,961 $ 1,745 $ 1,635 Adjustment.................................................. 14 94 -- ------- ------- ------- Consolidated totals............................... $ 1,975 $ 1,839 $ 1,635 ======= ======= ======= Interest expense -- segment totals.......................... $ -- $ 277 $ 1,074 Adjustment.................................................. 71 145 40 ------- ------- ------- Consolidated totals............................... $ 71 $ 422 $ 1,114 ======= ======= ======= Depreciation and amortization expense -- segment totals..... $ 1,745 $ 1,438 $ 2,343 Adjustment.................................................. 10 98 115 ------- ------- ------- Consolidated totals............................... $ 1,755 $ 1,536 $ 2,458 ======= ======= =======
The adjustments above represent the amount of expenses incurred for the corporate headquarters, which is not included in segment information. All revenues derived from external customers are generated in the United States, which is the Company's country of domicile. All long-lived assets are also located in the United States. During 1998, revenues from one customer of the Company's real estate tracking and outsourcing services and insurance products segments represent approximately $6.6 million of the Company's consolidated revenues. 70 72 NATIONAL INFORMATION GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 24. RESULTS BY QUARTER (UNAUDITED)
QUARTER ENDED --------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1997 1997 1997 1997 --------- -------- ------------- ------------ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Total revenue............... $10,914 $12,593 $13,227 $16,342 Income before provision for income taxes.............. 1,179 1,335 1,361 828 Net income.................. 802 838 878 749 Net income per share-diluted............. $ 0.20 $ 0.21 $ 0.22 $ 0.18 Net income per share-basic............... $ 0.21 $ 0.21 $ 0.22 $ 0.19 QUARTER ENDED --------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1998 1998 1998 1998 --------- -------- ------------- ------------ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Total revenue............... $15,979 $16,643 $16,994 $16,935 Income before provision for income taxes.............. 882 618 809 1,320 Net income.................. 588 427 940 862 Net income per share-diluted............. $ 0.14 $ 0.10 $ 0.22 $ 0.20 Net income per share-basic............... $ 0.15 $ 0.10 $ 0.23 $ 0.21
71 73 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES Our report on the consolidated financial statements of National Information Group and its 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. PricewaterhouseCoopers LLP February 15, 1999 72 74 SCHEDULE I NATIONAL INFORMATION GROUP AND SUBSIDIARIES SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 1998
AMOUNT AT NUMBER OF WHICH SHOWN SHARES OR MARKET IN THE PRINCIPAL COST VALUE BALANCE SHEET --------- ----------- ----------- ------------- Fixed Maturities: Bonds and notes: U.S. Government securities......... $ 1,149,811 $ 1,158,078 $ 1,158,078 Municipalities..................... 4,030,537 4,103,355 4,103,355 States............................. 1,327,825 1,353,234 1,353,234 Corporate.......................... 1,293,826 1,302,247 1,302,247 Certificates of deposit............ 3,067,496 3,067,496 3,067,496 Mortgage-backed securities......... 26,656 26,656 26,656 ----------- ----------- ----------- Total Fixed Maturities........ 10,896,151 11,011,066 11,011,066 ----------- ----------- ----------- Equity Securities: Preferred stock Public Utilities................... 51,564 1,685,395 1,765,803 1,765,803 Financial Institutions............. 78,000 2,039,750 2,080,875 2,080,875 Industrial......................... 39,000 1,078,250 1,076,750 1,076,750 Common stock Industrial......................... 14,000 146,400 89,688 89,688 Other.............................. 222,220 222,220 222,220 ----------- ----------- ----------- Total Equity Securities....... 5,172,015 5,235,336 5,235,336 ----------- ----------- ----------- Short-term Investments................ 3,438,124 3,438,124 3,438,124 ----------- ----------- ----------- Total Investments............. $19,506,290 $19,684,526 $19,684,526 =========== =========== ===========
73 75 SCHEDULE II NATIONAL INFORMATION GROUP AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY) BALANCE SHEETS ASSETS
AS OF DECEMBER 31, -------------------------- 1997 1998 ----------- ----------- Short-term investment and cash.............................. $ 153,350 $ 248,963 Investments in subsidiaries................................. 25,902,253 23,707,590 Receivable from subsidiaries................................ 2,762,350 5,174,090 Federal and state income taxes receivables.................. 484,990 2,880,272 Deferred federal income taxes receivables................... 153,113 184,805 Other assets................................................ 514,929 2,155,826 ----------- ----------- Total assets...................................... $29,970,985 $34,351,546 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Accrued liabilities......................................... $ 1,857,222 $ 1,999,584 Notes payable(1)............................................ 333,333 2,000,000 ----------- ----------- Total liabilities................................. 2,190,555 3,999,584 ----------- ----------- Shareholders' equity Common stock.............................................. 18,610,173 19,749,337 Retained earnings......................................... 9,170,257 10,602,625 ----------- ----------- Total shareholders' equity........................ 27,780,430 30,351,962 ----------- ----------- Total liabilities and shareholders' equity........ $29,970,985 $34,351,546 =========== ===========
- --------------- (1) Notes payable balances as of December 31, 1997 and 1998 are due in less than one year. 74 76 SCHEDULE II NATIONAL INFORMATION GROUP AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY) STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, -------------------------------------- 1996 1997 1998 ---------- ---------- ---------- Net investment income.................................. $ 14,495 $ 105,251 $ 348 Operating expenses..................................... 29,229 69,978 (116,032) (Provision for) benefit from income taxes.............. (991,959) 139,020 2,508,624 Equity in net income of subsidiaries................... 2,221,737 2,951,733 424,736 ---------- ---------- ---------- Net income........................................ $1,273,502 $3,265,982 $2,817,676 ========== ========== ==========
75 77 SCHEDULE II NATIONAL INFORMATION GROUP AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY) STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, ----------------------------------------- 1996 1997 1998 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income.......................................... $ 1,273,502 $ 3,265,982 $ 2,817,676 Adjustments to reconcile net income to net cash provided (used) by operating activities: Undistributed equity in net income of subsidiaries................................... (2,221,737) (2,951,733) (424,736) Increase in taxes receivable...................... (241,060) (1,320,368) (2,426,974) Other............................................. 5,149,149 1,792,635 (3,910,273) ----------- ----------- ----------- Net cash provided (used) by operating activities.... 3,959,854 786,516 (3,944,307) ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of investments............................. -- (2,393,731) (2,220) Maturity of investments............................. 143,000 2,173,731 -- ----------- ----------- ----------- Net cash provided (used) by investing activities.... 143,000 (220,000) (2,220) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from capital contributions................. -- 4,495,000 2,500,000 Dividends paid...................................... -- (5,103,706) (1,265,910) Proceeds from stock options exercised............... 188,601 1,018,385 1,139,164 Repurchase of common stock.......................... (5,667,365) -- -- Proceeds from (payment to) notes payable............ 1,333,333 (1,000,000) 1,666,666 ----------- ----------- ----------- Net cash provided (used) by financing activities.... (4,145,431) (590,321) 4,039,920 ----------- ----------- ----------- Net change in cash.................................. (42,577) (23,805) 93,393 Cash at beginning of year........................... (268) (42,845) (66,650) ----------- ----------- ----------- Cash at end of year................................. $ (42,845) $ (66,650) $ 26,743 =========== =========== ===========
76 78 SCHEDULE III NATIONAL INFORMATION GROUP AND SUBSIDIARIES SUPPLEMENTARY INSURANCE INFORMATION CONCERNING PROPERTY CASUALTY OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, ----------------------------------------- 1996 1997 1998 ----------- ----------- ----------- Deferred policy acquisition costs................... $ 2,186,586 $ 2,704,326 $ 2,197,827 Reserves for unpaid claims and claims adjustment expenses.......................................... 2,198,478 3,231,589 2,484,517 Unearned premiums................................... 4,753,448 6,216,693 4,994,616 Earned premiums..................................... 13,585,007 19,037,427 15,512,202 Net investment income............................... 1,974,925 1,838,888 1,635,525 Claims and claim adjustment expenses incurred related to: Current year...................................... 3,971,000 6,364,000 6,307,000 Prior year........................................ 31,000 119,000 (892,000) Amortization of deferred policy acquisition costs... 6,296,010 8,643,187 7,911,479 Paid claims and claim adjustment expense............ 4,859,000 5,449,000 6,162,000 Net premiums written................................ 12,635,058 20,500,672 14,290,125
77 79 SCHEDULE IV NATIONAL INFORMATION GROUP AND SUBSIDIARIES REINSURANCE FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
PERCENTAGE CEDED ASSUMED OF AMOUNT GROSS TO OTHER FROM OTHER ASSUMED AMOUNT COMPANIES COMPANIES NET AMOUNT TO NET ----------- --------------- ---------- ----------- ---------- Fire and allied lines insurance premiums: Year ended December 31, 1998.... $14,605,460 $ 684,396 $ (723) $13,920,341 (0.0)% =========== ========== ======== =========== ==== Year ended December 31, 1997.... $20,326,220 $ 780,338 $ (9,689) $19,536,193 (0.0)% =========== ========== ======== =========== ==== Year ended December 31, 1996.... $13,005,117 $ 691,208 $(29,511) $12,284,398 (0.2)% =========== ========== ======== =========== ==== Auto physical damage insurance premiums: Year ended December 31, 1998.... $ 357,588 $ -- $ -- $ 375,588 0.0% =========== ========== ======== =========== ==== Year ended December 31, 1997.... $ 672,540 $ -- $ -- $ 672,540 0.0% =========== ========== ======== =========== ==== Year ended December 31, 1996.... $ (18,430) $ -- $ -- $ (18,430) 0.0% =========== ========== ======== =========== ==== Flood insurance premiums: Year ended December 31, 1998.... $ 2,952,307 $2,952,307 $ -- $ -- 0.0% =========== ========== ======== =========== ==== Year ended December 31, 1997.... $ 2,859,438 $2,859,438 $ -- $ -- 0.0% =========== ========== ======== =========== ==== Year ended December 31, 1996.... $ 2,267,703 $2,267,703 $ -- $ -- 0.0% =========== ========== ======== =========== ====
78 80 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 INFORMATION GROUP a California corporation Date: March 22, 1999 By: /s/ ROBERT P. BARBAROWICZ ------------------------------------ Robert P. Barbarowicz, Executive Vice President, General Counsel and Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, this Report on Form 10-K has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ MARK A. SPEIZER Director, Chief Executive Officer, March 22, 1999 - ------------------------------------------------ and Chairman of the Board Mark A. Speizer /s/ BRUCE A. COLE Director and President March 22, 1999 - ------------------------------------------------ Bruce A. Cole /s/ RORY C. SNYDER Vice President, Treasurer and March 22, 1999 - ------------------------------------------------ Controller (Principal Financial and Rory C. Snyder Accounting Officer) /s/ BARD E. BUNAES Director March 22, 1999 - ------------------------------------------------ Bard E. Bunaes /s/ LAWRENCE M. GOODMAN Director March 22, 1999 - ------------------------------------------------ Lawrence M. Goodman /s/ SAUL B. JODEL Director March 22, 1999 - ------------------------------------------------ Saul B. Jodel
79 81 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 2.1 Agreement and Plan of merger, dated as of November 17, 1998 by and among The First American Financial Corporation, Pea Soup Acquisition Corp. and National Information Group.(13) 3.1 Articles of Incorporation of Company, as Amended 3.2 Bylaws of Company(1) 10.1 1986 Stock Option Plan, as amended through July 11, 1997(10) 10.2 1991 Director Option Plan, as amended through May 23, 1995(4) 10.3 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 (1997)(6) 10.4 Memoranda of Reinsurance as to First Property Per Risk Excess of Loss Reinsurance Agreements and the First, Second and Third Property Catastrophe Excess Reinsurance Agreements (1998)(10) 10.5 Memoranda of Reinsurance as to First Property Per Risk Excess of Loss Reinsurance Agreements and the First, Second and Third Property Catastrophe Excess Reinsurance Agreements (1999) 10.6 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(4) 10.7 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(2) 10.8 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(3) 10.9 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(3) 10.10 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(3) 10.11 Office Lease dated January 1, 1998 between Pinnacle Data Corporation and Systron Business Center, LLC, for the premises at 2727 Systron Drive, Concord, California (exhibits omitted)(10). 10.12 Form of Indemnification Agreement between Registrant and its officers and directors(3) 10.13 Mark A. Speizer Employment Agreement dated July 11, 1996 by and between National and Mark A. Speizer(5) 10.14 Bruce A. Cole Employment Agreement dated July 11, 1996 by and between National and Bruce A. Cole(5) 10.15 Employment Agreement effective August 12, 1996 by and between National and Robert P. Barbarowicz(9) 10.16 Employment Agreement dated May 7, 1997 by and between National and Douglas H. Helm(7) 10.17 First Amendment to At Will Employment Agreement by and between National Information Group and Douglas H. Helm dated April 15, 1998(11) 10.18 Assets Purchase Agreement by and among New ARTS Acquisition, Inc., National Insurance Group, American Realty Tax Services, Inc., American Realty Tax Services of New York, Inc., and Certain Shareholders dated August 15, 1997 and Amendment No. 1 to Assets Purchase Agreement dated September 18, 1997(8)
80 82
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.19 Credit Terms and Conditions dated April 2, 1997, by and between National Insurance Group and Imperial Bank and Amendment No. 1 to Credit Terms and Conditions dated September 17, 1997, by and between National Insurance Group and Imperial Bank(9) 10.20 Credit Terms and Conditions dated September 11, 1997, by and between New Arts Acquisition, Inc. and Imperial Bank(9) 10.21 Note dated September 11, 1997, made by New Arts Acquisition, Inc. payable to Imperial Bank in the original principal amount of $11,268,000(9) 10.22 Addendum to Note dated September 11, 1997, made by New Arts Acquisition, Inc.(9) 10.23 Note dated September 11, 1997, made by National Insurance Group payable to Imperial Bank in the original principal amount of $1,000,000(9) 10.24 Letter Amendment dated March 20, 1998 which amends the Note dated September 11, 1997, made by National Insurance Group payable to Imperial Bank in the original principal amount of $1,000,000(10) 10.25 Continuing Guarantee dated September 11, 1997, by National Insurance Group for the benefit of Imperial Bank(9) 10.26 General Security Agreement dated September 11, 1997, by New Arts Acquisition, Inc. for the benefit of Imperial Bank(9) 10.27 Pledge Agreement dated September 10, 1996, by and between National Insurance Group and Imperial Bank, as amended by Amendment No. 1 to Pledge Agreement dated April 2, 1997, and as further amended by Amendment No. 2 to Pledge Agreement dated September 18, 1997(9) 10.28 401(k) Plan, First Amendment to 401(k) Plan and Participation Agreements(9) 10.29 401(k) Plan, as amended, dated as of October 1, 1997, ValuSelect Trust Agreement, and Adoption Agreement(10) 10.30 Amendment No. 2 to Credit Terms and Conditions, dated May 12, 1998 to Credit Terms and Conditions, dated as of April 2, 1997 between Imperial Bank and National Information Group(11) 10.31 Note dated May 12, 1998, made by New Arts Acquisition, Inc. payable to Imperial Bank in the original principal amount of $11,268,000(11) 10.32 Purchaser note dated May 26, 1998, made by New Arts Acquisition, Inc., payable to JMD Group, Inc. in the original amount of $1,027,768(11) 10.33 Lease dated June 24, 1998 between BD 34th Properties, Inc. and National Information Group for the premises located at Building 302 at 6950 South Country Club, Tucson, Arizona(11) 10.34 Deed of Lease dated May 8, 1998 between FCP-Dulles Business Park I, L.C. and Pinnacle Real Estate Tax Services, Inc. for the premises located at 14026 Thunderbolt Place, Suite 200, Chantilly, Virginia(11) 10.35 Amendment No. 3 to Credit Terms and Conditions, dated September 22, 1998 to Credit Terms and Conditions, dated as of April 2, 1997 between Imperial Bank and National Information Group(12) 10.36 Amendment No. 3 to Pledge Agreement, dated September 22, 1998 Pledge Agreement, dated as of September 10, 1996 between Imperial Bank and National Information Group(12) 10.37 Note dated September 22, 1998, made by National Information Group payable to Imperial Bank in the original principal amount of $4,275,000(12) 10.38 Voting Agreement, dated as of November 17, 1998 by and among The First American Financial Corporation, Mark A. Speizer and Bruce A. Cole(13) 10.39 Employment Agreement by and among The First American Financial Corporation, National Information Group and Mark A. Speizer dated as of November 17, 1998
81 83
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.40 Employment Agreement by and among The First American Financial Corporation, National Information Group and Bruce A. Cole dated as of November 17, 1998 10.41 Retention and Modification of At Will Employment Agreement by and between National Information Group and Gerry Gauer dated as of February 3, 1999 10.42 Retention and Modification of At Will Employment Agreement by and between National Information Group and George Jump dated as of January 4, 1999 11.1 Computation of Weighted Average Shares Outstanding and Earnings per Share 21.1 Subsidiaries of Company(10) 24.1 Power of Attorney 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, 1992. (3) 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. (4) Incorporated by reference to exhibits filed with the Company's Form 10-K for the fiscal year ended December 31, 1995. (5) Incorporated by reference to exhibits filed with the Company's Form 10-Q/A for the quarter ended June 30, 1996. (6) Incorporated by reference to exhibits filed with the Company's Form 10-K for the fiscal year ended December 31, 1996. (7) Incorporated by reference to exhibits filed with the Company's Form 10-Q for the quarter ended June 30, 1997. (8) Incorporated by reference to exhibits filed with the Company's Form 8-K dated September 18, 1997. (9) Incorporated by reference to exhibits filed with the Company's Form 10-Q for the quarter ended September 30, 1997. (10) Incorporated by reference to exhibits filed with the Company's Form 10-K for the fiscal year ended December 31, 1997. (11) Incorporated by reference to exhibits filed with the Company's Form 10-Q for the quarter ended June 30, 1998. (12) Incorporated by reference to exhibits filed with the Company's Form 10-Q for the quarter ended September 30, 1998. (13) Incorporated by reference to exhibits filed with the Company's Form 8-K dated November 17, 1998. THE REGISTRANT WILL FURNISH ANY EXHIBIT UPON THE PAYMENT OF A REASONABLE FEE, WHICH FEE SHALL BE LIMITED TO THE REGISTRANT'S REASONABLE EXPENSES IN FURNISHING SUCH EXHIBIT. 82 EX-3.1 2 ARTICLES OF INCORPORATION OF COMPANY 1 Exhibit 3.1 1546254 FILED In the office of the Secretary of State of the State of California NOV 7 1986 /s/ March Fong Eu ---------------------------------- MARCH FONG EU, Secretary of State ARTICLES OF INCORPORATION OF NATIONAL INSURANCE GROUP I The name of this corporation is National Insurance Group. II The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. III The name and address in the State of California of this corporation's initial agent for service of process is Howard L. Herman, 1250 Bayhill Drive, Suite 212, San Bruno, California 94066. IV This corporation is authorized to issue only one class of shares of stock, to be designated "Common Stock." The total number of shares of Common Stock that this corporation is authorized to issue is 15,000,000. The aggregate par value of all such Common Stock 2 is $150,000, and the par value of each share of common stock is one cent ($0.01). Dated: November 3, 1986 /s/ FRANCIS S. CURRIE ---------------------------------------- Incorporator I hereby declare that I am the person who executed the foregoing Articles of Incorporation, which execution is my act and deed. /s/ FRANCIS S. CURRIE ---------------------------------------- -2- 3 1546254 A324034 FILED In the office of the Secretary of State of the State of California NOV. 13 1986 /s/ March Fong Eu ------------------------ MARCH FONG EU, Secretary of State CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION OF NATIONAL INSURANCE GROUP Howard L. Herman and Donna J. Greyling certify that: 1. They are the President and Secretary of National Insurance Group, a California corporation. 2. Article IV of the Articles of Incorporation of this corporation is amended to read in full as follows: "This corporation is authorized to issue two classes of shares to be designated respectively Common Stock and Preferred Stock. The total number of shares of Common Stock this corporation shall have authority to issue is 15,000,000, and the total number of shares of Preferred Stock this corporation shall have authority to issue is 5,000,000. The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is authorized to fix the number of shares of any series of Preferred Stock and to determine or alter the rights, preferences, privileges, and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock and, within the limits and restrictions stated in any resolution or resolutions of the Board of Directors originally fixing the number of shares constituting any series of Preferred Stock, to decrease (but not below the number of shares of any such series then outstanding) the number of shares of any such series subsequent to the issue of shares of that series. The initial series of Preferred Stock shall be designated Series A Preferred Stock ("Series A Preferred") and shall consist of 1,020,000 shares. The corporation shall from time to time in accordance with the laws of the State of California increase the authorized amount of its Common Stock if at any time the number of shares of Common Stock remaining unissued and available for issuance shall not be sufficient to permit conversion of the Preferred Stock. The relative rights, preferences, privileges and restrictions granted to or imposed on the respective classes of the shares of capital stock or the holders thereof are as follows: 4 1. Dividends. (a) The holders of the Series A Preferred shall be entitled to receive, when and as declared by the Board of Directors, out of funds legally available therefor, dividends in an amount equal to the dividends paid on such number of shares of Common Stock into which such share of Series A Preferred, on the record date for such dividend payment, is convertible. Such dividends on the Series A Preferred shall be payable in preference and priority to any payment of any dividend on Common Stock of the Corporation. The right to such dividends on the Series A Preferred shall not be cumulative. No dividend or other distribution with respect thereto shall be paid on the Common Stock, other than dividends payable solely in Common Stock, until all accrued dividends have been declared and paid on the Series A Preferred. (b) As authorized by Section 402.5(c) of the California Corporations Code, the provisions of Sections 502 and 503 of the California Corporations Code shall not apply with respect to repurchases by the Corporation of shares of Common Stock or Preferred Stock issued to or held by employees, officers, directors or consultants of the Corporation or its subsidiaries upon termination of their employment or services pursuant to agreements providing for the right of said repurchase. 2. Liquidation Preference. In the event of any liquidation, dissolution, or winding up of the Corporation, either voluntary or involuntary, distributions to the shareholders of the Corporation shall be made in the following manner: (a) The holders of the Series A Preferred shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the Corporation to the holders of the Common Stock by reason of their ownership of such stock, the amount of $2.50 per share for each share of Series A Preferred then held by them, and, in addition, an amount equal to all declared but unpaid dividends on the Series A Preferred held by them. If the assets and funds thus distributed among the holders of the Series A Preferred shall be insufficient to permit the payment to such holders of the full aforesaid preferential amount, then the entire assets and funds of the Corporation legally available for distribution shall be distributed ratably among the holders of the Series A Preferred in proportion to the aggregate preferential amount of all shares of Series A Preferred then held by them bears to the aggregate preferential amount of all shares of Series A Preferred outstanding as of the date of the distribution upon the occurrence of such event. After payment has been made to the holders of the Series A Preferred of the full amounts to which they shall be entitled as aforesaid, the holders of the Common Stock shall be entitled to -2- 5 share ratably in the remaining assets, based on the number of shares of Common Stock held. (b) For purposes of this Section 2, a merger or consolidation of the Corporation with or into any other corporation or corporations, or the merger of any other corporation or corporations into the Corporation, or the sale of all or substantially all of the assets of the Corporation, or any other corporate reorganization, in which consolidation, merger, sale of assets or reorganization the shareholders of the Corporation receive distributions in cash or securities of another corporation or corporations as a result of such consolidation, merger, sale of assets or reorganization, shall be treated as a liquidation, dissolution or winding up of the Corporation. 3. Voting Rights. Except as otherwise required by law or by Section 5 hereof, the holder of each share of Common Stock issued and outstanding shall have one vote and the holder of each share of Preferred Stock shall be entitled to the number of votes equal to the number of shares of Common Stock into which such share of Preferred Stock could be converted at the record date for determination of the shareholders entitled to vote on such matters, or, if no such record date is established, at the date such vote is taken or any written consent of shareholders is solicited, such votes to be counted together with all other shares of stock of the Company having general voting power and not separately as a class. Holders of Common Stock and Preferred Stock shall be entitled to notice of any shareholders' meeting in accordance with the Bylaws of the Corporation. Fractional votes by the holders of Preferred Stock shall not, however, be permitted and any fractional voting rights shall (after aggregating all shares into which shares of Preferred Stock held by each holder could be converted) be rounded to the nearest whole number. Cumulative voting shall apply with respect to the elections of the Board of Directors. 4. Conversion. The holders of the Preferred Stock have conversion rights as follows (the "Conversion Rights"): (a) Right to Convert. Each share of Series A Preferred shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share at the office of the Corporation or any transfer agent for the Preferred Stock, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing $2.50 by the Conversion Price, determined as hereinafter provided, in effect at the time of the conversion. The price at which shares of Common Stock shall be deliverable upon conversion shall initially be $2.50 with respect to shares of Series A Preferred (the "Conversion Price"). The -3- 6 initial Conversion Price shall be subject to adjustment as hereinafter provided. (b) Automatic Conversion. Each share of Series A Preferred shall automatically be converted into shares of Common Stock at the then effective Conversion Price upon the closing of an underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of Common Stock for the account of the Corporation to the public at a price per share (prior to underwriter commissions and offering expenses) of not less than $5.00 per share (appropriately adjusted for any recapitalizations, stock splits, stock combinations, stock dividends and the like) and an aggregate offering price to the public of not less than $5,000,000. In the event of the automatic conversion of the Series A Preferred upon a public offering as aforesaid, the person(s) entitled to receive the Common Stock issuable upon such conversion of Preferred Stock shall not be deemed to have converted such Preferred Stock until immediately prior to the closing of such sale of securities. (c) Mechanics of Conversion. No fractional shares of Common Stock shall be issued upon conversion of Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the then effective Conversion Price. Before any holder of Preferred Stock shall be entitled to convert the same into full shares of Common Stock and to receive certificates therefor, he shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for the Preferred Stock, and shall give written notice to the Corporation at such office that he elects to convert the same; provided, however, that in the event of an automatic conversion pursuant to Section 4(b), the outstanding shares of Preferred Stock shall be converted automatically without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent, and provided further that the Corporation shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such automatic conversion unless the certificates evidencing such shares of Preferred Stock are either delivered to the Corporation or its transfer agent as provided above, or the holder notifies the Corporation or its transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection with such certificates. The Corporation shall, as soon as practicable after such delivery, or such agreement and indemnification in the case of a lost certificate, issue and deliver at such office to such holder of Preferred Stock, a certificate or certificates for the number of shares of Common -4- 7 Stock to which he shall be entitled as aforesaid and a check payable to the holder in the amount of any cash amounts payable as the result of a conversion into fractional shares of Common Stock. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Preferred Stock to be converted, or in the case of automatic conversion on the date of closing of the offering, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common stock on such date. (d) Adjustments to Conversion Price for Diluting Issues. (i) Special Definitions. For purposes of this Section 4(d), the following definitions shall apply: (1) "Options" shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire either Common Stock or Convertible Securities. (2) "Original Issue Date" shall mean the date on which the first share of Series A Preferred was first issued. (3) "Convertible Securities" shall mean any evidences of indebtedness, shares or other securities convertible into or exchangeable for Common Stock. (4) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued (or, pursuant to Section 4(d)(iii) deemed to be issued) by the Corporation after the Original Issue Date, other than shares of Common Stock issued or issuable at any time: (A) upon conversion of shares of the Series A Preferred authorized herein; (B) to employees or directors of, or consultants to, the Corporation or its majority-owned subsidiaries pursuant to a stock grant, stock option plan or stock purchase plan or other stock agreement or arrangement approved by the Board of Directors; (C) as a dividend or distribution on the Series A Preferred authorized herein; (D) pursuant to clause (vi) and (vii) of this Section 4(d); and -5- 8 (ii) No Adjustment of Conversion Price. No adjustment in the Conversion Price of a particular share of Preferred Stock shall be made in respect of the issuance of Additional Shares of Common Stock unless the consideration per share for an Additional Share of Common Stock issued or deemed to be issued by the corporation is less than the Conversion Price in effect on the date of, and immediately prior to such issue, for such share of Preferred Stock. (iii) Deemed Issue of Additional Shares of Common Stock. Options and Convertible Securities. In the event the corporation at any time or from time to time after the Original Issue Date shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, than the maximum number of shares (as set forth in the instrument relating thereto without regard to any provisions contained therein for a subsequent adjustment of such number) of Common Stock issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date, provided that Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to Section 4(d)(v) hereof) of such Additional Shares of Common Stock would be less than the Conversion Price in effect on the date of and immediately prior to such issue, or such record date, as the case may be, and provided further that in any such case in which Additional Shares of Common Stock are deemed to be issued: (A) no further adjustment in the Conversion Price shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities; (B) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any change in the amount of consideration payable to the corporation, or change in the number of shares of Common Stock issuable, upon the exercise, conversion or exchange thereof, the Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such change becoming effective, be recomputed to reflect an appropriate increase or decrease reflecting such change insofar as it affects such Options -6- 9 or the rights of conversion or exchange under such Convertible Securities, but only if as a result of such adjustment the Conversion Price then in effect is thereby reduced; (C) upon the expiration of any such Options or any rights of conversion or exchange under such Convertible Securities which shall not have been exercised, the Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon such expiration, be recomputed as if: (I) in the case of Convertible Securities or Options for Common Stock, the only Additional Shares of Common Stock issued were shares of Common Stock, if any, actually issued upon the exercise of such Options or the conversion or exchange of such Convertible Securities and the consideration received therefor was the consideration actually received by the corporation for the issue of all such Options, whether or not exercised, plus the consideration actually received by the corporation upon such exercise, or for the issue of all such Convertible Securities which were actually converted or exchanged, plus the additional consideration, if any, actually received by the corporation upon such conversion or exchange, and (II) in the case of Options for Convertible Securities, only the Convertible Securities, if any, actually issued upon the exercise thereof were issued at the time of issue of such Options, and the consideration received by the corporation for the Additional Shares of Common Stock deemed to have been then issued was the consideration actually received by the corporation for the issue of all such Options, whether or not exercised, plus the consideration deemed to have been received by the corporation upon the issue of the Convertible Securities with respect to which such Options were actually exercised; (D) no readjustment pursuant to clause (B) or (C) above shall have the effect of increasing the Conversion Price to an amount which exceeds the lower of (i) the Conversion Price on the original adjustment date, or (ii) the Conversion Price that would have resulted from any issuance of Additional Shares of Common Stock between the original adjustment date and such readjustment date; and (E) in the case of any Options which expire by their terms not more than thirty (30) days after the date of issue thereof, no adjustment of the Conversion Price shall be made until the expiration or exercise of all such Options, whereupon -7- 10 such adjustment shall be made in the same manner provided in clause (C) above. (iv) Adjustment of Conversion Price Upon Issuance of Additional Shares of Common Stock. In the event this corporation shall issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Section 4(d)(iii)) without consideration or for a consideration per share less than the Conversion Price for a share of Preferred Stock in effect on the date of, and immediately prior to such issue, then and in such event, such Conversion Price shall be reduced, concurrently with such issue, to a price (calculated to the nearest cent) determined by multiplying such Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of shares of Common Stock which the aggregate consideration received by the corporation for the total number of Additional Shares of Common Stock so issued would purchase at such Conversion Price; and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of such Additional Shares of Common Stock so issued; and provided further that, for the purposes of this Section 4(d)(iv), all shares of Common Stock issuable upon exercise of outstanding Options or conversion of outstanding Convertible Securities shall be deemed to be outstanding, and immediately after any Additional Shares of Common Stock are deemed issued pursuant to Section 4(d)(iii), such Additional Shares of Common Stock shall be deemed to be outstanding. (v) Determination of Consideration. For purposes of this Section 4(d), the consideration received by the corporation for the issue of any Additional Shares of Common Stock shall be computed as follows: (1) Cash and Property: Such consideration shall: (A) insofar as it consists of cash, be computed at the aggregate amount of cash received by the corporation (before commissions or expenses) excluding amounts paid or payable for accrued interest or accrued dividends; (B) insofar as it consists of property other than cash, be computed at the fair value thereof at the time of such issue, as determined in good faith by the Board; and -8- 11 (C) in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the corporation for consideration which covers both, be the proportion of such consideration so received, computed as provided in clauses (A) and (B) above, as determined in good faith by the Board. (2) Options and Convertible Securities. The consideration per share received by the corporation for Additional Shares of Common Stock deemed to have been issued pursuant to Section 4(c)(iii) shall be determined by dividing (x) the total amount, if any, received or receivable by the corporation as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the corporation upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities by (y) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (vi) Adjustments for Subdivisions, Combinations or Consolidation of Common Stock. In the event the outstanding shares of Common Stock shall be subdivided (by stock split, stock dividends or otherwise), into a greater number of shares of Common Stock, the Conversion Price then in effect shall, concurrently with the effectiveness of such subdivision, be proportionately decreased. In the event the outstanding shares of Common Stock shall be combined or consolidated, by reclassification or otherwise, into a lesser number of shares of Common Stock, the Conversion Price then in effect shall, concurrently with the effectiveness of such combination or consolidation, be proportionately increased. (vii) Adjustments for Stock Dividends and Other Distributions. In the event the Corporation at any time or from time to time makes, or fixes a record date for the determination of holders of -9- 12 Common Stock entitled to receive any distribution (excluding any repurchases of securities by the Corporation not made on a pro-rata basis from all holders of any class of the Corporation's securities) payable in property or in securities of the Corporation other than shares of Common Stock, and other than as otherwise adjusted in this Section 4 or as provided in Section 1(a), then and in each such event the holders of Preferred Stock shall receive at the time of such distribution, the amount of property or the number of securities of the Corporation that they would have received had their Preferred Stock been converted into Common Stock on the date of such event. (e) No Impairment. Except as provided in Section 5, the Corporation will not, by amendment of its Articles of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation but will at all times in good faith assist in the carrying out of all the provisions of this Section 4 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Preferred Stock against impairment. (f) Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of the Conversion Price pursuant to this Section 4, the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and readjustments, (ii) the Conversion Price at the time in effect, and (iii) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of Preferred Stock. (g) Notices of Record Date. In the event that this Corporation shall propose at any time: (i) to declare any dividend or distribution upon its Common Stock, whether in cash, property, stock or other securities, whether or not a regular cash dividend and whether or not out of earnings or earned surplus; -10- 13 (ii) to offer for subscription pro rata to the holders of any class or series of its stock any additional shares of stock of any class or series or other rights; or (iii) to effect any reclassification or recapitalization of its Common Stock outstanding involving a change in the Common Stock; or (iv) to merge or consolidate with or into any other corporation where the Corporation will not be the surviving corporation, or sell, lease or convey all or substantially all its property or business, or to liquidate, dissolve or wind up; then, in connection with each such event, this Corporation shall send to the holders of the Preferred Stock: (1) at least 20 days' prior written notice of the date on which a record shall be taken for such dividend, distribution or subscription rights (and specifying the date on which the holders of Common Stock shall be entitled thereto) or for determining rights to vote in respect of the matters referred to in (i) and (ii) above; and (2) in the case of the matters referred to in (iii) and (iv) above, at least 20 days' prior written notice of the date when the same shall take place (and specifying the date on which the holders of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon the occurrence of such event). Each such written notice shall be delivered personally or given by first class mail, postage prepaid, addressed to the holders of the Preferred Stock at the address for each such holder as shown on the books of this Corporation. 5. Covenants. (a) Amendment by Majority Vote. In addition to any other rights provided by law, this Corporation shall not, without first obtaining the affirmative vote or written consent of the holders of not less than a majority of such outstanding shares of the Series A Preferred: (i) amend or repeal any provision of the Corporation's Articles of Incorporation; (ii) authorize or issue shares of any class of stock having any preference or priority as to dividends or assets superior to or on a parity with any such preference or priority of such Series A Preferred; -11- 14 (iii) reclassify any shares of Common Stock and any other shares of this Corporation other than the Series A Preferred into shares having any preference or priority as to dividends or assets superior to or on a parity with any such preference or priority of the Series A Preferred; (iv) liquidate or dissolve the corporation; or (v) effect (i) any sale of all or substantially all the assets of the Corporation or its subsidiaries, or (ii) any merger or other reorganization of the Corporation or its subsidiaries with or into another corporation where this corporation would be the surviving corporation, or (iii) any transaction or series of transactions which would be integrated for purposes of the Federal Securities Act of 1933 and which would cause the occurrence of the events referred to in clauses (i) and (ii), above after such merger, reorganization or transaction(s). (vi) redeem or repurchase any outstanding stock except for Common Stock held by any officers, employees, directors or consultants of the Corporation or any of its majority-owned subsidiaries pursuant to agreements providing for such right of repurchase. (b) Board Of Directors. In addition to any other rights provided by law, so long as more than fifty percent (50%) of the authorized Series A Preferred shall be outstanding, the holders of the Series A Preferred shall have the right to vote as a separate class for two (2) members of the Board of Directors of the Corporation, and the holders of the Common Stock of the corporation shall have the right to vote, as a separate class, for three (3) members of the Board of Directors. In the event that fifty (50%) or less of the authorized Series A Preferred shall be outstanding, the holders of Preferred Stock and the holders of the Common Stock shall vote for members of the Board of Directors as set forth in Section 3 hereof. 6. Status Of Converted Stock. In case any shares of any series of Preferred Stock shall be converted pursuant to Section 4 hereof, the shares so converted shall resume the status of authorized but unissued shares of Preferred Stock. 3. The foregoing amendment of Articles of Incorporation has been duly approved by the Board of Directors. 4. The corporation has issued no shares. -12- 15 We further declare under penalty of perjury that the matters set forth in the foregoing Certificate are true and correct of our own knowledge. Executed at San Bruno, California, this 11 day of November, 1986. /s/ HOWARD L. HERMAN ------------------------------- Howard L. Herman /s/ DONNA J. GREYLING ------------------------------- Donna J. Greyling \ -13- 16 CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION OF NATIONAL INSURANCE GROUP Howard L. Herman and Donna J. Greyling certify that: 1. They are the President and Secretary, respectively, of National Insurance Group, a California corporation. 2. So much of Article IV of the Articles of Incorporation as now reads: "This corporation is authorized to issue two classes of shares to be designated respectively Common Stock and Preferred Stock. The total number of shares of Common Stock this corporation shall have authority to issue is 15,000,000, and the total number of shares of Preferred Stock this corporation shall have authority to issue is 5,000,000. The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is authorized to fix the number of shares of any series of Preferred Stock and to determine or alter the rights, preferences, privileges, and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock and, within the limits and restrictions stated in any resolution or resolutions of the Board of Directors originally fixing the number of shares constituting any series of Preferred Stock, to decrease (but not below the number of shares of any such series then outstanding) the number of shares of any such series subsequent to the issue of shares of that series. The initial series of Preferred Stock shall be designated Series A Preferred Stock ("Series A Preferred") and shall consist of 1,020,000 shares." is amended to read as follows: "This corporation is authorized to issue two classes of shares to be designated respectively Common Stock and Preferred Stock. The total number of shares of Common Stock this corporation shall have authority to issue is 15,000,000, and the total number of shares of Preferred Stock this corporation shall have authority to issue is 5,000,000. Effective upon the amendment of this article to read 17 as set forth herein, each outstanding share of Common Stock shall be automatically converted into and reconstituted as .667 shares of Common Stock. Any fractional shares resulting from said reverse stock split (after aggregating all shares held by each holder) shall be rounded downward to the next whole share and this corporation shall pay cash for each such fractional share equal to such fraction multiplied by the fair market value (as determined by this corporation's Board of Directors) of a share of the Common Stock on the effective date of the amendment of this article. The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is authorized to fix the number of shares of any series of Preferred Stock and to determine or alter the rights, preferences, privileges, and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock and, within the limits and restrictions stated in any resolution or resolutions of the Board of Directors originally fixing the number of shares constituting any series of Preferred Stock, to decrease (but not below the number of shares of any such series then outstanding) the number of shares of any such series subsequent to the issue of shares of that series. The initial series of Preferred Stock shall be designated Series A Preferred Stock ("Series A Preferred") and shall consist of 1,020,000 shares." 3. The forgoing amendment of Articles of Incorporation has been duly approved by the Board of Directors. 4. The forgoing amendment of Articles of Incorporation has been duly approved by the required vote of shareholders in accordance with Section 903 of the Corporations Code. The total number of outstanding shares of Common Stock and Series A Preferred Stock of the corporation is 3,624,997 and 1,020,000, respectively. The number of shares voting in favor of the amendment equaled or exceeded the vote required. The percentage vote required was more than 50% of the outstanding shares of Common Stock and Series A Preferred Stock, voting as separate classes. -2- 18 We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge. Executed at San Bruno, California this 2nd day of June, 1987. /s/ HOWARD L. HERMAN ---------------------------------------- Howard L. Herman, President /s/ DONNA J. GREYLING ---------------------------------------- Donna J. Greyling, Secretary -3- 19 CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION OF NATIONAL INSURANCE GROUP Howard L. Herman and Donna J. Greyling hereby certify that: 1. They are President and Secretary, respectively, of National Insurance Group, a California corporation. 2. The Articles of Incorporation of this corporation are amended to add the following Article V: V. "Section 1. Limitation of Directors' Liability. The liability of the directors of this Corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. Section 2. Indemnification of Corporate Agents. This Corporation is authorized to provide indemnification of its agents (as defined in Section 317 of the California General Corporation Law) through bylaw provisions, agreements with agents, vote of shareholders or disinterested directors or otherwise, in excess of the indemnification otherwise permitted by Section 317 of the California Corporations Code, subject only to the applicable limits set forth in Section 204 of the California Corporations Code with respect to actions for breach of duty to the corporation and its shareholders. Section 3. Repeal or Modification. Any repeal or modification of the foregoing provisions of this Article V. shall not adversely affect any right of indemnification or limitation of liability of an agent of this Corporation relating to acts or omissions occurring prior to such repeal or modification." 3. The foregoing Certificate of Amendment of Articles of Incorporation has been duly approved by the Board of Directors. 4. The foregoing Certificate of Amendment of Articles of Incorporation has been duly approved by the required vote of shareholders in accordance with Section 902 of the California General Corporation Law. The total number of outstanding shares of capital stock of the corporation as of March 31, 1988, the record date for approval of this Certificate of Amendment of Articles of Incorporation was 4,225,363 shares of Common Stock. The number of 20 shares voting in favor of the Certificate of Amendment of Articles of Incorporation equaled or exceeded the vote required. The percentage vote required was more than 50% of the outstanding Common Stock. We further declare under penalty of perjury under the laws of the State of California that the matters set forth in the Certificate of Amendment of Articles of Incorporation are true of our own knowledge. Executed at San Bruno, California this 11th day of May, 1988. /s/ HOWARD L. HERMAN ----------------------------------- Howard L. Herman, President /s/ DONNA J. GREYLING ------------------------------------ Donna J. Greyling, Secretary -2- 21 CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION OF NATIONAL INSURANCE GROUP The undersigned certify that: 1. They are the president and the secretary of National Insurance Group, a California corporation. 2. Article I of the Articles of Incorporation of this corporation is amended to read as follows: The name of this corporation is National Information Group. 3. The foregoing amendment of Articles of Incorporation has been duly approved by the Board of Directors. 4. The foregoing amendment of Articles of Incorporation has been duly approved by the required vote of shareholders in accordance with Section 902, California Corporations Code. The total number of outstanding shares of the corporation is 4,102,882. The number of shares voting in favor of the amendment equaled or exceeded the vote required. The percentage vote required was more than 50%. We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge. Date: June 15, 1998 /s/ BRUCE A. COLE ------------------------------------ Bruce A. Cole, President /s/ ROBERT P. BARBAROWICZ ------------------------------------ Robert P. Barbarowicz, Secretary EX-10.5 3 MEMORANDA OF REINSURANCE AS TO FIRST PROPERTY 1 Exhibit 10.5 REASSURED: NATIONAL INFORMATION GROUP COMPANIES GREAT PACIFIC INSURANCE COMPANY South San Francisco, California CONTRACT: FIRST PER RISK EXCESS OF LOSS REINSURANCE CONTRACT Effective January 1, 1999 BUSINESS COVERED: Business produced by Fastrac Systems, Inc. of Bellevue, Washington, and produced by M.A. Speizer & Co., Inc. or any other of the National Information Group Companies of South San Francisco, California on behalf of the Reassured and classified as: Coverage A: Dwelling Fire, Fire, Extended Perils, Special Form on Interim Coverage policies, Forced Order policies, Real-Estate Owned (REO) policies, Personal Article Floaters, Personal Lines, Watercraft and Private Passenger Planes, Force Placed Property and/or Blanket Mortgage Security Insurance. Coverage B: Comprehensive Personal Liability (Section II Liability), including, but not limited to, General Bodily Injury and Property Damage Liability, Medical Payments and Third Party Liability Coverages which may be written in conjunction with the Reassured's Coverage A Policies. TERM AND CANCELLATION: The term of this Contract shall be from January 1, 1999 to January 1, 2000, both days at 12:01 a.m., Local Standard Time (Local Standard Time being that time which applies in the area where the risk is located) for losses occurring on new, renewal and in force policies. PAGE 1 OR 9 2 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 policies apply. RETENTION AND LIMIT: Coverage A: 100% of $2,000,000 excess of $500,000 on any one risk, in any one loss occurrence, subject to a maximum recovery of 100% of $4,000,000 any one loss occurrence. Limits include affiliated coverages. Affiliated coverages shall mean appurtenant structures, living expenses and shrubbery. Coverage B: 100% of $90,000 excess of $10,000 each occurrence. Allocated loss adjustment expenses pro rata in addition. REINSTATEMENTS: Unlimited reinstatements without charge. REINSURANCE RATE: 0.83% of Gross Net Earned Premium Income. MINIMUM AND DEPOSIT PREMIUM: Deposit Premium of $175,000 payable in equal quarterly installments of $43,750 each on January 1, April 1, July 1, and October 1, 1999. PAGE 2 OF 9 3 Annual minimum premium of $157,500. Subject to annual adjustment. Estimated GNEPI for 1999: $21,000,000. 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 (except as provided for under the BUSINESS COVERED, Coverage B section of this Contract); c. Financial and Insolvency guarantees; d. Aviation business except for physical damage on private planes not to exceed $100,000 any one risk; e. Automobile business; f. Inland Marine policies covering railroad rolling stock, streamlined trains, negative films, registered mail, jewelers block, animal mortality, offshore drilling rigs; g. Excess of Loss Reinsurance and reinsurance accepted under obligatory reinsurance treaties except for business produced by Fastrac Systems, Inc. of Bellevue, Washington, and by M.A. Speizer & Co., Inc. or any other of the National Information Group companies of South San Francisco, California; h. Hail damage to growing/standing crops; i. Flood insurance when written as such; j. Pools, Associations or Syndicates as per Exclusion Clause attached (amended to include coverage for the California Fair Plan); k. Insolvency Funds as per Exclusion Clause attached; l. Loss or damage occasioned by invasion, hostilities, acts of foreign enemies, civil war, rebellion, insurrection, military or usurped power, martial law or confiscation by order of any government or public PAGE 3 OF 9 4 authority, as excluded under a standard policy containing a Standard War Exclusion Clause; m. Nuclear Incident as per Nuclear Incident Exclusion Clause Physical Damage - Reinsurance - (USA & Canada) attached; n. Nuclear Incident as per Nuclear Incident Exclusion Clause - Liability - Reinsurance - (USA & Canada) attached; o. Seepage and Pollution as per ISO wording, or so deemed; p. Transmission and Distribution Lines. GENERAL CONDITIONS: Definition of Loss Occurrence Clause (Property Business) to include LPO 515 definition of hours clause as attached, and as follows: - 72 hours clause tornado, cyclone, hurricane, windstorm and hail - 120 hours clause riots and civil commotion/vandalism and malicious mischief within the area of one municipality or county and the municipalities or counties contiguous thereto - 168 hours Freeze - 168 hours Earthquake and Ensuing Loss - 168 hours All Other Perils Definition of Occurrence (Casualty Business) Extra Contractual Obligations (100%) Excess of Policy Limits (100%) Definition of Net Loss Clause (which shall include defense costs but not limited to expenses incurred in determination of coverage, and Declaratory Judgment Expenses) Net Retained Lines Clause (All recoveries received from the Florida Hurricane Fund will be retained net by the Reassured, down to a net occurrence loss to the Reassured of $250,000, after which any additional recoveries will inure to this Contract by reducing the gross loss subject to this program.) Notice of Loss and Loss Settlement Currency Clause Tax Provisions Clause Access to Records Clause Errors and Omissions Clause Insolvency Clause Arbitration Clause PAGE 4 OF 9 5 Service of Suit Clause Towers Perrin Reinsurance Reserves Clause which complies with requirements of New York, California, and other states Towers Perrin Reinsurance Intermediary Clause WORDING: As per the expiring Contract. REINSURERS: 100% placement through Towers Perrin Reinsurance. See attached Schedule for listing of Reinsurers and their respective participations. Note: 1. The financial statements of participating Reinsurers will be furnished upon request. 2. Towers Perrin Reinsurance has no ownership interest in or control of: - any Reinsurer subscribing to this reinsurance. - any underwriting agent or correspondent intermediary involved in this reinsurance. 3. Towers Perrin Reinsurance has on file written evidence from any Reinsurer whose participation in this reinsurance was authorized by a representative other than an employee. This written evidence states the representative's authority to bind the participation of such Reinsurer. PAGE 5 OF 9 6 SCHEDULE REINSURERS ATTACHING TO COVER NOTE NO. C-99-01332 FOR NATIONAL INSURANCE GROUP COMPANIES GREAT PACIFIC INSURANCE COMPANY SOUTH SAN FRANCISCO, CALIFORNIA FIRST PER RISK EXCESS OF LOSS REINSURANCE CONTRACT
Direct Placement through Towers Perrin Reinsurance Share - -------------------------------------------------- ----- Constitution Reinsurance Corporation 20.00% New York, New York FEIN# 13-5009848 NAIC# 21032 Continental Casualty Company 7.00% Chicago, Illinois FEIN# 36-2114545 NAIC# 20443 Employers Mutual Casualty Company 2.50% Des Moines, Iowa FEIN# 42-0234980 NAIC# 21415 First Excess & Reinsurance Corporation 5.00% Jefferson City, Missouri FEIN# 43-1037123 NAIC# 32018 Folksamerica Reinsurance Company 5.00% New York, New York FEIN# 13-2997499 NAIC# 38776
PAGE 6 OF 9 7 SCHEDULE REINSURERS ATTACHING TO COVER NOTE NO. C-99-01332
Direct Placement through Towers Perrin Reinsurance Share - -------------------------------------------------- ----- Hartford Fire Insurance Company 10.00% Hartford, Connecticut FEIN# 06-0383750 NAIC# 19682 through Hartford Re Company Hartford, Connecticut PMA Reinsurance Corporation 6.00% Philadelphia, Pennsylvania FEIN# 23-2153760 NAIC# 39675 Republic Western Insurance Company 3.00% Phoenix, Arizona FEIN# 86-0274508 NAIC# 31089 Signet Star Reinsurance Company 5.00% Wilmington, Delaware FEIN# 47-0574325 NAIC# 32603 St. Paul Fire and Marine Insurance Company 13.50% St. Paul, Minnesota FEIN# 41-0406690 NAIC# 24767 through St. Paul Re, Inc. New York, New York Sumitomo Marine & Fire Insurance Company Ltd. (U.S.) 3.00% New York, New York FEIN# 13-2758523 NAIC# 20362 through Sumitomo Marine Re Management, Inc. New York, New York
PAGE 7 OF 9 8 SCHEDULE REINSURERS ATTACHING TO COVER NOTE NO. C-99-01332
Direct Placement through Towers Perrin Reinsurance Share - -------------------------------------------------- ----- Sydney Reinsurance Corporation 10.00% Philadelphia, Pennsylvania FEIN# 23-1641984 NAIC# 10219 USF Re Insurance Company 10.00% Boston, Massachusetts FEIN# 04-1590940 NAIC# 11835 ------- Total Placement 100.00%
PAGE 8 OF 9 9 REINSURANCE COVER NOTE NO. C-99-01332 FOR NATIONAL INSURANCE GROUP COMPANIES GREAT PACIFIC INSURANCE COMPANY SOUTH SAN FRANCISCO, CALIFORNIA FIRST PER RISK EXCESS OF LOSS REINSURANCE CONTRACT EFFECTIVE JANUARY 1, 1999 The Reassured hereby confirms its approval of the terms and conditions of the reinsurance set forth in this Reinsurance Cover Note and the Reinsurers participating hereon. A copy of Towers Perrin Reinsurance's Market Security Policy and Procedures has been attached to this Cover Note and the Reassured has been advised as to the status of all Reinsurers participating herein as regards this market security criteria. By: /s/ Robert P. Barbarowicz ------------------------------------- Title: Executive Vice President ---------------------------------- Date: March 12, 1999 ----------------------------------- PAGE 9 OF 9 10 EXHIBIT A DEFINITION OF LOSS OCCURRENCE (PROPERTY) 1. The term "Loss Occurrence" shall mean the sum of all individual losses directly occasioned by any one disaster, accident or loss or series of disasters, accidents or losses arising out of one event which occurs within the area of one state of the United States of America or province of Canada and states or provinces contiguous thereto and to one another. However, the duration and extent of any one "Loss Occurrence" shall be limited to all individual losses sustained by the Reassured occurring during any period of 168 consecutive hours arising out of and directly occasioned by the same event except that the term "Loss Occurrence" shall be further defined as follows: a. As regards windstorm, hail, tornado, hurricane, cyclone, including ensuing collapse and water damage, all individual losses sustained by the Reassured occurring during any period of 72 consecutive hours arising out of and directly occasioned by the same event. However, the event need not be limited to one state or province or states or provinces contiguous thereto. b. As regards riot, riot attending a strike, civil commotion, vandalism and malicious mischief, all individual losses sustained by the Reassured, occurring during any period of 120 consecutive hours within the area of one municipality or county and the municipalities or counties contiguous thereto arising out of and directly occasioned by the same event. The maximum duration of 120 consecutive hours may be extended in respect of individual losses which occur beyond such 120 consecutive hours during the continued occupation of an assured's premises by strikers, provided such occupation commenced during the aforesaid period. c. As regards earthquake (the epicenter of which need not necessarily be within the territorial confines referred to in the opening paragraph of this Article) and fire following directly occasioned by the earthquake, only those individual fire losses which commence during the period of 168 consecutive hours may be included in the Reassured's "Loss Occurrence." d. As regards "Freeze," only individual losses directly occasioned by collapse, breakage of glass and water damage (caused by bursting of frozen pipes and tanks) may be included in the Reassured's "Loss Occurrence." 2. Except for those "Loss Occurrences" referred to in Paragraphs a. and b. the Reassured may choose the date and time when any such period of consecutive hours commences provided that it is not earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Reassured arising out of that disaster, accident or loss and provided that only one such period of 168 consecutive hours shall apply with respect to one event. 3. However, as respects those "Loss Occurrences" referred to in Paragraphs a. and b., if the disaster, accident or loss occasioned by the event is of greater duration than 120 consecutive hours then the Reassured may divide the disaster, accident or loss into two or more "Loss Occurrences" provided no two periods overlap and no individual loss is included in more than one such period and -1- 11 provided that no period commences earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Reassured arising out of that disaster, accident or loss. 4. No individual losses occasioned by an event that would be covered by 72 or 120 hours clauses may be included in any "Loss Occurrence" claimed under the 168 hours provision. DEFINITION OF OCCURRENCE (CASUALTY) 5. As respects Section II Liability coverage under Coverage B of the Preamble, the term "occurrence", except as otherwise provided herein, shall mean any one accident, disaster, casualty, or happening, or series of accidents, disasters, casualties, or happenings arising out of or caused by one event, regardless of the number of interests insured or the number of policies responding. Furthermore, all losses having a common origin or traceable to the same act, omission, mistake, or happening shall be considered an accident, disaster, casualty, or happening. The term "loss occurrence" shall otherwise follow the definitions of the Reassured's original policies. -2- 12 CANADA NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE 1. This Contract does not cover any loss or liability accruing to the Reassured directly or indirectly, and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy Risks. 2. Without in any way restricting the operation of Paragraph 1. of this Clause, this Contract does not cover any loss or liability accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to: a. Nuclear reactor power plants including all auxiliary property on the site, or b. Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and critical facilities as such, or c. Installations for fabricating complete fuel elements or for processing substantial quantities of prescribed substances, and for reprocessing, salvaging, chemically separating, storing or disposing of spent nuclear fuel or waste materials, or d. Installations other than those listed in Paragraph 2.c. above using substantial quantities of radioactive isotopes or other products of nuclear fission. 3. Without in any way restricting the operation of Paragraphs 1. and 2. of this Clause, this Contract does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith except that this Paragraph 3. shall not operate: a. Where the Reassured does not have knowledge of such nuclear reactor power plant or nuclear installation, or b. Where the said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused. 4. Without in any way restricting the operation of Paragraphs 1., 2. and 3. of this Clause, this Contract does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurers or Reinsurer, when such radioactive contamination is a named hazard specifically insured against. 5. This Clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Reassured to be the primary hazard. 6. The term "prescribed substances" shall have the meaning given to it by the Atomic Energy Control Act R.S.C. 1985 (c), A-16 or by any law amendatory thereof. -1- 13 CANADA NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE 7. Reassured to be sole judge of what constitutes: a. Substantial quantities, and b. The extent of installation, plant or site. 8. Without in any way restricting the operation of Paragraphs 1., 2., 3. and 4. of this Clause, this Contract does not cover any loss or liability accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer caused: a. By any nuclear incident as defined in the Nuclear Liability Act or any other nuclear liability act, law or statute, or any law amendatory thereof or nuclear explosion, except for ensign loss or damage which results directly from fire, lightning or explosion of natural, coal or manufactured gas; b. By contamination by radioactive material. NOTE: Without in any way restricting the operation of Paragraphs 1., 2., 3. and 4. of this Clause, Paragraph 8. of this Clause shall only apply to all original contracts of the Reassured whether new, renewal or replacement which became effective on or after December 31, 1992. -2- 14 U.S.A. NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE 1. This reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy Risks. 2. Without in any way restricting the operation of Paragraph 1. of this Clause, this reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to: a. Nuclear reactor power plants including all auxiliary property on the site, or b. Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and "critical facilities" as such, or c. Installations for fabricating complete fuel elements or for processing substantial quantities of "special nuclear material," and for reprocessing, salvaging, chemically separating, storing or disposing of "spent" nuclear fuel or waste materials, or d. Installations other than those listed in Paragraph 2.c. above using substantial quantities of radioactive isotopes or other products of nuclear fission. 3. Without in any way restricting the operations of Paragraphs 1. and 2. hereof, this reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith except that this Paragraph 3. shall not operate: a. Where Reassured does not have knowledge of such nuclear reactor power plant or nuclear installation, or b. Where said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused. However on and after 1st January 1960 this SubParagraph 3.B. shall only apply provided the said radioactive contamination exclusion provision has been approved by the Governmental Authority having jurisdiction thereof. 4. Without in any way restricting the operations of Paragraphs 1., 2. and 3. hereof, this reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against. 5. It is understood and agreed that this Clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Reassured to be the primary hazard. -1- 15 U.S.A. NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE 6. The term "special nuclear material" shall have the meaning given it in the Atomic Energy Act of 1954 or by any law amendatory thereof. 7. Reassured to be the sole judge of what constitutes: a. Substantial quantities, and b. The extent of installation, plant or site. NOTE: Without in any way restricting the operation of Paragraph 1. hereof, it is understood and agreed that: (a) all policies issued by the Reassured on or before December 31, 1957 shall be free from the application of the other provisions of this Clause until expiry date of December 31, 1960 whichever first occurs whereupon all the provisions of this Clause shall apply. (b) with respect to any risk located in Canada policies issued by the Reassured on or before December 31, 1958 shall be free from the application of the other provisions of this Clause until expiry date or December 31, 1960 whichever first occurs whereupon all the provisions of this Clause shall apply. NOTES: 1) The words printed in italic text in the Limited Exclusion Provision and in the Broad Exclusion Provision shall apply only in relation to original liability policies which include a Limited Exclusion Provision or a Broad Exclusion Provision containing those words. 2) Wherever used herein the term "Company" shall be understood to mean "Reassured," "Reinsured" or whatever other term is used in the attached reinsurance Agreement to designate the reinsured company. -2- 16 CANADA NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE 1. This Contract does not cover any loss or liability accruing to the Reassured as a member of, or subscriber to, any association of insurers or reinsurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association. 2. Without in any way restricting the operation of Paragraph 1. of this Clause, it is agreed that for all purposes of this Contract all the original liability contracts of the Reassured, whether new, renewal or replacement, of the following classes, namely: Personal Liability, Farmers Liability, Storekeepers Liability, which become effective on or after December 31, 1984, shall be deemed to include, from their inception dates and thereafter, the following provision: LIMITED EXCLUSION PROVISION This Policy does not apply to bodily injury or property damage with respect to which an Insured is also insured under a contract of nuclear energy liability insurance (whether the Insured is unnamed in such contract and whether or not it is legally enforceable by the Insured) issued by the Nuclear Insurance Association of Canada or any other group or pool of insurers or would be an Insured under any such policy but for its termination upon exhaustion of its limit of liability. With respect to property, loss of use of such property shall be deemed to be property damage. 3. Without in any way restricting the operation of Paragraph 1. of this Clause it is agreed that for all purposes of this Contract all the original liability contracts of the Reassured, whether new, renewal or replacement, of any class whatsoever (other than Personal Liability, Farmers Liability, Storekeepers Liability, or Automobile Liability contracts), which become effective on or after December 31, 1984, shall be deemed to include, from their inception dates and thereafter, the following provision: BROAD EXCLUSION PROVISION It is agreed that this Policy does not apply: a. To liability imposed by or arising under the Nuclear Liability Act; nor b. To bodily injury or property damage with respect to which an Insured under this policy is also insured under a contract of nuclear energy liability insurance (whether the Insured is unnamed in such contract and whether or not it is legally enforceable by the Insured) issued by the Nuclear Insurance Association of Canada or any other insurer or group or pool of insurers or would be an Insured under any such policy but for its termination upon exhaustion of its limit of liability; nor -1- 17 CANADA NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE c. To bodily injury or property damage resulting directly or indirectly from the nuclear energy hazard arising from: (1) the ownership, maintenance, operation or use of a nuclear facility by or on behalf of an Insured; (2) the furnishing by an Insured of services, materials, parts or equipment in connection with the planning, construction, maintenance, operation or use of any nuclear facility; and (3) the possession, consumption, use, handling, disposal or transportation of fissionable substances, or of other radioactive material (except radioactive isotopes, away from a nuclear facility, which have reached the final stage of fabrication so as to be usable for any scientific, medical, agricultural, commercial or industrial purpose) used, distributed, handled, or sold by an Insured. AS USED IN THIS POLICY 1. The term "nuclear energy hazard" means the radioactive, toxic, explosive or other hazardous properties of radioactive material; 2. The term "radioactive material" means uranium, thorium, plutonium, neptunium, their respective derivatives and compounds, radioactive isotopes of other elements and any other substances that the Atomic Energy Control Board may, by regulation, designate as being prescribed substances capable of releasing atomic energy, or as being requisite for the production, use or application of atomic energy; 3. The term "nuclear facility" means: a. Any apparatus designed or used to sustain nuclear fission in a self-supporting chain reaction or to contain a critical mass of plutonium, thorium, and uranium, or any one or more of them; b. Any equipment or device designed or used for (i) separating the isotopes of plutonium, thorium and uranium, or any one or more of them, (ii) processing or utilizing spent fuel, or (iii) handling, processing or packaging waste; c. Any equipment or device used for the processing, fabricating or alloying of plutonium, thorium or uranium enriched in the isotope uranium 233 or in the isotope uranium 235, or any one or more of them if at any time the total amount of such material in the custody of the Insured at the premises where such equipment or device is located consists of or contains more than 25 grams of plutonium or uranium 233 or any combination thereof, or more than 250 grams of uranium 235; -2- 18 CANADA NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE d. Any structure, basin, excavation, premises or place prepared or used for the storage or disposal of waste radioactive material; and includes the site on which any of the foregoing is located, together with all operations conducted thereon and all premises used for such operations. 4. The term "fissionable substance" means any prescribed substance that is, or from which can be obtained, a substance capable of releasing atomic energy by nuclear fission. 5. With respect to property, loss of use of such property shall be deemed to be property damage. -3- 19 U.S.A. NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE 1. This reinsurance does not cover any loss or liability accruing to the Reassured as a member of, or subscriber to, any association of insurers or reinsurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association. 2. Without in any way restricting the operation of Paragraph 1. of this Clause it is understood and agreed that for all purposes of this reinsurance all the original policies of the Reassured (new, renewal and replacement) of the classes specified in Clause II of this Paragraph 2. from the time specified in Clause III in this Paragraph 2. shall be deemed to include the following provision (specified as the Limited Exclusion Provision): Limited Exclusion Provision* I. It is agreed that the policy does not apply under any liability coverage to { injury, sickness, disease, death or destruction bodily injury or property damage with respect to which an insured under the policy is also an insured under a nuclear energy liability policy issued by Nuclear Energy Liability Insurance Association, Mutual Atomic Energy Liability Underwriters or Nuclear Insurance Association of Canada, or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability. II. Family Automobile Policies (liability only), Special Automobile Policies (private passenger automobiles, liability only), Farmers Comprehensive Personal Liability Policies (liability only), Comprehensive Personal Liability Policies (liability only) or policies of a similar nature; and the liability portion of combination forms related to the four classes of policies stated above, such as the Comprehensive Dwelling Policy and the applicable types of Homeowners Policies. III. The inception dates and thereafter of all original policies as described in II. above, whether new, renewal or replacement, being policies which either (a) become effective on or after 1st May, 1960, or (b) become effective before that date and contain the Limited Exclusion Provision set out above; provided this paragraph 2 shall not be applicable to Family Automobile Policies, Special Automobile Policies, or policies or combination policies of a similar nature, issued by the Reassured on New York risks, until 90 days following approval of the Limited Exclusion Provision by the Governmental Authority having jurisdiction thereof. 3. Except for those classes of policies specified in Clause II of paragraph 2 and without in any way restricting the operation of paragraph 1 of this Clause, it is understood and agreed that for all purposes of this reinsurance the original liability policies of the Reassured (new, renewal and replacement) affording the following coverages: -1- 20 U.S.A. NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE Owners, Landlords and Tenants Liability, Contractual Liability, Elevator Liability, Owners or Contractors (including railroad) Protective Liability, Manufacturers and Contractors Liability, Product Liability, Professional and Malpractice Liability, Storekeepers Liability, Garage Liability, Automobile Liability (including Massachusetts Motor Vehicle or Garage Liability) shall be deemed to include with respect to such coverages, from the time specified in Clause V of this paragraph 3, the following provision (specified as the Broad Exclusion Provision): Broad Exclusion Provision* It is agreed that the policy does not apply: injury, sickness, disease, death or I. Under any Liability Coverage, to {destruction bodily injury or property damage (a) with respect to which an insured under the policy is also an insured under a nuclear energy liability policy issued by Nuclear Energy Liability Insurance Association, Mutual Atomic Energy Liability Underwriters or Nuclear Insurance Association of Canada, or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability; or (b) resulting from the hazardous properties of nuclear material and with respect to which (1) any person or organization is required to maintain financial protection pursuant to the Atomic Energy Act of 1954, or any law amendatory thereof, or (2) the insured is, or had this policy not be issued would be, entitled to indemnity from the United States of America, or any agency thereof, under any agreement entered into by the United States of America, or any agency thereof, with any person or organization. II. Under any Medical Payments Coverage, or under any Supplementary Payments Provision relating to { immediate medical or surgical relief, first aid to expenses incurred with respect to { bodily injury, sickness, disease or death bodily injury, resulting from the hazardous properties of nuclear material and arising out of the operation of a nuclear facility by any person or organization. III. Under any Liability coverage, to {injury, sickness, disease, death or destruction bodily injury or property damage resulting from the hazardous properties of nuclear material, if (a) the nuclear material (1) is at any nuclear facility owned by, or operated by or on behalf of, an insured or (2) has been discharged or dispersed therefrom; (b) the nuclear material is contained in spent fuel or waste at any time possessed, handled, used, processed, stored, transported or disposed of by or on behalf on an insured; or -2- 21 U.S.A. NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE (c) the { injury, sickness, disease, death or destruction bodily injury or property damage arises out of the furnishing by an insured of services, materials, parts or equipment in connection with the planning, construction, maintenance, operation or use of any nuclear facility, but if such facility is located within the United States of America, its territories, or possessions or Canada, this exclusion (c) applies only to {injury to or destruction of property at such nuclear facility. property damage to such nuclear facility and any property there at. IV. As used in this endorsement: "hazardous properties" include radioactive, toxic or explosive properties; "nuclear material" means source material, special nuclear material or by-product material; "source material," "special nuclear material," and "byproduct material" have the meanings given them in the Atomic Energy Act of 1954 or in any law amendatory thereof; "spent fuel" means any fuel element or fuel component, solid or liquid, which has been used or exposed to radiation in a nuclear reactor; "waste" means any waste material (1) containing byproduct material and (2) resulting from the operation by any person or organization of any nuclear facility included within the definition of nuclear facility under paragraph (a) or (b) thereof; "nuclear facility" means (a) any nuclear reactor, (b) any equipment or device designed or used for (1) separating the isotopes of uranium or plutonium, (2) processing or utilizing spent fuel, or (3) handling, processing or packaging waste, (c) any equipment or device used for the processing, fabricating or alloying of special nuclear material if at any time the total amount of such material in the custody of the insured at the premises where such equipment or device is located consists of or contains more than 25 grams of plutonium or uranium 233 or any combination thereof, or more than 250 grams of uranium 235, (d) any structure, basin, excavation, premises or place prepared or used for the storage or disposal of waste, and includes the site on which any of the foregoing is located, all operations conducted on such site and all premises used for such operations; "nuclear reactor" means any apparatus designed or used to sustain nuclear fission in a self-supporting chain reaction or to contain a critical mass of fissionable material; With respect to injury to or destruction of property, the word "injury or "destruction" includes all forms of radioactive contamination of property. "Property damage" includes all forms of radioactive contamination of property. V. The inception dates and thereafter of all original policies affording coverages specified in this paragraph 3, whether new, renewal or replacement, being policies which become effective on or after 1st May, 1960, provided this paragraph 3 shall not be applicable to -3- 22 U.S.A. NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE (i) Garage and Automobile Policies issued by the Reassured on New York risks, or (ii) statutory liability insurance required under Chapter 90, General Laws of Massachusetts, until 90 days following approval of the Broad Exclusion Provision by the Governmental Authority having jurisdiction thereof. 4. Without in any way restricting the operation of paragraph 1 of this Clause, it is understood and agreed that paragraphs 2 and 3 are not applicable to original liability policies of the Reassured in Canada and that with respect to such policies this Clause shall be deemed to include the Nuclear Energy Liability Exclusion Provisions adopted by the Canadian Underwriters' Association or the Independent Insurance Conference of Canada NOTES: 1) The words printed in italic text in the Limited Exclusion Provision and in the Broad Exclusion Provision shall apply only in relation to original liability policies which include a Limited Exclusion Provision or a Broad Exclusion Provision containing those words. 2) Wherever used herein the term "Company" shall be understood to mean "Reassured," "Reinsured" or whatever other term is used in the attached reinsurance Agreement to designate the reinsured company. -4- 23 POOLS, ASSOCIATIONS AND SYNDICATES EXCLUSION CLAUSE SECTION A Excluding: (a) All Business derived directly or indirectly from any Pool, Association or Syndicate which maintains its own reinsurance facilities. (b) Any Pool or Scheme (whether voluntary or mandatory) formed after March 1, 1968 for the purpose of insuring Property whether on a country-wide basis or in respect of designated areas. This exclusion shall not apply to so-called Automobile Insurance Plans or other Pools formed to provide coverage for Automobile Physical Damage. SECTION B It is agreed that business written by the Company for the same perils, which is known at the time to be insured by, or in excess of underlying amounts placed in the following Pools, Association or Syndicates, whether by way of insurance or reinsurance, is excluded hereunder: Industrial Risk Insurers; Association Factory Mutuals; Improved Risk Mutuals. Any Pool, Association or Syndicate formed for the purpose of writing Oil, Gas or Petro-Chemical Plants and/or Oil or Gas Drilling Rigs. United States Aircraft Insurance Group, Canadian Aircraft Insurance Group, Associated Aviation Underwriters, American Aviation Underwriters. Section B does not apply: (a) Where the Total Insured Value over all interests of the risk in question is less than $250,000,000. (b) To interests traditionally underwritten as Inland Marine or Stock and/or Contents written on a Blanket basis. (c) To Contingent business Interruption, except when the Company is aware that the key location is known at the time to be insured in any Pool, Association or Syndicate named above, other than as provided for under Section B (a). (d) To risks as follows: Offices, Hotels, Apartments, Hospitals, Educational Establishments, Public Utilities (other than Railroad Schedules) and Builders Risks on the classes or risks specified in this subsection (d) only. NOTE: Wherever used herein the term "Company" shall be understood to mean "Company," "Reinsured," "Reassured" or whatever other term is used in the attached reinsurance document to designate the reinsured company of companies. 24 INSOLVENCY FUNDS EXCLUSION CLAUSE 1. This Contract excludes all liability of the Reassured arising, by contract, operation of law, or otherwise, from its participation or membership, whether voluntary or involuntary, in any insolvency fund, plan, pool, association, fund or other arrangement, howsoever denominated, established or governed; which provides for any assessment of or payment or assumption by the Reassured of part or all of any claim, debt, charge, fee, or other obligation of any insurer, or its successors or assigns, which has been declared by any competent authority to be insolvent, or which is otherwise deemed unable to meet any claim, debt, charge, fee or other obligation in whole or in part. 25 REASSURED: NATIONAL INFORMATION GROUP COMPANIES GREAT PACIFIC INSURANCE COMPANY South San Francisco, California CONTRACT: FIRST PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT Effective January 1, 1999 BUSINESS COVERED: Business classified as Dwelling Fire, Fire, Extended Perils, Special Form on Interim Coverage policies, Forced Order policies, Real-Estate Owned (REO) policies, Personal Article Floaters, Personal Lines; Watercraft and Private Passenger Planes, Force Placed Property and/or Blanket Mortgage Security Insurance produced by Fastrac Systems, Inc. of Bellevue, Washington, and produced by M.A. Speizer & Co., Inc. or any other of the National Information Group Companies of South San Francisco, California on behalf of the Reassured. TERM AND CANCELLATION: The term of this Contract shall be from January 1, 1999 to January 1, 2000, both days at 12:01 a.m., Local Standard Time (Local Standard Time being that time which applies in the area where the risk is located) for losses occurring on new, renewal and in force policies. Should this Contract terminate while a loss occurrence is in progress, the Reinsurers shall nevertheless be liable, to the extent of their interest and subject to the other conditions of this Contract, for all losses resulting from such loss occurrence, whether such losses occur before or after such termination. TERRITORY: This reinsurance shall cover wherever the Reassured's policies apply. PAGE 1 OF 9 26 RETENTION AND LIMIT: The Reinsurers shall be liable in each and every loss occurrence irrespective of the number and kinds of risks and perils involved, for 95% of $2,500,000 Net Loss each loss occurrence excess of $2,500,000 Net Loss each loss occurrence, not to exceed 95% of $5,000,000 Net Loss for all loss occurrences during the term of this Contract. All recoveries received from the Florida Hurricane Fund will be retained net by the Reassured, down to a net occurrence loss to the Reassured of $250,000 after which any additional recoveries will inure to the Catastrophe Excess Program by reducing the gross loss subject to the Catastrophe program. Recoveries from all underlying reinsurance greater than $2,500,000 shall inure to the sole benefit of the Reinsurers hereunder; subject to a minimum net retention by the Reassured any one loss of no less than $250,000. The reassured agrees to carry at its own risk and not reinsured in any way the remaining 5% of each excess net loss for which claim is made hereunder. REINSTATEMENT: One full reinstatement at pro rata additional premium with respect to amount and a minimum of 100% with respect to time. (Refer to Exhibit A for further details). WARRANTY: It is hereby warranted that any recovery under this Contract shall involve two or more risks in each loss occurrence. REINSURANCE RATE: 1.030% of Gross Net Earned Premium Income. MINIMUM AND DEPOSIT PREMIUM: Deposit Premium of $215,000 payable in equal quarterly installments of $53,750 each at January 1, April 1, July 1, and October 1, 1999. Annual minimum premium of $172,000. Subject to annual adjustment. Estimated GNEPI for 1999: $21,000,000. EXCLUSIONS: a. Business classified as Ocean Marine except for personal lines watercraft physical damage not to exceed $100,000 any one risk; PAGE 2 OF 9 27 b. Personal Accident, Health, Surety and Fidelity, Workers' Compensation, and all classes of Casualty; c. Financial and Insolvency guarantees; d. Aviation business except for physical damage on private planes not to exceed $100,000 any one risk; e. Automobile; f. Inland Marine policies covering railroad rolling stock, streamlined trains, negative films, registered mail, jewelers block, animal mortality, offshore drilling rigs; g. Excess of Loss Reinsurance and reinsurance accepted under obligatory reinsurance treaties except for business produced by Fastrac Systems, Inc. of Bellevue, Washington, and by M.A. Speizer & Co., Inc. or any other of the National Information Group companies of South San Francisco, California; h. Hail damage to growing/standing crops; i. Flood insurance when written as such; j. Pools, Associations or Syndicates as per Exclusion Clause attached; k. Insolvency Funds as per Exclusion Clause attached; l. Loss or damage occasioned by invasion, hostilities, acts of foreign enemies, civil war, rebellion, insurrection, military or usurped power, martial law or confiscation by order of any government or public authority, as excluded under a standard policy containing a Standard War Exclusion Clause; m. Nuclear Incident as per Nuclear Incident Exclusion Clause Physical Damage - Reinsurance - (USA & Canada) attached; n. Seepage and Pollution as per ISO wording, or so deemed; o. Transmission and Distribution Lines. PAGE 3 OF 9 28 GENERAL CONDITIONS: Definition of Loss Occurrence Clause to include definition of hours clause as attached, and as follows (no reinstatement for wind): - 72 hours clause tornado, cyclone, hurricane, windstorm and hail - 120 hours clause riots and civil commotion/vandalism and malicious mischief within the area of one municipality or county and the municipalities or counties contiguous thereto - 168 hours Freeze - 168 hours Earthquake and Ensuing Loss - 168 hours All Other Perils Extra Contractual Obligations (100%) Excess of Policy Limits (100%) (ECO/XPL subject to a maximum of 25% of original catastrophe loss) Definition of Net Loss Clause (which shall include defense costs but not limited to expenses incurred in determination of coverage) Net Retained Lines Clause Notice of Loss and Loss Settlement Clause Currency Clause Tax Provisions Clause Access to Records Clause Errors and Omissions Clause Insolvency Clause Arbitration Clause Service of Suit Clause Towers Perrin Reinsurance Reserves Clause which complies with requirements of New York, California, and other states Towers Perrin Reinsurance Intermediary Clause WORDING: As per the expiring Contract. REINSURERS: 100% placement through Towers Perrin Reinsurance. See attached Schedule for listing of Reinsurers and their respective participations. Note: 1. The financial statements of participating Reinsurers will be furnished upon request. PAGE 4 OF 9 29 2. Towers Perrin Reinsurance has no ownership interest in or control of: # any Reinsurer subscribing to this reinsurance. [ ] any underwriting agent or correspondent intermediary involved in this reinsurance. 3. Towers Perrin Reinsurance has on file written evidence from any Reinsurer whose participation in this reinsurance was authorized by a representative other than an employee. This written evidence states the representative's authority to bind the participation of such Reinsurer. PAGE 5 OF 9 30 SCHEDULE REINSURERS ATTACHING TO COVER NOTE NO. C-99-01371 FOR NATIONAL INSURANCE GROUP COMPANIES GREAT PACIFIC INSURANCE COMPANY SOUTH SAN FRANCISCO, CALIFORNIA FIRST PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT
Direct Placement through Towers Perrin Reinsurance Share - -------------------------------------------------- ----- Constitution Reinsurance Corporation 13.50% New York, New York FEIN# 13-5009848 NAIC# 21032 Folksamerica Reinsurance Company 8.00% New York, New York FEIN# 13-2997499 NAIC# 38776 Hartford Fire Insurance Company 12.50% Hartford, Connecticut FEIN# 06-0383750 NAIC# 19682 through Hartford Re Company Hartford, Connecticut Nationwide Mutual Insurance Company 7.50% Columbus, Ohio FEIN# 31-4177100 NAIC# 23787
PAGE 6 OF 9 31 SCHEDULE REINSURERS ATTACHING TO COVER NOTE NO. C-99-01371
Direct Placement through Towers Perrin Reinsurance Share - -------------------------------------------------- ----- Reliance Insurance Company 3.50% Philadelphia, Pennsylvania FEIN# 23-0580680 NAIC# 24457 through Reliance Reinsurance Corp. Philadelphia, Pennsylvania Republic Western Insurance Company 5.00% Phoenix, Arizona FEIN# 86-0274508 NAIC# 31089 Signet Star Reinsurance Company 5.00% Wilmington, Delaware FEIN# 47-0574325 NAIC# 32603 St. Paul Fire and Marine Insurance Company 12.50% St. Paul, Minnesota FEIN# 41-0406690 NAIC# 24767 through St. Paul Re, Inc. New York, New York Sydney Reinsurance Corporation 10.00% Philadelphia, Pennsylvania FEIN# 23-1641984 NAIC# 10219 Underwriters Reinsurance Company 10.00% Concord, New Hampshire FEIN# 16-0366830 NAIC# 22314
PAGE 7 OF 9 32 SCHEDULE REINSURERS ATTACHING TO COVER NOTE NO. C-99-01371
Direct Placement through Towers Perrin Reinsurance Share - -------------------------------------------------- ----- USF Re Insurance Company 7.50% Boston, Massachusetts FEIN# 04-1590940 NAIC# 11835 Winterthur Reinsurance Corporation of America 5.00% New York, New York FEIN# 13-3531373 NAIC# 10006 ------ Total Placement 100.00%
PAGE 8 OF 9 33 REINSURANCE COVER NOTE NO. C-99-01371 FOR NATIONAL INSURANCE GROUP COMPANIES GREAT PACIFIC INSURANCE COMPANY SOUTH SAN FRANCISCO, CALIFORNIA FIRST PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT EFFECTIVE JANUARY 1, 1999 The Reassured hereby confirms its approval of the terms and conditions of the reinsurance set forth in this Reinsurance Cover Note and the Reinsurers participating hereon. A copy of Towers Perrin Reinsurance's Market Security Policy and Procedures has been attached to this Cover Note and the Reassured has been advised as to the status of all Reinsurers participating herein as regards this market security criteria. By: /s/Robert P. Barbarowicz ------------------------------------ Title: Executive Vice President ------------------------------------ Date: March 12, 1999 ------------------------------------ PAGE 9 OF 9 34 EXHIBIT A DEFINITION OF LOSS OCCURRENCE 1. The term "Loss Occurrence" shall mean the sum of all individual losses directly occasioned by any one disaster, accident or loss or series of disasters, accidents or losses arising out of one event which occurs within the area of one state of the United States of America or province of Canada and states or provinces contiguous thereto and to one another. However, the duration and extent of any one "Loss Occurrence" shall be limited to all individual losses sustained by the Reassured occurring during any period of 168 consecutive hours arising out of and directly occasioned by the same event except that the term "Loss Occurrence" shall be further defined as follows: a. As regards windstorm, hail, tornado, hurricane, cyclone, including ensuing collapse and water damage, all individual losses sustained by the Reassured occurring during any period of 72 consecutive hours arising out of and directly occasioned by the same event. However, the event need not be limited to one state or province or states or provinces contiguous thereto. b. As regards riot, riot attending a strike, civil commotion, vandalism and malicious mischief, all individual losses sustained by the Reassured, occurring during any period of 120 consecutive hours within the area of one municipality or county and the municipalities or counties contiguous thereto arising out of and directly occasioned by the same event. The maximum duration of 120 consecutive hours may be extended in respect of individual losses which occur beyond such 120 consecutive hours during the continued occupation of an assured's premises by strikers, provided such occupation commenced during the aforesaid period. c. As regards earthquake (the epicenter of which need not necessarily be within the territorial confines referred to in the opening paragraph of this Article) and fire following directly occasioned by the earthquake, only those individual fire losses which commence during the period of 168 consecutive hours may be included in the Reassured's "Loss Occurrence." d. As regards "Freeze," only individual losses directly occasioned by collapse, breakage of glass and water damage (caused by bursting of frozen pipes and tanks) may be included in the Reassured's "Loss Occurrence." 2. Except for those "Loss Occurrences" referred to in Paragraphs a. and b. the Reassured may choose the date and time when any such period of consecutive hours commences provided that it is not earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Reassured arising out of that disaster, accident or loss and provided that only one such period of 168 consecutive hours shall apply with respect to one event. 3. However, as respects those "Loss Occurrences" referred to in Paragraphs a. and b., if the disaster, accident or loss occasioned by the event is of greater duration than 120 consecutive hours then the Reassured may divide the disaster, accident or loss into two or more "Loss Occurrences" provided no two periods overlap and no individual loss is included in more than one such period and -1- 35 provided that no period commences earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Reassured arising out of that disaster, accident or loss. 4. No individual losses occasioned by an event that would be covered by 72 or 120 hours clauses may be included in any "Loss Occurrence" claimed under the 168 hours provision. -2- 36 CANADA NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE 1. This Contract does not cover any loss or liability accruing to the Reassured directly or indirectly, and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy Risks. 2. Without in any way restricting the operation of Paragraph 1. of this Clause, this Contract does not cover any loss or liability accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to: a. Nuclear reactor power plants including all auxiliary property on the site, or b. Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and critical facilities as such, or c. Installations for fabricating complete fuel elements or for processing substantial quantities of prescribed substances, and for reprocessing, salvaging, chemically separating, storing or disposing of spent nuclear fuel or waste materials, or d. Installations other than those listed in Paragraph 2.c. above using substantial quantities of radioactive isotopes or other products of nuclear fission. 3. Without in any way restricting the operation of Paragraphs 1. and 2. of this Clause, this Contract does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith except that this Paragraph 3. shall not operate: a. Where the Reassured does not have knowledge of such nuclear reactor power plant or nuclear installation, or b. Where the said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused. 4. Without in any way restricting the operation of Paragraphs 1., 2. and 3. of this Clause, this Contract does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurers or Reinsurer, when such radioactive contamination is a named hazard specifically insured against. 5. This Clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Reassured to be the primary hazard. 6. The term "prescribed substances" shall have the meaning given to it by the Atomic Energy Control Act R.S.C. 1985 (c), A-16 or by any law amendatory thereof. -1- 37 CANADA NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE 7. Reassured to be sole judge of what constitutes: a. Substantial quantities, and b. The extent of installation, plant or site. 8. Without in any way restricting the operation of Paragraphs 1., 2., 3. and 4. of this Clause, this Contract does not cover any loss or liability accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer caused: a. By any nuclear incident as defined in the Nuclear Liability Act or any other nuclear liability act, law or statute, or any law amendatory thereof or nuclear explosion, except for ensign loss or damage which results directly from fire, lightning or explosion of natural, coal or manufactured gas; b. By contamination by radioactive material. NOTE: Without in any way restricting the operation of Paragraphs 1., 2., 3. and 4. of this Clause, Paragraph 8. of this Clause shall only apply to all original contracts of the Reassured whether new, renewal or replacement which became effective on or after December 31, 1992. -2- 38 U.S.A. NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE 1. This reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy Risks. 2. Without in any way restricting the operation of Paragraph 1. of this Clause, this reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to: a. Nuclear reactor power plants including all auxiliary property on the site, or b. Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and "critical facilities" as such, or c. Installations for fabricating complete fuel elements or for processing substantial quantities of "special nuclear material," and for reprocessing, salvaging, chemically separating, storing or disposing of "spent" nuclear fuel or waste materials, or d. Installations other than those listed in Paragraph 2.c. above using substantial quantities of radioactive isotopes or other products of nuclear fission. 3. Without in any way restricting the operations of Paragraphs 1. and 2. hereof, this reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith except that this Paragraph 3. shall not operate: a. Where Reassured does not have knowledge of such nuclear reactor power plant or nuclear installation, or b. Where said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused. However on and after 1st January 1960 this SubParagraph 3.B. shall only apply provided the said radioactive contamination exclusion provision has been approved by the Governmental Authority having jurisdiction thereof. 4. Without in any way restricting the operations of Paragraphs 1., 2. and 3. hereof, this reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against. 5. It is understood and agreed that this Clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Reassured to be the primary hazard. -1- 39 U.S.A. NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE 6. The term "special nuclear material" shall have the meaning given it in the Atomic Energy Act of 1954 or by any law amendatory thereof. 7. Reassured to be the sole judge of what constitutes: a. Substantial quantities, and b. The extent of installation, plant or site. NOTE: Without in any way restricting the operation of Paragraph 1. hereof, it is understood and agreed that: (a) all policies issued by the Reassured on or before December 31, 1957 shall be free from the application of the other provisions of this Clause until expiry date of December 31, 1960 whichever first occurs whereupon all the provisions of this Clause shall apply. (b) with respect to any risk located in Canada policies issued by the Reassured on or before December 31, 1958 shall be free from the application of the other provisions of this Clause until expiry date or December 31, 1960 whichever first occurs whereupon all the provisions of this Clause shall apply. NOTES: 1) The words printed in italic text in the Limited Exclusion Provision and in the Broad Exclusion Provision shall apply only in relation to original liability policies which include a Limited Exclusion Provision or a Broad Exclusion Provision containing those words. 2) Wherever used herein the term "Company" shall be understood to mean "Reassured," "Reinsured" or whatever other term is used in the attached reinsurance Agreement to designate the reinsured company. -2- 40 POOLS, ASSOCIATIONS, SYNDICATES EXCLUSION CLAUSE (FLORIDA AMENDED) SECTION A It is agreed that the following is excluded hereunder: (a) All business derived directly or indirectly from any Pool, Association or Syndicate which maintains its own reinsurance facilities. (b) Any Pool or Scheme, (whether voluntary or mandatory) formed after 1st March 1968 for the purpose of insuring property whether on a countrywide basis or in respect of designated areas. This exclusion shall not apply to so-called Automobile Insurance Plans or other Pools formed to provide coverage for Automobile Physical Damage. SECTION B It is agreed that business written by the Reassured for the same perils, which is known at the time to be insured by, or in excess of underlying amounts placed in the following Pools, Associations or Syndicates, whether by way of insurance or reinsurance, is excluded hereunder: Industrial Risk Insurers Associated Factory Mutuals Improved Risk Mutuals Any Pool, Association or Syndicate formed for the purpose of writing oil, gas or petro-chemical plants and/or oil or gas drilling rigs United States Aircraft Insurance Group Canadian Aircraft Insurance Group Associated Aviation Underwriters American Aviation Underwriters Section B does not apply: (a) Where the Total Insured Value over all interests of the risk in question is less than $250,000,000. (b) To interests traditionally underwritten as Inland Marine or Stock and/or Contents written on a Blanket Basis. (c) To Contingent Business Interruption, except when the Reassured is aware that the key location is known at the time to be insured in any Pool, Association or Syndicate named above. (d) To risks as follows: Offices, Hotels, Apartments, Hospitals, Educational Establishments, Public Utilities (other than Railroad Schedules), and Builder's Risks on the classes of risks specified in this subsection (d) only. -1- 41 SECTION C NEVERTHELESS, the Reinsurers specifically agree that liability accruing to the Reassured from its participation in Residual Market Mechanisms including but limited to: (a) The following so-called "Coastal Pools": Alabama Insurance Underwriting Association Florida Windstorm Insurance Underwriting Association (FWUA) Louisiana Insurance Underwriting Association Mississippi Insurance Underwriting Association North Carolina Insurance Underwriting Association South Carolina Windstorm and Hail Underwriting Association Texas Catastrophe Property Insurance Association (b) All "Fair Plan" and "Rural Risk Plan" business, and (c) Florida Property and Casualty Joint Underwriting Association (FPCJUA) and Residential Property and Casualty Joint Underwriting Association (RPCJUA), for all perils otherwise protected hereunder shall not be excluded, except that this reinsurance does not include any increase in such liability resulting from: (1) The inability of any participant in such Residual Market Mechanisms to meet its liability, (2) Any claim against such Residual Market Mechanisms or any participant therein, including the Reassured, whether by way of subrogation or otherwise, brought by or on behalf of any insolvency fund (as defined in the Insolvency Funds Exclusion Clause in this Contract). SECTION D Notwithstanding SECTION C above, in respect of the FWUA, FPCJUA and RPCJUA, where an assessment is made against the Reassured by the FWUA, the FPCJUA, the RPCJUA, or any combination thereof, the maximum loss that the Reassured may include in the Ultimate Net Loss in respect of any loss occurrence hereunder shall not exceed the lesser of: (1) The Reassured's assessment from the relevant entity (FWUA, FPCJUA and/or RPCJUA) for the accounting year in which the loss occurrence commenced, or (2) The product of the following: (a) The Reassured's percentage participation in the relevant entity for the accounting year in which the loss occurrence commenced; and -2- 42 (b) The relevant entity's total losses in such loss occurrence. Any assessments for accounting years subsequent to that in which the loss occurrence commenced may not be included in the Ultimate Net Loss hereunder. Moreover, notwithstanding SECTION C above, in respect of the FWUA, the FPCJUA and/or the RPCJUA, the Ultimate Net Loss hereunder shall not include any monies expended to purchase or retire bonds as a consequence of being a member of the FWUA, the FPCJUA and/or RPCJUA. For the purposes of this Contract, the Reassured may not include in the Ultimate Net Loss any assessment or any percentage assessment levied by the FWUA, the FPCJUA and/or the RPCJUA to meet the obligations of an insolvent insurer member or other party, or to meet any obligations arising from the deferment by the FWUA, FPCJUA and/or RPCJUA of the collection of monies. NOTES: Wherever used herein the terms: "Reassured" shall be understood to mean "Company," "Reinsured," "Reassured" or whatever other term is used in the attached reinsurance document to designate the reinsured company or companies. "Agreement" shall be understood to mean "Agreement," "Contract," "Policy" or whatever other term is used to designate the attached reinsurance document. "Reinsurers" shall be understood to mean "Reinsurers," "Underwriters" or whatever other term is used in the attached reinsurance document to designate the reinsurer or reinsurers. -3- 43 INSOLVENCY FUNDS EXCLUSION CLAUSE 1. This Contract excludes all liability of the Reassured arising, by contract, operation of law, or otherwise, from its participation or membership, whether voluntary or involuntary, in any insolvency fund, plan, pool, association, fund or other arrangement, howsoever denominated, established or governed; which provides for any assessment of or payment or assumption by the Reassured of part or all of any claim, debt, charge, fee, or other obligation of any insurer, or its successors or assigns, which has been declared by any competent authority to be insolvent, or which is otherwise deemed unable to meet any claim, debt, charge, fee or other obligation in whole or in part. 44 REASSURED: NATIONAL INFORMATION GROUP COMPANIES GREAT PACIFIC INSURANCE COMPANY South San Francisco, California CONTRACT: SECOND PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT Effective January 1, 1999 BUSINESS COVERED: Business classified as Dwelling Fire, Fire, Extended Perils, Special Form on Interim Coverage policies, Forced Order policies, Real-Estate Owned (REO) policies, Personal Article Floaters, Personal Lines; Watercraft and Private Passenger Planes, Force Placed Property and/or Blanket Mortgage Security Insurance produced by Fastrac Systems, Inc. of Bellevue, Washington, and produced by M.A. Speizer & Co., Inc. or any other of the National Information Group Companies of South San Francisco, California on behalf of the Reassured. TERM AND CANCELLATION: The term of this Contract shall be from January 1, 1999 to January 1, 2000, both days at 12:01 a.m., Local Standard Time (Local Standard Time being that time which applies in the area where the risk is located) for losses occurring on new, renewal and in force policies. Should this Contract terminate while a loss occurrence is in progress, the Reinsurers shall nevertheless be liable, to the extent of their interest and subject to the other conditions of this Contract, for all losses resulting from such loss occurrence, whether such losses occur before or after such termination. TERRITORY: This reinsurance shall cover wherever the Reassured's policies apply. PAGE 1 OF 9 45 RETENTION AND LIMIT: The Reinsurers shall be liable in each and every loss occurrence irrespective of the number and kinds of risks and perils involved, for 95% of $5,000,000 Net Loss each loss occurrence excess of $5,000,000 Net Loss each loss occurrence, not to exceed 95% of $10,000,000 Net Loss for all loss occurrences during the term of this Contract. All recoveries received from the Florida Hurricane Fund will be retained net by the Reassured, down to a net occurrence loss to the Reassured of $250,000 after which any additional recoveries will inure to the Catastrophe Excess Program by reducing the gross loss subject to the Catastrophe program. Recoveries from all underlying reinsurance greater than $2,500,000 shall inure to the sole benefit of the Reinsurers hereunder; subject to a minimum net retention by the Reassured any one loss of no less than $250,000. The reassured agrees to carry at its own risk and not reinsured in any way the remaining 5% of each excess net loss for which claim is made hereunder. REINSTATEMENT: One full reinstatement at pro rata additional premium with respect to amount and a minimum of 100% with respect to time. (Refer to Exhibit A for further details). WARRANTY: It is hereby warranted that any recovery under this Contract shall involve two or more risks in each loss occurrence. REINSURANCE RATE: 1.430% of Gross Net Earned Premium Income. MINIMUM AND DEPOSIT PREMIUM: Deposit Premium of $300,000 payable in equal quarterly installments of $75,000 at January 1, April 1, July 1, and October 1, 1999. Annual minimum premium of $240,000. Subject to annual adjustment. Estimated GNEPI for 1999: $21,000,000. EXCLUSIONS: a. Business classified as Ocean Marine except for personal lines watercraft physical damage not to exceed $100,000 any one risk; PAGE 2 OF 9 46 b. Personal Accident, Health, Surety and Fidelity, Workers' Compensation, and all classes of Casualty; c. Financial and Insolvency guarantees; d. Aviation business except for physical damage on private planes not to exceed $100,000 any one risk; e. Automobile business; f. Inland Marine policies covering railroad rolling stock, streamlined trains, negative films, registered mail, jewelers block, animal mortality, offshore drilling rigs; g. Excess of Loss Reinsurance and reinsurance accepted under obligatory reinsurance treaties except for business produced by Fastrac Systems, Inc. of Bellevue, Washington, and by M.A. Speizer & Co., Inc. or any other of the National Information Group companies of South San Francisco, California; h. Hail damage to growing/standing crops; i. Flood insurance when written as such; j. Pools, Associations or Syndicates as per Exclusion Clause attached; k. Insolvency Funds as per Exclusion Clause attached; l. Loss or damage occasioned by invasion, hostilities, acts of foreign enemies, civil war, rebellion, insurrection, military or usurped power, martial law or confiscation by order of any government or public authority, as excluded under a standard policy containing a Standard War Exclusion Clause; m. Nuclear Incident as per Nuclear Incident Exclusion Clause Physical Damage - Reinsurance - (USA & Canada) attached; n. Seepage and Pollution as per ISO wording, or so deemed; o. Transmission and Distribution Lines. GENERAL PAGE 3 OF 9 47 CONDITIONS: Definition of Loss Occurrence Clause to include definition of hours clause as attached, and as follows (no reinstatement for wind): - 72 hours clause tornado, cyclone, hurricane, windstorm and hail - 120 hours clause riots and civil commotion/vandalism and malicious mischief within the area of one municipality or county and the municipalities or counties contiguous thereto - 168 hours Freeze - 168 hours Earthquake and Ensuing Loss - 168 hours All Other Perils Extra Contractual Obligations (100%) Excess of Policy Limits (100%) (ECO/XPL subject to a maximum of 25% of original catastrophe loss) Definition of Net Loss Clause (which shall include defense but not limited to expenses incurred in determination of coverage) Net Retained Lines Clause Notice of Loss and Loss Settlement Clause Currency Clause Tax Provisions Clause Access to Records Clause Errors and Omissions Clause Insolvency Clause Arbitration Clause Service of Suit Clause Towers Perrin Reinsurance Reserves Clause which complies with requirements of New York, California, and other states Towers Perrin Reinsurance Intermediary Clause WORDING: As per the expiring Contract. REINSURERS: 100% placement through Towers Perrin Reinsurance. See attached Schedule for listing of Reinsurers and their respective participations. Note: 1. The financial statements of participating Reinsurers will be furnished upon request. PAGE 4 OF 9 48 2. Towers Perrin Reinsurance has no ownership interest in or control of: - any Reinsurer subscribing to this reinsurance. - any underwriting agent or correspondent intermediary involved in this reinsurance. 3. Towers Perrin Reinsurance has on file written evidence from any Reinsurer whose participation in this reinsurance was authorized by a representative other than an employee. This written evidence states the representative's authority to bind the participation of such Reinsurer. PAGE 5 OF 9 49 SCHEDULE REINSURERS ATTACHING TO COVER NOTE NO. C-99-01402 FOR NATIONAL INSURANCE GROUP COMPANIES GREAT PACIFIC INSURANCE COMPANY SOUTH SAN FRANCISCO, CALIFORNIA SECOND PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT
Direct Placement through Towers Perrin Reinsurance Share Constitution Reinsurance Corporation 10.00% New York, New York FEIN# 13-5009848 NAIC# 21032 Continental Casualty Company 14.50% Chicago, Illinois FEIN# 36-2114545 NAIC# 20443 Employers Mutual Casualty Company 2.25% Des Moines, Iowa FEIN# 42-0234980 NAIC# 21415 First Excess & Reinsurance Corporation 7.50% Jefferson City, Missouri FEIN# 43-1037123 NAIC# 32018 Folksamerica Reinsurance Company 8.00% New York, New York FEIN# 13-2997499 NAIC# 38776
PAGE 6 OF 9 50 SCHEDULE REINSURERS ATTACHING TO COVER NOTE NO. C-99-01402
Direct Placement through Towers Perrin Reinsurance Share Insurance Company of the West 8.00% San Diego, California FEIN# 95-2769232 NAIC# 27847 Nationwide Mutual Insurance Company 7.50% Columbus, Ohio FEIN# 31-4177100 NAIC# 23787 Reliance Insurance Company 3.50% Philadelphia, Pennsylvania FEIN# 23-0580680 NAIC# 24457 through Reliance Reinsurance Corporation Philadelphia, Pennsylvania Signet Star Reinsurance Company 5.00% Wilmington, Delaware FEIN# 47-0574325 NAIC# 32603 St. Paul Fire and Marine Insurance Company 10.75% St. Paul, Minnesota FEIN# 41-0406690 NAIC# 24767 through St. Paul Re, Inc. Underwriters Reinsurance Company 10.00% Concord, New Hampshire FEIN# 16-0366830 NAIC# 22314
PAGE 7 OF 9 51 SCHEDULE REINSURERS ATTACHING TO COVER NOTE NO. C-99-01402
Direct Placement through Towers Perrin Reinsurance Share United Fire & Casualty Company 0.50% Cedar Rapids, Iowa FEIN# 42-0644327 NAIC# 13021 USF Re Insurance Company 7.50% Boston, Massachusetts FEIN# 04-1590940 NAIC# 11835 Winterthur Reinsurance Corporation of America 5.00% New York, New York FEIN# 13-3531373 NAIC# 10006 Total Placement 100.00%
PAGE 8 OF 9 52 REINSURANCE COVER NOTE NO. C-99-01402 FOR NATIONAL INSURANCE GROUP COMPANIES GREAT PACIFIC INSURANCE COMPANY SOUTH SAN FRANCISCO, CALIFORNIA SECOND PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT EFFECTIVE JANUARY 1, 1999 The Reassured hereby confirms its approval of the terms and conditions of the reinsurance set forth in this Reinsurance Cover Note and the Reinsurers participating hereon. A copy of Towers Perrin Reinsurance's Market Security Policy and Procedures has been attached to this Cover Note and the Reassured has been advised as to the status of all Reinsurers participating herein as regards this market security criteria. By: /s/ Robert P. Barbarowicz ------------------------------------------- Title: Executive Vice President --------------------------------------- Date: March 12, 1999 --------------------------------------- PAGE 9 OF 9 53 EXHIBIT A DEFINITION OF LOSS OCCURRENCE 1. The term "Loss Occurrence" shall mean the sum of all individual losses directly occasioned by any one disaster, accident or loss or series of disasters, accidents or losses arising out of one event which occurs within the area of one state of the United States of America or province of Canada and states or provinces contiguous thereto and to one another. However, the duration and extent of any one "Loss Occurrence" shall be limited to all individual losses sustained by the Reassured occurring during any period of 168 consecutive hours arising out of and directly occasioned by the same event except that the term "Loss Occurrence" shall be further defined as follows: a. As regards windstorm, hail, tornado, hurricane, cyclone, including ensuing collapse and water damage, all individual losses sustained by the Reassured occurring during any period of 72 consecutive hours arising out of and directly occasioned by the same event. However, the event need not be limited to one state or province or states or provinces contiguous thereto. b. As regards riot, riot attending a strike, civil commotion, vandalism and malicious mischief, all individual losses sustained by the Reassured, occurring during any period of 120 consecutive hours within the area of one municipality or county and the municipalities or counties contiguous thereto arising out of and directly occasioned by the same event. The maximum duration of 120 consecutive hours may be extended in respect of individual losses which occur beyond such 120 consecutive hours during the continued occupation of an assured's premises by strikers, provided such occupation commenced during the aforesaid period. c. As regards earthquake (the epicenter of which need not necessarily be within the territorial confines referred to in the opening paragraph of this Article) and fire following directly occasioned by the earthquake, only those individual fire losses which commence during the period of 168 consecutive hours may be included in the Reassured's "Loss Occurrence." d. As regards "Freeze," only individual losses directly occasioned by collapse, breakage of glass and water damage (caused by bursting of frozen pipes and tanks) may be included in the Reassured's "Loss Occurrence." 2. Except for those "Loss Occurrences" referred to in Paragraphs a. and b. the Reassured may choose the date and time when any such period of consecutive hours commences provided that it is not earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Reassured arising out of that disaster, accident or loss and provided that only one such period of 168 consecutive hours shall apply with respect to one event. 3. However, as respects those "Loss Occurrences" referred to in Paragraphs a. and b., if the disaster, accident or loss occasioned by the event is of greater duration than 120 consecutive hours then the Reassured may divide the disaster, accident or loss into two or more "Loss Occurrences" provided no two periods overlap and no individual loss is included in more than one such period and -1- 54 provided that no period commences earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Reassured arising out of that disaster, accident or loss. 4. No individual losses occasioned by an event that would be covered by 72 or 120 hours clauses may be included in any "Loss Occurrence" claimed under the 168 hours provision. -2- 55 CANADA NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE 1. This Contract does not cover any loss or liability accruing to the Reassured directly or indirectly, and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy Risks. 2. Without in any way restricting the operation of Paragraph 1. of this Clause, this Contract does not cover any loss or liability accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to: a. Nuclear reactor power plants including all auxiliary property on the site, or b. Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and critical facilities as such, or c. Installations for fabricating complete fuel elements or for processing substantial quantities of prescribed substances, and for reprocessing, salvaging, chemically separating, storing or disposing of spent nuclear fuel or waste materials, or d. Installations other than those listed in Paragraph 2.c. above using substantial quantities of radioactive isotopes or other products of nuclear fission. 3. Without in any way restricting the operation of Paragraphs 1. and 2. of this Clause, this Contract does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith except that this Paragraph 3. shall not operate: a. Where the Reassured does not have knowledge of such nuclear reactor power plant or nuclear installation, or b. Where the said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused. 4. Without in any way restricting the operation of Paragraphs 1., 2. and 3. of this Clause, this Contract does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurers or Reinsurer, when such radioactive contamination is a named hazard specifically insured against. 5. This Clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Reassured to be the primary hazard. 6. The term "prescribed substances" shall have the meaning given to it by the Atomic Energy Control Act R.S.C. 1985 (c), A-16 or by any law amendatory thereof. -1- 56 CANADA NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE 7. Reassured to be sole judge of what constitutes: a. Substantial quantities, and b. The extent of installation, plant or site. 8. Without in any way restricting the operation of Paragraphs 1., 2., 3. and 4. of this Clause, this Contract does not cover any loss or liability accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer caused: a. By any nuclear incident as defined in the Nuclear Liability Act or any other nuclear liability act, law or statute, or any law amendatory thereof or nuclear explosion, except for ensign loss or damage which results directly from fire, lightning or explosion of natural, coal or manufactured gas; b. By contamination by radioactive material. NOTE: Without in any way restricting the operation of Paragraphs 1., 2., 3. and 4. of this Clause, Paragraph 8. of this Clause shall only apply to all original contracts of the Reassured whether new, renewal or replacement which became effective on or after December 31, 1992. -2- 57 U.S.A. NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE 1. This reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy Risks. 2. Without in any way restricting the operation of Paragraph 1. of this Clause, this reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to: a. Nuclear reactor power plants including all auxiliary property on the site, or b. Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and "critical facilities" as such, or c. Installations for fabricating complete fuel elements or for processing substantial quantities of "special nuclear material," and for reprocessing, salvaging, chemically separating, storing or disposing of "spent" nuclear fuel or waste materials, or d. Installations other than those listed in Paragraph 2.c. above using substantial quantities of radioactive isotopes or other products of nuclear fission. 3. Without in any way restricting the operations of Paragraphs 1. and 2. hereof, this reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith except that this Paragraph 3. shall not operate: a. Where Reassured does not have knowledge of such nuclear reactor power plant or nuclear installation, or b. Where said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused. However on and after 1st January 1960 this SubParagraph 3.B. shall only apply provided the said radioactive contamination exclusion provision has been approved by the Governmental Authority having jurisdiction thereof. 4. Without in any way restricting the operations of Paragraphs 1., 2. and 3. hereof, this reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against. 5. It is understood and agreed that this Clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Reassured to be the primary hazard. -1- 58 U.S.A. NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE 6. The term "special nuclear material" shall have the meaning given it in the Atomic Energy Act of 1954 or by any law amendatory thereof. 7. Reassured to be the sole judge of what constitutes: a. Substantial quantities, and b. The extent of installation, plant or site. NOTE: Without in any way restricting the operation of Paragraph 1. hereof, it is understood and agreed that: (a) all policies issued by the Reassured on or before December 31, 1957 shall be free from the application of the other provisions of this Clause until expiry date of December 31, 1960 whichever first occurs whereupon all the provisions of this Clause shall apply. (b) with respect to any risk located in Canada policies issued by the Reassured on or before December 31, 1958 shall be free from the application of the other provisions of this Clause until expiry date or December 31, 1960 whichever first occurs whereupon all the provisions of this Clause shall apply. NOTES: 1) The words printed in italic text in the Limited Exclusion Provision and in the Broad Exclusion Provision shall apply only in relation to original liability policies which include a Limited Exclusion Provision or a Broad Exclusion Provision containing those words. 2) Wherever used herein the term "Company" shall be understood to mean "Reassured," "Reinsured" or whatever other term is used in the attached reinsurance Agreement to designate the reinsured company. -2- 59 POOLS, ASSOCIATIONS, SYNDICATES EXCLUSION CLAUSE (FLORIDA AMENDED) SECTION A It is agreed that the following is excluded hereunder: (a) All business derived directly or indirectly from any Pool, Association or Syndicate which maintains its own reinsurance facilities. (b) Any Pool or Scheme, (whether voluntary or mandatory) formed after 1st March 1968 for the purpose of insuring property whether on a countrywide basis or in respect of designated areas. This exclusion shall not apply to so-called Automobile Insurance Plans or other Pools formed to provide coverage for Automobile Physical Damage. SECTION B It is agreed that business written by the Reassured for the same perils, which is known at the time to be insured by, or in excess of underlying amounts placed in the following Pools, Associations or Syndicates, whether by way of insurance or reinsurance, is excluded hereunder: Industrial Risk Insurers Associated Factory Mutuals Improved Risk Mutuals Any Pool, Association or Syndicate formed for the purpose of writing oil, gas or petro-chemical plants and/or oil or gas drilling rigs United States Aircraft Insurance Group Canadian Aircraft Insurance Group Associated Aviation Underwriters American Aviation Underwriters Section B does not apply: (a) Where the Total Insured Value over all interests of the risk in question is less than $250,000,000. (b) To interests traditionally underwritten as Inland Marine or Stock and/or Contents written on a Blanket Basis. (c) To Contingent Business Interruption, except when the Reassured is aware that the key location is known at the time to be insured in any Pool, Association or Syndicate named above. (d) To risks as follows: Offices, Hotels, Apartments, Hospitals, Educational Establishments, Public Utilities (other than Railroad Schedules), and Builder's Risks on the classes of risks specified in this subsection (d) only. -1- 60 SECTION C NEVERTHELESS, the Reinsurers specifically agree that liability accruing to the Reassured from its participation in Residual Market Mechanisms including but limited to: (a) The following so-called "Coastal Pools": Alabama Insurance Underwriting Association Florida Windstorm Insurance Underwriting Association (FWUA) Louisiana Insurance Underwriting Association Mississippi Insurance Underwriting Association North Carolina Insurance Underwriting Association South Carolina Windstorm and Hail Underwriting Association Texas Catastrophe Property Insurance Association (b) All "Fair Plan" and "Rural Risk Plan" business, and (c) Florida Property and Casualty Joint Underwriting Association (FPCJUA) and Residential Property and Casualty Joint Underwriting Association (RPCJUA), for all perils otherwise protected hereunder shall not be excluded, except that this reinsurance does not include any increase in such liability resulting from: (1) The inability of any participant in such Residual Market Mechanisms to meet its liability, (2) Any claim against such Residual Market Mechanisms or any participant therein, including the Reassured, whether by way of subrogation or otherwise, brought by or on behalf of any insolvency fund (as defined in the Insolvency Funds Exclusion Clause in this Contract). SECTION D Notwithstanding SECTION C above, in respect of the FWUA, FPCJUA and RPCJUA, where an assessment is made against the Reassured by the FWUA, the FPCJUA, the RPCJUA, or any combination thereof, the maximum loss that the Reassured may include in the Ultimate Net Loss in respect of any loss occurrence hereunder shall not exceed the lesser of: (1) The Reassured's assessment from the relevant entity (FWUA, FPCJUA and/or RPCJUA) for the accounting year in which the loss occurrence commenced, or (2) The product of the following: (a) The Reassured's percentage participation in the relevant entity for the accounting year in which the loss occurrence commenced; and (b) The relevant entity's total losses in such loss occurrence. -2- 61 Any assessments for accounting years subsequent to that in which the loss occurrence commenced may not be included in the Ultimate Net Loss hereunder. Moreover, notwithstanding SECTION C above, in respect of the FWUA, the FPCJUA and/or the RPCJUA, the Ultimate Net Loss hereunder shall not include any monies expended to purchase or retire bonds as a consequence of being a member of the FWUA, the FPCJUA and/or RPCJUA. For the purposes of this Contract, the Reassured may not include in the Ultimate Net Loss any assessment or any percentage assessment levied by the FWUA, the FPCJUA and/or the RPCJUA to meet the obligations of an insolvent insurer member or other party, or to meet any obligations arising from the deferment by the FWUA, FPCJUA and/or RPCJUA of the collection of monies. NOTES: Wherever used herein the terms: "Reassured" shall be understood to mean "Company," "Reinsured," "Reassured" or whatever other term is used in the attached reinsurance document to designate the reinsured company or companies. "Agreement" shall be understood to mean "Agreement," "Contract," "Policy" or whatever other term is used to designate the attached reinsurance document. "Reinsurers" shall be understood to mean "Reinsurers," "Underwriters" or whatever other term is used in the attached reinsurance document to designate the reinsurer or reinsurers. -3- 62 INSOLVENCY FUNDS EXCLUSION CLAUSE 1. This Contract excludes all liability of the Reassured arising, by contract, operation of law, or otherwise, from its participation or membership, whether voluntary or involuntary, in any insolvency fund, plan, pool, association, fund or other arrangement, howsoever denominated, established or governed; which provides for any assessment of or payment or assumption by the Reassured of part or all of any claim, debt, charge, fee, or other obligation of any insurer, or its successors or assigns, which has been declared by any competent authority to be insolvent, or which is otherwise deemed unable to meet any claim, debt, charge, fee or other obligation in whole or in part. 63 REASSURED: NATIONAL INFORMATION GROUP COMPANIES GREAT PACIFIC INSURANCE COMPANY South San Francisco, California CONTRACT: THIRD PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT Effective January 1, 1999 BUSINESS COVERED: Business classified as Dwelling Fire, Fire, Extended Perils, Special Form on Interim Coverage policies, Forced Order policies, Real-Estate Owned (REO) policies, Personal Article Floaters, Personal Lines; Watercraft and Private Passenger Planes, Force Placed Property and/or Blanket Mortgage Security Insurance produced by Fastrac Systems, Inc. of Bellevue, Washington, and produced by M.A. Speizer & Co., Inc. or any other of the National Information Group Companies of South San Francisco, California on behalf of the Reassured. TERM AND CANCELLATION: The term of this Contract shall be from January 1, 1999 to January 1, 2000, both days at 12:01 a.m., Local Standard Time (Local Standard Time being that time which applies in the area where the risk is located) for losses occurring on new, renewal and in force policies. Should this Contract terminate while a loss occurrence is in progress, the Reinsurers shall nevertheless be liable, to the extent of their interest and subject to the other conditions of this Contract, for all losses resulting from such loss occurrence, whether such losses occur before or after such termination. TERRITORY: This reinsurance shall cover wherever the Reassured's policies apply. PAGE 1 OF 9 64 RETENTION AND LIMIT: The Reinsurers shall be liable in each and every loss occurrence irrespective of the number and kinds of risks and perils involved, for 95% of $5,000,000 Net Loss each loss occurrence excess of $10,000,000 Net Loss each loss occurrence, not to exceed 95% of $10,000,000 Net Loss for all loss occurrences during the term of this Contract. All recoveries received from the Florida Hurricane Fund will be retained net by the Reassured, down to a net occurrence loss to the Reassured of $250,000 after which any additional recoveries will inure to the Catastrophe Excess Program by reducing the gross loss subject to the Catastrophe program. Recoveries from all underlying reinsurance greater than $2,500,000 shall inure to the sole benefit of the Reinsurers hereunder; subject to a minimum net retention by the Reassured any one loss of no less than $250,000. The reassured agrees to carry at its own risk and not reinsured in any way the remaining 5% of each excess net loss for which claim is made hereunder. REINSTATEMENT: One full reinstatement at pro rata additional premium with respect to amount and a minimum of 100% with respect to time. (Refer to Exhibit A for further details). WARRANTY: It is hereby warranted that any recovery under this Contract shall involve two or more risks in each loss occurrence. REINSURANCE RATE: 0.720% of Gross Net Earned Premium Income. MINIMUM AND DEPOSIT PREMIUM: Deposit Premium of $150,000 payable in equal quarterly installments of $37,500 at January 1, April 1, July 1, and October 1, 1999. Annual minimum premium of $120,000. Subject to annual adjustment. Estimated GNEPI for 1999: $21,000,000. EXCLUSIONS: a. Business classified as Ocean Marine except for personal lines watercraft physical damage not to exceed $100,000 any one risk; PAGE 2 OF 9 65 b. Personal Accident, Health, Surety and Fidelity, Workers' Compensation, and all classes of Casualty; c. Financial and Insolvency guarantees; d. Aviation business except for physical damage on private planes not to exceed $100,000 any one risk; e. Automobile business; f. Inland Marine policies covering railroad rolling stock, streamlined trains, negative films, registered mail, jewelers block, animal mortality, offshore drilling rigs; g. Excess of Loss Reinsurance and reinsurance accepted under obligatory reinsurance treaties except for business produced by Fastrac Systems, Inc. of Bellevue, Washington, and by M.A. Speizer & Co., Inc. or any other of the National Information Group companies of South San Francisco, California; h. Hail damage to growing/standing crops; i. Flood insurance when written as such; j. Pools, Associations or Syndicates as per Exclusion Clause attached; k. Insolvency Funds as per Exclusion Clause attached; l. Loss or damage occasioned by invasion, hostilities, acts of foreign enemies, civil war, rebellion, insurrection, military or usurped power, martial law or confiscation by order of any government or public authority, as excluded under a standard policy containing a Standard War Exclusion Clause; m. Nuclear Incident as per Nuclear Incident Exclusion Clause Physical Damage - Reinsurance - (USA & Canada) attached; n. Seepage and Pollution as per ISO wording, or so deemed; o. Transmission and Distribution Lines. PAGE 3 OF 9 66 GENERAL CONDITIONS: Definition of Loss Occurrence Clause to include definition of hours clause as attached, and as follows (no reinstatement for wind): - 72 hours clause tornado, cyclone, hurricane, windstorm and hail - 120 hours clause riots and civil commotion/vandalism and malicious mischief within the area of one municipality or county and the municipalities or counties contiguous thereto - 168 hours Freeze - 168 hours Earthquake and Ensuing Loss - 168 hours All Other Perils Extra Contractual Obligations (100%) Excess of Policy Limits (100%) (ECO/XPL subject to a maximum of 25% of original catastrophe loss) Definition of Net Loss Clause (which shall include defense costs but not limited to expenses incurred in determination of coverage) Net Retained Lines Clause Notice of Loss and Loss Settlement Clause Currency Clause Tax Provisions Clause Access to Records Clause Errors and Omissions Clause Insolvency Clause Arbitration Clause Service of Suit Clause Towers Perrin Reinsurance Reserves Clause which complies with requirements of New York, California, and other states Towers Perrin Reinsurance Intermediary Clause WORDING: As per the expiring Contract. REINSURERS: 100% placement through Towers Perrin Reinsurance. See attached Schedule for listing of Reinsurers and their respective participations. Note: 1. The financial statements of participating Reinsurers will be furnished upon request. PAGE 4 OF 9 67 2. Towers Perrin Reinsurance has no ownership interest in or control of: - any Reinsurer subscribing to this reinsurance. - any underwriting agent or correspondent intermediary involved in this reinsurance. 3. Towers Perrin Reinsurance has on file written evidence from any Reinsurer whose participation in this reinsurance was authorized by a representative other than an employee. This written evidence states the representative's authority to bind the participation of such Reinsurer. PAGE 5 OF 9 68 SCHEDULE REINSURERS ATTACHING TO COVER NOTE NO. C-99-01493 FOR NATIONAL INSURANCE GROUP COMPANIES GREAT PACIFIC INSURANCE COMPANY SOUTH SAN FRANCISCO, CALIFORNIA THIRD PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT
Direct Placement through Towers Perrin Reinsurance Share Constitution Reinsurance Corporation 9.00% New York, New York FEIN# 13-5009848 NAIC# 21032 Employers Mutual Casualty Company 2.25% Des Moines, Iowa FEIN# 42-0234980 NAIC# 21415 First Excess & Reinsurance Corporation 5.50% Jefferson City, Missouri FEIN# 43-1037123 NAIC# 32018 Hartford Fire Insurance Company 7.00% Hartford, Connecticut FEIN# 06-0383750 NAIC# 19682 through Hartford Re Company Hartford, Connecticut Insurance Company of the West 8.00% San Diego, California FEIN# 95-2769232 NAIC# 27847
PAGE 6 OF 9 69 SCHEDULE REINSURERS ATTACHING TO COVER NOTE NO. C-99-01493
Direct Placement through Towers Perrin Reinsurance Share Nationwide Mutual Insurance Company 7.50% Columbus, Ohio FEIN# 31-4177100 NAIC# 23787 PMA Reinsurance Corporation 7.00% Philadelphia, Pennsylvania FEIN# 23-2153760 NAIC# 39675 Republic Western Insurance Company 5.00% Phoenix, Arizona FEIN# 86-0274508 NAIC# 31089 St. Paul Fire and Marine Insurance Company 10.00% St. Paul, Minnesota FEIN# 41-0406690 NAIC# 24767 through St. Paul Re, Inc. New York, New York The Sumitomo Marine & Fire Insurance Company Ltd. 3.25% New York, New York FEIN# 13-2758523 NAIC# 20362 through Sumitomo Marine Re Management, Inc. New York, New York Sydney Reinsurance Corporation 15.00% Philadelphia, Pennsylvania FEIN# 23-1641984 NAIC# 10219
PAGE 7 OF 9 70 SCHEDULE REINSURERS ATTACHING TO COVER NOTE NO. C-99-01493
Direct Placement through Towers Perrin Reinsurance Share Underwriters Reinsurance Company 10.00% Concord, New Hampshire FEIN# 16-0366830 NAIC# 22314 United Fire & Casualty Company 3.00% Cedar Rapids, Iowa FEIN# 42-0644327 NAIC# 13021 USF Re Insurance Company 7.50% Boston, Massachusetts FEIN# 04-1590940 NAIC# 11835 ------- Total Placement 100.00%
PAGE 8 OF 9 71 REINSURANCE COVER NOTE NO. C-99-01493 FOR NATIONAL INSURANCE GROUP COMPANIES GREAT PACIFIC INSURANCE COMPANY SOUTH SAN FRANCISCO, CALIFORNIA THIRD PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT EFFECTIVE JANUARY 1, 1999 The Reassured hereby confirms its approval of the terms and conditions of the reinsurance set forth in this Reinsurance Cover Note and the Reinsurers participating hereon. A copy of Towers Perrin Reinsurance's Market Security Policy and Procedures has been attached to this Cover Note and the Reassured has been advised as to the status of all Reinsurers participating herein as regards this market security criteria. By: /s/ Robert P. Barbarowicz ---------------------------------------- Title: Executive Vice President ------------------------------------- Date: March 12, 1999 -------------------------------------- PAGE 9 OF 9 72 EXHIBIT A DEFINITION OF LOSS OCCURRENCE 1. The term "Loss Occurrence" shall mean the sum of all individual losses directly occasioned by any one disaster, accident or loss or series of disasters, accidents or losses arising out of one event which occurs within the area of one state of the United States of America or province of Canada and states or provinces contiguous thereto and to one another. However, the duration and extent of any one "Loss Occurrence" shall be limited to all individual losses sustained by the Reassured occurring during any period of 168 consecutive hours arising out of and directly occasioned by the same event except that the term "Loss Occurrence" shall be further defined as follows: a. As regards windstorm, hail, tornado, hurricane, cyclone, including ensuing collapse and water damage, all individual losses sustained by the Reassured occurring during any period of 72 consecutive hours arising out of and directly occasioned by the same event. However, the event need not be limited to one state or province or states or provinces contiguous thereto. b. As regards riot, riot attending a strike, civil commotion, vandalism and malicious mischief, all individual losses sustained by the Reassured, occurring during any period of 120 consecutive hours within the area of one municipality or county and the municipalities or counties contiguous thereto arising out of and directly occasioned by the same event. The maximum duration of 120 consecutive hours may be extended in respect of individual losses which occur beyond such 120 consecutive hours during the continued occupation of an assured's premises by strikers, provided such occupation commenced during the aforesaid period. c. As regards earthquake (the epicenter of which need not necessarily be within the territorial confines referred to in the opening paragraph of this Article) and fire following directly occasioned by the earthquake, only those individual fire losses which commence during the period of 168 consecutive hours may be included in the Reassured's "Loss Occurrence." d. As regards "Freeze," only individual losses directly occasioned by collapse, breakage of glass and water damage (caused by bursting of frozen pipes and tanks) may be included in the Reassured's "Loss Occurrence." 2. Except for those "Loss Occurrences" referred to in Paragraphs a. and b. the Reassured may choose the date and time when any such period of consecutive hours commences provided that it is not earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Reassured arising out of that disaster, accident or loss and provided that only one such period of 168 consecutive hours shall apply with respect to one event. 3. However, as respects those "Loss Occurrences" referred to in Paragraphs a. and b., if the disaster, accident or loss occasioned by the event is of greater duration than 120 consecutive hours then the Reassured may divide the disaster, accident or loss into two or more "Loss Occurrences" provided no two periods overlap and no individual loss is included in more than one such period and -1- 73 provided that no period commences earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Reassured arising out of that disaster, accident or loss. 4. No individual losses occasioned by an event that would be covered by 72 or 120 hours clauses may be included in any "Loss Occurrence" claimed under the 168 hours provision. -2- 74 CANADA NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE 1. This Contract does not cover any loss or liability accruing to the Reassured directly or indirectly, and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy Risks. 2. Without in any way restricting the operation of Paragraph 1. of this Clause, this Contract does not cover any loss or liability accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to: a. Nuclear reactor power plants including all auxiliary property on the site, or b. Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and critical facilities as such, or c. Installations for fabricating complete fuel elements or for processing substantial quantities of prescribed substances, and for reprocessing, salvaging, chemically separating, storing or disposing of spent nuclear fuel or waste materials, or d. Installations other than those listed in Paragraph 2.c. above using substantial quantities of radioactive isotopes or other products of nuclear fission. 3. Without in any way restricting the operation of Paragraphs 1. and 2. of this Clause, this Contract does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith except that this Paragraph 3. shall not operate: a. Where the Reassured does not have knowledge of such nuclear reactor power plant or nuclear installation, or b. Where the said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused. 4. Without in any way restricting the operation of Paragraphs 1., 2. and 3. of this Clause, this Contract does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurers or Reinsurer, when such radioactive contamination is a named hazard specifically insured against. 5. This Clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Reassured to be the primary hazard. 6. The term "prescribed substances" shall have the meaning given to it by the Atomic Energy Control Act R.S.C. 1985 (c), A-16 or by any law amendatory thereof. -1- 75 CANADA NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE 7. Reassured to be sole judge of what constitutes: a. Substantial quantities, and b. The extent of installation, plant or site. 8. Without in any way restricting the operation of Paragraphs 1., 2., 3. and 4. of this Clause, this Contract does not cover any loss or liability accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer caused: a. By any nuclear incident as defined in the Nuclear Liability Act or any other nuclear liability act, law or statute, or any law amendatory thereof or nuclear explosion, except for ensign loss or damage which results directly from fire, lightning or explosion of natural, coal or manufactured gas; b. By contamination by radioactive material. NOTE: Without in any way restricting the operation of Paragraphs 1., 2., 3. and 4. of this Clause, Paragraph 8. of this Clause shall only apply to all original contracts of the Reassured whether new, renewal or replacement which became effective on or after December 31, 1992. -2- 76 U.S.A. NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE 1. This reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy Risks. 2. Without in any way restricting the operation of Paragraph 1. of this Clause, this reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to: a. Nuclear reactor power plants including all auxiliary property on the site, or b. Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and "critical facilities" as such, or c. Installations for fabricating complete fuel elements or for processing substantial quantities of "special nuclear material," and for reprocessing, salvaging, chemically separating, storing or disposing of "spent" nuclear fuel or waste materials, or d. Installations other than those listed in Paragraph 2.c. above using substantial quantities of radioactive isotopes or other products of nuclear fission. 3. Without in any way restricting the operations of Paragraphs 1. and 2. hereof, this reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith except that this Paragraph 3. shall not operate: a. Where Reassured does not have knowledge of such nuclear reactor power plant or nuclear installation, or b. Where said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused. However on and after 1st January 1960 this SubParagraph 3.B. shall only apply provided the said radioactive contamination exclusion provision has been approved by the Governmental Authority having jurisdiction thereof. 4. Without in any way restricting the operations of Paragraphs 1., 2. and 3. hereof, this reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against. 5. It is understood and agreed that this Clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Reassured to be the primary hazard. -1 77 U.S.A. NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE 6. The term "special nuclear material" shall have the meaning given it in the Atomic Energy Act of 1954 or by any law amendatory thereof. 7. Reassured to be the sole judge of what constitutes: a. Substantial quantities, and b. The extent of installation, plant or site. NOTE: Without in any way restricting the operation of Paragraph 1. hereof, it is understood and agreed that: (a) all policies issued by the Reassured on or before December 31, 1957 shall be free from the application of the other provisions of this Clause until expiry date of December 31, 1960 whichever first occurs whereupon all the provisions of this Clause shall apply. (b) with respect to any risk located in Canada policies issued by the Reassured on or before December 31, 1958 shall be free from the application of the other provisions of this Clause until expiry date or December 31, 1960 whichever first occurs whereupon all the provisions of this Clause shall apply. NOTES: 1) The words printed in italic text in the Limited Exclusion Provision and in the Broad Exclusion Provision shall apply only in relation to original liability policies which include a Limited Exclusion Provision or a Broad Exclusion Provision containing those words. 2) Wherever used herein the term "Company" shall be understood to mean "Reassured," "Reinsured" or whatever other term is used in the attached reinsurance Agreement to designate the reinsured company. -2- 78 INSOLVENCY FUNDS EXCLUSION CLAUSE 1. This Contract excludes all liability of the Reassured arising, by contract, operation of law, or otherwise, from its participation or membership, whether voluntary or involuntary, in any insolvency fund, plan, pool, association, fund or other arrangement, howsoever denominated, established or governed; which provides for any assessment of or payment or assumption by the Reassured of part or all of any claim, debt, charge, fee, or other obligation of any insurer, or its successors or assigns, which has been declared by any competent authority to be insolvent, or which is otherwise deemed unable to meet any claim, debt, charge, fee or other obligation in whole or in part. 79 POOLS, ASSOCIATIONS, SYNDICATES EXCLUSION CLAUSE (FLORIDA AMENDED) SECTION A It is agreed that the following is excluded hereunder: (a) All business derived directly or indirectly from any Pool, Association or Syndicate which maintains its own reinsurance facilities. (b) Any Pool or Scheme, (whether voluntary or mandatory) formed after 1st March 1968 for the purpose of insuring property whether on a countrywide basis or in respect of designated areas. This exclusion shall not apply to so-called Automobile Insurance Plans or other Pools formed to provide coverage for Automobile Physical Damage. SECTION B It is agreed that business written by the Reassured for the same perils, which is known at the time to be insured by, or in excess of underlying amounts placed in the following Pools, Associations or Syndicates, whether by way of insurance or reinsurance, is excluded hereunder: Industrial Risk Insurers Associated Factory Mutuals Improved Risk Mutuals Any Pool, Association or Syndicate formed for the purpose of writing oil, gas or petro-chemical plants and/or oil or gas drilling rigs United States Aircraft Insurance Group Canadian Aircraft Insurance Group Associated Aviation Underwriters American Aviation Underwriters Section B does not apply: (a) Where the Total Insured Value over all interests of the risk in question is less than $250,000,000. (b) To interests traditionally underwritten as Inland Marine or Stock and/or Contents written on a Blanket Basis. (c) To Contingent Business Interruption, except when the Reassured is aware that the key location is known at the time to be insured in any Pool, Association or Syndicate named above. (d) To risks as follows: Offices, Hotels, Apartments, Hospitals, Educational Establishments, Public Utilities (other than Railroad Schedules), and Builder's Risks on the classes of risks specified in this subsection (d) only. -1- 80 SECTION C NEVERTHELESS, the Reinsurers specifically agree that liability accruing to the Reassured from its participation in Residual Market Mechanisms including but limited to: (a) The following so-called "Coastal Pools": Alabama Insurance Underwriting Association Florida Windstorm Insurance Underwriting Association (FWUA) Louisiana Insurance Underwriting Association Mississippi Insurance Underwriting Association North Carolina Insurance Underwriting Association South Carolina Windstorm and Hail Underwriting Association Texas Catastrophe Property Insurance Association (b) All "Fair Plan" and "Rural Risk Plan" business, and (c) Florida Property and Casualty Joint Underwriting Association (FPCJUA) and Residential Property and Casualty Joint Underwriting Association (RPCJUA), for all perils otherwise protected hereunder shall not be excluded, except that this reinsurance does not include any increase in such liability resulting from: (1) The inability of any participant in such Residual Market Mechanisms to meet its liability, (2) Any claim against such Residual Market Mechanisms or any participant therein, including the Reassured, whether by way of subrogation or otherwise, brought by or on behalf of any insolvency fund (as defined in the Insolvency Funds Exclusion Clause in this Contract). SECTION D Notwithstanding SECTION C above, in respect of the FWUA, FPCJUA and RPCJUA, where an assessment is made against the Reassured by the FWUA, the FPCJUA, the RPCJUA, or any combination thereof, the maximum loss that the Reassured may include in the Ultimate Net Loss in respect of any loss occurrence hereunder shall not exceed the lesser of: (1) The Reassured's assessment from the relevant entity (FWUA, FPCJUA and/or RPCJUA) for the accounting year in which the loss occurrence commenced, or (2) The product of the following: (a) The Reassured's percentage participation in the relevant entity for the accounting year in which the loss occurrence commenced; and (b) The relevant entity's total losses in such loss occurrence. -2- 81 Any assessments for accounting years subsequent to that in which the loss occurrence commenced may not be included in the Ultimate Net Loss hereunder. Moreover, notwithstanding SECTION C above, in respect of the FWUA, the FPCJUA and/or the RPCJUA, the Ultimate Net Loss hereunder shall not include any monies expended to purchase or retire bonds as a consequence of being a member of the FWUA, the FPCJUA and/or RPCJUA. For the purposes of this Contract, the Reassured may not include in the Ultimate Net Loss any assessment or any percentage assessment levied by the FWUA, the FPCJUA and/or the RPCJUA to meet the obligations of an insolvent insurer member or other party, or to meet any obligations arising from the deferment by the FWUA, FPCJUA and/or RPCJUA of the collection of monies. NOTES: Wherever used herein the terms: "Reassured" shall be understood to mean "Company," "Reinsured," "Reassured" or whatever other term is used in the attached reinsurance document to designate the reinsured company or companies. "Agreement" shall be understood to mean "Agreement," "Contract," "Policy" or whatever other term is used to designate the attached reinsurance document. "Reinsurers" shall be understood to mean "Reinsurers," "Underwriters" or whatever other term is used in the attached reinsurance document to designate the reinsurer or reinsurers. -3- EX-10.39 4 EMPLOYMENT AGREEMENT (MARK A. SPEIZER) 1 Exhibit 10.39 ================================================================================ EMPLOYMENT AGREEMENT BY AND AMONG THE FIRST AMERICAN FINANCIAL CORPORATION, NATIONAL INFORMATION GROUP AND MARK A. SPEIZER Dated as of November 17, 1998 ================================================================================ 2 EMPLOYMENT AGREEMENT (this "Agreement"), dated as of November 17, 1998, by and among The First American Financial Corporation, a California corporation ("FAFCO"), National Information Group, a California corporation (the "Company"), and Mark A. Speizer, an individual residing in the State of California (the "Executive"). W I T N E S S E T H: WHEREAS, pursuant to an Agreement and Plan of Merger, dated as of the date hereof (the "Merger Agreement"), by and among FAFCO, the Company and Pea Soup Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of FAFCO ("FAFCOSUB"), FAFCOSUB will merge with and into the Company and the Company will thereby become a wholly-owned subsidiary of FAFCO (the "Merger"); WHEREAS, it is a condition precedent to FAFCO's willingness to enter into the Merger Agreement and consummate the Merger that the Executive execute and deliver this Agreement; WHEREAS, the Executive is willing to serve in the capacities set forth below and FAFCO desires to retain the Executive in such capacities on the terms and conditions herein set forth; NOW THEREFORE, in consideration of the mutual covenants herein contained, FAFCO and the Executive hereby agree as follows: 1. Employment. FAFCO agrees to employ the Executive, and the Executive agrees to be employed by and serve FAFCO, upon the terms and conditions hereinafter provided for a period commencing as of the Effective Time (as that term is defined in the Merger Agreement) and continuing until the fifth anniversary of the Effective Time (such period, the "Term"), unless earlier terminated pursuant to Section 5. The Executive hereby represents and warrants that he has the legal capacity to execute and perform this Agreement, that it is a valid and binding agreement against him according to its terms, and that its execution and performance by him does not violate the terms of any existing agreement or understanding to which the Executive is a party or any judgment or decree to which the Executive is subject. In addition, the Executive represents and warrants that he knows of no reason why he is not physically or legally capable of performing his obligations under this Agreement in accordance with its terms. 2. Position and Duties. (a) During the Term, the Executive agrees to serve as Chairman and Chief Executive Officer of Fastrac Systems, Inc. ("Fastrac"), Great Pacific Insurance Company ("Great Pacific") and Pinnacle Management Solutions Insurance Services ("PMSIS") and will have such powers and duties as are commensurate with such positions and as reasonably may be conferred upon or delegated to him by their respective Boards of Directors. The Executive shall at all times be subject to the policies established by the Board of Directors of Fastrac, Great Pacific 3 and PMSIS, as the case may be. (b) During the Term, the Executive shall devote all of his business time, effort and skill as is reasonably necessary to accomplish the duties for which the Executive is responsible in accordance with the terms hereof and shall not take part in activities detrimental to the best interests of Fastrac, Great Pacific, PMSIS, FAFCO or their respective subsidiaries and affiliates (each, a "FAFCO Company" and, collectively, the "FAFCO Companies"). 3. Compensation. For all services rendered by the Executive in the capacities required hereunder during the Term, including, without limitation, services as an executive, officer, director or member of any committee of a FAFCO Company or any division thereof, the Executive shall be compensated as follows: (a) Base Salary. FAFCO shall pay, or shall cause to be paid, the Executive a salary of three hundred twenty-five thousand dollars ($325,000) per annum (the "Base Salary"). The Base Salary shall be payable in accordance with the customary payroll practices of FAFCO, but in no event less frequently than monthly. (b) Bonus. The Executive shall also receive a guaranteed fixed bonus during the Term equal to three hundred thousand dollars ($300,000) per annum (the "Fixed Bonus"). The Executive also shall be entitled to receive an annual formula bonus during the Term (the "Formula Bonus") equal to 10% of Fastrac's Adjusted Earnings for each fiscal year; provided, however, if Executive is not employed for an entire fiscal year of Fastrac, the Formula Bonus, if any, shall be prorated by multiplying the Formula Bonus by a fraction, the numerator of which is the number of days in such fiscal year during which Executive was employed by Fastrac and the denominator of which is 365. For purposes of this Agreement, "Adjusted Earnings" shall mean the difference (if positive) between the amount described in that line item entitled "Income before provision for income taxes" on Fastrac's Statements of Income for each fiscal year, minus (i) two million dollars ($2,000,000) and (ii) four percent (4%) of the amount described in that line item entitled "Total revenues", which is the overhead fee FAFCO customarily charges each of its subsidiaries for their share of general administration, payroll services, accounting, home office and personnel functions and sales costs relative to sales functions performed by sales people not employed by such subsidiary. The Fixed Bonus shall be paid in monthly installments of twenty five thousand dollars ($25,000) each. The Formula Bonus shall be paid annually as soon as practicable after the financial statements of Fastrac have been audited. Fastrac's fiscal year shall end on December 31 of each calendar year. The Earnings shall be calculated by Fastrac's accountant in accordance with United States generally accepted accounting principles applied on a consistent basis. (c) Medical and Dental Health Benefits. During the Term, the Executive shall be entitled to medical and dental health benefits in accordance with the practices established by FAFCO with respect to its key employees; provided, however, that if the Executive is terminated -2- 4 Without Cause the Executive will continue to receive such medical and dental health benefits through the duration of the Term as though he was not so terminated. (d) Vacation; Sick Leave. During the Term, the Executive shall be entitled to vacation and sick leave in accordance with the practices established by FAFCO with respect to its key employees. (e) Pension Plan. Prior to the Effective Time, FAFCO shall create, and during the Term the Executive shall participate, in a non-qualified pension plan with terms and conditions substantially similar to the pension plans established by FAFCO with respect to its key executives; provided, however, that at the commencement of the Term, the after tax benefits to be received by the Executive shall be equivalent to the benefits provided for in the plans for key executives with 26 years vested in such plans; and, provided further, that if the Executive is terminated Without Cause the Executive will continue to participate in such non-qualified pension plan through the duration of the Term at his then current compensation level as though he was not so terminated, otherwise the benefits to be received by the Executive under this Section 3(e) will be calculated as of the date the Executive's employment with FAFCO ceases. (f) Deferred Compensation Plan. The Executive may participate in the FAFCO deferred compensation plan in accordance with the practices established by FAFCO with respect to its key employees. (g) Stock Options. The Executive shall be granted an option or options to purchase, in the aggregate, 30,000 FAFCO Common shares, par value $1.00, at the closing price of a single FAFCO Common share on the New York Stock Exchange on the day during which the Effective Time occurs. Such option shall vest and otherwise be on the same terms and condition of those stock options issued by FAFCO to its other key employees. 4. Business Expenses. FAFCO shall cause Fastrac, Great Pacific and PMSIS, as the case may be, to pay or reimburse the Executive for all reasonable travel and out-of-pocket expenses incurred by the Executive in connection with the performance of his duties and obligations under this Agreement, subject to the Executive's presentation of appropriate vouchers in accordance with such procedures as such entities may from time to time establish for senior officers and to preserve any deductions for federal income taxation purposes to which such entities may be entitled. The Executive shall be reimbursed for business-related travel expenses for his spouse; 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. Termination of Employment. (a) Termination. The Executive's employment hereunder shall terminate prior to the last day of the Term (i) upon the death of the Executive, (ii) upon the Permanent Disability (as defined below) of the Executive, (iii) at the option of FAFCO for Cause (as defined below) upon written notice from FAFCO to the Executive, (iv) on or after the second anniversary of the Effective Time, at the option of FAFCO Without Cause (as defined below) upon 30 days prior written notice from FAFCO to the Executive, (v) at the option of the Executive upon 30 days -3- 5 prior written notice from the Executive to FAFCO and (vi) at the option of FAFCO upon written notice to the Executive if, after the Merger is consummated, a material representation and warranty made by the Company in the Merger Agreement at the time specified in the Merger Agreement shall be found to be materially untrue or inaccurate at such time. (b) Payments. In the event the Executive's employment hereunder shall terminate prior to the last day of the Term as a result of the exercise by FAFCO of its option to terminate the Executive's employment Without Cause, FAFCO shall, as liquidated damages or severance, or both, continue, subject to compliance by the Executive with the provisions of Section 6 below, to pay the Executive's Base Salary and Fixed Bonus as in effect at the time of such termination at the times and in the manner such Base Salary and Fixed Bonus would otherwise have become due and payable until the earlier of (i) the expiration of the Term had such termination not occurred, (ii) the death of the Executive or (iii) the Disability of the Executive. In the event the Executive's employment hereunder shall terminate prior to the last day of the Term as a result of (i) the exercise by FAFCO of its option to terminate the Executive's employment for Cause, or (ii) the exercise by the Executive of his option to terminate employment (whether by retirement or otherwise), all earned but unpaid Base Salary and all accrued but unused vacation pay as of the date of termination of employment shall be payable in full to the Executive by FAFCO within 10 business days. In addition, all monthly Fixed Bonus amounts due but not yet paid as of the date of termination shall be payable to the Executive by FAFCO within 10 business days. Except as provided in this Section 5(b) and Sections 3(c) and 3(e), no other payments (except for unreimbursed business expenses payable pursuant to Section 4) of any nature whatsoever shall be made, or benefits provided, by any of the FAFCO Companies under this Agreement upon the Executive's termination of employment prior to the last day of the Term. For a period of 120 days following termination, the Executive shall have reasonable use of his office, telephone and fax machine. (c) Definitions. For purposes of this Agreement, the following terms have the following meanings: (i) "Cause" means the conviction of a felony or a finding of liability based on intentional tortious conduct consisting of a breach of fiduciary duty relating to the Executive's performance as an officer and/or director of a FAFCO Company; (ii) "Permanent Disability" means the inability of the Executive, as reasonably determined by FAFCO and confirmed by competent medical evidence, to work for any period of 90 consecutive days or any 120 non-consecutive days during any twelve consecutive calendar month period due to illness or injury of a physical or mental nature. In order to determine issues of disability, the Executive agrees to submit himself for appropriate medical examination to physicians reasonably acceptable to FAFCO and the Executive; and -4- 6 (iii) "Without Cause" means termination of the Executive's employment for any reason other than as specified in Sections 5(a)(i), 5(a)(ii), 5(a)(iii) and 5(a)(v) above. 6. Other Duties of the Executive During and After the Term. (a) Confidential Information. The Executive recognizes and acknowledges that all information pertaining to the affairs, business, clients, customers, vendors, plans or prospects of the FAFCO Companies (collectively, the "Business") (including, without limitation, all customer lists, pricing policies, projections, product development, trade secrets and other privileged and confidential information essential to the Business), as such information may exist from time to time, other than information that a FAFCO Company has previously made publicly available, is confidential information and is a unique and valuable asset of the Business, access to and knowledge of which are essential to the performance of the Executive's duties under this Agreement. The Executive shall not at any time (during or after the Term), except to the extent reasonably necessary in the performance of his duties under this Agreement, divulge to any person, firm, association, corporation, partnership, limited liability company or governmental agency, any information concerning the Business (except such information as is required by law to be divulged to a government agency or pursuant to lawful process), or make use of any such information for his own purposes. All records, memoranda, letters, books, reports, accounting, experience or other data, and other records and documents relating to the Business, whether made by the Executive or otherwise coming into his possession and whether existing in print, electronic or other form, are confidential information and are, shall be and shall remain the property of the FAFCO Companies. No copies thereof shall be made which are not retained by the respective FAFCO Company, and the Executive agrees, on termination of his employment or on demand of FAFCO, to deliver the same to FAFCO. The obligation of confidentiality contained herein shall not apply to information which (i) is generally available to the public through no fault of the Executive, (ii) is required by a court order or regulatory or governmental authority to be disclosed or (iii) is believed by the Executive in good faith to be required by a court order or regulatory or governmental authority to be disclosed, provided that before such disclosure FAFCO shall first be notified of any such good faith belief by the Executive and the Executive shall not make any such disclosure if FAFCO provides an opinion prepared by independent counsel that the disclosure is not required. (b) Intellectual Property. Any software, delivery systems, methods, developments, inventions, processes, techniques, know-how, plans, products, devices and/or improvements or the like (collectively, Intellectual Property), whether registered or filed with any governmental authority or agency (domestic or foreign) or not so registered or filed, which the Executive may conceive or make, alone or with others, which are related to the business of any FAFCO Company while in FAFCO's employ, shall be and remain the property of the respective FAFCO Company and the Executive hereby assigns any and all rights therein to such FAFCO Company. The Executive further agrees on request of any FAFCO Company to execute patent, trademark, servicemark and copyright applications based on the Intellectual Property, -5- 7 including any other instruments deemed necessary by such FAFCO Company for the prosecution of such patent, trademark, servicemark and copyright application of the Intellectual Property. (c) Non-Interference. For a period of five years after termination of the Executive's employment hereunder, the Executive agrees not to, directly or indirectly, interfere with the employment relationship between any FAFCO Company and its directors, managers, officers and employees by soliciting any of such individuals to participate in independent business ventures and agrees not to, directly or indirectly, solicit business from any client or prospective client of any FAFCO Company within any FAFCO Company's market for the Executive's benefit or for the benefit of any entity in which the Executive has an interest or is employed or any person with which the Executive is related. During the term of this Agreement and thereafter, the Executive shall not take any action to disparage or criticize to any third parties any of the services or products of any FAFCO Company or to commit any other action that injures or hinders the business of any FAFCO Company. (d) Enforceability. It is the desire and intent of the parties that the provisions of this Section 6 shall be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. If any particular provision or portion of this Section 6 shall be adjudicated to be invalid or unenforceable, this Section 6 shall be deemed amended to delete therefrom such provision or portion adjudicated to be invalid or unenforceable, such amendment shall apply only with respect to the operation of this Section 6 in the particular jurisdiction in which such adjudication is made. 7. Breach by the Executive. Both parties to this Agreement recognize that the services to be rendered under this Agreement by the Executive are special, unique and extraordinary in character, and that in the event of the breach by the Executive of the terms and conditions of this Agreement to be performed by the Executive, FAFCO shall be entitled, if it so elects, to institute and prosecute proceedings consistent with the provisions of Section 14, either in law or in equity, to obtain damages for any breach of this Agreement or to enforce the specific performance thereof by the Executive. 8. Withholding Taxes. FAFCO may directly or indirectly withhold from any payments made under this Agreement all Federal, state, city or other taxes as shall be required to be withheld pursuant to any law or governmental regulation or ruling. 9. Notices. All notices, requests, demands and other communications required or permitted hereunder shall be given in writing and shall be deemed to have been duly given if sent by facsimile (and confirmed by telephone) or delivered by a nationally recognized courier service (e.g. Federal Express) or three business days after being sent by registered or certified mail (return receipt requested), postage prepaid, in each case, as follows: -6- 8 if to FAFCO, to: The First American Financial Corporation 114 East Fifth Street Santa Ana, California 92701 Attention: President Facsimile: 714-647-2242 if to the Company, to: National Information Group 395 Oyster Point Boulevard, Suite 500 San Francisco, California 94080 Attention: General Counsel Facsimile: 650-872-4777 with a copy to: The First American Financial Corporation 114 East Fifth Street Santa Ana, California 92701 Attention: President Facsimile: 714-647-2242 if to the Executive, to: Mark A. Speizer 395 Oyster Point Boulevard, Suite 500 San Francisco, California 94080 Facsimile: 650-872-4777 or such other address as either party shall have previously specified in writing to the other. 10. Rights to Payments. The Executive shall not under any circumstances have any option or right to require payments hereunder otherwise than in accordance with the terms of this Agreement. 11. Source of Payment. All payments provided for under this Agreement shall be paid in cash from the general funds of FAFCO. 12. Binding Agreement. Except as otherwise expressly provided herein, this Agreement shall be binding upon, and shall inure to the benefit of, FAFCO, its successors and assigns. This Agreement, as it relates to the Executive, is a personal contract and the rights and interest of the Executive hereunder may not be sold, transferred, assigned, pledged or hypothecated. -7- 9 13. Amendments. This Agreement may not be waived, amended, modified, supplemented or discharged orally, but only by agreement in writing signed by the party against whom enforcement of any waiver, amendment, modification, supplement or discharge is sought. 14. Dispute Resolution. Any dispute arising out of or relating to this Agreement, or breach of this Agreement, shall be settled by arbitration in the State of California, in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect and, as to matters not specifically governed thereby, shall comply with the provisions of the California Arbitration Act (Cal. Code Civ. Proc. Sections 1280-1294.2). There shall be three arbitrators, one to be chosen by each party directly at will, and the third arbitrator to be selected by the two arbitrators so chosen. Each party shall pay the fees of the arbitrator he or it selects and of his or its own attorneys and the expenses of his or her witnesses, and all other fees and costs shall be borne equally by the parties. Judgment on any award rendered by the arbitrators may be entered in any court having jurisdiction. 15. Survival. So long as FAFCO performs its obligations with respect to the payment of Base Salary, Fixed Bonus and pension benefits in accordance with the terms of Sections 3(a), 3(b), 3(e) and 5(b) of this Agreement (provided, however, that FAFCO shall not be deemed to have failed to perform its obligations with respect to the payment of pension benefits in accordance with the terms of Section 3(e) of this Agreement unless the Executive shall have given FAFCO written notice of such failure and FAFCO shall have failed to cure such failure within 30 days of its receipt of such notice), the covenants set forth in Section 6 of this Agreement shall survive and shall continue to be binding upon the Executive notwithstanding the termination of this Agreement for any reason whatsoever. Subject to the first sentence of this Section 15, the covenants set forth in Section 6 of this Agreement shall be deemed and construed as separate agreements independent of any other provision of this Agreement. It is expressly agreed that the remedy at law for the breach of the covenants of Section 6 is inadequate and, so long as FAFCO has performed its obligations with respect to the payment of Base Salary, Fixed Bonus and pension benefits in accordance with the terms of Sections 3(a), 3(b), 3(e) and 5(b) of this Agreement (provided, however, that FAFCO shall not be deemed to have failed to perform its obligations with respect to the payment of pension benefits in accordance with the terms of Section 3(e) of this Agreement unless the Executive shall have given FAFCO written notice of such failure and FAFCO shall have failed to cure such failure within 30 days of its receipt of such notice), that injunctive relief shall be available to prevent the breach or any threatened breach thereof. 16. Termination of Current Employment Agreement. At that moment in time immediately prior to the Effective Time, that certain Employment Agreement, entered into and made effective as of July 11, 1996, together with all amendments through the date hereof, by and among the Executive and the Company (under its former name, National Insurance Group) (the "Current Employment Agreement"), shall hereby be terminated and the Executive hereby waives any right he may have thereunder, including any right to any payment or benefit, including, but not limited to, any salary payments, bonus payments, stock option grants (except for stock option grants already made thereunder and grants made pursuant to the 1986 National Information Group Stock Option Plan, as amended, and the National Information Group Directors' Stock -8- 10 Option Plan, as amended), automobile or other allowances, insurance benefits, severance payments ("Compensation"), thereunder or in association with the termination of his employment under the Current Employment Agreement or the termination of the Current Employment Agreement itself; provided, however, that the rights and obligations set forth in Section 8 (Waiver of Limitation on Reemployment) of the Current Employment Agreement shall remain in full force and effect pursuant to the terms set forth therein provided the Executive remains employed by FAFCO through July 10, 1999, at which time any obligation on the part of the Executive to repay the severance contemplated by that section of the Current Employment Agreement shall expire. The Executive represents and warrants, as of the date hereof, that he has no rights under and is not entitled to any Compensation under any employment agreement or any employment or consulting (or similar) arrangement with the Company or any of its subsidiaries, other than pursuant to this Agreement and the Executive agrees to indemnify and hold harmless FAFCO, the Company and their respective subsidiaries for any claims, losses, expenses, liabilities, damages, obligations, costs and expenses suffered or paid as a result of or arising out of the failure of this representation or warranty. 17. Recommendation for Appointment to FAFCO Board. FAFCO hereby agrees to recommend the Executive to its Nominating Committee, the committee charged by the FAFCO Board of Directors (the "FAFCO Board") with identifying and appointing members of the FAFCO Board, to fill the vacancy which currently exists on the FAFCO Board. 18. Effectiveness. This Agreement shall become effective at the Effective Time, except that, provided the Effective Time has occurred, Section 16 shall become effective at that moment in time immediately prior to the Effective Time. In the event the Effective Time does not occur for any reason, this Agreement shall be null and void and no party shall have any rights against, or obligations to, any other party hereto and the Current Employment Agreement shall continue in effect in accordance with its terms. 19. GOVERNING LAW. THE VALIDITY, INTERPRETATION, PERFORMANCE AND ENFORCEMENT OF THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO AGREEMENTS EXECUTED AND TO BE PERFORMED SOLELY WITHIN SUCH STATE. 20. Captions. Section headings are for convenience of reference only and shall not be considered a part of this Agreement. 21. Counterparts. This Agreement may be executed in any number of counterparts, each of which when executed shall be deemed to be an original and all of which together shall be deemed to be one and the same instrument. 22. Severability. In case any provisions in this Agreement shall be held invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions hereof will not in any way be affected or impaired thereby. -9- 11 23. Entire Agreement. This Agreement contains the entire understanding of the parties hereto with respect to the subject matter contained herein. This Agreement supersedes all prior agreements and understanding between the parties with respect to such subject matter. 24. Third Party Beneficiaries. Except as expressly provided herein, each party hereto intends that this Agreement shall not benefit or create any right or cause of action in or on behalf of any person other than the parties hereto and each FAFCO Company that is not also a party hereto. -10- 12 IN WITNESS WHEREOF, the parties hereto have executed this Agreement, on and as of the day and year first above written. THE FIRST AMERICAN FINANCIAL CORPORATION By: /s/ Parker S. Kennedy ----------------------------------------- Name: Parker S. Kennedy Title: President NATIONAL INFORMATION GROUP By: /s/ Robert P. Barbarowicz ----------------------------------------- Name: Robert P. Barbarowicz Title: Executive Vice President, General Counsel and Secretary /s/ Mark A. Speizer ----------------------------------------- Mark A. Speizer -11- EX-10.40 5 EMPLOYMENT AGREEMENT (BRUCE A. COLE) 1 Exhibit 10.40 ================================================================================ EMPLOYMENT AGREEMENT BY AND AMONG THE FIRST AMERICAN FINANCIAL CORPORATION, NATIONAL INFORMATION GROUP AND BRUCE A. COLE Dated as of November 17, 1998 ================================================================================ 2 EMPLOYMENT AGREEMENT (this "Agreement"), dated as of November 17, 1998, by and among The First American Financial Corporation, a California corporation ("FAFCO"), National Information Group, a California corporation (the "Company"), and Bruce A. Cole, an individual residing in the State of California (the "Executive"). W I T N E S S E T H: WHEREAS, pursuant to an Agreement and Plan of Merger, dated as of the date hereof (the "Merger Agreement"), by and among FAFCO, the Company and Pea Soup Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of FAFCO ("FAFCOSUB"), FAFCOSUB will merge with and into the Company and the Company will thereby become a wholly-owned subsidiary of FAFCO (the "Merger"); WHEREAS, it is a condition precedent to FAFCO's willingness to enter into the Merger Agreement and consummate the Merger that the Executive execute and deliver this Agreement; WHEREAS, the Executive is willing to serve in the capacities set forth below and FAFCO desires to retain the Executive in such capacities on the terms and conditions herein set forth; NOW THEREFORE, in consideration of the mutual covenants herein contained, FAFCO and the Executive hereby agree as follows: 1. Employment. FAFCO agrees to employ the Executive, and the Executive agrees to be employed by and serve FAFCO, upon the terms and conditions hereinafter provided for a period commencing as of the Effective Time (as that term is defined in the Merger Agreement) and continuing until the third anniversary of the Effective Time (such period, the "Term"), unless earlier terminated pursuant to Section 5. The Executive hereby represents and warrants that he has the legal capacity to execute and perform this Agreement, that it is a valid and binding agreement against him according to its terms, and that its execution and performance by him does not violate the terms of any existing agreement or understanding to which the Executive is a party or any judgment or decree to which the Executive is subject. In addition, the Executive represents and warrants that he knows of no reason why he is not physically or legally capable of performing his obligations under this Agreement in accordance with its terms. 2. Position and Duties. (a) During the Term, the Executive agrees to serve as Executive Vice President of Fastrac Systems, Inc. ("Fastrac") and will have such powers and duties as are commensurate with such position and as reasonably may be conferred upon or delegated to him by the Board of Directors of Fastrac. The Executive shall at all times be subject to the policies established by the Board of Directors of Fastrac. The Executive may serve as a member of the board of directors of companies, agencies and/or with charitable organizations so long as (i) such company, agency or organization is not engaged in any business that is competitive with, in conflict with, related to or ancillary to the business of any FAFCO Company (as defined below), (ii) the activities of the Executive described in clause (i) above shall not interfere with the 3 performance by the Executive of his duties under this Agreement and (iii) the Executive provides FAFCO with written notice of all such positions held as of the date hereof and as all new positions are held by the Executive after the date hereof. (b) During the Term, the Executive shall devote all of his business time, effort and skill as is reasonably necessary to accomplish the duties for which the Executive is responsible in accordance with the terms hereof and shall not take part in activities detrimental to the best interests of Fastrac, FAFCO or their respective subsidiaries and affiliates (each, a "FAFCO Company" and, collectively, the "FAFCO Companies"). 3. Compensation. For all services rendered by the Executive in the capacity required hereunder during the Term, including, without limitation, services as an executive, officer or member of any committee of a FAFCO Company or any division thereof, the Executive shall be compensated as follows: (a) Base Salary. FAFCO shall pay, or shall cause to be paid, the Executive a salary of three hundred thousand dollars ($300,000) per annum (the "Base Salary"). The Base Salary shall be payable in accordance with the customary payroll practices of FAFCO, but in no event less frequently than monthly. (b) Bonus. The Executive shall also receive a guaranteed fixed bonus during the Term equal to one hundred thousand dollars ($100,000) per annum (the "Bonus"). The Bonus shall be paid in monthly installments of eight thousand three hundred thirty three dollars and thirty three cents ($8,333.33) each. (c) Medical and Dental Health Benefits. During the Term, the Executive shall be entitled to medical and dental health benefits in accordance with the practices established by FAFCO with respect to its key employees; provided, however, that if the Executive is terminated Without Cause the Executive will continue to receive such medical and dental health benefits through the duration of the Term as though he was not so terminated. (d) Vacation; Sick Leave. During the Term, the Executive shall be entitled to vacation and sick leave in accordance with the practices established by FAFCO with respect to its key employees. (e) Deferred Compensation Plan. The Executive may participate in the FAFCO deferred compensation plan in accordance with the practices established by FAFCO with respect to its key employees. 4. Business Expenses. FAFCO shall cause Fastrac to pay or reimburse the Executive for all reasonable travel and out-of- pocket expenses incurred by the Executive in connection with the performance of his duties and obligations under this Agreement, subject to the Executive's presentation of appropriate vouchers in accordance with such procedures as Fastrac may from time to time establish for senior officers and to preserve any deductions for federal income taxation purposes to which such entities may be entitled. -2- 4 5. Termination of Employment. (a) Termination. The Executive's employment hereunder shall terminate prior to the last day of the Term (i) upon the death of the Executive, (ii) upon the Permanent Disability (as defined below) of the Executive, (iii) at the option of FAFCO for Cause (as defined below) upon written notice from FAFCO to the Executive, (iv) at the option of FAFCO at any time Without Cause (as defined below) upon 30 days prior written notice from FAFCO to the Executive, (v) at the option of the Executive upon 30 days prior written notice from the Executive to FAFCO and (vi) at the option of FAFCO upon written notice to the Executive if, after the Merger is consummated, a material representation and warranty made by the Company in the Merger Agreement at the time specified in the Merger Agreement shall be found to be materially untrue or inaccurate at such time. (b) Payments. In the event the Executive's employment hereunder shall terminate prior to the last day of the Term as a result of the exercise by FAFCO of its option to terminate the Executive's employment Without Cause, FAFCO shall, as liquidated damages or severance, or both, continue, subject to compliance by the Executive with the provisions of Section 6 below, to pay the Executive's Base Salary and Bonus as in effect at the time of such termination at the times and in the manner such Base Salary and Bonus would otherwise have become due and payable until the earlier of (i) the expiration of the Term had such termination not occurred, (ii) the death of the Executive or (iii) the Disability of the Executive. In the event the Executive's employment hereunder shall terminate prior to the last day of the Term as a result of (i) the exercise by FAFCO of its option to terminate the Executive's employment for Cause, or (ii) the exercise by the Executive of his option to terminate employment (whether by retirement or otherwise), all earned but unpaid Base Salary and all accrued but unused vacation pay as of the date of termination of employment shall be payable in full to the Executive by FAFCO within 10 business days. In addition, all monthly Bonus amounts due but not yet paid as of the date of termination shall be payable to the Executive by FAFCO within 10 business days. Except as provided in this Section 5(b) and Section 3(c), no other payments (except for unreimbursed business expenses payable pursuant to Section 4) of any nature whatsoever shall be made, or benefits provided, by any of the FAFCO Companies under this Agreement upon the Executive's termination of employment prior to the last day of the Term. (c) Definitions. For purposes of this Agreement, the following terms have the following meanings: (i) "Cause" means the conviction of a felony or a finding of liability based on intentional tortious conduct consisting of a breach of fiduciary duty relating to the Executive's performance as an officer and/or director of a FAFCO Company; (ii) "Permanent Disability" means the inability of the Executive, as reasonably determined by FAFCO and confirmed by competent medical evidence, to work for any period of 90 consecutive days or any 120 non-consecutive days during any twelve consecutive calendar month period due to illness or injury of a physical or mental -3- 5 nature. In order to determine issues of disability, the Executive agrees to submit himself for appropriate medical examination to physicians reasonably acceptable to FAFCO and the Executive; and (iii) "Without Cause" means termination of the Executive's employment for any reason other than as specified in Sections 5(a)(i), 5(a)(ii), 5(a)(iii) and 5(a)(v), above. 6. Other Duties of the Executive During and After the Term. (a) Confidential Information. The Executive recognizes and acknowledges that all information pertaining to the affairs, business, clients, customers, vendors, plans or prospects of the FAFCO Companies (collectively, the "Business") (including, without limitation, all customer lists, pricing policies, projections, product development, trade secrets and other privileged and confidential information essential to the Business), as such information may exist from time to time, other than information that a FAFCO Company has previously made publicly available, is confidential information and is a unique and valuable asset of the Business, access to and knowledge of which are essential to the performance of the Executive's duties under this Agreement. The Executive shall not at any time (during or after the Term), except to the extent reasonably necessary in the performance of his duties under this Agreement, divulge to any person, firm, association, corporation, partnership, limited liability company or governmental agency, any information concerning the Business (except such information as is required by law to be divulged to a government agency or pursuant to lawful process), or make use of any such information for his own purposes. All records, memoranda, letters, books, reports, accounting, experience or other data, and other records and documents relating to the Business, whether made by the Executive or otherwise coming into his possession and whether existing in print, electronic or other form, are confidential information and are, shall be and shall remain the property of the FAFCO Companies. No copies thereof shall be made which are not retained by the respective FAFCO Company, and the Executive agrees, on termination of his employment or on demand of FAFCO, to deliver the same to FAFCO. The obligation of confidentiality contained herein shall not apply to information which (i) is generally available to the public through no fault of the Executive, (ii) is required by a court order or regulatory or governmental authority to be disclosed or (iii) is believed by the Executive in good faith to be required by a court order or regulatory or governmental authority to be disclosed, provided that before such disclosure FAFCO shall first be notified of any such good faith belief by the Executive and the Executive shall not make any such disclosure if FAFCO provides an opinion prepared by independent counsel that the disclosure is not required. (b) Intellectual Property. Any software, delivery systems, methods, developments, inventions, processes, techniques, know-how, plans, products, devices and/or improvements or the like (collectively, Intellectual Property), whether registered or filed with any governmental authority or agency (domestic or foreign) or not so registered or filed, which the Executive may conceive or make, alone or with others, which are related to the business of any FAFCO Company while in FAFCO's employ, shall be and remain the property of the -4- 6 respective FAFCO Company and the Executive hereby assigns any and all rights therein to such FAFCO Company. The Executive further agrees on request of any FAFCO Company to execute patent, trademark, servicemark and copyright applications based on the Intellectual Property, including any other instruments deemed necessary by such FAFCO Company for the prosecution of such patent, trademark, servicemark and copyright application of the Intellectual Property. (c) Non-Interference. For a period of three years after termination of the Executive's employment hereunder, the Executive agrees not to, directly or indirectly, interfere with the employment relationship between any FAFCO Company and its directors, managers, officers and employees by soliciting any of such individuals to participate in independent business ventures and agrees not to, directly or indirectly, solicit business from any client or prospective client of any FAFCO Company within any FAFCO Company's market for the Executive's benefit or for the benefit of any entity in which the Executive has an interest or is employed or any person with which the Executive is related. During the term of this Agreement and thereafter, the Executive shall not take any action to disparage or criticize to any third parties any of the services or products of any FAFCO Company or to commit any other action that injures or hinders the business of any FAFCO Company. (d) Enforceability. It is the desire and intent of the parties that the provisions of this Section 6 shall be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. If any particular provision or portion of this Section 6 shall be adjudicated to be invalid or unenforceable, this Section 6 shall be deemed amended to delete therefrom such provision or portion adjudicated to be invalid or unenforceable, such amendment shall apply only with respect to the operation of this Section 6 in the particular jurisdiction in which such adjudication is made. 7. Breach by the Executive. Both parties to this Agreement recognize that the services to be rendered under this Agreement by the Executive are special, unique and extraordinary in character, and that in the event of the breach by the Executive of the terms and conditions of this Agreement to be performed by the Executive, FAFCO shall be entitled, if it so elects, to institute and prosecute proceedings consistent with the provisions of Section 14, either in law or in equity, to obtain damages for any breach of this Agreement or to enforce the specific performance thereof by the Executive. 8. Withholding Taxes. FAFCO may directly or indirectly withhold from any payments made under this Agreement all Federal, state, city or other taxes as shall be required to be withheld pursuant to any law or governmental regulation or ruling. 9. Notices. All notices, requests, demands and other communications required or permitted hereunder shall be given in writing and shall be deemed to have been duly given if sent by facsimile (and confirmed by telephone) or delivered by a nationally recognized courier service (e.g. Federal Express) or three business days after being sent by registered or certified mail (return receipt requested), postage prepaid, in each case, as follows: -5- 7 if to FAFCO, to: The First American Financial Corporation 114 East Fifth Street Santa Ana, California 92701 Attention: President Facsimile: 714-647-2242 if to the Company, to: National Information Group 395 Oyster Point Boulevard, Suite 500 San Francisco, California 94080 Attention: General Counsel Facsimile: 650-872-4777 with a copy to: The First American Financial Corporation 114 East Fifth Street Santa Ana, California 92701 Attention: President Facsimile: 714-647-2242 if to the Executive, to: Bruce A. Cole 630 North Elm Drive Beverly Hills, California 90210 Facsimile: 310-858-5984 or such other address as either party shall have previously specified in writing to the other. 10. Rights to Payments. The Executive shall not under any circumstances have any option or right to require payments hereunder otherwise than in accordance with the terms of this Agreement. 11. Source of Payment. All payments provided for under this Agreement shall be paid in cash from the general funds of FAFCO. 12. Binding Agreement. Except as otherwise expressly provided herein, this Agreement shall be binding upon, and shall inure to the benefit of, FAFCO, its successors and assigns. This Agreement, as it relates to the Executive, is a personal contract and the rights and interest of the Executive hereunder may not be sold, transferred, assigned, pledged or hypothecated. -6- 8 13. Amendments. This Agreement may not be waived, amended, modified, supplemented or discharged orally, but only by agreement in writing signed by the party against whom enforcement of any waiver, amendment, modification, supplement or discharge is sought. 14. Dispute Resolution. Any dispute arising out of or relating to this Agreement, or breach of this Agreement, shall be settled by arbitration in the State of California, in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect and, as to matters not specifically governed thereby, shall comply with the provisions of the California Arbitration Act (Cal. Code Civ. Proc. Sections 1280-1294.2). There shall be three arbitrators, one to be chosen by each party directly at will, and the third arbitrator to be selected by the two arbitrators so chosen. Each party shall pay the fees of the arbitrator he or it selects and of his or its own attorneys and the expenses of his or her witnesses, and all other fees and costs shall be borne equally by the parties. Judgment on any award rendered by the arbitrators may be entered in any court having jurisdiction. 15. Survival. So long as FAFCO performs its obligations with respect to the payment of Base Salary and Bonus in accordance with the terms of Sections 3(a), 3(b) and 5(b) of this Agreement, the covenants set forth in Section 6 of this Agreement shall survive and shall continue to be binding upon the Executive notwithstanding the termination of this Agreement for any reason whatsoever. Subject to the first sentence of this Section 15, the covenants set forth in Section 6 of this Agreement shall be deemed and construed as separate agreements independent of any other provision of this Agreement. It is expressly agreed that the remedy at law for the breach of the covenants of Section 6 is inadequate and, so long as FAFCO has performed its obligations with respect to the payment of Base Salary and Bonus in accordance with the terms of Sections 3(a), 3(b) and 5(b) of this Agreement, that injunctive relief shall be available to prevent the breach or any threatened breach thereof. 16. Termination of Current Employment Agreement. At the moment in time immediately prior to the Effective Time, that certain Employment Agreement, entered into and made effective as of July 11, 1996, together with all amendments through the date hereof, by and among the Executive and the Company (under its former name, National Insurance Group) (the "Current Employment Agreement"), shall hereby be terminated and the Executive hereby waives any right he may have thereunder, including any right to any payment or benefit, including, but not limited to, any salary payments, bonus payments, stock option grants (except for stock option grants already made thereunder and grants made pursuant to the 1986 National Information Group Stock Option Plan, as amended, and the National Information Group's Directors' Stock Option Plan, as amended), automobile or other allowances, insurance benefits, severance payments ("Compensation"), thereunder or in association with the termination of his employment under the Current Employment Agreement or the termination of the Current Employment Agreement itself. The Executive represents and warrants, as of the date hereof, that he has no rights under and is not entitled to any Compensation under any employment agreement or any employment or consulting (or similar) arrangement with the Company or any of its subsidiaries, other than pursuant to this Agreement and the Executive agrees to indemnify and hold harmless FAFCO, the Company and their respective subsidiaries for any claims, losses, -7- 9 expenses, liabilities, damages, obligations, costs and expenses suffered or paid as a result of or arising out of the failure of this representation or warranty. 17. Effectiveness. This Agreement shall become effective at the Effective Time, except that, provided the Effective Time has occurred, Section 16 shall become effective at that moment in time immediately prior to the Effective Time. In the event the Effective Time does not occur for any reason, this Agreement shall be null and void and no party shall have any rights against, or obligations to, any other party hereto and the Current Employment Agreement shall continue in effect in accordance with its terms. 18. GOVERNING LAW. THE VALIDITY, INTERPRETATION, PERFORMANCE AND ENFORCEMENT OF THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO AGREEMENTS EXECUTED AND TO BE PERFORMED SOLELY WITHIN SUCH STATE. 19. Captions. Section headings are for convenience of reference only and shall not be considered a part of this Agreement. 20. Counterparts. This Agreement may be executed in any number of counterparts, each of which when executed shall be deemed to be an original and all of which together shall be deemed to be one and the same instrument. 22. Severability. In case any provisions in this Agreement shall be held invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions hereof will not in any way be affected or impaired thereby. 23. Entire Agreement. This Agreement contains the entire understanding of the parties hereto with respect to the subject matter contained herein. This Agreement supersedes all prior agreements and understanding between the parties with respect to such subject matter. 24. Third Party Beneficiaries. Except as expressly provided herein, each party hereto intends that this Agreement shall not benefit or create any right or cause of action in or on behalf of any person other than the parties hereto and each FAFCO Company that is not also a party hereto. [INTENTIONALLY LEFT BLANK] -8- 10 IN WITNESS WHEREOF, the parties hereto have executed this Agreement, on and as of the day and year first above written. THE FIRST AMERICAN FINANCIAL CORPORATION By: /s/ Parker S. Kennedy --------------------------------------- Name: Parker S. Kennedy Title: President NATIONAL INFORMATION GROUP By: /s/ Mark A. Speizer --------------------------------------- Name: Mark A. Speizer Title: Chairman and Chief Executive Officer /s/ Bruce A. Cole --------------------------------------- Bruce A. Cole -9- EX-10.41 6 MODIFICATION OF AT WILL EMPLOYMENT (GERRY GAUER) 1 Exhibit 10.41 RETENTION AND MODIFICATION OF AT WILL EMPLOYMENT AGREEMENT THIS RETENTION AND MODIFICATION OF AT WILL EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of the 3rd day of February, 1999, by and between NATIONAL INFORMATION GROUP, a California corporation (the "Company"), and GERRY GAUER, an individual (the "Employee"). Recitals A. The Employee is an at will employee of the Company pursuant to that certain letter agreement dated as of July 1, 1996, together with any and all amendments (the "Current At Will Employment Agreement"), between the Employee and National Information Group ("NAIG"). B. On or about November 18, 1998, NAIG entered into that certain Agreement and Plan of Merger by and among The First American Financial Corporation ("First American"), Pea Soup Acquisition, Inc., a wholly owned affiliate of First American ("Pea Soup"), and NAIG (the "Agreement of Merger"), pursuant to which NAIG will be merged with and into Pea Soup and the Company will become an indirect subsidiary of First American (the "Merger"). C. The Merger is subject to certain conditions precedent, including, without limitation, regulatory approvals and approval of the shareholders of NAIG. For purposes of this Agreement, the date on which the Merger shall occur and become effective shall be referred to as the "Effective Date of the Merger". D. The Company and First American desire to provide an incentive to Employee in order to keep the services of Employee available to the Company during the pendency of the Merger and thereafter, in each case subject to the terms and conditions of this Agreement. Agreement NOW, THEREFORE, the Company and the Employee agree as follows: 1. CURRENT AT WILL EMPLOYMENT AGREEMENT. The Current At Will Employment Agreement continues in full force and effect except as modified by this Agreement. Page 1 of 10 2 2. TERM. 2.1 Section 4 of the Current At Will Employment Agreement (regarding at will employment) is deleted in its entirety and replaced with the agreement set forth in Paragraph 2.2 below. 2.2 Employee shall be employed by the Company for fifteen (15) months, commencing as of January 1, 1999 and ending on March 31, 2000 (the "Initial Term"), unless sooner terminated in accordance with the provisions of this Agreement, including without limitation, Paragraph 4 of this Agreement. Upon expiration of the Initial Term, the provisions of Section 4 of the Current At Will Employment Agreement in effect immediately before the execution of this Agreement shall once again govern and Employee's employment shall continue on an "at will" basis in accordance with the provisions of the Current At Will Employment Agreement. Notwithstanding Employee's at will employment status at the expiration of the Initial Term, the Company agrees that it will provide Employee four (4) months notice prior to terminating Employee unless such termination is for Cause as set forth in Paragraph 4 of this Agreement. If Employee is terminated other than for Cause, then Employee shall for the Initial Term continue to be treated as an employee of the Company for all purposes including, payment of salary and benefits and the vesting of any stock options granted to Employee, but excluding the accrual of any bonus pursuant to Section 3.3.3. Notwithstanding the foregoing sentence, during any such termination period, Employee shall not have or exercise any of the powers or authority granted to employees and/or officers by the Company and/or by its subsidiaries and/or by law or regulation. 2.3 During the Initial Term, unless sooner terminated in accordance with the provisions of this Agreement, including without limitation, Paragraph 4 of this Agreement, and unless the Employee is promoted to a higher office, Employee's title shall be Executive Vice President and General Manager of Pinnacle Management Solutions Insurance Services, and Employee shall not be assigned to any duties that materially diminish such position, duties, responsibilities or status. 3. COMPENSATION. 3.1. Base Salary. The bi-weekly salary currently in effect for Employee shall continue to be paid during the Initial Term in accordance with the payroll practices and procedures of the Company; provided, however, the Company may, at the option of the Company, increase the bi-weekly salary of the Employee during the Initial Term. Page 2 of 10 3 3.2. Retention and Non-Competition Payment. Subject to the terms, covenants, agreements, and conditions set forth below, Employee shall be entitled to a retention and non-competition payment in the aggregate amount of $100,000 less any applicable withholdings, taxes as required by law and/or regulation and deductions authorized by Employee or required by law and/or regulation(the "Retention Payment"), payable as follows: 3.2.1 The Company shall pay to Employee an amount equal to twenty percent of the Retention Payment upon execution of this Agreement; provided, however, such amount shall not be paid prior to January 1, 1999 and shall be paid with Employee's first regular pay check in January 1999. 3.2.2 In the event that (i) Employee remains employed by the Company on a full-time basis until the expiration of this Agreement or Employee has been terminated by the Company without Cause, regardless of whether the Merger is successfully consummated, the Company shall pay to Employee an amount equal to eighty percent of the Retention Payment upon the expiration of the Initial Term. 3.2.3 If Employee (i) resigns, retires, goes on leave, or is terminated for Cause before the expiration of the Initial Term, the eighty percent payment referred to herein will not be earned or paid. 3.2.3 In the event Employees dies during the Initial Term while he is employed by the Company, the Company will pay to his estate an amount equal to eighty percent of the Retention Payment. Employee will not, however, be entitled to any remaining payments that would have otherwise be paid to him under Paragraph 2.1 or any other provision of this Agreement, except for any fully earned but unpaid bonus. 3.3 Bonus. In addition to Base Salary, but subject to the terms, covenants, agreements and conditions set forth below, Employee shall be entitled to a bonus as follows: 3.3.1 Employee shall be paid a guaranteed bonus for the calendar year 1999 of One Hundred Thousand Dollars ($100,000) payable with the first pay check paid to Employee by the Company in January 2000. This guaranteed bonus shall not be prepaid by the Company. If Employee resigns, retires, goes on leave, or is terminated for Cause before December 31, 1999, the foregoing guaranteed bonus will not be earned or paid. Page 3 of 10 4 3.3.2 In addition to the guaranteed bonus set forth in Section 3.3.1, if the Merger is successfully consummated such that NAIG is merged with and into Pea Soup, the Company shall pay to Employee an additional bonus of Twenty Five Thousand Dollars ($25,000) payable with the first pay check paid to Employee by the Company in January 2000. This additional bonus shall not be prepaid by the Company. If Employee resigns, retires, goes on leave, or is terminated for Cause before December 31, 1999, the foregoing additional bonus will not be earned or paid. 3.3.3 Employee shall be paid a bonus for the year 2000 and for each subsequent year thereafter as determined below; provided, however, if Employee has resigned, retired, gone on leave, or been terminated with or without Cause before the end of any such year no such bonus shall be earned or paid for such year. The amount of such bonus shall equal five percent (5%) of the combined net income (the "Combined Net Income") of Great Pacific Insurance Company, a California corporation ("GPIC"), and Pinnacle Management Solutions Insurance Services, a California corporation ("PMSIS"), on a combined basis as follows: Combined Net Income shall be determined using the following criteria: The net income of GPIC shall be deemed to be the net underwriting profit of the lender placed and REO fire and flood insurance business of GPIC, as determined pursuant to statutory accounting procedures or practices prescribed or permitted by the Insurance Commissioner of the State of California, the Department of Insurance of the State of California and insurance departments of other states and Washington, D.C. or any applicable insurance commission or other governmental entity having such authority over GPIC, and as such net underwriting profit is reported by GPIC to the California Department of Insurance on a statutory basis in its written annual "Convention Statement" as filed with the California Department of Insurance. The net income of GPIC shall be increased or decreased by the net profit or net loss, respectively, of PMSIS determined pursuant to generally accepted accounting principles, consistently applied. From any amount so determined an amount shall be subtracted equal to the amount of corporate overhead charged by the Company (or its parent or successor, as the case may be)to GPIC and PMSIS; provided, however, for the purposes of such determination of Combined Net Income such corporate overhead shall not exceed four percent (4%) of net earned premium of GPIC for the applicable period and four percent (4%) of the fee income of PMSIS for the applicable period. Such bonus as determined above shall be paid annually as soon as practicable after the Combined Net Income is determined by the Company. Page 4 of 10 5 3.3.4 For the year 2000 only, in addition to the bonus set forth in Section 3.3.3, if the Merger is successfully consummated such that NAIG is merged with and into Pea Soup, the Company shall pay to Employee an additional bonus of Twenty Five Thousand Dollars ($25,000) payable with the first pay check paid to Employee by the Company in January 2001. This additional bonus shall not be prepaid by the Company. If Employee resigns, retires, goes on leave, or is terminated for Cause before December 31, 2000, the foregoing additional bonus will not be earned or paid. 3.4 Vacation. Section 6 of the Current At Will Employment Agreement is amended to provide that effective with the commencement of the Initial Term and for each Working Year thereafter, subject to the terms and conditions set forth in the Policies and Procedures (as defined in the Current At Will Employment Agreement), Employee's vacation time will accrue 0.0577 of a vacation day for each full working day worked at the Companies (as defined in the Current At Will Employment Agreement) during each Working Year (as defined in the Current At Will Employment Agreement)(15 days of Vacation Time for each Working Year). 4. TERMINATION FOR CAUSE. For purposes of this Agreement, "Cause" shall mean: 4.1 The failure of the Employee to discharge or perform his duties and obligations under this Agreement with due diligence and care; 4.2 The refusal of the Employee to implement or adhere to written policies, procedures, practices or directives of the Board of Directors of the Company and/or of First American as the case may be, or the Chairman or Chief Executive Officer of Pinnacle Management Solutions Insurance Services or of Great Pacific Insurance Company; 4.3 Conduct which is in violation of Employee's common law duty of loyalty to the Company; 4.4 Fraudulent conduct in connection with the business affairs of Employer, regardless of whether said conduct is designed to defraud the Company or others, 4.5 Conduct which is in violation of any provision of this Agreement, or 4.6 Conviction of a felony. Page 5 of 10 6 5. OTHER BENEFITS. So long as Employee is employed, he shall be entitled to the same Company-provided benefits provided by the Company for its employees in accordance with the Current At Will Employment Agreement and the Personnel Policy and Practice Manual of NAIG and its subsidiaries or, after the Effective Date of the Merger, at the election of the Company, the policies and procedures applicable to First American and its subsidiaries (the "Company's Personnel Practices and Policy Manual"). 6 COVENANTS. 6.1 Confidentiality; Trade Secrets. Employee acknowledges and agrees that he continues to be bound by the terms of the Proprietary Information Agreement executed by Employee concurrently with the execution of the Current At Will Employment Agreement, and that such agreement continues in full force and effect. 6.2 [Intentionally Left Blank] 6.3 Remedies for Breach of Certain Covenants. The covenants and agreements set forth in Paragraph 6 of this Agreement shall continue to be binding upon Employee, notwithstanding the termination of his employment with the Company for any reason whatsoever. Such covenants and agreements shall be deemed and construed as separate agreements independent of any other provisions of this Agreement and any other agreement between the Company and Employee. The existence of any claim or cause of action by Employee against the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of any or all of such covenants and agreements. It is expressly agreed that the remedy at law for the breach of the covenants and agreements in Paragraph 6 are inadequate and that injunctive relief shall be available to prevent the breach or any threatened breach thereof. 7. SEPARATE AND SEVERABLE. Each term, clause, condition, covenant, agreement, 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. 8. WAIVER OR MODIFICATION INEFFECTIVE UNLESS IN WRITING. No waiver or modification of this Agreement shall be valid unless in writing and executive by duly authorized officers of the Company and Employee. Oral agreements are not binding on the parties. Page 6 of 10 7 9. 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 American and the State of California and any arbitration, mediation or other proceeding arising hereunder shall be filed and adjudicated in San Mateo County, California. 10. ARBITRATION OF DISPUTES. Except as provided in Paragraph 6, any dispute or controversy arising from or relating to this Agreement, or from any other aspect of Employee's employment or the termination thereof, shall be decided by arbitration in South San Francisco or any other city in San Mateo County, California, in accordance with the rules and regulations of the American Arbitration Association. 11. ATTORNEYS' FEES. The prevailing party in any dispute with respect to this Agreement and/or Employee's employment and/or termination shall be entitled to all reasonable costs and attorneys' fees. 12. RELIANCE; INTERPRETATION. The parties hereto represent and acknowledge that in executing this Agreement they do no 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 and 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 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 paragraphs, subparagraphs 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 paragraph or subparagraph. 13. COMPANY PERSONNEL POLICIES AND PRACTICE MANUAL AND RELATIONSHIP TO THIS AGREEMENT. Notwithstanding anything to the contrary herein, Employee's employment shall continue to be governed by the Company's Personnel Policies and Practice Manual. In the event any provision in the Company's Personnel Policies and Practice Manual is inconsistent with this Agreement, the provisions of this Agreement shall prevail over any inconsistent provision of the Company's Personnel Policies and Practice Manual. Page 7 of 10 8 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. 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 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 constitutes the entire Agreement between the parties relating to the subject matter hereof, and supersedes and replaces that certain Retention and Modification of At Will Employment Agreement dated January 7, 1999 by and between the parties and such agreement shall for all purposes be deemed null and void. Employee acknowledges that he has received the payment referenced in Section 3.2.1 of 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 execution date of this Agreement, it shall be set forth in writing and executed by a duly authorized officer of the Company and Employee. 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. 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 Inconsistent Obligations. Employee 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. 14.6. Notices. All communications required or permitted to be made under this Agreement 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 Page 8 of 10 9 address or addresses set forth below, or to such other address or addresses as a party may notify another party pursuant to this Paragraph . Any such communication shall be deemed to be properly given (i) if delivered personally or by courier, upon written acknowledgment of receipt after delivery to the address specified; (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 Information Group 395 Oyster Point Boulevard, Suite 500 South San Francisco, CA 94080-1933 Attention: Robert P. Barbarowicz To Employee: Gerry Gauer 153 Fox Sparrow Lane Brisbane, CA 94005 Page 9 of 10 10 IN WITNESS WHEREOF, the parties hereto have executed this Agreement and agree to enter into and be bound by the provisions thereof, as of the date first written above. NATIONAL INFORMATION GROUP By: /s/ Mark A. Speizer ------------------------------- Mark A. Speizer Chairman of the Board and Chief Executive Officer /s/ Gerry Gauer ---------------------------------- Gerry Gauer ACKNOWLEDGED AND AGREED TO: THE FIRST AMERICAN FINANCIAL CORPORATION By: ____________________ Its: ____________________ Page 10 of 10 EX-10.42 7 MODIFICATION OF AT WILL EMPLOYMENT (GEORGE JUMP) 1 Exhibit 10.42 RETENTION AND MODIFICATION OF AT WILL EMPLOYMENT AGREEMENT THIS RETENTION AND MODIFICATION OF AT WILL EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into this 4th day of January, 1999, by and between NATIONAL INFORMATION GROUP, a California corporation (the "Company"), and GEORGE JUMP, an individual (the "Employee"). Recitals A. The Employee is an at will employee of the Company pursuant to that certain letter agreement dated as of September 3, 1993, together with any and all amendments (the "Current At Will Employment Agreement"), between the Employee and National Information Group ("NAIG"). B. On or about November 18, 1998, NAIG entered into that certain Agreement and Plan of Merger by and among The First American Financial Corporation ("First American"), Pea Soup Acquisition, Inc., a wholly owned affiliate of First American ("Pea Soup"), and NAIG (the "Agreement of Merger"), pursuant to which NAIG will be merged with and into Pea Soup and the Company will become an indirect subsidiary of First American (the "Merger"). C. The Merger is subject to certain conditions precedent, including, without limitation, regulatory approvals and approval of the shareholders of NAIG. For purposes of this Agreement, the date on which the Merger shall occur and become effective shall be referred to as the "Effective Date of the Merger". D. The Company and First American desire to provide an incentive to Employee in order to keep the services of Employee available to the Company during the pendency of the Merger and thereafter, in each case subject to the terms and conditions of this Agreement. Agreement NOW, THEREFORE, the Company and the Employee agree as follows: 1. CURRENT AT WILL EMPLOYMENT AGREEMENT. The Current At Will Employment Agreement continues in full force and effect except as modified by this Agreement. Page 1 of 8 2 2. TERM. 2.1 Section 4 of the Current At Will Employment Agreement (regarding at will employment) is deleted in its entirety and replaced with the agreement set forth in Paragraph 2.2 below. 2.2 Employee shall be employed by the Company for fifteen (15) months, commencing as of December 31, 1998 and ending on March 31, 2000 (the "Initial Term"), unless sooner terminated in accordance with the provisions of this Agreement, including without limitation, Paragraph 4 of this Agreement. Upon expiration of the Initial Term, the provisions of Section 4 of the Current At Will Employment Agreement in effect immediately before the execution of this Agreement shall once again govern and Employee's employment shall continue on an "at will" basis in accordance with the provisions of the Current At Will Employment Agreement. Notwithstanding Employee's at will employment status at the expiration of the Initial Term, the Company agrees that it will provide Employee four (4) months notice prior to terminating Employee unless such termination is for Cause as set forth in Paragraph 4 of this Agreement. 3. COMPENSATION. 3.1. Base Salary. The bi-weekly salary currently in effect for Employee shall continue to be paid during the Initial Term in accordance with the payroll practices and procedures of the Company; provided, however, the Company may, at the option of the Company, increase the bi-weekly salary of the Employee during the Initial Term. 3.2. Retention and Non-Competition Payment. Subject to the terms, covenants, agreements, and conditions set forth below, Employee shall be entitled to a retention and non-competition payment in the aggregate amount of $100,000 less any applicable withholdings, taxes as required by law and deductions authorized by Employee or required by law (the "Retention Payment"), payable as follows: 3.2.1 The Company shall pay to Employee an amount equal to twenty percent of the Retention Payment upon execution of this Agreement. 3.2.2 In the event that (i) Employee remains employed by the Company on a full-time basis until the expiration of this Agreement or Employee has been terminated by the Company without Cause and (ii) the Merger is successfully consummated such that NAIG is merged with and into Pea Soup, the Company Page 2 of 8 3 shall pay to Employee an amount equal to eighty percent of the Retention Payment upon the expiration of the Initial Term. 3.2.3 If Employee (i) resigns, retires, goes on leave, or is terminated for Cause before the expiration of the Initial Term or (ii) the Merger is not consummated for any reason, the eighty percent payment referred to herein will not be earned or paid. 3.2.4 For the purposes of determining commissions payable to Employee during the Initial Term in accordance with the terms of the currently in force Sales Administration Memoranda ("SAMS") of the Company, any accounts of the Company which, as of the date hereof, are assigned to Employee shall continue to be assigned to Employee during the Initial Term and the rate of commissions payable to Employee pursuant to the currently in force SAMS with respect to any such accounts shall remain unchanged during the Initial Term. During the Initial Term, Employee shall continue to be entitled to any override commissions on accounts assigned to other sales representatives of the Company (other than vehicle tracking accounts)to which Employee is entitled prior to the date hereof. If the employment by the Company of any such other sales representatives is terminated, either voluntarily or involuntarily, during the Initial Term, any accounts of the Company which were assigned to such other sales representatives (other than vehicle tracking accounts) shall be assigned to Employee, and Employee shall be entitled to receive the same commission that such terminated sales representative would have been entitled to receive but for such termination of employment; provided, however, in such case, Employee shall not be entitled to any override commission with respect to any such reassigned accounts. If Employee (i) resigns, retires, goes on leave, or is terminated for Cause before the expiration of the Initial Term or (ii) the Merger is not consummated for any reason, then, upon the happening of any such event, or upon the public announcement that the Merger will not be consummated, the provisions of this Section 3.2.4 shall no longer be applicable. 3.3. Death of Employee. In the event Employees dies during the Initial Term while he/she is employed by the Company, the Company will pay to his/her estate an amount equal to eighty percent of the Retention Payment if the Merger is consummated. Employee will not, however, be entitled to any remaining payments that would have otherwise be paid to him/her under Paragraph 2.1 or any other provision of this Agreement. Page 3 of 8 4 4. TERMINATION FOR CAUSE. For purposes of this Agreement, "Cause" shall mean: 4.1 The failure of the Employee to discharge or perform his duties and obligations under this Agreement with due diligence and care; 4.2 The refusal of the Employee to implement or adhere to written policies, procedures, practices or directives of the Board of Directors or Managers of the Company as the case may be; 4.3 Conduct which is in violation of Employee's common law duty of loyalty to the Company; 4.4 Fraudulent conduct in connection with the business affairs of Employer, regardless of whether said conduct is designed to defraud the Company or others, 4.5 Conduct which is in violation of any provision of this Agreement, or 4.6 Conviction of a felony. 5. OTHER BENEFITS. So long as Employee is employed, he/she shall be entitled to the same Company-provided benefits provided by the Company for its employees in accordance with the Current At Will Employment Agreement and the Personnel Policy and Practice Manual of NAIG and its subsidiaries or, after the Effective Date of the Merger, at the election of the Company, the policies and procedures applicable to First American and its subsidiaries (the "Company's Personnel Practices and Policy Manual"). 6. COVENANTS. 6.1 Confidentiality; Trade Secrets. Employee acknowledges and agrees that he/she continues to be bound by the terms of the Proprietary Information Agreement executed by Employee concurrently with the execution of the Current At Will Employment Agreement, and that such agreement continues in full force and effect. 6.2 Non-Competition. For and in consideration of, among other things, the payment, in whole or in part, of the Retention Payment and the agreement of the Company to employ Employee for the Initial Term in lieu of at will employment, Employee agrees that until the expiration of the Initial Term, he/she shall not, (a) without the prior written consent of a duly authorized Page 4 of 8 5 officer of the Company, serve or act in any capacity, including without limitation, employee, director, administrator, manager, agent, consultant, employer, principal, partner, a shareholder, on behalf of another company or any other business that is in competition, or in the process of becoming in competition, with the business of the Company, (b) interfere with, disrupt or attempt to disrupt the relationship, contractual or otherwise, between the Company and any third parties, including without limitation, customers, clients or contractors of the Company or (c) directly or indirectly, or by acting alone or in concert with others, induce or influence any person or entity that is engaged (as an employee, agent independent contractor or otherwise) by the Company to terminate his/her/its engagement. This covenant not to compete shall be applicable to the counties of Maricopa and Pima of Arizona, the counties of Los Angeles, Orange, San Diego and San Francisco, California, the county of Fulton of Georgia the counties of New York and Nassau of New York, the counties of Philadelphia and Allegheny of Pennsylvania, the county of Fairfax of Virginia. 6.3 Remedies for Breach of Certain Covenants. The covenants and agreements set forth in Paragraph 6 of this Agreement shall continue to be binding upon Employee, notwithstanding the termination of his/her employment with the Company for any reason whatsoever. Such covenants and agreements shall be deemed and construed as separate agreements independent of any other provisions of this Agreement and any other agreement between the Company and Employee. The existence of any claim or cause of action by Employee against the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of any or all of such covenants and agreements. It is expressly agreed that the remedy at law for the breach of the covenants and agreements in Paragraph 6 are inadequate and that injunctive relief shall be available to prevent the breach of any threatened breach thereof. 7. SEPARATE AND SEVERABLE. Each term, clause, condition, covenant, agreement, 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. 8. WAIVER OR MODIFICATION INEFFECTIVE UNLESS IN WRITING. No waiver or modification of this Agreement shall be valid unless in writing and executive by duly authorized officers of the Company and Employee. Oral agreements are not binding on the parties. Page 5 of 8 6 9. 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 American and the State of Kansas and any arbitration, mediation or other proceeding arising hereunder shall be filed and adjudicated in Johnson County, Kansas. 10. ARBITRATION OF DISPUTES. Except as provided in Paragraph 6, any dispute or controversy arising from or relating to this Agreement, or from any other aspect of Employee's employment or the termination thereof, shall be decided by arbitration in South San Francisco or any other city in San Mateo County, California, in accordance with the rules and regulations of the American Arbitration Association. 11. ATTORNEYS' FEES. The prevailing party in any dispute with respect to this Agreement and/or Employee's employment and/or termination shall be entitled to all reasonable costs and attorneys' fees. 12. RELIANCE; INTERPRETATION. The parties hereto represent and acknowledge that in executing this Agreement they do no rely and have no relied upon any representation or statement made by any of the other parties or by any of the other parties' agents, attorneys and 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 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 paragraphs, subparagraphs 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 paragraph or subparagraph. 13. COMPANY PERSONNEL POLICIES AND PRACTICE MANUAL AND RELATIONSHIP TO THIS AGREEMENT. Notwithstanding anything to the contrary herein, Employee's employment shall continue to be governed by the Company's Personnel Policies and Practice Manual. In the event any provision in the Company's Personnel Policies and Practice Manual is inconsistent with this Agreement, the provisions of this Agreement shall prevail over any inconsistent provision of the Company's Personnel Policies and Practice Manual. Page 6 of 8 7 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. 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 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 constitutes the entire Agreement between the parties relating to the subject matter hereof. 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 execution date of this Agreement, it shall be set forth in writing and executed by a duly authorized officer of the Company and Employee. 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. 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 Inconsistent Obligations. Employee 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. 14.6. Notices. All communications required or permitted to be made under this Agreement 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 Paragraph . Any such communication shall be deemed to be properly given (i) if delivered personally or by courier, upon written acknowledgment of receipt after delivery to the address Page 7 of 8 8 specified; (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 Information Group 395 Oyster Point Boulevard, Suite 500 South San Francisco, CA 94080-1933 Attention: Robert P. Barbarowicz To Employee: George Jump 12508 Borton Overland Park, KS 66213 IN WITNESS WHEREOF, the parties hereto have executed this Agreement and agree to enter into and be bound by the provisions thereof, as of the date first written above. NATIONAL INFORMATION GROUP By: /s/ Mark A. Speizer ----------------------------------------- Mark A. Speizer Chairman of the Board and Chief Executive Officer /s/ George Jump ----------------------------------------- George Jump ACKNOWLEDGED AND AGREED TO: THE FIRST AMERICAN FINANCIAL CORPORATION By: /s/ Parker S. Kennedy Its: ____________________ Page 8 of 8 EX-11.1 8 COMPUTATION OF WEIGHTED AVERAGE SHARES 1 EXHIBIT 11.1 NATIONAL INFORMATION GROUP AND SUBSIDIARIES COMPUTATION OF WEIGHTED AVERAGE SHARES OUTSTANDING AND EARNINGS PER SHARE FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 BASIC EPS UNDER SFAS NO. 128
1996 1997 1998 ---------- ---------- ---------- Weighted average common shares ............................. 4,109,655 3,946,257 4,095,154 Net income (in thousands) .................................. $ 1,274 $ 3,266 2,817 Per share results: Net income ........................................ $ 0.31 $ 0.83 $ 0.69 DILUTED EPS UNDER SFAS NO. 128 1996 1997 1998 ---------- ---------- ---------- Weighted average common shares ............................. 4,109,655 3,946,257 4,095,154 Common shares issuable under outstanding stock options...... 31,705 181,125 230,800 ---------- ---------- ---------- Total ............................................. 4,141,360 4,127,382 4,325,954 ========== ========== ========== Net income (in thousands) .................................. $ 1,274 $ 3,266 2,817 Per share results: Net income ........................................ $ 0.31 $ 0.79 $ 0.65
Please refer to Note 10 of the Consolidated Financial Statements for a description of the method used to calculate earnings per share. EX-24.1 9 POWER OF ATTORNEY 1 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose name and individual signature appears below constitutes and appoints Robert P. Barbarowicz and Rory C. Snyder (each of them with full power of substitution and with full power to act without the other), his true and lawful attorneys-in- fact and agents, with the power of substitution and resubstitution, for the undersigned, in such person's name, place and stead, in any and all capacities, to sign an Annual Report for the fiscal year ended December 31, 1998 on Form 10-K, and any all subsequent amendments thereto, and to file such Annual Report on Form 10-K, with any amendments thereto, so signed with all exhibits thereto and any other and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and to perform any and all acts and things requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or either of them, or their substitutes, may lawfully do or cause to be done by virtue hereof.
NAME AND SIGNATURE TITLE DATE ------------------ ----- ---- /s/ MARK A. SPEIZER Chairman of the Board and Chief March 19, 1999 - ----------------------------------------------------- Executive Officer and Director Mark A. Speizer (Principal Executive Officer) /s/ BRUCE A. COLE President and Director March 19, 1999 - ----------------------------------------------------- Bruce A. Cole /s/ RORY C. SNYDER Vice President, Treasurer and March 19, 1999 - ----------------------------------------------------- Controller (Principal Financial Rory C. Snyder and Accounting Officer) /s/ BARD E. BUNAES Director March 19, 1999 - ----------------------------------------------------- Bard E. Bunaes /s/ SAUL B. JODEL Director March 19, 1999 - ----------------------------------------------------- Saul B. Jodel /s/ LAWRENCE M. GOODMAN Director March 19, 1999 - ----------------------------------------------------- Lawrence M. Goodman
EX-27.1 10 FINANCIAL DATA SCHEDULE
7 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 11,011 0 0 5,235 0 0 19,684 5,852 0 2,198 67,941 2,485 4,995 0 0 13,273 0 0 19,749 10,602 67,941 15,512 1,780 0 49,260 5,415 7,911 49,597 3,629 812 2,817 0 0 0 2,817 0.69 0.65 3,232 6,306 (892) 3,936 2,226 2,484 (892)
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