-----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, U3yQwe3M0TFWQT1q73TLzp51Q69qHwmfGIQEDwQYQFEbdWSo54x0wUFFuHTwonO+ QuviTERqUbug1BP6wfI9kQ== 0001017062-97-000507.txt : 19970328 0001017062-97-000507.hdr.sgml : 19970328 ACCESSION NUMBER: 0001017062-97-000507 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970327 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: US FACILITIES CORP CENTRAL INDEX KEY: 0000798085 STANDARD INDUSTRIAL CLASSIFICATION: SURETY INSURANCE [6351] IRS NUMBER: 330097221 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-12099 FILM NUMBER: 97565370 BUSINESS ADDRESS: STREET 1: 650 TOWN CENTER DR STE 1600 CITY: COSTA MESA STATE: CA ZIP: 92626 BUSINESS PHONE: 7145491600 MAIL ADDRESS: STREET 1: 650 TOWN CENTER DRIVE STREET 2: STE 1600 CITY: COSTA MESA STATE: CA ZIP: 92626-1925 10-K 1 1996 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission file number: 0-15196 US FACILITIES CORPORATION (Exact name of Registrant as specified in its charter) DELAWARE 33-0097221 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 650 TOWN CENTER DRIVE, SUITE 1600, COSTA MESA, CA. 92626 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE: 714-549-1600 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: TITLE OF SECURITIES EXCHANGES ON WHICH REGISTERED ------------------- ----------------------------- Common Stock, par value $.01 per share New York Stock Exchange Common Stock Purchase Rights New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Aggregate Market Value of Voting Stock held by non-affiliates of the Registrant as of March 21, 1997: $109,866,435 (5,425,503 shares at the closing price of $20.25 per share). For this purpose, all shares held by officers and directors of the Registrant are considered to be held by affiliates, but neither the Registrant nor such persons concede that they are affiliates of the Registrant. Number of Shares of Common Stock of the Registrant outstanding as of March 21, 1997: 5,960,148 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's 1996 Annual Report to Stockholders are incorporated by reference into Part II of this Form 10-K. Portions of the Registrant's definitive Proxy Statement to be filed within 120 days after December 31, 1996, are incorporated by reference into Part III of this Form 10-K. 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 the Registrant's knowledge, in definitive proxy or information statements incorporated by reference into Part III of this Form 10-K or any amendment to this Form 10-K. [_] PART 1 ITEM 1. BUSINESS GENERAL INFORMATION The Registrant, US Facilities Corporation (the "Company"), is a Delaware holding company formed in 1982 which, through its subsidiaries, operates as a specialty insurance group. The Company's two principal operating units are USBenefits Insurance Services, Inc. ("USBenefits") and USF RE INSURANCE COMPANY ("USF RE"). USBenefits underwrites, manages and markets medical stop- loss and provider excess coverages nationwide for The Continental Insurance Company ("Continental"), one of the CNA Insurance Companies ("CNA"), an unaffiliated insurance company, in exchange for management fees. Medical stop- loss insurance protects self-insured employers against the risk of exposure to excessive losses by limiting their liability to a predetermined amount. Self- insured plans permit employers to design employee benefit coverages structured to meet their specific needs, allow employers to exercise more control over their health insurance costs, and provide health coverages that might not otherwise be available. Provider excess coverage limits the financial risks healthcare providers face from medical plans that prepay the providers fixed sums per plan participant (capitated fees) or provide specified rates for services. USBenefits also markets other employee benefits related products on behalf of several national life insurance companies. USF RE is a property/casualty reinsurance company whose primary business is the reinsurance of 50% of the medical lines coverages underwritten by USBenefits for Continental and the reinsurance of property/casualty accounts produced by independent sources. Its subsidiary, USF Insurance Company ("USFIC"), writes excess and surplus lines insurance on a direct basis through independent excess and surplus lines brokers. FINANCIAL INFORMATION RELATING TO BUSINESS SEGMENTS The Company's operations are classified into two business segments: (1) medical lines (which include the revenues from commissions and fees of the Company, and from reinsurance of 50% of its medical lines business); and (2) property/casualty reinsurance and insurance underwriting. The medical lines segment produced 70%, 73% and 80%, and the property/casualty segment produced 29%, 26% and 20% of the Company's consolidated revenues for 1996, 1995 and 1994, respectively. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and also "Note 9" of Notes to CONSOLIDATED FINANCIAL STATEMENTS," incorporated herein by reference from the Company's 1996 Annual Report to Stockholders under Items 7 and 8 hereof, respectively. MEDICAL LINES GENERAL Since 1980, USBenefits has had a mutually exclusive agreement to underwrite and manage medical lines coverages for Continental or its predecessor. Such agreement provides that USBenefits is responsible for designing medical lines products, marketing the products, underwriting risks, collecting premiums, administering coverage agreements, investigating and settling claims and making claim payments within specified limits. While USBenefits participates in the setting of rates and underwriting standards, which are the ultimate responsibility of Continental, it does not insure any risks in its role as underwriting manager; all insurance risks are borne by Continental and its reinsurers, including USF RE. See "BUSINESS--MEDICAL LINES--MEDICAL LINES REINSURANCE". Under its current management agreement with Continental, USBenefits is paid management fees for its services which are a percentage of premiums collected. The management agreement may be terminated by either 1 party at any December 31 upon 90 days prior notice, and can also be terminated upon the occurrence of certain events. The management agreement provides that during its term and for a period ranging from 12 to 18 months following termination, Continental will not solicit or take away USBenefits' customers, and that upon termination USBenefits has the right to the expirations and renewals of the medical lines business. The Company believes that these provisions permit USBenefits to move the medical lines business to another insurance company if its relationship with Continental were to terminate. Alternatively, USBenefits could write medical lines coverages on a direct basis through its affiliate, USF RE, which is currently licensed to issue such coverage in 42 states and the District of Columbia. USBenefits also markets various employee benefits insurance products on behalf of several large national life insurance companies. Other than Continental, no one insurance company, third party administrator ("TPA") or insurance producer accounts for 10% or more of USBenefits' revenues. During 1995 the Company determined that its medical bill review business was no longer viable and terminated its operations in May. Consolidated pre-tax results for 1995 and 1994 include losses from this bill review operation of $1,156,000 and $1,137,000, respectively. MARKETING USBenefits markets and distributes its medical lines products through a network of TPAs, insurance agents, brokers and consultants (collectively "Producers"). Producers have non-exclusive arrangements with USBenefits that enable them to submit requests for coverage quotations on behalf of their clients. Continental may pay a fee or commission to Producers for placing the coverage, the amount of which is based on a percentage of the premium written and is negotiated on a case-by-case basis. Additionally, USBenefits may pay an annual production bonus to Producers based on the amount of new business and rate of retention of accounts during the calendar year. USBenefits markets its products to a variety of employers, including both large and small employee groups. PRODUCTS Medical Stop-Loss. USBenefits offers two types of medical stop-loss products: specific excess and aggregate excess. Employers can elect to purchase specific excess coverage only, or a combination of specific and aggregate coverage. USBenefits does not offer aggregate coverage separately. Generally, self-insured employers purchase a combination of specific and aggregate medical stop-loss coverage in order to minimize their exposure. Medical stop-loss coverage is written on a basic form which can be customized to meet the employer's individual needs and ability to retain risk. Medical stop-loss coverage indemnifies only the employer for its obligations under its self-insured plan of medical benefits; no plan participant or beneficiary is covered by the medical stop-loss policy. Provider Excess. In 1994 USBenefits commenced the marketing, underwriting and managing of a provider excess product on behalf of Continental. This product limits the exposure which providers of medical services incur when they enter into capitated fee arrangements; it protects these providers from excessive losses that can arise when expenses exceed a predetermined level. Continental pays USBenefits management fees for its services, which are a percentage of premiums collected. UNDERWRITING MANAGEMENT Under its agreement with Continental, USBenefits, with the assistance of USF RE, provides the services necessary to underwrite and service the medical lines business, including, but not limited to: (i) selecting Producers; (ii) accepting medical lines risks and issuing coverage agreements on behalf of Continental within mutually agreed upon underwriting and pricing guidelines; and (iii) processing claims for reimbursement under policies on behalf of Continental. 2 MEDICAL LINES REINSURANCE USF RE reinsures a portion of the medical lines business underwritten by USBenefits. Under the reinsurance agreement with Continental, USF RE is responsible for 50% of Continental's liability under such contracts issued through USBenefits. Continental's liability under medical stop-loss contracts varies per account, but in no event can exceed $2,000,000 lifetime per individual self-insured plan participant or $2,000,000 in the aggregate per agreement year for each self-insured employer account. Continental's liability under provider capitation contracts generally is limited to a maximum of $1,000,000 per individual participant and up to a maximum of $5,000,000 for all participants. In addition, USF RE is responsible for a proportionate share of loss adjustment expenses and any liability incurred by Continental for extra-contractual or punitive damages. The amount of premium ceded by Continental to USF RE under the reinsurance agreement is equal to a proportionate share of the original gross premiums written by Continental, less a ceding commission paid by USF RE to Continental which covers Continental's costs of acquiring and servicing such business. PROPERTY/CASUALTY UNDERWRITING GENERAL USF RE underwrites property/casualty reinsurance which it secures from numerous reinsurance intermediaries and directly from unaffiliated insurance companies. USF RE is licensed to write various lines of insurance in 47 states, the District of Columbia and Puerto Rico. USF RE and USFIC both carry an A (Excellent) rating from A.M. Best Company. During the third quarter of 1995, USF RE ceased writing plate glass insurance, which accounted for 3% and 5%, of USF RE's premiums earned in 1995 and 1994, respectively. PROPERTY/CASUALTY REINSURANCE Gross premiums written by the Company's property/casualty segment were $65,850,000 in 1996, an increase of 29% as compared to 1995 premiums written of $50,915,000, which was an increase of 42% over $35,760,000 in premiums written during 1994. The ceding companies of one client organization accounted for a total of 23%, 27% and 17% of gross premiums written in the property/casualty segment in 1996, 1995 and 1994, respectively. General. USF RE offers a variety of reinsurance coverages in selected property/casualty lines. In general, reinsurance coverage is provided on the basis of the underwriter's evaluation of the acceptability of the risk to be assumed, the adequacy of the premium, the potential exposure of the line of business to be underwritten, the quality of the primary insurers' operations and the ceding commission. USF RE's property/casualty premiums are generated from writing facultative and treaty reinsurance. Facultative is the reinsurance of one account at a time, while reinsurance treaties cover a portion of all policies written by another insurer in a particular risk category. Product Lines. USF RE concentrates its casualty writings on three principal lines: general liability, commercial automobile liability and products liability. USF RE provides casualty reinsurance for primary as well as excess policies, with the majority of its writing in low excess layers. USF RE provides a broad range of reinsurance coverages for most types of property exposures, subject to adequate underwriting information and proper rates and forms. All Risk and Difference in Conditions coverages respresent the majority of property premiums written; other coverages include fire and extended coverage, as well as allied lines and inland marine. Retrocessions. USF RE has entered into retrocession (reinsurance) agreements which mitigate USF RE's exposure to losses and therefore allow it to increase the limits it can offer on each property/casualty account. Other retrocession agreements protect against catastrophic losses. Management believes this coverage is adequate to protect the Company from excessive catastrophic losses. 3 USF RE evaluates the financial condition of potential retrocessionaires to determine whether to cede retrocessional coverage to such companies. USF RE's retrocession agreements are placed with unaffiliated companies which management believes to be financially secure and experienced in this type of business. Reinsurance recoverables are monitored continually, and any retrocessionaire not qualified in USF RE's state of domicile, Massachusetts, is requested to post security in the amount of its estimated liability to USF RE. Surplus Lines. USFIC, a Pennsylvania domiciled insurance company, is eligible to offer surplus lines coverages in 33 states, the District of Columbia and the U.S. Virgin Islands and is also licensed as an admitted insurer in New York and Florida. Since acquiring USFIC in 1991, USF RE has increased USFIC's policyholders' surplus to over $16,000,000 at December 31, 1996. USFIC's business consists primarily of writing commercial property/ casualty coverages on a surplus lines basis. USFIC's operations contributed 13%, 13% and 8% of the property/casualty underwriting segment's premiums earned in 1996, 1995 and 1994, respectively. STATUTORY FINANCIAL INFORMATION COMBINED RATIO The statutory combined ratio is the traditional indicator of the potential underwriting profitability of an insurance company's business. It reflects the percentage of losses and loss adjustment expenses incurred to earned premiums (the "loss ratio") plus the percentage of production and servicing expenses to net written premiums (the "underwriting expense ratio"). The table below sets forth USF RE's consolidated loss ratio, underwriting expense ratio and combined ratio determined in accordance with statutory accounting practices ("SAP") for the years indicated. Management believes that USF RE's combined ratio is generally better than the combined ratio for the reinsurance industry as a whole and is well within the requirements of regulatory agencies.
YEAR ENDED DECEMBER 31, ------------------------- 1996 1995 1994 -------- ------- -------- Loss ratio......................................... 71.0 67.6 69.1 Underwriting expense ratio......................... 31.4 32.1 34.7 -------- ------- -------- Combined ratio..................................... 102.4 99.7 103.8 ======== ======= ========
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES Insurance and reinsurance companies are required to maintain reserves for losses and loss adjustment expenses ("LAE") which are intended to cover the ultimate cost of settling all losses incurred and unpaid, including an estimate of those not yet reported to the insurer, in order to properly match the expected losses incurred to the related earned premium. Reserves for medical stop-loss reinsurance are established on the basis of the most widely used techniques for determining loss reserves for this line of business, such as trended cost per covered person and loss payment pattern analysis. Property/casualty loss reserves are determined by customary industry methods of evaluating reported claims on the basis of the type of loss involved, knowledge of the circumstances surrounding the claim, policy provisions relating to the type of loss, and by estimating the cost of unreported claims on the basis of statistical information for occurrences which have not yet been reported to the carrier. Reserves are adjusted from time to time based on monitoring by the insurer. USF RE conducts, on a quarterly basis, an in-depth analysis of its incurred but not reported losses and bulk reserves relative to recent experience and trends, and adjusts such reserves upward or downward as necessary to maintain the reserves at a level which USF RE deems to be sufficient to provide for all claims incurred through the reporting date. Such reserves are regularly reviewed by USF RE's independent actuaries. 4 Loss reserve estimates are not precise because they are based on predictions of future events, as well as other variable factors, including changes in the legal system which can affect the results of litigated claims. Reserves for losses and LAE are estimates only. It is possible that an insurer's ultimate liability may be greater or less than such estimates. At USF RE, no explicit provisions are made for inflation, but inflationary trends are considered when setting reserves. USF RE does not discount its reserves to their present value. USF RE has no known pre-1986 environmental or asbestos exposures. The loss settlement period for certain types of insurance claims, such as casualty reinsurance, may be many years, and during such time it often becomes necessary to adjust the estimate of liability on a claim either upward or downward. In the last few years various factors (including escalation of repair costs, the size and unpredictability of jury awards and inflation) have necessitated periodic upward adjustments in reserves by most property/casualty insurers, including USF RE. Due to USF RE's size, should any future adjustments of its reserves become necessary, such adjustments could have a proportionately greater impact upon its reported earnings and surplus than they would have upon the earnings and surplus of a much larger insurance company. LAE reserves are intended to cover the ultimate cost of investigating and settling all losses. LAE reserves are estimated throughout each year based on historical data and factors similar to those used in estimating loss reserves, and are adjusted from time to time as management deems appropriate. In 1987, USF RE established a liability for uncollectible reinsurance related to adverse development in its discontinued general liability and special multiple peril ("GL/SMP") liability lines of business to recognize that certain amounts would not be recoverable from a former reinsurer. Under generally accepted accounting principles ("GAAP"), that provision was recorded as additional loss and LAE reserves, and has been adjusted periodically as claims develop. USF RE has not experienced any other material unrecoverable reinsurance. The following table reconciles USF RE's consolidated reserve for losses and LAE from SAP to amounts based on GAAP:
DECEMBER 31, 1996 ----------------------- 1996 1995 1994 ------- ------- ------- (DOLLARS IN THOUSANDS) Statutory loss and LAE reserves..................... $72,385 $62,420 $56,304 Reserves ceded to reinsurers........................ 22,265 16,426 13,292 Provision for uncollectible reinsurance............. 18 48 51 ------- ------- ------- GAAP loss and LAE reserves.......................... $94,668 $78,894 $69,647 ======= ======= =======
Except for the foregoing, there is no difference in USF RE's reserves for losses and LAE whether determined in accordance with GAAP or SAP. 5 The table below provides a reconciliation of beginning and ending consolidated statutory liability balances as of December 31, 1996, 1995 and 1994. Management will continue to evaluate and monitor reserves on all of its businesses, and management believes that USF RE's consolidated reserves at December 31, 1996 are adequate to cover the ultimate cost of settlement of all losses incurred through that date.
DECEMBER 31 ---------------------------- 1996 1995 1994 -------- -------- -------- (DOLLARS IN THOUSANDS) Reserves for losses and LAE at beginning of period....................................... $62,420 $56,304 $51,358 Incurred losses and LAE: Provision for losses and LAE for claims oc- curring in the current year........................................ 83,485 74,935 61,941 Increase in estimated losses and LAE for claims occurring in prior years............. 4,688 2,808 2,425 Payments: Losses and LAE payments for claims occurring during: The current year............................ (43,287) (39,511) (33,345) Prior years................................. (34,921) (32,116) (26,075) -------- -------- -------- Reserve for losses and LAE at end of period. $72,385 $62,420 $56,304 ======== ======== ========
The table on the following page presents the development of USF RE's consolidated statutory balance sheet liability for losses and LAE for 1986 through 1996. The top line of the table shows the estimated liability for unpaid losses and LAE recorded at December 31 for each of the indicated years. This liability represents the estimated amount of losses and LAE for claims arising in all years that are unpaid at the balance sheet date, including losses that had been incurred but not yet reported. Insurance and reinsurance companies establish reserves for losses incurred, but not yet paid, in order to match such losses with the related premiums earned. The process of establishing loss reserves is subject to uncertainties that are a normal, recurring aspect of the insurance business which requires the use of informed judgments and estimates. Estimating loss reserves is a process where many factors can ultimately affect the final settlement of a claim and, therefore, the ultimate reserve that is needed. In addition, time can be a critical part of reserving determinations, since the longer the span between the incidence of a loss and the payment or settlement of the claim, the more variable the ultimate settlement amounts may be. In 1996, changes in the payment patterns experienced within the Company's medical lines segment produced adjustments to factors applied to actuarial models resulting in increases in estimated losses and LAE for claims occurring in prior years. Loss and loss adjustment expense reserve development is reviewed on a regular basis, incorporating analyses of current trends, market changes in the Company's business segments and historical experience to analyze the Company's actuarial assumptions. As additional experience and other data become available, the Company's actuarial estimates may be revised and impact earnings. The upper portion of the table shows the re-estimated amount of the previously recorded liability based on experience as of the end of each succeeding year. The estimate is increased or decreased as more information becomes known about the frequency and severity of claims for individual years. The material increase in loss reserves beginning in 1986 is primarily attributable to USF RE's commencement of and, thereafter, significant growth in its reinsurance business. The cumulative redundancy or deficiency represents the total change in reserves from the original balance sheet date to December 31, 1996, and is a measure of the accuracy of the original estimate. The significant deficiencies shown for years 1986 and 1987 are related to the aforementioned discontinued GL/SMP lines of business. Such increases related to losses incurred in 1983 through 1984, and therefore affect reserve amounts in all years from 1986 through 1996. 6 The lower portion of the table shows the cumulative amount paid with respect to the previously recorded liability as of the end of each succeeding year, and a reconciliation of the gross and net amounts for the latest three years.
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 ------ ------ ------- ------- ------- ------- ------- ------- ------- ------- ------- (DOLLARS IN THOUSANDS) Net Liability for Losses/LAE-- End of Year............ $6,462 $8,623 $17,660 $28,697 $35,975 $36,481 $45,483 $51,358 $56,304 $62,420 $72,385 Net Liability re- estimated as of: 1 year later............ 8,736 11,143 17,003 29,715 33,871 37,528 47,119 53,783 59,112 67,108 2 years later........... 10,233 11,622 17,752 29,619 32,720 36,381 47,482 52,625 56,601 3 years later........... 10,788 12,370 18,290 29,694 31,654 36,037 46,786 50,185 4 years later........... 11,299 12,717 18,294 28,581 30,222 34,529 42,785 5 years later........... 11,702 12,154 18,063 27,392 29,610 31,614 6 years later........... 11,091 12,288 17,994 26,815 27,111 7 years later........... 11,205 12,326 17,707 25,647 8 years later........... 11,244 12,314 17,496 9 years later........... 11,222 12,271 10 years later.......... 11,189 Net Cumulative redundancy/(deficiency). (4,727) (3,648) 164 3,050 8,864 4,867 2,698 1,172 (297) (4,688) Cumulative %............ (73)% (42)% 1% 11% 25% 13% 6% 2% (1)% (8)% Paid (cumulative) as of: 1 year later............ 5,616 6,988 9,373 14,255 13,918 14,516 22,190 26,075 32,115 34,921 2 years later........... 6,734 8,424 11,676 18,265 17,497 17,832 26,374 33,952 38,884 3 years later........... 7,881 9,638 14,959 21,095 19,946 20,164 31,747 38,488 4 years later........... 8,766 11,472 15,693 21,833 21,276 24,004 34,347 5 years later........... 10,509 11,741 15,927 22,653 22,868 25,672 6 years later........... 10,732 11,920 16,606 23,480 23,281 7 years later........... 10,899 12,028 16,122 23,606 8 years later........... 10,998 12,042 16,170 9 years later........... 11,012 12,091 10 years later.......... 11,061
1992 1993 1994 1995 1996 ------ ------ ------ ------ ------ Gross Liability--End of Year.............. 51,803 58,542 69,597 78,846 94,650 Reinsurance Recoverable................... 6,320 7,184 13,293 16,426 22,265 Net Liability--End of Year................ 45,483 51,358 56,304 62,420 72,385 Gross Re-Estimated Liability-Latest....... 49,646 58,558 72,011 84,666 Re-Estimated Recoverable-Latest........... 6,861 8,373 15,410 17,558 Net Re-Estimated Liability-Latest......... 42,785 50,185 56,601 67,108 Gross Cumulative Deficiency............... 2,157 (16) (2,414) (5,820)
INVESTMENTS For information, see "Note 1 (c) and Note 2 of Notes to Consolidated Financial Statements," incorporated by reference from the Company's Annual Report to Stockholders under Item 8 herein. 7 COMPETITION The insurance and reinsurance industries are highly competitive and consist of a large number of companies, many of which have financial resources, employees, facilities and experience substantially in excess of those of the Company. MEDICAL LINES The medical lines business is highly competitive and involves a diversified field of participants from small, start-up operations to large, well- established organizations such as USBenefits. In the past few years there has been significant growth in the number of medical lines providers. Currently the Company believes that there are over 200 providers of medical stop-loss coverage, as compared to approximately 120 providers in 1990. Based on its over-15 years of experience in the medical stop-loss business, the Company believes that it is the largest single issuer of medical stop-loss coverage in the United States. However, other large and established companies offer medical lines products and services similar to those offered by USBenefits. USBenefits currently relies primarily on its long-standing relationships with independent TPAs as a source of business, as well as newer relationships with insurance agents, brokers and consultants. USBenefits must compete for its business by offering competitively priced products, providing high quality, timely services and paying commissions which are competitive. USBenefits believes that the financial strength of Continental and its A- (Excellent) rating from A.M. Best Company are positive factors in USBenefits' competitive position. PROPERTY/CASUALTY REINSURANCE Competition in the reinsurance business is based on many factors, including a reinsurer's perceived overall financial strength, premiums charged, A.M. Best Company rating, services offered, claims handling, experience in the lines of business written and the number of jurisdictions in which a reinsurer is authorized to do business. During 1996 surplus capacity in the industry caused changes in demand and rates in the various sectors of the reinsurance marketplace. Although these factors result in highly competitive market conditions, the combination of increasing surplus levels, strict underwriting standards and A (Excellent) rating from A.M. Best Company provide a strong position for USF RE to continue property/casualty growth. The reinsurance market has two basic segments: reinsurers that primarily obtain their business directly from ceding insurance companies, and those that primarily obtain business through reinsurance intermediaries. USF RE obtains the majority of its property/casualty business through reinsurance intermediaries. USF RE's competition in this field includes numerous major international and domestic insurance and reinsurance companies and underwriting syndicates. SURPLUS LINES Competition in the surplus lines area involves the same factors and considerations as with any insurance operation: the financial strength of the carrier, the premiums charged, the A.M. Best Company rating, the services offered, the timeliness of claims handling, experience in the lines of business written, relationships with brokers and the number of jurisdictions in which the carrier is authorized to do business. 8 REGULATION GENERAL Insurance and reinsurance companies are subject to primary regulation and supervision by the insurance departments of their states of domicile, as well as by agencies of other states where they are licensed or authorized to transact business. Such regulation and supervision is designed primarily to protect policyholders, not stockholders. Although the extent of such regulation varies from state to state, in general the insurance laws of states provide such supervisory agencies with broad administrative powers. These powers include the granting and revocation of licenses to transact business, the licensing of agents, the approval of policy forms and rates, the determination of reserve requirements, the monitoring of financial stability, the form and content of required financial statements, and the type and character of investments. Further, the National Association of Insurance Commissioners ("NAIC") has proposed a variety of model laws and regulations affecting insurance companies generally, including laws and regulations relating to solvency standards for all insurance companies. Certain of these model laws and regulations have been adopted by various states and others are being considered for adoption. USF RE and USFIC are required to file detailed annual financial and other reports with the appropriate insurance regulatory agency in each state in which they are admitted or authorized to do business. Their business and accounts are subject to examination by such agencies at any time, and the laws of Massachusetts and Pennsylvania and other states require periodic examination of USF RE and USFIC. USF RE was examined by the Division of Insurance of the Commonwealth of Massachusetts during 1993 for the four-year period ended December 31, 1992. USFIC was examined by the Insurance Department of the Commonwealth of Pennsylvania during 1993 for the three-year period ended December 31, 1992. The final reports of these examinations did not indicate any concerns of a material nature or which were significant to USF RE's or USFIC's surplus as regards policyholders. PROPERTY/CASUALTY Historically the property/casualty reinsurance business had not been subject to extensive regulation. However, reinsurance is now under closer scrutiny by state agencies, as evidenced by the promulgation by the NAIC of several model laws and regulations. Additionally, legislative initiatives are being considered at the federal level to regulate the solvency of insurance and reinsurance companies. Management expects this trend toward greater regulation of the insurance and reinsurance industries to continue. At this time management cannot anticipate what impact, if any, such regulation would have on the Company's operations. USFIC is required by state laws governing surplus lines to be eligible to write business as a surplus lines insurer in each state in which its products are sold. Eligibility is based on a number of considerations, including size, financial condition, experience in the insurer's state of domicile, expertise of management and plan of operations. The writing of surplus lines is constrained by laws that require that the business can be written in a state only if coverage for the risk is not available from an insurer admitted in such state. Furthermore, the business can only be written through a licensed excess and surplus lines broker. MEDICAL LINES State regulation of self-insured medical plans is preempted by the Employee Retirement Income Security Act of 1974 ("ERISA"). However, as medical stop- loss has grown in importance, states have attempted to circumvent ERISA's preemption by seeking to assert their regulatory authority over insurance companies writing medical stop-loss coverages and related service providers, such as USBenefits. The NAIC has adopted a model Managing General Agents Law, the substance of which has been enacted in 49 states and the District of Columbia. This model law requires the licensing of managing general agents that 9 perform certain functions on behalf of insurance companies, such as underwriting together with claims settlement and payment. It also imposes certain requirements with respect to the content of agreements between insurance companies and managing general agents. USBenefits is licensed or registered as a managing general agent or third party administrator in various states. It is also licensed directly, or through one or more of its employees, in 47 states as an accident and health insurance agent and in 36 states as a property/casualty insurance agent. STATE INSURANCE HOLDING COMPANY LAWS The Company, its stockholders, and its insurance company subsidiaries are subject to the Insurance Holding Company Acts of the Commonwealth of Massachusetts where USF RE is domiciled, the State of California where USF RE has been deemed to be "commercially domiciled" and the Commonwealth of Pennsylvania where USFIC is domiciled. Generally these Insurance Holding Company Acts prohibit any person from acquiring "control" of a domestic insurer, or of a company controlling a domestic insurer, without prior approval of the insurance commissioner of such insurer's state of domicile. Control is presumed to exist through ownership or the right to acquire 10% or more of the stock of the insurer; but this presumption may be rebutted. These Insurance Holding Company Acts require holding companies and their insurance subsidiaries to register and file on a regular basis reports which include information concerning their capital structure, ownership and financial condition. Certain transactions between members of the holding company group are subject to fairness and reasonableness standards, and notice of such transactions must be given to the Commissioners of Insurance of Massachusetts and Pennsylvania 30 days prior to entering into such transactions, during which time the Commissioners of these states may indicate their disapproval. Further, the California Holding Company Act requires approval of material transactions of an extraordinary type. The amount of dividends which USF RE is permitted to pay the Company is limited by the insurance laws of Massachusetts and California. USF RE must give notice to the Massachusetts and California Insurance Commissioners of all dividends and other distributions to stockholders within five business days after they are declared, and may not pay such dividends until ten business days after receipt by both Commissioners of the required notices. Following such dividends or distributions, USF RE's surplus to policyholders must be reasonable in relation to its outstanding liabilities and adequate for its financial needs. In addition, USF RE may not pay any "extraordinary" dividend or distribution until 30 days after the Massachusetts and California Insurance Commissioners have received notice of such dividend or distribution, and until both Commissioners have either (i) not disapproved such payment within such 30-day period, or (ii) approved such payment within such 30-day period. For 1997, the amount which may be paid in dividends by USF RE without prior regulatory approval is $10,988,000. The amount of dividends which USFIC may pay to USF RE is subject to similar restrictions under the laws of Pennsylvania. Since being acquired by the Company, neither USF RE nor USFIC has paid any dividends. Further, under changes adopted during the latter part of 1996, USF RE may no longer continue to be "commercially domiciled" in California as of 1997. LEGISLATIVE AND REGULATORY DEVELOPMENTS As noted in prior filings with the Securities and Exchange Commission by the Company, various Federal and state healthcare legislative and regulatory proposals which could impact the financing and delivery of healthcare have been considered. The 104th Congress enacted certain of those proposals, some of which cover self-insured medical benefit plans. Management cannot predict at this time what impact, if any, these enactments would have on the Company's medical lines business. However, based on management's review of the latest information received, management believes that these enactments will not have an adverse impact on the Company's business. Some of the statements included within this Item 1 and Management's Discussion and Analysis of Financial Condition and Results of Operations as well as in the Consolidated Financial Statements and related Notes (incorporated herein by reference from the Company's 1996 Annual Report to Stockholders under items 7 and 8 hereof, respectively) may be considered to be forward looking statements (as that term is defined in the Private Securities Litigation Reform Act of 1995), and which are subject to certain risks and uncertainties. Among those 10 factors which could cause the actual results to differ materially from those suggested by such statements are: catastrophe losses in the Company's insurance lines or a material aggregation of losses; changes in federal or state law affecting an employer's ability to self-insure; the availability of adequate retrocessional insurance coverage at appropriate prices; a downturn in the general economy; the effects of competitive market pressures within the medical stop-loss or property/casualty marketplaces; the effect of changes required by generally accepted accounting practices or statutory accounting practices; and other risks which are described from time to time in the Company's filings with the Securities and Exchange Commission. EMPLOYEES As of March 21, 1997 the Company had 183 full-time employees. No employees are represented by labor unions, and management considers its employee relations to be excellent. EXECUTIVE OFFICERS OF THE COMPANY The executive officers of the Company are:
NAME AGE POSITION ---- --- -------- David L. Cargile........ 51 Chairman, President and Chief Executive Officer Howard S. Singer........ 51 Executive Vice President-Corporate Finance and Investor Relations John T. Grush........... 48 Senior Vice President Mark Burke.............. 52 Senior Vice President, Chief Financial Officer and Treasurer Jose A. Velasco......... 42 Senior Vice President, Secretary and General Counsel Craig J. Kelbel......... 43 Senior Vice President
All executive officers have been employed by the Company for more than five years. There are no family relationships among any of the executive officers of the Company. There have been no events under bankruptcy or insolvency laws, no criminal proceedings and no judgments or injunctions material to the evaluation of the ability and integrity of any executive officer during the past five years. ITEM 2. PROPERTIES The principal executive offices of the Company and its subsidiaries are located in 40,281 square feet of leased office space at 650 Town Center Drive, Costa Mesa, California. The lease on this facility was renewed for the period from October 1, 1995 through March 31, 2007, with a five-year option to extend. Additional offices are maintained in leased premises in Chicago, Illinois; Philadelphia, Pennsylvania; Atlanta, Georgia; Tulsa, Oklahoma; Troy, Michigan and Phoenix, Arizona. ITEM 3. LEGAL PROCEEDINGS From time to time the Company is a party to legal proceedings incidental to its business, none of which individually or in the aggregate is considered by the Company to be material to its financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders, through the solicitaion of proxies or otherwise. 11 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company paid quarterly cash dividends of $.06 and $.05 per share in 1996 and 1995, respectively. In addition, material appearing under the captions "Stockholder Information" and "Stock Price Information" in the 1996 Annual Report to Stockholders of US Facilities Corporation (the "Annual Report") is hereby incorporated by this reference. On May 22, 1996, the Company sold 10,000 shares of common stock to Howard S. Singer, an officer and director of the Company, for $5.04 per share, and on September 13, 1996 sold 10,000 shares for $11.88 per share and 10,000 shares for $13.00 per share. Such shares were acquired upon exercise of stock options purchased in 1991 by a corporation controlled by Mr. Singer. These shares were issued in reliance upon the exemption from registration afforded by Section 4(2) of the Securities act of 1933, as amended. Mr. Singer executed an Investment Representation certifying that he acquired the shares for his own account, for investment purposes and not with a view to the resale thereof. ITEM 6. SELECTED FINANCIAL DATA Material appearing under the caption "Selected Financial Data" in the Company's Annual Report is hereby incorporated by this reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Material appearing under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report is hereby incorporated by this reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Material appearing under the captions "Report on Consolidated Financial Statements" and "Independent Auditors' Report" and contained in the Company's Consolidated Financial Statements and Notes thereto in the Company's Annual Report is hereby incorporated by this reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information regarding directors and executive officers of the Registrant as required by Items 401 and 405 of Regulation S-K is set forth in Part I of this Form 10-K under the caption "EXECUTIVE OFFICERS OF THE COMPANY" and under the caption "ELECTION OF DIRECTORS" in the Company's definitive Proxy Statement for the Company's 1997 Annual Meeting of Stockholders scheduled to be held on May 14, 1997, and which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 1996 (the "Proxy Statement"), and is hereby incorporated by this reference. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 402 of Regulation S-K is set forth under the caption "COMPENSATION OF EXECUTIVE OFFICERS," "COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS REPORT ON EXECUTIVE COMPENSATION," and "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION" in the Company's Proxy Statement, and is hereby incorporated by this reference. 12 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 403 of Regulation S-K is set forth under the captions "SECURITY OWNERSHIP OF MANAGEMENT" and "SECURITY OWNERSHIP OF CERTAIN OTHER STOCKHOLDERS" in the Company's Proxy Statement, and is hereby incorporated by this reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information regarding certain relationships and related transactions as required by Item 404 of Regulation S-K is set forth in the Company's Proxy Statement under the captions "COMPENSATION OF EXECUTIVE OFFICERS" and "RELATED TRANSACTIONS," and is hereby incorporated by this reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Form 10-K: (i) The following is a list of financial statements, together with reports thereon, filed as part of this Form 10-K, all of which have been incorporated herein by reference to the material in the Company's Annual Report as described under Item 8 of this Form 10-K: Report on Consolidated Financial Statements Consolidated Income Statements--Years ended December 31, 1996, 1995 and 1994 Consolidated Balance Sheets--December 31, 1996 and 1995 Consolidated Statements of Stockholders' Equity-- at December 31, 1994, 1995, and 1996 Consolidated Statements of Cash Flows--Years ended December 31, 1996, 1995 and 1994 Notes to Consolidated Financial Statements Independent Auditors' Report (ii) The following is a list of financial statement schedules filed with this Form 10-K: Index to Schedules Independent Auditors' Report Schedule I--Summary of Investments Schedule II--Condensed Financial Information of Registrant Schedule III--Supplementary Insurance Information Schedule IV--Reinsurance All other schedules to the Consolidated Financial Statements required by Article 7 of Regulation S-X are not required under the related instructions or are inapplicable and therefore have been omitted. (iii) The following is a list of exhibits required to be filed as part of this Form 10-K by Item 601 of Regulation S-K: 3.1, 4.1 Restated Certificate of Incorporation, as amended, as presently in effect. Filed as Exhibits 3.1 and 3.1.1 to the Company's Form S-1 Registration Statement declared effective by the Securities and Exchange Commission ("Commission") on October 31, 1986 (the "S-1 Registration Statement"), and incorporated herein by this reference; and as Exhibit 3 to the Company's Current Report on Form 8-K dated May 24, 1990, and incorporated herein by this reference. 3.2, 4.2 Bylaws of the Company, as amended, as presently in effect. Filed as Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994 (the "June 1994 Form 10-Q"), and incorporated herein by this reference. 4.3* Stock Certificate of the Company (complying with New York Stock Exchange requirements).
13 4.4 Rights Agreement. Filed as Exhibit 2 to the Company's Current Report on Form 8-K dated May 24, 1990, and incorporated herein by this reference. 4.5 First Amendment to Rights Agreement. Filed as Exhibit 1 to the Company's Current Report on Form 8-K dated January 16, 1992, and incorporated herein by this reference. 4.6 Second Amendment to Rights Agreement. Filed as Exhibit 10.1 to the Company's Current Report on Form 8-K dated April 29, 1994, and incorporated herein by this reference. 4.7 Third Amendment to Rights Agreement. Filed as Exhibit 4 to the Company's Current Report on Form 8-K dated September 28, 1995, and incorporated herein by this reference. 9 Not applicable. 10 Material Contracts. 10.1 Agreement of Employment between the Company and David L. Cargile dated August 4, 1994, and Amendment to Agreement of Employment dated July 21, 1995. Filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 (the "September 1994 Form 10-Q") and as Exhibit 10.4(i) to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (the "1995 Form 10-K"), respectively, and incorporated herein by this reference. 10.2* Agreement of Employment between the Company and David L. Cargile effective as of November 1, 1996. 10.3* Agreement of Employment between the Company and Howard S. Singer effective as of November 1, 1996. 10.4* Agreement of Employment between the Company and Craig J. Kelbel effective as of November 1, 1996. 10.5(i) Severance Agreement dated May 24, 1994 between the Company and Howard S. Singer. Filed as Exhibit 10.2 to the Company's June 1994 Form 10-Q, and incorporated herein by this reference. 10.5(ii) Severance Agreement dated May 24, 1994 between the Company and David L. Cargile. Filed as Exhibit 10.3 to the Company's June 1994 Form 10-Q, and incorporated herein by this reference. 10.5(iii) Severance Agreement dated May 24, 1994 between the Company and John T. Grush. Filed as Exhibit 10.4 to the Company's June 1994 Form 10-Q, and incorporated herein by this reference. 10.5(iv) Severance Agreement dated May 24, 1994 between the Company and Mark Burke. Filed as Exhibit 10.5 to the Company's June 1994 Form 10-Q, and incorporated herein by this reference. 10.5(v) Severance Agreement dated May 24, 1994 between the Company and Jose A. Velasco. Filed as Exhibit 10.6 to the Company's June 1994 Form 10-Q, and incorporated herein by this reference. 10.5(vi) Severance Agreement dated May 24, 1994 between the Company and Craig J. Kelbel. Filed as Exhibit 10.14(v) to the Company's 1995 Form 10-K, and incorporated herein by this reference. 10.5(vii)* Amendment dated December 4, 1996 to Severance Agreement between the Company and David L. Cargile. 10.5(viii)* Amendment dated December 4, 1996 to Severance Agreement between the Company and Howard S. Singer. 10.5(ix)* Amendment dated December 4, 1996 to Severance Agreement between the Company and John T. Grush. 10.5(x)* Amendment dated December 4, 1996 to Severance Agreement between the Company and Craig J. Kelbel. 10.5(xi)* Amendment dated December 4, 1996 to Severance Agreement between the Company and Mark Burke.
14 10.5(xii)* Amendment dated December 4, 1996 to Severance Agreement between the Company and Jose A. Velasco. 10.6(i) Lease Agreement dated May 28, 1985 between Center Tower Associates and US Benefits, Inc. Filed as Exhibit 10.13 to the Company's S-1 Registration Statement, and incorporated herein by this reference. 10.6(ii) First Amendment dated November 24, 1986 to Lease Agreement between Center Tower Associates and the Company as assignee of US Benefits, Inc. Filed as Exhibit 10.26 to the Company's Form S-2 Registration Statement declared effective by the Commission on December 4, 1991 ( the "S-2 Registration Statement"), and incorporated herein by this reference. 10.6(iii) Second Amendment dated July 8, 1992 to Lease Agreement between Center Tower Associates and the Company. Filed as Exhibit 10.17 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992, and incorporated herein by this reference. 10.6(iv) Third Amendment dated May 4,1993 to Lease Agreement between Center Tower Associates and the Company. Filed as Exhibit 10.18 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 ( the "1993 Form 10-K"), and incorporated herein by this reference. 10.6(v) Fourth and Fifth Amendments dated August 29, 1994 and October 1, 1995, respectively, to Lease Agreement between Center Tower Associates and the Company. Filed as Exhibit 10.18(i) to the Company's 1995 Form 10-K, and incorporated herein by this reference. 10.7(i) Management Agreement No. 1 dated October 3, 1994 (with Addenda) between The Continental Insurance Company and USBenefits Insurance Services, Inc. Filed as Exhibit 10.1 to the Company's September 1994 Form 10-Q, and incorporated herein by this reference. 10.7(ii) Additional Addenda to Management Agreement No.1 between The Continental Insurance Company and USBenefits Insurance Services, Inc. Filed as Exhibit 10.19(i) to the Company's 1995 Form 10-K and incorporated herein by this reference. 10.8(i) Quota Share Retrocession Agreement dated July 11, 1986 between The Continental Insurance Company, as successor to Harbor Insurance Company by assumption, and USF RE INSURANCE COMPANY, as amended. Filed as Exhibit 10.47 to the Company's S-2 Registration Statement, and incorporated herein by this reference. 10.8(ii) Amendment dated January 16, 1991 to Quota Share Retrocession Agreement between The Continental Insurance Company and USF RE INSURANCE COMPANY. Filed as Exhibit 10.21 to the Company's 1993 Form 10-K, and incorporated herein by this reference. 10.8(iii) Amendment dated October 3, 1994 to Quota Share Retrocession Agreement between The Continental Insurance Company and USF RE INSURANCE COMPANY. Filed as Exhibit 10.21(i) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994, and incorporated herein by this reference. 10.9(i) Credit Agreement dated as of December 20, 1994 between the Company and Fleet National Bank of Connecticut (formerly known as Shawmut Bank Connecticut, N.A.), including Revolving Note and Pledge Agreement. Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995, and incorporated herein by this reference. 10.9(ii) First and Second Amendments to the Credit Agreement between the Company and Fleet National Bank of Connecticut. Filed as Exhibit 10.1 to the Company's Quarterly Reports on Form 10-Q for the quarters ended March 31, 1996 and September 30, 1996, respectively, and incorporated herein by this reference. 10.10(i) US Facilities Corporation Amended 1988 Employee Stock Option Plan. Filed as Appendix 3 to the Company's Preliminary Proxy Statement for the May 14, 1997 Annual Meeting of Stockholders, which was filed with the Commission on March 11, 1997, and incorporated herein by this reference.
15 10.11 US Facilities Corporation Amended and Restated 1991 Employee Stock Option Plan. Filed as Appendix 2 to the Company's Preliminary Proxy Statement for the May 14, 1997 Annual Meeting of Stockholders, which was filed with the Commission on March 11, 1997, and incorporated herein by this reference. 10.12 Form of Stock Option Agreement under the US Facilities Corporation Amended and Restated 1991 Employee Stock Option Plan. Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 (the "June 1996 Form 10-Q"), and incorporated herein by this reference 10.20(i) US Facilities Corporation 1988 Directors Stock Option Plan. Filed as Exhibit B to the Company's Proxy Statement for the May 25, 1988 Annual Meeting of Stockholders, and incorporated herein by this reference. 10.20(ii) US Facilities Corporation 1991 Directors Stock Option Plan Amended and Restated. Filed as Exhibit B to the Company's Proxy Statement for the May 22, 1996 Annual Meeting of Stockholders, and incorporated herein by this reference. 10.20(iii) Form of Stock Option Agreement under the US Facilities Corporation 1991 Directors Stock Option Plan Amended and Restated. Filed as Exhibit 10.2 to the Company's June 1996 Form 10-Q, and incorporated herein by this reference 10.21 US Facilities Corporation Amended Incentive Compensation Program. Filed as Exhibit 10.26 to the Company's 1995 Form 10-K, and incorporated herein by this reference. 10.22 US Facilities Corporation 1997 Long-Term Incentive-Performance Unit Plan, including form of Plan Agreement. Filed as Appendix 1 to the Company's Preliminary Proxy Statement for the May 14, 1997 Annual Meeting of Stockholders, which was filed with the Commission on March 11, 1997, and incorporated herein by this reference. 10.23* US Facilities Corporation Non-Qualified Deferred Compensation Plan, including form of Plan Agreement. 11* The US Facilities Corporation and Subsidiaries Computation of Earnings Per Share. 12 Not applicable. 13* US Facilities Corporation 1996 Annual Report to Stockholders (filed with the Commission only to the extent it is specifically incorporated by reference in this Form 10-K). 18 Not applicable. 19 Not applicable. 21* Subsidiaries of US Facilities Corporation. 22 Not applicable. 23* Independent Auditors' Consent dated March 26, 1997. 24 Not applicable. 27* Financial Data Schedules
(b) Reports on Form 8-K: No reports on Form 8-K were filed during the fourth quarter of the year ended December 31, 1996. - -------- * Describes a document filed with the Annual Report on Form 10-K for the year ended December 31, 1996. 16 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 28, 1997 US FACILITIES CORPORATION By /s/ DAVID L. CARGILE ------------------------------ David L. Cargile Chairman of the Board Chief Executive Officer and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ MARK BURKE - ---------------------------------------- Mark Burke Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) March 26, 1997 /s/ DAVID L. CARGILE - ---------------------------------------- David L. Cargile Chairman of the Board, Chief Executive Officer and President (Principal Executive Officer) March 26, 1997 /s/ JOHN F. KOOKEN - ---------------------------------------- John F. Kooken Director March 26, 1997 /s/ L. STEVEN MEDGYESY - ---------------------------------------- L. Steven Medgyesy Director March 26, 1997 /s/ BERNARD H. ROSS - ---------------------------------------- Bernard H. Ross Director March 26, 1997 /s/ CHARLES L. SCHULTZ - ---------------------------------------- Charles L. Schultz Director March 26, 1997 /s/ HOWARD S. SINGER - ---------------------------------------- Howard S. Singer Director and Executive Vice President-Corporate Finance and Investor Relations March 26, 1997 /s/ KENNETH C. TYLER - ---------------------------------------- Kenneth C. Tyler Director March 26, 1997
17 INDEX TO SCHEDULES Independent Auditors' Report Summary of Investments........................................... Schedule I Condensed Financial Information of Registrant.................... Schedule II Supplementary Insurance Information.............................. Schedule III Reinsurance...................................................... Schedule IV
18 INDEPENDENT AUDITORS' REPORT Under date of February 4, 1997, we reported on the consolidated balance sheets of US Facilities Corporation and Subsidiaries as of December 31, 1996 and 1995, and the related consolidated income statements, statements of stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996 as contained in the 1996 Annual Report to Stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 1996. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedules as listed in the accompanying index. These consolidated financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statement schedules based on our audits. In our opinion, such schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. /s/KPMG PEAT MARWICK LLP Los Angeles, California February 4, 1997 19 US FACILITIES CORPORATION AND SUBSIDIARIES SCHEDULE I-SUMMARY OF INVESTMENTS DECEMBER 31, 1996
AMOUNT AT WHICH SHOWN ON BALANCE COST(1) VALUE(1) SHEET(1) --------- -------- ------------ (DOLLARS IN THOUSANDS) Fixed maturities: Bonds: United States Government agencies and author- ities....................................... $ 13,265 $ 13,421 $ 13,421 States, municipalities and political subdivi- sions....................................... 89,996 93,265 93,265 Foreign governments.......................... 529 554 554 All other corporate bonds.................... 46,884 48,240 48,240 --------- -------- -------- Total fixed maturities...................... 150,674 155,480 155,480 Equity securities: Preferred stocks: Industrial and miscellaneous................ 250 256 256 Common stocks: Industrial and miscellaneous................ 16,046 20,114 20,114 --------- -------- -------- Total....................................... 16,296 20,370 20,370 Other invested assets......................... 863 863 863 Short-term investments........................ 17,639 17,639 17,639 --------- -------- -------- Total investments............................. $185,472 $194,352 $194,352 ========= ======== ========
(1) Cost represents the amortized cost of investments to the Company. Value represents current market value. Amount at which investments are shown on the balance sheet represents current market value as required by SFAS No. 115. 20 US FACILITIES CORPORATION AND SUBSIDIARIES SCHEDULE II-CONDENSED INCOME STATEMENTS US FACILITIES CORPORATION (PARENT COMPANY ONLY)
YEAR ENDED DECEMBER 31, 1996 1995 1994 ------- ------- ------ (DOLLARS IN THOUSANDS) Revenues: Dividends from subsidiaries......................... $ 4,000 $ 6,000 $2,500 Other............................................... 58 49 13 ------- ------- ------ Total revenues..................................... 4,058 6,049 2,513 Operating expenses: Other general and administrative.................... 896 1,723 648 Restructuring....................................... -- -- 654 Interest............................................ 2,610 2,259 48 ------- ------- ------ Total operating expenses........................... 3,506 3,982 1,350 Other expenses: Unusual charges related to unsolicited takeover proposal........................................... -- -- 2,029 ------- ------- ------ Income (loss) before income taxes.................... 552 2,067 (866) Income tax benefits................................. (1,652) (2,324) (1,008) ------- ------- ------ Income before equity in earnings of subsidiaries..... 2,204 4,391 142 Equity in earnings of subsidiaries.................. 12,816 9,463 6,096 ------- ------- ------ Net income........................................... $15,020 $13,854 $6,238 ======= ======= ======
21 US FACILITIES CORPORATION AND SUBSIDIARIES SCHEDULE II-CONDENSED BALANCE SHEETS US FACILITIES CORPORATION (PARENT COMPANY ONLY) ASSETS
DECEMBER 31, 1996 ----------------- 1996 1995 -------- -------- (DOLLARS IN THOUSANDS) Cash......................................................... $ 641 $ 815 Investment in and due from affiliates........................ 134,838 122,049 Other assets................................................. 3,889 2,425 -------- -------- Total assets................................................. $139,368 $125,289 ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY Note payabable.............................................. $ 35,000 $ 35,000 Accounts payable and accrued expenses....................... 2,004 2,228 -------- -------- Total liabilities........................................... 37,004 37,228 Stockholders' equity: Common stock................................................ 61 61 Paid-in capital............................................. 45,503 44,489 Net unrealized investment gain.............................. 5,860 7,211 Retained earnings........................................... 52,883 39,273 -------- -------- 104,307 91,034 Less treasury stock, at cost................................ (1,943) (2,973) -------- -------- Total stockholders' equity.................................. 102,364 88,061 -------- -------- Total liabilities and stockholders' equity.................. $139,368 $125,289 ======== ========
22 US FACILITIES CORPORATION AND SUBSIDIARIES US FACILITIES CORPORATION (PARENT COMPANY ONLY) SCHEDULE II-CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, -------------------------- 1996 1995 1994 ------- ------- -------- (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income........................................ $15,020 $13,854 $ 6,238 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Increase (decrease) in accounts payable and accrued expenses................................ (224) (359) 666 Increase in other assets......................... (1,464) (690) (406) Equity in income of and change in due from affiliates...................................... (14,140) (15,310) (5,602) ------- ------- -------- Net cash provided by (used in) operating activities........................................ (808) (2,505) 896 ------- ------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from note payable....................... -- 10,000 25,000 Proceeds from issuance of common stock........... 2,044 2,405 1,588 Dividends Paid................................... (1,410) (1,125) -- Purchase of 498,000 shares of treasury stock..... -- -- (5,000) ------- ------- -------- Net cash provided by financing activities....... 634 11,280 21,588 CASH FLOWS FROM INVESTING ACTIVITIES: Increase in investment in affiliates.............. -- (10,500) (20,000) ------- ------- -------- Net (decrease) increase in cash................... (174) (1,725) 2,484 Cash at beginning of year......................... 815 2,540 56 ------- ------- -------- Cash at end of year............................... $ 641 $ 815 $ 2,540 ======= ======= ======== Supplemental Disclosures of Cash Flow Information: Cash paid during the year for: Interest.......................................... $ 2,498 $ 2,187 $ 19 Income taxes...................................... $ 4,771 $ 5,217 $1,350
23 US FACILITIES CORPORATION AND SUBSIDIARIES SCHEDULE III-SUPPLEMENTARY INSURANCE INFORMATION
FUTURE POLICY BENEFITS, AMORTIZATION DEFERRED BENEFITS, CLAIMS, OF DEFERRED POLICY LOSSES, NET LOSSES AND POLICY OTHER NET ACQUISITION CLAIMS AND UNEARNED PREMIUM INVESTMENT SETTLEMENT ACQUISITION OPERATING PREMIUMS COSTS LOSS EXPENSES PREMIUMS REVENUE INCOME EXPENSES COSTS EXPENSES WRITTEN SEGMENT ----------- ------------- ----------- ----------- ---------- ---------- ------------ --------- -------- (DOLLARS IN THOUSANDS) 1996 Medical lines..... $ -- 17,400 -- 84,179 3,312 58,095 28,526 10,111 84,179 Property/casualty. 3,644 77,250 22,936 39,945 6,777 30,078 8,653 3,988 43,799 ------- ------ ---------- ----------- ------ ------ ------ ------ ------- Total............. $ 3,644 94,650 22,936 124,124 10,089 88,173 37,179 14,099 127,978 ======= ====== ========== =========== ====== ====== ====== ====== ======= 1995 Medical lines..... $ -- 17,947 -- 81,546 3,269 54,563 27,069 12,025 81,546 Property/casualty. 2,830 60,947 17,705 33,425 5,872 23,180 8,895 3,304 35,350 ------- ------ ---------- ----------- ------ ------ ------ ------ ------- Total............. $ 2,830 78,894 17,705 114,971 9,141 77,743 35,964 15,329 116,896 ======= ====== ========== =========== ====== ====== ====== ====== ======= 1994 Medical lines..... $ -- 18,113 -- 72,517 2,273 48,356 23,647 13,772 72,517 Property/casualty. 3,047 51,534 14,613 20,752 3,677 16,010 7,694 2,499 23,865 ------- ------ ---------- ----------- ------ ------ ------ ------ ------- Total............. $ 3,047 69,647 14,613 93,269 5,950 64,366 31,341 16,271 96,382 ======= ====== ========== =========== ====== ====== ====== ====== =======
24 US FACILITIES CORPORATION AND SUBSIDIARIES SCHEDULE IV-REINSURANCE USF RE INSURANCE COMPANY AND SUBSIDIARY (WHOLLY-OWNED SUBSIDIARIES OF US FACILITIES CORPORATION)
INSURANCE PREMIUMS EARNED 1996 1995 1994 - ------------------------- -------- ------- ------ (DOLLARS IN THOUSANDS) Gross amount (direct)................................ $10,279 $12,218 $9,386 Ceded to other companies............................. 20,869 14,398 10,690 Assumed from other companies......................... 134,714 117,151 94,573 Net amount........................................... 124,124 114,971 93,269 Percentage of amount assumed to net.................. 108.5% 101.9% 101.4%
25 EX-4.3 2 STOCK CERTIFICATE EXHIBIT 4.3 COMMON STOCK PAR VALUE $.01 [VINGETTE WITH HUMAN FIGURE] NUMBER SHARES [LOGO US FACILITIES CORPORATION] INCORPORATED UNDER THE LAWS OF THE CUSIP 911822 10 4 STATE OF DELAWARE SEE REVERSE FOR CERTAIN DEFINITIONS This Certifies that [STOCKHOLDER NAME] SPECIMEN is the owner of FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF US Facilities Corporation (hereinafter called the "Corporation"), transferable only on the books of the Corporation upon the surrender of this certificate properly endorsed. This certificate is not valid unless countersigned and registered by the Transfer Agent and Registrar. Witness the facsimile and of the Corporation and the facsimile signatures of its duly authorized officers. Dated: /s/ JOSE A. VELASCO [SEAL of US FACILITIES CORPORATION] /s/ DAVID L. CARGILE Secretary Chairman of the Board TRANSFERABLE IN THE CITY OF NEW YORK, NEW YORK COUNTERSIGNED AND REGISTERED: AMERICAN STOCK TRANSFER & TRUST COMPANY TRANSFER AGENT AND REGISTRAR BY AUTHORIZED SIGNATURE US FACILITIES CORPORATION THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO REQUESTS, THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS. ANY SUCH REQUEST MAY BE MADE TO THE EXECUTIVE OFFICE OF THE CORPORATION. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations:
TEN COM - as tenants in common UNIF TRAN MIN ACT -____________Custodian______________ (Cust) (Minor) TEN ENT - as tenants by the entireties under Uniform Transfers to Minors Act JT TEN - as joint tenants with right ----------------------------------- of survivorship and not as (State) tenants in common UNIF GIFT MIN ACT -_____________Custodian_____________ (Cust) (Minor) under Uniform Gifts to Minors Act ___________________________________ (State)
Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED,__________________________hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE ______________________________________________________________________________ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE) ______________________________________________________________________________ ______________________________________________________________________________ ________________________________________________________________________Shares of the common capital stock represented by the within Certificate, and do hereby irrevocably constitute and appoint____________________________________________ ______________________________________________________________________Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated:____________________________________ _____________________________________ NOTICE: The signature to this assignment must correspond with the name as written upon the face of this certificate in every particular, with- out alteration or enlargement or any change whatever. SIGNATURE(S) GUARANTEED: By_______________________________________ THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (Banks, Stockbrokers, Savings and Loan Associations and Credit Unions) WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM PURSUANT TO S.E.C. RULE 17Ad-15. EX-10.2 3 AGREEMENT - COMPANY & DAVID CARGILE EXHIBIT 10.2 Agreement of Employment Between David L. Cargile And US Facilities Corporation --------------- This Agreement is made at Costa Mesa, California, and shall be effective as of the 1st day of November, 1996, between US Facilities Corporation, a Delaware corporation (the "Company"), and David L. Cargile (the "Executive"). In consideration of the respective promises and mutual covenants and agreements of the parties which are set forth herein, and intending to be legally bound thereby, the parties hereby agree as set forth below. Section 1. Employment The Company hereby agrees to employ the Executive and the Executive hereby agrees to be employed by and to serve the Company on the terms and conditions as set forth in this Agreement. Section 2. Period of Employment This Agreement will commence and be effective as of November 1, 1996, and shall expire and terminate as of October 31, 2000. Section 3. Position and Duties The Executive shall serve the Company as its President and Chief Executive Officer, with all the duties, responsibilities, authority, rights and privileges which normally attach to those offices, and with such powers that are consistent with such positions, including full responsibility for the day-to-day management of the Company's business operations; and shall have such additional duties, powers, responsibilities and authority as may be delegated or assigned to Executive from time to time by the Company's Board of Directors. Section 4. Devotion of Time and Best Efforts Executive agrees that during the period of his employment he will devote the substantial portion of his working and productive time, attention, energies, abilities, skill and efforts to the business affairs of the Company; and he will diligently exert his best efforts to the promotion, development and best interest of the Company and its affiliates (including all subsidiaries), and -1- will faithfully and diligently perform all of the duties incident to his positions. It is recognized by the Company that Executive, during his employment period, may have certain personal business activities and enterprises, and the Company accepts that a relatively minor portion of any given business day may be spent by Executive attending to such personal business affairs. The Company acknowledges that such activities will not interfere with the performance of Executive's duties under this Agreement; and Executive agrees that he will spend such time in the daily performance of his duties under this Agreement as an executive in the same industry with similar positions and responsibilities would spend on behalf of his employer; provided, however, during the term of his employment Executive, as hereinafter set forth, will not, directly or indirectly, promote, participate or engage in any activities, whether as a partner, employee, creditor, shareholder or otherwise, in any business which shall in any way be competitive or constitute a conflict of interest with the Company's business. Section 5. Place of Performance Executive's duties and responsibilities shall be performed primarily at the Company's corporate headquarters in Costa Mesa, California, except for such travel as may be required to be undertaken on behalf of the Company's business. The Company may not relocate the Executive for purposes of his employment under this Agreement without the express agreement by the Executive to such relocation. Section 6. Compensation Payable to Executive 6.01 Salary Payments: In consideration of Executive's services, the Company shall pay to the Executive a salary at the rate of not less than Four Hundred Twenty Thousand Dollars ($420,000) per annum, in equal installments as nearly as practicable, on the fifteenth (15th) and the last day of each month in arrears, or otherwise in conformity with the Company's prevailing payroll practices and policies which are in effect from time to time. At least once each year, at some date prior to each anniversary date of this Agreement, the Board of Directors shall review the annual salary being paid to Executive which is then in effect under this Agreement, and determine whether any increase thereto may be appropriate. The amount of annual salary being paid to the Executive by the Company may be adjusted upward as hereinabove provided, and such adjustment shall not require a written amendment to this Agreement, nor shall such upward salary adjustment affect any other provisions of this Agreement, which shall remain in effect -2- unless changed by a written amendment hereto; provided, further, that any reference in this Agreement to amounts payable to Executive pursuant to this Section 6.01 shall refer to the annual salary payable to Executive as then in effect, whether or not adjusted pursuant to a written amendment to this Agreement. It is specifically agreed to that Executive's salary shall not be decreased at any time during the term of this Agreement. Compensation of the Executive by salary payments shall not be deemed to be exclusive, and shall not prevent Executive from participating in other bonus, compensation, incentive or benefit plans of the Company. The salary payments hereunder shall not in any way limit or reduce any other obligation of the Company under this Agreement. 6.02 Discretionary Bonus Payments: In addition to the amount of salary payment set forth in Section 6.01 above and Executive's participation in Company benefit plans as provided for in Section 7.01 below, the Executive may be paid a bonus in such amount as the Board of Directors deems to be appropriate. Any bonus due to the Executive under this Section 6.02 will be payable to the Executive by the Company within thirty (30) days following the declaration thereof by the Company's Board of Directors, unless the Company and the Executive mutually agree otherwise. Section 7. Additional Benefits 7.01 General: During the period of his employment, Executive shall be entitled to receive all other benefits of employment generally available to the Company's senior executive officers, and shall have the same rights and privileges to participate in any employee benefits as any other employee of the Company. Specifically, nothing contained in this Agreement is intended to or shall be deemed to be granted to Executive in lieu of whatever rights and privileges which Executive may be entitled to receive as a regular employee and as the senior executive officer of the Company. Such general employment benefits include but are not limited to the Company's group medical, hospital, life and disability insurance plans, the Company's pension, retirement, stock option and salary incentive plans, the Company's long-term and short-term bonus and incentive plans, as well as other forms of compensation arrangements which may now be in effect or which may hereafter be adopted by the Company during the period of Executive's employment. In addition, Executive shall be entitled to an annual paid vacation and to such amount of paid sick leave in accordance with the Company's policies on these matters -3- for senior executives, so that Executive's normal salary then in effect shall continue to be paid to him during such vacation and sick leave periods. 7.02 Company Automobile: During the period of Executive's employment, the Company shall furnish an automobile to Executive of a type and model to be selected by Executive for his use in connection with the Company's business, the full price or the monthly rental or other expense of which shall be paid for by the Company. The Company shall provide insurance coverage with respect to said automobile, as well as costs for its operation and maintenance. Executive agrees that he will be responsible for any federal or state income taxes that may be incurred by Executive to the extent applicable which result from Executive's use of such automobile, as reflected on Executive's W-2 Form from the Company. 7.03 Expense Reimbursement: The Company agrees that during the period of employment described in this Agreement, Executive is authorized to incur ordinary and necessary expenses in connection with the promotion, operation and furtherance of the business affairs of the Company, including expenses incurred for purposes of entertainment, professional memberships, dues and subscriptions, travel, as well as educational/professional meetings as shall, in Executive's judgment, be required for the effective and efficient performance of the Executive's duties. In accordance with normal Company policy, Executive shall also be permitted to use credit cards issued in the Company's name for such business expenses and to take an advance monetary allowance prior to any such expenditure. However, any business expenditures and expenses which are paid in the first instance by the Executive shall be reimbursed to the Executive by the Company upon presentation by the Executive to the Company, not less often than monthly, of an itemized account of such expenditures, together with receipts and vouchers. At Executive's option, all travel by Executive for Company purposes shall be of such class and all hotels shall be of such quality in compliance with the Company's policy on this matter for its senior executives. 7.04 Club Membership: During the period of Executive's employment, the Company shall provide for Executive's membership in various clubs, the selection of which shall be subject to approval by the Board of Directors, through the payment of the monthly and annual dues as well as the initial membership fee required for such membership. In addition, the -4- Executive shall have the right to incur monthly charges, and the Company will pay such monthly charges for entertainment at the said clubs when such entertainment is for and on behalf of the Company. 7.05 Indemnification: (a) Maximum Permitted Plus Insurance: The Company shall, to the maximum extent permitted by law, indemnify and hold Executive harmless against expenses, including reasonable attorneys' fees, judgments, fines, settlements and other amounts actually incurred in connection with any proceeding arising by reason of Executive's employment by the Company. The Company shall advance to Executive any expenses incurred in defending such proceeding, to the maximum extent permitted by law. In addition, the Company shall make every reasonable effort to secure and maintain directors and officers liability insurance on behalf of the Executive against any liability asserted against or incurred by Executive arising out of his employment by the Company. Such insurance shall not discharge the Company from its obligation to provide the Executive with the maximum indemnification permitted by law. (b) No Decrease and Continuing Effect: The Company agrees that the rights, benefits and the protections now afforded to officers and directors of the Company, whether through the Company's Certificate of Incorporation or its Bylaws, or by resolutions of its Board of Directors, operation of law or by any other source (i) shall not be diminished (but may be expanded) during the Executive's term of employment under this Agreement; and (ii) shall be continued to be kept in full force and effect after the Executive's employment has terminated for such additional period of time as may be necessary until any cause of action for which indemnification would otherwise be available is barred by the applicable statute of limitations. 7.06 Estate Planning Reimbursement: Recognizing the importance to the Company of Executive's peace of mind, so that Executive's major efforts will be more directly focused toward those business affairs of the Company which require his attention, the Company agrees that during the term of employment described in this Agreement it will reimburse to the Executive any and all costs or expenses, of whatever nature, incurred by Executive, including professional fees of attorneys, accountants and banking or similar institutions, which arise from or in connection with Executive's estate planning and the estate planning of his immediate family -5- members. For purposes of such reimbursement, estate planning shall include, but not be limited to, the establishment of inter vivos or testamentary trusts, the preparation of a Last Will and Testament, or similar testamentary arrangements, and any and all other documents required in connection with the above. The amount to be reimbursed to Executive under this Section 7.06 for estate planning expenses shall be subject to approval by the Board of Directors of the Company only if such amount exceeds $22,500.00 over a four (4) year period. 7.07 Relocation and Loan Arrangements. (a) Pursuant to the July 21, 1995 amendment to the prior (August 4, 1994) Employment Agreement between the Company and Executive, which amendment relates to Executive's agreement to relocate at the request of the Company his family from Atlanta, Georgia, to the Southern California (Orange County) area, the Company provided a loan (the "Loan") to Executive as partial financing for the purchase by Executive of a new residence in Orange County, which Loan is secured by a trust deed on Executive's Orange County residence. (See Exhibit A attached hereto.) (b) The Loan is a non-transferable loan with a fixed monthly payment thereon for the first five years which equals the monthly principal and interest payments of the mortgage loan on Executive's former Atlanta residence. All Loan payments are being applied to interest during the first five years. Following the expiration of such five-year period, or at such time as the unpaid principal balance shall be reduced below the former balance of Executive's former Atlanta mortgage loan, the Loan shall be converted to a fully amortizing 15-year loan at a fixed interest rate equal to the lower of either (i) the fixed rate on Executive's former Atlanta mortgage loan, or (ii) the lowest rate paid by the Company for funds which the Company is then borrowing. The Loan shall become due upon the earlier sale of the Orange County residence by Executive or one year after the termination of Executive's employment with the Company for any reason. Executive hereby certifies to the Company that Executive reasonably expects to be entitled to and will itemize deductions for federal income tax purposes for each year that the Loan is outstanding. (c) At the end of each calendar month or portion thereof during which Executive is employed by the Company (to a maximum of sixty (60) months) following the closing date -6- of the acquisition of his Orange County residence, Executive shall receive a credit of $6,920 on the unpaid principal balance of the Loan. In addition, should Executive die or become disabled (as defined in Section 8.02 of this Agreement) while employed by the Company or should Executive be terminated by the Company, he or his heirs shall be entitled at such time to the maximum sixty (60) month credit on the unpaid principal balance of the Loan, notwithstanding that his actual employment period was less. (d) While the Loan is outstanding and Executive is employed by the Company, the Company agrees to provide monthly to Executive as additional compensation an amount equal to the additional state income taxes, net of any federal tax benefit, that are incurred by Executive as a result of the taxation of his income during the year (or a pro rata portion of such income if Executive is not employed by the Company for the whole year) as a California resident as contrasted with the taxation of such income as a Georgia resident. Furthermore, the Company agrees to provide to Executive as additional compensation an amount equal to the additional federal and state income taxes incurred by Executive due to the applicable credits as described above against the unpaid Loan balance. Such additional amount as set forth in this Section 7.07(d) shall be "grossed- up" to reflect the additional federal and state tax impact of such additional compensation and of any imputed income resulting from the interest rate on the Loan and the Company's payment of Executive's moving expenses. Section 8. Death or Disability 8.01 Payment: In the event of the death or disability (as hereinafter defined) of Executive during the period of Executive's employment, the Company will pay to the Executive, or to the Executive's estate, or to any other person whom the Executive shall have designated by written notice to the Company for that purpose, a sum equal to the amount of compensation or other payments remaining due to Executive under Section 6 for the remainder of the full term of this Agreement as set forth in Section 2 hereof, and any amount due to Executive under Section 7 of this Agreement; provided, however, that there shall be a minimum payment under this Section 8.01 equal to one (1) year's salary in the event that death or disability of Executive occurs when Executive has less than a one (1) year period remaining until the expiration of the term of this Agreement, as set forth in Section 2 hereof. Any amounts payable hereunder shall be made in accordance with the Company's normal payroll policies and procedures. -7- 8.02 Definition of "Disability": The term "disability" in this Agreement for purposes of this section shall mean the inability of the Executive to perform the normal functions, duties and responsibilities as required for his position under this Agreement due to his incapacity, whether such incapacity arises from physical or mental illness or injury. In order to determine any issue relating to the question of disability, the Company shall have the right to require that Executive submit to a medical examination by a licensed physician who shall be mutually agreed upon and selected by the Executive and the Company. The Company shall also have the right to carry disability insurance on the Executive to provide for its obligations under this Section 8. Section 9. Termination 9.01 Termination for Cause: (a) Definition of Cause: At any time during the period covered by this Agreement the Company may terminate the Executive from his employment under this Agreement for cause. The term "cause" in this Agreement for purposes of termination shall include, but not be limited to: (i) the commission by Executive of any act of fraud or material dishonesty with respect to the financial or monetary aspects of the business, as determined by an independent national accounting firm selected by mutual agreement of the Company and Executive; or (ii) a final conviction of a felony involving moral turpitude in either a state or federal court proceeding; or (iii) the intentional and willful breach of the terms of this Agreement, including the failure of Executive to diligently and faithfully perform his duties under this Agreement or as instructed by the Board of Directors of the Company, after reasonable notice to and discussion with Executive; or (iv) intentionally acting in a manner or intentionally engaging in activities which place Executive in a direct or indirect conflicting position with the interests of the Company and which could have a material adverse effect on the Company, after reasonable notice to and discussion with Executive. (b) Payment When Terminated For Cause: In the event of termination of Executive for cause, the Company will pay to the Executive the accrued but unpaid salary compensation due to Executive under Section 6.01, the unpaid reimbursement expenses due to Executive under Section 7.03 and the accrued vacation days due to Executive under Section 7.01 of this Agreement to the date of such termination. Such payment shall be made to Executive either in single lump sum or as is mutually agreed upon between Executive and the Company. -8- 9.02 Involuntary Termination (Without Cause): (a) Payment: During the period of Executive's employment, the Company shall have the right to terminate the Executive involuntarily and without any cause or any reason by paying to the Executive one hundred fifty percent (150%) of all amounts which would be due and payable to the Executive pursuant to the compensation provisions set forth in Section 6.01 of this Agreement for the remainder of the term as set forth in Section 2 of this Agreement. In addition to the salary provisions of Section 6.01, such payment shall include any amounts due to Executive under the provisions of Section 7 hereof, such as amounts due for expense reimbursement or for accrued vacation time. Any and all monetary amounts payable to the Executive under this Section 9 shall be paid in the manner selected by the Executive, at his sole discretion. (b) Transfer of Automobile: In the event of termination under this Section 9.02, the automobile then being used by Executive shall be transferred to him (the title to which automobile shall be free and clear of all liens) at no cost to Executive. 9.03 Piggyback Registration Rights: (a) General: In the event that the Company exercises its right of involuntary termination of Executive as set forth in Section 9.02 hereof, the Executive shall have the following registration rights. Subject to Subsection (b) below, if at any time and from time to time until Executive no longer owns shares of the Company's Common Stock, the Company proposes to register any of its securities under the Securities Act of 1933, as amended (the "Securities Act"), in connection with the public offering of its securities solely for cash on a form that would also permit the registration of the shares of the Company's Common Stock owned by Executive, the Company shall, on the first occasion after it exercises its right of involuntary termination of Executive, promptly give Executive written notice of its determination to register its securities. Upon the written request of Executive given within thirty (30) days after receipt by Executive of such notice from the Company, the Company shall use its best efforts to cause to be registered under the Securities Act as a part of the Company's registration statement all of the Common Stock of Executive that Executive has requested be registered by the Company. In addition, the Company further agrees to do the following: -9- (i) Furnish to the Executive such copies of each preliminary and final prospectus and other documents as may be necessary or reasonably requested by Executive to facilitate the public offering of Executive's Common Stock; (ii) Use its best efforts to register or qualify Executive's Common Stock covered by said registration statement under applicable securities or "Blue Sky" laws of such jurisdictions as Executive may reasonably request; (iii) Furnish to the Executive an appropriate opinion of counsel for the Company and a "comfort" letter signed by the Company's independent accountant who examined and reported on the Company's financial statements included in the registration statement; (iv) Permit Executive or his counsel to inspect and copy such corporate records and documents as may be requested by them; (v) Furnish to Executive or his counsel any and all correspondence relating to the public offering, whether dealing with the Securities and Exchange Commission, state securities commissions or the National Association of Securities Dealers; (vi) Pay all costs and expenses of the said registration statement described in this Section 9.03, whether printing, legal, accounting, state and federal regulatory filing fees, as well as Executive's attorneys' fees, but not any portion of the underwriter's commissions or discount attributable to Executive's Common Stock being sold under said registration statement; and (vii) Promptly notify the Executive in the event that any prospectus included in the said registration statement described in this Section 9.03 includes a misstatement of a material fact or omits to state any material fact required to be stated therein, or necessary in order to make the statements therein not misleading in the light of the circumstances then existing. (b) Restrictions on Registration: In connection with any registration rights offered to Executive under this Section 9.03, the Company shall not be required to include any of Executive's Common Stock in such registration statement unless Executive accepts the terms -10- of the underwriting as agreed to by the Company and the underwriters who are selected by the Company to distribute the Company's securities. Further, if the total amount of securities to be included in such offering exceeds the amount of securities that the underwriter reasonably believes to be compatible with the success of the Company's underwriting, the Company shall only be required to include in the registration statement so many of the shares of the Executive's Common Stock as the underwriters' reasonably believe will not jeopardize the success of the Company's offering; provided, however, that the shares owned by selling shareholders which are included in the registration statement shall be a number apportioned pro rata among all selling shareholders who have similar registration rights, with respect to the number of shares requested by each to be included in such registration statement. (c) Indemnification of Executive: In connection with the registration rights granted to Executive under this Section 9.03, and to the extent permitted by law, the Company will indemnify and hold Executive harmless against any losses, claims, damages or liabilities, including attorneys' fees, judgments, fines, settlements and other amounts actually incurred, to or for which Executive may become subject under the Securities Act arising out of any untrue or alleged untrue statements of material facts contained in the registration statement or which arise from or are based upon the omission or alleged omission to state therein any material fact required to be stated therein, or necessary to make the statements therein not misleading, to the extent that such untrue statements or alleged untrue statements or omission or alleged omission made in such registration statement were made in reliance upon and in conformity with written information furnished by the Company especially for use in connection with such registration statement. (d) Indemnification of the Company: In connection with the registration rights granted to Executive under this Section 9.03, and to the extent permitted by law, the Executive will indemnify and hold the Company harmless against any losses, claims, damages or liabilities to which the Company may become subject under the Securities Act arising out of any untrue or alleged untrue statements of material facts contained in the registration statement or which arise from or are based upon the omission or alleged omission to state therein any material fact required to be stated therein, or necessary to make the statements therein not misleading, to the -11- extent that such untrue statements or alleged untrue statements or omission or alleged omission made in such registration statement were made in reliance upon and in conformity with written information furnished by the Executive to the Company especially for use in connection with such registration statement. Section 10. Covenant of Non-Competition Executive agrees that for the period commencing from the date of his employment under this Agreement and continuing for the full period of such employment, he shall not directly or indirectly be involved in, or shall have an interest in, any person, firm, corporation or business, whether as an employee, officer, director, agent, shareholder or otherwise (except as a minority shareholder of a publicly held corporation) that is engaged in any business in which the Company is engaged or which places Executive in a position which may constitute a conflict between the interests of the Executive and the interests of the Company during the period of his employment under this Agreement; provided, however, the prohibitions and restrictions set forth in this section shall not apply to or in any way limit a relationship, involvement or interest in any firm, corporation or business which in the ordinary course of its business activities does not have more than ten percent (10%) of its annual gross income derived from the business activities in which the Company is engaged during the period of Executive's employment under this Agreement. Section 11. Settlement of Disputes (a) Any controversy or dispute between the parties to this Agreement involving the construction, interpretation, application or performance of the terms, covenants or conditions of this Agreement or in any way arising under this Agreement shall, on demand of one of the parties by written notice hereto served on the other in the manner prescribed in Section 16 hereof, be determined pursuant to the general reference provisions of California Code of Civil Procedure ("CCP") ss.638(1), et seq., by a retired or former judge of the Superior Court for the County of Orange, State of California. The parties intend this general reference provision to be specifically enforceable in accordance with said ss.638(1). (b) The reference may be commenced by any party hereto by the filing in the Superior Court of the State of California for the County of Orange of a petition or a motion for a general -12- reference. The petition and any opposition or response thereto shall recite in a clear and meaningful manner the factual basis of the controversy between the parties and identify the issues to be submitted to the referee for decision. (c) The petition or motion shall designate as a sole referee a retired judge from the Orange County, California, Judicial Arbitration & Mediation Services ("JAMS") panel acceptable to that party. If the parties to the reference proceeding are unable to agree upon a referee, the Presiding Judge or any judge of the Orange County Superior Court to whom the matter is assigned shall appoint a retired or former Orange County Superior Court Judge from the JAMS panel as the referee. (d) The parties acknowledge that the terms of this Section 11 are specifically enforceable and that the decision by the referee is tantamount to a judgment by a trial court (CCP ss.644) and is subject to review in accordance with CCP ss.645, and that any judgment rendered in the trial court is appealable in the same manner as any other trial court judgment. Section 12. Setoff The Company agrees that its obligation to the Executive, whether to pay the Executive the compensation as provided in Section 6 of this Agreement, to provide Executive with the benefits set forth in Section 7 of this Agreement, or otherwise, shall not be subject at any time to any setoff, reduction, mitigation or diminishment as a result of any alleged claims which the Company believes it has against Executive, or for any other reason whatsoever. Section 13. Covenant of Good Faith The parties to this Agreement covenant that they enter into this Agreement and undertake the obligations of this Agreement in good faith. No party will do anything to interfere with the rights of any other party to obtain the advantages extended to that party by this Agreement. The parties agree that a breach of this covenant shall create a liability against the party in breach for consequential damages as though the breach were a tort, in addition to liability for other contractual damages. Section 14. Nonassignability This Agreement is a personal service contract and the rights and duties of the parties hereunder shall not be assignable, except in accordance with the provisions of Section 15 of this -13- Agreement. Any attempted assignment or transfer not permitted by the terms of Section 15 shall be void and of no force and effect. Section 15. Successors and Assigns 15.01 Of the Company: If the Company shall at any time be merged or consolidated into or with any other corporation, or if substantially all of the assets of the Company are transferred to another corporation or party, the provisions of this Agreement shall be binding upon and inure to the benefit of the entity or successors resulting from such merger or consolidation or to which such assets shall be transferred; and this provision shall apply in such events. 15.02 Of Executive: To the extent applicable, this Agreement shall be binding on the devises, heirs, next of kin, executors and administrators of the Executive. Section 16. Notice 16.01 Method of Notice: All notices, demands or other communications required or desired to be given hereunder by any party shall be in writing and shall be validly given or made to the other parties if served personally on such other parties or if deposited in the United States mail, certified or registered, postage prepaid, return receipt requested. If such notice, demand or other communication be served personally, service shall be deemed made at the time of such personal service. If such notice, demand or other communication be given by mail, such notice shall be conclusively deemed given forty-eight (48) hours after the deposit thereof in the United States mail, addressed to the party to whom such notice, demand or other communication is to be given as hereinafter provided. 16.02 Addresses: Notice shall be given to the Company at the following address: US Facilities Corporation 650 Town Center Drive, Suite 1600 Costa Mesa, California 92626 Attention: Jose A. Velasco, Senior Vice President, Secretary and General Counsel Notice shall be given to the Executive at the following address: David L. Cargile 26231 Mount Diablo Road Laguna Hills, California 92653 -14- Any party hereto may change his address for purposes of receiving notices, demands or other communications as herein provided by a written notice given in the manner aforesaid to the other party hereto. Section 17. Applicable Governing Law The parties hereto specifically concur that this Agreement, having been executed and delivered in the State of California between US Facilities Corporation, whose principal offices are in the State of California, and Executive David L. Cargile, a resident of the State of California, shall be construed in accordance with the laws of the State of California; and the validity, interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of California, including its laws and decisions relating to conflict of laws. Section 18. Severability/Captions Every provision in this Agreement is intended to be severable. If any term or provision hereof is illegal or invalid, for any reason whatsoever, such illegality or invalidity shall not affect the validity of the remainder hereof. The captions or headings in this Agreement are inserted for convenience and identification only and are in no way intended to describe, interpret, define or limit the scope, extent or intent of this Agreement or any provisions hereof. Section 19. Amendments/Waivers No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing after approval by the Company's Board of Directors and signed by Executive and an officer of the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. Section 20. Entire Agreement/Severance Agreement 20.01 Employment Agreement: Except as set forth in Section 20.02 below, this Agreement expresses the entire agreement of the parties hereto, and supersedes all prior promises, representations, understandings, arrangements and agreements between these parties with respect to the subject matter herein, specifically including any prior Employment Agreement between the Executive and the Company, and any amendments and corrections to -15- such prior Employment Agreement. The parties hereto further acknowledge and agree that neither of them has made any representation to induce the execution and delivery of this Agreement, except those as specifically set forth herein. 20.02 Severance Agreement: Notwithstanding anything set forth in Subsection 20.01 above or in any Severance Agreement with Executive which would appear to be to the contrary, if Executive and the Company have entered into a Severance Agreement which is in effect at the time of Executive's termination, then in that event the Company and Executive hereby agree that Executive shall be entitled to receive upon Executive's termination either (i) the salary and bonus termination payments as provided for in this Employment Agreement, or (ii) the salary and bonus termination payments as provided for in any Severance Agreement between Executive and the Company, whichever salary and bonus termination payment is the greater; but under no conditions shall Executive be entitled to receive upon termination the salary and bonus termination payments under a Severance Agreement and the salary and bonus termination payments under this Employment Agreement. Section 21. Signatures In Witness Whereof, the Company has authorized that this Agreement be executed, and when the Company's duly authorized officers and the Executive have signed this Agreement in the places indicated below, this Agreement shall be effective as of November 1, 1996. Company: US Facilities Corporation By /s/ JOSE A. VELASCO ------------------------------------- Jose A. Velasco Senior Vice President, Secretary and General Counsel Executive: /s/ DAVID L. CARGILE ------------------------------------- David L. Cargile Witness: /s/ MARK BURKE - --------------------------------- Mark Burke Senior Vice President, Treasurer and Chief Financial Officer -16- Amendment No. 1 To The Promissory Note Dated July 24, 1995 In the Amount of $649,000 Executed By David L. Cargile and Ann M. Cargile In Favor of US Facilities Corporation ------------------ In connection with the July 21, 1995 amendment to the August 4, 1994 Agreement of Employment between US Facilities Corporation, a Delaware Corporation (the "Company" or "Lender"), and David L. Cargile (the "Executive"), the Company loaned $649,000 to David L. Cargile and Ann M. Cargile, husband and wife ("Borrower"). This loan was evidenced by a Promissory Note dated July 24, 1995 and secured by a Deed of Trust of even date therewith given by Borrower. Effective as of November 1, 1996, the Company and Executive entered into a new Agreement of Employment, the terms of which new Agreement of Employment require that the July 24, 1995 Promissory Note be amended in the manner as hereinafter set forth. Now, Therefore, section 1. PAYMENTS, B. Months 61 through 240 is hereby amended in its entirety to read in full as follows: "1. PAYMENTS * * * * "B. Months 61 through 240. Commencing on the earlier of the Early Change Date or the 61st Payment Date (collectively hereinafter referred to as the 'Payment Change Date'), and continuing on each Payment Date following and including the Payment Change Date through the Maturity Date, the monthly payment amount due hereunder shall be adjusted to be the amount that will amortize fully the entire principal balance of the Note then outstanding along with all accrued but unpaid interest then outstanding in approximately equal monthly installments of principal and interest over the period commencing on the Payment Change Date and ending on the date which is one hundred eighty (180) months after the Payment Change Date with interest commencing at the Payment Change Date on the unpaid principal and interest balance at the -1- lower of either (i) Nine and Three-Quarters Percent (9.75%) per annum or (ii) that interest rate which is the lowest rate paid by the Lender for funds which the Lender is borrowing from its principal lending source at the Payment Change Date. The interest rate that is applicable at the Payment Change Date shall continue to be the interest rate until the date on which this Note is paid in full. On or before thirty (30) days prior to the Payment Change Date, Lender shall notify Borrower of the amount thereafter due per month, provided that Lender's failure to so notify Borrower shall not relieve Borrower of its obligations to continue to make payments hereunder. Borrower shall pay such amount on the Payment Change Date and on each Payment Date thereafter until the date this Note is paid in full." Except as modified by this Amendment No. 1, the terms and provisions of the July 24, 1995 Promissory Note Secured by Deed of Trust shall remain in full force and effect as provided therein. This Amendment was executed by Borrower on this 1st day of November, 1996, as set forth below. BORROWER: /s/ DAVID L. CARGILE ---------------------- David L. Cargile /s/ ANN M. CARGILE ---------------------- Ann M. Cargile -2- EX-10.3 4 AGREEMENT - COMPANY & HOWARD S. SINGER EXHIBIT 10.3 Agreement of Employment Between Howard S. Singer And US Facilities Corporation --------------- This Agreement is made at Costa Mesa, California, and shall be effective as of the 1st day of November, 1996, between US Facilities Corporation, a Delaware corporation (the "Company"), and Howard S. Singer (the "Executive"). In consideration of the respective promises and mutual covenants and agreements of the parties which are set forth herein, and intending to be legally bound thereby, the parties hereby agree as set forth below. Section 1. Employment The Company hereby agrees to employ the Executive and the Executive hereby agrees to be employed by and to serve the Company on the terms and conditions as set forth in this Agreement. Section 2. Period of Employment This Agreement will commence and be effective as of November 1, 1996, and shall expire and terminate as of October 31, 2000. Section 3. Position and Duties The Executive shall serve the Company as its Executive Vice President-- Corporate Finance and Investor Relations, with all the duties, responsibilities, authority, rights and privileges which normally attach to those offices, and with such powers that are consistent with such positions; and shall have such additional duties, powers, responsibilities and authority as may be delegated or assigned to Executive from time to time by the Company's Chief Executive Officer. Executive's services shall be performed on behalf of the Company in consonance with the Company's Certificate of Incorporation and its Bylaws, and Executive shall be subject at all times to the supervision, direction and control of the Company's Chief Executive Officer and its Board of Directors. -1- Section 4. Devotion of Time and Best Efforts Executive agrees that during the period of his employment he will devote the substantial portion of his working and productive time, attention, energies, abilities, skill and efforts to the business affairs of the Company; and he will diligently exert his best efforts to the promotion, development and best interest of the Company and its affiliates (including all subsidiaries), and will faithfully and diligently perform all of the duties incident to his positions. It is recognized by the Company that Executive, during his employment period, may have certain personal business activities and enterprises, and the Company accepts that a relatively minor portion of any given business day may be spent by Executive attending to such personal business affairs. The Company acknowledges that such activities will not interfere with the performance of Executive's duties under this Agreement; and Executive agrees that he will spend such time in the daily performance of his duties under this Agreement as an executive in the same industry with similar positions and responsibilities would spend on behalf of his employer; provided, however, during the term of his employment Executive, as hereinafter set forth, will not, directly or indirectly, promote, participate or engage in any activities, whether as a partner, employee, creditor, shareholder or otherwise, in any business which shall in any way be competitive or constitute a conflict of interest with the Company's business. Section 5. Place of Performance Executive's duties and responsibilities shall be performed primarily at the Company's offices in the area of Chicago, Illinois, except for such travel as may be required to be undertaken on behalf of the Company's business. The Company may not relocate the Executive for purposes of his employment under this Agreement without the express agreement by the Executive to such relocation. Section 6. Compensation Payable to Executive 6.01 Salary Payments: In consideration of Executive's services, the Company shall pay to the Executive a salary at the rate of not less than Two Hundred Twenty-Seven Thousand Two Hundred Seventy Dollars ($227,270) per annum, in equal installments as nearly as practicable, on the fifteenth (15th) and the last day of each month in arrears, or otherwise in conformity with the Company's prevailing payroll practices and policies which are in effect from time to time. At least once each year, at some date prior to each anniversary date of this Agreement, the Chief -2- Executive Officer shall (i) review the annual salary being paid to Executive which is then in effect, (ii) determine whether any increase thereto may be appropriate and (iii) recommend any such adjustment to the Compensation Committee of the Board of Directors. The amount of annual salary being paid to the Executive by the Company may be adjusted upward as hereinabove provided, and such adjustment shall not require a written amendment to this Agreement, nor shall such upward salary adjustment affect any other provisions of this Agreement, which shall remain in effect unless changed by a written amendment hereto; provided, further, that any reference in this Agreement to amounts payable to Executive pursuant to this Section 6.01 shall refer to the annual salary payable to Executive as then in effect, whether or not adjusted pursuant to a written amendment to this Agreement. It is specifically agreed to that Executive's salary shall not be decreased at any time during the term of this Agreement. Compensation of the Executive by salary payments shall not be deemed to be exclusive, and shall not prevent Executive from participating in other bonus, compensation, incentive or benefit plans of the Company. The salary payments hereunder shall not in any way limit or reduce any other obligation of the Company under this Agreement. 6.02 Discretionary Bonus Payments: In addition to the amount of salary payment set forth in Section 6.01 above and Executive's participation in Company benefit plans as provided for in Section 7.01 below, the Executive may be paid a bonus. Such bonus shall be in an amount as recommended by the Chief Executive Officer and as approved by the Compensation Committee of the Board of Directors. Any bonus due to the Executive under this Section 6.02 will be payable to the Executive by the Company within thirty (30) days following the declaration thereof by the Company's Board of Directors, unless the Company and the Executive mutually agree otherwise. Section 7. Additional Benefits 7.01 General: During the period of his employment, Executive shall be entitled to receive all other benefits of employment generally available to the Company's senior executive officers, and shall have the same rights and privileges to participate in any employee benefits as any other employee of the Company. Specifically, nothing contained in this Agreement is intended to or shall be deemed to be granted to Executive in lieu of whatever rights and -3- privileges which Executive may be entitled to receive as a regular employee and as a senior executive officer of the Company. Such general employment benefits include but are not limited to the Company's group medical, hospital, life and disability insurance plans, the Company's pension, retirement, stock option and salary incentive plans, the Company's long-term and short-term bonus and incentive plans, as well as other forms of compensation arrangements which may now be in effect or which may hereafter be adopted by the Company during the period of Executive's employment. In addition, Executive shall be entitled to an annual paid vacation and to such amount of paid sick leave in accordance with the Company's policies on these matters for senior executives, so that Executive's normal salary then in effect shall continue to be paid to him during such vacation and sick leave periods. 7.02 Company Automobile: During the period of Executive's employment, the Company shall furnish an automobile to Executive of a type to be mutually agreed upon by Executive and the Company's Chief Executive Officer for Executive's use in connection with the Company's business, the full price or the monthly rental or other expense of which shall be paid for by the Company. The Company shall provide insurance coverage with respect to said automobile, as well as costs for its operation and maintenance. Executive agrees that he will be responsible for any federal or state income taxes that may be incurred by Executive to the extent applicable which result from Executive's use of such automobile, as reflected on Executive's W- 2 Form from the Company. 7.03 Expense Reimbursement: The Company agrees that during the period of employment described in this Agreement, Executive is authorized to incur ordinary and necessary expenses in connection with the promotion, operation and furtherance of the business affairs of the Company, including expenses incurred for purposes of entertainment, professional memberships, dues and subscriptions, travel, as well as educational/professional meetings as shall, in Executive's judgment, be required for the effective and efficient performance of the Executive's duties. In accordance with normal Company policy, Executive shall also be permitted to use credit cards issued in the Company's name for such business expenses and to take an advance monetary allowance prior to any such expenditure. However, any business expenditures and expenses which are paid in the first instance by the Executive shall be -4- reimbursed to the Executive by the Company upon presentation by the Executive to the Company, not less often than monthly, of an itemized account of such expenditures, together with receipts and vouchers. At Executive's option, all travel by Executive for Company purposes shall be of such class and all hotels shall be of such quality in compliance with the Company's policy on this matter for its senior executives. 7.04 Club Membership: Subject to approval by the Company's Chief Executive Officer, during the period of Executive's employment, the Company shall provide for Executive's membership in various clubs through the payment of the monthly and annual dues as well as the initial membership fee required for such membership. In addition, the Executive shall have the right to incur monthly charges, and the Company will pay such monthly charges for entertainment at the said clubs when such entertainment is for and on behalf of the Company. 7.05 Indemnification: (a) Maximum Permitted Plus Insurance: The Company shall, to the maximum extent permitted by law, indemnify and hold Executive harmless against expenses, including reasonable attorneys' fees, judgments, fines, settlements and other amounts actually incurred in connection with any proceeding arising by reason of Executive's employment by the Company. The Company shall advance to Executive any expenses incurred in defending such proceeding, to the maximum extent permitted by law. In addition, the Company shall make every reasonable effort to secure and maintain directors and officers liability insurance on behalf of the Executive against any liability asserted against or incurred by Executive arising out of his employment by the Company. Such insurance shall not discharge the Company from its obligation to provide the Executive with the maximum indemnification permitted by law. (b) No Decrease and Continuing Effect: The Company agrees that the rights, benefits and the protections now afforded to officers and directors of the Company, whether through the Company's Certificate of Incorporation or its Bylaws, or by resolutions of its Board of Directors, operation of law or by any other source (i) shall not be diminished (but may be expanded) during the Executive's term of employment under this Agreement; and (ii) shall be continued to be kept in full force and effect after the Executive's employment has terminated for -5- such additional period of time as may be necessary until any cause of action for which indemnification would otherwise be available is barred by the applicable statute of limitations. 7.06 Estate Planning Reimbursement: Recognizing the importance to the Company of Executive's peace of mind, so that Executive's major efforts will be more directly focused toward those business affairs of the Company which require his attention, the Company agrees that during the term of employment described in this Agreement it will reimburse to the Executive the expense incurred by Executive arising from or in connection with Executive's estate planning. For purposes of such reimbursement, estate planning shall include, but not be limited to, the establishment of inter vivos or testamentary trusts, the preparation of a Last Will and Testament, or similar testamentary arrangements, and any and all other documents required in connection with the above. The amount to be reimbursed to Executive under this Section 7.06 for estate planning expenses shall be subject to approval by the Chief Executive Officer of the Company. Section 8. Death or Disability 8.01 Payment: In the event of the death or disability (as hereinafter defined) of Executive during the period of Executive's employment, the Company will pay to the Executive, or to the Executive's estate, or to any other person whom the Executive shall have designated by written notice to the Company for that purpose, a sum equal to the amount of compensation or other payments remaining due to Executive under Section 6 for a period of one (1) year under this Agreement and due to Executive under Section 7 of this Agreement. Any amounts payable hereunder shall be made in accordance with the Company's normal payroll policies and procedures. 8.02 Definition of "Disability": The term "disability" in this Agreement for purposes of this section shall mean the inability of the Executive to perform the normal functions, duties and responsibilities as required for his position under this Agreement due to his incapacity, whether such incapacity arises from physical or mental illness or injury. In order to determine any issue relating to the question of disability, the Company shall have the right to require that Executive submit to a medical examination by a licensed physician who shall be mutually agreed -6- upon and selected by the Executive and the Company. The Company shall also have the right to carry disability insurance on the Executive to provide for its obligations under this Section 8. Section 9. Termination 9.01 Termination for Cause: (a) Definition of Cause: At any time during the period covered by this Agreement the Company may terminate the Executive from his employment under this Agreement for cause. The term "cause" in this Agreement for purposes of termination shall include, but not be limited to: (i) the commission by Executive of any act of fraud or material dishonesty with respect to the financial or monetary aspects of the business, as determined by an independent national accounting firm selected by mutual agreement of the Company and Executive; or (ii) a final conviction of a felony involving moral turpitude in either a state or federal court proceeding; or (iii) the intentional and willful breach of the terms of this Agreement, including the failure of Executive to diligently and faithfully perform his duties under this Agreement or as instructed by the Board of Directors of the Company, after reasonable notice to and discussion with Executive; or (iv) intentionally acting in a manner or intentionally engaging in activities which place Executive in a direct or indirect conflicting position with the interests of the Company and which could have a material adverse effect on the Company, after reasonable notice to and discussion with Executive. (b) Payment When Terminated For Cause: In the event of termination of Executive for cause, the Company will pay to the Executive the accrued but unpaid salary compensation due to Executive under Section 6.01, the unpaid reimbursement expenses due to Executive under Section 7.03 and the accrued vacation days due to Executive under Section 7.01 of this Agreement to the date of such termination. Such payment shall be made to Executive either in a lump sum or in accordance with the Company's normal payroll policies and procedures, as determined by the Company in its sole discretion. 9.02 Involuntary Termination (Without Cause): (a) Payment: During the period of Executive's employment, the Company shall have the right to terminate the Executive involuntarily and without any cause or any reason by paying to the Executive one hundred fifty percent (150%) of all amounts which would be due -7- and payable to the Executive pursuant to the compensation provisions set forth in Section 6.01 of this Agreement for the remainder of the term as set forth in Section 2 of this Agreement. In addition to the salary provisions of Section 6.01, such payment shall include any amounts due to Executive under the provisions of Section 7 hereof, such as amounts due for expense reimbursement or for accrued vacation time. Any and all monetary amounts payable to the Executive under this Section 9 shall be paid in the manner selected by the Executive, at his sole discretion. (b) Transfer of Automobile: In the event of termination under this Section 9.02, the automobile then being used by Executive shall be transferred to him (the title to which automobile shall be free and clear of all liens) at no cost to Executive. 9.03 Piggyback Registration Rights: (a) General: In the event that the Company exercises its right of involuntary termination of Executive as set forth in Section 9.02 hereof, the Executive shall have the following registration rights. Subject to Subsection (b) below, if at any time and from time to time until Executive no longer owns shares of the Company's Common Stock, the Company proposes to register any of its securities under the Securities Act of 1933, as amended (the "Securities Act"), in connection with the public offering of its securities solely for cash on a form that would also permit the registration of the shares of the Company's Common Stock owned by Executive, the Company shall, on the first occasion after it exercises its right of involuntary termination of Executive, promptly give Executive written notice of its determination to register its securities. Upon the written request of Executive given within thirty (30) days after receipt by Executive of such notice from the Company, the Company shall use its best efforts to cause to be registered under the Securities Act as a part of the Company's registration statement all of the Common Stock of Executive that Executive has requested be registered by the Company. In addition, the Company further agrees to do the following: (i) Furnish to the Executive such copies of each preliminary and final prospectus and other documents as may be necessary or reasonably requested by Executive to facilitate the public offering of Executive's Common Stock; -8- (ii) Use its best efforts to register or qualify Executive's Common Stock covered by said registration statement under applicable securities or "Blue Sky" laws of such jurisdictions as Executive may reasonably request; (iii) Furnish to the Executive an appropriate opinion of counsel for the Company and a "comfort" letter signed by the Company's independent accountant who examined and reported on the Company's financial statements included in the registration statement; (iv) Permit Executive or his counsel to inspect and copy such corporate records and documents as may be requested by them; (v) Furnish to Executive or his counsel any and all correspondence relating to the public offering, whether dealing with the Securities and Exchange Commission, state securities commissions or the National Association of Securities Dealers; (vi) Pay all costs and expenses of the said registration statement described in this Section 9.03, whether printing, legal, accounting, state and federal regulatory filing fees, as well as Executive's attorneys' fees, but not any portion of the underwriter's commissions or discount attributable to Executive's Common Stock being sold under said registration statement; and (vii) Promptly notify the Executive in the event that any prospectus included in the said registration statement described in this Section 9.03 includes a misstatement of a material fact or omits to state any material fact required to be stated therein, or necessary in order to make the statements therein not misleading in the light of the circumstances then existing. (b) Restrictions on Registration: In connection with any registration rights offered to Executive under this Section 9.03, the Company shall not be required to include any of Executive's Common Stock in such registration statement unless Executive accepts the terms of the underwriting as agreed to by the Company and the underwriters who are selected by the Company to distribute the Company's securities. Further, if the total amount of securities to be included in such offering exceeds the amount of securities that the underwriter reasonably -9- believes to be compatible with the success of the Company's underwriting, the Company shall only be required to include in the registration statement so many of the shares of the Executive's Common Stock as the underwriters' reasonably believe will not jeopardize the success of the Company's offering; provided, however, that the shares owned by selling shareholders which are included in the registration statement shall be a number apportioned pro rata among all selling shareholders who have similar registration rights, with respect to the number of shares requested by each to be included in such registration statement. (c) Indemnification of Executive: In connection with the registration rights granted to Executive under this Section 9.03, and to the extent permitted by law, the Company will indemnify and hold Executive harmless against any losses, claims, damages or liabilities, including attorneys' fees, judgments, fines, settlements and other amounts actually incurred, to or for which Executive may become subject under the Securities Act arising out of any untrue or alleged untrue statements of material facts contained in the registration statement or which arise from or are based upon the omission or alleged omission to state therein any material fact required to be stated therein, or necessary to make the statements therein not misleading, to the extent that such untrue statements or alleged untrue statements or omission or alleged omission made in such registration statement were made in reliance upon and in conformity with written information furnished by the Company especially for use in connection with such registration statement. (d) Indemnification of the Company: In connection with the registration rights granted to Executive under this Section 9.03, and to the extent permitted by law, the Executive will indemnify and hold the Company harmless against any losses, claims, damages or liabilities to which the Company may become subject under the Securities Act arising out of any untrue or alleged untrue statements of material facts contained in the registration statement or which arise from or are based upon the omission or alleged omission to state therein any material fact required to be stated therein, or necessary to make the statements therein not misleading, to the extent that such untrue statements or alleged untrue statements or omission or alleged omission made in such registration statement were made in reliance upon and in conformity with written -10- information furnished by the Executive to the Company especially for use in connection with such registration statement. Section 10. Covenant of Non-Competition Executive agrees that for the period commencing from the date of his employment under this Agreement and continuing for the full period of such employment, he shall not directly or indirectly be involved in, or shall have an interest in, any person, firm, corporation or business, whether as an employee, officer, director, agent, shareholder or otherwise (except as a minority shareholder of a publicly held corporation) that is engaged in any business in which the Company is engaged or which places Executive in a position which may constitute a conflict between the interests of the Executive and the interests of the Company during the period of his employment under this Agreement; provided, however, the prohibitions and restrictions set forth in this section shall not apply to or in any way limit a relationship, involvement or interest in any firm, corporation or business which in the ordinary course of its business activities does not have more than ten percent (10%) of its annual gross income derived from the business activities in which the Company is engaged during the period of Executive's employment under this Agreement. Section 11. Settlement of Disputes (a) Any controversy or dispute between the parties to this Agreement involving the construction, interpretation, application or performance of the terms, covenants or conditions of this Agreement or in any way arising under this Agreement shall, on demand of one of the parties by written notice hereto served on the other in the manner prescribed in Section 16 hereof, be determined pursuant to the general reference provisions of California Code of Civil Procedure ("CCP") ss.638(1), et seq., by a retired or former judge of the Superior Court for the County of Orange, State of California. The parties intend this general reference provision to be specifically enforceable in accordance with said ss.638(1). (b) The reference may be commenced by any party hereto by the filing in the Superior Court of the State of California for the County of Orange of a petition or a motion for a general reference. The petition and any opposition or response thereto shall recite in a clear and -11- meaningful manner the factual basis of the controversy between the parties and identify the issues to be submitted to the referee for decision. (c) The petition or motion shall designate as a sole referee a retired judge from the Orange County, California, Judicial Arbitration & Mediation Services ("JAMS") panel acceptable to that party. If the parties to the reference proceeding are unable to agree upon a referee, the Presiding Judge or any judge of the Orange County Superior Court to whom the matter is assigned shall appoint a retired or former Orange County Superior Court Judge from the JAMS panel as the referee. (d) The parties acknowledge that the terms of this Section 11 are specifically enforceable and that the decision by the referee is tantamount to a judgment by a trial court (CCP ss.644) and is subject to review in accordance with CCP ss.645, and that any judgment rendered in the trial court is appealable in the same manner as any other trial court judgment. Section 12. Setoff The Company agrees that its obligation to the Executive, whether to pay the Executive the compensation as provided in Section 6 of this Agreement, to provide Executive with the benefits set forth in Section 7 of this Agreement, or otherwise, shall not be subject at any time to any setoff, reduction, mitigation or diminishment as a result of any alleged claims which the Company believes it has against Executive, or for any other reason whatsoever. Section 13. Covenant of Good Faith The parties to this Agreement covenant that they enter into this Agreement and undertake the obligations of this Agreement in good faith. No party will do anything to interfere with the rights of any other party to obtain the advantages extended to that party by this Agreement. The parties agree that a breach of this covenant shall create a liability against the party in breach for consequential damages as though the breach were a tort, in addition to liability for other contractual damages. Section 14. Nonassignability This Agreement is a personal service contract and the rights and duties of the parties hereunder shall not be assignable, except in accordance with the provisions of Section 15 of this -12- Agreement. Any attempted assignment or transfer not permitted by the terms of Section 15 shall be void and of no force and effect. Section 15. Successors and Assigns 15.01 Of the Company: If the Company shall at any time be merged or consolidated into or with any other corporation, or if substantially all of the assets of the Company are transferred to another corporation or party, the provisions of this Agreement shall be binding upon and inure to the benefit of the entity or successors resulting from such merger or consolidation or to which such assets shall be transferred; and this provision shall apply in such events. 15.02 Of Executive: To the extent applicable, this Agreement shall be binding on the devises, heirs, next of kin, executors and administrators of the Executive. Section 16. Notice 16.01 Method of Notice: All notices, demands or other communications required or desired to be given hereunder by any party shall be in writing and shall be validly given or made to the other parties if served personally on such other parties or if deposited in the United States mail, certified or registered, postage prepaid, return receipt requested. If such notice, demand or other communication be served personally, service shall be deemed made at the time of such personal service. If such notice, demand or other communication be given by mail, such notice shall be conclusively deemed given forty-eight (48) hours after the deposit thereof in the United States mail, addressed to the party to whom such notice, demand or other communication is to be given as hereinafter provided. 16.02 Addresses: Notice shall be given to the Company at the following address: US Facilities Corporation 650 Town Center Drive, Suite 1600 Costa Mesa, California 92626 Attention: David L. Cargile, President and Chief Executive Officer Notice shall be given to the Executive at the following address: Howard S. Singer 2956 Techny Road Northbrook, Illinois 60062 -13- Any party hereto may change his address for purposes of receiving notices, demands or other communications as herein provided by a written notice given in the manner aforesaid to the other party hereto. Section 17. Applicable Governing Law The parties hereto specifically concur that this Agreement, having been executed and delivered in the State of California with US Facilities Corporation, whose principal offices are in the State of California, shall be construed in accordance with the laws of the State of California; and the validity, interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of California, including its laws and decisions relating to conflict of laws. Section 18. Severability/Captions Every provision in this Agreement is intended to be severable. If any term or provision hereof is illegal or invalid, for any reason whatsoever, such illegality or invalidity shall not affect the validity of the remainder hereof. The captions or headings in this Agreement are inserted for convenience and identification only and are in no way intended to describe, interpret, define or limit the scope, extent or intent of this Agreement or any provisions hereof. Section 19. Amendments/Waivers No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing after approval by the Company's Board of Directors and signed by Executive and an officer of the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. Section 20. Entire Agreement/Severance Agreement 20.01 Employment Agreement: Except as set forth in Section 20.02 below, this Agreement expresses the entire agreement of the parties hereto, and supersedes all prior promises, representations, understandings, arrangements and agreements between these parties with respect to the subject matter herein, specifically including any prior Employment Agreement between the Executive and the Company, and any amendments and corrections to -14- such prior Employment Agreement. The parties hereto further acknowledge and agree that neither of them has made any representation to induce the execution and delivery of this Agreement, except those as specifically set forth herein. 20.02 Severance Agreement: Notwithstanding anything set forth in Subsection 20.01 above or in any Severance Agreement with Executive which would appear to be to the contrary, if Executive and the Company have entered into a Severance Agreement which is in effect at the time of Executive's termination, then in that event the Company and Executive hereby agree that Executive shall be entitled to receive upon Executive's termination either (i) the salary and bonus termination payments as provided for in this Employment Agreement, or (ii) the salary and bonus termination payments as provided for in any Severance Agreement between Executive and the Company, whichever salary and bonus termination payment is the greater; but under no conditions shall Executive be entitled to receive upon termination the salary and bonus termination payments under a Severance Agreement and the salary and bonus termination payments under this Employment Agreement. Section 21. Signatures In Witness Whereof, the Company has authorized that this Agreement be executed, and when the Company's duly authorized officers and the Executive have signed this Agreement in the places indicated below, this Agreement shall be effective as of November 1, 1996. Company: US Facilities Corporation By /s/ DAVID L. CARGILE ------------------------------------- David L. Cargile President and Chief Executive Officer Executive: /s/ HOWARD S. SINGER ------------------------------------- Howard S. Singer Witness: /s/ JOSE A. VELASCO - ------------------------------------ Jose A. Velasco Senior Vice President, Secretary and General Counsel -15- EX-10.4 5 AGREEMENT - COMPANY & CRAIG J. KELBEL EXHIBIT 10.4 Agreement of Employment Between Craig J. Kelbel And US Facilities Corporation --------------- This Agreement is made at Costa Mesa, California, and shall be effective as of the 1st day of November, 1996, between US Facilities Corporation, a Delaware corporation (the "Company"), and Craig J. Kelbel (the "Executive"). In consideration of the respective promises and mutual covenants and agreements of the parties which are set forth herein, and intending to be legally bound thereby, the parties hereby agree as set forth below. Section 1. Employment The Company hereby agrees to employ the Executive and the Executive hereby agrees to be employed by and to serve the Company on the terms and conditions as set forth in this Agreement. Section 2. Period of Employment This Agreement will commence and be effective as of November 1, 1996, and shall expire and terminate as of October 31, 1999. Section 3. Position and Duties The Executive shall serve the Company as a Senior Vice President and as the President and Chief Operating Officer of its USBenefits Insurance Services, Inc. subsidiary ("USB"), with the duties, responsibilities, authority, rights and privileges which normally attach to those offices; and shall have such additional duties, powers, responsibilities and authority as may be delegated or assigned to Executive from time to time by the Company's Chief Executive Officer. Executive's services shall be performed on behalf of the Company in consonance with the Company's Certificate of Incorporation and its Bylaws, and Executive shall be subject at all times to the supervision, direction and control of the Company's Chief Executive Officer and its Board of Directors. -1- Section 4. Devotion of Time and Best Efforts Executive agrees that during the period of his employment he will devote the substantial portion of his working and productive time, attention, energies, abilities, skill and efforts to the business affairs of the Company; and he will diligently exert his best efforts to the promotion, development and best interest of the Company and its affiliates (including all subsidiaries), and will faithfully and diligently perform all of the duties incident to his positions. It is recognized by the Company that Executive, during his employment period, may have certain personal business activities and enterprises, and the Company accepts that a relatively minor portion of any given business day may be spent by Executive attending to such personal business affairs. The Company acknowledges that such activities will not interfere with the performance of Executive's duties under this Agreement; and Executive agrees that he will spend such time in the daily performance of his duties under this Agreement as an executive in the same industry with similar positions and responsibilities would spend on behalf of his employer; provided, however, during the term of his employment Executive, as hereinafter set forth, will not, directly or indirectly, promote, participate or engage in any activities, whether as a partner, employee, creditor, shareholder or otherwise, in any business which shall in any way be competitive or constitute a conflict of interest with the Company's business. Section 5. Place of Performance Executive's duties and responsibilities shall be performed primarily at the Company's offices in Costa Mesa, California, except for such travel as may be required to be undertaken on behalf of the Company's business. The Company may not relocate the Executive for purposes of his employment under this Agreement without the express agreement by the Executive to such relocation. Section 6. Salary Compensation Payable to Executive In consideration of Executive's services, the Company shall pay to the Executive a salary at the rate of not less than Two Hundred Thirty-One Thousand Five Hundred Twenty-Nine Dollars and Ninety-Two Cents ($231,529.92) per annum, in equal installments as nearly as practicable, on the fifteenth (15th) and the last day of each month in arrears, or otherwise in conformity with the Company's prevailing payroll practices and policies which are in effect from time to time. At least once each year, at some date prior to each anniversary date of this -2- Agreement, the Chief Executive Officer shall (i) review the annual salary being paid to Executive which is then in effect, (ii) determine whether any increase thereto may be appropriate and (iii) recommend any such adjustment to the Compensation Committee of the Board of Directors. The amount of annual salary being paid to the Executive by the Company may be adjusted upward as hereinabove provided, and such adjustment shall not require a written amendment to this Agreement, nor shall such upward salary adjustment affect any other provisions of this Agreement, which shall remain in effect unless changed by a written amendment hereto; provided, further, that any reference in this Agreement to amounts payable to Executive pursuant to this Section 6 shall refer to the annual salary payable to Executive as then in effect, whether or not adjusted pursuant to a written amendment to this Agreement. It is specifically agreed to that Executive's salary shall not be decreased at any time during the term of this Agreement. Compensation of the Executive by salary payments shall not be deemed to be exclusive, and shall not prevent Executive from participating in other bonus, compensation, incentive or benefit plans of the Company. The salary payments hereunder shall not in any way limit or reduce any other obligation of the Company under this Agreement. Section 7. Additional Benefits 7.01 General: During the period of his employment, Executive shall be entitled to receive all other benefits of employment generally available to the Company's senior executive officers, and shall have the same rights and privileges to participate in any employee benefits as any other employee of the Company. Specifically, nothing contained in this Agreement is intended to or shall be deemed to be granted to Executive in lieu of whatever rights and privileges which Executive may be entitled to receive as a regular employee and as a senior executive officer of the Company. Such general employment benefits include but are not limited to the Company's group medical, hospital, life and disability insurance plans, the Company's pension, retirement, stock option and salary incentive plans, the Company's long-term and short-term bonus and incentive plans, as well as other forms of compensation arrangements which may now be in effect or which may hereafter be adopted by the Company during the period of Executive's employment. In addition, Executive shall be entitled to an annual paid vacation and to such amount of paid sick leave in accordance with the Company's policies on these matters -3- for senior executives, so that Executive's normal salary then in effect shall continue to be paid to him during such vacation and sick leave periods. 7.02 Company Automobile or Car Allowance: During the period of Executive's employment, the Company will either (i) furnish an automobile to Executive of a type to be mutually agreed upon by Executive and the Company's Chief Executive Officer, which automobile shall be for Executive's use in connection with the Company's business, and for which the Company shall provide insurance coverage as well as costs for its operation and maintenance; or (ii) grant to Executive a monthly automobile allowance in an amount to be mutually agreed upon by Executive and the Company's Chief Executive Officer, which allowance will be used to provide an automobile of a type to be mutually upon by Executive and the Company's Chief Executive Officer, and which allowance shall be used by Executive to pay for insurance coverage as well as all costs for the automobile's operation and maintenance. Executive agrees that he will be responsible for any federal or state income taxes that may be incurred by Executive to the extent applicable which result from Executive's use of such automobile, as reflected on Executive's W-2 Form from the Company. 7.03 Expense Reimbursement: The Company agrees that during the period of employment described in this Agreement, Executive is authorized to incur ordinary and necessary expenses in connection with the promotion, operation and furtherance of the business affairs of the Company, including expenses incurred for purposes of entertainment, professional memberships, dues and subscriptions, travel, as well as educational/professional meetings as shall, in Executive's judgment, be required for the effective and efficient performance of the Executive's duties. In accordance with normal Company policy, Executive shall also be permitted to use credit cards issued in the Company's name for such business expenses and to take an advance monetary allowance prior to any such expenditure. However, any business expenditures and expenses which are paid in the first instance by the Executive shall be reimbursed to the Executive by the Company upon presentation by the Executive to the Company, not less often than monthly, of an itemized account of such expenditures, together with receipts and vouchers. All travel by Executive for Company purposes shall be of such class -4- and all hotels shall be of such quality in compliance with the Company's policy on this matter for its senior executives. 7.04 Club Membership: Subject to approval by the Company's Chief Executive Officer, during the period of Executive's employment, the Company shall provide for Executive's membership in various clubs through the payment of the monthly and annual dues as well as the initial membership fee required for such membership. In addition, the Executive shall have the right to incur monthly charges, and the Company will pay such monthly charges for entertainment at the said clubs when such entertainment is for and on behalf of the Company. 7.05 Indemnification: (a) Maximum Permitted Plus Insurance: The Company shall, to the maximum extent permitted by law, indemnify and hold Executive harmless against expenses, including reasonable attorneys' fees, judgments, fines, settlements and other amounts actually incurred in connection with any proceeding arising by reason of Executive's employment by the Company. The Company shall advance to Executive any expenses incurred in defending such proceeding, to the maximum extent permitted by law. In addition, the Company shall make every reasonable effort to secure and maintain directors and officers liability insurance on behalf of the Executive against any liability asserted against or incurred by Executive arising out of his employment by the Company. Such insurance shall not discharge the Company from its obligation to provide the Executive with the maximum indemnification permitted by law. (b) No Decrease and Continuing Effect: The Company agrees that the rights, benefits and the protections now afforded to officers and directors of the Company, whether through the Company's Certificate of Incorporation or its Bylaws, or by resolutions of its Board of Directors, operation of law or by any other source (i) shall not be diminished (but may be expanded) during the Executive's term of employment under this Agreement; and (ii) shall be continued to be kept in full force and effect after the Executive's employment has terminated for such additional period of time as may be necessary until any cause of action for which indemnification would otherwise be available is barred by the applicable statute of limitations. -5- 7.06 Estate Planning Reimbursement: Recognizing the importance to the Company of Executive's peace of mind, so that Executive's major efforts will be more directly focused toward those business affairs of the Company which require his attention, the Company agrees that during the term of employment described in this Agreement it will reimburse to the Executive the expense incurred by Executive arising from or in connection with Executive's estate planning. For purposes of such reimbursement, estate planning shall include, but not be limited to, the establishment of inter vivos or testamentary trusts, the preparation of a Last Will and Testament, or similar testamentary arrangements, and any and all other documents required in connection with the above. Any amount to be reimbursed to Executive under this Section 7.06 for estate planning expenses which exceeds $5,000 shall be subject to approval by the Chief Executive Officer of the Company. Section 8. Death or Disability 8.01 Payment: In the event of the death or disability (as hereinafter defined) of Executive during the period of Executive's employment, the Company will pay to the Executive, or to the Executive's estate, or to any other person whom the Executive shall have designated by written notice to the Company for that purpose, a sum equal to the amount of compensation or other payments remaining due to Executive under Section 6 for a period of one (1) year under this Agreement and due to Executive under Section 7 of this Agreement. Any amounts payable hereunder shall be made in accordance with the Company's normal payroll policies and procedures. 8.02 Definition of "Disability": The term "disability" in this Agreement for purposes of this section shall mean the inability of the Executive to perform the normal functions, duties and responsibilities as required for his position under this Agreement due to his incapacity, whether such incapacity arises from physical or mental illness or injury. In order to determine any issue relating to the question of disability, the Company shall have the right to require that Executive submit to a medical examination by a licensed physician who shall be mutually agreed upon and selected by the Executive and the Company. The Company shall also have the right to carry disability insurance on the Executive to provide for its obligations under this Section 8. -6- Section 9. Termination 9.01 Termination for Cause: (a) Definition of Cause: At any time during the period covered by this Agreement the Company may terminate the Executive from his employment under this Agreement for cause. The term "cause" in this Agreement for purposes of termination shall include, but not be limited to: (i) the commission by Executive of any act of fraud or material dishonesty with respect to the financial or monetary aspects of the business, as determined by an independent national accounting firm selected by mutual agreement of the Company and Executive; or (ii) a final conviction of a felony involving moral turpitude in either a state or federal court proceeding; or (iii) the intentional and willful breach of the terms of this Agreement, including the failure of Executive to diligently and faithfully perform his duties under this Agreement or as instructed by the Board of Directors of the Company, after reasonable notice to and discussion with Executive; or (iv) intentionally acting in a manner or intentionally engaging in activities which place Executive in a direct or indirect conflicting position with the interests of the Company and which could have a material adverse effect on the Company, after reasonable notice to and discussion with Executive. (b) Payment When Terminated For Cause: In the event of termination of Executive for cause, the Company will pay to the Executive the accrued but unpaid salary compensation due to Executive under Section 6, the unpaid reimbursement expenses due to Executive under Section 7.03 and the accrued vacation days due to Executive under Section 7.01 of this Agreement to the date of such termination. Such payment shall be made to Executive either in a lump sum or in accordance with the Company's normal payroll policies and procedures, as determined by the Company in its sole discretion. 9.02 Involuntary Termination (Without Cause): During the period of Executive's employment, the Company shall have the right to terminate the Executive involuntarily and without any cause or any reason by paying to the Executive one hundred percent (100%) of all amounts which would be due and payable to the Executive pursuant to the compensation provisions set forth in Section 6 of this Agreement for the remainder of the term as set forth in Section 2 of this Agreement. In addition to the salary provisions of Section 6, such payment shall include any amounts due to Executive under the provisions of Section 7 hereof, such as -7- amounts due for expense reimbursement or for accrued vacation time. Any and all monetary amounts payable to the Executive under this Section 9 shall be paid in the manner selected by the Executive, at his sole discretion. Section 10. Covenants 10.01 Covenants of Executive: (a) Noncompetition: Executive agrees that for the period commencing from the date of his employment under this Agreement and continuing for the period of such employment and for a period of eighteen (18) months after termination of such employment, he shall not directly or indirectly be involved in, or shall have an interest in, any person, firm, corporation or business, whether as an employee, officer, director, agent, shareholder or otherwise (except as a minority shareholder of a publicly held corporation) that is engaged in any business in which the Company is engaged or which places Executive in a position which may constitute a conflict between the interests of the Executive and the interests of the Company; provided, however, the prohibitions and restrictions set forth in this section shall not apply to or in any way limit a relationship, involvement or interest in any firm, corporation or business which in the ordinary course of its business activities does not have more than ten percent (10%) of its annual gross income derived from the business activities in which the Company is engaged during the period of Executive's employment under this Agreement. (b) Nonsolicitation: Executive covenants that for a period of eighteen (18) months after the termination of Executive's employment with the Company, Executive shall not, directly or indirectly (meaning, for purposes hereof, through another person or entity acting on Executive's behalf), as an employee, agent, salesperson, consultant or member of any person, corporation, firm or otherwise, (i) call upon or solicit any persons, firms, corporations or otherwise who are clients or customers of the Company; (ii) solicit any employee or agent of the Company or make such other contact with the employees or agents of the Company, the result of which contact will or may yield a termination of the employment or agency relationship of such employees or agents from the Company. -8- (c) Confidentiality: Executive acknowledges that he has been exposed to or has had access to, and will continue to have access to, confidential information regarding the business of the Company, including, but not limited to, trade secrets and proprietary information, all of which are proprietary assets of the Company, and which give the Company an advantage in the marketplace against its competitors. Executive covenants that for a period of eighteen (18) months after termination of Executive's employment with the Company, Executive will hold and keep secret such proprietary information, and shall not directly or indirectly disclose or divulge any proprietary information to any person, firm or corporation unless prior written approval for such disclosure is given to Executive by the Company. (d) Protection of Company: Executive acknowledges that compliance with the restrictive covenants set forth in this Section 10 are necessary to protect the business, goodwill and proprietary information of the Company, and that a breach of these restrictions will irreparably and continually damage the Company for which money damages may not be adequate. Consequently, Executive agrees that in the event he breaches or threatens to breach any of these covenants, the Company shall be entitled to both (i) a temporary, preliminary or permanent injunction in order to prevent the continuation of such harm and (ii) money damages insofar as they can be determined. 10.02 Severability of Covenants: The unenforceability (or the modification to conform with such laws and public policies) of any provision of these covenants shall not render unenforceable or impair the remainder of the covenants. Accordingly, if any provisions of these covenants shall be determined to be invalid or unenforceable, either in whole or in part, these covenants shall be amended to delete or modify, as necessary, the offending provisions or offending portions of said provisions, and to alter the balance of these covenants in order to render the same valid and enforceable. Without limiting the generality of the foregoing, the Executive agrees that if these covenants are deemed by a court or other body having jurisdiction to be unreasonably broad, there shall be automatically substituted such area of coverage as such court or other body having jurisdiction deems to be reasonable and sufficient to protect the Company's interests herein. -9- 10.03 Survival of Covenants: The covenants set forth in this Section 10 shall survive the termination of this Agreement, and shall continue for a period of eighteen (18) months after the termination of Executive's employment with the Company. Section 11. Settlement of Disputes (a) Any controversy or dispute between the parties to this Agreement involving the construction, interpretation, application or performance of the terms, covenants or conditions of this Agreement or in any way arising under this Agreement shall, on demand of one of the parties by written notice hereto served on the other in the manner prescribed in Section 16 hereof, be determined pursuant to the general reference provisions of California Code of Civil Procedure ("CCP") ss.638(1), et seq., by a retired or former judge of the Superior Court for the County of Orange, State of California. The parties intend this general reference provision to be specifically enforceable in accordance with said ss.638(1). (b) The reference may be commenced by any party hereto by the filing in the Superior Court of the State of California for the County of Orange of a petition or a motion for a general reference. The petition and any opposition or response thereto shall recite in a clear and meaningful manner the factual basis of the controversy between the parties and identify the issues to be submitted to the referee for decision. (c) The petition or motion shall designate as a sole referee a retired judge from the Orange County, California, Judicial Arbitration & Mediation Services ("JAMS") panel acceptable to that party. If the parties to the reference proceeding are unable to agree upon a referee, the Presiding Judge or any judge of the Orange County Superior Court to whom the matter is assigned shall appoint a retired or former Orange County Superior Court Judge from the JAMS panel as the referee. (d) The parties acknowledge that the terms of this Section 11 are specifically enforceable and that the decision by the referee is tantamount to a judgment by a trial court (CCP ss.644) and is subject to review in accordance with CCP ss.645, and that any judgment rendered in the trial court is appealable in the same manner as any other trial court judgment. -10- Section 12. Setoff The Company agrees that its obligation to the Executive, whether to pay the Executive the compensation as provided in Section 6 of this Agreement, to provide Executive with the benefits set forth in Section 7 of this Agreement, or otherwise, shall not be subject at any time to any setoff, reduction, mitigation or diminishment as a result of any alleged claims which the Company believes it has against Executive, or for any other reason whatsoever. Section 13. Covenant of Good Faith The parties to this Agreement covenant that they enter into this Agreement and undertake the obligations of this Agreement in good faith. No party will do anything to interfere with the rights of any other party to obtain the advantages extended to that party by this Agreement. The parties agree that a breach of this covenant shall create a liability against the party in breach for consequential damages as though the breach were a tort, in addition to liability for other contractual damages. Section 14. Nonassignability This Agreement is a personal service contract and the rights and duties of the parties hereunder shall not be assignable, except in accordance with the provisions of Section 15 of this Agreement. Any attempted assignment or transfer not permitted by the terms of Section 15 shall be void and of no force and effect. Section 15. Successors and Assigns 15.01 Of the Company: If the Company shall at any time be merged or consolidated into or with any other corporation, or if substantially all of the assets of the Company are transferred to another corporation or party, the provisions of this Agreement shall be binding upon and inure to the benefit of the entity or successors resulting from such merger or consolidation or to which such assets shall be transferred; and this provision shall apply in such events. 15.02 Of Executive: To the extent applicable, this Agreement shall be binding on the devises, heirs, next of kin, executors and administrators of the Executive. Section 16. Notice 16.01 Method of Notice: All notices, demands or other communications required or desired to be given hereunder by any party shall be in writing and shall be validly given or made -11- to the other parties if served personally on such other parties or if deposited in the United States mail, certified or registered, postage prepaid, return receipt requested. If such notice, demand or other communication be served personally, service shall be deemed made at the time of such personal service. If such notice, demand or other communication be given by mail, such notice shall be conclusively deemed given forty-eight (48) hours after the deposit thereof in the United States mail, addressed to the party to whom such notice, demand or other communication is to be given as hereinafter provided. 16.02 Addresses: Notice shall be given to the Company at the following address: US Facilities Corporation 650 Town Center Drive, Suite 1600 Costa Mesa, California 92626 Attention: David L. Cargile, President and Chief Executive Officer Notice shall be given to the Executive at the following address: Craig J. Kelbel 56 Prairie Falcon Aliso Viejo, California 92656 Any party hereto may change his address for purposes of receiving notices, demands or other communications as herein provided by a written notice given in the manner aforesaid to the other party hereto. Section 17. Applicable Governing Law The parties hereto specifically concur that this Agreement, having been executed and delivered in the State of California between US Facilities Corporation, whose principal offices are in the State of California, and Craig J. Kelbel, a resident of the State of California, shall be construed in accordance with the laws of the State of California; and the validity, interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of California, including its laws and decisions relating to conflict of laws. Section 18. Severability/Captions Every provision in this Agreement is intended to be severable. If any term or provision hereof is illegal or invalid, for any reason whatsoever, such illegality or invalidity shall not affect the validity of the remainder hereof. The captions or headings in this Agreement are -12- inserted for convenience and identification only and are in no way intended to describe, interpret, define or limit the scope, extent or intent of this Agreement or any provisions hereof. Section 19. Amendments/Waivers No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing after approval by the Company's Board of Directors and signed by Executive and an officer of the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. Section 20. Entire Agreement/Severance Agreement 20.01 Employment Agreement: Except as set forth in Section 20.02 below, this Agreement expresses the entire agreement of the parties hereto, and supersedes all prior promises, representations, understandings, arrangements and agreements between these parties with respect to the subject matter herein, specifically including any prior Employment Agreement between the Executive and the Company, and any amendments and corrections to such prior Employment Agreement. The parties hereto further acknowledge and agree that neither of them has made any representation to induce the execution and delivery of this Agreement, except those as specifically set forth herein. 20.02 Severance Agreement: Notwithstanding anything set forth in Subsection 20.01 above or in any Severance Agreement with Executive which would appear to be to the contrary, if Executive and the Company have entered into a Severance Agreement which is in effect at the time of Executive's termination, then in that event the Company and Executive hereby agree that Executive shall be entitled to receive upon Executive's termination either (i) the salary and bonus termination payments as provided for in this Employment Agreement, or (ii) the salary and bonus termination payments as provided for in any Severance Agreement between Executive and the Company, whichever salary and bonus termination payment is the greater; but under no conditions shall Executive be entitled to receive upon termination the salary and bonus termination payments under a Severance Agreement and the salary and bonus termination payments under this Employment Agreement. -13- Section 21. Signatures In Witness Whereof, the Company has authorized that this Agreement be executed, and when the Company's duly authorized officers and the Executive have signed this Agreement in the places as indicated below, this Agreement shall be effective as of November 1, 1996. Company: US Facilities Corporation By /s/ DAVID L. CARGILE ------------------------------------- David L. Cargile President and Chief Executive Officer Executive: /s/ CRAIG J. KELBEL ------------------------------------- Craig J. Kelbel Witness: /s/ JOSE A. VELASCO - ------------------------------------ Jose A. Velasco Senior Vice President, Secretary and General Counsel
-14- EX-10.5(VII) 6 AMEND TO SEVERANCE - COMPANY & DAVID CARGILE EXHIBIT 10.5 (vii) Amendment No. 1 To Severance Agreement Between US Facilities Ccorporation And David L. Cargile --------------- Whereas, US Facilities Corporation, a Delaware corporation (the "Company"), and David L. Cargile (the "Executive") entered into a Severance Agreement dated May 24, 1994 with respect to the termination of Executive's employment with the Company (the "Agreement"); and Whereas, the Company and the Executive desire to amend Section 4(e) to clarify the definition of events which constitute a "Change in Control" for purposes of this Agreement and to amend Section 5(a) which defines the obligations of the Company regarding salary and bonus termination payments to Executive; Now, Therefore, in consideration of the Company's agreement to continue the employment of Executive for a period of a minimum of six (6) months from the date of this Amendment and the payment to Executive of $1.00 and other good and valuable consideration, receipt of which is hereby acknowledged, the Company and the Executive hereby agree to enter into this Amendment to the Agreement as follows: 1. Section 4(e) of the Agreement as originally written shall be stricken and eliminated from the Agreement, and shall be completely replaced by a new Section 4(e), which shall read in full as follows: (e) For purposes of this Agreement, a "Change in Control" shall mean the occurrence, after the Effective Date hereof, of any of the following events if such events are not approved by the Board of Directors of the Company prior to their occurrence; -1- (i) At any time during the term of this Agreement, any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") and the regulations of the Securities and Exchange Commission (the "SEC") thereunder, each as in effect on the Effective Date of this Agreement (including any such persons that may be deemed to be acting in concert with respect to the Company or the acquisition, ownership or voting of Company securities) becomes, directly or indirectly, the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act and the regulations of the SEC thereunder, each as in effect on the Effective Date of this Agreement) of outstanding securities of the Company representing 10% or more of the combined voting power of the Company's then outstanding securities. For purposes of this subsection (i) of Section 4(e) of the Agreement, a person becomes, directly or indirectly, the beneficial owner of outstanding securities of the Company representing 10% or more of the combined voting power of the Company's outstanding securities when such person, together with all affiliates and associates of such person, acquires beneficial ownership of, in the aggregate, a number of voting shares of the Company equal to 1% or more of the voting shares then outstanding, and thereupon or thereafter beneficially owns (as defined in the aforenoted Rule 13d-3 under the Exchange Act) 10% or more of the voting shares of the Company then outstanding; provided, however, that the concept of any person becoming the owner of 10% or more of the combined voting shares shall not include: (A) the Company, any wholly owned subsidiary of the Company, any employee benefit plan of the Company or of a subsidiary of the Company, or any person holding voting shares for or pursuant to the terms of any such employee benefit plan; or (B) any person if such person would not otherwise be a 10% stockholder but for a reduction in the number of outstanding voting shares resulting from a stock repurchase program or other similar plan instituted by the Company or from a self-tender offer of the Company, which plan or tender offer commenced on or after the Effective Date of this Agreement; provided, however, that the concept of becoming the owner of 10% or more of the combined voting shares shall include such beneficial owner after the first date upon which (x) such person, since the date of commencement of such plan or tender offer, shall have acquired beneficial ownership of, in the aggregate, a number of voting shares of the Company equal to 1% or more of the voting shares then outstanding, and (y) such person, together with all affiliates and associates of such person, shall beneficially own 10% or more of the voting shares of the Company then outstanding. In calculating the percentage of the person for purposes of this subsection, voting shares that are beneficially owned by such person shall be deemed outstanding, and voting shares that are not beneficially owned by such person and that are subject to issuance upon the exercise or conversion of outstanding conversion rights, exchange rights, rights (other than rights), warrants or options shall not be deemed outstanding. Any determination made by the directors as to whether any person is or is not a 10% stockholder for purposes of this subsection shall be conclusive and binding upon the Company and upon all stockholders; -2- (ii) At any time during the term of this Agreement the composition of the Board of Directors of the Company is changed such that persons who were directors of the Company as of the Effective Date, or persons nominated or elected as directors by a majority of such persons who were directors as of the Effective Date, do not continue to comprise a majority of the members of such Board of Directors of the Company; (iii) At any time during the term of this Agreement the stockholders of the Company approve a merger or consolidation of the Company with, or a reorganization transaction involving the Company and, any other entity, other than a merger, consolidation or reorganization which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (iv) At any time during the term of this Agreement the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of more than 50% of its consolidated assets. 2. Section 5(a) of the Agreement as originally written shall be stricken and eliminated from the Agreement, and shall be completely replaced by a new Section 5(a), which shall read in full as follows: (a) Salary and Bonus: Subject to the limitations set forth in Section 7 hereof, the Company shall pay to the Executive that amount which is equal to his regular base salary, at the rate then in effect, for a period of three (3) years, plus a bonus in an amount which shall be equal to one-and-one-half (1 1/2) times the largest cash bonus actually received by Executive during his term of employment with the Company; provided, however, that if Executive shall have entered into an Employment Agreement with the Company which is in effect at the time of Executive's termination, then and in that event the Company and Executive agree that upon Executive's termination Executive shall be entitled to receive either (i) the salary and bonus termination payments under this Section 5(a), or (ii) the salary and bonus terminations payments provided for in such Employment Agreement, whichever salary and bonus termination payment is the greater; but under no conditions shall Executive be entitled to receive upon termination both the salary and bonus termination payments under this Severance Agreement and the salary and bonus termination payments under any such Employment Agreement. -3- 3. This Amendment shall be retroactive and shall be considered and deemed to have been in effect as of May 24, 1994, the Effective Date of the Agreement, which is the date when it was entered into by the parties hereto. 4. Apart from this Amendment, the terms of the Agreement as entered into on May 24, 1994 shall otherwise in all respects remain as originally written to the extent that such terms do not conflict with or are inconsistent with this Amendment. In Witness Whereof, this Amendment No. 1 has been executed by a duly authorized officer of the Company and by the Executive as of the 4th day of December, 1996. Company: US Facilities Corporation By /s/ JOSE A. VELASCO ---------------------------------------- Jose A. Velasco Senior Vice President, Secretary and General Counsel Executive: /s/ DAVID L. CARGILE ----------------------------------------- David L. Cargile
-4- EX-10.5(VIII) 7 AMEND TO SEVERANCE - COMPANY & HOWARD S. SINGER EXHIBIT 10.5 (viii) Amendment No. 1 To Severance Agreement Between US Facilities Corporation And Howard S. Singer ---------------- Whereas, US Facilities Corporation, a Delaware corporation (the "Company"), and Howard S. Singer (the "Executive") entered into a Severance Agreement dated May 24, 1994 with respect to the termination of Executive's employment with the Company (the "Agreement"); and Whereas, the Company and the Executive desire to amend Section 4(e) to clarify the definition of events which constitute a "Change in Control" for purposes of this Agreement and to amend Section 5(a) which defines the obligations of the Company regarding salary and bonus termination payments to Executive; Now, Therefore, in consideration of the Company's agreement to continue the employment of Executive for a period of a minimum of six (6) months from the date of this Amendment and the payment to Executive of $1.00 and other good and valuable consideration, receipt of which is hereby acknowledged, the Company and the Executive hereby agree to enter into this Amendment to the Agreement as follows: 1. Section 4(e) of the Agreement as originally written shall be stricken and eliminated from the Agreement, and shall be completely replaced by a new Section 4(e), which shall read in full as follows: (e) For purposes of this Agreement, a "Change in Control" shall mean the occurrence, after the Effective Date hereof, of any of the following events if such events are not approved by the Board of Directors of the Company prior to their occurrence; -1- (i) At any time during the term of this Agreement, any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") and the regulations of the Securities and Exchange Commission (the "SEC") thereunder, each as in effect on the Effective Date of this Agreement (including any such persons that may be deemed to be acting in concert with respect to the Company or the acquisition, ownership or voting of Company securities) becomes, directly or indirectly, the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act and the regulations of the SEC thereunder, each as in effect on the Effective Date of this Agreement) of outstanding securities of the Company representing 10% or more of the combined voting power of the Company's then outstanding securities. For purposes of this subsection (i) of Section 4(e) of the Agreement, a person becomes, directly or indirectly, the beneficial owner of outstanding securities of the Company representing 10% or more of the combined voting power of the Company's outstanding securities when such person, together with all affiliates and associates of such person, acquires beneficial ownership of, in the aggregate, a number of voting shares of the Company equal to 1% or more of the voting shares then outstanding, and thereupon or thereafter beneficially owns (as defined in the aforenoted Rule 13d-3 under the Exchange Act) 10% or more of the voting shares of the Company then outstanding; provided, however, that the concept of any person becoming the owner of 10% or more of the combined voting shares shall not include: (A) the Company, any wholly owned subsidiary of the Company, any employee benefit plan of the Company or of a subsidiary of the Company, or any person holding voting shares for or pursuant to the terms of any such employee benefit plan; or (B) any person if such person would not otherwise be a 10% stockholder but for a reduction in the number of outstanding voting shares resulting from a stock repurchase program or other similar plan instituted by the Company or from a self-tender offer of the Company, which plan or tender offer commenced on or after the Effective Date of this Agreement; provided, however, that the concept of becoming the owner of 10% or more of the combined voting shares shall include such beneficial owner after the first date upon which (x) such person, since the date of commencement of such plan or tender offer, shall have acquired beneficial ownership of, in the aggregate, a number of voting shares of the Company equal to 1% or more of the voting shares then outstanding, and (y) such person, together with all affiliates and associates of such person, shall beneficially own 10% or more of the voting shares of the Company then outstanding. In calculating the percentage of the person for purposes of this subsection, voting shares that are beneficially owned by such person shall be deemed outstanding, and voting shares that are not beneficially owned by such person and that are subject to issuance upon the exercise or conversion of outstanding conversion rights, exchange rights, rights (other than rights), warrants or options shall not be deemed outstanding. Any determination made by the directors as to whether any person is or is not a 10% stockholder for purposes of this subsection shall be conclusive and binding upon the Company and upon all stockholders; -2- (ii) At any time during the term of this Agreement the composition of the Board of Directors of the Company is changed such that persons who were directors of the Company as of the Effective Date, or persons nominated or elected as directors by a majority of such persons who were directors as of the Effective Date, do not continue to comprise a majority of the members of such Board of Directors of the Company; (iii) At any time during the term of this Agreement the stockholders of the Company approve a merger or consolidation of the Company with, or a reorganization transaction involving the Company and, any other entity, other than a merger, consolidation or reorganization which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (iv) At any time during the term of this Agreement the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of more than 50% of its consolidated assets. 2. Section 5(a) of the Agreement as originally written shall be stricken and eliminated from the Agreement, and shall be completely replaced by a new Section 5(a), which shall read in full as follows: (a) Salary and Bonus: Subject to the limitations set forth in Section 7 hereof, the Company shall pay to the Executive that amount which is equal to his regular base salary, at the rate then in effect, for a period of two (2) years, plus a bonus in an amount which shall be equal to the largest cash bonus actually received by Executive during his term of employment with the Company; provided, however, that if Executive shall have entered into an Employment Agreement with the Company which is in effect at the time of Executive's termination, then and in that event the Company and Executive agree that upon Executive's termination Executive shall be entitled to receive either (i) the salary and bonus termination payments under this Section 5(a), or (ii) the salary and bonus terminations payments provided for in such Employment Agreement, whichever salary and bonus termination payment is the greater; but under no conditions shall Executive be entitled to receive upon termination both the salary and bonus termination payments under this Severance Agreement and the salary and bonus termination payments under any such Employment Agreement. -3- 3. This Amendment shall be retroactive and shall be considered and deemed to have been in effect as of May 24, 1994, the Effective Date of the Agreement, which is the date when it was entered into by the parties hereto. 4. Apart from this Amendment, the terms of the Agreement as entered into on May 24, 1994 shall otherwise in all respects remain as originally written to the extent that such terms do not conflict with or are inconsistent with this Amendment. In Witness Whereof, this Amendment No. 1 has been executed by a duly authorized officer of the Company and by the Executive as of the 4th day of December, 1996. Company: US Facilities Corporation By /s/ DAVID L. CARGILE ---------------------------------------- David L. Cargile President and Chief Executive Officer Executive: /s/ HOWARD S. SINGER ------------------------------------------- Howard S. Singer
-4- EX-10.5(IX) 8 AMEND TO SEVERANCE - COMPANY & JOHN T. GRUSH EXHIBIT 10.5(ix) Amendment No. 1 To Severance Agreement Between US Facilities Corporation And John T. Grush --------------- Whereas, US Facilities Corporation, a Delaware corporation (the "Company"), and John T. Grush (the "Executive") entered into a Severance Agreement dated May 24, 1994 with respect to the termination of Executive's employment with the Company (the "Agreement"); and Whereas, the Company and the Executive desire to amend Section 4(e) to clarify the definition of events which constitute a "Change in Control" for purposes of this Agreement and to amend Section 5(a) which defines the obligations of the Company regarding salary and bonus termination payments to Executive; Now, Therefore, in consideration of the Company's agreement to continue the employment of Executive for a period of a minimum of six (6) months from the date of this Amendment and the payment to Executive of $1.00 and other good and valuable consideration, receipt of which is hereby acknowledged, the Company and the Executive hereby agree to enter into this Amendment to the Agreement as follows: 1. Section 4(e) of the Agreement as originally written shall be stricken and eliminated from the Agreement, and shall be completely replaced by a new Section 4(e), which shall read in full as follows: (e) For purposes of this Agreement, a "Change in Control" shall mean the occurrence, after the Effective Date hereof, of any of the following events if such events are not approved by the Board of Directors of the Company prior to their occurrence; -1- (i) At any time during the term of this Agreement, any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") and the regulations of the Securities and Exchange Commission (the "SEC") thereunder, each as in effect on the Effective Date of this Agreement (including any such persons that may be deemed to be acting in concert with respect to the Company or the acquisition, ownership or voting of Company securities) becomes, directly or indirectly, the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act and the regulations of the SEC thereunder, each as in effect on the Effective Date of this Agreement) of outstanding securities of the Company representing 10% or more of the combined voting power of the Company's then outstanding securities. For purposes of this subsection (i) of Section 4(e) of the Agreement, a person becomes, directly or indirectly, the beneficial owner of outstanding securities of the Company representing 10% or more of the combined voting power of the Company's outstanding securities when such person, together with all affiliates and associates of such person, acquires beneficial ownership of, in the aggregate, a number of voting shares of the Company equal to 1% or more of the voting shares then outstanding, and thereupon or thereafter beneficially owns (as defined in the aforenoted Rule 13d-3 under the Exchange Act) 10% or more of the voting shares of the Company then outstanding; provided, however, that the concept of any person becoming the owner of 10% or more of the combined voting shares shall not include: (A) the Company, any wholly owned subsidiary of the Company, any employee benefit plan of the Company or of a subsidiary of the Company, or any person holding voting shares for or pursuant to the terms of any such employee benefit plan; or (B) any person if such person would not otherwise be a 10% stockholder but for a reduction in the number of outstanding voting shares resulting from a stock repurchase program or other similar plan instituted by the Company or from a self-tender offer of the Company, which plan or tender offer commenced on or after the Effective Date of this Agreement; provided, however, that the concept of becoming the owner of 10% or more of the combined voting shares shall include such beneficial owner after the first date upon which (x) such person, since the date of commencement of such plan or tender offer, shall have acquired beneficial ownership of, in the aggregate, a number of voting shares of the Company equal to 1% or more of the voting shares then outstanding, and (y) such person, together with all affiliates and associates of such person, shall beneficially own 10% or more of the voting shares of the Company then outstanding. In calculating the percentage of the person for purposes of this subsection, voting shares that are beneficially owned by such person shall be deemed outstanding, and voting shares that are not beneficially owned by such person and that are subject to issuance upon the exercise or conversion of outstanding conversion rights, exchange rights, rights (other than rights), warrants or options shall not be deemed outstanding. Any determination made by the directors as to whether any person is or is not a 10% stockholder for purposes of this subsection shall be conclusive and binding upon the Company and upon all stockholders; -2- (ii) At any time during the term of this Agreement the composition of the Board of Directors of the Company is changed such that persons who were directors of the Company as of the Effective Date, or persons nominated or elected as directors by a majority of such persons who were directors as of the Effective Date, do not continue to comprise a majority of the members of such Board of Directors of the Company; (iii) At any time during the term of this Agreement the stockholders of the Company approve a merger or consolidation of the Company with, or a reorganization transaction involving the Company and, any other entity, other than a merger, consolidation or reorganization which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (iv) At any time during the term of this Agreement the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of more than 50% of its consolidated assets. 2. Section 5(a) of the Agreement as originally written shall be stricken and eliminated from the Agreement, and shall be completely replaced by a new Section 5(a), which shall read in full as follows: (a) Salary and Bonus: Subject to the limitations set forth in Section 7 hereof, the Company shall pay to the Executive that amount which is equal to his regular base salary, at the rate then in effect, for a period of two (2) years, plus a bonus in an amount which shall be equal to the largest cash bonus actually received by Executive during his term of employment with the Company; provided, however, that if Executive shall have entered into an Employment Agreement with the Company which is in effect at the time of Executive's termination, then and in that event the Company and Executive agree that upon Executive's termination Executive shall be entitled to receive either (i) the salary and bonus termination payments under this Section 5(a), or (ii) the salary and bonus terminations payments provided for in such Employment Agreement, whichever salary and bonus termination payment is the greater; but under no conditions shall Executive be entitled to receive upon termination both the salary and bonus termination payments under this Severance Agreement and the salary and bonus termination payments under any such Employment Agreement. -3- 3. This Amendment shall be retroactive and shall be considered and deemed to have been in effect as of May 24, 1994, the Effective Date of the Agreement, which is the date when it was entered into by the parties hereto. 4. Apart from this Amendment, the terms of the Agreement as entered into on May 24, 1994 shall otherwise in all respects remain as originally written to the extent that such terms do not conflict with or are inconsistent with this Amendment. In Witness Whereof, this Amendment No. 1 has been executed by a duly authorized officer of the Company and by the Executive as of the 4th day of December, 1996. Company: US Facilities Corporation By /s/ DAVID L. CARGILE ----------------------- David L. Cargile President and Chief Executive Officer Executive: /s/ JOHN T. GRUSH ------------------------------------- John T. Grush
-4- EX-10.5(X) 9 AMEND TO SEVERANCE - COMPANY & CRAIG J. KELBEL EXHIBIT 10.5(x) Amendment No. 1 To Severance Agreement Between US Facilities Corporation And Craig J. Kelbel --------------- Whereas, US Facilities Corporation, a Delaware corporation (the "Company"), and Craig J. Kelbel (the "Executive") entered into a Severance Agreement dated May 24, 1994 with respect to the termination of Executive's employment with the Company (the "Agreement"); and Whereas, the Company and the Executive desire to amend Section 4(e) to clarify the definition of events which constitute a "Change in Control" for purposes of this Agreement and to amend Section 5(a) which defines the obligations of the Company regarding salary and bonus termination payments to Executive; Now, Therefore, in consideration of the Company's agreement to continue the employment of Executive for a period of a minimum of six (6) months from the date of this Amendment and the payment to Executive of $1.00 and other good and valuable consideration, receipt of which is hereby acknowledged, the Company and the Executive hereby agree to enter into this Amendment to the Agreement as follows: 1. Section 4(e) of the Agreement as originally written shall be stricken and eliminated from the Agreement, and shall be completely replaced by a new Section 4(e), which shall read in full as follows: (e) For purposes of this Agreement, a "Change in Control" shall mean the occurrence, after the Effective Date hereof, of any of the following events if such events are not approved by the Board of Directors of the Company prior to their occurrence; -1- (i) At any time during the term of this Agreement, any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") and the regulations of the Securities and Exchange Commission (the "SEC") thereunder, each as in effect on the Effective Date of this Agreement (including any such persons that may be deemed to be acting in concert with respect to the Company or the acquisition, ownership or voting of Company securities) becomes, directly or indirectly, the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act and the regulations of the SEC thereunder, each as in effect on the Effective Date of this Agreement) of outstanding securities of the Company representing 10% or more of the combined voting power of the Company's then outstanding securities. For purposes of this subsection (i) of Section 4(e) of the Agreement, a person becomes, directly or indirectly, the beneficial owner of outstanding securities of the Company representing 10% or more of the combined voting power of the Company's outstanding securities when such person, together with all affiliates and associates of such person, acquires beneficial ownership of, in the aggregate, a number of voting shares of the Company equal to 1% or more of the voting shares then outstanding, and thereupon or thereafter beneficially owns (as defined in the aforenoted Rule 13d-3 under the Exchange Act) 10% or more of the voting shares of the Company then outstanding; provided, however, that the concept of any person becoming the owner of 10% or more of the combined voting shares shall not include: (A) the Company, any wholly owned subsidiary of the Company, any employee benefit plan of the Company or of a subsidiary of the Company, or any person holding voting shares for or pursuant to the terms of any such employee benefit plan; or (B) any person if such person would not otherwise be a 10% stockholder but for a reduction in the number of outstanding voting shares resulting from a stock repurchase program or other similar plan instituted by the Company or from a self-tender offer of the Company, which plan or tender offer commenced on or after the Effective Date of this Agreement; provided, however, that the concept of becoming the owner of 10% or more of the combined voting shares shall include such beneficial owner after the first date upon which (x) such person, since the date of commencement of such plan or tender offer, shall have acquired beneficial ownership of, in the aggregate, a number of voting shares of the Company equal to 1% or more of the voting shares then outstanding, and (y) such person, together with all affiliates and associates of such person, shall beneficially own 10% or more of the voting shares of the Company then outstanding. In calculating the percentage of the person for purposes of this subsection, voting shares that are beneficially owned by such person shall be deemed outstanding, and voting shares that are not beneficially owned by such person and that are subject to issuance upon the exercise or conversion of outstanding conversion rights, exchange rights, rights (other than rights), warrants or options shall not be deemed outstanding. Any determination made by the directors as to whether any person is or is not a 10% stockholder for purposes of this subsection shall be conclusive and binding upon the Company and upon all stockholders; -2- (ii) At any time during the term of this Agreement the composition of the Board of Directors of the Company is changed such that persons who were directors of the Company as of the Effective Date, or persons nominated or elected as directors by a majority of such persons who were directors as of the Effective Date, do not continue to comprise a majority of the members of such Board of Directors of the Company; (iii) At any time during the term of this Agreement the stockholders of the Company approve a merger or consolidation of the Company with, or a reorganization transaction involving the Company and, any other entity, other than a merger, consolidation or reorganization which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (iv) At any time during the term of this Agreement the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of more than 50% of its consolidated assets. 2. Section 5(a) of the Agreement as originally written shall be stricken and eliminated from the Agreement, and shall be completely replaced by a new Section 5(a), which shall read in full as follows: (a) Salary and Bonus: Subject to the limitations set forth in Section 7 hereof, the Company shall pay to the Executive that amount which is equal to his regular base salary, at the rate then in effect, for a period of two (2) years, plus a bonus in an amount which shall be equal to the largest cash bonus actually received by Executive during his term of employment with the Company; provided, however, that if Executive shall have entered into an Employment Agreement with the Company which is in effect at the time of Executive's termination, then and in that event the Company and Executive agree that upon Executive's termination Executive shall be entitled to receive either (i) the salary and bonus termination payments under this Section 5(a), or (ii) the salary and bonus terminations payments provided for in such Employment Agreement, whichever salary and bonus termination payment is the greater; but under no conditions shall Executive be entitled to receive upon termination both the salary and bonus termination payments under this Severance Agreement and the salary and bonus termination payments under any such Employment Agreement. -3- 3. This Amendment shall be retroactive and shall be considered and deemed to have been in effect as of May 24, 1994, the Effective Date of the Agreement, which is the date when it was entered into by the parties hereto. 4. Apart from this Amendment, the terms of the Agreement as entered into on May 24, 1994 shall otherwise in all respects remain as originally written to the extent that such terms do not conflict with or are inconsistent with this Amendment. In Witness Whereof, this Amendment No. 1 has been executed by a duly authorized officer of the Company and by the Executive as of the 4th day of December, 1996. Company: US Facilities Corporation By /s/ DAVID L. CARGILE ---------------------------------------- David L. Cargile President and Chief Executive Officer Executive: /s/ CRAIG J. KELBEL ---------------------------------------- Craig J. Kelbel
-4- EX-10.5(XI) 10 AMEND TO SEVERANCE - COMPANY & MARK BURKE EXHIBIT 10.5 (xi) Amendment No. 1 To Severance Agreement Between US Facilities Corporation And Mark Burke --------------- Whereas, US Facilities Corporation, a Delaware corporation (the "Company"), and Mark Burke (hereinafter referred to as "Executive") entered into a Severance Agreement dated May 24, 1994 with respect to the termination of Executive's employment with the Company (the "Agreement"); and Whereas, the Company and the Executive desire to amend Section 4(e) to clarify the definition of events which constitute a "Change in Control" for purposes of this Agreement and to amend Section 5(a) which defines the obligations of the Company regarding salary and bonus termination payments to Executive; Now, Therefore, in consideration of the Company's agreement to continue the employment of Executive for a period of a minimum of six (6) months from the date of this Amendment and the payment to Executive of $1.00 and other good and valuable consideration, receipt of which is hereby acknowledged, the Company and the Executive hereby agree to enter into this Amendment to the Agreement as follows: 1. Section 4(e) of the Agreement as originally written shall be stricken and eliminated from the Agreement, and shall be completely replaced by a new Section 4(e), which shall read in full as follows: (e) For purposes of this Agreement, a "Change in Control" shall mean the occurrence, after the Effective Date hereof, of any of the following events if such events are not approved by the Board of Directors of the Company prior to their occurrence; -1- (i) At any time during the term of this Agreement, any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") and the regulations of the Securities and Exchange Commission (the "SEC") thereunder, each as in effect on the Effective Date of this Agreement (including any such persons that may be deemed to be acting in concert with respect to the Company or the acquisition, ownership or voting of Company securities) becomes, directly or indirectly, the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act and the regulations of the SEC thereunder, each as in effect on the Effective Date of this Agreement) of outstanding securities of the Company representing 10% or more of the combined voting power of the Company's then outstanding securities. For purposes of this subsection (i) of Section 4(e) of the Agreement, a person becomes, directly or indirectly, the beneficial owner of outstanding securities of the Company representing 10% or more of the combined voting power of the Company's outstanding securities when such person, together with all affiliates and associates of such person, acquires beneficial ownership of, in the aggregate, a number of voting shares of the Company equal to 1% or more of the voting shares then outstanding, and thereupon or thereafter beneficially owns (as defined in the aforenoted Rule 13d-3 under the Exchange Act) 10% or more of the voting shares of the Company then outstanding; provided, however, that the concept of any person becoming the owner of 10% or more of the combined voting shares shall not include: (A) the Company, any wholly owned subsidiary of the Company, any employee benefit plan of the Company or of a subsidiary of the Company, or any person holding voting shares for or pursuant to the terms of any such employee benefit plan; or (B) any person if such person would not otherwise be a 10% stockholder but for a reduction in the number of outstanding voting shares resulting from a stock repurchase program or other similar plan instituted by the Company or from a self-tender offer of the Company, which plan or tender offer commenced on or after the Effective Date of this Agreement; provided, however, that the concept of becoming the owner of 10% or more of the combined voting shares shall include such beneficial owner after the first date upon which (x) such person, since the date of commencement of such plan or tender offer, shall have acquired beneficial ownership of, in the aggregate, a number of voting shares of the Company equal to 1% or more of the voting shares then outstanding, and (y) such person, together with all affiliates and associates of such person, shall beneficially own 10% or more of the voting shares of the Company then outstanding. In calculating the percentage of the person for purposes of this subsection, voting shares that are beneficially owned by such person shall be deemed outstanding, and voting shares that are not beneficially owned by such person and that are subject to issuance upon the exercise or conversion of outstanding conversion rights, exchange rights, rights (other than rights), warrants or options shall not be deemed outstanding. Any determination made by the directors as to whether any person is or is not a 10% stockholder for purposes of this subsection shall be conclusive and binding upon the Company and upon all stockholders; -2- (ii) At any time during the term of this Agreement the composition of the Board of Directors of the Company is changed such that persons who were directors of the Company as of the Effective Date, or persons nominated or elected as directors by a majority of such persons who were directors as of the Effective Date, do not continue to comprise a majority of the members of such Board of Directors of the Company; (iii) At any time during the term of this Agreement the stockholders of the Company approve a merger or consolidation of the Company with, or a reorganization transaction involving the Company and, any other entity, other than a merger, consolidation or reorganization which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (iv) At any time during the term of this Agreement the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of more than 50% of its consolidated assets. 2. Section 5(a) of the Agreement as originally written shall be stricken and eliminated from the Agreement, and shall be completely replaced by a new Section 5(a), which shall read in full as follows: (a) Salary and Bonus: Subject to the limitations set forth in Section 7 hereof, the Company shall pay to the Executive that amount which is equal to his regular base salary, at the rate then in effect, for a period of two (2) years, plus a bonus in an amount which shall be equal to the largest cash bonus actually received by Executive during his term of employment with the Company; provided, however, that if Executive shall have entered into an Employment Agreement with the Company which is in effect at the time of Executive's termination, then and in that event the Company and Executive agree that upon Executive's termination Executive shall be entitled to receive either (i) the salary and bonus termination payments under this Section 5(a), or (ii) the salary and bonus terminations payments provided for in such Employment Agreement, whichever salary and bonus termination payment is the greater; but under no conditions shall Executive be entitled to receive upon termination both the salary and bonus termination payments under this Severance Agreement and the salary and bonus termination payments under any such Employment Agreement. -3- 3. This Amendment shall be retroactive and shall be considered and deemed to have been in effect as of May 24, 1994, the Effective Date of the Agreement, which is the date when it was entered into by the parties hereto. 4. Apart from this Amendment, the terms of the Agreement as entered into on May 24, 1994 shall otherwise in all respects remain as originally written to the extent that such terms do not conflict with or are inconsistent with this Amendment. In Witness Whereof, this Amendment No. 1 has been executed by a duly authorized officer of the Company and by the Executive as of the 4th day of December, 1996. Company: US Facilities Corporation By /s/ DAVID L. CARGILE ------------------------------------- David L. Cargile President and Chief Executive Officer Executive: /s/ MARK BURKE ---------------- Mark Burke
-4- EX-10.5(XII) 11 AMEND TO SEVERANCE - COMPANY & JOSE A. VELASCO EXHIBIT 10.5(xii) Amendment No. 1 To Severance Agreement Between US Facilities Corporation And Jose A. Velasco --------------- Whereas, US Facilities Corporation, a Delaware corporation (the "Company"), and Jose A. Velasco (the "Executive") entered into a Severance Agreement dated May 24, 1994 with respect to the termination of Executive's employment with the Company (the "Agreement"); and Whereas, the Company and the Executive desire to amend Section 4(e) to clarify the definition of events which constitute a "Change in Control" for purposes of this Agreement and to amend Section 5(a) which defines the obligations of the Company regarding salary and bonus termination payments to Executive; Now, Therefore, in consideration of the Company's agreement to continue the employment of Executive for a period of a minimum of six (6) months from the date of this Amendment and the payment to Executive of $1.00 and other good and valuable consideration, receipt of which is hereby acknowledged, the Company and the Executive hereby agree to enter into this Amendment to the Agreement as follows: 1. Section 4(e) of the Agreement as originally written shall be stricken and eliminated from the Agreement, and shall be completely replaced by a new Section 4(e), which shall read in full as follows: (e) For purposes of this Agreement, a "Change in Control" shall mean the occurrence, after the Effective Date hereof, of any of the following events if such events are not approved by the Board of Directors of the Company prior to their occurrence; -1- (i) At any time during the term of this Agreement, any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") and the regulations of the Securities and Exchange Commission (the "SEC") thereunder, each as in effect on the Effective Date of this Agreement (including any such persons that may be deemed to be acting in concert with respect to the Company or the acquisition, ownership or voting of Company securities) becomes, directly or indirectly, the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act and the regulations of the SEC thereunder, each as in effect on the Effective Date of this Agreement) of outstanding securities of the Company representing 10% or more of the combined voting power of the Company's then outstanding securities. For purposes of this subsection (i) of Section 4(e) of the Agreement, a person becomes, directly or indirectly, the beneficial owner of outstanding securities of the Company representing 10% or more of the combined voting power of the Company's outstanding securities when such person, together with all affiliates and associates of such person, acquires beneficial ownership of, in the aggregate, a number of voting shares of the Company equal to 1% or more of the voting shares then outstanding, and thereupon or thereafter beneficially owns (as defined in the aforenoted Rule 13d-3 under the Exchange Act) 10% or more of the voting shares of the Company then outstanding; provided, however, that the concept of any person becoming the owner of 10% or more of the combined voting shares shall not include: (A) the Company, any wholly owned subsidiary of the Company, any employee benefit plan of the Company or of a subsidiary of the Company, or any person holding voting shares for or pursuant to the terms of any such employee benefit plan; or (B) any person if such person would not otherwise be a 10% stockholder but for a reduction in the number of outstanding voting shares resulting from a stock repurchase program or other similar plan instituted by the Company or from a self-tender offer of the Company, which plan or tender offer commenced on or after the Effective Date of this Agreement; provided, however, that the concept of becoming the owner of 10% or more of the combined voting shares shall include such beneficial owner after the first date upon which (x) such person, since the date of commencement of such plan or tender offer, shall have acquired beneficial ownership of, in the aggregate, a number of voting shares of the Company equal to 1% or more of the voting shares then outstanding, and (y) such person, together with all affiliates and associates of such person, shall beneficially own 10% or more of the voting shares of the Company then outstanding. In calculating the percentage of the person for purposes of this subsection, voting shares that are beneficially owned by such person shall be deemed outstanding, and voting shares that are not beneficially owned by such person and that are subject to issuance upon the exercise or conversion of outstanding conversion rights, exchange rights, rights (other than rights), warrants or options shall not be deemed outstanding. Any determination made by the directors as to whether any person is or is not a 10% stockholder for purposes of this subsection shall be conclusive and binding upon the Company and upon all stockholders; -2- (ii) At any time during the term of this Agreement the composition of the Board of Directors of the Company is changed such that persons who were directors of the Company as of the Effective Date, or persons nominated or elected as directors by a majority of such persons who were directors as of the Effective Date, do not continue to comprise a majority of the members of such Board of Directors of the Company; (iii) At any time during the term of this Agreement the stockholders of the Company approve a merger or consolidation of the Company with, or a reorganization transaction involving the Company and, any other entity, other than a merger, consolidation or reorganization which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (iv) At any time during the term of this Agreement the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of more than 50% of its consolidated assets. 2. Section 5(a) of the Agreement as originally written shall be stricken and eliminated from the Agreement, and shall be completely replaced by a new Section 5(a), which shall read in full as follows: (a) Salary and Bonus: Subject to the limitations set forth in Section 7 hereof, the Company shall pay to the Executive that amount which is equal to his regular base salary, at the rate then in effect, for a period of two (2) years, plus a bonus in an amount which shall be equal to the largest cash bonus actually received by Executive during his term of employment with the Company; provided, however, that if Executive shall have entered into an Employment Agreement with the Company which is in effect at the time of Executive's termination, then and in that event the Company and Executive agree that upon Executive's termination Executive shall be entitled to receive either (i) the salary and bonus termination payments under this Section 5(a), or (ii) the salary and bonus terminations payments provided for in such Employment Agreement, whichever salary and bonus termination payment is the greater; but under no conditions shall Executive be entitled to receive upon termination both the salary and bonus termination payments under this Severance Agreement and the salary and bonus termination payments under any such Employment Agreement. -3- 3. This Amendment shall be retroactive and shall be considered and deemed to have been in effect as of May 24, 1994, the Effective Date of the Agreement, which is the date when it was entered into by the parties hereto. 4. Apart from this Amendment, the terms of the Agreement as entered into on May 24, 1994 shall otherwise in all respects remain as originally written to the extent that such terms do not conflict with or are inconsistent with this Amendment. In Witness Whereof, this Amendment No. 1 has been executed by a duly authorized officer of the Company and by the Executive as of the 4th day of December, 1996. Company: US Facilities Corporation By /s/ DAVID L. CARGILE ---------------------------------------- David L. Cargile President and Chief Executive Officer Executive: /s/ JOSE A. VELASCO ------------------------------------------- Jose A. Velasco
-4- EX-10.23 12 NON-QUALIFIED DEFERRED COMPENSATION PLAN EXHIBIT 10.23 [LOGO] US FACILITIES CORPORATION NON-QUALIFIED DEFERRED COMPENSATION PLAN EXECUTIVE PLAN TABLE OF CONTENTS
ARTICLE PAGE -------- ---- 1 DEFINITIONS................................................................ 1 2 ELIGIBILITY................................................................ 5 2.1 Selection by Committee of the Board of Directors................... 5 2.2 Deferred Compensation Plan Agreement............................... 5 3 DEFERRALS AND CONTRIBUTIONS................................................ 5 3.1 Annual Bonus Deferrals............................................. 5 3.2 401(k) Excess Salary Deferrals..................................... 5 3.3 Company Matching Contributions for 401(k) Excess Salary Deferrals.. 5 3.4 Long Term Incentive Plan........................................... 6 3.5 Vesting............................................................ 6 3.6 Time of Deferral................................................... 7 3.7 Investment Rate.................................................... 7 3.8 Interest Crediting................................................. 7 4 DISTRIBUTION OF BENEFITS................................................... 7 4.1 Amount of Distribution and Satisfaction of Company's Obligation......................................................... 7 4.2 Time of Distribution............................................... 7 4.3 Premature Distribution............................................. 7 4.4 Method of Distribution............................................. 8 5 BENEFICIARY BENEFIT........................................................ 8 5.1 Pre-retirement Survivor Benefit.................................... 8 5.2 Eligibility Requirements for Survivor Benefit...................... 8 5.3 Payment of Survivor Benefit........................................ 8 6 BENEFICIARY................................................................ 8 6.1 Beneficiary Designation............................................ 8 6.2 Change of Beneficiary Designation.................................. 8 6.3 No Beneficiary Designation......................................... 8 6.4 Effect of Payment.................................................. 8 7 LEAVE OF ABSENCE........................................................... 9 7.1 Paid Leave of Absence.............................................. 9 7.2 Unpaid Leave of Absence............................................ 9
ii
ARTICLE PAGE -------- ---- 8 TERMINATION, AMENDMENT OR MODIFICATION................................... 9 8.1 Termination...................................................... 9 8.2 Amendment........................................................ 9 8.3 Change in Control................................................ 9 9 MISCELLANEOUS............................................................ 9 9.1 Unsecured General Creditor....................................... 9 9.2 ERISA Provisions................................................. 9 9.3 Nonassignability................................................. 10 9.4 Not a Contract of Employment..................................... 10 9.5 Cooperation...................................................... 10 9.6 Terms............................................................ 10 9.7 Captions......................................................... 10 9.8 Governing Law.................................................... 10 9.9 Validity......................................................... 10 9.10 Notice.......................................................... 10 9.11 Successors...................................................... 11 9.12 Incompetent..................................................... 11 10 ADMINISTRATION.......................................................... 11 10.1 Committee Duties................................................ 11 10.2 Agents.......................................................... 11 10.3 Binding Effect of Decisions..................................... 11 10.4 Indemnity of Committee.......................................... 11 10.5 Company Information............................................. 12 10.6 Change in Payments.............................................. 12
iii [LOGO] US FACILITIES CORPORATION NON-QUALIFIED DEFERRED COMPENSATION PLAN EXECUTIVE PLAN PURPOSE This US Facilities Corporation Non-Qualified Deferred Compensation Plan - Executive Plan is adopted by US Facilities Corporation as of January 1, 1997 to provide specified benefits to a select group of key executive employees who contribute materially to the success of the Company and its subsidiaries. ARTICLE 1 DEFINITIONS For purposes hereof, the following phrases or terms shall have the following indicated meanings: 1.1 "Beneficiary" shall mean the person or entity designated by the Participant to receive any benefits payable under this Plan upon the death of a Participant. 1.2 "Board of Directors" shall mean the Board of Directors of US Facilities Corporation. 1.3 "Change in Control" shall mean the following and shall be deemed to occur if any of the following events occur: (i) Any "person," as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding voting securities; (ii) Individuals who, as of the date of the Plan, constituted the Board of Directors ("Incumbent Board") cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent 1 to such date whose election, or nomination for election by the Company's stockholders, is approved by a vote of at least a majority of the directors then comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of the office is in connection with an actual or threatened election contest relating to the election of the directors of the Company, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) shall, for the purposes of the Plan, be considered as though such person were a member of the Incumbent Board; (iii) The stockholders of the Company approve a merger or consolidation with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of another entity) more than 50% of the combined voting power of the voting securities of the Company or such other entity outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person acquired 50% or more of the combined voting power of the Company's then outstanding voting securities; or (iv) The stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or other disposition by the Company of all or substantially all of the Company's assets. Notwithstanding the preceding provisions of this Section 1.3, a Change in Control shall not be deemed to have occurred (1) if the "person" described in clause (i) of the preceding provisions of this Section 1.3 above (1) is an underwriter or underwriting syndicate that has acquired the ownership of 50% or more of the combined voting power of the Company's then outstanding voting securities solely in connection with a public offering of the Company's securities; (2) is the Company, any wholly owned subsidiary of the Company, any employee benefit plan of the Company or of a subsidiary of the Company, or any person holding voting shares for or pursuant to the terms of any such employee benefit plan; or (3) would not otherwise be a beneficial owner of 25% or more of the combined voting power of the Company's then outstanding voting securities but for a reduction in the number of outstanding voting securities resulting from a stock repurchase program or other similar plan of the Company or from a self tender offer of the Company, which plan or tender offer commenced on or after the date hereof; provided, however, that the term "person" shall include such person from and after the first date upon which (A) such person, since the date of the commencement of such plan or tender offer, shall have acquired beneficial ownership of, in the aggregate, a number of voting securities of the Company 2 equal to 1% or more of the voting securities of the Company then outstanding, and (B) such person, together with all affiliates and associates of such person, shall beneficially own 25% or more the voting securities of the Company then outstanding. In calculating the percentage of the person for purposes of this subsection, voting shares that are beneficially owned by such person shall be deemed outstanding, and voting shares that are not beneficially owned by such person and that are subject to issuance upon the exercise or conversion of outstanding conversion rights, exchange rights, rights (other than rights), warrants or options shall not be deemed outstanding. Any determination made by the Committee as to whether any person is or is not a 25% stockholder for purposes of this subsection shall be conclusive and binding upon the Company and upon all stockholders. 1.4 "Code" shall mean the Internal Revenue Code of 1986, as from time to time amended. 1.5 "Committee" shall mean the Compensation Committee appointed by the Board of Directors to manage and administer the Plan in accordance with its provisions pursuant to Article 10. 1.6 "Company" shall mean US Facilities Corporation, its successors and assigns as applicable. 1.7 "Compensation" shall mean compensation as the term is defined in the Qualified Plan. 1.8 "DCP Account" shall mean an individual account comprised of a Participant's Deferral Amounts and interest credited thereon. A DCP Account shall be maintained for each Participant. A Participant's DCP Account shall be only a bookkeeping entry and shall be utilized solely as a device for the measurement and determination of the amounts to be paid to the Participant pursuant to this Plan. A Participant's DCP Account(s) shall not constitute or be treated as a trust fund. 1.9 "Deferred Compensation Plan Agreement" shall mean the form of written agreement, as amended from time to time, which is entered into by and between the Company and a Participant. 1.10 "Deferral Amount" shall mean the amount of Compensation deferred by a Participant at the Time of Deferral pursuant to the election in the Deferred Compensation Plan Agreement. 1.11 "Disability" or "Disabled" shall be defined in the same manner as defined in the Company's Long Term Disability Plan in effect at the time that the Participant makes a disability claim. 3 1.12 "Distribution Event" shall be the earliest of the following to occur: (a) a Participant's death, Disability, Retirement or Termination of Employment, (b) the date the Participant elects to receive a Short- Term Payout under the applicable Deferred Compensation Plan Agreement, or (c) in the sole discretion of the Committee, in the event of a Medical Financial Emergency. 1.13 "Executives" shall mean those persons in the regular full-time employment of the Company who are key employees selected for participation in the Plan by the Committee. 1.14 "Investment Rate" shall mean the rate of earnings on deferrals as determined by the Board of Directors from time to time and shall not be changed once determined for a Plan Year. 1.15 "Long-Term Incentive Plan" shall mean the US Facilities Corporation 1997 Long-Term Incentive - Performance Unit Plan as in effect from time to time. 1.16 "Medical Financial Emergency" shall mean an unexpected need for cash arising from an illness of the Participant or members of the Participant's immediate family. 1.17 "Participant" shall mean any Executive who is eligible to participate and elects to participate in the Plan by executing a Deferred Compensation Plan Agreement. 1.18 "Plan" shall mean the US Facilities Corporation Non-Qualified Deferred Compensation Plan - Executive Plan which shall be evidenced by this instrument and by each Deferred Compensation Plan Agreement, as amended from time to time. 1.19 "Plan Anniversary Date" shall be the first day of the Plan Year. 1.20 "Plan Year" shall mean the calendar year. 1.21 "Qualified Plan" shall mean the US Facilities Corporation Employees' Savings Plan. 1.22 "Retirement" and "Retire" shall mean severance from employment with the Company at or after the attainment of age sixty-five (65). 1.23 "Short-Term Payout" shall mean the period elected in a Participant's Deferred Compensation Plan Agreement, which shall equal or exceed five (5) Plan Years. 1.24 "Termination of Employment" shall mean the ceasing of employment with the Company, voluntarily or involuntarily, for any reason other than Retirement, Disability or Death. 4 1.25 "Time of Deferral" shall mean the time the Participant must elect to defer compensation. 1.26 "Years of Service" shall mean all periods of employment with the Company. ARTICLE 2 ELIGIBILITY 2.1 Selection by Committee of the Board of Directors. The Committee shall ------------------------------------------------- have the sole discretion to determine the Executives who are key employees eligible to become Participants in accordance with the purpose of the Plan. 2.2 Deferred Compensation Plan Agreement. As a condition of ------------------------------------- participation, each prospective Participant shall complete, execute, and return a Deferred Compensation Plan Agreement to the Committee prior to the applicable Time of Deferral. ARTICLE 3 DEFERRALS AND CONTRIBUTIONS 3.1 Annual Bonus Deferrals. Participants may defer no less than ten ----------------------- percent (10%) and no more than fifty percent (50%) per Plan Year of annual bonus awards, if any, paid to Participants under the US Facilities Corporation Incentive Compensation Program or any successor cash bonus program. 3.2 401(k) Excess Salary Deferrals. Participants may elect to defer a ------------------------------- percentage of their Compensation to the extent the Participants are constrained in the Qualified Plan by the limitation on includable compensation under Code Section 401(a)(17) or the limitation on elective deferrals under Code Section 402(g). This election shall be irrevocable and shall be made on annual basis prior to the Plan Year to which it relates. The deferrals made pursuant to the election will be made into the Plan only after the Participant has maximized deferrals into the Qualified Plan. The amount of deferrals made pursuant to this Section 3.2, when aggregated with amounts deferred into the Qualified Plan, may not exceed the maximum percentage of Compensation allowed to be deferred under the Qualified Plan (notwithstanding limitations imposed by the Code). Moreover, to the extent that deferrals into the Qualified Plan are constrained at the end of a Qualified Plan year as a result of the non-discrimination testing under Code Sections 401(k)(3) and 401(m)(2) (ADP/ACP testing), such deferrals must be refunded to the Participant and may not be deferred or any other way contributed to this Plan. WITHHOLDING OF 401(K) EXCESS SALARY DEFERRALS. The Participant's 401(k) excess salary deferrals shall be withheld from the Participant's Compensation in equal amounts over the portion of the Plan Year for which 401(k) excess salary deferrals are made. 5 3.3 Company Matching Contributions for 401(k) Excess Salary Deferrals. ------------------------------------------------------------------ The Company will make a matching contribution to the Plan with respect to a Participant's 401(k) excess salary deferrals. This matching contribution will be made only after the Participant has maximized deferrals into the Qualified Plan. The matching contribution, if any, will be a percentage, set by the Board of Directors of the 401(k) excess salary deferrals each Participant has elected to defer in the Participant's Deferred Compensation Plan Agreement. This matching contribution, when aggregated with the Company's matching contributions to the Qualified Plan, shall not exceed 6% of the Participant's compensation (notwithstanding limitations imposed by the Code). 3.4 Long Term Incentive Plan. Payouts (as defined in the Long-Term ------------------------- Incentive Plan) under the Long Term Incentive Plan will automatically be deferred into the Plan. Deferrals shall be deemed made as of the Plan Anniversary Date following the end of the Performance Period (as defined in the Long-Term Incentive Plan) for which the Payouts are earned. 3.5 Vesting ------- ANNUAL BONUS DEFERRALS. Participants shall at all times be 100% ----------------------- vested in their annual bonus award deferrals. 401(K) EXCESS SALARY DEFERRALS. Participants shall at all times be 100% vested in their 401(k) excess salary deferrals. COMPANY MATCHING CONTRIBUTIONS FOR 401(K) EXCESS SALARY DEFERRALS. Participants shall be vested in their Company Matching Contributions for 401(k) excess salary deferrals in accordance with the following schedule:
Percent of Years of Service Nonforfeitable Interest --------------------------------------------------------------------------------- Less than 1 . . . . . . . . . . . . . . . . . . . . . . . . . . 0% 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0% 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0% 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20% 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40% 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60% 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80% 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100%
In any event, Participants shall be vested in their Company Matching Contributions for 401(k) Excess Salary Deferrals upon the first of the following events to occur: (1) Retirement, (2) death, or (3) Disability. 6 LONG TERM INCENTIVE PLAN PAYOUT DEFERRALS. Participants shall vest in their Long Term Incentive Plan Payout Deferrals over a two year period which shall commence as of the date the Payouts are deferred into the Plan, as follows:
PERCENT OF YEARS NONFORFEITABLE INTEREST ----------------------------------------------------------------------------------- Less than 1 . . . . . . . . . . . . . . . . . . . . . . . . . . 0% 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50% 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100%
In any event, Participants shall be vested in their Long Term Incentive Plan Payouts upon the first of the following events to occur: (1) Retirement, (2) death, (3) Disability, or (4) Involuntary Termination of Employment, at the discretion of the Committee. 3.6 Time of Deferral. For the first year the Plan is implemented, ----------------- Participants may elect to defer Compensation no later than December 31, 1996 for services to be performed in 1997. Furthermore, except as otherwise provided above, a newly eligible participant may elect, within thirty (30) days after becoming eligible, to defer Compensation for services to be performed after the election. In all other cases, the Participant must elect to defer Compensation on or before December 31 prior to the Plan Year for which the services are to be performed. 3.7 Investment Rate. The Investment Rate for each Plan Year shall be ---------------- established from time to time by the Board of Directors. 3.8 Interest Crediting. Interest shall be credited to the DCP Account on ------------------- the quarterly average of the DCP Account balance on the last day of each quarter of a Plan year. Upon a Distribution Event, interest will be credited until the benefits are actually distributed to the Participant or the Participant's Beneficiary. ARTICLE 4 DISTRIBUTION OF BENEFITS 4.1 Amount of Distribution and Satisfaction of Company's Obligation. Upon ---------------------------------------------------------------- the occurrence of a Distribution Event, the Participant shall receive the vested portion of his or her DCP Account as set forth in this Article 4. This distribution shall constitute complete satisfaction of the Company's obligation to the Participant and no other amounts shall be due or payable under the Plan. 4.2 Time of Distribution. A Participant's DCP Account will be distributed --------------------- no later than ninety (90) days following a Distribution Event. 7 4.3 Premature Distribution. Premature distribution shall occur in the ----------------------- event of an unforseeable Medical Financial Emergency, subject to approval of the Compensation Committee. 4.4 Method of Distribution. Benefits distributed shall be paid in a lump ----------------------- sum. Another manner of benefit payment may be authorized by the Committee in its sole discretion. ARTICLE 5 BENEFICIARY BENEFIT 5.1 Pre-retirement Survivor Benefit. If a Participant dies before -------------------------------- Retirement, the Company will pay a survivor benefit to the Beneficiary of the Participant. Such benefit will be equal to the total vested DCP Account as of the date of death, plus interest thereon until the benefits are actually distributed to the Participant's beneficiary. 5.2 Eligibility Requirements for Survivor Benefit. The obligation of the ---------------------------------------------- Company to pay any benefits to any Beneficiary shall exist only if proof of death, in such form as determined acceptable by the Committee, is furnished. 5.3 Payment of Survivor Benefit. A survivor benefit shall be paid in a ---------------------------- lump sum. The payment shall be paid within 90 days of proof of the Participant's death. ARTICLE 6 BENEFICIARY 6.1 Beneficiary Designation. Each Participant shall have the right, at ------------------------ any time, to designate any person or persons as a Beneficiary (both primary as well as secondary) to whom benefits under this Plan shall be paid in the event of the Participant's death prior to complete distribution to the Participant of the benefits due under the Plan. A Beneficiary designation shall be made by written instrument filed with the Committee and shall become effective only when received, accepted and acknowledged in writing by the Committee. 6.2 Change of Beneficiary Designation. Any Beneficiary designation may be ---------------------------------- changed by a Participant at any time by the filing in writing of such change on a form prescribed by the Committee. The filing of a new Beneficiary designation form will cancel all Beneficiary designations previously filed. The Committee shall be entitled to rely on the last designation filed by the Participant prior to the Participant's death. 6.3 No Beneficiary Designation. If a Participant fails to designate a --------------------------- Beneficiary as provided above, or if all Beneficiaries predecease the Participant or die prior to complete distribution of the Participant's benefits, then the Participant's Beneficiary shall be deemed to be the surviving spouse. If the participant has no 8 surviving spouse, the benefits remaining under the Plan shall be payable to the Participant's estate. 6.4 Effect of Payment. The payment of benefits under the Plan to the ------------------ Beneficiary shall completely discharge the Company's obligations under this Plan. ARTICLE 7 LEAVE OF ABSENCE 7.1 Paid Leave of Absence. If a Participant is authorized by the Company ---------------------- for any reason to take a paid leave of absence from the employment of the Company, the applicable Deferred Compensation Plan Agreement shall remain in full force and effect during such leave of absence. 7.2 Unpaid Leave of Absence. If a participant is authorized by the ------------------------ Company for any reason to take an unpaid leave of absence from the employment of the Company, the Participant's Deferred Compensation Plan Agreement shall be suspended until the earlier of the date the leave of absence expires or the Participant's employment resumes. ARTICLE 8 TERMINATION, AMENDMENT OR MODIFICATION 8.1 Termination. The Company reserves the right to discontinue future ------------ deferrals under the Plan at any time and further reserves the right to terminate the Plan and distribute all Participants' DCP Accounts (which in the case of such distribution upon plan termination shall be deemed 100% vested). 8.2 Amendment. The Company may, at any time, amend or modify the Plan in ---------- whole or in part, provided, however, that no amendment or modification shall be effective to decrease or restrict any DCP Account in existence at the time the amendment or modification is made. The amendment or modification of the Plan shall not affect any Participant or Beneficiary who has become entitled to the payment of benefits under the Plan as of the date of the amendment or modification. 8.3 Change in Control. In the event a Change in Control, Participants ------------------ shall be 100% vested in all benefits with interest credited at the Investment Rate on the Participants' DCP Accounts through the date of distribution. ARTICLE 9 MISCELLANEOUS 9.1 Unsecured General Creditor. The Company's obligation under the Plan --------------------------- shall be merely that of an unfunded and unsecured promise of the Company to pay money in the future. Under this Plan, Participants and their Beneficiaries, heirs, successors and assigns shall have no legal or equitable rights, interest or claims in 9 any property or assets of the Company other than as an unsecured general creditor. Nothing in this Plan shall cause the Plan's assets to be anything but the general, unpledged, unrestricted assets of the Company. 9.2 ERISA Provisions. This Plan is designed to provide deferred ----------------- compensation for only the key employees of the Company. To that end, the Committee may immediately distribute the account balance to any employee who at any time is determined or reasonably believed, based on a judicial or administrative determination or an opinion of counsel, not to qualify as a "management" or "highly compensated" employee. In addition, it is the intention of the parties that the arrangements be unfunded for tax purposes. This Plan is not subject to the Employment Retirement Income Security Act of 1974, as amended (ERISA.) 9.3 Nonassignability. Neither a Participant nor any Beneficiary shall ----------------- have any right to commute, sell, assign, transfer, pledge, mortgage, or otherwise encumber, transfer, hypothecate or convey in advance of actual receipt, the amounts, if any, payable hereunder, or any part thereof. No part of the amounts payable shall, prior to actual payment, be subject to seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owned by a Participant or any Beneficiary, nor be transferable by operation of law in the event of a Participant's or any Beneficiary's bankruptcy or insolvency. 9.4 Not a Contract of Employment. The terms and conditions of this Plan ----------------------------- shall not be deemed to constitute a contract of employment between the Company and the Participant, and the Participant (or the Participant's Beneficiary) shall have no rights against the Company except as may otherwise be specifically provided herein. Moreover, nothing in this Plan shall be deemed to give a Participant the right to be retained in the service of the Company or to interfere with the right of the Company to discipline or discharge the Participant at any time. 9.5 Cooperation. A Participant will cooperate with the Company by ------------ furnishing any and all information requested by the Company. 9.6 Terms. Whenever any words are used herein in the masculine, they ------ shall be construed as though they were used in the feminine in all cases where they would so apply; and wherever any words are used herein in the singular or in the plural, they shall be construed as though they were used in the plural or the singular, as the case may be, in all cases where they would so apply. 9.7 Captions. The captions of the articles, Sections and paragraphs of --------- this Plan are for convenience only and shall not control or affect the meaning or construction of any of its provisions. 9.8 Governing Law. The provisions of this Plan shall be construed and -------------- interpreted according to the laws of the State of California. 10 9.9 Validity. In case any provision of this Plan shall be illegal or --------- invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Plan shall be construed and enforced as if such illegal and invalid provision had never been inserted herein. 9.10 Notice. Any notice or filing required or permitted to be given to ------- the Company shall be sufficient if in writing and hand delivered or sent by U.S. mail, postage prepaid, or Federal Express or any other recognized courier service to the principal office of the Company directed to the attention of the Company's Vice President of Human Resources. Any notice to the Participant must be in writing and is effective when hand delivered or sent by U.S. mail, postage prepaid, or Federal Express or any other recognized courier service to the Participant or his personal representatives at his her last address on record with the Company. 9.11 Successors. The provisions of this Plan shall bind and inure to the ----------- benefit of the Company and its successors and assigns. The term successors as used herein shall include any corporate or other business entity which shall, whether by merger, consolidation, purchase or otherwise acquire all or substantially all of the business and assets of the Company, and successors of any such corporation or other business entity. 9.12 Incompetent. In the event that it shall be found upon evidence ------------ satisfactory to the Committee that any Participant or Beneficiary to whom a benefit is payable under this Plan is unable to care for his affairs because of illness or accident, any payment due (unless prior claim therefore shall have been made by a duly authorized guardian or other legal representative) may be paid, upon appropriate indemnification of the Committee, to the spouse of such person or the person deemed by the Committee to have incurred expenses for such Participant. Any such payment shall be a payment for the account of the Participant and shall be a complete discharge of any liability of the Plan for such payment amount. ARTICLE 10 ADMINISTRATION 10.1 Committee Duties. The Plan shall be administered by the Committee ----------------- which shall consist of persons appointed by the Board of Directors. Members of the Committee may not be Participants under this Plan. The Committee shall have the authority to interpret and enforce all appropriate rules and regulations for the administration of this Plan and decide or resolve any and all questions including interpretations of this Plan, as may arise in connection with the Plan. 10.2 Agents. In the administration of this Plan, the Committee may, from ------- time to time, employ agents and delegate to them such administrative duties as it sees fit and may from time to time consult with counsel who may be counsel to the Company. 11 10.3 Binding Effect of Decisions. The decision or action of the Committee ---------------------------- with respect to any question arising out of or in connection with the administration, interpretation and application of the Plan and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in the Plan. 10.4 Indemnity of Committee. The Company shall indemnify and hold ----------------------- harmless the members of the Committee against any and all claims, losses, damages, expenses or liabilities arising from any action or failure to act with respect to this Plan, except in the case of willful misconduct by the Committee or any of its members. 10.5 Company Information. To enable the Committee to perform its -------------------- functions, the Company shall supply full and timely information to the Committee on all matters relating to the Participants' Compensation, the date and circumstances of the Retirement, Disability, death or Termination of Employment of all Participants, and such other pertinent information as the Committee may reasonably require. 10.6 Change in Payments. The Committee shall have the power, in its sole ------------------- discretion, to change the manner and time of payments to be made to a Participant or Beneficiary from that which would be otherwise payable to such person, if requested to do so by such Participant or Beneficiary. IN WITNESS WHEREOF the Company has signed this Plan Document this _____ day of December,1996. Company: US Facilities Corporation By:____________________________ Title:_________________________ 12 ================================================================================ US FACILITIES EXECUTIVE DEFERRED COMPENSATION PLAN DEFERRED COMPENSATION PLAN AGREEMENT ================================================================================ This Deferred Compensation Plan Agreement is entered into this ___________ day of ____________________, 19_____, between the US Facilities Corporation, hereafter referred to as the "Company," and __________________________________, hereafter referred to as the "Participant." WHEREAS, the Participant is a key employee of the Company, and WHEREAS, the Company has adopted the US Facilities Executive Deferred Compensation Plan (the "Plan") and the Participant has been offered the opportunity to participate; (Please Choose A or B and Complete C and D) [_] A. WAIVER OF DEFERRAL ELECTION. I irrevocably elect not to participate in ---------------------------- the Plan for the specified year. Notwithstanding this waiver, my Long Term Incentive - Performance Unit Plan award shall automatically be deferred into the Plan. ______________________________________________ ________________________ Signature of Participant Date Signed [_] B. DEFERRAL ELECTION. I elect to Participate in the Plan for the 1997 ----------------- Plan year and duly authorize the Company to make the appropriate deductions from my compensation, as specified below. - -------------------------------------------------------------------------------- 1) ANNUAL BONUS AWARD DEFERRAL [_] I elect to defer __________% of my 1997 Annual Incentive Plan award (a minimum of 10% and a maximum of 50% of the award). 2) 401(k) EXCESS SALARY DEFERRAL [_] Pursuant to Section 3.2 of the Plan, I elect to defer __________% of my Compensation to the extent I am constrained in the US Facilities Corporation Employees' Savings Plan by the limitation on includable compensation under Code Section 401(a)(17) or the limitation on elective deferrals under Code Section - -------------------------------------------------------------------------------- 13 - ------------------------------------------------------------------------------- 402(g). - ------------------------------------------------------------------------------- C. ELECTION OF SHORT - TERM PAYOUT (please select one option) [_] I elect not to receive a Short-Term Payout of my 19_____ Plan Year Deferral Amount. [_] I elect to receive to a Short-Term Payout of my 19_____ Plan Year Deferral Amount, with interest thereon, payable in _____________, 20____ (no less than five (5) Plan Years) in accordance with the terms of the Plan. D. BENEFICIARY ELECTION. The benefits payable under the Plan in the event of --------------------- the death of the undersigned Participant prior to Separation from Service shall be paid as follows: (a) PRIMARY BENEFICIARY:____________________________________________ RELATIONSHIP: _________________________________________________ (b) SECONDARY BENEFICIARY:__________________________________________ RELATIONSHIP: __________________________________________________ (c) The Primary Beneficiary [_] shall [_] shall not have undersigned Participant, to the right, surviving the change the designation of Secondary Beneficiary. (d) This designation may be amended or revoked by the Participant through delivery of a similar designation to the Plan Committee. The last designation so delivered to shall control. NOW THEREFORE, it is mutually agreed that: 1. The Plan, a copy of which is attached, is hereby incorporated into and made a part of this Deferred Compensation Plan Agreement as though set forth in full herein. The parties shall be bound by, and have the benefit of, each and every provision of the Plan. The Deferred Compensation Plan Agreement shall inure to the benefit of, and be binding upon, the Company, its successors and assigns, and the Participant and Beneficiaries. 2. The Company, as of ________________________, hereby agrees to defer __________% of the Participant's Annual Incentive Plan award at the election of the Participant, as designated above. 3. The Company, as of ________________________, hereby agrees to defer the Participants 401(k) Excess Salary Deferrals, at the election of the Participant as designated above. 14 4. The Company, as of ________________________, hereby agrees, pursuant to Section 3.3 of the Plan, to make a matching contribution on the Participants 401(k) Excess Salary Deferrals, as designated by the Participant above. 5. Investment Rate: The Investment Rate for 1997 will be ______________. --------------- 6. Regulatory Risk: All amounts deferred under the Plan are viewed as --------------- ordinary liabilities under applicable law. The liabilities under the Plan would generally be payable on a basis equal to unsecured creditors. This Plan is subject to Federal regulations limiting executive compensation as in effect from time to time. 7 Assignability: Except to the extent that this provision may be contrary ------------- to applicable law, no assignment, pledge, collateralization, or attachment of any of the deferrals hereunder hall be valid or recognized by the Company. 8 Employment Rights: This agreement creates no right in the Participant ----------------- to continue in the Company's employ for any specific length of time, nor does it create any other rights in the Participant or obligations on the part of the Company, except those set forth in this Deferred Compensation Plan Agreement. 9 Law Governing: This Deferred Compensation Plan Agreement shall be ------------- governed by the laws of the State of California. IN WITNESS WHEREOF, the Company and the Participant have executed this Deferred Compensation Plan Agreement as of the date written above. By: __________________________________________ US Facilities Corporation __________________________________________ Title __________________________________________ Participant (Print Name) __________________________________________ 15 EX-11 13 COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11 US FACILITIES CORPORATION AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE The computation of per share income is based upon the weighted average number of common and common equivalent shares outstanding during each year ended December 31, as follows:
(000 omitted, except for per share data) 1996 1995 1994 ------- ------- ------- Net income......................................................................... $15,020 $13,854 $6,238 ======= ======= ====== Weighted average shares outstanding during the period............................... 5,866 5,602 5,810 Common stock equivalent shares...................................................... 109 126 196 ------- ------- ------ Common and common stock equivalent shares outstanding for purposes of calculating income per share....................................... 5,975 5,728 6,006 Incremental shares to reflect full dilution......................................... 21 87 - ------- ------- ------ Total shares for purpose of calculating fully diluted income per share................................................................... 5,996 5,815 6,006 ======= ======= ====== Primary net income per share........................................................ $ 2.51 $ 2.42 $ 1.04 Fully diluted net income per share.................................................. $ 2.51 $ 2.38 $ 1.04 ======= ======= ======
EX-13 14 U.S. FACILITIES 1996 ANNUAL REPORT EXHIBIT 13 SELECTED FINANCIAL DATA
Year Ended December 31 1996 1995 1994 1993 1992 - -------------------------------------------------------------------------------------------------------- [Dollars in thousands, except per share data] INCOME STATEMENT DATA: REVENUES: Premiums earned $124,124 $114,971 $ 93,269 $ 83,206 $ 59,732 Commissions and fees 26,722 25,994 23,583 21,736 18,403 Investment income 12,273 10,212 5,959 7,037 6,187 --------------------------------------------------------- Total revenues $163,119 $151,177 $122,811 $111,979 $ 84,322 ========================================================= Income before income taxes $ 20,162 $ 18,159 $ 7,382 $ 8,407 $ 6,222 Net income 15,020 13,854 6,238 6,767 4,641 ========================================================= PER SHARE: Net income $ 2.51 $ 2.42 $ 1.04 $ 1.14 $ .78 ========================================================= Cash dividends paid $ .24 $ .20 $ -- $ -- $ -- ========================================================= BALANCE SHEET DATA: Total assets $288,743 $249,872 $199,737 $154,723 $133,567 --------------------------------------------------------- Notes payable 35,000 35,000 25,000 -- 1,600 --------------------------------------------------------- Stockholders' equity 102,364 88,061 63,079 63,333 55,915 ---------------------------------------------------------
21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BUSINESS OPERATIONS US Facilities Corporation (Company) conducts business primarily in two segments: Medical lines includes medical stop-loss and provider excess coverages underwritten by the Company's subsidiary, USBenefits Insurance Services, Inc. (USBenefits) on behalf of The Continental Insurance Company (Continental), one of the CNA Insurance Companies, and reinsurance of 50% of such business by the Company's USF RE INSURANCE COMPANY (USF RE) subsidiary. USBenefits is the managing general underwriter for medical lines coverages issued by Continental. Medical stop-loss coverage is a form of insurance that protects employers that self-insure their employee healthcare plans by limiting their exposure from the risk of loss to a pre-established amount. Provider excess coverage limits the financial risks healthcare providers face from medical plans that prepay the providers fixed sums per plan participant (capitated fees) or provide specified rates for services. USBenefits also markets other employee benefits related products on behalf of several national life insurance companies. Medical lines products are marketed through a network of unaffiliated third party administrators, insurance agents, brokers and consultants (Producers). Producers have non-exclusive arrangements with USBenefits that enable them to submit requests for coverage quotations. Substantially all commissions and fees and approximately 67%, 71% and 79% of premiums earned for 1996, 1995 and 1994, respectively, resulted from the management agreement between USBenefits and Continental and the reinsurance agreement between USF RE and Continental related to the medical lines business. Property/Casualty reinsurance and insurance underwriting is conducted by USF RE and its wholly-owned subsidiary USF Insurance Company (USFIC). These subsidiaries both carry an A (Excellent) rating from A.M. Best Company. Insurance companies purchase reinsurance in order to control and manage the risk they accept when they issue policies. USF RE assumes facultative and treaty reinsurance from unaffiliated insurance companies, primarily through reinsurance intermediaries. Facultative is reinsurance of one risk at a time. Reinsurance treaties cover a portion of all risk written or assumed by another insurer in a particular class or classes of business. USF RE concentrates its casualty writings in general liability, commercial auto liability and products liability. It also provides a broad range of coverages for most types of property exposures. USFIC writes surplus lines insurance on commercial property/casualty risks which are marketed through independent excess and surplus lines brokers. 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Consolidated Results The table below presents certain consolidated financial information regarding the Company's operations.
Year ended December 31, 1996 Change 1995 Change 1994 - ------------------------------------------------------------------------------------------------------------ [Dollars in thousands] REVENUES: Insurance revenues $150,846 7 % $140,965 21 % $116,852 Net Investment income 10,147 10 % 9,190 54 % 5,950 Realized investment gain 2,126 108 % 1,022 -- 9 ------------------------------------------------------ Total revenues 163,119 8 % 151,177 23 % 122,811 ------------------------------------------------------ EXPENSES: Insurance expenses 127,962 10 % 116,661 22 % 95,765 General and administrative 14,995 (8)% 16,357 (4)% 16,981 Unusual charges -- -- -- -- 2,683 ------------------------------------------------------ Total expenses 142,957 7 % 133,018 15 % 115,429 ------------------------------------------------------ Income before income taxes 20,162 11 % 18,159 146 % 7,382 Income tax expense 5,142 19 % 4,305 276 % 1,144 ------------------------------------------------------ Net income $ 15,020 8 % $ 13,854 122 % $ 6,238 ======================================================
Increases in revenues between the periods presented reflect the Company's diversification in two distinct business segments. In 1996, the Company was able to balance greater competitive pressure in medical lines by capturing broader opportunities in property/casualty. Revenue changes between 1995 and 1994 are a result of expansion in each business segment, reflecting growth of medical lines premiums and the Company's success in increasing its property/casualty business as discussed below. Returns on invested assets are an integral element of results from operations. Underwriting cash flows, which consist of premiums collected over losses and expenses paid, and investment cash flows, which consist of income from existing investments and proceeds from sales and maturities of investments, provide the funds used to build the investment portfolio. The portfolio is managed based upon Company guidelines which incorporate a variety of factors including the relationship of invested assets to liabilities, total return, business needs, regulatory requirements and tax considerations. Increases in net investment income result primarily from higher levels of invested assets in 1996 and 1995 due to higher production levels in each business segment. Increases in realized gains between years are a result of continuous evaluation of the investment portfolio to enhance and maintain yields and total return consistent with the Company's investment guidelines. 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Insurance expenses are comprised of losses and loss adjustment expenses incurred and policy acquisition expenses. Insurance and reinsurance companies establish reserves for losses incurred, but not yet paid, in order to match such losses with the related premiums earned. The process of establishing loss reserves is subject to uncertainties that are a normal, recurring aspect of the insurance business which requires the use of informed judgments and estimates. The Company reviews loss and loss adjustment expense reserve development on a regular basis, incorporating analysis of current trends, market changes in the Company's business segments and historical experience to analyze the Company's actuarial assumptions. As additional experience and other data become available, the Company's actuarial estimates may be revised. Such revisions may impact earnings. Policy acquisition expenses vary on the basis of market conditions and mix of business. The Company's cost control programs, begun in 1994, continued to favorably impact operations and resulted in a decrease in general and administrative expenses to 9% of revenues in 1996, compared to 11% of revenues in 1995 and 14% of revenues in 1994. The increase in 1996 net income as compared to 1995 resulted from the increases in revenues and an 8% decrease in consolidated general and administrative (G&A) expenses, as the Company continued to increase productivity and control expenses in relation to revenues, offset in part by higher claims cost in the medical lines segment. The increase in 1995 net income as compared to 1994 reflected improvements resulting from increased marketing efforts and the effect of the Company's cost control programs. Pre-tax income for 1995 was reduced by $695,000 in connection with the March 1995 resignation of the Company's former Chief Executive Officer. In 1994, several events affected the Company's results. In April 1994, the Company became the target of an unsolicited takeover proposal and was involved in a proxy contest. The expenses of responding to the issues raised by these events reduced the Company's 1994 pre-tax income by $2,029,000. The Company also posted a restructuring charge during the second quarter of 1994 arising from the closings of branch marketing offices and reductions in personnel, which decreased pre-tax income for the year by $654,000. No similar events transpired during 1996 or 1995. Pre-tax income for 1994 was also reduced by $2,100,000 due to claims incurred as a result of the Northridge, California earthquake in January 1994. In 1996 and 1995, the Company did not incur significant claims from natural disasters. Income taxes as a percentage of pre-tax income fluctuate depending on the proportion of tax exempt investment income to total pre-tax income and the proportion of total income subject to state income taxes. 25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BUSINESS SEGMENTS The following tables present pre-tax operating information by business segment and holding company operations (including realized gains) for the years ended December 31, 1996, 1995 and 1994. MEDICAL LINES
Year ended December 31, 1996 Change 1995 Change 1994 - -------------------------------------------------------------------------------------------------- [Dollars in thousands] Gross premiums written $ 84,179 3% $ 81,546 12% $72,517 Net premiums written 84,179 3% 81,546 12% 72,517 --------------------------------------------------- REVENUES: Premiums earned 84,179 3% 81,546 12% 72,517 Commissions and fees 26,722 3% 25,994 10% 23,583 Net investment income 3,312 1% 3,269 44% 2,273 --------------------------------------------------- Total revenues 114,213 3% 110,809 13% 98,373 --------------------------------------------------- EXPENSES: Losses and loss adjustment 58,095 6% 54,563 13% 48,356 Policy acquisition 28,526 5% 27,069 14% 23,647 General and administrative 10,111 (16%) 12,025 (13%) 13,772 --------------------------------------------------- Total expenses 96,732 3% 93,657 9% 85,775 --------------------------------------------------- Income before income taxes $ 17,481 2% $ 17,152 36% $12,598 ===================================================
Throughout 1996, the Company has maintained its long-term focus on adherence to underwriting standards balanced against continued competitive pressures in the medical lines segment. Medical lines production increased by 3% in 1996 over 1995 and 12% in 1995 over 1994, which generated the increases in premiums earned and substantially all of the commission and fee revenues. The increase in medical lines production during such periods was primarily due to controlled growth of the provider excess line in 1996, a substantial increase in new medical stop-loss business in 1995 and strong retention of in-force accounts combined with modest rate increases during the periods presented. Loss and loss adjustment expenses in 1996 as compared to 1995 reflect changes in the cost of healthcare which were not fully offset by corresponding increases in premium rates, as well as the effect of higher formula reserves incurred in 1996 in connection with greater volume in the provider excess line. Policy acquisition expenses vary due to the mix of business and market conditions. Increases in such expenses between periods presented are a result of the growth of the provider excess business and higher production levels during the periods presented. 26 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The segment information presented in the table above includes losses before income tax of $1,156,000 and $1,137,000 for the years ended December 31, 1995 and 1994, respectively, from the Company's medical bill review operations which were closed effective May 31, 1995. PROPERTY/CASUALTY
Year ended December 31, 1996 Change 1995 Change 1994 - ------------------------------------------------------------------------------------------------ [Dollars in thousands] Gross premiums written $65,850 29% $50,915 42% $35,760 Net premiums written 43,799 24% 35,350 48% 23,865 ------------------------------------------------- REVENUES: Premiums earned 39,945 19% 33,425 61% 20,752 Net investment income 6,777 15% 5,872 60% 3,677 ------------------------------------------------- Total revenues 46,722 19% 39,297 61% 24,429 ------------------------------------------------- EXPENSES: Losses and loss adjustment 30,078 30% 23,180 45% 16,010 Policy acquisition 8,653 (3%) 8,895 16% 7,694 General and administrative 3,988 21% 3,304 32% 2,499 ------------------------------------------------- Total expenses 42,719 21% 35,379 35% 26,203 ------------------------------------------------- Income (loss) before income taxes $ 4,003 2% $ 3,918 - $(1,774) =================================================
USF RE entered the property/casualty reinsurance market in 1987, and continues to be in a growth mode. Statutory policyholders' surplus has increased from $30,555,000 at December 31,1986 to $109,880,000 at December 31, 1996. In December 1996, A.M. Best Company upgraded its rating of USFRE and USFIC to "A" (Excellent). Although market conditions remain highly competitive, the combination of increasing surplus levels, strict underwriting standards and "A" (Excellent) rating from A.M. Best Company provides a strong position for USF RE to continue property/casualty growth. Changes in the relationship between gross and net premiums written were due to changes in the Company's ceded reinsurance programs. Some retrocession (reinsurance) agreements mitigate an insurance company's exposure to losses and, therefore, allow increases in the limits which can be offered on each account. Other retrocession agreements protect against catastrophic losses. Management believes its retrocessional coverage is adequate to protect the Company from excessive catastrophic losses. The strength of these programs was evident in 1996, which represented the fourth largest insured catastrophe year since such records have been kept. During 1996, the Company did not incur any significant losses due to natural disasters. 27 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company evaluates the financial condition of potential retrocessionaires to determine whether to cede coverage to such companies. Retrocession agreements are placed with unaffiliated companies which management believes to be financially secure and experienced in this type of business. Reinsurance recoverables are monitored continually, and any retrocessionaire not qualified in USF RE's or USFIC's states of domicile is required to post security in the amount of its estimated liability. Fluctuations in losses and loss adjustment expenses and policy acquisition expenses generally result from growth in premiums and changes in the mix of business. Increases in losses and loss adjustment expenses in 1996 as compared to 1995 reflect the Company's continued growth in casualty lines which are generally reserved at a higher formula loss ratio than property lines, offset in part by the 1995 withdrawal from the plate glass business, which generally carried a lower loss ratio and higher acquisition expenses. The plate glass business accounted for 3% and 5% of premiums earned in 1995 and 1994, respectively. Shifts in policy acquisition expenses between periods presented result from changes in the mix of business and modification of retrocessional arrangements, in addition to the aforementioned withdrawal from the plate glass insurance business. Also, the property/casualty segment incurred higher losses in 1994 principally due to claims resulting from the Northridge, California earthquake. HOLDING COMPANY
Year ended December 31, 1996 Change 1995 Change 1994 - ------------------------------------------------------------------------------------------------------- [Dollars in thousands] REVENUES: Investment income $ 58 18 % $ 49 -- -- Realized gains 2,126 108 % 1,022 -- 9 --------------------------------------------------- Total revenues 2,184 104 % 1,071 -- 9 --------------------------------------------------- EXPENSES: General and administrative 896 (13)% 1,028 45 % 710 Expenses related to unsolicited takeover proposal -- -- -- -- 2,029 Restructuring -- -- -- -- 654 Other -- -- 695 -- -- Interest 2,610 15 % 2,259 -- 58 --------------------------------------------------- Total expenses 3,506 (12)% 3,982 15 % 3,451 --------------------------------------------------- Loss before income taxes $(1,322) (55)% $(2,911) (16)% $(3,442) ===================================================
Interest expense increased in 1996 as a result of a $25,000,000 bank loan funded in December 1994, which increased to $35,000,000 in November, 1995. 28 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ACCOUNTING POLICIES See Footnote 1 to the Company's Consolidated Financial Statements appearing elsewhere in this Annual Report for information regarding significant accounting policies. INFLATION The healthcare marketplace has long been subject to the effects of the increases in costs of services. Such inflation in the costs of healthcare tends to generate increases in premiums for medical lines coverage, resulting not only in greater revenues but also higher claim payments. Inflation can negatively impact insurance and reinsurance operations by causing higher claims settlements than may have originally been estimated, while not necessarily allowing an immediate increase in premiums to a level necessary to maintain profit margins. Historically, the Company has not provided explicitly for inflation, but trends are considered when setting underwriting terms and claim reserves. Such reserves are subjected to a continual internal and external review process to assess their adequacy and are adjusted as deemed appropriate. Overall economic trends also affect interest rates, which in turn affect investment income and the market value of the Company's investment portfolio. LIQUIDITY AND CAPITAL RESOURCES The Company utilizes cash from operations and maturing investments to meet its insurance obligations to policyholders and claimants, as well as to meet operating costs. Primary sources of cash from operations include premium collections, commissions and fees and investment income. The principal uses of cash from operations are for premium payments to insurance companies, payments of claims under USF RE's and USFIC's reinsurance and insurance contracts, and operating expenses such as salaries, commissions, taxes and general overhead. The Company secured a $25,000,000 bank loan in December 1994 which was increased to $35,000,000 in November 1995. Of this amount, the Company contributed $30,500,000 to the surplus of its insurance group to support additional growth. The Credit Agreement with the Company's lender contains certain covenants, restrictions and dividend payment limitations with which the Company was in compliance at December 31, 1996. See Footnote 5 to the Company's Consolidated Financial Statements appearing elsewhere in this Annual Report. The Company anticipates that it will continue to generate sufficient cash flow from operations to cover its short-term (1-18 months) and long-term (18 months to 3 years) liquidity needs. While the Company currently has no 29 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS immediate plans for significant capital outlays, from time to time it contemplates acquisition opportunities that complement its business operations. The Company currently invests primarily in the highest grades of bonds, equities, certificates of deposit and short-term instruments. At yearend 1996, 99% of the fixed income securities were rated A or better. All such securities are carried at quoted market values at the latest balance sheet date. The Company does not invest in real estate, derivatives or high yield bonds. USF RE is restricted in the annual amount of dividends which it may pay to the Company without receiving prior approval from the Massachusetts and California Commissioners of Insurance. For 1997 the amount which may be paid without approval is $10,988,000. Since its acquisition by the Company in 1983, USF RE has not paid any dividends. Application of the National Association of Insurance Commissioners risk-based capital (RBC) requirements for property and casualty insurance entities to USF RE's and USFIC's statutory financial information indicates that presently they substantially exceed the capital level required under the RBC requirements. LEGISLATIVE AND REGULATORY DEVELOPMENTS As noted in prior filings with the Securities and Exchange Commission by the Company, various federal and state healthcare legislative and regulatory proposals which could impact the financing and delivery of healthcare have been considered. The 104th Congress enacted certain of those proposals. Certain of these enactments cover self-insured benefit plans. Management cannot predict at this time what impact, if any, these enactments would have on the Company's medical lines business. However, based on its review of the latest information management has received, management believes that these enactments will not have an adverse impact on the Company's business. Some of the statements included within Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and related Notes may be considered to be forward looking statements (as that term is defined in the Private Securities Litigation Reform Act of 1995), which are subject to certain risks and uncertainties. Among those factors which could cause the actual results to differ materially from those suggested by such statements are: catastrophe losses in the Company's insurance lines or a material aggregation of losses; changes in federal or state law affecting an employer's ability to self-insure; availability of adequate retrocessional insurance coverage at appropriate prices; a downturn in the general 30 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS economy; the effects of competitive market pressures within the stop-loss or property/casualty marketplaces; the effect of changes required by generally accepted accounting practices or statutory accounting practices; and other risks which are described from time to time in the Company's filings with the Securities and Exchange Commission. 31 FINANCIAL STATEMENTS REPORT ON CONSOLIDATED FINANCIAL STATEMENTS The accompanying consolidated financial statements were prepared by the Company, which is responsible for their integrity and objectivity. The statements have been prepared in conformity with generally accepted accounting principles, appropriate in the circumstances, and necessarily include some amounts that are based upon the Company's best estimates and judgment. Financial information presented elsewhere in this Annual Report is consistent with these accompanying consolidated financial statements. The accounting systems and controls of the Company are designed to provide assurance that transactions are executed in accordance with management's authorization, that the financial records are reliable for preparing financial statements and maintaining accountability for assets, and that assets are safeguarded against losses from unauthorized use or disposition. The Company's consolidated financial statements have been audited by KPMG Peat Marwick LLP, independent certified public accountants, whose audits thereon were made in accordance with generally accepted auditing standards and included a review of internal accounting controls to the extent necessary to design audit procedures aimed at gathering sufficient evidence to assess their opinion on the fairness or presentation of the consolidated financial statements. The auditors have full access to each member of management in conducting their audits, and their report is contained elsewhere in this Annual Report. The Audit Committee of the Board of Directors, comprised solely of non-employee, independent directors meets regularly with management and the independent auditors to review the work and procedures of each. The independent auditors have free access to the Audit Committee, without management being present, to discuss the results of their work and their opinions on the adequacy of the Company's accounting controls and the quality of the Company's financial reporting. The Board of Directors, upon the recommendation of the Audit Committee, appoints the independent auditors, subject to annual stockholder approval. /s/ DAVID L. CARGILE /s/ MARK BURKE David L. Cargile Mark Burke Chairman of the Board, President Senior Vice President, Treasurer and Chief Executive Officer and Chief Financial Officer
33 CONSOLIDATED INCOME STATEMENTS
Year ended December 31, 1996 1995 1994 - ------------------------------------------------------------------------------- [Dollars in thousands, except per share data] REVENUES: Premiums earned $124,124 $114,971 $ 93,269 Commissions and fees 26,722 25,994 23,583 Net investment income 10,147 9,190 5,950 Realized investment gains 2,126 1,022 9 -------------------------------- Total revenues 163,119 151,177 122,811 -------------------------------- OPERATING EXPENSES: Losses and loss adjustment expenses incurred 88,173 77,743 64,366 Policy acquisition expenses 37,179 35,964 31,341 General and administrative expenses 14,995 16,357 16,981 Other expense -- 695 -- Interest expense 2,610 2,259 58 -------------------------------- 142,957 133,018 112,746 Unusual charges: Expenses related to unsolicited takeover proposal -- -- 2,029 Restructuring expenses -- -- 654 -------------------------------- Total operating expenses 142,957 133,018 115,429 -------------------------------- INCOME BEFORE INCOME TAXES 20,162 18,159 7,382 Income tax expense 5,142 4,305 1,144 -------------------------------- NET INCOME $ 15,020 $ 13,854 $ 6,238 ================================ NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE $ 2.51 $ 2.42 $ 1.04 ================================
See accompanying notes to consolidated financial statements 34 CONSOLIDATED BALANCE SHEETS
December 31, 1996 1995 - -------------------------------------------------------------------------------- [Dollars in thousands] ASSETS Investments: Bonds, available for sale, at market (amortized cost $150,674 in 1996 and $127,577 in 1995) $155,480 $136,746 Equity securities at market (cost $16,296 in 1996 and $14,935 in 1995) 20,370 16,691 Short-term and other investments, at cost which approximates market 18,502 16,821 -------------------- Total investments 194,352 170,258 Cash and invested cash 11,132 8,165 Restricted cash and short-term investments 23,771 24,036 Accrued investment income 2,653 2,414 Receivables: Reinsurance losses and reserves 23,975 18,597 Premiums 16,841 14,065 Prepaid reinsurance premiums 6,495 5,117 Deferred policy acquisition costs 3,644 2,830 Other assets 5,880 4,390 -------------------- Total assets $288,743 $249,872 ==================== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Insurance liabilities: Amounts due insurance companies $ 27,148 $ 25,712 Losses and loss adjustment expenses 94,669 78,894 Unearned premiums 22,936 17,705 Note payable 35,000 35,000 Accounts payable and accrued expenses 6,626 4,500 -------------------- Total liabilities 186,379 161,811 -------------------- STOCKHOLDERS' EQUITY: Common stock, $.01 par value; 20,000,000 shares authorized; 6,153,000 shares issued in 1996 and 6,074,000 issued in 1995, including 193,000 and 296,000 shares held in treasury in 1996 and 1995, respectively. 61 61 Paid in capital 45,503 44,489 Net unrealized investment gain 5,860 7,211 Retained earnings 52,883 39,273 -------------------- 104,307 91,034 Less treasury stock, at cost (1,943) (2,973) -------------------- Total stockholders' equity 102,364 88,061 -------------------- Commitments and contingencies Total liabilities and stockholders' equity $288,743 $249,872 ====================
See accompanying notes to consolidated financial statements 35 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Net Unrealized Investment Total Common Paid in Gain Retained Treasury Stockholders' Stock Capital (Loss) Earnings Stock Equity - -------------------------------------------------------------------------------------------------------- [Dollars in thousands] Balance at January 1, 1994 $ 59 $ 43,156 $ 443 $ 20,306 $ (631) $ 63,333 Effect of adoption of SFAS No. 115, January 1, 1994 -- -- 3,338 -- -- 3,338 Net income -- -- -- 6,238 -- 6,238 Exercise of stock options (171,000 shares) -- 1,105 -- -- 483 1,588 Unrealized investment loss, net -- -- (6,913) -- -- (6,918) Purchase of 498,000 shares of common stock -- -- -- -- (5,000) (5,000) ------------------------------------------------------------------------ Balance at December 31, 1994 59 44,261 (2,637) 26,544 (5,148) 63,079 Net income -- -- -- 13,854 -- 13,854 Exercise of stock options (280,700 shares) 2 228 -- -- 2,175 2,405 Dividends paid (.20 per share) -- -- -- (1,125) -- (1.125) Unrealized investment gain, net -- -- 9,848 -- -- 9,848 ------------------------------------------------------------------------ Balance at December 31, 1995 61 44,489 7,211 89,273 (2,973) 88,061 Net income -- -- -- 15,020 -- 15,020 Exercise of stock options (185,500) -- 1,014 -- -- 1,030 2,044 Dividends paid (.24 per share) -- -- -- (1,410) -- (1,410) Unrealized investment loss, net -- -- (1,351) -- -- (1,351) ------------------------------------------------------------------------ Balance at December 31, 1996 $ 61 $45,503 $5,860 $52,883 $(1,943) $102,364 ========================================================================
See accompanying notes to consolidated financial statements 36 CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, 1996 1995 1994 - -------------------------------------------------------------------------------- [Dollars in thousands] Cash Flows From Operating Activities: Net income $ 15,020 $ 13,854 $ 6,288 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of deferred policy acquisition costs 37,179 34,281 30,032 Deferred policy acquisition costs (37,993) (34,064) (30,612) Realized investment gains (2,126) (1,022) (9) Increase in premiums receivable (2,776) (4,631) (1,351) Increase in reinsurance receivables (5,378) (4,296) (6,283) Increase in losses and loss adjustment expenses 15,775 9,247 10,877 Increase in unearned premiums 5,231 3,092 4,322 Other, net 2,095 (990) 2,949 Depreciation and amortization 502 445 464 Net transfers to restricted cash and short-term investments 265 (2,696) (158) ------------------------------------ Net cash provided by operating activities 27,794 13,220 16,469 ------------------------------------ Cash Flows From Investing Activities: Purchases of bonds (46,453) (102,339) (30,129) Purchases of equity securities (6,544) (12,790) (7,061) Proceeds from sales and maturities of investment securities 31,455 86,587 22,673 Net sales (purchases) of short-term investments (1,681) 7,886 (21,586) Purchases of property and equipment (2,288) (181) (303) ------------------------------------ Net cash used in investing activities (25,461) (20,837) (36,406) ------------------------------------ Cash Flows From Financing Activities: Proceeds from note payable -- 10,000 25,000 Purchase of treasury stock -- -- (5,000) Dividends paid (1,410) (1,125) -- Proceeds from issuance of common stock 2,044 2,405 1,588 ------------------------------------ Net cash provided by financing activities 634 11,280 21,588 ------------------------------------ Net increase in cash and invested cash: 2,967 3,663 1,651 Cash and invested cash at beginning of 8,165 4,502 2,851 year ------------------------------------ Cash and invested cash at end of year $ 11,132 $ 8,165 $ 4,502 ==================================== Supplemental Disclosures of Cash Flow Information: Cash paid during the year for: Interest $ 2,498 $ 2,187 $ 19 Income taxes 4,771 5,217 1,350 ===================================
See accompanying notes to consolidated financial statements 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Summary of Significant Accounting Policies [A] ORGANIZATION AND PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of US Facilities Corporation, a Delaware corporation (Company), and its wholly owned subsidiaries. The Company's USBenefits Insurance Services, Inc. subsidiary is the managing general underwriter and marketing organization for medical lines coverages issued by The Continental Insurance Company (Continental), one of the CNA Insurance Companies. The Company's USF RE INSURANCE COMPANY and USF Insurance Company subsidiaries write property/casualty reinsurance and insurance. All significant intercompany balances and transactions have been eliminated in consolidation. [B] RECOGNITION OF REVENUE Management fees and brokerage commissions are primarily recognized as of the effective date of the underlying insurance coverage. Insurance and reinsurance premiums are generally recognized as revenues over the terms of the related policies on a pro-rata basis, and are reported net of ceded earned premiums. Substantially all commissions and fees and approximately 67%, 71% and 79% of premiums earned for 1996, 1995 and 1994 respectively, result from contracts between subsidiaries of the Company and Continental. Such contracts may be terminated as of any year-end. [C] INVESTMENTS Securities are purchased to support the investment strategies of the Company, which are based on many factors including, but not limited to, total rate of return, maturity, credit risk, tax considerations, regulatory requirements and market economics. The Company has the ability to hold all bonds to maturity. However, securities in the portfolio may be sold from time to time based upon the Company's investment strategies and market opportunities. Bonds and equity securities are held as "available for sale" and carried at market value as of the balance sheet date. Market values are principally obtained from a national quotation service. Declines in the market value of any security below cost, which are deemed other than temporary, will be charged to earnings. Unrealized gains and losses net of income taxes are reported as a separate component of stockholders' equity. Market values of bonds are primarily a function of current interest rates, and vary from period to period. Realized gains or losses on sales of investments are computed on a specific identification basis. [D] SHORT-TERM AND OTHER INVESTMENTS, CASH AND INVESTED CASH Short-term and other investments are principally money market mutual funds. Cash and invested cash consists of bank deposits and money market mutual funds. 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Premiums collected but not yet remitted to insurance companies are restricted by law as to use. Such amounts are reported as restricted cash and short-term investments, which at December 31, 1996 and 1995 consisted primarily of money market mutual funds, tax-free auction rate preferred stocks which are redeemable at par value every 7 - 270 days, and U.S. Government obligations. [E] POLICY ACQUISITION COSTS The insurers' costs of acquiring new business are deferred to the extent estimated to be recoverable from future income, including investment income, and amortized to operations ratably over the terms of the related policies. Acquisition costs include commissions, premium taxes and certain underwriting expenses related to production of insurance and reinsurance business. [F] LOSSES AND LOSS ADJUSTMENT EXPENSES The liability for losses is determined on the basis of claim adjusters' and ceding reinsurers' reports and other estimates, including those for incurred but not reported losses. The liability for loss adjustment expenses (LAE) is established by estimating future expenses to be incurred in the settlement of claims provided for in the liability for losses. Both estimates are dependent upon future events, the outcomes of which can be affected by economic, legal, political and social factors. The Company does not discount estimated future expenses to their present values. Management believes that the liability for losses and loss adjustment expenses at December 31, 1996 is adequate to cover the ultimate liability; however, such estimates may be more or less than the amount ultimately paid when the claims are settled. [G] REINSURANCE Reinsurance receivables (including amounts related to claims incurred, both reported and not reported) and prepaid reinsurance premiums are reported as assets. In the normal course of business, the Company seeks to reduce losses that may arise from events which may cause unfavorable underwriting results by reinsuring certain levels of risk with other insurance companies. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. However, such estimates may be more or less than the amount ultimately collected when claims are settled. 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [H] DEPRECIATION AND AMORTIZATION Depreciation and amortization are provided on the straight-line basis over the estimated useful lives of the related assets. Leasehold improvements are amortized over the lesser of the lease terms or useful lives of the improvements. Intangibles are amortized over their estimated useful lives of predominantly forty years. [I] INCOME TAXES Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial reporting basis and the tax basis of the Company's assets and liabilities, as well as expected benefits of utilizing net operating loss carryforwards. The impact on deferred taxes of changes in tax rates and laws, if any, are applied to the years during which temporary differences are expected to be settled, and reflected in the financial statements in the period of enactment. [J] INCOME PER COMMON SHARE The computation of per share data is based upon 5,975,000, 5,728,000 and 6,006,000 weighted average shares outstanding during the years ended December 31, 1996, 1995 and 1994, respectively. Common stock equivalents, consisting of outstanding stock options, have been included in the computation of primary income per share, which approximated fully diluted income per share. [K] STOCK-BASED COMPENSATION Effective December 31, 1996, the Company adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation". Management has elected to continue use of the accounting methods prescribed by Accounting Principles Board Opinion No. 25 and expand its disclosure of stock-based compensation as permitted by SFAS No. 123. Accordingly, no related compensation cost has been recognized. [L] CERTAIN RECLASSIFICATIONS Certain reclassifications have been made to the accompanying 1995 and 1994 financial statements to conform to the 1996 presentation. [M] FAIR VALUE OF FINANCIAL INSTRUMENTS The Company has disclosed the fair value of financial instruments and the methods and assumptions used to establish fair value, as required by SFAS No. 107, "Disclosures about the Fair Value of Financial Instruments" which was adopted for the year ending December 31, 1995. 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [N] MANAGEMENT'S ESTIMATES 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 assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Note 2 - Investments Bonds valued at approximately $10,545,000 were on deposit with various governmental authorities at December 31, 1996. The amortized cost and estimated market values of bonds (in thousands of dollars) at December 31, 1996 and 1995 are as follows:
Gross Gross Amortized Unrealized Unrealized Market December 31, 1996 Cost Gains Losses Value - -------------------------------------------------------------------------------- U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 13,265 $ 236 $ 80 $ 13,421 Foreign bonds 529 25 -- 554 Obligations of states and political subdivisions 89,996 3,508 239 93,265 Corporate bonds 46,884 1,737 381 48,240 ------------------------------------------ Total $150,674 $5,506 $700 $155,480 ==========================================
Gross Gross Amortized Unrealized Unrealized Market December 31, 1995 Cost Gains Losses Value - ---------------------------------------------------------------------------------- U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 11,071 $ 722 $ -- $ 11,793 Foreign bonds 557 65 -- 622 Obligations of states and political subdivisions 69,967 4,587 117 74,437 Corporate bonds 45,982 3,963 51 49,894 -------------------------------------------- Total $127,577 $9,337 $ 168 $136,746 ============================================
The amortized cost and estimated market value of bonds at December 31, 1996, by contractual maturity, are shown below (in thousands of dollars). Expected maturities will differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties. 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Maturity Dates Amortized Cost Market Value - -------------------------------------------------------------------------- 1997 $ 528 $ 538 1998-2001 26,886 27,728 2002-2006 74,457 76,626 2007-Thereafter 48,803 50,588 ----------------------------- Total $150,674 $155,480 =============================
Information regarding bond sales (in thousands of dollars) follows: Year ended December 31, Proceeds from sales Gross Gains Gross Losses - ---------------------------------------------------------------------------------------------------------------------------------- 1996 $ 24,656 $ 809 $ 80 1995 77,373 1,677 522 1994 17,136 385 355 ====================================== Information regarding equity dispositions (in thousands of dollars) follows: Year ended December 31, Proceeds from sales Gross Gains Gross Losses - ----------------------------------------------------------------------------------------------------------------------------------- 1996 $ 6,799 $ 1,757 $ 120 1995 9,214 211 344 1994 2,853 68 54 ======================================
Information regarding gross unrealized gains and losses on equity securities (in thousands of dollars) follows: Gross Gross Unrealized Unrealized Year ended December 31, Gains Losses - ---------------------------------------------------------------------------------------------------------------------- 1996 $ 4,766 $ 692 1995 2,243 487 1994 375 1,212 =======================
Net investment income (in thousands of dollars) consists of the following: Year ended December 31, 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------- Interest on bonds $ 8,618 $ 8,134 $5,347 Short-term investment interest 2,349 1,569 803 Dividends on equity securities 346 496 604 -------------------------------------- 11,313 10,199 6,754 Less: Investment expenses 1,166 1,009 804 -------------------------------------- Net investment income $ 10,147 $ 9,190 $5,950 ======================================
Note 3 - Reinsurance The property and casualty insurance companies cede a portion of their business to other insurance companies under multiple reinsurance agreements. Reinsurance contracts do not relieve the Company from its 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS obligations to policyholders. A contingent liability exists for the amount of all reinsurance deductions necessary in the event that any of the reinsuring companies are unable to pay their portion of any losses; consequently, allowances are established for amounts deemed uncollectible. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers to minimize its exposure to significant losses from a reinsurer's insolvency. At December 31, 1996, reinsurance recoverables and prepaid premiums of $18,166,000 were unsecured. The Company holds letters of credit totaling $9,831,000 under certain reinsurance agreements that can be drawn on for amounts that remain unpaid for more than 120 days. The effect of reinsurance on premiums written and earned and the effect of ceding arrangements (in thousands of dollars) follows:
Year ended December 31, 1996 1995 1994 - ------------------------------------------------------------------------------------------- Premiums Premiums Premiums Premiums Premiums Premiums Written Earned Written Earned Written Earned --------------------------------------------------------------------- Direct $ 10,122 $ 10,279 $ 11,260 $ 12,218 $ 12,004 $ 9,386 Reinsurance assumed 140,102 134,714 121,201 117,151 96,275 94,573 Reinsurance ceded (22,246) (20,869) (15,565) (14,398) (11,897) (10,690) --------------------------------------------------------------------- Net $127,978 $124,124 $116,896 $114,971 $ 96,382 $ 93,269 ===================================================================== Losses and loss adjustment expenses ceded $ 12,844 $ 8,327 $ 10,141 ======================================================== Liabilities for losses and loss adjustment expenses ceded $ 22,265 $ 16,426 $ 13,343 ======================================================== Commissions ceded $ 4,144 $ 2,441 $ 1,723 ========================================================
Note 4 - Reserve for Losses and Loss Adjustment Expenses The table below summarizes the activity for losses and loss adjustment expenses (LAE), net of reinsurance recoverable (in thousands of dollars), for each year ended December 31, 1996, 1995 and 1994, respectively. Reserves are established for losses that have occurred as of each balance sheet date, whether or not reported to the Company. Insurance and reinsurance companies establish reserves for losses incurred, but not yet paid, in order to match such losses with the related premiums earned. The process of establishing loss reserves is subject to uncertainties that are a normal, recurring aspect of the insurance business which requires the use of informed judgments and estimates. Estimating loss reserves is a process where many factors can ultimately affect the final settlement of a claim and, therefore, the ultimate 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS reserve that is needed. In addition, time can be a critical part of reserving determinations, since the longer the span between the incidence of a loss and the payment or settlement of the claim, the more variable the ultimate settlement amounts may be. In 1996, changes in the payment patterns experienced within the Company's medical lines segment produced adjustments to factors applied to actuarial models resulting in increases in estimated losses and LAE for claims occurring in prior years. Loss and loss adjustment expense reserve development is reviewed on a regular basis, incorporating analyses of current trends, market changes in the Company's business segments and historical experience to analyze the Company's actuarial assumptions. As additional experience and other data become available, the Company's actuarial estimates may be revised and impact earnings.
Year ended December 31, 1996 1995 1994 - --------------------------------------------------------------------------------- Balance at beginning of period $78,894 $69,647 $58,770 Less reinsurance recoverables 16,474 13,343 7,412 --------------------------------- Reserve for losses and LAE at beginning of period, net 62,420 56,304 51,358 Incurred losses and LAE: Provision for losses and LAE for claims occurring in the current year 83,485 74,935 61,941 Increase in estimated losses and LAE for claims occurring in prior years 4,688 2,808 2,425 Loss and LAE payments for claims occurring during: The current year (43,287) (39,511) (33,345) Prior years (34,902) (32,116) (26,075) -------------------------------- Reserve for losses and LAE at end of period, net 72,404 62,420 56,304 Plus reinsurance recoverables 22,265 16,474 13,343 -------------------------------- Balance at end of period $94,669 $78,894 $69,647 ================================
44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 5 - Note Payable On December 20, 1994 the Company entered into a $35,000,000 reducing, revolving, variable interest rate bank Credit Agreement. Amounts bear interest at LIBOR plus a margin, currently 1%. At December 31, 1996, $35,000,000 was outstanding. Under its terms, the outstanding balance is to be reduced quarterly beginning March 31, 1997, with aggregate annual reductions (in thousands of dollars) as follows:
Year Commitment Reductions - ---------------------------------- 1997 $ 2,500 1998 5,300 1999 6,800 2000 6,800 2001 6,800 2002 6,800 ------- Total $35,000 -------
Interest on amounts outstanding at December 31, 1996 is paid at an effective rate of 6.59% through March 24, 1997. The Credit Agreement also contains restrictive covenants which include restrictions on other debt, mergers, acquisitions and investment portfolio quality. Additionally, the credit agreement requires the Company to maintain certain levels of financial ratios, statutory surplus and pretax statutory net income, minimum consolidated tangible net worth, risk based capital ratio and A.M. Best Company rating. The credit agreement is secured by a pledge of all the capital stock of USF RE INSURANCE COMPANY. At December 31, 1996 the Company was in compliance with all covenants. 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 6 - Income Taxes Income tax expense (benefit) (in thousands of dollars) consists of:
Year ended December 31, 1996: Federal State Total - ------------------------------------------------------------- Current $5,849 $ 452 $6,301 Deferred (1,154) (5) (1,159) -------------------------- Total $4,695 $ 447 $5,142 ========================== Year ended December 31, 1995: Federal State Total - ------------------------------------------------------------- Current $3,818 312 $4,130 Deferred 121 54 175 -------------------------- Total $3,939 $ 366 $4,305 ========================== Year ended December 31, 1994: Federal State Total - ------------------------------------------------------------- Current $ 884 -- $ 884 Deferred 289 (29) 260 -------------------------- Total $1,173 $ (29) $1,144 ==========================
Actual tax expense differs from "expected" tax expense computed by applying the federal statutory rate to income before taxes (in thousands of dollars) as follows:
Year ended December 31, 1996 1995 1994 - ------------------------------------------------------------- "Expected" federal tax expense $ 7,057 $ 6,174 $ 2,510 Tax exempt interest - net (1,393) (1,621) (1,615) Change in valuation allowance (576) (115) (146) Other 54 (133) 395 --------------------------- Actual income tax expense $ 5,142 $ 4,305 $ 1,144 ===========================
46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at December 31, 1996 and 1995 are presented below (in thousands of dollars):
December 31, 1996 1995 - --------------------------------------------------------------------------- Deferred tax assets: Loss and loss adjustment expense reserves $ 3,708 $ 3,111 Unearned premiums 1,151 861 Net operating loss carryforwards 444 462 Other 292 207 ------------------ Total deferred tax assets 5,595 4,641 Less valuation allowance (444) (1,020) ------------------ Net deferred tax assets 5,151 3,621 ------------------ Deferred tax liabilities: Intangibles (569) (560) Depreciation (104) (145) Policy acquisition costs (1,276) (968) Net unrealized gain (3,020) (3,672) Other (33) -- ------------------- Total deferred tax liabilities (5,002) (5,345) ------------------- Total deferred income taxes $ 149 $(1,724) ===================
Based on the Company's current and historical earnings, management believes it is more likely than not that the existing net deductible temporary differences will reverse during periods in which the Company generates net taxable income. However, there can be no assurance that the Company will generate any earnings or any specific level of continuing earnings in future years. Valuation allowances established for uncertainties associated with the utilization of future tax benefits are revised when changes in circumstances indicate that it is more likely than not that the reversal of such temporary differences will be realized. Certain tax planning strategies could be implemented to supplement income from operations to fully realize recorded tax benefits. Net operating loss carryforwards of $1,268,000 are available to offset future federal taxable income of a subsidiary through 2005. Note 7 - Stockholders' Equity The Company is authorized to issue 20,000,000 shares of common stock and 5,000,000 shares of preferred stock. The Company has a Stockholder Rights Plan which provides that in the event any person becomes the beneficial owner of 10% or more of the 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS outstanding common stock of the Company, each right (other than rights held by the 10% stockholder) will be exercisable at a predetermined price after the close of business on the tenth business day following such event. Each right entitles the holder thereof to purchase shares of common stock of the Company which have a market value equal to two times the then established exercise price ($70.00 per share at December 31, 1996). The Plan further provides that if, on or after the occurrence of the previously mentioned event, the Company is merged with or into any other corporation, or 50% or more of the Company's assets or earning power are sold, each right (other than rights held by the 10% stockholder) will be exercisable to purchase shares of common stock of the surviving corporation or purchaser which have a market value equal to two times the exercise price. The rights expire on May 24, 2000, and can be redeemed by the Board of Directors at $.001 per right at any time before the first date on which they first become exercisable. At December 31, 1996 and 1995, USF RE's statutory surplus was $109,880,000 and $100,568,000, respectively. Consolidated statutory net income for USF RE was $8,022,000, $10,343,000, and $6,316,000 for the years ended December 31, 1996, 1995 and 1994, respectively. Statutory amounts are determined on the basis of regulations promulgated by the National Association of Insurance Commissioners, which is a comprehensive basis of accounting other than Generally Accepted Accounting Principles. The more significant of these statutory accounting practices are: (1) premiums are taken into income over the terms of the policies, whereas the related acquisition and commission costs are expensed when incurred; (2) certain assets designated as "nonadmitted assets" are charged to surplus; (3) bonds are carried at amortized costs, irrespective of the Company's investment portfolio activity; (4) adjustments reflecting the equity in earnings of subsidiaries are carried to the surplus account as unrealized capital gains or losses rather than income; (5) deferred federal income tax effects for tax return timing differences are not provided; (6) gains and losses from retrospective reinsurance contracts are recognized immediately through the income statement and (7) a provision is made for unearned premiums and losses recoverable, in excess of funds held, on business reinsured with companies not qualified by license, through a charge to surplus. USF RE is limited in the amount of dividends it can pay to the Company without approval of the Insurance Commissioners of Massachusetts and California. Such limitation is the greater of net income or 10% of policyholders' surplus of the preceding year. During 1997 USF RE may pay dividends of $10,988,000 to the Company without such prior approval. 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 8 - Stock Compensation and Employee Benefits The US Facilities Corporation Employees Savings Plan is a voluntary contributory 401(k) savings plan covering substantially all employees. Under the Company's plan eligible employees may contribute up to 15% of their compensation on a pre- tax basis up to the IRS allowable limit. The Company makes matching contributions to the plan on a pro-rata basis for all participants up to a maximum of 6% of each individual's compensation. For 1996, 1995 and 1994 such matching contributions were $388,000, $395,000 and $321,000, respectively. The Company has four fixed stock option plans under which options to purchase shares of the Company's common stock have been or may be granted. As of December 31, 1996 options to purchase up to 300,000 and 1,000,000 shares, respectively, have been authorized under the 1988 and 1991 Employee Stock Option Plans. Options to purchase up to 35,000 and 150,000 shares, respectively, have been authorized under the 1988 and 1991 Director Stock Option Plans. Such plans allow the Company to grant incentive stock options (ISO's), nonqualified stock options (NQSO's), stock appreciation rights (SAR's) and restricted shares to key employees and directors at prices not lower than the market value at date of grant. Options generally vest 50% after one year and 50% after two years from the date of grant and have a maximum term of five years. Options are exercisable through periods ending December 2, 1997 to May 28, 2001. No SAR's or restricted share grants were outstanding at December 31, 1996, 1995 or 1994. At December 31,1995, the Company had 30,000 options outstanding, exercisable at prices ranging from $5.04 to $13.00. These options were sold in 1991 at $1 per share to a corporation controlled by a current officer and director of the Company, and were exercised during 1996. Such options are excluded from the following information. The Company has adopted the disclosure-only provisions of FAS 123, "Accounting for Stock-based Compensation," but applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its fixed stock option plans. Accordingly, no related compensation cost has been recognized. If the Company had elected to recognize compensation cost for its Employee and Director plans based on the fair value at the 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS grant dates for awards under those plans, net income and earnings per share would have been reported as the proforma amounts noted below (in thousands of dollars) consistent with the method prescribed by FAS 123:
Year ended December 31, 1996 1995 - ----------------------------------------------------------------------- Net income As reported $15,020 $13,854 Pro forma $14,762 $13,611 Primary earnings per share, As reported $ 2.51 $ 2.42 which approximates fully diluted Pro forma $ 2.47 $ 2.38 earnings per share
The fair value of each option grant subsequent to December 15, 1994 used to compute proforma net income and earnings per share disclosures is the estimated present value at grant date using the Black-Scholes option-pricing model with following weighted average assumptions for 1996 and 1995: dividend yield of 1.4%, expected volatility of 15%, a risk free interest rate of 5%, and an expected holding period of 4 years. The status of all optioned shares is as follows:
December 31, 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------- Shares Weighted- Shares Weighted- Shares Weighted- Average Average Average Exercise Exercise Exercise Price Price Price ----------------------------------------------------------------------------- Outstanding- beginning of year 602,600 $13.55 648,900 $ 9.79 828,400 $ 9.36 Granted 15,000 17.00 255,400 16.00 36,000 10.06 Exercised (155,500) 11.73 (280,700) 7.42 (161,000) 6.93 Canceled (6,500) 17.69 (21,000) 13.76 (54,500) 11.62 ----------------------------------------------------------------------------- Outstanding- end of year 455,600 $14.04 602,600 $ 13.55 648,900 $ 9.79 ============================================================================= Options exercisable at year end 315,400 $13.15 310,700 $ 11.64 547,600 $ 9.32 ========================================================================== Weighted- average fair value of options granted during the year $ 2.88 $ 3.07 ====================================
50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes information about fixed stock options outstanding at December 31,1996:
Options Outstanding Options Exercisable - ----------------------------------------------------------------------------------------------- Weighted- Average Weighted- Weighted- Number Remaining Average Number Average Range of Outstanding at Contractual Exercise Exercisable at Exercise Exercise Prices 12/31/96 Life Price 12/31/96 Price - ----------------------------------------------------------------------------------------------- $9 to $13.50 221,200 2 Years $11.43 171,200 $10.85 $14 to $20 234,400 3 Years 16.50 144,200 15.74 ------- ------- Total 455,600 315,400 ======= =======
Note 9 - Segment Information Certain information about the Company's operations by industry segment is summarized as follows (in thousands of dollars):
Year ended December 31, 1996 1995 1994 - -------------------------------------------------------------------------------- REVENUES: Medical lines $114,213 $110,809 $ 98,373 Property/casualty underwriting 46,722 39,297 24,429 Holding company (including realized gains) 2,184 1,071 9 ----------------------------------------- Total $163,119 $151,177 $122,811 ----------------------------------------- INCOME BEFORE INCOME TAXES: Medical lines $ 17,481 $ 17,152 $ 12,598 Property/casualty underwriting 4,003 3,918 (1,774) Holding company (1,322) (2,911) (3,442) ----------------------------------------- Total $ 20,162 $ 18,159 $ 7,382 ----------------------------------------- IDENTIFIABLE ASSETS: Medical lines $ 87,228 $ 75,529 $ 69,160 Property/casualty underwriting 196,987 170,645 126,297 Holding company 4,528 3,698 4,280 ----------------------------------------- Total $288,743 $249,872 $199,737 -----------------------------------------
51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 10 - Commitments and Contingencies The Company leases certain facilities and equipment under long-term operating leases which expire at various dates through 2007. Taxes, insurance and maintenance are generally obligations of the Company. Total rent expense, including month-to-month rentals, was $1,273,000 in 1996, $1,951,000 in 1995 and $1,566,000 in 1994. Future minimum noncancelable lease commitments (in thousands of dollars) are as follows:
Year ending December 31, - ------------------------------------ 1997 $ 1,434 1998 1,303 1999 1,296 2000 1,295 2001 1,216 Thereafter 6,384 ------- $12,928 =======
52 US FACILITIES CORPORATION AND SUBSIDIARIES INDEPENDENT AUDITORS' REPORT THE BOARD OF DIRECTORS AND STOCKHOLDERS US FACILITIES CORPORATION We have audited the accompanying consolidated balance sheets of US Facilities Corporation and subsidiaries as of December 31, 1996 and 1995 and the related consolidated income statements, statements of stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of US Facilities Corporation and subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ KPMG PEAT MARWICK LLP February 4, 1997 Los Angeles, California QUARTERLY RESULTS OF OPERATIONS Following is quarterly summary financial information for 1996, 1995 and 1994 (in thousands of dollars, except per share data).
1st 2nd 3rd 4th Quarter Quarter Quarter Quarter - --------------------------------------------------------------------- 1996 Revenues $38,918 $38,529 $40,525 $45,147 Income before income taxes 4,977 4,781 5,091 5,313 Net Income 3,808 3,585 3,709 3,918 ------------------------------------- Net income per share $ .64 $ .60 $ .62 $ .65 ------------------------------------- 1995 Revenues $35,459 $39,932 $36,330 $39,456 Income before income taxes 3,732 5,023 4,606 4,798 Net Income 2,922 3,849 3,477 3,606 ------------------------------------- Net income per share $ .52 $ .67 $ .60 $ .61 ------------------------------------- 1994 Revenues $30,469 $32,185 $29,505 $30,652 Income before income taxes 424 697 2,832 3,429 Net Income 600 761 2,107 2,770 ------------------------------------- Net income per share $ .10 $ .13 $ .35 $ .46 -------------------------------------
Stock Price Information Following are the quarterly high and low prices from January 1, 1995 through February 28, 1997. The Company believes that as of February 28, 1997 there were approximately 2,000 holders of its common stock.
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter High Low High Low High Low High Low - ------------------------------------------------------------------------------------------- 1997 through February 28 $20 3/8 18 3/4 1996 $21 3/8 16 1/2 $20 1/8 16 3/8 $19 1/2 14 7/8 $19 7/8 17 1/8 1995 $14 1/2 9 3/4 $16 1/4 13 1/8 $20 3/8 16 0/0 $23 3/8 17 1/2
55
Board of Directors Officers David L. Cargile [1, 3, 5] David L. Cargile Chairman, President and Chief Executive Officer, Chairman of the Board, President and Chief Executive Officer, US Facilities Corporation US Facilities Corporation John R. Kooken [1, 2, 3] Howard S. Stinger Retired; Director Glendale Federal Savings Bank; Executive Vice President-Corporate Finance and Director, Pacific Gulf Properties, Inc.; Former Vice Investor Relations Chairman and Chief financial Officer, Security Pacific Corporation Mark Burke Senior Vice President, Treasurer and Chief L. Steven Medgyesy, M.D. [3, 4, 5] Financial Officer Retired; Former Director of Laboratories, Lincoln West Medical Center John T. Grush Senior Vice President Bernard H. Ross [2, 4, 5] Executive Vice President, Request, Inc.; Former Craig J. Kelbel Partner and National Director of Healthcare Senior Vice President Services, Touche Ross & Company Jose A. Velasco Charles L Schultz [2, 3, 4] Senior Vice President, Secretary and Retired; Director, Amwest Insurance Group; General Counsel Former Senior Vice President, Finance and Chief Financial Officer, Farmers Group. Inc Patricia S. Boisseranc Vice President Howard S. Singer [1, 3, 5] Executive Vice President-Corporate Finance and Edward D. Jones, III Investor Relations, US Facilities Corporation Vice President Kenneth C. Tyler [2, 4, 5] Barbara Fox Stoner Retired; Attorney at Law; Former Vice Chairman Vice President and General Counsel, Farmers Group, Inc. Frank P. Van Buskirk DIRECTOR EMERITUS: Vice President John A. Allison Retired; Former Vice Chairman, Transamercia Insurance Group 1996 Committee Assignments 1 MEMBER OF EXECUTIVE COMMITTEE 2 MEMBER OF AUDIT COMMITTEE 3 MEMBER OF INVESTMENT COMMITTEE 4 MEMBER 0F COMPENSATION COMMITTEE 5 MEMBER OF NOMINATING COMMITTEE
STOCKHOLDER INFORMATION ANNUAL MEETING The 1997 Annual Meeting of Stockholders of US Facilities Corporation will be held on May 14, 1997, at 9:00 a.m. Local Time, at the offices of the Company, 650 Town Center Drive, Suite 1500, Costa Mesa, California 92626. ADDITIONAL INFORMATION Stockholder inquiries and request for additional copies of this Annual Report and the Company's 1996 Report on Form 10-K filed with the Securities and Exchange Commission should be directed to: Howard S. Singer, Executive Vice President, US Facilities Corporation, 6200 N. Hiawatha, Suite 400, Chicago, Illinois 60646, (800) 550-3285 BOOK VALUE $17.18 per share at December 31, 1996. REGISTRAR AND TRANSFER AGENT American Stock Transfer & Trust Company, 40 Wall Street, New York, New York 10005. INDEPENDENT AUDITORS KPMG Peat Marwick LLP, 725 South Figueroa Street, Los Angeles, California 90017. STOCK TRADING INFORMATION The Company's common stock trades on The New York Stock Exchange under the symbol UF. EX-21 15 U.S. FACILITIES SUBSIDIARIES EXHIBIT 21 US FACILITIES CORPORATION AND SUBSIDIARIES AS OF DECEMBER 31, 1996 US Facilities Corporation A Delaware Corporation
100% 100% USBenefits Insurance Services, Inc. US MedCare Review, Inc. A California Corporation An Illinois Corporation (INACTIVE)
100% USF RE INSURANCE COMPANY A Massachusetts Corporation 100% US Holdings, Inc. A Delaware Corporation 100% USF Insurance Company A Pennsylvania Corporation EX-23 16 CONSENT - KPMG PEAT MARWICK EXHIBIT 23 The Board of Directors US Facilities Corporation We consent to incorporation by reference in Registration Statements (No. 33- 41086 and No. 33-46841), both on Form S-8, of US Facilities Corporation of our reports dated February 4, 1997, relating to the consolidated balance sheets of US Facilities Corporation and subsidiaries as of December 31, 1996 and 1995, and the related consolidated income statements, statements of stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996, and all related schedules, which report appears in the December 31, 1996 annual report on Form 10-K of US Facilities Corporation and subsidiaries. /s/ KPMG Peat Marwick LLP Los Angeles, California March 26, 1997 EX-27 17 ARTICLE 5 FDS FOR 1996 FORM 10-K
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 0 0 0 0 0 0 194,352 34,903 23,975 3,644 288,743 94,669 22,936 0 0 35,000 0 0 61 102,303 288,743 124,124 10,147 2,126 26,722 88,173 37,179 14,995 20,162 5,142 0 0 0 0 15,020 2.51 2.51 62,420 83,485 4,688 43,287 34,902 72,404 4,688
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