-----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, DyjCpV27JzFM6d7k+zqW4x3QcL+PubRFhxmcCP5lsWNi0kOD5L0x8meswt54zNXZ PL/GjtIYBxJEi1kQrwbplA== 0000898430-96-003846.txt : 19960816 0000898430-96-003846.hdr.sgml : 19960816 ACCESSION NUMBER: 0000898430-96-003846 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PAC RIM HOLDING CORP CENTRAL INDEX KEY: 0000837942 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 954105740 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-18779 FILM NUMBER: 96613646 BUSINESS ADDRESS: STREET 1: 6200 CANOGA AVE CITY: WOODLAND HILLS STATE: CA ZIP: 91367 BUSINESS PHONE: 8182266200 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark one) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to _____________ Commission file number 0-18779 PAC RIM HOLDING CORPORATION - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 95-4105740 - -------------------------------- -------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 6200 CANOGA AVENUE, WOODLAND HILLS, CALIFORNIA 91367 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (818) 226-6200 - ------------------------------------------------------------------------------- (Registrant's telephone number, including area code) - ------------------------------------------------------------------------------- (Former name, former address, 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 ----- ----- The number of shares of Registrant's Common Stock, $.01 par value, outstanding as of August 13, 1996, was 9,528,200. 1 PAC RIM HOLDING CORPORATION INDEX TO FORM 10-Q Part I. FINANCIAL INFORMATION ------------------------------
Page No. -------- Item 1. Financial Statements: Consolidated Balance Sheets June 30, 1996 (Unaudited) and December 31, 1995 3 Consolidated Statements of Operations Three months ended June 30, 1996 and 1995 (Unaudited) and six months ended June 30, 1996 and 1995 (Unaudited) 4 Consolidated Statements of Cash Flows Six months ended June 30, 1996 and 1995 (Unaudited) 5 Notes to Unaudited Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Part II. OTHER INFORMATION --------------------------- Item 6. Exhibits and Reports on Form 8-K 18 Signatures 19
2 PAC RIM HOLDING CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Amounts in Thousands, Except Share and Per Share Data)
JUNE 30, DECEMBER 31, 1996 1995 (UNAUDITED) ----------- ------------- ASSETS Investments: Bonds, available-for-sale, at fair value (amortized cost $112,687 and $119,314) $112,277 $121,771 Short-term investments (at cost, which approximates fair value) 4,777 7,260 -------- -------- Total Investments 117,054 129,031 Cash 1,493 773 Reinsurance recoverable 4,275 4,068 Premiums receivable, less allowance for doubtful accounts of $1,094 and $1,221 13,650 11,616 Earned but unbilled premiums 5,981 4,880 Investment income receivable 1,967 2,207 Deferred policy acquisition costs 1,241 974 Property and equipment, less accumulated depreciation and amortization of $4,353 and $3,803 3,817 2,434 Unamortized debenture issuance costs 1,265 1,468 Income taxes recoverable 979 1,456 Deferred income taxes 9,503 8,348 Prepaid reinsurance premiums 184 227 Other assets 2,080 1,569 -------- -------- Total Assets $163,489 $169,051 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Reserve for losses and loss adjustment expenses $ 90,709 $ 96,525 Debentures payable, less unamortized discount of $1,231 and $1,393 18,769 18,607 Unearned premiums 5,586 5,715 Reserve for policyholder dividends 233 381 Obligation under capital lease 1,065 -- Accrued expenses and accounts payable 5,304 3,668 -------- -------- Total Liabilities 121,666 124,896 Commitments and contingencies Stockholders' Equity: Preferred Stock: $.01 par value--shares authorized 500,000; none issued and outstanding Common Stock: $.01 par value--shares authorized 35,000,000 issued and outstanding 9,528,200 95 95 Additional paid-in capital 29,624 29,624 Warrants 1,800 1,800 Unrealized gain (loss) on available-for-sale securities, net (270) 1,622 Retained earnings 10,574 11,014 -------- -------- Total Stockholders' Equity 41,823 44,155 -------- -------- Total Liabilities and Stockholders' Equity $163,489 $169,051 ======== ========
See notes to unaudited consolidated financial statements. 3 PAC RIM HOLDING CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (Amounts in Thousands, Except Per Share Data)
Three Months Ended June 30, Six Months Ended June 30, ---------------------------- -------------------------- 1996 1995 1996 1995 ------------- ------------ ------------ ----------- REVENUES: Net premiums earned $22,374 $20,914 $41,259 $39,156 Net investment income 1,793 2,090 3,606 4,183 Realized capital gains 0 35 88 39 A&H commission income 2 0 2 0 ------- ------- ------- ------- Total revenue 24,169 23,039 44,955 43,378 COSTS AND EXPENSES: Losses and loss adjustment expenses 16,457 13,224 31,132 22,873 Amortization of policy acquisition costs-net 3,944 5,715 7,461 11,214 Administrative, general, and other 3,192 2,813 5,963 5,662 Policyholder dividends (181) 220 (141) 419 Interest expense 584 576 1,165 1,149 ------- ------- ------- ------- Total costs and expenses 23,996 22,548 45,580 41,317 Income (loss) before income taxes 173 491 (625) 2,061 Income tax expense (benefit) 72 169 (185) 717 ------- ------- ------- ------- Net income (loss) $ 101 $ 322 $ (440) $ 1,344 ======= ======= ======= ======= Earnings (loss) per common and common equivalent shares: Primary $ 0.01 $ 0.03 $ (0.05) $ 0.14 ======= ======= ======= ======= Assuming full dilution $ 0.01 $ 0.03 $ (0.05) $ 0.12 ======= ======= ======= =======
See notes to unaudited consolidated financial statements. 4 PAC RIM HOLDING CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED) (Amounts in Thousands)
Six Months Ended June 30, --------------------------- 1996 1995 ------------ ------------ OPERATING ACTIVITIES Net Income (loss) $ (440) $ 1,344 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 903 673 Provision for losses on accounts receivable (127) 118 Provision (benefit) for deferred income taxes (180) 1,425 Realized capital gains (88) (39) Changes in: Reserve for losses and loss adjustment expenses (5,816) (12,627) Unearned premiums (129) (3,323) Reserve for policyholders' dividends (148) (70) Premiums receivable (3,008) 1,172 Reinsurance recoverable (207) (876) Prepaid reinsurance premiums 43 66 Deferred policy acquisition costs (267) 944 Income taxes recoverable 477 (708) Accrued expenses and accounts payable 1,636 (1,407) Investment income receivable 240 612 Other assets (511) 88 ------- ------- NET CASH USED BY OPERATING ACTIVITIES (7,622) (12,608) INVESTING ACTIVITIES Purchase of investments - bonds (23,943) (36,138) Sales of investments - bonds 26,145 44,017 Maturity and call of investments - bonds 4,525 0 Net additions to property and equipment (868) (352) ------- ------- NET CASH PROVIDED IN INVESTMENT ACTIVITIES 5,859 7,527 DECREASE IN CASH AND CASH EQUIVALENTS (1,763) (5,081) Cash and cash equivalents at beginning of period 8,033 9,841 ------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,270 $ 4,760 ======= ======= Supplemental Disclosures: Interest paid $ 800 $ 800 ======= =======
The Company entered into a capital lease to acquire certain computer operating system hardware and software; the lease obligation at June 30, 1996, is $1,065,000. See notes to unaudited consolidated financial statements. 5 PAC RIM HOLDING CORPORATION AND SUBSIDIARY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS June 30, 1996 NOTE 1 -- BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of Pac Rim Holding Corporation ("Pac Rim Holding") and its subsidiary, The Pacific Rim Assurance Company ("Pacific Rim Assurance"), and its subsidiary, Regional Benefits Insurance Services, Inc., (collectively referred to herein as "the Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the Instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 1996 are not necessarily indicative of the results that may be expected for the year ending December 31, 1996. For further information, refer to the consolidated financial statements for the year ended December 31, 1995, and notes thereto, included in the Company's Annual Report on Form 10-K for the year ended December 31, 1995. Certain amounts in the accompanying financial statements have been reclassified to conform with current period presentation. NOTE 2 -- EARNINGS PER SHARE Earnings per common and common equivalent shares are based on the weighted average number of common shares outstanding during each period, plus common stock equivalent shares arising from the effects of stock options, warrants, and convertible debentures. (See Note 4.) The number of shares used in the three months ended June 30, 1996 and 1995 in the computation of primary earnings per share was 9,528,000. The number of shares used in the six months ended June 30, 1996 and 1995 in the computation of primary earnings per share was 9,528,000 and 12,360,000, respectively. The number of shares used in the three months ended June 30, 1996 and 1995 in the computation of fully diluted earnings per share was 9,528,000. The number of shares used in the six months ended June 30, 1996 and 1995 in the computation of fully diluted earnings per share was 9,528,000 and 19,632,000, respectively. NOTE 3 -- REINSURANCE Under the Company's specific excess of loss reinsurance treaties, the reinsurers assume the liability on that portion of workers' compensation claims between $350,000 and $80,000,000 per occurrence. The Company accounts for reinsurance transactions in accordance with the Financial Accounting Standards Board ("FASB") Statement 113, "Accounting and Reporting for Reinsurance Short-Duration and Long-Duration Contracts", which established the conditions required for a contract with a reinsurer to be accounted for as reinsurance and prescribes accounting and reporting standards for those contracts. 6 NOTE 3 -- REINSURANCE -- Continued The components of net premiums written are summarized as follows (amounts in thousands):
Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- 1996 1995 1996 1995 ---- ---- ---- ---- Direct $22,533 $20,709 $42,451 $37,790 Assumed 496 -- 790 6 Ceded (1,106) (1,062) (2,067) (1,896) ------- ------- ------- ------- Net premiums written $21,923 $19,647 $41,174 $35,900 ======= ======= ======= =======
The components of net premiums earned are summarized as following (amounts in thousands):
Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- 1996 1995 1996 1995 ---- ---- ---- ---- Direct $22,976 $21,975 $42,572 $41,111 Assumed 534 2 798 7 Ceded (1,136) (1,063) (2,111) (1,962) ------- ------- ------- ------- Net premiums earned $22,374 $20,914 $41,259 $39,156 ======= ======= ======= =======
The components of net losses and loss adjustment expenses are summarized as follows (amounts in thousands):
Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- 1996 1995 1996 1995 ---- ---- ---- ---- Direct $17,060 $13,976 $31,959 $23,867 Assumed 232 49 392 57 Ceded (835) (801) (1,219) (1,051) ------- ------- ------- ------- Net losses and loss adjustment expenses $16,457 $13,224 $31,132 $22,873 ======= ======= ======= =======
NOTE 4--LONG TERM DEBT The Company has $20,000,000 in outstanding principal on its August 16, 1994 issue of Series A Convertible Debentures, with detachable warrants to purchase 3,800,000 shares of the Company's common stock, which are primarily owned by PRAC, Ltd., a Nevada limited partnership (which is controlled by Mr. Richard Pickup), and other individuals and entities. Mr. Pickup presently controls approximately 26% of the outstanding shares of the Company through various investment entities, which together are the Company's largest stockholder. The Debentures carry an 8% annual rate of interest, payable semiannually, and are due on August 16, 1999. The Debentures are convertible at the holder's option, into shares of common stock at a conversion price of $2.75 per share. The Debentures are subject to 7 NOTE 4--LONG TERM DEBT -- Continued automatic conversion if, after three years from issuance, the price of the Common Stock exceeds 150% of the conversion price for a period of 20 out of 30 consecutive trading days. The Debenture Agreement also provided for the issuance to the Investor of detachable warrants (the "Warrants") to acquire 1,500,000 shares of the Company's Common Stock at an exercise price of $2.50 per share (the "Series 1 Warrants"), 1,500,000 shares at an exercise price of $3.00 per share (the "Series 2 Warrants"), and 800,000 shares at an exercise price of $3.50 per share (the "Series 3 Warrants"). The Warrants expire on August 16, 1999, and the exercise price of the Warrants is subject to downward adjustment in the event of adverse development in the Company's December 31, 1993 loss and allocated loss adjustment expense reserves related to the 1992 and 1993 accident years, measured as of June 30, 1996, which date has been extended to June 30, 1997 by agreement of the parties. Under the terms of the Agreement, the maximum adverse development that would impact the exercise price of the Warrants is $20,000,000. In the event that the adverse development of reserves for those periods exceeds $20,000,000, the exercise price of the Series 1 Warrants would be reduced to $0.01, and the exercise price of the Series 2 Warrants would be reduced to $1.39 per share. The Debentures are carried on the balance sheet net of unamortized discount of $1,231,000 at June 30, 1996. The effective average interest rate of this debt after consideration of debt issuance costs and discount was 13.3%. Pacific Rim Assurance has an unsecured line of credit for $3,000,000 at Imperial Bank of California. Borrowing under the line of credit bears interest at a rate of 1% in excess of prime rate. No borrowing has occurred under the line of credit. NOTE 5 -- NEW ACCOUNTING STANDARDS In October 1995, FASB issued Statement 123, "Accounting For Stock-Based Compensation" which established a fair value based method of accounting for stock-based compensation plans. This statement is effective for financial statements with fiscal years beginning after December 15, 1995. The Company elected to continue accounting for stock-based compensation based on Accounting Principles Board Opinion 25; and thus, the Company adopts only the disclosure provision of FASB Statement 123. The Company does not expect the implementation of this pronouncement to have a material effect on the Company's financial position or results of operations, as the Company does not anticipate having any stock based compensation. 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations For the six months ended June 30, 1996 compared to the six months ended June 30, 1995. Net premiums earned increased 5.4%, to $41,259,000 for the six months ended June 30, 1996, from $39,156,000 for the six months ended June 30, 1995. This increase was primarily the result of increased premium rates by the Company in California throughout the first half of 1996, as well as continued expansion by the Company into additional geographic areas during the first half of 1996, which had begun in 1995. In May 1995, Pacific Rim Assurance received a Certificate of Authority to write workers' compensation insurance in the State of Arizona, and commenced operations in June 1995. During August 1995, Pacific Rim Assurance received a Certificate of Authority to write workers' compensation insurance in the State of Texas, and commenced operations in October 1995. In March 1996, Pacific Rim Assurance received a Certificate of Authority to write workers' compensation insurance in the State of Georgia, and commenced operations in April 1996. Premiums earned outside of California equaled approximately $3,769,000 or 9.1% of the Company's total premiums earned during the first half of 1996. The Company also is considering the filing of applications in certain other states. The Company believes that geographic expansion will enable it to increase its premium revenues and operate regionally in more, and potentially less volatile, markets. However, there can be no assurance that such expansion will ultimately increase revenues or prove to be profitable. Net investment income decreased 13.8%, to $3,606,000 for the six months ended June 30, 1996, from $4,183,000 for the six months ended June 30, 1995. The amount of average invested assets decreased 14.9% to $122,000,000 for the six months ended June 30, 1996, compared to the same period in 1995. This decrease in invested assets was the result of the Company experiencing negative cash flow from operations during 1995 and the first half of 1996. As a result, the Company sold securities, or utilized maturing securities, to meet its cash flow needs. The average yield on average invested assets was 5.9% for the six months ended June 30, 1996 and for the comparable period in 1995. Losses and loss adjustment expenses ("LAE") incurred increased by $8,259,000 for the six months ended June 30, 1996, compared to the same period for 1995. The loss and LAE ratio increased to 75.5% during the six months ended June 30, 1996, compared to 58.4% during the six months ended June 30, 1995. The loss and LAE ratio generally increased in the California workers' compensation environment since July 1, 1995, following more than a year of lower premium rate levels. For the second quarter of 1996, the loss and loss expense ratio was lower than the first quarter 1996 ratio of 77.7%, reflecting the positive impact of premiums earned during the second quarter of 1996 from business written throughout the first half of 1996 at higher premium rates. Total underwriting expenses decreased $3,452,000, or 20.5%, for the six months ended June 30, 1996, compared to the same period in 1995. The decrease was primarily the result of a decrease in commissions paid to agents and brokers. The average commission ratio to agents and brokers decreased to 15.0% for the first six months of 1996, compared to 25.0% for the first six months of 1995. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) The general and administrative expense component of the Company's underwriting expenses increased by $301,000, or 5.3%, to $5,963,000 during the first half of 1996, from $5,662,000 during the first half of 1995. The increase in general and administrative expense was primarily due to the Company's recent expansion into other geographical areas and the related increased premium levels. The ratio of general and administrative expenses to net premiums earned was 14.5% for both the first half of 1996 and the first half of 1995. Policyholder dividends for the six months ended June 30, 1996 were a net credit of ($141,000), compared to a net charge of $419,000 for the six months ended June 30, 1995. The net credit reflects the elimination of $200,000 of dividend reserves for which no further future liability is expected. That amount was transferred to loss and LAE reserves as of June 30, 1996. The remaining reserve for policyholder dividends of $233,000 as of June 30, 1996 represents current expectations of future policyholder dividend payments on participating policies inforce. In determining the appropriate policyholder dividend reserve level, the Company analyzes competitive factors related to quality of service, loss prevention, claims management and cost control, and adequacy of premium rates, as well as its own underwriting results. The loss before taxes was $625,000 for the six months ended June 30, 1996, compared to net income before taxes of $2,061,000 for the six months ended June 30, 1995. This decrease was due primarily to an increase in loss and LAE expense, offset by decreases in underwriting expenses and dividends, and an increase in premiums earned. The net loss for the six months ended June 30, 1996 was $440,000, compared to net income of $1,344,000 for the six months ended June 30, 1995. For the three months ended June 30, 1996 compared to the three months ended June 30, 1995. Net premiums earned increased 7.0%, to $22,374,000, for the three months ended June 30, 1996, from $20,914,000, for the three months ended June 30, 1995. This increase was primarily the result of increased premium rates by the Company in California, effective January 1, 1996, as well as continued expansion by the Company into additional geographic areas during the second quarter of 1996, which had begun in 1995. In May 1995, Pacific Rim Assurance received a Certificate of Authority to write workers' compensation insurance in the State of Arizona, and commenced operations in June 1995. During August 1995, Pacific Rim Assurance received a Certificate of Authority to write workers' compensation insurance in the State of Texas, and commenced operations in October 1995. In March 1996, Pacific Rim Assurance received a Certificate of Authority to write workers' compensation insurance in the State of Georgia, and commenced operations in April 1996. Premiums earned outside of California equaled approximately $2,243,000 or 10% of the total Company premiums earned during the second quarter of 1996. The Company also is considering the filing of applications in certain other states. The Company believes that geographic expansion will enable it to increase its premium revenues and operate regionally in more, and potentially less volatile, markets. However, there can be no assurance that such expansion will ultimately increase revenues or prove to be profitable. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Net investment income decreased 14.2% to $1,793,000 for the three months ended June 30, 1996, from $2,090,000 for the three months ended June 30, 1995. The amount of average invested assets decreased 15.0% to $119,500,000 for the three months ended June 30, 1996, compared to the same period in 1995. This decrease in invested assets was the result of the Company experiencing negative cash flow from operations during 1995 and the first six months of 1996. As a result, the Company sold securities, or utilized maturing securities, to meet its cash flow needs. The average yield on average invested assets was 6.0% for the three months ended June 30, 1996 and for the comparable period in 1995. Losses and LAE incurred increased by $3,233,000 for the three months ended June 30, 1996, compared to the same period for 1995. The loss and LAE ratio increased to 73.6% during the three months ended June 30, 1996, compared to 63.2% during the three months ended June 30, 1995. The loss and LAE ratio generally increased in the California workers' compensation environment following more than a year of lower premium rate levels. For the second quarter of 1996, the loss and loss adjustment expense ratio was lower than the first quarter 1996 ratio of 77.7%, reflecting the positive impact of premiums earned during the second quarter of 1996 from business written throughout the first half of 1996 at higher premium rates. Total underwriting expenses decreased $1,392,000, or 16.3%, for the three months ended June 30, 1996, compared to the same period in 1995. The decrease was primarily the result of a decrease in commissions paid to agents and brokers. The average commission ratio to agents and brokers decreased to 14.6% for the three months ended June 30, 1996, compared to 23.0% for the three months ended June 30, 1995. The general and administrative expense component of the Company's underwriting expenses increased by $379,000, or 13.5%, to $3,192,000 during the second quarter of 1996, from $2,813,000 during the second quarter of 1995. The increase in general and administrative expense was primarily due to the Company's recent expansion into other geographical areas and the related increased premium levels. The ratio of general and administrative expenses to net premiums earned was 14.3% for the second quarter of 1996 compared to 13.5% for the second quarter of 1995. Policyholder dividends for the three months ended June 30, 1996 were a net credit of ($181,000) compared to a net charge of $220,000 for the three months ended June 30, 1995. The net credit reflects the elimination of $200,000 of dividend reserves for which no further future liability is expected. That amount was transferred to loss and LAE reserves as of June 30, 1996. The remaining reserve for policyholder dividends of $233,000 as of June 30, 1996 represents current expectations of future policyholder dividend payments on participating policies inforce. In determining the appropriate policyholder dividend reserve level, the Company analyzes competitive factors related to quality of service, loss prevention, claims management and cost control, and adequacy of premium rates, as well as its own underwriting results. Net income before taxes was $173,000 for the three months ended June 30, 1996, as compared to net income before taxes of $491,000 for the three months ended June 30, 1995. This decrease was due primarily to an increase in loss and LAE expense, offset by decreases in underwriting expenses and dividends, and an increase in premiums earned. 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) The net income for the three months ended June 30, 1996 was $101,000, compared to net income of $322,000 for the three months ended June 30, 1995. Certain statements in Management's Discussion and Analysis that are not historical facts are forward looking statements. These forward looking statements involve risks and uncertainties that could render them materially different, including, but not limited to, the effect of economic conditions, premium rate adequacy as a result of pricing factors related to competition or regulation, actual versus estimated claims experience, the effect of the Company's accounting policies, the effect of regulatory and legal developments, and other risks detailed in the Company's filings with regulatory agencies. Liquidity and Capital Resources Pac Rim Holding was organized in May 1987 and has been capitalized from sales of the Company's Common Stock. Pac Rim Holding is dependent on dividends from Pacific Rim Assurance for operating funds. Pacific Rim Assurance may pay dividends without prior California Insurance Department approval to the extent it has available "earned surplus". Dividends are further limited to an amount up to the greater of net income from the preceding calendar year or 10% of policyholders' surplus as of the end of the preceding year. Earned surplus for Pacific Rim Assurance is its unassigned surplus, which was $2,131,000 at December 31, 1995. Accordingly, Pacific Rim Assurance may pay dividends of $2,131,000 to Pac Rim Holding in 1996, without such prior approval. One of the most widely accepted factors used by regulators and rating agencies in evaluating insurance companies is the ratio of net premiums written to policyholders' surplus, which is an indication of the degree to which an insurer is leveraged. While there is no statutory requirement applicable to Pacific Rim Assurance that establishes a permissible net premiums written to policyholders' surplus ratio, as determined in accordance with statutory accounting practices, the National Association of Insurance Commissioners ("NAIC") uses a ratio of three to one as an appropriate guideline in assessing a property/casualty insurance company's financial condition. The lower the ratio, the less leveraged is the company. At June 30, 1996, the statutory-basis policyholders surplus of Pacific Rim Assurance was $46,711,000. Pacific Rim Assurance's ratio of annualized net premiums written to policyholders' surplus for 1996 was 1.76 to 1, as determined on the basis of statutory accounting practices. Insurance companies are required to maintain on deposit with the Regulatory Agencies deposits for the benefit of policyholders, in an amount prescribed by regulations. At June 30, 1996, the Company was in good standing with all Departments of Insurance with respect to its deposit requirements, maintaining investments with a total fair value of $112,827,000 on deposit with authorized depositories in various states, in excess of total deposit requirements of $99,137,000. A workers' compensation insurance company must maintain sufficient liquid assets to meet its contractual obligations to policyholders, in addition to maintaining funds to meet ordinary operating expenses. The Company typically has several sources of funds to meet obligations, including cash flow from operations, interest from fixed-income securities, recoveries from reinsurance contracts, as well as the ability to sell portions of its investment portfolio. In addition, the Company has an unsecured line of credit for $3,000,000 from a bank. No 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) borrowings have been made from this line of credit. The Company has an investment portfolio of high quality, highly liquid, U.S. Treasury, other governmental agency, and corporate obligations. The Company's cash flows used in operating activities for the six months ended June 30, 1996 and 1995, were $(7,622,000), and $(12,608,000), respectively. In light of the reduced level of premiums written during 1995 and the first half of 1996, compared to prior years, due to state-mandated reductions in premium rates, and the repeal of the minimum rate law, coupled with claim payments required on the relatively higher levels of premium volume previously written, it is probable that the Company will experience a continued period of negative cash flow, until the level of loss payments decreases to the level proportionate to the level of premiums collected. The Company believes that Pacific Rim Assurance will be able to meet its requirements for both claim payments and expenses. As a result of its ownership of debentures of Pac Rim Holding, PRAC, Ltd. ("PRAC"), together with certain affiliated entities, is entitled to vote the equivalent of 56.0% of the Company's voting securities with respect to certain matters, and will be entitled to vote the equivalent of approximately 62.3% of the Company's voting securities as to those matters on exercise of Warrants. These voting rights, together with PRAC's right to designate certain members of the Board of Directors, give PRAC effective control of the Board of Directors and over all major corporate matters and transactions. It may also have the effect of discouraging certain types of transactions involving an actual or potential change of control of the Company, including transactions in which the holders of the Company's shares might otherwise receive a premium for their shares over then current market prices. These actions will have the effect, among other things, of limiting the ability of the Company to enter into certain significant transactions without the support of PRAC, and allowing PRAC to cause the Company to enter into certain transactions. These transactions may include transactions between PRAC, or its affiliates, and the Company, as well as transactions for the sale of the Company or the sale of control of the Company. PRAC may have interests that diverge from or conflict with those of the Company. Although such conflicts may arise, Directors designated by PRAC to the Board of Directors have a fiduciary responsibility to act in the Company's best interest. Since the first quarter of 1995, the Company has retained as consultants, Salomon Brothers (the investment banking firm that assisted the Company in previous capital-raising transactions) to advise of future strategic alternatives. Effects of Inflation Inflation can be expected to affect the operating performance and financial condition of the Company in several aspects. Inflation can reduce the market value of the investment portfolio. However, generally the intent of the Company is to hold its investments to maturity. (See "Liquidity and Capital Resources") Inflation adversely affects the portion of reserve for losses and LAE that relates to hospital and medical expenses, as these expenses normally increase during inflationary periods (and in recent years have increased at a greater rate than prevailing inflation). The liabilities for losses and LAE, relating to indemnity benefits for lost wages are not directly affected by inflation, as these amounts are established by statute. To the extent that the reserve for losses and LAE and claim payments have increased as a result of inflation, premium rates have historically increased by operation of the rate setting process. This process established the minimum rates in effect in California prior to January 1, 1995. However, no assurance can be given that following the introduction of open premium rating in California 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) effective January 1, 1995, premium rates will keep pace with inflation. Another result of inflation is an expected escalation of wages paid to employees. To the extent that wages increase, premium revenues will proportionately increase, since rates are based on the employer's payroll. Since May 1987, the Company's inception, the Company believes that the effect of inflation on the Company has not been material. Recent Accounting Pronouncements In October 1995, FASB issued FASB No. 123, "Accounting For Stock-Based Compensation" which established a fair value based method of accounting for stock-based compensation plans. This statement is effective for financial statements with fiscal years beginning after December 15, 1995. The Company elected to continue accounting for stock-based compensation based on Accounting Principles Board Opinion 25; and thus, the Company adopts only the disclosure provision of FASB Statement 123. The Company does not expect the implementation of this pronouncement to have a material effect on the Company's financial position or results of operations. Workers' Compensation System Workers' compensation is a statutory system under which an employer is required to provide its employees with the costs of medical care and other specified benefits for work-related injuries and illnesses. Most employers provide for this liability by purchasing workers' compensation insurance. The principal concept underlying workers' compensation insurance laws is that an employee injured in the course of his or her employment has only the legal remedies for that injury available under workers' compensation law and does not have any other claims against his or her employer. Generally, insurers must pay compensation to an insured's employees injured in the course and scope of their employment. The obligation to pay such compensation does not depend on any negligence or wrong on the part of the employer, and exists even for injuries that result from the negligence or wrongs of another person, including the employee. The standard workers' compensation insurance policy issued by most insurance companies, including Pacific Rim Assurance, obligates the carrier to pay all benefits that the insured employer may become obligated to pay under applicable workers' compensation laws. The benefits payable under workers' compensation policies fall under the following four categories: (i) temporary or permanent disability benefits (either in the form of short-term to life-term payments or lump sum payments); (ii) vocational rehabilitation benefits; (iii) medical benefits; and (iv) death benefits. The amount of benefits payable for various types of claims is determined by regulation and varies with the severity and nature of the injury or illness and the wage, occupation, and age of the employee. The amount of the premiums charged for workers' compensation insurance is dependent on the size of an employer's payroll and the type of business, and the application of corresponding rate schedules setting forth the appropriate rate. In California and Texas, rates are independently filed by the Company, reflecting either the advisory rates of the applicable rating bureau, or an appropriate deviation therefrom. In Arizona, and Georgia, the National Council of Compensation Insurance (NCCI) files the pure premium rates on behalf of all insurance companies. 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) In addition to established premium rates, premium levels based on the insured's payroll could be affected by inflation and/or the application of Experience Rating Plans. Experience Rating Plans govern all policyholders whose annual premiums are in excess of certain levels and are based on the insured's loss experience over a three-year period commencing four years prior to, and terminating one year prior to, the date for which the experience modification is to be established. Application of the Experience Rating Plan generally results in an increase or decrease to the insured's premium rate, and is therefore intended to provide an incentive to employers to reduce work-related injuries and illnesses. Significant Changes in the California Workers' Compensation System Material changes have taken place in recent years in California, the jurisdiction in which the Company has in the past conducted all its activities. Prior to 1995 within California, a minimum rate law was in effect, which law was intended to curtail indiscriminate rate cutting, which rate cutting was felt to threaten the solvency of private workers' compensation insurers. Although an insurer could not charge less than the minimum rates set by the California Insurance Department ("Department"), insurers could charge more than the minimum rates. The minimum rates for workers' compensation policies were reviewed annually by the Workers' Compensation Insurance Rating Bureau ("WCIRB") and the Department. In reviewing the WCIRB's proposed rates, the Department considered the loss experience for the industry as a whole and, after adding factors for reasonable underwriting costs and profits, approved publication of minimum premium rate schedules for various classifications of employees. Rates could be revised and approved by the Insurance Commissioner whenever the legislature changed the levels of benefits payable or industry loss experience indicated the need for a rate revision. In July 1993, the California state legislature passed two sets of workers' compensation law reforms, which have significantly impacted the benefits available under the California workers' compensation system. While the legislation was designed to reduce the claim costs and rates applicable to California workers' compensation coverage, its ultimate impact upon the operations and profitability of the Company is uncertain. However, the Company did experience a reduction in the overall number of outstanding claims, and a stable trend in the severity of claims, during years subsequent to 1993, which in turn has led to lower premium rates overall. The more significant aspects of the legislation are outlined below. Initially, the legislature enacted two sets of legislation dealing with the premium rates applicable to California workers' compensation coverage. The first item of legislation repealed the California minimum rate law effective January 1, 1995. As of that date, the repeal of the minimum rate law opened the workers' compensation insurance market to direct price competition among insurers. Thus, the official end to the minimum rate law and the start of open price competition in the industry was January 1, 1995. Although repeal of the minimum rating law formally became effective January 1, 1995, the Company believed that competitive forces working in the marketplace during 1994 already showed signs of informal price competition, through the use of higher commissions paid to agents and brokers, which in turn were rebated in part to policyholders. The ultimate effect of open rating on the Company's operations and profitability cannot be stated with certainty. However, since January 1, 1995, open rating has created an intense level of price competition and an overall erosion of premium rate levels. 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) The second item of rate-related legislation required a 7% decrease in the minimum premium rates charged with respect to California workers' compensation coverage. The 7% minimum premium rate decrease was effective July 16, 1993, for all policies inforce at that date. Effective January 1, 1994, the minimum premium rate was decreased another 12.7%, to be phased-in upon the insured's policy renewal date during 1994. Effective October 1, 1994, the minimum premium rate was decreased another 16% for all policies inforce at that date. The reduced minimum rates were to remain in effect until a policy renewed in 1995, at which time the open price competition resulting from the repeal of the minimum rate law took effect. Along with that legislation affecting workers' compensation rates, the California legislature further enacted legislation designed to reform the benefits available and combat fraud within the California workers' compensation system. In particular, the legislation provided for increased benefit payments applicable to totally disabled and seriously injured workers, while at the same time cutting benefits for certain over-utilized treatments and psychiatric injury claims. The more significant provisions of the benefits reform legislation are outlined below. The reform legislation increased the weekly benefits payable for temporary total disability from $336 per week to $490 per week and is being phased in over a three-year period that began July 1, 1994. In addition, benefit payments to seriously injured workers have increased. Each of these benefit level increases will result in increased California claims costs to the Company. While it cannot be stated with certainty, proponents of the legislation have urged that such increased costs will be more than offset by the following benefit reduction reforms: The legislation tightened restrictions on the number of permissible evaluations utilized to resolve medical issues associated with a claim. Under previous law, claims for psychiatric injury, including stress, were compensable if 10% or more of their cause was attributable to employment- related factors. The legislation raised this standard to require that employment be the "predominant" cause of the psychiatric injury. The legislation further limited post termination (including terminations and layoffs) psychiatric injury claims to those in which the employee can establish that the injury at issue arose prior to termination. The legislation limited vocational rehabilitation benefits to a total of $16,000 per claim, a decrease from $25,000 previously. Of the $16,000 limit, no more than $4,500 can be claimed for counseling services. The legislation allows certain employers to direct the treatment of work- related injuries under a system of managed care for a period of up to 365 days. The availability of the managed care option is dependent on the type of group health coverage provided by the employer. The legislation prohibits insurers, doctors, and rehabilitation counselors from referring claimants to facilities in which such persons or entities maintain a financial interest. 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) The legislation adopted certain anti-fraud provisions, which make any efforts to bribe adjusters a felony, and provides for restitution of benefits paid on fraudulent claims. The ultimate effect of the workers' compensation reform legislation, repeal of the minimum rate law, and premium rate decrease on the Company's operations and profitability cannot be stated with certainty. Regulation The NAIC has finalized a formula to calculate Risk Based Capital ("RBC") of property and casualty insurance companies. The purpose of the RBC Model is to help the NAIC monitor the capital adequacy of property and casualty insurance companies. The RBC model for property and casualty insurance companies measures three major areas of risk facing property and casualty insurers: underwriting, credit, and investment. Companies having less statutory surplus than the RBC model calculates are required to adequately address these three risk factors and will be subject to varying degrees of regulatory intervention, depending on the level of capital inadequacy. The NAIC adopted an RBC model for property and casualty insurance companies in 1993 for inclusion in the 1994 Annual Statement. The results of the RBC model for 1994 and 1995, showed that Pacific Rim Assurance had adequate capital and required no form of regulatory monitoring or intervention. Although the federal government does not directly regulate the business of insurance, federal initiatives often affect the insurance business in a variety of ways. State regulation remains the dominant form of regulation; however, the federal government has shown increasing concern over the adequacy of state regulation. In view of the savings and loan industry crisis and several significant insurer insolvencies, several Congressional inquiries are considering the adequacy of existing state regulations related to the financial health of insurance companies. Congressional committees are also reviewing the McCarran-Ferguson Act of 1945, which currently provides a limited exemption from federal antitrust laws for the "business of insurance". The exemption allows limited cooperative activities by rating organizations and other joint industry efforts. These include the development of standardized policy forms and endorsements, statistical plans, the collection and compilation of premium, loss, and expense data, and the development of advisory rates or loss costs. The proposal would limit the insurance industry's limited exemption from federal antitrust laws and was introduced in the belief that it would foster competitive pricing among insurers. The proposal would curtail the activities of rating organizations and thus could require the expansion of individual insurer internal resources. With the possible loss of statistically valid data and/or increased costs, market niches could become even more focused. California is reviewing its statutory exemptions for the "business of insurance" from its antitrust laws. 17 PAC RIM HOLDING CORPORATION Part II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits -------- 10.115 Quota Share reinsurance agreement between TIG Insurance Company and the Pacific Rim Assurance Company, a subsidiary of Pac Rim Holding Corporation, dated April 1, 1996. 10.116 Producer agreement between Regional Benefits Insurance Services, a subsidiary of Pac Rim Holding Corporation, and Hull & Co., Inc., dated May 15, 1996. 10.117 Producer agreement between Regional Benefits Insurance Services, a subsidiary of Pac Rim Holding Corporation, and Gulf Atlantic Management Group, Inc., dated May 15, 1996. 10.118 Office lease between Gulf Atlantic Investment Group, Inc. and Regional Benefits Insurance Services, Inc., a subsidiary of Pac Rim Holding Corporation, dated May 20, 1996. 11 Computation of Per Share Earnings 27 Financial Data Schedule (b) Reports on Form 8-K ------------------- The Company filed a Current Report on Form 8-K, dated May 20, 1996 reporting on Item 5, Other Events, in connection with the resignation of Mr. Robert M. Anderson as Chairman of the Board of Directors. 18 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. Pac Rim Holding Corporation August 13, 1996 By: /s/Stanley Braun ------------------------- Stanley Braun President and Chief Executive Officer August 13, 1996 By: /s/Paul W. Craig ------------------------- Paul W. Craig Executive Vice President and Chief Financial Officer (Principal Financial Officer) August 13, 1996 By: /s/Jonathan T. Wallace ------------------------ Jonathan T. Wallace Controller (Chief Accounting Officer) 19 INDEX TO EXHIBITS
Exhibit Sequentially Number Description Numbered Page - ------ ----------- ------------- 10.115 Quota Share reinsurance agreement between TIG Insurance Company and the Pacific Rim Assurance Company, a subsidiary of Pac Rim Holding Corporation, dated April 1, 1996. 10.116 Producer agreement between Regional Benefits Insurance Services, a subsidiary of Pac Rim Holding Corporation, and Hull & Co., Inc., dated May 15, 1996. 10.117 Producer agreement between Regional Benefits Insurance Services, a subsidiary of Pac Rim Holding Corporation, and Gulf Atlantic Management Group, Inc., dated May 15, 1996. 10.118 Office lease between Gulf Atlantic Investment Group, Inc. and Regional Benefits Insurance Services, Inc., a subsidiary of Pac Rim Holding Corporation, dated May 20, 1996. 11 Computation of Per Share Earnings 27 Financial Data Schedule
EX-10.115 2 QUOTA SHARE REINSURANCE AGREEMENT 08-96-0001 EXHIBIT 10.115 WORKERS' COMPENSATION QUOTA SHARE REINSURANCE AGREEMENT (hereinafter referred to as the "Agreement") entered into by and between TIG INSURANCE COMPANY, A California Corporation and/or any other Company now or hereafter affiliated with TIG INSURANCE COMPANY (hereinafter referred to as the "Company") and THE PACIFIC RIM ASSURANCE COMPANY Woodland Hills, California (hereinafter referred to as the "Reinsurer") WITNESSETH: - ----------- The Reinsurer hereby reinsures the Company to the extent and on the terms and conditions and subject to the exceptions, exclusions and limitations hereinafter set forth, and nothing hereinafter shall in any manner create any obligations or establish any rights against the Reinsurer in favor of any third parties or any persons not parties to this Agreement. ARTICLE I BUSINESS COVERED: - ----------------- The Company shall cede to the Reinsurer and the Reinsurer shall accept from the Company a 10% quota share participation of the net insurance liability of the Company on each risk insured under the 163 policies of Workers' Compensation Insurance as detailed in the attached Exhibit I with expiration dates ranging from April 1, 1996 through April 1, 1997, issued in various states, with estimated annual net premium of $15,561,864, and estimated net unearned premium of $4,472,990 (hereinafter referred to as the Policies), in force at the inception of this Agreement. ARTICLE II TERM: - ----- A. This Agreement will apply to losses occurring at and after 12:01 A.M., Local Standard Time at the location of the risk, April 1, 1996 as respects policies covered hereunder. Page 1 of 10 08-96-0001 B. It is understood and agreed that the Reinsurer shall be liable for its 10% quota share participation under all policies or portions thereof in force at the effective date of this Agreement, up to natural expiration or prior termination date of said policies, but not to exceed a further twelve (12) months period. ARTICLE III EXCLUSIONS: - ----------- This Agreement does not apply to and specifically excludes: 1. Extra Contractual Obligations, including but not limited to any extra or non-contractual damages or legal fees and expense attended to the defense thereof, including compensatory, exemplary and punitive damages or fines or statutory penalties which are awarded against the Company as a result of an act, omission, or course of conduct committed by or on behalf of the Company. 2. The exclusions shall be identical with those contained in Company's policies. ARTICLE IV TERRITORY: - ---------- The territorial limits of this Agreement shall be identical with those of the Company's policies. ARTICLE V REINSURANCE COVERAGE: - --------------------- With respect to Business Covered, the Company shall cede and the Reinsurer shall accept, be liable to and reimburse the Company for 10% of the Company's net insurance liability, each risk, each occurrence, including allocated loss adjustment expenses. ARTICLE VI ORIGINAL CONDITIONS: - -------------------- All amounts ceded hereunder shall be subject to the same gross rates and to the same clauses, conditions, interpretations, and modifications of the Company's policies, subject to the limits, terms and conditions of this Agreement. ARTICLE VII WARRANTY: - --------- The Company has agreed not to alter its claims policies or practices as respects all claims arising from business covered under this Agreement. However, the Company retains the right to contract with a third party administrator for claims handling. Page 2 of 10 08-96-0001 ARTICLE VIII LOSSES, LOSS ADJUSTMENT EXPENSES AND SALVAGES: - ---------------------------------------------- A. The Company shall settle all loss claims under its policies and the Reinsurer shall pay to the Company its pro rata share of such loss claims as payable by the Company. B. The Reinsurer shall also bear its pro rata share of allocated loss adjustment expenses incurred by the Company under policies subject hereto. C. The Reinsurer shall benefit pro rata in all salvages, discounts and other recoveries. D. The Company is to be the sole judge of what constitutes a loss hereunder. ARTICLE IX ALLOCATED LOSS ADJUSTMENT EXPENSE: - ---------------------------------- A. The term "Allocated Loss Adjustment Expense" means all costs and expenses allocable to a specific claim that are incurred by the Company in the investigation, appraisal, adjustment, settlement, litigation, defense or appeal of a specific claim, including court costs and costs of supersedeas and appeal bonds, and including a) pre-judgment interest, unless included as part of the award or judgment; b) post-judgment interest; c) legal expenses and costs incurred in connection with coverage questions and legal actions connected thereto; and d) a pro rata share of salaries and expenses of Company field employees, and expenses of other Company employees who have been temporarily diverted from their normal and customary duties and assigned to the field adjustment of losses covered by this Agreement. B. Allocated loss adjustment expense does not include unallocated loss adjustment expense. Unallocated loss adjustment expense includes, but is not limited to, salaries and expenses of employees, other than (d) above, and office and other overhead expenses. ARTICLE X REINSURANCE PREMIUM: - -------------------- A. The Company agrees to pay the Reinsurer, on the effective date of this Agreement, 10% of the estimated net unearned premium of $4,472,990 that has been billed, as of the effective date of this Agreement, in accordance with policy terms of the Company. B. Thereafter, the Company agrees to pay the Reinsurer, promptly, as of the first day of each month, an additional premium equal to the portion of the net unearned premiums in force that are billable, in accordance with policy terms, to the policyholder by the Company during such month. Such premiums shall include any adjustments for premium audits, endorsements, cancellations, etc. C. As the Company agrees to pay the Reinsurer, based upon paragraph B. above, the Company agrees to bear the risk of any uncollectible premiums. Page 3 of 10 08-96-0001 D. Dividends paid to policyholders by the Company shall be deducted from premiums. It is understood and agreed that dividends payable on business covered under this Agreement shall not exceed 2.0% of premium subject to this Agreement. ARTICLE XI COMMISSION: - ----------- A. The Reinsurer shall allow the Company a 22.5% commission on all premiums ceded to the Reinsurer hereunder. The Company shall allow the Reinsurer return commission on return premiums and dividends at the same rate. B. It is expressly agreed that the ceding commission allowed the Company includes provision for all commissions, taxes, assessments and all other expenses of whatever nature, except allocated loss adjustment expense. ARTICLE XII REPORTS AND REMITTANCES: - ------------------------ A. The Company will provide the Reinsurer with all necessary data respecting premiums and losses, including reserves thereon, as at dates and on forms mutually acceptable to the Company and the Reinsurer. B. The Company shall render a monthly account within fifteen (15) days after the end of each month summarizing the following information relating to reinsurance covered under this Agreement during the said month: 1. Any interim policy cancellations; 2. Statement of premiums as set forth in the Reinsurance Premium Article; 3. Statement of losses and allocated loss expenses paid and salvages recovered by claim; 4. Statement of losses and allocated loss expenses outstanding; 5. Account Current summarizing premiums, commissions, losses and allocated loss expenses paid and salvages recovered; and any balance due the Reinsurer, as indicated by the aforesaid Account Current, shall be remitted by the Company immediately via wire transfer with the Account. Any balance due the Company shall be remitted by the Reinsurer within fifteen (15) days following receipt of the monthly Account. C. The Company shall report promptly to the Reinsurer all cases of serious injury which, regardless of considerations of liability or coverage, might involve this reinsurance, including but not limited to the following: Page 4 of 10 08-96-0001 1. Cord injury - paraplegia, quadriplegia; 2. Amputations - requiring a prosthesis; 3. Brain damage affecting mentality or central nervous system - such as permanent disorientation, behavior disorder, personality change, seizures, motor deficit, inability to speak (aphasia), hemiplegia or unconsciousness (comatose); 4. Blindness; 5. Burns - involving over 10% of body with third degree or 30% of body with second degree; 6. Nerve damage causing paralysis and loss of sensation in arm and hand (brachial plexus nerve damage); 7. Fatalities; 8. Any other serious injury which, in the judgement of the Company, might involve the Reinsurer. D. It is warranted by the Company that as of April 17, 1996, there are no known or reported losses arising from items C. 1. through C. 8. listed immediately above. E. The Company shall advise the Reinsurer of the reserved amount of net loss and adjustment expense in connection with each such claim or loss listed above and of any subsequent changes in such estimates. ARTICLE XIII INURING REINSURANCE: - -------------------- It is understood and agreed that other reinsurance contracts covering the business subject to this Agreement shall be considered inuring reinsurance. It is further agreed that premium and losses subject to this Agreement shall be net after inuring reinsurance. ARTICLE XIV OFFSET: - ------- (In the event of a conflict between any provision of this Article and the laws of the domiciliary state of any company intended to be reinsured hereunder, that domiciliary state's laws will prevail.) The Company and each Reinsurer hereunder shall be entitled to deduct from amounts due to the other party under this Agreement any amounts due itself from the other party under this Agreement; however, in the event of insolvency of any party hereto, offset will be in accordance with applicable law. Page 5 of 10 08-96-0001 ARTICLE XV ACCESS TO RECORDS: - ------------------ The Company shall place at the disposal of the Reinsurer at all reasonable times, and the Reinsurer shall have the right to inspect, through its authorized representatives, during the period of this Agreement and thereafter, all books, records and papers of the Company in connection with this reinsurance hereunder or the subject matter thereof. ARTICLE XVI ERRORS AND OMISSIONS: - --------------------- Any inadvertent delay, omission or error shall not be held to relieve either party hereto from any liability which would attach to it hereunder if such delay, omission or error had not been made, providing such omission or error is rectified as soon as possible after discovery. ARTICLE XVII TAXES: - ------ The Company shall pay all taxes (except Federal Excise Tax, if applicable) on premiums reported to the Reinsurers on this Agreement. ARTICLE XVIII CURRENCY: - --------- A. Whenever the word "Dollars" or the "$" sign appears in this Agreement, they shall be construed to mean United States Dollars and all transactions under this Agreement shall be in United States Dollars. B. Amounts paid or received by the Company in any other currency shall be converted to United States Dollars at the rate of exchange at the date such transaction is entered on the books of the Company. ARTICLE XIX ARBITRATION: - ------------ A. As a condition precedent to any right of action hereunder, any dispute arising out of the interpretation, performance or breach of this Agreement, including the formation or validity thereof, shall be submitted for decision to a panel of three arbitrators. Notice requesting arbitration will be in writing and sent certified or registered mail, return receipt requested. Page 6 of 10 08-96-0001 B. One arbitrator shall be chosen by each party and the two arbitrators shall, before instituting the hearing, choose an impartial third arbitrator who shall preside at the hearing. If either party fails to appoint its arbitrator within thirty (30) days after being requested to do so by the other party, the latter, after ten (10) days notice by certified or registered mail of its intention to do so, may appoint the second arbitrator. C. If the two arbitrators are unable to agree upon the third arbitrator within thirty (30) days of their appointment, the third arbitrator shall be selected from a list of six individuals (three named by each arbitrator) by a judge of the federal district court having jurisdiction over the geographical area in which the arbitration is to take place, or if the federal court declines to act, the state court having general jurisdiction in such area. D. All arbitrators shall be disinterested active or former executive officers of insurance or reinsurance companies or Underwriters at Lloyd's, London. E. Within thirty (30) days after notice of appointment of all arbitrators, the panel shall meet and determine timely periods for briefs, discovery procedures and schedules for hearings. F. The panel shall be relieved of all judicial formality and shall not be bound by the strict rules of procedure and evidence. Unless the panel agrees otherwise, arbitration shall take place in Dallas, Texas, but the venue may be changed when deemed by the panel to be in the best interest of the arbitration proceeding. Insofar as the arbitration panel looks to substantive law, it shall consider the law of the State of Texas. The decision of any two arbitrators when rendered in writing shall be final and binding. The panel is empowered to grant interim relief as it may deem appropriate. G. The panel shall make its decision considering the custom and practice of the applicable insurance and reinsurance business within thirty (30) days following the termination of the hearings. Judgment upon the award may be entered in any court having jurisdiction thereof. H. Each party shall bear the expense of its own arbitrator and shall jointly and equally bear with the other party the cost of the third arbitrator. The remaining costs of the arbitration shall be allocated by the panel. The panel may, at its discretion, award such further costs and expenses as it considers appropriate, including but not limited to attorneys fees, to the extent permitted by law. ARTICLE XX SERVICE OF SUIT: - ---------------- A. It is agreed that in the event of the failure of the Reinsurer hereon to pay any amount claimed to be due hereunder, the Reinsurer hereon, at the request of the Company, will submit to the jurisdiction of a court of competent jurisdiction within the United States. Nothing in this Article constitutes or should be understood to constitute a waiver of the Reinsurer's rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as permitted by the laws of the United States or of any state in the United States. It is further agreed that service of process in such suit may be made upon: Page 7 of 10 08-96-0001 For the Company: TIG Insurance Company 5205 North O'Connor Blvd. Irving, Texas 75039 Att: Steven A. Cook For the Reinsurer: The Pacific Rim Assurance Company 6200 Canoga Avenue Woodland Hills, California 91367-2402 Att: Paul W. Craig B. Further, pursuant to any statute of any state, territory or district of the United States which makes provision therefore, the Reinsurer hereon hereby designates the Superintendent, Commissioner or Director of Insurance or other officer specified for that purpose in the statute, or his successor or successors in office, as its true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Company or any beneficiary hereunder arising out of this Agreement of reinsurance, and hereby designates the above-named as the person to whom the said officer is authorized to mail such process or a true copy thereof. ARTICLE XXI INSOLVENCY: - ----------- (The following Article and the laws of the domiciliary state shall apply in the event of the insolvency of any company intended to be reinsured hereunder. In the event of a conflict between any provision of this Article and the laws of the domiciliary state of any company intended to be reinsured hereunder, that domiciliary state's laws shall prevail.) A. In the event of the Company's insolvency, the reinsurance afforded by this Agreement shall be payable immediately on demand, with reasonable provision for verification, by the Reinsurers on the basis of the Company's liability under the policies reinsured without diminution because of the Company's insolvency or because its liquidator, receiver, conservator, or statutory successor has failed to pay all or a portion of any claims. The reinsurance shall be payable by the Reinsurers directly to the Company, its liquidator, receiver, conservator, or statutory successor except as provided by Section 4118(a) of the New York Insurance Law or except (a) where this Agreement specifically provides another payee of such reinsurance in the event of the Company's insolvency and (b) where the Reinsurers, with consent of the direct insured or insureds, have assumed such policy obligations of the Company as direct obligations of themselves to the payees under such policies in substitution for the Company's obligation to such payees. Then, and in that event only, the Company, with prior approval by the Superintendent of Insurance of the state of New York of the Certificate of Assumption on New York risks, is entirely released from its obligation and the Reinsures shall pay any loss directly to payees under such policies. Page 8 of 10 08-96-0001 B. The Company's liquidator, receiver, conservator, or statutory successor shall give written notice of the pendency of a claim against the Company under the policies reinsured within a reasonable time after such claim is filed in the insolvency proceeding. During the pendency of such a claim, the Reinsurers may investigate said claim and interpose in the proceeding where the claim is to be adjudicated, at their own expense, any defense that they may deem available to the Company, its liquidator, receiver, conservator, or statutory successor. The expense thus incurred by the Reinsurers shall be chargeable against the Company, subject to court approval, as part of the expense of conservation or liquidation to the extent that such proportionate share of the benefit shall accrue to the Company solely as a result of the defense undertaken by the Reinsurers. Where two or more Reinsurers are involved in the same claim, and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Agreement as though such expense had been incurred by the Company. C. In the event of the insolvency of any company or companies included in the designation of "Company", this Article shall apply only to the insolvent company or companies. Each party to this Agreement agrees to honor the terms set forth herein as if the Agreement were a separate agreement between each Reinsurer and each individually named company. Balances payable or recoverable by each Reinsurer or each individually named company shall not serve to offset any balances payable or recoverable to or from any other company party to the Agreement. Reports and remittances made to any Reinsurer in accordance with the provisions of this Agreement are to be in sufficient detail to identify both said Reinsurer's loss obligation due each company and each company's premium remittance under this Agreement. However, the maximum amount recoverable, the maximum amount retained, and total premium due under this Agreement shall not be increased by application of the above provisions. ARTICLE XXII ENTIRETY OF THE AGREEMENT: - -------------------------- This Agreement constitutes the entire agreement and supersedes all previous agreements, whether written or oral, between the Company and Reinsurer, or their predecessors with respect to the business to be written under this Agreement. This Agreement may not be amended, altered or modified except in writing signed by both parties. ARTICLE XXIII INTERMEDIARY: - ------------- Willcox Incorporated Reinsurance Intermediaries is hereby recognized as the Intermediary negotiating this Agreement for all business hereunder. All communications (including but not limited to notices, statements, premium, return premium, commissions, taxes, losses, loss adjustment expense, salvages and loss settlements) relating thereto shall be transmitted to the Company or the Reinsurer through Willcox Incorporated Reinsurance Intermediaries, 180 Maiden Lane, New York, New York 10038-4993. Payments by the Company to the Intermediary shall be deemed to constitute payment to the Reinsurer. Payments by the Reinsurer to the Intermediary shall be deemed to constitute payment to the Company only to the extent that such payments are actually received by the Company. Page 9 of 10 08-96-0001 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed in duplicate by their duly authorized representatives. Signed in Irving, TX this 13th day of May, 1996 TIG INSURANCE COMPANY By:_________________________________ Signed in Woodland Hills, California this 3rd day of May, 1996 THE PACIFIC RIM ASSURANCE COMPANY By:_________________________________ Paul W. Craig Executive Vice President Chief Financial Officer Page 10 of 10 EX-10.116 3 PRODUCER AGREEMENT EXHIBIT 10.116 PRODUCER - COMPANY AGREEMENT THIS AGREEMENT, made this 15th day of May, 1996, by and between REGIONAL BENEFITS INSURANCE SERVICES (hereinafter referred to as the "Company"), and HULL & CO., INC. (hereinafter referred to as the "Producer"). The parties hereto agree as follows: 1. The Producer is an independent contractor, not an employee of the Company subject to requirements imposed by law, the terms of this agreement and its addenda, and the maximum premium limits and underwriting rules and regulations of the insurance carriers to whom business will be submitted by Company. 2. The Company hereby grants authority, and that authority only, to the Producer in the State of Florida, to solicit and accept applications for Florida Workers' Compensation and Employers Liability Insurance, and Accident and Health to collect and receipt for premiums thereon. 3. The Producer agrees to keep a true and complete record and account for all business transacted for or on behalf of the Company, and to report all risks assumed and forward all applications to the Company for acceptance within 24 hours after the effective date thereof. 4. The Producer agrees that all monies or funds of the Company from whatever source received, and all premiums collected on policies issued through the Company, less only the commissions on such premiums as provided in writing by the Company at the time the insurance is effective, shall be held as a fiduciary trust and be paid to the Company, as hereinafter provided or on demand and shall not be used for any other purpose whatsoever. 5. The Producer agrees that any credit extended for the payment of premiums shall be at the sole risk of the Producer, and that the Producer will account for and pay over to the Company all premiums on such business and will remit premiums and render account reports to the Company not later than 45 days following the end of the month after Company billing for new premiums, additional premiums, renewal premiums and additional premiums developed by audit. The Producer shall not offset balances due under one contract with any offset due under any other contract. The Producer may be relieved from responsibility for payment of uncollectible workers' compensation final audits by turning back said final audits to Company for direct collection within 45 days from the date of receipt of said final audit. Producer may be relieved of responsibility for payment of final workers' compensation audit billings caused by fraudulent reporting provided that Producer provides Company documentary evidence of such fraudulent reporting within 30 days from the date of receipt of the final workers' compensation audit billing. No commission will be paid on amounts turned back to Company for direct collection and failure to timely turn back said final audits will not relieve Producer from liability for the premium. 1 6. The omission of any item(s) from a monthly statement shall not affect the responsibility of either party to account for and pay all amounts due the other, nor shall it prejudice the rights of either party to collect all such amounts due from the other. 7. The Producer is authorized to advance premiums on behalf of policyholders, in which event the Producer accepts full responsibility for such premiums. 8. The Producer agrees that the above terms create a guarantee by the Producer for the Payment of all premiums under the payment terms of paragraph 5, above. 9. The Company shall have the right to reject any application submitted by the Producer. The Producer shall have no authority to make, add to or in any way alter any policy of insurance or other contract affecting the Company, nor to waive any of the Company's rights thereunder, nor appoint or terminate the appointment of agents. 10. The Producer will: (a) Provide all usual and customary services of an insurance producer on all insurance contracts placed by the Producer with the Company as well as sales, advertising, marketing, and guaranteeing payment of premium. (b) Exercise his authority personally or through his authorized employees. (c) Represent other companies. (d) Exercise exclusive and independent control of his time and the conduct of his producer's office. (e) Provide Company with proof of insurance for current errors & omissions coverage and fidelity bond. (f) Use their best efforts to write a minimum of $4,000,000 in new EAP, net of bad debts, during each term. 11. The Company shall not be responsible for any producer expenses, including rent, transportation, clerical hire, fees, postage, telegrams, telephone, advertising or any other expense in connection with the operation or maintenance of the Producer's office, nor shall the Producer incur any expense for claims incurred, nor shall he discharge or incur any liability whatsoever under any policy issued through this Agreement. 12. The Company reserves the right to cancel any policy by direct notice to the insured, and in the event the Company refunds return premiums under any policy by reason of cancellation, rescission or otherwise, the Producer shall immediately return to the Company the commission originally retained by him prorated to the amount of the premium refunded. 13. This Agreement supersedes all previous agreements, whether oral or written, between the Company and the Producer. Any amendments and changes to this Agreement must be made in writing, signed by both Company and Producer and specify the effective date. The Producer may not assign this Agreement directly or indirectly in whole or in part without prior written approval of Company. In the event of termination of this agreement, the Producer having promptly accounted 2 for and paid over premiums for which he may be liable, the Producer's billing records and the use and control of expirations shall remain the property of the Producer and be left in his undisputed possession; otherwise, the billing records, use and control of all expirations of business placed with the Company shall become vested in the Company and the Company shall have the right to direct bill and direct collect premiums. Company will also have the right to assign said business to replacement producers. If in disposing of such billings and expirations, the Company does not realize sufficient money to discharge in full the Producer's indebtedness to the Company, the Producer shall remain liable for the balance of such indebtedness. Any amount realized in excess of indebtedness, less expense of disposing of such records and expirations, shall be returned to the Producer. 14. The Producer is not authorized to bind policies of insurance. 15. The term of this Agreement is one year and will be automatically renewed for subsequent consecutive one year terms unless the notice specified below in this paragraph is given. This Agreement may be amended at any time in writing, signed by both Company and Producer, or it may be terminated at any time upon written agreement, signed by both Company and Producer. The Company may suspend the authority of the Producer during the pendency of any dispute regarding any event of default. Company cannot amend or terminate without giving 90 days (180 days after this Agreement has been in force for a one year period) advance written notice to the Producer except in those instances in which the Producer has done any of the following: (a) The Producer has violated the written underwriting rules or regulations of the Company, which violation has misled the Company concerning the nature or the extent of a risk. (b) The Producer has failed to comply with the provisions of this agreement. (c) The Producer has failed to remit funds within 10 days after receiving written notice that the time limits set forth in paragraph 5 have not been met. (d) The Producer has had his license suspended or revoked by the Florida Commissioner of Insurance. (e) The Producer has engaged in fraudulent acts affecting his relationship with the Company or its insureds. (f) The Producer becomes insolvent. (g) The Producer fails to pay premiums to the Company when due. 16. Upon the receipt by the Producer of written notice of termination, the Producer shall immediately remit to the Company all fiduciary funds held for the benefit of the Company, and the Producer will forward any deposit premium accepted thereafter immediately to the Company. The Producer shall also immediately return to the Company all unused forms and any other property of the Company in the Producer possession. 17. In the event that any legal action is commenced by either party to enforce the terms of this Agreement, the prevailing party in such legal action shall be entitled to, in addition to any other remedies provided hereunder or by law, its reasonable attorneys' fees and costs incurred in such 3 action. It is expressly agreed that any litigation related to or connected with this Agreement shall be subject only to the jurisdiction of the courts within the State of California, both federal and state, and no other jurisdiction. The undersigned hereby submit to the jurisdiction of the courts of Los Angeles County and the Federal District Court, Central District located in Los Angeles, California. 18. The Producer must notify the Company in writing if there is a change in ownership of 10% or more of the outstanding stock in the Producer, if there is a change in any principal officer of the Producer, or a change of Director of the Producer. 19. During the term of this Agreement, Company may disclose proprietary information to Producer. Producer agrees not to ever disclose said proprietary information to any third parties. Producer further agrees not to utilize Company's proprietary information after the termination of this Agreement. Producer agrees not to move business written through Company during the term of this Agreement plus the policy year thereafter. IN WITNESS WHEREOF, Company and Producer have caused this agreement to be executed on the day and year first above written. HULL & CO., INC. (PRODUCER) By:_________________________________ Title:______________________________ REGIONAL BENEFITS INSURANCE SERVICES (COMPANY) By:_________________________________ James K. Hindes Title: Vice President ------------------------------ 4 Addendum A COMMISSION RATES ---------------- A commission of three percent (3%) of the collected earned premium plus the NCCI expense constant currently at $140 per policy will be paid to producer on each Workers' Compensation Policy written by Producer. Company and Producer will split equally (50/50) any and all commissions earned due to the production of MetraHealth business by Producer. 5 Addendum B SPACE AGREEMENT --------------- During the term of this Agreement, Producer will provide Company with office space located within Producer's office (hereinafter "subject space") at no charge to Company for one of Company's employees. Company employees will have adequate parking available and will be given access to all necessary areas, for example; bathrooms, kitchen and lounge area, etc., at all times. Producer will continue to be solely responsible for maintenance of their office space including the subject space, telecommunications and furniture they have provided, except that Company shall be responsible for the maintenance of its own furniture (if any) and equipment. Company will be responsible to pay for its own furniture, equipment, computers, faxes, phones, terminals, supplies, and mail services. Company assumes no obligations of any kind in regard to the subject space, including, but not limited to, Producer's obligations with respect to any lease which may be in effect during the term of this Agreement. Producer warrants that neither the making of this Agreement nor the terms of this Agreement violate the lease on the subject space or any other agreement. Company will add the Producer location to all relevant policies of insurance. No expenses, other than those which are previously agreed upon by both parties in writing, will be charged to, or incurred on behalf of, Company by Producer. Should the Company wish to lease additional equipment, services, or space from Producer, said lease will be the subject of a separate agreement after good faith negotiations. 6 EX-10.117 4 PRODUCER AGREEMENT EXHIBIT 10.117 PRODUCER - COMPANY AGREEMENT THIS AGREEMENT, made this 15th day of May, 1996, by and between REGIONAL BENEFITS INSURANCE SERVICES (hereinafter referred to as the "Company") with principal offices at 6200 Canoga Avenue, Woodland Hills, CA 91367-2402, and GULF ATLANTIC MANAGEMENT GROUP, INC. (hereinafter referred to as the "Producer"), a Florida Corporation, with principal offices at 1901 West Cypress Creek Road, Fort Lauderdale, Florida 33340. The parties hereto agree as follows: 1. The Company is a duly licensed General Agent with authority to produce and administer workers' compensation insurance and accident and health business from "insurers" which are companies authorized to transact workers' compensation insurance and/or accident and health business in various states. A non-limiting list of current insurers is attached hereto as Addendum "A". 2. The Producer is a duly licensed General Agent who, for purposes of this agreement, is an independent contractor, not an employee of the Company, and is subject to requirements imposed by law, the terms of this Agreement, the insurers' maximum volume limits, and the underwriting rules and regulations of the Company. 3. The Company hereby grants authority, and that authority only, to the Producer initially in the State of Florida, to solicit and accept applications for workers' compensation and employers liability and accident and health insurance on behalf of the insurers from insureds with a minimum potential standard premium of $75,000, which applications shall be immediately submitted to the Company for acceptance or rejection. For the purpose of this Agreement, "standard premium" shall mean manual premium multiplied by experience modification factors as defined by Florida Statute. 4. The Producer agrees to keep a true and complete record and account for all business transacted for or on behalf of the Company, and to report all risks assumed and forward all applications to the Company for acceptance as soon as practical after the effective date thereof. 5. The Company shall accept or reject such application submitted by the Producer on behalf of the insurers within a reasonable time of receipt thereof based upon the information provided, and advise the Producer accordingly, it being expressly understood and agreed that the decision whether to accept or reject any application is the responsibility of the Company. The Producer shall have no authority to make, add to, or in any way alter, any policy of insurance or other contract affecting the insurer or the Company, nor to waive any of the insurer or Company's rights thereunder without prior written approval. 6. The Company shall issue Policies and binders on behalf of the insurers through the Producer who will distribute same through Producer's network of duly licensed insurance brokers, 1 agents and producers in Florida (collectively referred to as "agents"). The Producer is also granted authority to collect and receipt for premiums thereon. 7. The Producer agrees that all monies or funds of the insurer or of the Company from whatever source received, and all premiums collected on policies issued through the Company, less only: i) commissions payable to sub-agents at the rates outlined in Addendum "B" attached hereto; ii) an overriding commission to the Producer of six and one-half percent (6-1/2%) of standard premium; iii) an expense constant of $140 per policy to the Producer; shall be held as a fiduciary trust and be paid to a bank account to be established and controlled by the Company within seven (7) days of receipt of same by the Producer and shall not be used for any other purpose whatsoever. It is also understood and agreed that in the event the Producer produces between $10,000,000 and $15,000,000 in standard premium to the insurers, net of bad debts, during any term, then the Producer shall be entitled to an additional commission of one percent (1%) of the total premium earned during such term and in the event the Producer produces in excess of $15,000,000 in standard premium to the insurers, net of bad debts, during any term, then the Producer shall be entitled to an additional commission of two percent (2%) of the total premium earned during such term. 8. The Company shall establish a separate bank account to be established and controlled by the Company in Fort Lauderdale, Florida, and funded with and thereafter maintained at the level of $25,000 (initial funding, to be increased as demand warrants) which the Producer may draw upon to pay claims; in accordance with claims settling decisions made by the Company. 9. The Producer agrees that any credit extended for the payment of premiums shall be at the sole risk of the Producer, and that the Producer will account for and pay over to the Company all premiums on such business and will remit premiums and render account reports to the Company not later than 45 days following the end of the month after Company billing for new premiums, additional premiums, renewal premiums and additional premiums developed by audit. The Producer shall not offset balances due under one contract with any offset due under any other contract. The Producer may be relieved from responsibility for payment of uncollectible workers' compensation final audits by turning back said final audits to Company for direct collection within 30 days of Producer's knowledge of a collection problem. Producer will be relieved of responsibility for payment of final workers' compensation audit billings caused by fraudulent reporting provided that Producer provides Company documentary evidence of such fraudulent reporting within 30 days from the date of the final workers' compensation audit billing. Only three and one half percent (3 1/2%) commission will be paid on amounts turned back to the Company for direct collection, and failure to timely turn back said final audits will not relieve Producer from liability for the premium. Producer will also be relieved of responsibility for payment of uncollected premium caused by intentional acts of premium avoidance by insureds if reported to Company by Producer within 30 days from the date of the final workers compensation audit billing. If the insured has sought administrative remedies regarding a disputed final workers' compensation audit during the initial 2 30 day notice period, the 30 day notice period set forth above shall be stayed until the administrative remedy is exhausted. 10. The omission of any item(s) from a monthly statement shall not affect the responsibility of either party to account for and pay all amounts due the other, nor shall it prejudice the rights of either party to collect all such amounts due from the other. 11. The Producer is authorized to advance premiums on behalf of policyholders, in which event the Producer accepts full responsibility for such premiums. 12. The Producer agrees that the above terms create a guarantee by the Producer for the payment of all premiums under the above payment terms. 13. The Producer: (a) will provide all usual and customary services of an insurance producer on all insurance contracts produced hereunder, including sales, advertising, marketing, loss control, billings, collections, guaranteeing payment of premium, and production of cancellation notices and reports; (b) will provide claims administration and managed care support to the Company, it being expressly understood and agreed that actual decisions regarding claims adjustment, settling and reserving levels in relation to those claims remain the responsibility of the Company. If any revenues are generated by the application of loss conversion factors to paid claims under any given policy, the Producer shall be entitled to receive 50% of such revenues above a base conversion factor of 1.03; (c) will exercise its authority personally or through its authorized employees; (d) may represent other companies; (e) will exercise exclusive and independent control of its time; (f) will provide Company with a current certificate of errors & omissions insurance and crime policy with limits of $5,000,000; (g) will obtain prior written approval of Company prior to issuing any advertisement, circular, pamphlet, or other publication which includes references to Company or insurers; and (h) will utilize its best endeavors to produce a minimum of $10,000,000 in standard premium to the insurers, net of bad debts, during each term. 14. The Company shall not be responsible for any Producer expenses, including rent, transportation, clerical hire, fees, postage, telegrams, telephone, advertising or any other expense in connection with the operation or maintenance of the Producer's office, nor shall it discharge or incur any liability whatsoever under any policy issued through this Agreement. The Company shall be responsible for postage relating to the handling and/or processing of policies and endorsements. All marketing-related postage shall be to the charge of Producer. 3 15. The Company reserves the right to cancel any policy by direct notice to the insured, and in the event return premiums are refunded thereon by reason of cancellation, rescission or otherwise, the Producer shall immediately return to the Company the overriding commission originally retained by it, prorated to the amount of the premium refunded. 16. This Agreement supersedes all previous agreements, whether oral or written, between the Company and the Producer. Any amendments and changes to this Agreement must be in writing and specify the effective date. The Producer may not assign this Agreement directly or indirectly, in whole or in part, without prior written approval of Company. 17. In the event of termination of this Agreement, the Producer having promptly accounted for and paid over premiums for which he may be liable, the Producer's records and the use and control of expirations shall be its property; otherwise, the records, use and control of all business placed with the insurers, including, but not limited to, policy and claims files shall remain the property and responsibility of the Company, and Company shall have the right to direct bill and direct collect premiums. 18. The Producer is not authorized to bind policies of insurance. 19. The term of this Agreement is two years effective May 15, 1996, and will be automatically renewed for subsequent consecutive one-year terms unless the notice specified below in this paragraph is given. During the term of this Agreement Producer agrees that, other than working with Clarendon National, Producer will not submit workers' compensation business to any other source other than Company. This Agreement may be amended at any time in writing by mutual consent or it may be terminated at any time by mutual consent upon written agreement. The Company may suspend the authority of the Producer during the pendency of any dispute regarding any event of default. Either party may terminate this Agreement by giving 90 days (180 days after this Agreement has been in force for a two-year period) advance written notice to the other. No advance written notice of termination is necessary in those instances in which: (a) the other has failed to comply with the provisions of this Agreement; (b) the Producer has failed to remit funds within 10 days after receiving written notice that the time limits set forth in paragraph 9 have not been met; (c) the other has had its license suspended or revoked by the Florida Commissioner of Insurance; (d) the other has engaged in fraudulent acts affecting its relationship with the Company or its insureds; (e) the other becomes insolvent; (f) the Producer has failed to pay premiums; or (g) the Company or an insurer has failed to pay claims. 20. Upon the receipt by the Producer of written notice of termination, the Producer shall immediately remit to the Company all fiduciary funds held for the benefit of the insurers or the 4 Company, and forward any deposit premium accepted thereafter immediately to the Company. Upon the receipt by either party of written notice of termination, both shall also immediately return to the other all forms and other property of the other in its possession. 21.1 Any dispute arising out of, or relating to, this Agreement or the enforcement hereof, may be determined by a board of arbitration meeting in Fort Lauderdale, Florida. The laws of the State of Florida shall govern the interpretation and application of this Agreement and the enforcement of the arbitration award. Either party (hereinafter called the "Claimant") may commence an arbitration by serving a written Demand for Arbitration upon the other party (hereinafter called the "Respondent"). 21.2 Board of Arbitration. The Board of Arbitration shall be composed of -------------------- two arbitrators and an umpire. Each member of the Board of Arbitration shall be active or retired officials of insurance or insurance management companies (other than the parties or their affiliates). Each party shall appoint its arbitrator, and the two arbitrators shall choose an impartial umpire. The Claimant shall name its arbitrator in the Demand for Arbitration. If the Respondent fails to appoint its arbitrator and to notify Claimant of such appointment within twenty (20) business days of receipt of the Demand for Arbitration, the Claimant may also appoint the second arbitrator within ten (10) business days after the expiration of said twenty-day period. If the two arbitrators fail to agree upon the appointment of an umpire at the end of twenty (20) business days following the appointment of the second arbitrator, then the umpire shall be appointed by the American Arbitration Association (or its successor) in accordance with its then prevailing commercial arbitration rules. 21.3 The Claimant shall submit to the arbitrators, the umpire and the Respondent its initial statement of claim within twenty (20) business days after the appointment of the umpire. The Respondent shall submit its statement to the arbitrators, the umpire and the Claimant within twenty (20) business days after receipt of the Claimant's statement. The Claimant may submit a reply statement within ten (10) business days after receipt of Respondent's statement. No other written statements shall be submitted by either party unless requested to do so by the entire Board of Arbitration. 21.4 Any hearing shall commence within thirty (30) business days after submission of Claimant's reply statement, or after submission of Respondent's statement if Claimant does not submit a reply statement, and shall be held at a time and place determined by the Board of Arbitration. The Board of Arbitration shall consider this Agreement an honorable engagement rather than merely a legal obligation, and shall make its decision with regard to the custom, practice and usage of the insurance and reinsurance business. The hearing shall be conducted in accordance with the commercial arbitration rules of the American Arbitration Association (or its successor); strict rules of evidence need not be followed, but written evidence and evidence in the form of testimony may be taken and cross-examination and rebuttal may be allowed. 21.5 The Board of Arbitration shall make its award in writing within forty-five (45) days following the termination of the hearing (or any continued hearing) unless the parties consent to an extension. The majority decision of the Board of Arbitration shall be final and binding on all parties to the proceeding. Judgment may be entered on the award in any court having jurisdiction thereof. 5 21.6 Each party shall bear the expense of its own arbitrator and shall jointly and equally bear the expense of the umpire. The other costs of the arbitration proceeding shall be allocated by the Board of Arbitration. In the event of subsequent actions or proceedings to enforce any rights hereunder, including, without limitation, any proceeding to enter judgment on the award, the prevailing party shall be entitled to recover court costs and its reasonable attorneys' fees. 22. In the event that any legal action is commenced by either party to enforce the terms of this Agreement, the prevailing party in such legal action shall be entitled to, in addition to any other remedies provided hereunder or by law, its reasonable attorneys' fees and costs incurred in such action. It is expressly agreed that any litigation related to or connected with this Agreement shall be subject only to the jurisdiction of the courts within the State of Florida, both federal and state, and no other jurisdiction. 23. Either party must notify the other in writing if there is a change in ownership of 10% or more of its outstanding stock or if there is a change in any of its principal officers or directors. 24. During the term of this Agreement, both the Company and the Producer may disclose proprietary information to each other. Both agree not to ever disclose said proprietary information to any third parties, either during this Agreement or after its termination. 25. In the event that commissions are earned by either party as a result of the utilization of Accident and Health products by insureds produced under this Agreement, then that party will share any such commission equally (50/50) with the other. IN WITNESS WHEREOF, the Company and the Producer have caused this Agreement to be executed on the day and year first above written. GULF ATLANTIC MANAGEMENT GROUP, INC. (PRODUCER) By:_________________________________ Title:______________________________ REGIONAL BENEFITS INSURANCE SERVICES (COMPANY) By:_________________________________ James K. Hindes Title: Vice President ------------------------------ 6 Addendum "A" LIST OF CURRENT INSURERS ------------------------ The Pacific Rim Assurance Company MetraHealth Blue Cross/Blue Shield - AZ Harden & Co./National Med Health Plan Services: Greater Pacific-California United World Boston Mutual Reliance Insurance Company Celtic Life 7 Addendum "B" SUB-AGENT COMMISSIONS --------------------- The commissions payable to Producer's licensed sub-agents shall be payable on a risk-by-risk basis at a rate between 8-10%. 8 EX-10.118 5 OFFICE LEASE EXHIBIT 10.118 LEASE AGREEMENT THIS AGREEMENT, entered into the 20th day of May, 1996 between GULF ATLANTIC INVESTMENT GROUP, INC., a Florida corporation, with its office at 1901 West Cypress Creek Boulevard, Second Floor, Fort Lauderdale, Florida 33309, hereinafter called the lessor, and REGIONAL BENEFITS INSURANCE SERVICES, a California corporation, as lessee. WITNESSETH, that the said lessor does this day lease unto said lessee, and said lessee does hereby hire and take as tenant under said lessor the premises described as suite number 100, at Gulf Atlantic Center, 1901 West Cypress Creek Boulevard, Fort Lauderdale, Florida 33309. This lease is an all-inclusive, full- service lease, including furniture, phone (lessee responsible for phone bills), file cabinets, conference room, and computer system support. The term of this Agreement is to be co-terminus with the Producer-Company Agreement dated May 15, 1996, between Regional Benefits Insurance Services and Gulf Atlantic Management Group (attached hereto as Exhibit "A") beginning the first day of June, 1996, and ending with the termination of the Producer-Company Agreement between Regional Benefits Insurance Services and Gulf Atlantic Management Group (Exhibit "A" hereto), for an agreed rental pursuant to the schedule set forth in Exhibit "E" attached hereto. A security deposit equal to one month's rent shall be payable upon execution of the Agreement and be returned to Lessee upon termination of the lease. In all instances of termination of the Producer Agreement, this Lease Agreement will also terminate unless all parties mutually agree in writing to the contrary. Payment is due on June 1, 1996 and continuing on the first of each and every month for the term of the lease as provided in this paragraph. 1. The lessee shall not assign this lease, nor sublet the premises, or any part thereof, nor make any alternations therein, and all additions thereto, without the written consent of the lessor, and all additions, fixtures or improvements which may be made by lessee, except movable office furniture and equipment owned by lessee, shall become the property of the lessor and remain upon the premises as a part thereof, and be surrendered with the premises at the termination of this lease. 2. All personal property placed or moved in the premises above described shall be at the risk of the lessee or owner thereof, and lessor shall not be liable for any damage to said personal property, or to the lessee arising from the busting or leaking of water pipes, or from any act of negligence of any co- tenant or occupants of the building or of any other person whomsoever. 3. In the event the premises shall be destroyed or so damaged or injured by fire or other casualty during the life of this agreement, whereby the same shall be rendered untenantable, then the lessor shall have the right to render said premises tenantable by repairs within ninety (90) days therefrom. If said premises are not rendered tenantable within said time, it shall be optional with either party hereto to cancel this lease, and in the event of such cancellation, the rent shall be paid only to the date of such fire or casualty. The cancellation herein mentioned shall be evidenced in writing. 4. The prompt payment of the rent for said premises on the first of each month from and after June 1, 1996, for the term of this lease, and the faithful observance of the rules and regulations set forth in Exhibit "D" attached hereto, and which are hereby made a part of this covenant, and of such other and further rules or regulations as may be hereafter made by the lessor, are the conditions upon which the lease is made and accepted and any failure on the part of the lessee to comply with the terms of said lease, or any of said rules and regulations now in existence, or which may be 1 hereafter prescribed by the lessor, shall, at the option of the lessor, work a forfeiture of this contract, and all of the rights of the lessee hereunder. 5. If the lessee shall abandon or vacate said premises before the end of the term of this lease and cease making the lease payments, the lessor may, at his option, forthwith cancel this lease or he may enter said premises as the agent of the lessee, and re-let the premises with or without any furniture that may be therein, as the agent of the lessee, at such price and upon such terms and for such duration of time as the lessor may determine, and receive the rent therefor, applying the same to the payment of the rent due by these presents, and if the full rental herein provided shall not be realized by lessor over and above the expenses to lessor in such re-letting, the said lessee shall pay any deficiency, and if more than the full rental is realized lessor will pay over to said lessee the excess of demand. 6. In the event of any dispute arising out of this lease, it is agreed between lessor and lessee that the prevailing party be awarded reasonable costs and reasonable attorneys' fees in prosecuting or defending said action. 7. The lessor, or any of his agents, shall have the right to enter said premises during all reasonable hours, to examine the same to make such repairs, additions or alterations as may be deemed necessary for the safety, comfort, or preservation thereof, or of said building. 8. Lessee hereby accepts the premises in the condition they are in at the beginning of this lease and agrees to maintain said premises in the same condition, order and repair as they are at the commencement of said term, excepting only reasonable wear and tear arising from the use thereof under this agreement, and to make good to said lessor immediately upon demand, any damage to water apparatus, or electric lights or any fixture, appliances or appurtenances of said premises, or of the building, caused by any act or neglect of lessee, or of any person or persons in the employ or under the control of the lessee. 9. If the lessee shall become insolvent or if bankruptcy proceedings shall be begun before the end of said term, the lessor is hereby irrevocably authorized at its option, to forthwith cancel this lease, as for a default. Lessor may elect to accept rent from such receiver, trustee, or other judicial officer during the term of their occupancy in their fiduciary capacity without effecting lessor's rights as contained in this contract, but no receiver, trustee or other judicial officer shall ever have any right, title or interest in or to the above-described property by virtue of this contract. 10. This contract shall bind the lessor and its assigns or successors, and the heirs, assigns, administrators, legal representatives, executors or successors, as the case may be, of the lessee. 11. It is understood and agreed between the parties hereto that time is of the essence of this contract and this applies to all terms and conditions contained herein. 12. It is understood and agreed between the parties hereto that written notice mailed or delivered to the lessor and lessee as follow shall constitute sufficient notice to the parties to comply with the terms of this contract: Lessee's Notice Address: 6200 Canoga Avenue Woodland Hills, California 91367-2402 2 Lessor's Notice Address: 1901 West Cypress Creek Road, 2nd Floor Fort Lauderdale, Florida 33309-1864 13. It is hereby understood and agreed that lessee may place signs and advertising according to building standards. However, lessee shall first submit a proposal for said signs and advertising to lessor for approval. 14. Radon gas is a naturally occurring radioactive gas that, when it has accumulated in a building in sufficient quantities, may present health risks to persons who are exposed to it over time. Levels of radon that exceed federal and state guidelines have been found in buildings in Florida. Additional information regarding radon and radon testing may be obtained from your county public health unit. 15. Execution and facsimile signature shall be deemed to be the same as the original and the parties agree to deliver immediately by overnight messenger the original signatures of the parties hereto. IN WITNESS WHEREOF, Lessor and Lessee have executed this Lease or have caused the same to be executed as of the day and year first above written. Signed, sealed and delivered in the presence of: LESSOR: LESSEE: Gulf Atlantic Investment Group, Inc., Regional Benefits Insurance a Florida corporation Services, a California corporation By:__________________________________ By:______________________________ Mark S. Sanz James Kemper Hindes Vice President Vice President 3 EX-11 6 COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11 PAC RIM HOLDING CORPORATION STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS (Amounts in thousands, except per share data)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- ------------------------- 1996 1995 1996 1995 -------- ------- ------ ------ Primary: Average shares outstanding 9,528 9,528 9,528 9,528 Net effect of dilutive stock warrants and options--based on modified treasury stock method using average market price 2,824 2,832 2,824 2,832 ------- ------- ------- ------- Totals 12,352 12,360 12,352 12,360 ======= ======= ======= ======= Net income (loss) $ 101 $ 322 $ (440) $ 1,344 Add interest on retirement of convertible debenture, net of tax 234 222 460 449 ------- ------- ------- ------- Net income (loss) for primary earnings per share $ 335 $ 544 $ 20 $ 1,793 ======= ======= ======= ======= Per share income (loss) amount* $ 0.01 $ 0.03 $ (0.05) $ 0.14 ======= ======= ======= ======= Assuming Full Dilution: Average shares outstanding 9,528 9,528 9,528 9,528 Net effect of dilutive stock warrants and options--based on modified treasury stock method using closing market price 2,824 2,851 2,824 2,831 Assumed conversion of convertible debenture 7,273 7,273 7,273 7,273 ------- ------- ------- ------- Totals 19,625 19,652 19,625 19,632 ======= ======= ======= ======= Net income (loss) $ 101 $ 322 $ (440) $ 1,344 Add interest on conversion of convertible debenture, net of tax 385 769 758 Add interest income from excess funds on conversion, net of tax 129 255 228 ------- ------- ------- ------- Net income (loss) for fully diluted earnings per share $ 615 $ 322 $ 584 $ 2,330 ======= ======= ======= ======= Per share income (loss) amount* $ 0.01 $ 0.03 $ (0.05) $ 0.12 ======= ======= ======= =======
*The Common Stock equivalent shares arising from the effects of stock options, warrants, and convertible debentures were antidilutive for the quarter ended June 30, 1996, therefore, 9,528,000 are used for the calculation of primary and fully diluted earnings per share. EX-27 7 FINANCIAL DATA SCHEDULE
7 This schedule contains summary financial information extracted from Consolidated Balance Sheet and Consolidated Statement of Operations and is qualified in its entirety by reference to such financial statements. 1,000 3-MOS 6-MOS DEC-31-1996 DEC-31-1996 APR-01-1996 JAN-01-1996 JUN-30-1996 JUN-30-1996 0 112,277 0 0 0 0 0 0 0 0 0 0 0 117,054 0 1,493 0 4,275 0 1,241 0 163,489 0 90,709 0 5,586 0 0 0 233 0 18,769 0 0 0 0 0 95 0 41,728 0 163,489 22,374 41,259 1,793 3,606 0 88 2 2 16,457 31,132 3,944 7,461 3,011 5,822 173 (625) 72 (185) 101 (440) 0 0 0 0 0 0 101 (440) .01 (.05) .01 (.05) 0 96,525 0 30,213 0 929 0 4,843 0 32,213 0 90,709 0 929
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