As of 12/6/95 a 20% stock dividend was declared payable to stockholders of record on January 26, 1996.
The profitability of the property-casualty business is dependent on competitive influences, the efficiency and costs of operations, investment results between the time premiums are collected and losses are paid, the level of ultimate losses paid, and the ability to estimate each of these factors in setting premium rates. Investment results are dependent on the selection of investment vehicles, the ability to project ultimate loss payments, and the timing of the loss payments. Ultimate loss payments are dependent on the types of coverages provided, results of litigation, the geographic areas of the country covered and the quality of underwriting.
The major product lines the Registrant reinsures are professional liability, directors & officers ("D&O") liability, other reinsurance lines, and run-off reinsurance exposures acquired in the First Re acquisition. These product lines and their unique risk characteristics are discussed below.
Since 1991, First Re has expanded its reinsurance business by writing participating coverages brokered by reinsurance intermediaries. As a result of these efforts, First Re has been able to increase existing business lines in casualty, professional liability and property catastrophe. These exposures are typically less than $500,000 per insured exposure of each reinsurance program ceded and have different risk characteristics from the Registrant's insurance program.
The professional liability and casualty reinsurance components of this business are typically claims-made policies that reimburse injured third parties or defend insureds for wrongful acts.
The D&O liability coverages issued by VSC/DIC and other ceding companies, and reinsured in part by First Re, is a Directors and Officers and Company Indemnity Policy form ("Policy"). The policy was marketed by Aon Corporation affiliates until the program terminated July 1, 1993, when VSC withdrew from the market for this coverage.
The reinsurance contracts generally have customary clauses which bind First Re to pay its share of claims and claim settlement costs. First Re reviews and monitors all aspects of the reinsurance relationships based on the monthly or quarterly reports it receives as part of the contract terms.
Oakley claims are adjusted by an affiliate of Aon for VSC, First Re and its reinsurers. The claims are typically reported to the insured's broker who in turn reports them to Oakley or VSC. VSC reports the claims to reinsurers as per terms of the reinsurance agreements in place. Some of the claims reported will be notification of an incident or potential claim that will ultimately be closed without payment or indemnity. Legal counsel is assigned to significant claims.
First Re establishes reserves for its loss and loss adjustment expense liabilities. These liabilities consist of accruals for reported claims and estimates for incurred but not reported claims ("IBNR"). First Re utilizes ceding company actuarial reports, industry experience, independent legal counsel and its own experience to establish IBNR reserves.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
First Re regularly monitors the relative proportions of its gross reserves to ensure that they are adequate. In the event such reserves are deemed to be either redundant or deficient, adjustments are made at the time of such determination. Such adjustments were recorded as reductions in losses and loss adjustment expenses in the consolidated income statement for 1995, 1994 and 1993 in the amounts of $4,883,000, $3,352,436, and $1,648,000, respectively.
Management considers First Re's gross and net reserves to be adequate to support the level of premiums previously written.
The extended development period on claims permits First Re to invest the reserves from the associated premiums and then realize investment income. Such extended periods may also cause temporary and possibly significant pressure on liquidity due to unanticipated requests for claim payments.
The Registrant's investment portfolio has been structured such that the average expected maturity of the portfolio is approximately three and one half years. The length of time needed to settle claims from contracts or policies is influenced by the type of coverage involved, the complexity of the individual loss occurrence and the early determination of ultimate liability. Management believes that it has positioned the Registrant's investment portfolio to ensure that it can meet its obligations without adverse deviation from its current investment objectives. It is also believed that the Registrant's current investment policies permit it to continue to take advantage of favorable changes that might occur in the investment marketplace. The Registrant has also reduced exposure to duration risk and maintains an investment grade portfolio with an average credit rating of "A" as determined by Moodys.
The Registrant believes that it will not have to sell invested assets to meet its obligations ahead of their scheduled maturities. There are no equity investments with an unrealized loss position that represent a permanent impairment to the Registrant's fixed capital structure.
Cash balances at year end were $3,782,536 in 1995 as compared to $3,251,227 in 1994.
In 1993, operating activities included the release of funds held by VSC which provided $14,101,348 of cash. A decrease of $607,932 related to the utilization of other assets, and accrued liabilities provided additional cash in 1994. Purchases of fixed maturities held for trading in 1993 totaled $16,727,247. These purchases were the principal use of the cash.
Sales of fixed term investments and other securities were completed in 1993 and 1994 as part of a strategy to utilize all of a long term capital loss carryforward that would have expired on December 31, 1994. The realized gains of $570,231 were utilized in the remaining balance of that capital loss carryforward. The investing activity in 1993 was also directed at utilizing the long term capital loss and investing for the highest after tax total return possible.
In September 1994, the Registrant made a formal offer to acquire, in a cash transaction, AmerInst Insurance Group, Inc. ("AIIG"), a publicly held reinsurer of accountants professional liability insurance. This offer was rejected by the AmerInst board as being insufficient. The Registrant increased its offer to purchase AIIG in January, 1995 and this offer too was rejected as being insufficient.
Management considers the Registrant's capitalization and net reserves to be adequate to meet current operating and financing needs. The Registrant is unaware of any other trends or uncertainties that have had, or it reasonably expects will have, a material effect on its liquidity, and capital resources or operations.
The Registrant's financial position and results of operations are subject to fluctuations due to a variety of factors. Abnormally high severity or frequency of claims in any period could have a material adverse effect on the Registrant. Additionally, re-evaluations of the Registrant's loss reserves could result in an increase or decrease in these reserves and a corresponding adjustment to earnings. The historical results of operations are not necessarily indicative of future results.
Net income per share in 1995 amounted to $1.30 as compared to $1.13 for 1994. This represents an increase of 15.0% for the year. In 1994, earnings per share were 14.1% higher than 1993 ($1.13 vs $.99). Earnings per share are calculated on a primary basis and have been adjusted to reflect the 20.0% stock dividends declared in June 1995 and December 1995.
Net investment income and net realized gains on investments in 1995 increased by 36.3% to $5,244,382 from $ 3,848,095. Capital gains increased $623,549 due to improvement in the stock and bond markets. Investment income increased principally due to increased investment funds from underwriting operations. Net investment income and net realized gains on investments in 1994 decreased from 1993 by 18.9% from $4,745,344 to $3,848,095. This decrease is attributable to reduced capital gains and lower short-term interest rates that were available in the first six months of 1994.
Uncertainty exists about the future direction of investment yields and realization of capital gains, making forecasts regarding future interest income difficult.
The Oakley operation produced professional liability and D&O net written premiums of approximately $12,500,000 for 1995, $7,038,954 for 1994 and $3,256,991 in the last three quarters of 1993. The increase was due to an increase in gross written premiums and to a change in participation of the underlying risk premium (gross premium) from approximately 37.0% to 47.0% in the second quarter of 1994 and to 70.0% in the second quarter of 1995.
Commission expense increased 70.3% to $3,042,719 in 1995. The 1995 commissions paid include contractual contingent commissions of $416,000 on financial institutions' business for the prior underwriting year results. The remainder of the 1995 commission expense increase relates to the increase in premiums written.
Commissions paid relate directly to premiums written as they follow contractually set rates. The Oakley premiums have a lower commission rate due to the use of ceded reinsurance programs. The average commission rate on Oakley production is approximately 24.0%, as contrasted to 29.0% on the discontinued financial institution business. The Registrant expects to lower its commission rate as the Oakley premiums become an even larger proportion of the total writings. The Registrant's premium writings for all sources of business in 1995, 1994 and 1993 were approximately $14,140,000, $8,962,000 and $7,425,000 respectively.
Loss and loss adjustment expenses incurred in 1995 were $4,843,484. This is $2,230,090 or 85.3% greater than 1994. The year 1994 losses incurred were $2,310,268 or 46.9% less than in 1993. These changes vary in direct relation to the volume of business underwritten for the subject year, the type of business written, and the development of actual claims incurred for both the subject year and re-estimations of prior year claims.
The incurred relationship between paid losses and reserves in the current and prior periods is explained in Note K to the financial statements.
The other reinsurance had incurred losses of approximately $1,167,000 in 1995 as compared to approximately $500,800 in 1994 and $2,022,000 in 1993. The 1994 losses reflected favorable re-estimations of approximately $1,100,000 related to property exposures on expired reinsurance contracts. The Registrant records these reserves at values reported by the ceding companies plus estimates for additional development.
Total losses incurred are shown in aggregate terms in the consolidated statements of income in the financial statements. Losses are such that First Re is not required to record premium deficiency reserves.
A portion of the expenses of the Registrant are fixed and do not vary directly in relation to the volume of operating activity.
The operating and management expenses increased 6.2 % to $3,683,860 in 1995 from 1994. The increase in general expenses relates to the increase in premium revenues and the related expenses on Oakley business as compared to other reinsurance that had been written by First Re. The operating and management expenses increased 20.2 % to $3,467,801 in 1994 from 1993. This was due to the full year of costs involving Oakley, which required more staff and the corresponding expenses including additional office space.
The Registrant incurred taxes of $1,265,544, $803,748, and $68,160 for the years ended December 31, 1995, 1994 and 1993 respectively on net income before taxes and cumulative effect of changes in accounting principles. The increase in the tax provision from 1994 to 1995 is primarily due to the favorable re-estimations of loss reserves as described more fully in Paragraph 4 above. This contributed a higher proportion of fully taxable income to the total income.
The effective tax rate was 22.7%, 17.7% and 2.4% for 1995, 1994 and 1993 respectively. The increase from 1993 to 1994 was primarily due to the full recognition of the capital loss carry forward in 1993 due to the adoption of FASB 109. The increase in the rate from 1994 to 1995 is the result of a lower proportion of tax advantaged investment income to the total investment income.
Current statutes require prior approval by the Connecticut Insurance Commissioner for any dividend distributions during a twelve-month period that are in excess of the greater of (a) 10% of an insurer's surplus, or (b) net income measured as of the preceding December 31. This will not have any material effect on First Re's dividend paying ability.
The Registrant will continue to monitor developments and respond as necessary to the changing environment. Without an appropriate response, actions of regulatory authorities could adversely affect the operations of the Registrant.
The NAIC is currently conducting a project to codify statutory accounting principles. The codification is not expected to be final until 1997. At this time the impact on the financial statements of the Registrant cannot be determined.
The Registrant executed a letter agreement dated as of February 17, 1996 with John A. Dore, and Castle Harlan Partners II, L.P. ("CHP II") pursuant to which CHP II and John Dore have jointly proposed to acquire the Registrant at a cash price of $16.00 per share (after giving effect to the 20% stock dividend payable on February 22, 1996). The proposal is subject to negotiation and execution of a definitive purchase agreement, regulatory approval, and other customary closing conditions. The proposal is not conditioned upon receipt of financing.
This annual report contains forward looking statements that involve risks and uncertainties, including but not limited to the following: premium revenues, commissions and other expenses are dependent on rates charged by insurers, which are subject to fluctuation; the property and casualty insurance industry continues to experience a soft market; continued low interest rates will reduce income earned on invested funds; changes in the performance of financial markets will affect investment earnings; the insurance and reinsurance businesses are extremely competitive; and the general level of economic activity can have a substantial impact on the Registrant's business production. Accordingly, actual results may differ materially from those set forth in the forward looking statements. Attention is also directed to other risk factors set forth in documents filed by the Registrant with the Securities and Exchange Commission.
As discussed in Note A to the consolidated financial statements, the Company changed its method of accounting for income taxes and accounting and reporting for debt and equity securities in 1993.
Financial Institutions Insurance Group, Ltd. ("the Registrant") is an insurance holding company, which through its subsidiaries underwrites insurance and reinsurance. The principal lines of business include professional liability, directors and officers liability, fidelity, property catastrophe reinsurance and other lines of property and casualty reinsurance.
The First Reinsurance Company of Hartford ("First Re") is the insurance company. First Re is domiciled in the State of Connecticut and maintains direct licenses in 20 states. First Re has reinsurance authorities in an additional 14 states. A second insurance company, Financial Institutions Insurance Fund, Incorporated ("FIIF"), was sold at book value plus legal fees in the third quarter of 1994, after all of the liabilities and the net unrestricted assets were transferred to First Re during 1993 and 1994.
On August 23, 1991, FIIF completed the acquisition of all the outstanding common stock of JBR Holdings, Inc. ("JBR") and its wholly-owned subsidiary, The First Reinsurance Company of Hartford. JBR's only operation is as the holding company for First Re.
First Re had stopped writing new business in April 1990, was running-off its discontinued underwriting operations and commuting, where possible, its underwriting liabilities since that time. The run-off of this book of business has continued since the acquisition and has been combined with the Registrant's primary business. Liabilities on contracts issued prior to November, 1987 were assumed by the former owners of First Re.
The provision for federal and state income taxes gives effect to permanent differences between income before taxes and taxable income. Deferred income taxes are provided for certain transactions which are reported in different periods for financial reporting than for income tax purposes. The deferred federal income tax asset is recognized to the extent that future realization of the tax benefit is more likely than not, with a valuation allowance for the portion that is not likely to be realized.
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes" was adopted by the Registrant during the first quarter of 1993 retroactive to January 1, 1993. SFAS No. 109 establishes an asset and liability approach for financial reporting of income taxes. The adoption of SFAS No. 109 resulted in a one time increase to earnings of $192,515 or $0.08 per share, in the first quarter of 1993. This increase in earnings was principally due to the recognition of a portion of previously unrecognized deferred tax assets.
At December 31, 1993, the Registrant adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The Registrant classified its entire portfolio of fixed maturities and equity securities as available for sale and reported them at market value. The unrealized gain or loss on the securities is recorded directly to stockholders' equity, less the applicable capital gains tax. The adoption of SFAS No. 115 had an immaterial effect on the unrealized capital gains of the Registrant, because most of the portfolio had been marked to market prior to December 31, 1993 as part of the trading portfolio. During 1993, before the adoption of SFAS No. 115, the Registrant's fixed maturities portfolio was segregated into two classifications: securities held for trading and securities held for investment. All securities held for trading were previously reported at estimated market values, whereas the securities held for investment were reported at amortized cost.
The Registrant's estimates are developed from its own experience using independent actuarial analysis and advice from its ceding reinsurers. Additionally, the Registrant uses available industry information on similar lines of insurance coverage to establish its reserves. The Registrant believes that the combined liability reflected in the accompanying consolidated financial statements is a reasonable estimate of unpaid losses and loss adjustment expenses (See Note K).
Due to the nature of the Registrant's operations, none of the short-term investments are considered to be cash equivalents for purposes of the statements of cash flows. Restricted cash is also not considered to be cash for the statements of cash flows, as such cash is not available for general corporate purposes.
The proceeds from the sale of investment account securities were $2,719,755, in 1993.
Net purchases and sales activity related to fixed maturities held for trading are reflected in the operating activities section of the consolidated statement of cash flows.
The carrying values of investments held for sale at market value at December 31, 1995 and 1994 are summarized below.
Included in the above, at December 31, 1995, are mortgage backed securities with a market value of $12,292,889 and amortized cost of $12,116,499. The gross unrealized gains and losses are $183,335 and $6,945 respectively.
The amortized cost and estimated market value of fixed income securities at December 31, 1995, by contractual maturity are shown below. Expected maturities will differ from contractual maturities, because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
During 1992, First Re drew down a letter of credit from a reinsurer for approximately $3,200,000 in response to the reinsurer's financial condition. The current $2,601,312 balance of restricted cash and funds withheld from reinsurers represents the projected ultimate reinsurance recoverable due to First Re based on expected loss development. On a quarterly basis, the restricted cash is reduced by the amount of losses paid by the Registrant on behalf of the reinsurer, and the remaining balance is not available for general use.
A reconciliation of the expected federal income tax on income before tax expense using the 34% statutory rate to the provision for income taxes is as follows:
Upon adoption of SFAS No. 109, a valuation allowance of $192,675 was established to reduce the net deferred tax asset to an amount that, based on all available evidence, would more likely than not be realized. During 1993, this allowance was reduced, allowing full recognition of the deferred tax asset as there were unrealized gains on investments in the balance sheet against which the tax deduction giving rise to the asset could be taken.
First Re had immaterial amounts of ceded premiums earned and incurred losses and loss adjustment expenses for the year ended 1993 as related to the 1987-1993 underwriting years. For the years ended 1995 and 1994, the following shedule shows the components of First Res' underwriting results.
At December 31, 1995, $4,181,349 represented reinsurance recoverable related to the reserves. First Re is liable to pay the claims even if this is not collected from the reinsurers who are liable under their ceded contracts. The ceded contracts allow First Re to collateralize the reinsurance recoverable to a certain extent with letters of credit and other collateral balances. Accordingly, First Re has received collateral of approximately $1,441,000 which came from a formerly affiliated insurance company in the form of a letter of credit from Citibank of New York. In addition, as discussed in Note B, First Re has restricted cash of $2,601,312, which is drawn upon to pay losses on behalf of a former affiliated reinsurer.
The Registrant released its former affiliated reinsurer of its reinsurance obligation on February 7, 1996, to reduce handling costs and agreed to release $1,340,000 of the funds held and retain $1,261,314 of funds.
The State of Connecticut, under the statutes and regulations that govern the operations and affairs of insurance companies that are domiciled in the state, impose a restriction on the amount of dividends that can be paid by First Re to the Registrant without prior regulatory approval. The maximum amount of dividends that may be paid by First Re without prior regulatory approval, is limited to the greater of 10% of statutory surplus (stockholders' equity determined on a statutory basis) or 100% of net income for the preceding fiscal year. There is also a further limitation to earned surplus. Dividends exceeding these limitations require regulatory approval. The maximum dividends that could be paid in 1996 by First Re is equal to 10% of the company's surplus or $4,226,588.
NOTE F - RECONCILIATION OF NET INCOME AND STOCKHOLDERS' EQUITY (CONTINUED)
In October 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 is effective for fiscal years beginning after December 15, 1995. SFAS No. 123 introduces a preferable fair value-based method of accounting for stock-based compensation. SFAS No. 123 encourages, but does not require, companies to recognize compensaton expense for grants of stock, stock options, and other equity instruments to employees based on the new fair value accounting rules. The Company intends to continue applying the existing accounting rules contained in Accounting Principles Board Opinion No. 25, " Accounting for Stock Issued to Employees," and disclose net income and earnings per share on a pro forma basis, based on the new fair value methodology.
Mr. Dore received a loan from the Registrant in 1991 in the amount of $150,000 in order to finance the purchase of 43,200 shares of common stock from the Registrant at a price of $3.48 per share. Mr. Dore purchased the 43,200 shares from the Registrant on January 2, 1991, and executed a Promissory Note in the amount of $150,000 payable to the Registrant. The Promissory Note provided that payment of the amounts due thereunder was secured by the 43,200 shares so purchased by Mr. Dore. The principal amount bore interest at a rate equal to the average yield on five year Treasury obligations, and interest was due and payable annually. The $150,000 principal amount plus accrued interest was paid in full by Mr. Dore in 1995.
The Board of Directors in 1990 approved plans for stock options and stock grants for certain key officers, directors, and employees.
At December 31, 1995, stock options for an adjusted total of 310,896 shares were outstanding with exercise prices ranging from $3.13-$10.70 per share. Of this total, 180,504 stock options were exercisable. During 1995 there were 23,600 stock options exercised for a total of $120,754. During 1995, stock options for an adjusted total of 51,120 shares were granted with market values $9.20 and $12.32.
In addition, at December 31, 1995, the Registrant had allocated for future grants a total of 3,600 shares after adjusting for the stock dividend. The Registrant granted in 1994 and issued in 1995, 7,200 shares with a market value of $9.20 and in addition the Registrant granted in 1994 and 1995 7,776 shares and issued during 1995 15,552 with a market value of $12.32 per share.
At the December 10, 1993 Board of Directors' Meeting, the Registrant declared a split of the common stock to be effected by a distribution on February 24, 1994 of one fully paid and non-assessable share of common stock for each share of stock outstanding with shareholders of record on January 20, 1994. The Registrant submitted to its shareholders at the June 1994 annual meeting a proposal to increase its authorized shares of stock from 3,000,000 to 6,000,000 which was approved.
At the June 7, 1995 meeting of the Board of Directors, a 20% stock dividend was declared payable on August 24, 1995 to stockholders of record on July 27, 1995. At the December 6, 1995 board meeting, the Registrant declared another 20% stock dividend payable February 22, 1996 to stockholders of record on January 25, 1996. Information set forth herein has been adjusted to reflect the stock split and dividends.
The Registrant, with the help of consulting actuaries and the advice from its reinsured companies, establishes incurred but not reported "IBNR" reserves in addition to the reserves reported by the reinsureds. These reserves are estimates based on company and industry data that estimate claims that may occur against the policy coverage. Reserves are estimates involving actuarial and statistical projections of the ultimate settlement and administration of claims, based on facts and circumstances then known, predictions of future events, estimates of future trends in severity and other variable factors such as new concepts of liability. Future revisions of the estimated claims liability have occurred and are likely to continue to occur. These revisions are recorded on the statement of income in the period in which they occur. The following table displays the effect of those revisions for 1995, 1994, and 1993.
Included in the table on the prior page are reserves with respect to contracts on programs no longer renewed. While this business is not a separate segment or operation, the loss behavior patterns are unique. While no premium is currently being earned on these programs, the continual adjustment of reserves on this business is charged to current operations and has had a material effect on net income. The following table displays the changes in those reserves in 1995 and 1994:
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
W. Dean Cannon, Jr. served as President of the California League of Savings Institutions from 1973 until his retirement on December 31, 1991.
Gerald J. Levy has served for more than five years as Chairman of the Board and Chief Executive Officer of Guaranty Bank, Milwaukee, Wisconsin. Mr. Levy also serves as a director of FISERV, Asset Management Fund for Financial Institutions, Inc. and Republic Mortgage Insurance Company. Mr. Levy, who is a past Chairman of the U.S. League, also has served as a director of Advance America Funds, Inc., the Federal Asset Disposition Association, and as a member of the Advisory Committee of the Federal Home Loan Mortgage Corporation.
Dale C. Bottom served as Secretary General of the International Union of Housing Finance Institutions from 1992 through 1995, and as President and Chief Executive Officer of the Institute of Financial Education from 1967 through 1992. Mr. Bottom previously was Executive Vice President of the U.S. League, and between 1985 and 1988 served as the U.S. League's Chief Financial Officer. Mr. Bottom served as Vice President and Chief Financial Officer of the Registrant from 1986 until his resignation in September, 1991.
Richard P. Ackerman is a partner in the law firm of Goodkind, Labaton, Rudoff & Sucharow, LLP, New York, New York, and serves on the Executive Committee of that firm. Mr. Ackerman received his law degree from New York University in 1973.
LONNIE L. STEFFEN Executive Vice President, Chief Financial Officer and Treasurer since 1991
Daniel S. Konar has served as Controller of the Registrant since January, 1990, Assistant Treasurer of the Registrant since September, 1990, and Assistant Vice President of the Registrant since June, 1991. In addition, Mr. Konar serves as Assistant Vice President, Assistant Treasurer and Controller of FRM, First Re and Oakley, and as Treasurer of F/I Agency. For the five years prior to 1990, Mr. Konar served as a reinsurance consultant with the CNA Insurance Companies.
Lana J. Braddock has served as Secretary of the Registrant and First Re since September, 1991, and also serves as Secretary of F/I Agency, FRM and Oakley. Ms. Braddock previously served as Assistant Secretary of the Registrant. Ms. Braddock has been an office manager and assistant to the President of the Registrant since February, 1990. Prior thereto, beginning in 1987, Ms. Braddock served as business manager for Internal Medicine Associates in Chicago, Illinois.
(1) The Executive Committee annually determines whether to award cash bonuses to officers and other key employees of the Registrant based on operating income and a performance assessment of the participant. Awards are recommended subject to approval of such awards by the Board of Directors. (2) Number of shares of Common Stock subject to options granted during the year indicated under the Registrant's Stock Option Plan described in more detail below.
January 1, 1992 3,600 Shares January 1, 1993 7,200 Shares January 1, 1994 7,200 Shares January 1, 1995 7,200 Shares January 1, 1996 3,600 Shares
A Stock Option Plan has been adopted by the Board of Directors of the Registrant. The purpose of the Stock Option Plan is to provide key employees with a proprietary interest in the Registrant and thereby develop in them a stronger incentive to devote maximum effort to the continued success and growth of the Registrant. Only salaried officers and other salaried key employees of the Registrant who are in a position to affect materially the profitability and growth of the Registrant are eligible to receive options under the Stock Option Plan.
The Stock Option Plan provides that the shares of common stock of the Registrant made subject to the options may not exceed in the aggregate 310,896.
(1) All options were granted on March 8, 1995 under the Registrant's Stock Option Plan. Beginning March 8, 1996, annually, upon the anniversary of the date of grant of the options, one-fifth of the options granted become vested and exercisable for a period of five years. (2) The option exercise price is equal to the fair market value per share of Common Stock on the date of grant.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
(1) Value of unexercised in-the-money options is equal to the difference between the fair market value per share of Common Stock at December 31, 1995 and the option exercise price per share multiplied by the number of shares subject to such options. (2) Indicates options exercisable at December 31, 1995.
Robert E. Wendt has entered into an Employment Agreement dated February 1, 1991. Mr. Wendt's Employment Agreement provides for an annual base salary of $88,500. Lonnie L. Steffen entered into an Employment Agreement dated August 23, 1991 providing for an annual base salary of $166,000. Salaries may be increased in conjunction with annual reviews of executive compensation. The Employment Agreements are terminable by either party on the last day of any month with 60 days prior written notice.
If employment is terminated under certain specific circumstances, including a change in control, the Executive may continue to receive monthly payments of his salary for up to 12 months, and in the case of Mr. Dore, for up to 36 months.
If, under certain limited circumstances, including a change in control, and subject to certain conditions, an Executive's employment is terminated, the Executive may be paid for each share of the common stock of the Registrant that is subject to any unexercised option to purchase granted to the Executive by the Registrant. In such case, the Executive would receive an amount equal to the difference between the exercise price and fair market value for the share of stock.
Prior to the effectiveness of the Amended Plan on July 1, 1995, each director received an annual cash fee of $3,000 for service on the Registrant's board and $3,000 for service on the board of FRM, as well as a $500 cash fee for each director's meeting attended. In addition, each director received 200 shares of Common Stock for each meeting of the Board of Directors of the Company and its subsidiaries attended in person.
As of January 31, 1996, the following options have been granted to the directors:
Except as reported herein, no other payments are made to the directors of the Registrant for their services as directors of the Registrant.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
2. Owned directly by a limited partnership, the general partner of which is a corporation owned by Mr. Long.
6. As reported in a Schedule 13D dated December 16, 1994 filed with the Securities and Exchange Commission.
8. Mr. Dore also holds options (currently exercisable or exercisable within 60 days of January 31, 1996) to acquire 59,040 shares of Common Stock.
1. The directors also hold certain options to purchase shares of the Registrant's Common Stock as described above under "Directors' Compensation."
5. Owned directly by a trust of which Mr. Morris is trustee.
8. Owned directly by the children of Mr. Steffen. Mr. Steffen also holds options (currently exercisable or exercisable within 60 days of January 31, 1996) to purchase 23,760 shares of Common Stock.
On April 19, 1995, Mr. Long submitted a written request to the Registrant to inspect and make copies of a list of the names and addresses of the Registrant's stockholders. Mr. Long indicated that he intended to solicit proxies in support of a slate of directors proposed by him in opposition to the slate of directors proposed by management.
Effective in January 1994, FRH, a subsidiary of the Registrant, has entered into an Investment Management Agreement with Otter Creek Management, Inc. ("OCM"). Director R. Keith Long is President and sole stockholder of OCM. Pursuant to the terms of the Investment Management Agreement, FRH has designated OCM as investment manager of funds in the amount of $7,000,000. OCM is required to obtain the specific approval of FRH prior to making any investments. OCM receives as compensation an annual fee equal to one percent of the market value of assets under management.
The Board of Directors of First Re in September, 1993 approved an arrangement pursuant to which First Re will share in the revenues from the sale of certain software products by Annual Statement Automated Products, Inc. ("ASAP"). Mr. Steffen, Chief Financial Officer of the Registrant and First Re, is founder and 45 percent owner of ASAP. In consideration of First Re's involvement in the enhancement of a general ledger software package for the preparation of annual statements, ASAP and First Re agreed to split any profits resulting from the sale of the package. Amounts to be received by First Re on an annual basis pursuant to the arrangement cannot be predicted at this time, but are not expected to be material in amount.