-----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, WDmCU1OaMoTZVfCT1FIY+XT15qenKtznrPHyUFRWYaEyk2u13aKpvUcDjh5QZK+l xEcagG/uOG/UJIBqE8xl+w== 0001017062-99-000944.txt : 19990518 0001017062-99-000944.hdr.sgml : 19990518 ACCESSION NUMBER: 0001017062-99-000944 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTRIS GROUP INC 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-Q SEC ACT: SEC FILE NUMBER: 001-12099 FILM NUMBER: 99625212 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 FORMER COMPANY: FORMER CONFORMED NAME: US FACILITIES CORP DATE OF NAME CHANGE: 19920703 10-Q 1 CENTRIS GROUP - 10-Q 3/31/1999 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 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: 001-12099 The Centris Group, Inc. ----------------------- (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 Number) 650 Town Center Drive, Suite 1600, Costa Mesa, CA 92626 ----------------------------------------------------------- (Address of principal executive offices) (Zip code) (714) 549-1600 -------------- (Registrant's telephone number, including area code) Not applicable -------------- (Former name, former address and former fiscal year, if changed since last report.) 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 [_] Number of shares outstanding of each class of the Registrant's Common Stock as of May 7, 1999: Common Stock, par value $.01 per share: 11,606,476 Common Stock Purchase Rights: 11,606,476 1 INDEX Part I FINANCIAL INFORMATION Item 1. FINANCIAL INFORMATION Unaudited Condensed Consolidated Financial Statements: Balance Sheets as of March 31, 1999 and December 31, 1998............................................ 3 Income Statements for the Quarters Ended March 31, 1999 and 1998...................................... 4 Statements of Cash Flows for the Quarters Ended March 31, 1999 and 1998...................................... 5 Notes to Condensed Consolidated Financial Statements............. 6 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................ 10 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.................................................. 19 Part II OTHER INFORMATION Item 6. EXHIBITS and REPORTS ON FORM 8-K............................. 20 SIGNATURES............................................................... 21 2 PART I FINANCIAL INFORMATION Item 1. FINANCIAL INFORMATION Unaudited Condensed Consolidated Financial Statements: The Centris Group, Inc. Condensed Consolidated Balance Sheets (Dollars in Thousands)
ASSETS March 31, 1999 December 31, 1998 -------------- ----------------- Investments, at market (amortized cost $283,185 at March 31, 1999, $292,181 at December 31, 1998) $287,769 $292,463 Cash and invested cash 12,828 15,789 Restricted cash and short-term investments 35,143 29,799 Accrued investment income 4,321 3,119 Assets held for transfer under pending reinsurance agreement 97,751 99,369 Receivables: Reinsurance losses and reserves 109,940 101,644 Premiums 51,413 57,558 Prepaid reinsurance premiums 15,514 14,507 Deferred policy acquisition costs 1,517 2,436 Other assets 31,388 29,761 -------- -------- Total assets $647,584 $646,445 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Insurance liabilities: Amounts due insurance companies 116,547 118,501 Losses and loss adjustment expenses 211,122 200,908 Unearned premiums 31,096 32,274 Pending transferable reinsurance 96,580 99,369 Note payable 72,550 72,550 Accounts payable and accrued expenses 30,926 31,809 -------- -------- Total liabilities 558,821 555,411 Stockholders' Equity 88,763 91,034 -------- -------- Total liabilities and stockholders' equity $647,584 $646,445 ======== ========
See accompanying notes to condensed consolidated financial statements. 3 The Centris Group, Inc. Condensed Consolidated Income Statements (Dollars in thousands, except per share data)
Quarter ended March 31, ----------------------- 1999 1998 ---------- ---------- Revenues: Premiums earned $22,053 $27,468 Managed and withdrawal lines 13,912 -- Commissions and fees 8,515 8,538 Net investment income 1,936 1,314 Realized investment gains (losses) (13) 641 ------- ------- Total revenues 46,403 37,961 ------- ------- Operating Expenses: Losses and loss adjustment expenses incurred 18,236 19,487 Managed and withdrawal lines 13,912 -- Policy acquisition expenses 6,705 9,422 General and administrative expenses 4,486 4,196 Interest 1,098 556 ------- ------- Total operating expenses 44,437 33,661 ------- ------- Income from continuing operations before income taxes 1,966 4,300 Income tax expense 723 1,677 ------- ------- Income from continuing operations $ 1,243 $ 2,623 Income from discontinued operations -- 1,611 ------- ------- Net income $ 1,243 $ 4,234 ======= ======= Basic income per share: Income from continuing operations $ .11 $ .22 Discontinued operations -- .13 ------- ------- Net income $ .11 $ .35 ======= ======= Diluted income per share: Income from continuing operations $ .11 $ .21 Discontinued operations -- .13 ------- ------- Net income $ .11 $ .34 ======= =======
See accompanying notes to condensed consolidated financial statements. 4 The Centris Group, Inc. Condensed Consolidated Statements of Cash Flows (Dollars in Thousands)
Quarter ended March 31, ----------------------- 1999 1998 ---------- ---------- Cash (used in) provided by operating activities: $ (1,960) $ 6,058 Cash flows from investing activities: Purchases of fixed maturity investments (17,059) (14,745) Purchases of equity securities (231) (2,814) Proceeds from sales of investment securities 22,653 11,907 Net purchases of short term investments (5,737) (559) Purchases of property and equipment (294) (69) -------- -------- Cash used in investing activities (668) (6,280) -------- -------- Cash flows from financing activities: Dividends paid (342) (374) Exercise of stock options 9 117 Payments on note payable -- (1,325) -------- -------- Cash used in financing activities (333) (1,582) -------- -------- Net decrease in cash and invested cash (2,961) (1,804) Cash and invested cash at beginning of period 15,789 11,122 -------- -------- Cash and invested cash at end of period $ 12,828 $ 9,318 ======== ======== Supplemental disclosure of cash flow information: Interest paid $ 1,029 $ 567 ======== ======== Income taxes paid, net $ 64 $ 1,184 ======== ========
See accompanying notes to condensed consolidated financial statements. 5 The Centris Group, Inc. Notes to Condensed Consolidated Financial Statements 1. General The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles and the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations for the quarter ended March 31, 1999 are not necessarily indicative of the results to be expected for the full year. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 1998 included in the 1998 Annual Report to the Securities and Exchange Commission on Form 10-K of The Centris Group, Inc. (the "Company"). 2. Changes in Capital Structure On February 3, 1998, the Company announced that its Board of Directors had authorized a two-for-one split of its common stock in the form of a 100% stock dividend to stockholders of record as of February 18, 1998. Certificates reflecting the stock split were issued February 27, 1998. All references in the financial statements to number of shares, per share amounts and market prices of the Company's common stock have been adjusted retroactively for all periods presented to reflect this change in capital structure. On September 3, 1998, the Company announced that its Board of Directors had authorized up to $5,000,000 for the repurchase of shares of the Company's stock. On October 13, 1998 the Company announced that the Board of Directors had authorized the repurchase of an additional $5,000,000 of its common stock under its existing repurchase program. Through March 31, 1999 the Company has acquired 619,000 common shares at a cost of $6.2 million. 3. Reinsurance Agreement In connection with the December 31, 1998 acquisition of Seaboard Life, the seller separately negotiated a reinsurance agreement with Life Re for its Individual Life and Annuity business to be retroactively effective as of July 1,1998. The Company has classified the liabilities relating to this agreement as pending transferable reinsurance and has classified the related assets as assets held for transfer. The Company and Life Re have extended the closure date of the reinsurance transaction to June 30, 1999 in order to complete the process of securing insurance department approvals in Indiana and California. On a statutory basis, premium and losses ceded in the first quarter of 1999 were $1,544,103. Such amounts have no effect on the consolidated income statement of the Company for the period. Any income earned or loss incurred from the 6 Individual Life and Annuity business line is credited or charged to the reinsurer. During the first quarter of 1999, $1,171,000 was credited to the reinsurer. 4. Discontinued Operations The Company announced discontinuance of its property/casualty reinsurance segment as of December 31, 1998 and recorded a $19.6 million reserve for anticipated future costs associated with the discontinuance. On March 31, 1999, the Company signed a definitive agreement with Folksamerica Holdings for the sale to Folksamerica of its property/casualty reinsurance subsidiary, USF RE INSURANCE COMPANY (USF RE), for $92,500,000. Terms of the sale include a cash payment of $71,750,000 and a $20,750,000 5-year interest bearing note. The note is subject to adjustment based on future loss development. As described below, for the quarter ended March 31, 1999, a net loss of $1.1 million from discontinued operations was charged against the reserve. Results of operations for the discontinued property/casualty reinsurance operations (in thousands of dollars) are as follows:
Quarter Ended March 31, --------- 1999 1998 ---- ---- Revenues $15,064 $15,957 ======= ======= Income (loss) before income taxes $(1,750) $ 1,883 Provision (benefit) for income taxes (636) 272 ------- ------- Net income (loss) $(1,114) $ 1,611 ======= =======
5. Managed and Withdrawal Lines In connection with its acquisition of the VASA Group companies, the Company agreed to run off the remaining VASA Group medical stop-loss, group term life insurance and other medical lines business in exchange for a fee that was included within the purchase price. The seller is providing loss protection for the run-off of this business so that the Company will have neither an underwriting gain nor incur an underwriting loss on such business. Such items are reported as "Managed and withdrawal lines" revenues and expenses in the Company's income statement. During the first quarter of 1999, receivables due from the seller of $1,564,000 related to this loss protection were recorded. 6. Note Payable In December 1998, the Company amended its bank Credit Agreement to provide an additional $40 million for the purchase of Seaboard Life Insurance Company (USA) and VASA North America, Inc. and subsidiaries. Amounts bear interest at LIBOR plus a margin, currently .75%. The amended Credit Agreement includes a required commitment reduction of $25 million on the earlier of (a) the completion of the sale of USF RE or (b) June 30, 1999. The Company believes that proceeds from the expected sale of USF RE will be used to meet the commitment reduction. The 7 Company's Credit Agreement contains certain covenants, restrictions and dividend payment limitations and call provisions in the event of non-compliance. The Company notified its lender that as of December 31, 1998, it would not meet one of its debt covenants related to the statutory surplus level of Seaboard Life and Vasa North Atlantic Insurance Company("VNAIC"), for which the lender granted a waiver. During the quarter ended March 31, 1999, the Company increased the surplus of Seaboard Life through a capital contribution and cured this non- compliance item. The Company has also notified its lender that it failed to comply with four of its debt covenants as of March 31,1999. Such non-compliance is the result of the sale of USF RE (See Note 4, herein) and the charge of $19,621,000 taken by the Company in connection with discontinuing the property/casualty reinsurance segment. The Company is currently involved in discussions with its lender to obtain a debt covenant waiver through the date of the expected close of the USF RE sale transaction and expects to subsequently revise its covenant requirements through renegotiation of its Credit Agreement to reflect the corresponding loan repayment during the second quarter of 1999. Upon closure of the USF RE sale, the Company has the option of paying down the debt utilizing the remaining expected free cash of $45,000,000 from the sale of USF RE. In the event that Company expectations to cure non-compliance with this covenant are not met, the lender retains the option to call the note as prescribed in the Credit Agreement. The Company has received no indication that its lender intends to call the debt. 7. Income Per Share Reconciliation of income and outstanding shares and related per share amounts adjusted to reflect the February 27, 1998 two-for-one stock split, is presented below (in thousands of dollars, except per share data):
Quarter ended March 31, 1999 1998 - ---------------------------------------------------------------------------- Income (Numerator) Income applicable to common stock for Basic and Diluted income per share: Income from continuing operations $ 1,243 $ 2,623 Discontinued operations -- 1,611 ------- ------- Net income $ 1,243 $ 4,234 ======= ======= Weighted Average Shares (Denominator) Basic Shares 11,596 12,167 Effect of dilutive securities Common Stock Equivalents 196 278 ------- ------- Diluted Shares 11,792 12,445 ======= ======= Basic Income Per Share Income from continuing operations $ .11 $ .22 Discontinued operations -- .13 ------- ------- Net income $ .11 $ .35 ======= ======= Diluted Income Per Share Income from continuing operations $ .11 $ .21 Discontinued operations -- .13 ------- ------- Net income $ .11 $ .34 ======= =======
8 8. Comprehensive Income SFAS No. 130, "Reporting Comprehensive Income" was adopted by the Company effective January 1, 1998. Comprehensive income represents a measure of all changes in equity of an enterprise that result from recognized transactions and other economic events of the period other than transactions with owners in their capacity as owners. Comprehensive income (loss) for the quarterly periods ended March 31, 1999 and 1998 was $(1,919,000) and $4,895,000, respectively. The Company's Comprehensive Income is comprised of net income for the period plus the tax effected increase or decrease in unrealized investment gains occurring during the period. 9 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Business Operations General In the first quarter of 1999 the Company continued its transformation into a specialty insurance company focused on medical and related niche markets. The 1999 period includes completion of a definitive agreement for the sale of the Company's USF RE subsidiary, significant changes in the Company's risk retention profile and was the first quarterly period which included the VASA Group companies, acquired December 31, 1998. These major transactions, which are more fully described in the Company's Annual Report on Form 10-K for the year ended December 31,1998 (1998 Form 10-K), are reflected in the 1999 first quarter period and result in reduced premiums and level commissions and fees in the medical lines segment. Termination of the inter-company pooling agreement between USF RE and its subsidiary, USFIC, affected the specialty lines segment. On March 31, 1999, the Company signed a Definitive Agreement with Folksamerica Holding Company, Inc. for the sale of USF RE for $92,500,000. The consideration is expected to be $71,750,000 in cash and an adjustable subordinated 5 year note for $20,750,000. The note, which accrues interest at the U.S. Treasury Note rate plus 50 basis points, is adjustable downward based on adverse loss development of the USF RE's reinsurance reserves at December 31, 1998. Management expects that the sale of USF RE will close during the second quarter of 1999 upon receipt of regulatory approvals. First quarter 1999 results were unaffected by the results of the property & casualty reinsurance lines due to the provision for discontinued operations reflected in the Company's December 31,1998 results of operations. As more fully discussed in the Company's 1998 Form 10-K, the VASA Group companies were acquired effective December 31,1998. Presently, the Company is continuing its final purchase price negotiations with the seller, which are expected to be completed during the second quarter of 1999. The purchase did not include the Individual Life and Annuity (ILA) business which is being sold separately and is expected to close by June 30, 1999. Accordingly, the ILA business has no effect on the Company's results of operations. The Company continues to actively pursue accretive acquisition and merger opportunities in complimentary business lines. Managed And Withdrawal Lines - ---------------------------- During the quarter ended March 31, 1999 the Company reported $13.9 million in both revenue and expenses from Managed and withdrawal lines. These lines of business were acquired as part of the VASA Group transaction, and pursuant to the terms of the agreement, the Company can neither profit nor suffer loss from running off this business due to loss protections provided by the seller. For further discussion of the terms and 10 conditions of the purchase of the VASA Group companies see the Company's 1998 Form 10-K. Results Of Operations - --------------------- Consolidated revenues, excluding Managed and withdrawal lines, decreased 14.4% in the first quarter of 1999 to $32,491,000 from $37,961,000 in the first quarter of 1998 as a result of decreases in the Company's retention rate on its medical lines business. Effective January 1, 1999, the Company reduced its retention rate to 25% on medical stop loss and provider excess business produced by its USBenefits subsidiary from 50% in prior years. Total premiums written during the first quarter increased 6% over the prior year period, however, the decrease in the retention rate caused earned premium to decline by 20% in the 1999 first quarter to $22,053,000 from $27,468,000 in the 1998 first quarter. Commissions and fees remained constant, reflecting a nominal reduction in market pricing, while investment income rose 47% as a result of the 25% increase in the investment portfolio arising from the acquired portfolio of the VASA group companies. Insurance and reinsurance companies establish reserves for losses incurred, but not yet paid or reported, 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. Loss and loss adjustment expense ("LAE") reserve development is reviewed 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 becomes available, the Company's actuarial estimates may be revised. Such revisions may impact earnings. Loss and loss adjustment expense decreased by 6.4%, to $18,236,000 for the 1999 quarter compared to $19,487,000 for the 1998 period as a result of changes in the net risk retention level in the medical lines segment to 25% on 1999 medical lines business and unanticipated loss development on medical lines policies written in 1997 for which the Company had a net retention level of 50%. Effective April 1, 1999, USF RE purchased $5,000,000 of reinsurance coverage on the 1998 medical stop loss and provider excess business to provide additional loss ratio protection. No benefit was recorded as a result of the reinsurance agreement in the first quarter of 1999. Specialty lines experience primarily reflects changes in retrocessional arrangements and termination of the inter- company pooling agreement with USF RE on January 1,1999. Policy acquisition expenses decreased to $6,705,000, or 28.8% in the 1999 period, from $9,422,000 in the prior period, due primarily to changes in retention levels associated with 1999 medical lines and specialty lines business operations. General and administrative expenses for the first quarter of 1999 increased by 6.9% as compared to the 1998 period principally due to increases in professional services incurred in connection with the Company's major transactions described herein. 11 Interest expense for the quarter rose to $1,098,000, or by 97.5%, in the 1999 period, from $556,000 in 1998, due to higher borrowing levels to finance the VASA Group acquisition. Interest expense is expected to decline as the Company's Credit Agreement requires reduction of the outstanding principal balance to $47,550,000 upon completion of the sale of USF RE, which management expects to complete in the second quarter of 1999. Net income from continuing operations decreased by 52.6% in the 1999 first quarter period to $1,243,000 from $2,623,000 in the 1998 period, primarily as a result of 1997 policy year loss development in the medical lines segment. 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. The statutory combined ratio is the traditional indicator of the potential underwriting profitability of an insurance company's business. The Company's statutory combined ratios for continuing operations were 104% and 99.2% for the quarters ended March 31, 1999 and 1998, respectively. BUSINESS SEGMENTS - ----------------- The Company conducts business in two segments: MEDICAL LINES includes (i) medical stop-loss and provider excess coverages - ------------- underwritten by USBenefits Insurance Services, Inc. ("USBenefits") on behalf of The Continental Insurance Company ("Continental"), one of the CNA Insurance Companies, (ii) catastrophic accident and health risks underwritten and managed nationally and internationally by INTERRA, Inc. ("INTERRA"), and (iii) reinsurance of 50% of such business by USF RE through December 31, 1998, at which time USF RE terminated its reinsurance of the medical lines business on a run-off basis. Effective January 1, 1999 Seaboard Life and VNAIC became reinsurers of the medical lines business with net retained liability under all medical stop-loss and provider excess contracts limited to 25%. In addition, USBenefits is the underwriting manager and marketing organization for medical lines coverages issued on behalf of Continental. Medical stop-loss coverage is a form of excess insurance that protects employers that self-fund their employee healthcare plans by limiting their exposure from the risk of loss. Provider excess coverage limits the financial risks which healthcare providers face from medical plans that prepay the providers fixed sums per plan participant (capitated fees) or provide specified rates for services. Medical lines products are marketed through a network of unaffiliated third party administrators, insurance agents, brokers and consultants ("producers"). SPECIALTY LINES insurance underwriting is conducted by the Company's subsidiary, - --------------- USF Insurance Company ("USFIC") which is presently rated "A" 12 (Excellent) by A.M. Best Company, a rating that it currently shares with USF RE, under an Intercompany Pooling Agreement that has been terminated effective as of January 1, 1999. A.M. Best Company has placed USFIC's and USF RE's ratings under review pending final resolution of the announced sale of USF RE. There can be no assurance that USFIC will continue to be rated by A.M. Best Company following the disposition of USF RE or that if USFIC continues to be rated, that it will retain its current rating of "A". USFIC writes both standard and surplus lines insurance on commercial and personal property/casualty risks which are marketed exclusively through managing general agents, general agents and program administrators. In 1999, USFIC expects to begin writing specialty risks for medically related lines of business where it can leverage existing relationships and opportunities through USBenefits and INTERRA. The tables set forth below present pre-tax operating information by continuing business segment and holding company operations (including realized gains) for the quarters ended March 31, 1999 and 1998, respectively. MEDICAL LINES - ------------- (Dollars in Thousands)
Quarter Ended March 31, ------------------ 1999 1998 % Change -------- -------- ---------- Revenues: Premiums earned $20,964 $25,840 (19)% Commissions and fees 8,488 8,538 (1)% Investment income 1,561 997 57% ------- ------- Total revenues 31,013 35,375 (12)% ------- ------- Expenses: Losses and loss adjustment 17,383 18,224 (5)% Policy acquisition 6,479 9,092 (29)% General and administrative 3,577 3,275 9% ------- ------- Total expenses 27,439 30,591 (10)% ------- ------- Income before income taxes $ 3,574 $ 4,784 (25)% ======= =======
The decline in premiums earned in 1999 as compared to the 1998 quarter is the result of the Company reducing its exposure to underwriting risk by limiting its retention on business written by USBenefits to 25% for the 1999 policy year from 50% in prior periods. Total business production for the segment increased 6% for the 1999 period. Commission and fee income on this production declined nominally in the 1999 period due to a reduction in the fee structure, which was a necessary condition to buying reinsurance and reducing underwriting risk. Loss and loss adjustment expenses declined 13 5% in the 1999 period as a result of changes in the net risk retention level to 25% on 1999 medical lines business combined with the additional loss development on policies written in 1997 which are retained at a 50% level. Effective April 1, 1999, USF RE purchased $5,000,000 of reinsurance coverage on the 1998 medical stop loss policy year to provide additional loss protection. No benefit was recorded as a result of the reinsurance agreement in the first quarter of 1999. Declines in policy acquisition costs in the first quarter of 1999 as compared to the first quarter of 1998 result primarily from the decrease in net retention on the 1999 policy year and a decrease in other costs of acquisition. General and administrative expenses increased 9% in the 1999 period principally due to transition costs incurred as the Company incorporates the VASA Group business into its operations. SPECIALTY LINES - --------------- (Dollars in Thousands)
Quarter Ended March 31, ------------------ 1999 1998 % Change -------- -------- ---------- Revenues: Premiums earned $1,089 $1,628 (33)% Investment income 375 293 28% ------ ------ Total revenues 1,464 1,921 (24)% ------ ------ Expenses: Losses and loss adjustment 853 1,263 (32)% Policy acquisition 226 330 (32)% General and administrative 275 152 81% ------ ------ Total expenses 1,354 1,745 (22)% ------ ------ Income before income taxes $ 110 $ 176 (38)% ====== ======
Specialty lines operating results reflect changes in reinsurance programs and termination of the inter-company pooling agreement with the Company's USF RE subsidiary effective January 1,1999. These operating changes are the principal factors impacting premiums earned, loss and loss adjustment expenses and policy acquisition costs in the 1999 period. 14 HOLDING COMPANY - --------------- (Dollars in Thousands)
Quarter Ended March 31, ------------------ 1999 1998 % Change -------- -------- ---------- Revenues: Commissions and fees $ 27 $ -- -- Investment income -- 24 (100)% Realized gains (13) 641 (102)% ------- ------ Total revenues 14 665 (98)% ------- ------ Expenses: General and administrative 634 769 (18)% Interest 1,098 556 97% ------- ------ Total expenses 1,732 1,325 31% ------- ------ Income before income taxes $(1,718) $ (660) 160% ======= ======
Changes in realized gains in the 1999 period as compared to the 1998 period arise from the continuous evaluation of the investment portfolio in accordance with the Company's investment guidelines. Declines in general and administrative expenses in the 1999 period result from declining support costs for the Company's USF RE operation. Interest expense for the quarter rose to $1.1 million, or 97%, from $0.6 million, due to higher borrowing levels to finance the VASA Group acquisition. Interest expense is expected to decline as the Company's Credit Agreement requires reduction of the outstanding principal balance to $47,550,000 upon completion of the sale of USF RE, which management expects to complete in the second quarter of 1999. 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 reinsurance and insurance contracts, and operating expenses such as salaries, commissions, taxes and general overhead. Cash available from operations varies between periods primarily due to the timing of premium collections and the payment of claims. In December 1998, the Company borrowed an additional $42,700,000 under its existing Credit Agreement for the purchase of the VASA Group companies. The Company is required to pay down the loan balance on its Credit Agreement to $47,550,000 by June 30, 1999. Proceeds from the sale of USF RE, expected to be completed in the second quarter of 1999, will be used to meet this obligation. The Company's Credit Agreement contains certain covenants, restrictions and dividend payment limitations and call provisions in the event of non-compliance. The Company notified its lender that as of December 31, 15 1998, it would not meet one of its debt covenants related to the statutory surplus level of Seaboard Life and VNAIC, for which the lender granted a waiver. During the quarter ended March 31, 1999, the Company increased the surplus of Seaboard Life through a capital contribution and cured this non-compliance item. The Company has also notified its lender that it failed to comply with four of its debt covenants as of March 31, 1999. Such non-compliance is the result of the sale of USF RE (See Note 4, herein) and the charge of $19,621,000 taken by the Company in connection with discontinuing the property/casualty reinsurance segment. The Company is currently involved in discussions with its lender to obtain a debt covenant waiver through the date of the expected close of the USF RE sale transaction and expects to subsequently revise its covenant requirements through renegotiation of its Credit Agreement to reflect the corresponding loan repayment during the second quarter of 1999. Upon closure of the USF RE sale, the Company has the option of paying down the debt utilizing the remaining expected free cash of $45,000,000 from the sale of USF RE. In the event that Company expectations to cure non-compliance with this covenant are not met, the lender retains the option to call the note as prescribed in the Credit Agreement. The Company has received no indication that its lender intends to call the debt. 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 immediate plans for significant capital outlays, from time to time it contemplates acquisition opportunities that complement its business operations. The sale of USF RE is expected to generate free cash of approximately $45,000,000 after expenses and the required pay down of the Company's debt noted above. The investment portfolio reflects an allocation of approximately 95% fixed- income investments, primarily taxable, with an "AA" average fixed income portfolio rating, and 5% in equities. The portfolio does not contain any real estate investments, derivatives, high yield bonds, private placements or mortgage loans. Year 2000 As the year 2000 approaches, the Company recognizes the need to ensure that its operations will not be adversely affected by Year 2000 computer software and hardware issues. Such issues pertain to date sensitive software and hardware which could incorrectly recognize a two digit date field. This could result in a system miscalculation or failure and lead to a disruption of operations, including, among other things, a temporary inability to process transactions, send invoices, make claims or other payments or engage in similar activities. The Company has a formal plan in place to evaluate and implement solutions to year 2000 related issues which focuses on eight separate compliance issues: (I) the ability of the Company's systems to handle the transition to the Year 2000; (II) the ability of the Company's customers and business partners to handle the transition to the Year 2000; (III) the ability of the Company's vendors and service providers to handle the transition to the Year 2000; (IV) the Company's disclosure of its Year 2000 compliance efforts to investors and regulators; (V) the Company's potential exposure to losses from Year 2000 16 claims under its reinsurance contracts and insurance policies; (VI) the Company's ability to secure and maintain insurance coverages protecting the Company against Year 2000 losses; (VII) budget and resource issues; and (VIII) development and implementation of a Contingency Plan. The evaluation phase of the plan, which was completed in December 1997, included an analysis of the Company's software and hardware systems, identification of hardware which needed to be upgraded or replaced, identification of software enhancements required to address Year 2000 issues and identification of those customers, business partners, vendors and service providers that could have an impact on the Company's operations in the event that their systems were not Year 2000 compliant. The Company's significant operational and financial software systems are provided by third party vendors who the Company has confirmed have also been focusing on addressing Year 2000 issues. During 1998, the Company has implemented and tested Year 2000 compliant systems for its corporate financial reporting system, its treaty reinsurance business, its facultative reinsurance operations and its medical lines operations. The Company believes that all of its internal systems have reached a state of Year 2000 readiness and expects to continue testing its systems during 1999. The Company has solicited its trading partners including agents and brokers, suppliers, financial institutions and others who could directly or indirectly affect the Company's operations as to their Year 2000 compliance efforts. Presently, these trading partners are in various stages of completion of their own Year 2000 remediation efforts. The third party vendors providing the Company's significant operational and financial software systems have represented to the Company that the software now in use is Year 2000 Compliant. The Company will continue to closely monitor the Year 2000 readiness of its own systems, as well as the readiness of its customers, business partners, vendors and service providers on an ongoing basis. It is presently not possible to quantify the aggregate cost to the Company with respect to external Year 2000 issues, if any, although the Company does not expect such matters to have a material adverse effect on its operations. As the Company continues to monitor the status of external Year 2000 issues, it expects to develop contingency plans for issues that may arise. In support of this objective, the Company has developed a worst case scenario relating to Year 2000 issues. This scenario indicates that Year 2000 risks relate to the Company's relationships with its trading partners where issues such as telephone availability, fax services and telecommunications including internet service usage could cause the Company to revise its business practices in the event of the non availability of such common services. The Company is presently developing alternative methods to conducting its business in the event that a worst case scenario or element thereof was to occur. This scenario considers it unlikely that all external trading relationships would become useless simultaneously. Therefore, the Company's contingency plan is based upon alternatives to the specific loss of up to two of the identified worst case items described. The Company intends to continue testing elements of its contingency plan throughout 1999. 17 In the event that the Company's systems do not function as expected and the Company has to implement its contingency plan, the Company does not believe there will be a material impact on the Company's operations. Critical operational tasks which could be negatively impacted include: insured name clearance, quote issuance, binder issuance, policy contract issuance, claims processing, generation of management reports, accounting, and communications with clients. The Company's critical operational task data currently being produced is backed-up daily and stored at an off-site facility and will be available for processing by either an outside third party vendor or by the Company on a manual basis or on off-the-shelf software which could be readily purchased. As mentioned, the Company is working to make certain that its business partners are aware of the potential risks and that they are taking steps to make certain their systems are Year 2000 compliant. In the event a vendor, supplier or service provider cannot certify or establish Year 2000 compliance status to the Company by October 1, 1999, the Company will contract with alternative sources for products and services. Further, the failure of one of the Company's business partners to achieve such compliance, or a finding that its systems do not function as expected, may have an impact on the Company. The Company has communicated with its business partners to determine their efforts at compliance and has learned that a variety of operating systems are being used by them. The Company believes that it is unlikely that the failure of one operating system to perform as expected will affect a significant portion of its business partners at any one time. The Company is developing contingency plans for its primary operating units and critical computer operations to address issues that may arise due to an inability of the Company's systems or the systems of one or more of its business partners, to process data into the 21st century. Strategies have been developed to include identification of and management of resources which can be operated in reduced or minimal modes, appropriate recovery processes and use of alternate methods to process data. For example, insured name clearance can be accomplished using copies of data currently being compiled and stored off- premises, quote issuance can be performed manually, and binder issuance and policy issuance can also be performed manually, so long as the Company has access to photocopy systems and can maintain a log, either via spreadsheet or manual listing. If necessary, claims could be processed and paid manually and the data could be input into its systems once any problems are resolved. Premiums, commissions, and other financial data could be processed on a spreadsheet and checks typed on a manual basis. Alternatively, record keeping could be kept in an Excel or other spreadsheet format, and the Company may rely on the systems of one or more of its affiliated companies to perform some of the functions affected. The Company has also taken steps to ensure that it will have adequate insurance coverages for any Year 2000 losses that it may incur by monitoring its coverages to ensure that there are no Year 2000 restrictions or limitations on its policies, renewing its D&O and E&O coverages early without any limitations pertaining to Year 2000, and by obtaining a multi-year contracts that will extend beyond the year 2000 to ensure that its coverages are not restricted or canceled during 1999. In addition, it is the Company's 18 intention to renew all of its other principal coverages to ensure that such coverages also do not contain Year 2000 restrictions. The Company's vendor provided software systems were scheduled for replacement between 1996 and 1998 as the legacy systems previously operated could no longer support the Company's growing business. Year 2000 compliance was a consideration in each system replacement made by the Company. Accordingly, specific remediation costs for hardware and software Year 2000 issues have been less that $100,000. Such cost of the Year 2000 remediation plan is not considered material to the Company's financial position. Forward Looking Statements Some of the statements included within this release which are not historical facts may be considered to be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and are intended to be covered by the safe harbor provisions created in such Acts. Investors are cautioned that all such forward looking statements are subject to certain risks and uncertainties which could cause the actual results to differ materially from those suggested by such statements. Such risks and uncertainties include, but are not limited to the following: natural disasters or other catastrophic losses or a material aggregation of such losses in the Company's insurance lines; changes in federal or state law affecting an employer's ability to self-insure or other adverse regulatory changes; the adequacy of the Company's reinsurance program; general economic conditions in this country or abroad; adverse developments in the securities markets and their impact on the Company's investment portfolio; the effects of competitive market pressures within the medical lines 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. The words "believes," "anticipates," "expects" and similar expressions are intended to identify forward-looking statements. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could prove to be inaccurate and, therefore there can be no assurance that such forward-looking statements will themselves prove to be accurate. In the light of the significant uncertainties inherent in the forward-looking statements, the inclusion of such information should not be regarded as a representation by the Company or by any other person that the objective and plans of the Company will be achieved. ITEM 3. Quantitative and Qualitative Disclosure About Market Risk The Company does not believe there have been any material changes in the market risks since December 31, 1998, which would impact the fair value of certain assets and liabilities included in the Condensed Consolidated Balance Sheets. 19 PART II OTHER INFORMATION Item 6. EXHIBITS and REPORTS ON FORM 8-K. (a) The following is a list of exhibits required to be filed as part of this Form 10-Q by Item 601 of Regulation S-K: 3.1, 4.1 The Company's Restated Certificate of Incorporation, as amended, as presently in effect. Filed as Exhibits 3.1 and 4.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997(the "1997 Form 10-K"), and incorporated herein by this reference. 3.2, 4.2 Amended and Restated Bylaws of the Company, as presently in effect. Filed as Exhibits 3.2 and 4.2 to the Company's 1997 Form 10-K, and incorporated herein by this reference. 4.3 Stock Certificate of the Company. Filed as Exhibit 4.3 to the Company's Quarterly report on Form 10-Q for the quarter ended June 30, 1997 (the "June 1997 Form 10-Q"), and incorporated herein by this reference. 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. 4.8 Fourth Amendment to Rights Agreement. Filed as Exhibit 1 to the Company's Current Report on Form 8-K dated July 23, 1997, and incorporated herein by this reference. 4.9 Fifth Amendment to Rights Agreement. Filed as Exhibit 1 to the Company's Current Report on Form 8-K dated January 28, 1998, and incorporated herein by this reference. 10.5(i)* Severance Agreement dated March 23, 1999 between the Company and Linton R. Groke. 10.5(ii)* Severance Agreement dated March 23, 1999 between the Company and David L. Hubert. 20 11 Computation of Earnings per Share See Note 7 of the Notes to the Condensed Consolidated Financial Statements for the period ended March 31,1999 of The Centris Group, Inc. and subsidiaries 15.* Independent Auditors' letter regarding unaudited interim financial information. 27.* Financial Data Schedules (b) The following reports on Form 8-K were filed by the Company with the Securities and Exchange Commission during the first quarter ended March 31, 1999: 1. Form 8-K filed on January 14, 1999 reporting an acquisition of assets and financing arrangements for the acquisition. The following exhibits were included: Exhibit 2.01: Stock Purchase Agreement dated as of August 20, 1998 by and between The Centris Group, Inc., Seaboard Life Insurance Company, Seaboard North American Holdings, Inc. and Eureko B.V.; and Exhibit 10.01: Fifth Amendment to the Credit Agreement dated as of December 28, 1998 between The Centris Group, Inc. and Fleet National Bank. 2. Form 8-K/A filed on March 15, 1999 amending the response to Item 7 (Financial Statements) of the January 14, 1999 Form 8-K. * Describes exhibits filed with this Quarterly Report on Form 10-Q. 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The Centris Group, Inc. Date: May 14, 1999 By: /S/ DAVID L. CARGILE ----------------------------------- DAVID L. CARGILE Chairman of the Board, President and Chief Executive Officer Date: May 14, 1999 By: /S/ CHARLES M. CAPORALE ----------------------------------- CHARLES M. CAPORALE Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) 22 EX-10.5(I) 2 SEVERANCE AGREEMENT EXHIBIT 10.5(i) SEVERANCE AGREEMENT ------------------- This Agreement is made and entered into as of this 23/RD/ day of March, 1999, by and between The Centris Group, Inc., a Delaware corporation (the "Company"), and Linton R. Groke ("Executive"). RECITALS Whereas, the Executive is currently employed by the Company and is considered a key employee of the Company; and Whereas, the Company desires to retain the services of the Executive; and Whereas, the Company and the Executive desire to set forth the amounts payable and benefits to be provided by the Company to the Executive in the event of a termination of the Executive's employment with the Company under the circumstances set forth herein after the happening of a Change in Control (as defined herein); Now, Therefore, in consideration of the foregoing and the mutual agreements contained herein, and intending to be legally bound hereby, the parties agree as follows: AGREEMENT 1. Continued Employment. In reliance upon the promises of the Company -------------------- hereinafter contained, the Executive agrees that, for a period of not less than six (6) months commencing on the date set forth above, and subject to reasonable absences for illness, 23 holiday and vacation or personal leave of absence in accordance with the Company's policies and practices in effect on the date hereof, the Executive will continue his employment with the Company and shall devote his best efforts to such duties as may be assigned to him by the Company from time to time. 2. Other Severance Arrangements. Except to the extent specifically set forth ---------------------------- herein, in the event of the termination of the Executive's employment with the Company, the Executive shall be entitled to receive any Company benefits payable under any employee benefit plan, program, policy or arrangement as such may then be in effect, including all such termination arrangements with Executive that may be described in any employment agreement. 3. Effective Date. This Agreement shall be effective as of the date first -------------- above written ("Effective Date") and shall continue and remain in full force and effect until the termination of Executive's employment with the Company, unless this Agreement is earlier terminated by the parties in writing. The completion of six (6) months of employment with the Company by the Executive as set forth in Section 1 shall not be a condition precedent to the effectiveness of this Agreement or to the payments of amounts or provision of benefits hereunder in the event the Executive's employment with the Company is terminated under the circumstances described in Section 4(b). 4. Termination of Employment. ------------------------- (a) Events Requiring No Payments Under Section 5: In the event the Executive's employment with the Company is terminated under any of the following circumstances, no 24 payments shall be or become due and owing, and the Company shall have no other obligations under Section 5 of this Agreement: (i) By either party for any reason prior to the happening of a Change in Control (as hereinafter defined); (ii) By either party for any reason at any time more than two (2) years after a Change in Control; (iii) By the Company at any time, whether prior to, contemporaneous with or subsequent to a Change in Control, for reason of "Cause" (as hereinafter defined) or due to the request or demand of any regulatory authority; or (iv) By the Executive at any time, whether prior to, contemporaneous with or subject to a Change in Control, upon his retirement or resignation for reasons other than "Good Reason" (as hereinafter defined). Notwithstanding the foregoing, nothing contained in this Section 4(a) shall prevent the Executive or his spouse, heirs, estate or personal representative from receiving any amounts payable under any other plan, program, policy or arrangement that is not a severance plan, program, policy or arrangement. (b) Events Requiring Payments Under Section 5: In the event the Executive's employment with the Company is terminated under any of the following circumstances set 25 forth in (i) and (ii) below, the Company shall make the payments and provide the benefits as set forth in Section 5: (i) By the Company, contemporaneously with or within two (2) years after the happening of a Change in Control, for any reason other than (1) for Cause or (2) due to the request or demand of any regulatory authority; or (ii) By the Executive, contemporaneously with or within two (2) years after a Change in Control, for Good Reason. (c) For purposes of this Agreement, the term "Cause" shall mean (i) the commission by Executive of any material act of fraud or dishonesty; (ii) a final conviction of Executive of a felony in either a state or federal court proceeding; (iii) intentional and willful failure by Executive to faithfully carry out his duties and responsibilities as an employee of the Company, after reasonable notice in writing to and discussion thereafter with Executive; and (iv) Executive engaging in activities which place Executive in a direct or indirect conflict with the Company or its interests. The decision as to the existence of "Cause," as described in (i), (iii) and (iv) above, shall be determined by a majority of the Company's nonemployee Directors; provided, however, if there is a change in the composition of the Board such that those persons who served as nonemployee Directors on the Effective Date of this Agreement represent less than fifty percent (50%) of the total number of nonemployee Directors, then "Cause" shall be determined by use of the Settlement of Disputes provisions set forth in Section 8 of this Agreement. 26 (d) For purposes of this Agreement, the term "Good Reason" shall mean the following five (5) events; provided, however, that Executive may waive in writing his objection to the occurrence of any such event, in which case such event will no longer constitute "Good Reason": (i) Any material breach by the Company of its obligations contained in this Agreement; (ii) The assignment to the Executive of any duties inconsistent with the status of his position with the Company as such duties and position existed on the day immediately preceding the happening of a Change in Control, or an alteration in the nature or status of the Executive's duties and responsibilities that renders the Executive's position to be of less dignity, responsibility or scope from that which existed on the day immediately preceding the happening of a Change in Control; provided, however, it shall not be an event of Good Reason if the Executive is assigned additional duties for the Company or any affiliate or subsidiary of the Company which are not inconsistent with the duties described in Section 1 hereof so long as the aggregate of all duties assigned to the Executive in connection with his service with the Company, its affiliates or subsidiaries do not require the Executive to devote, on a consistent and sustained basis, substantially more time than other senior level executives of the Company are required to devote to their duties; 27 (iii) A reduction by the Company in the Executive's annual base salary as was in effect on the day immediately preceding the happening of a Change in Control or as the same may be increased from time to time; (iv) The failure of the Company to continue in effect of the benefits enjoyed by the Executive under the Company's 1988 Employee Stock Plan or its 1991 Employee Stock Option Plan or under the Company's Incentive Compensation Program, or any other compensation plan, program or arrangement, or any of the Company's pension, retirement, profit sharing, savings, life insurance, medical, health-and-accident, disability or other employee benefit plans, programs or arrangements as they existed on the day immediately preceding the happening of a Change in Control, or the failure of the Company to continue the Executive's participation therein; or the failure by the Company to provide the Executive with the number of paid vacation days to which he is entitled on the basis of years of service and position with the Company in accordance with the Company's normal vacation policy, or the failure of the Company to continue or if the Company adversely changes or reduces other specific contractual benefits or perquisites provided to Executive as they existed on the day immediately preceding the happening of a Change in Control, including, but not limited to, providing an automobile or an automobile allowance, club memberships, and dues for professional associates for Executive; (v) The assignment of the Executive to an office which is located more than 50 miles from the office at which the Executive was primarily performing his duties on the day immediately preceding the happening of a Change in Control. 28 (e) For purposes of this Agreement, a "Change in Control" shall mean the occurrence, after the Effective Date, of any of the following events: (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), without the approval of the Board of Directors of the Company, of outstanding securities of the Company representing 10% or more of the combined voting power of the Company's then outstanding securities (except that if such person subsequently acquires more than 25% of the combined voting power of the Company's then outstanding securities, a "Change in Control" shall be deemed to occur at that time); 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 29 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 stock repurchase plan or Company self-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 stock repurchase plan or Company self-tender offer, shall have acquired Beneficial Ownership of, in the aggregate, additional voting shares of the Company representing 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 outstanding voting shares that are Beneficially Owned by a 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, warrants or options shall not be deemed outstanding. The Board of Directors shall have the absolute and unfettered authority to make the final determination as to whether any Person is or is not to be considered a 10% Stockholder for purposes of that term in this Agreement, which determination shall be conclusive for all purposes and shall be binding upon the Company and upon the Executive; 30 (ii) At any time during the term of this Agreement the composition of the Board of Directors of the Company is changed due to a solicitation in opposition to management's nominees, such that persons who were directors of the Company as of the date of this Amendment, or persons nominated or elected by a majority of such persons who were directors as of the date of this Amendment, 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. 5. Obligations of the Company Upon Termination of Employment. Upon --------------------------------------------------------- termination of Executive's employment with the Company under the circumstances set forth 31 in Section 4(b), the Executive shall be entitled to receive, notwithstanding such termination, the following payments and to be provided the following benefits: (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 one (1) 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 hereby 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. (b) Method of Payment: The payments due to Executive under Section 5(a) of this Agreement shall be made as follows: (i) The Company shall pay to the Executive his regular base salary in installments consistent with the Company's payroll practices then in effect, or in a 32 single lump sum payment, whichever method is selected by Executive, in his sole discretion; (ii) The Company shall pay to Executive the bonus payments in a single lump sum; and (iii) Any lump sum payments due to Executive shall be paid to Executive on the Effective Date of his termination of employment. (c) Other Benefits: The Company shall continue in force for Executive for a period of two (2) years after Executive's termination the life insurance, medical, health-and-accident and disability benefit plans or programs then in effect on the date of Executive's termination from the Company; provided, however, that such other benefits as are set forth in this Section 5(c) shall not be required to be available to Executive if subsequent employment by Executive with another employer offers to Executive similar plans or programs in which the benefits equal or exceed the benefits which Executive could receive under the Company's plans or programs as provided herein. 6. No Duty to Mitigate. The Executive shall not be required to mitigate the ------------------- amount of any payment required hereunder by seeking other employment or otherwise, nor shall the amount paid hereunder be reduced or offset by any compensation earned or received by the Executive as a result of employment with another employer, self-employment or any amount received from any other plan, program, policy or arrangement of the Company. 33 7. Nonapplicability of Excise Tax. The parties intend that this Agreement ------------------------------ shall govern the rights an obligations of the parties with respect to severance payments payable upon a termination of Executive's employment with the Company, and that the excise tax as now provided in Section 280G of the Internal Revenue Code shall not be applicable to payments under this Agreement. Accordingly, the parties agree that the aggregate amount which shall be paid to Executive under this Agreement shall be $1.00 less than that amount which would make such payment to Executive an "excess parachute payment" under the provisions of Sections 280G of the Internal Revenue Code, and to which an excise tax would be applicable. 8. Settlement of Disputes. ---------------------- (a) It is specifically agreed that any controversy or dispute between the parties to this Agreement involving the construction, interpretation, application, performance or breach 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 9(a) hereof, be determined pursuant to the general reference procedures prescribed by California Code of Civil Procedure Sections 638(1), et seq., as they may be amended from time to time, by a retired or former judge of the Superior Court for the County of Orange, State of California. The parties intend this general reference agreement to be specifically enforceable in accordance with said Section 638(1). 34 (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 proceeding. (c) The petition or motion may designate as a sole referee a retired judge working with JAMS who is acceptable to that party. If the parties to the reference proceeding are unable to mutually 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 those listed with JAMS as available to act as a referee. (d) 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. (e) The parties acknowledge that this Agreement is specifically enforceable and that the decision by the referee is tantamount to a judgment by a trial court (CCP (S) 644) and is subject to review in accordance with CCP (S) 645, and that any judgment rendered in the trial court is appealable in the same manner as any other trial court judgment. (f) The parties may agree on limited discovery. However, in the absence of an agreement, each party may: (i) take up to three depositions not totaling more than six hours cumulatively; (ii) propound one set of interrogatories, not to exceed 20 single questions; (iii) serve not more than 10 requests for admissions; and (iv) propound not to exceed 15 35 requests to produce documents, all as may be "reasonable," as measured by the circumstances and amount in dispute between the parties. Any disagreements between the parties regarding discovery matters shall be resolved by the referee. (g) The hearing shall be held within 60 days after the referee is selected. The referee shall issue a written memorandum of decision setting forth his findings of fact and conclusions of law. 9. Miscellaneous. ------------- (a) Notices: All notices and other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given if delivered personally or sent by certified mail, return receipt requested, first-class postage prepaid, to the parties to this Agreement at the following addresses: If to the Company: The Centris Group, Inc. 650 Town Center Drive, Suite 1600 Costa Mesa, California 92626 Attention: Chief Executive Officer If to Executive: Linton R. Groke 202 Coral Avenue Balboa Island, California 92662 or to such other address as either party to this Agreement shall have last designated by notice to the other party. All such notices and communications shall be deemed to have been received on the earlier of the date of receipt or the third business day after the date of mailing thereof. 36 (b) Binding Effect; Benefits: This Agreement shall be binding upon and inure to the benefit of the parties to this Agreement and their respective successors and assigns. Nothing in this Agreement, express or implied, is intended or shall be construed to give any person, other than the parties to this Agreement or their respective successors or assigns, any legal or equitable right, remedy or claim under or in respect of any agreement or any provision contained herein. (c) Waiver: Either party hereto may by written notice to the other (i) extend the time for the performance of any of the obligations or other actions of the other under this Agreement; (ii) waive compliance with any of the conditions or covenants of the other contained in this Agreement; and (iii) waive or modify performance of any of the obligations of the other under this Agreement. Except as provided in the preceding sentence, no action taken pursuant to this Agreement, including, without limitation, any investigation by or on behalf of any party, shall be deemed to constitute a waiver by the party taking such action of compliance with any representations, warranties, covenants or agreements contained herein. The waiver by any party hereto of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any preceding or succeeding breach, and no failure by either party to exercise any right or privilege hereunder shall be deemed a waiver of such party's rights or privileges hereunder or shall be deemed a waiver of such party's rights to exercise the same any subsequent time or times hereunder. (d) Amendment: This Agreement may be terminated, amended, modified or supplemented only by a written instrument executed by the Executive and the Company. 37 (e) Nonassignability: Neither this Agreement nor any right, remedy, obligation or liability arising hereunder or by reason hereof shall be assignable by either the Company or the Executive without the prior written consent of the other party. (f) Governing Law: This Agreement shall be governed by and construed in accordance with the laws of the State of California, regardless of the law that might be applied under principles of conflict of laws. (g) Section and Other Headings: The section and other headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement. (h) Withholding of Taxes: The Company may withhold from amounts required to be paid to the Executive hereunder any applicable federal, state, local and other taxes with respect thereto; provided, however, that the Company shall promptly pay over the amounts so withheld to the appropriate taxing bodies and provide to the Executive appropriate statements on forms proscribed for such purposes on the amounts so withheld. (i) Severability: If, for any reason, any provision of this Agreement is held invalid, such invalidity shall not affect any other provision of this Agreement not held so invalid, and each such other provision shall, to the full extent consistent with law, continue in full force and effect. If any provision of this Agreement shall be held invalid in part, such invalidity shall in no way affect the rest of such provision not held so invalid, and the rest of such provision, together with all other provisions of this Agreement, shall to the full 38 extent consistent with law continue in full force and effect. If this Agreement is held invalid or cannot be enforced, then to the full extent permitted by law, any prior agreement on the subject matter of this Agreement between the Company (or any predecessor thereof) and the Executive shall be deemed reinstated as if this Agreement had not been executed. (j) Counterparts: This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which together shall be deemed to be one and the same instrument. In Witness Whereof, the Company has caused this Agreement to be executed by a duly authorized officer, and the Executive has signed this Agreement, all as of the date first above written. Company: THE CENTRIS GROUP, INC. ------- By /s/ DAVID L. CARGILE -------------------- DAVID L. CARGILE President and Chief Executive Officer Executive: --------- /s/ LINTON R. GROKE ------------------- LINTON R. GROKE 39 EX-10.5(II) 3 SEVERANCE AGREEMENT EXHIBIT 10.5(ii) SEVERANCE AGREEMENT ------------------- THIS AGREEMENT is made and entered into as of this 23rd day of March, 1999, by and between THE CENTRIS GROUP, INC., a Delaware corporation (the "Company"), and David L. Hubert ("Executive"). RECITALS WHEREAS, the Executive is currently employed by the Company and is considered a key employee of the Company; and WHEREAS, the Company desires to retain the services of the Executive; and WHEREAS, the Company and the Executive desire to set forth the amounts payable and benefits to be provided by the Company to the Executive in the event of a termination of the Executive's employment with the Company under the circumstances set forth herein after the happening of a Change in Control (as defined herein); NOW, THEREFORE, in consideration of the foregoing and the mutual agreements contained herein, and intending to be legally bound hereby, the parties agree as follows: AGREEMENT 1. Continued Employment. In reliance upon the promises of the Company -------------------- hereinafter contained, the Executive agrees that, for a period of not less than six (6) months commencing on the date set forth above, and subject to reasonable absences for illness, 40 holiday and vacation or personal leave of absence in accordance with the Company's policies and practices in effect on the date hereof, the Executive will continue his employment with the Company and shall devote his best efforts to such duties as may be assigned to him by the Company from time to time. 2. Other Severance Arrangements. Except to the extent specifically set forth ---------------------------- herein, in the event of the termination of the Executive's employment with the Company, the Executive shall be entitled to receive any Company benefits payable under any employee benefit plan, program, policy or arrangement as such may then be in effect, including all such termination arrangements with Executive that may be described in any employment agreement. 3. Effective Date. This Agreement shall be effective as of the date first -------------- above written ("Effective Date") and shall continue and remain in full force and effect until the termination of Executive's employment with the Company, unless this Agreement is earlier terminated by the parties in writing. The completion of six (6) months of employment with the Company by the Executive as set forth in Section 1 shall not be a condition precedent to the effectiveness of this Agreement or to the payments of amounts or provision of benefits hereunder in the event the Executive's employment with the Company is terminated under the circumstances described in Section 4(b). 4. Termination of Employment. ------------------------- (a) Events Requiring No Payments Under Section 5: In the event the Executive's employment with the Company is terminated under any of the following circumstances, no 41 payments shall be or become due and owing, and the Company shall have no other obligations under Section 5 of this Agreement: (i) By either party for any reason prior to the happening of a Change in Control (as hereinafter defined); (ii) By either party for any reason at any time more than two (2) years after a Change in Control; (iii) By the Company at any time, whether prior to, contemporaneous with or subsequent to a Change in Control, for reason of "Cause" (as hereinafter defined) or due to the request or demand of any regulatory authority; or (iv) By the Executive at any time, whether prior to, contemporaneous with or subject to a Change in Control, upon his retirement or resignation for reasons other than "Good Reason" (as hereinafter defined). Notwithstanding the foregoing, nothing contained in this Section 4(a) shall prevent the Executive or his spouse, heirs, estate or personal representative from receiving any amounts payable under any other plan, program, policy or arrangement that is not a severance plan, program, policy or arrangement. (b) Events Requiring Payments Under Section 5: In the event the Executive's employment with the Company is terminated under any of the following circumstances set 42 forth in (i) and (ii) below, the Company shall make the payments and provide the benefits as set forth in Section 5: (i) By the Company, contemporaneously with or within two (2) years after the happening of a Change in Control, for any reason other than (1) for Cause or (2) due to the request or demand of any regulatory authority; or (ii) By the Executive, contemporaneously with or within two (2) years after a Change in Control, for Good Reason. (c) For purposes of this Agreement, the term "Cause" shall mean (i) the commission by Executive of any material act of fraud or dishonesty; (ii) a final conviction of Executive of a felony in either a state or federal court proceeding; (iii) intentional and willful failure by Executive to faithfully carry out his duties and responsibilities as an employee of the Company, after reasonable notice in writing to and discussion thereafter with Executive; and (iv) Executive engaging in activities which place Executive in a direct or indirect conflict with the Company or its interests. The decision as to the existence of "Cause," as described in (i), (iii) and (iv) above, shall be determined by a majority of the Company's nonemployee Directors; provided, however, if there is a change in the composition of the Board such that those persons who served as nonemployee Directors on the Effective Date of this Agreement represent less than fifty percent (50%) of the total number of nonemployee Directors, then "Cause" shall be determined by use of the Settlement of Disputes provisions set forth in Section 8 of this Agreement. 43 (d) For purposes of this Agreement, the term "Good Reason" shall mean the following five (5) events; provided, however, that Executive may waive in writing his objection to the occurrence of any such event, in which case such event will no longer constitute "Good Reason": (i) Any material breach by the Company of its obligations contained in this Agreement; (ii) The assignment to the Executive of any duties inconsistent with the status of his position with the Company as such duties and position existed on the day immediately preceding the happening of a Change in Control, or an alteration in the nature or status of the Executive's duties and responsibilities that renders the Executive's position to be of less dignity, responsibility or scope from that which existed on the day immediately preceding the happening of a Change in Control; provided, however, it shall not be an event of Good Reason if the Executive is assigned additional duties for the Company or any affiliate or subsidiary of the Company which are not inconsistent with the duties described in Section 1 hereof so long as the aggregate of all duties assigned to the Executive in connection with his service with the Company, its affiliates or subsidiaries do not require the Executive to devote, on a consistent and sustained basis, substantially more time than other senior level executives of the Company are required to devote to their duties; 44 (iii) A reduction by the Company in the Executive's annual base salary as was in effect on the day immediately preceding the happening of a Change in Control or as the same may be increased from time to time; (iv) The failure of the Company to continue in effect of the benefits enjoyed by the Executive under the Company's 1988 Employee Stock Plan or its 1991 Employee Stock Option Plan or under the Company's Incentive Compensation Program, or any other compensation plan, program or arrangement, or any of the Company's pension, retirement, profit sharing, savings, life insurance, medical, health-and-accident, disability or other employee benefit plans, programs or arrangements as they existed on the day immediately preceding the happening of a Change in Control, or the failure of the Company to continue the Executive's participation therein; or the failure by the Company to provide the Executive with the number of paid vacation days to which he is entitled on the basis of years of service and position with the Company in accordance with the Company's normal vacation policy, or the failure of the Company to continue or if the Company adversely changes or reduces other specific contractual benefits or perquisites provided to Executive as they existed on the day immediately preceding the happening of a Change in Control, including, but not limited to, providing an automobile or an automobile allowance, club memberships, and dues for professional associates for Executive; (v) The assignment of the Executive to an office which is located more than 50 miles from the office at which the Executive was primarily performing his duties on the day immediately preceding the happening of a Change in Control. 45 (e) For purposes of this Agreement, a "Change in Control" shall mean the occurrence, after the Effective Date, of any of the following events: (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), without the approval of the Board of Directors of the Company, of outstanding securities of the Company representing 10% or more of the combined voting power of the Company's then outstanding securities (except that if such person subsequently acquires more than 25% of the combined voting power of the Company's then outstanding securities, a "Change in Control" shall be deemed to occur at that time); 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 46 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 stock repurchase plan or Company self-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 stock repurchase plan or Company self-tender offer, shall have acquired Beneficial Ownership of, in the aggregate, additional voting shares of the Company representing 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 outstanding voting shares that are Beneficially Owned by a 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, warrants or options shall not be deemed outstanding. The Board of Directors shall have the absolute and unfettered authority to make the final determination as to whether any Person is or is not to be considered a 10% Stockholder for purposes of that term in this Agreement, which determination shall be conclusive for all purposes and shall be binding upon the Company and upon the Executive; 47 (ii) At any time during the term of this Agreement the composition of the Board of Directors of the Company is changed due to a solicitation in opposition to management's nominees, such that persons who were directors of the Company as of the date of this Amendment, or persons nominated or elected by a majority of such persons who were directors as of the date of this Amendment, 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. 5. Obligations of the Company Upon Termination of Employment. Upon --------------------------------------------------------- termination of Executive's employment with the Company under the circumstances set forth 48 in Section 4(b), the Executive shall be entitled to receive, notwithstanding such termination, the following payments and to be provided the following benefits: (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 one (1) year, 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 hereby 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. (b) Method of Payment: The payments due to Executive under Section 5(a) of this Agreement shall be made as follows: (i) The Company shall pay to the Executive his regular base salary in installments consistent with the Company's payroll practices then in effect, or in a 49 single lump sum payment, whichever method is selected by Executive, in his sole discretion; (ii) The Company shall pay to Executive the bonus payments in a single lump sum; and (iii) Any lump sum payments due to Executive shall be paid to Executive on the Effective Date of his termination of employment. (c) Other Benefits: The Company shall continue in force for Executive for a period of two (2) years after Executive's termination the life insurance, medical, health-and-accident and disability benefit plans or programs then in effect on the date of Executive's termination from the Company; provided, however, that such other benefits as are set forth in this Section 5(c) shall not be required to be available to Executive if subsequent employment by Executive with another employer offers to Executive similar plans or programs in which the benefits equal or exceed the benefits which Executive could receive under the Company's plans or programs as provided herein. 6. No Duty to Mitigate. The Executive shall not be required to mitigate the ------------------- amount of any payment required hereunder by seeking other employment or otherwise, nor shall the amount paid hereunder be reduced or offset by any compensation earned or received by the Executive as a result of employment with another employer, self-employment or any amount received from any other plan, program, policy or arrangement of the Company. 50 7. Nonapplicability of Excise Tax. The parties intend that this Agreement ------------------------------ shall govern the rights an obligations of the parties with respect to severance payments payable upon a termination of Executive's employment with the Company, and that the excise tax as now provided in Section 280G of the Internal Revenue Code shall not be applicable to payments under this Agreement. Accordingly, the parties agree that the aggregate amount which shall be paid to Executive under this Agreement shall be $1.00 less than that amount which would make such payment to Executive an "excess parachute payment" under the provisions of Sections 280G of the Internal Revenue Code, and to which an excise tax would be applicable. 8. Settlement of Disputes. ---------------------- (a) It is specifically agreed that any controversy or dispute between the parties to this Agreement involving the construction, interpretation, application, performance or breach 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 9(a) hereof, be determined pursuant to the general reference procedures prescribed by California Code of Civil Procedure Sections 638(1), et seq., as they may be amended from time to time, by a retired or former judge of the Superior Court for the County of Orange, State of California. The parties intend this general reference agreement to be specifically enforceable in accordance with said Section 638(1). 51 (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 proceeding. (c) The petition or motion may designate as a sole referee a retired judge working with JAMS who is acceptable to that party. If the parties to the reference proceeding are unable to mutually 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 those listed with JAMS as available to act as a referee. (d) 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. (e) The parties acknowledge that this Agreement is specifically enforceable and that the decision by the referee is tantamount to a judgment by a trial court (CCP (S) 644) and is subject to review in accordance with CCP (S) 645, and that any judgment rendered in the trial court is appealable in the same manner as any other trial court judgment. (f) The parties may agree on limited discovery. However, in the absence of an agreement, each party may: (i) take up to three depositions not totaling more than six hours cumulatively; (ii) propound one set of interrogatories, not to exceed 20 single questions; (iii) serve not more than 10 requests for admissions; and (iv) propound not to exceed 15 52 requests to produce documents, all as may be "reasonable," as measured by the circumstances and amount in dispute between the parties. Any disagreements between the parties regarding discovery matters shall be resolved by the referee. (g) The hearing shall be held within 60 days after the referee is selected. The referee shall issue a written memorandum of decision setting forth his findings of fact and conclusions of law. 9. Miscellaneous. ------------- (a) Notices: All notices and other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given if delivered personally or sent by certified mail, return receipt requested, first-class postage prepaid, to the parties to this Agreement at the following addresses: If to the Company: The Centris Group, Inc. 650 Town Center Drive, Suite 1600 Costa Mesa, California 92626 Attention: Chief Executive Officer If to Executive: David L. Hubert 401 White Cap Lane Newport Coast, California 92657 or to such other address as either party to this Agreement shall have last designated by notice to the other party. All such notices and communications shall be deemed to have been received on the earlier of the date of receipt or the third business day after the date of mailing thereof. (b) Binding Effect; Benefits: This Agreement shall be binding upon and inure to the benefit of the parties to this Agreement and their respective successors and assigns. Nothing in this Agreement, express or implied, is intended or shall be construed to give any 53 person, other than the parties to this Agreement or their respective successors or assigns, any legal or equitable right, remedy or claim under or in respect of any agreement or any provision contained herein. (c) Waiver: Either party hereto may by written notice to the other (i) extend the time for the performance of any of the obligations or other actions of the other under this Agreement; (ii) waive compliance with any of the conditions or covenants of the other contained in this Agreement; and (iii) waive or modify performance of any of the obligations of the other under this Agreement. Except as provided in the preceding sentence, no action taken pursuant to this Agreement, including, without limitation, any investigation by or on behalf of any party, shall be deemed to constitute a waiver by the party taking such action of compliance with any representations, warranties, covenants or agreements contained herein. The waiver by any party hereto of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any preceding or succeeding breach, and no failure by either party to exercise any right or privilege hereunder shall be deemed a waiver of such party's rights or privileges hereunder or shall be deemed a waiver of such party's rights to exercise the same any subsequent time or times hereunder. (d) Amendment: This Agreement may be terminated, amended, modified or supplemented only by a written instrument executed by the Executive and the Company. (e) Nonassignability: Neither this Agreement nor any right, remedy, obligation or liability arising hereunder or by reason hereof shall be assignable by either the Company or the Executive without the prior written consent of the other party. 54 (f) Governing Law: This Agreement shall be governed by and construed in accordance with the laws of the State of California, regardless of the law that might be applied under principles of conflict of laws. (g) Section and Other Headings: The section and other headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement. (h) Withholding of Taxes: The Company may withhold from amounts required to be paid to the Executive hereunder any applicable federal, state, local and other taxes with respect thereto; provided, however, that the Company shall promptly pay over the amounts so withheld to the appropriate taxing bodies and provide to the Executive appropriate statements on forms proscribed for such purposes on the amounts so withheld. (i) Severability: If, for any reason, any provision of this Agreement is held invalid, such invalidity shall not affect any other provision of this Agreement not held so invalid, and each such other provision shall, to the full extent consistent with law, continue in full force and effect. If any provision of this Agreement shall be held invalid in part, such invalidity shall in no way affect the rest of such provision not held so invalid, and the rest of such provision, together with all other provisions of this Agreement, shall to the full extent consistent with law continue in full force and effect. If this Agreement is held invalid or cannot be enforced, then to the full extent permitted by law, any prior agreement 55 on the subject matter of this Agreement between the Company (or any predecessor thereof) and the Executive shall be deemed reinstated as if this Agreement had not been executed. (j) Counterparts: This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which together shall be deemed to be one and the same instrument. In Witness Whereof, the Company has caused this Agreement to be executed by a duly authorized officer, and the Executive has signed this Agreement, all as of the date first above written. Company: THE CENTRIS GROUP, INC. ------- By /S/ DAVID L. CARGILE -------------------- DAVID L. CARGILE PRESIDENT AND CHIEF EXECUTIVE OFFICER Executive: --------- /S/ DAVID L. HUBERT ------------------- DAVID L. HUBERT 56 EX-15 4 INDEPENDENT AUDITORS' REVIEW REPORT EXHIBIT 15 Independent Auditors' Review Report The Board of Directors and Shareholders The Centris Group, Inc.: We have reviewed the condensed consolidated balance sheet of The Centris Group, Inc. and subsidiaries as of March 31, 1999, and the related condensed consolidated income statements and statements of cash flows for the three-month periods ended March 31, 1999 and 1998. These condensed consolidated financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of The Centris Group, Inc. and subsidiaries as of December 31, 1998, and the related consolidated income statement, and statements of stockholders' equity and cash flows for the year then ended (not presented herein); and in our report dated March 26, 1999, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1998, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /S/ KPMG LLP Los Angeles, California May 14,1999 EX-27 5 FINANCIAL DATA SCHEDULE
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 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 0 0 0 0 0 0 287,769 47,971 161,353 1,517 647,584 211,122 31,096 0 0 72,550 0 0 0 0 647,584 22,053 1,936 (13) 22,427 18,236 6,705 19,496 1,966 723 1,243 0 0 0 1,243 .11 .11 0 0 0 0 0 0 0
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