<PAGE> 1
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant [ X ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[ X ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
SUPERIOR NATIONAL INSURANCE GROUP, INC.
____________________________________________________________________
(Name of Registrant as Specified In Its Charter)
____________________________________________________________________
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ X ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a- 6(i)(1) and
O-11.
1) Title of each class of securities to which transaction applies:
_____________________________________________________________________
2) Aggregate number of securities to which transaction applies:
_____________________________________________________________________
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule O-11:*
_____________________________________________________________________
4) Proposed maximum aggregate value of transaction:
_____________________________________________________________________
5) Total fee paid:
_____________________________________________________________________
[ ] Fee paid previously with preliminary materials.
* Set forth the amount on which the filing fee is calculated and state
how it was determined.
[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule O-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or
Schedule and the date of its filing.
1) Amount Previously Paid:
_____________________________________________________________________
2) Form, Schedule or Registration Statement No.:
_____________________________________________________________________
3) Filing Party:
_____________________________________________________________________
4) Date Filed:
_____________________________________________________________________
<PAGE> 2
SUPERIOR NATIONAL INSURANCE GROUP, INC.
26601 AGOURA ROAD
CALABASAS, CALIFORNIA 91302
--------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 11, 1996
TO THE SHAREHOLDERS OF SUPERIOR NATIONAL INSURANCE GROUP, INC:
The 1996 Special Meeting of Shareholders (the "Special Meeting") of
Superior National Insurance Group, Inc., a California corporation (the
"Company"), will be held at 10:00 a.m., Pacific Time, on Wednesday, December
11, 1996, at the Company's principal business offices at 26601 Agoura Road,
Calabasas, California 91302, for the following purposes:
1. To consider and vote to approve the issuance of 2,390,438
shares of the Company's Common Stock pursuant to the Stock
Purchase Agreement dated as of September 17, 1996 among the
Company, Insurance Partners, L.P., Insurance Partners Offshore
(Bermuda), L.P., TJS Partners, L.P., and certain members of
the Company's management, the net proceeds of which shall be
used by the Company, in addition to the net proceeds to be
received by it under a term loan from one or more banks
including The Chase Manhattan Bank, as agent, and cash on
hand, to acquire Pac Rim Holding Corporation, a Delaware
corporation;
2. To consider and vote to approve a charter amendment that would
establish restrictions on transfers of the Company's Common
Stock in order to protect the availability of a substantial
portion of its Net Operating Loss Carryforwards under the
"ownership change" rules set forth in Section 382 of the
Internal Revenue Code of 1986, as amended;
3. To consider and vote to approve the reincorporation of the
Company in the State of Delaware;
4. To consider and vote to approve an amendment to the Bylaws of
the Company that would increase the size of the Board of
Directors of the Company from nine to eleven members;
5. To elect two new directors to the Company's Board of Directors
to fill the two newly created vacancies in the event the
Company's Bylaws are amended in accordance with Proposal No. 4
of the Proxy Statement; and
6. To transact such other business as may properly come before
the Special Meeting or any adjournment or postponement
thereof.
The Board of Directors intends to present Steven B. Gruber and Roger
W. Gilbert as nominees for election as directors at the Special Meeting.
The foregoing items of business are more fully described in the Proxy
Statement. Only the shareholders of record at the close of business on
November 8, 1996 are entitled to receive notice of and to vote at the Special
Meeting or any adjournment or postponement thereof.
By Order of the Board of Directors
ROBERT E. NAGLE
Secretary
November 11, 1996
Calabasas, California
YOU ARE URGED TO VOTE UPON THE MATTERS PRESENTED AND TO SIGN, DATE AND
PROMPTLY RETURN THE ENCLOSED PROXY IN THE ENVELOPE PROVIDED. IT IS IMPORTANT
FOR YOU TO BE REPRESENTED AT THE SPECIAL MEETING. PROXIES ARE REVOCABLE AT ANY
TIME AND THE EXECUTION OF YOUR PROXY WILL NOT AFFECT YOUR RIGHT TO VOTE IN
PERSON IF YOU ARE PRESENT AT THE MEETING.
--------------------
REQUESTS FOR ADDITIONAL COPIES OF PROXY MATERIALS SHOULD BE ADDRESSED
TO ROBERT E. NAGLE, SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY, AT
THE OFFICES OF THE COMPANY, 26601 AGOURA ROAD, CALABASAS, CALIFORNIA 91302.
<PAGE> 3
SUPERIOR NATIONAL INSURANCE GROUP, INC.
26601 AGOURA ROAD
CALABASAS, CALIFORNIA 91302
--------------------
PROXY STATEMENT
1996 SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 11, 1996
--------------------
GENERAL INFORMATION
This Proxy Statement is furnished in connection with the solicitation
of proxies by the Board of Directors (the "Board of Directors") of Superior
National Insurance Group, Inc., a California corporation (the "Company" or
"SNIG"), for use at the 1996 Special Meeting of Shareholders (the "Special
Meeting") to be held on Wednesday, December 11, 1996 at 10:00 a.m., Pacific
Time, at the Company's principal business offices at 26601 Agoura Road,
Calabasas, California 91302, and any adjournment or postponement thereof. This
Proxy Statement, the form of proxy utilized at the Special Meeting, and certain
related documents were mailed or delivered to the shareholders of the Company
on or about November 11, 1996.
MATTERS TO BE CONSIDERED
The Special Meeting has been called (1) to consider and vote to
approve the issuance (the "Stock Issuance") of 2,390,438 shares of the
Company's Common Stock (the "Common Stock") pursuant to the Stock Purchase
Agreement dated as of September 17, 1996 (the "Stock Purchase Agreement") among
the Company, Insurance Partners, L.P., Insurance Partners Offshore (Bermuda),
L.P., TJS Partners, L.P., and certain members of the Company's management, the
net proceeds of which shall be used by the Company, in addition to the net
proceeds to be received by it under a term loan (the "Term Loan") from one or
more banks including The Chase Manhattan Bank, as agent ("Chase"), and cash on
hand, to acquire Pac Rim Holding Corporation, a Delaware corporation ("Pac
Rim"); (2) to consider and vote to approve a charter amendment that would
establish restrictions on transfers of the Common Stock that are designed to
protect the availability of a substantial portion of the Company's Net
Operating Loss Carryforwards ("NOLs") under the "ownership change" rules set
forth in Section 382 of the Internal Revenue Code of 1986, as amended (the
"Code"), which would be adopted as part of the Company's Certificate of
Incorporation in Delaware, were it to reincorporate, or alternatively as an
amendment to the Company's existing Articles of Incorporation; (3) to consider
and vote to approve the reincorporation of the Company in the State of
Delaware; (4) to consider and vote to approve an amendment to the Bylaws of the
Company that would increase the size of the Board of Directors from nine to
eleven members; (5) to elect two new directors to the Board of Directors to
fill the two newly created vacancies in the event the Company's Bylaws are
amended in accordance with Proposal No. 4 of this Proxy Statement; and (6) to
transact such other business as may properly come before the Special Meeting or
any adjournment or postponement thereof.
RECORD DATE AND VOTING
The directors have fixed the close of business on November 8, 1996 as
the record date (the "Record Date") for the determination of shareholders
entitled to vote at the Special Meeting and any adjournment or postponement
thereof. Only holders of record of the Company's voting securities on the
Record Date are entitled to receive notice of and to vote at the Special
Meeting and any adjournment or postponement thereof. As of the Record Date,
there were outstanding 3,437,523 shares of Common Stock.
QUORUM AND VOTING REQUIREMENTS
The holders of record of a majority of the combined voting power of
the outstanding shares of Common Stock and the Company's 14.5% Senior
Subordinated Voting Notes due April 1, 2002 (the "Voting Notes") will
constitute
<PAGE> 4
a quorum for the transaction of business at the Special Meeting. As to all
matters, except the election of directors, each shareholder is entitled to one
vote for each share of Common Stock held. Each holder of the Voting Notes is
entitled to vote only in director elections, director removals, changes to the
authorized number of directors, and votes on amendments to that right to vote.
As of the Record Date, the number of votes held by the holders of the Voting
Notes was equivalent to 1,569,363 shares of Common Stock.
Upon the request of any person entitled to vote, each holder of voting
securities voting in the election of directors may cumulate such holder's votes
and give one candidate a number of votes equal to the number of directors to be
elected multiplied by the number of votes held by such holder, or distribute
such holder's votes on the same principle among as many candidates as the
holder may select, provided that, for purposes of the Special Meeting, votes
cannot be cast for more than two candidates. However, no shareholder shall be
entitled to cumulate votes for any candidate unless, pursuant to the Bylaws of
the Company, the candidate's name has been placed in nomination prior to the
voting.
All proxies that are properly completed, signed and returned prior to
the Special Meeting will be voted. If a shareholder specifies how the proxy is
to be voted with respect to any of the proposals for which a choice is
provided, the proxy will be voted in accordance with such specifications. If a
shareholder fails to so specify with respect to any such proposals, the proxy
will be voted in accordance with the recommendations of the Board of Directors.
Any proxy given by a shareholder may be revoked at any time before it is
exercised by filing with the Secretary of the Company an instrument revoking
it, by a duly executed proxy bearing a later date, or by the shareholder's
attending the Special Meeting and expressing a desire to vote his or her shares
in person.
Proxies for the Special Meeting are being solicited by mail directly
and through brokerage and banking institutions. The Company will pay all
expenses in connection with the solicitation of proxies. In addition to the
use of the mails, proxies may be solicited by directors, officers and regular
employees of the Company personally or by telephone. The Company does not
expect to pay any fees or compensation for the solicitation of proxies but may
reimburse brokers and other persons holding securities in their names, or in
the names of nominees, for their expenses in sending proxy materials to
shareholders and obtaining their proxies.
All shareholders are urged to complete, sign and promptly return the
enclosed proxy form.
VOTE REQUIRED
Approval of "Proposal No. 1--The Stock Issuance" requires the
affirmative vote of the holders of a majority of the shares of Common Stock
represented and voting at a meeting at which a quorum is present (which shares
voting affirmatively also constitute at least a majority of the required
quorum). The holders of the Voting Notes are not entitled to vote on this
proposal. Abstentions will have no effect. A condition to the Stock Issuance
is that the majority of the outstanding shares held by persons who are neither
parties to the Stock Purchase Agreement nor Associates of such parties (as
defined in "Certain Considerations--Concentration of Ownership") be voted in
favor of each of Proposals No. 1, No. 2, No. 4, and No. 5. See "Proposal No.
1--Terms of the Stock Issuance--Closing Conditions--Conditions to Purchasers'
Obligations."
Approval of "Proposal No. 2--Transfer Restrictions Charter Amendment"
requires the affirmative vote of the holders of a majority of the outstanding
shares of Common Stock entitled to vote thereon. The holders of the Voting
Notes are not entitled to vote on this proposal. Abstentions will have the
effect of a negative vote. A condition to the Stock Issuance is that the
majority of the outstanding shares held by persons who are neither parties to
the Stock Purchase Agreement nor Associates of such parties vote in favor of
each of Proposals No. 1, No. 2, No. 4, and No. 5. See "Proposal No. 1--Terms
of the Stock Issuance--Closing Conditions--Conditions to Purchasers'
Obligations."
Approval of "Proposal No. 3--Reincorporation of the Company in the
State of Delaware" requires the affirmative vote of the holders of a majority
of the outstanding shares of Common Stock entitled to vote thereon. The
holders of the Voting Notes are not entitled to vote on this proposal.
Abstentions will have the effect of a negative vote. Reincorporation is not a
condition precedent to the Stock Issuance, but is recommended by the Board of
Directors.
ii
<PAGE> 5
Approval of "Proposal No. 4--Amendment of Bylaws to Increase
Authorized Number of Directors" requires the affirmative vote of a majority of
the outstanding shares of Common Stock entitled to vote thereon and the
affirmative vote of a majority of the Common Stock equivalent votes held by the
Voting Notes as provided in the Amended and Restated Articles of Incorporation
and Bylaws of the Company, each voting as a separate class. Abstentions will
have the effect of a negative vote. A condition to the Stock Issuance is that
the majority of the outstanding shares held by persons who are neither parties
to the Stock Purchase Agreement nor Associates of such parties vote in favor of
each of Proposals No. 1, No. 2, No. 4, and No. 5. See "Proposal No. 1--Terms
of the Stock Issuance--Closing Conditions--Conditions to Purchasers'
Obligations."
With respect to "Proposal No. 5--Election of Two Additional
Directors," the two nominees who receive the greatest number of votes cast for
the election of those directorships shall become directors at such time as the
Stock Issuance occurs. Holders of shares of Common Stock are entitled to cast
ballots for directors, as are the holders of the Voting Notes (casting votes as
if they were holders of shares of Common Stock as provided in the Amended and
Restated Articles of Incorporation and Bylaws of the Company). Shareholders
may cumulate their votes for one or more candidates in the manner and upon the
satisfaction of conditions described in this Proxy Statement. Abstentions
shall have no effect on voting for election of directors. A condition to the
Stock Issuance is that the majority of the outstanding shares held by persons
who are neither parties to the Stock Purchase Agreement nor Associates of such
parties vote in favor of each of Proposals No.1, No. 2, No. 4, and No. 5. See
"Proposal No. 1--Terms of the Stock Issuance--Closing Conditions--Conditions to
Purchasers' Obligations."
EFFECT OF BROKER NON-VOTES
"Broker Non-Votes" occur when a broker holding shares of Common Stock
in street name withholds its vote on certain "non-routine" matters because the
broker has not received instructions from the beneficial owner of those shares
and does not have discretionary authority to vote on such non-routine matters
without specific instructions. Brokers holding shares in street name must
receive specific instructions from the beneficial owners in order to have the
authority to vote, in person or by proxy, on certain non-routine matters. When
a beneficial owner does not give specific instructions to the broker, the
broker, as the holder of record, is entitled to vote only on "routine" matters
and must withhold its votes as to any "non-routine" matters. Where a proxy
solicitation includes a non-routine proposal and the broker does not receive
specific instructions from the beneficial owner, the resulting proxy is
considered a "limited proxy." Shares represented by limited proxies are
considered present for quorum purposes, but are not considered present for
purposes of determining the total number of shares with voting power present
with regard to a non-routine proposal. The resulting Broker Non-Vote of such a
limited proxy will be treated as an abstention on such non-routine proposal.
Each of "Proposal No. 1--The Stock Issuance," "Proposal No.
2--Transfer Restrictions Charter Amendment," "Proposal No. 3--Reincorporation
of the Company in the State of Delaware," and "Proposal No. 4--Amendment of
Bylaws to Increase Authorized Number of Directors" is a non-routine proposal.
Approval of Proposal No. 1 requires the affirmative vote of a majority of the
shares of Common Stock represented and voting at the meeting. A limited proxy
as to Proposal No. 1 will have no effect, unless abstentions cause the
conditions to the Stock Issuance as discussed above under "--Vote Required" not
to be satisfied. Approval of each of Proposal No. 2 and Proposal No. 3
requires the affirmative vote of a majority of the outstanding shares of Common
Stock entitled to vote thereon, as discussed above under "--Vote Required."
Approval of Proposal No. 4 requires the affirmative vote of a majority of the
outstanding shares of Common Stock entitled to vote thereon, and an affirmative
vote of a majority of the Voting Notes, each voting as a separate class as
discussed above under "--Vote Required." The effect of a limited proxy will be
that Broker Non-Votes will be treated as votes against each of Proposals No. 2,
No. 3, and No. 4. "Proposal No. 5--Election of Two Additional Directors" is a
"routine" matter upon which brokers holding shares in street name can cast
votes with or without specific instructions from the beneficial holders of
those shares. Shares held by brokers thus will be counted for purposes of
determining whether Proposal No. 5 has been approved.
iii
<PAGE> 6
SUBMISSION OF SHAREHOLDER PROPOSALS
Any shareholder who wishes to present a proposal for action at the
1997 annual meeting and who wishes to have it set forth in the corresponding
proxy statement and identified in the corresponding form of proxy prepared by
management must notify the Company no later than December 15, 1996 in such form
as required under the rules and regulations promulgated by the Securities and
Exchange Commission.
OTHER INFORMATION
The Common Stock is listed for trading under the symbol "SNTL" on The
Nasdaq National Market ("Nasdaq"), which is operated by The Nasdaq Stock
Market, Inc. On November 8, 1996, the closing price for a share of Common
Stock on Nasdaq was $12.00.
A member of KPMG Peat Marwick LLP, the Company's independent auditors,
is expected to be present at the Special Meeting, will have an opportunity to
make a statement, and will be available to respond to appropriate questions.
The principal executive offices of the Company are located at 26601
Agoura Road, Calabasas, California 91302, and its telephone number is (818)
880-1600.
The information set forth in this Proxy Statement concerning Pac Rim
has been furnished by Pac Rim.
--------------------
THIS PROXY STATEMENT IS DATED NOVEMBER 11, 1996.
iv
<PAGE> 7
SUPERIOR NATIONAL INSURANCE GROUP, INC.
PROXY STATEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
DOCUMENTS INCORPORATED BY REFERENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
GLOSSARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Defined Terms and Selected Insurance Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
PROPOSALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
SUMMARY FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
SUMMARY UNAUDITED PRO FORMA FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
CERTAIN CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Inherent Uncertainties Relating to Certain Effects of the Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . 21
Registration of Additional Shares; Shares Eligible for Future Sale . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Concentration of Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Dilution of Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Increased Leverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Transfer Restrictions--Antitakeover Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Transfer Restrictions--Continued Risk of Ownership Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Uncertainty as to Market Price of the Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
PROPOSAL NO. 1 -- THE STOCK ISSUANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
OVERVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Background of Stock Issuance and Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Rationale for Stock Issuance and Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Opinion of Financial Advisor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Management After the Stock Issuance and the Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Prior Relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AFTER THE STOCK ISSUANCE . . . . . . . . . . . . . . . . . 32
Security Ownership of Certain Beneficial Owners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Security Ownership of Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
TERMS OF THE STOCK ISSUANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Stock Purchase Agreement: Parties and Amounts Committed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Representations and Warranties of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Representations and Warranties of the Purchasers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Certain Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Covenants of All Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Covenants of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Covenants of IP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Closing Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Conditions to Each Party's Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Conditions to the Company's Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Conditions to Purchasers' Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Amendment/Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Expenses and Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Restrictions on Transfer of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Registration Rights Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
USE OF PROCEEDS: THE ACQUISITION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Pac Rim Holding Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Terms of the Acquisition and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Structure of the Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Effectiveness of the Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Conditions to the Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Limited Survival of Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Covenants of the Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Certain Payments Under Existing Pac Rim Compensation Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . 50
Termination, Amendment and Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Termination Fee and Liquidated Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Effect of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Related Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Term Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Certain Other Items Related to the Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Accounting Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Market Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Additional Information Regarding Pac Rim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
UNAUDITED PRO FORMA FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
CERTAIN OTHER ITEMS RELATED TO THE STOCK ISSUANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Governmental and Regulatory Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Federal Income Tax Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Vote Required to Approve the Stock Issuance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
PROPOSAL NO. 2--TRANSFER RESTRICTIONS CHARTER AMENDMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Purpose of the Transfer Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
The Company's NOLs and Section 382 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Effect of the Stock Issuance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Standstill on Exercise of Outstanding Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Description of the Transfer Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Enforceability of the Transfer Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
</TABLE>
v
<PAGE> 8
<TABLE>
<S> <C>
Continued Risk of Ownership Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Antitakeover Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Possible Effect on Liquidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Vote Required to Approve the Transfer Restrictions Charter Amendment . . . . . . . . . . . . . . . . . . . . . . . . . 65
PROPOSAL NO. 3--REINCORPORATION OF THE COMPANY IN THE STATE OF DELAWARE . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Principal Reasons for the Reincorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Antitakeover Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Possible Disadvantages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
No Change in the Name, Board Members, Business, Management, Employee Plans, or Location of Principal
Facilities of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
The Charter and Bylaws of SNIG-California and SNIG-Delaware . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Comparison of the Charters of SNIG-California and SNIG-Delaware . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Significant Differences Between the Corporation Laws of California and Delaware . . . . . . . . . . . . . . . . . . . . 71
Application of the General Corporation Law of California to Delaware Corporations . . . . . . . . . . . . . . . . . . . 79
Certain Federal Income Tax Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Vote Required to Approve the Reincorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
PROPOSAL NO. 4--AMENDMENT OF BYLAWS TO INCREASE AUTHORIZED NUMBER OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . 81
Vote Required to Approve Bylaw Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
PROPOSAL NO. 5--ELECTION OF TWO ADDITIONAL DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Committees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Meetings and Remuneration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
EXECUTIVE OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Employment Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Change-in-Control Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
Equity Incentive Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
Option Grants in Last Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Option Exercises and Year End Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
Compensation Committee Interlocks and Insider Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
Report of the Compensation Committee of the Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
Company Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
Transactions with IIA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
Transactions with Centre and its Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
Stock Issuance to IP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934 . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
COMPANY INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
Unaudited Condensed Consolidated Financial Statements for the Six Months Ended June 30, 1996 . . . . . . . . . . . . . . 97
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . 102
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
Financial Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
Selected Financial Data as Reported for the Six Months Ended June 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . 105
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . 109
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . 111
Discontinued Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
Accounting Standard Issued and Adopted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
Company Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
Workers' Compensation Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118
Data Processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
Loss Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121
Claim Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121
Policyholder Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
Claims and Claim Adjustment Expense Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
Reconciliation of Liability for Claims and Claim Adjustment Expense . . . . . . . . . . . . . . . . . . . . . . . . . . 124
Analysis of Direct Claims and Claim Adjustment Expense Development . . . . . . . . . . . . . . . . . . . . . . . . . . 125
Discontinued P&C Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
Reconciliation of Liability for Discontinued Operations Claims and Claim Adjustment Expense . . . . . . . . . . . . . . 127
Analysis of Discontinued Operations Direct Claims and Claim Adjustment Expense Development . . . . . . . . . . . . . . 128
Reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131
Information Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133
Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138
Security Ownership of Certain Beneficial Owners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138
Security Ownership of Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140
MARKET PRICE OF AND DIVIDENDS ON THE COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS . . . . . . . . . . . . . . . 142
DOCUMENTS INCORPORATED BY REFERENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143
OTHER BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
</TABLE>
vi
<PAGE> 9
--------------------
ANNEXES
Annex A - Stock Purchase Agreement dated as of September 17, 1996, among the
Company, Insurance Partners, L.P., Insurance Partners Offshore
(Bermuda), L.P., TJS Partners, L.P., and certain members of the
Company's management, as amended.
Annex B - Opinion of Donaldson, Lufkin & Jenrette Securities Corporation.
Annex C - Agreement and Plan of Merger dated as of September 17, 1996 among
the Company, SNTL Acquisition Corp., and Pac Rim.
Exhibit C to Annex C - Series A Convertible Debentures and Series 1,
2 and 3 Detachable Warrant Purchase Agreement
dated as of September 17, 1996 among the
Company, Prac Limited Partnership and
Allstate Insurance Company.
Exhibit E to Annex C - Series 3 Detachable Warrant Surrender
Agreement dated as of September 17, 1996,
among Pac Rim and the individuals named
therein.
Exhibit H to Annex C - Voting Agreement dated as of September 17,
1996, among the Company and certain
stockholders and debenture holders of Pac
Rim.
Exhibit K to Annex C - Employment Agreement dated as of April 15,
1994, among Pac Rim, The Pacific Rim
Assurance Company and Stanley Braun, as
amended March 27, 1995 and March 30, 1996.
Annex D - Text of Transfer Restrictions Charter Amendment.
Annex E - Agreement and Plan of Merger between the Company and Superior
National Insurance Group, Inc., a Delaware corporation ("SNIG-
Delaware").
Annex F - Certificate of Incorporation of SNIG-Delaware.
Annex G - Bylaws of SNIG-Delaware.
Annex H - Pac Rim Annual Report on Form 10-K for the year ended December 31,
1995.
Annex I - Pac Rim Quarterly Report on Form 10-Q for the quarter ended June 30,
1996.
vii
<PAGE> 10
AVAILABLE INFORMATION
The Company and Pac Rim are subject to the informational requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports, proxy statements and other information with
the Securities and Exchange Commission (the "SEC"). Copies of such reports,
proxy statements, and other information filed by each of the Company and Pac
Rim can be inspected and copied at the SEC's Public Reference Room, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the public
reference facilities maintained by the SEC at its regional offices located at
500 West Market Street, Suite 1450, Chicago, Illinois 60661, and 7 World Trade
Center, 13th Floor, New York, New York 10048. Copies of such materials can be
obtained from the SEC at prescribed rates from the Public Reference Section of
the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. Such reports, proxy
statements and other information concerning each of the Company and Pac Rim are
also available for inspection at The Nasdaq Stock Market, Inc., 1735 K Street,
N.W., Washington, D.C. 20006.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents filed by Pac Rim are incorporated herein by
reference:
(1) The Annual Report of Pac Rim on Form 10-K for the year ended
December 31, 1995.
(2) The Quarterly Report of Pac Rim on Form 10-Q for the quarter
ended June 30, 1996.
Such documents are attached to this Proxy Statement as Annex H and Annex I,
respectively.
1
<PAGE> 11
GLOSSARY
DEFINED TERMS AND SELECTED INSURANCE TERMS
Acquisition . . . . . . . . . . . . The acquisition of Pac Rim by the Company
pursuant to the Pac Rim Acquisition
Agreement, attached hereto as Annex C.
Admitted Assets . . . . . . . . . . Assets recognized and accepted by state
insurance regulatory authorities for their
purposes in determining the financial
condition of an insurance company.
Associate . . . . . . . . . . . . . See definition in "Certain Considerations
--Concentration of Ownership."
Bishop Estate . . . . . . . . . . . Estate of Bernice P. Bishop, a limited
partner of III.
Board of Directors . . . . . . . . Board of Directors of the Company.
Centre . . . . . . . . . . . . . . See definition in "Proposal No.
1--Security Ownership of Certain
Beneficial Owners and Management After
the Stock Issuance--Security Ownership of
Certain Beneficial Owners."
CentreLine . . . . . . . . . . . . See definition in "Proposal No.
1--Security Ownership of Certain
Beneficial Owners and Management After
the Stock Issuance--Security Ownership of
Certain Beneficial Owners."
CentreLine Warrant . . . . . . . . See definition in "Proposal No.
1--Security Ownership of Certain
Beneficial Owners and Management After the
Stock Issuance--Security Ownership of
Certain Beneficial Owners," footnote 6.
Certificate of Incorporation . . . Certificate of Incorporation of SNIG-
Delaware, attached hereto as Annex F.
Chase . . . . . . . . . . . . . . . The Chase Manhattan Bank.
Claims and Claim Adjustment Expenses The estimated ultimate cost of claims,
whether reported or unreported, charged
against earnings when claims occur,
including the estimated expenses of
settling claims (claim adjustment
expenses).
Closing Date . . . . . . . . . . . Date on which the Stock Issuance, the Term
Loan and the Acquisition all will be
consummated.
Code . . . . . . . . . . . . . . . Internal Revenue Code of 1986, as amended.
Combined Ratio . . . . . . . . . . The sum of the expense ratio, the loss
ratio, and the policyholder dividend
ratio. A combined ratio under 100%
generally indicates an underwriting
profit, and a combined ratio over 100%
generally indicates an underwriting loss.
Common Stock . . . . . . . . . . . Common Stock of SNIG.
Company . . . . . . . . . . . . . . Superior National Insurance Group, Inc.,
a California corporation, including, if
the context requires, its subsidiaries,
on a consolidated basis.
Convertible Debentures . . . . . . The Pac Rim Series A Convertible
Debentures.
Debenture Purchase Agreement . . . The Series A Convertible Debentures and
Series 1, 2 and 3 Detachable Warrant
Purchase Agreement dated as of September
17, 1996 among the Company, Prac Limited
Partnership, and Allstate Insurance
Company, attached hereto as Exhibit C to
Annex C.
Disinterested Approval . . . . . . See definition in "Proposal No. 1--Terms
of the Stock Issuance--Certain
Covenants--Covenants of IP."
DLJ . . . . . . . . . . . . . . . . Donaldson, Lufkin & Jenrette Securities
Corporation.
2
<PAGE> 12
DLJ Opinion . . . . . . . . . . . . Opinion as to financial fairness provided
by DLJ, described in "Proposal No.
1--Overview--Opinion of Financial
Advisor," and attached as Annex B.
DOI . . . . . . . . . . . . . . . . California Department of Insurance.
Exchange Act . . . . . . . . . . . Securities Exchange Act of 1934, as
amended.
Expense Ratio . . . . . . . . . . . The ratio of underwriting expenses to net
premiums earned.
Form A . . . . . . . . . . . . . . See definition in
"Summary--Proposals--Proposal No.
1--Governmental and Regulatory Approvals."
HSR Act . . . . . . . . . . . . . . Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended.
IIA . . . . . . . . . . . . . . . . International Insurance Advisors, Inc., a
New York corporation, investment advisors
to III.
III . . . . . . . . . . . . . . . . International Insurance Investors, L.P.,
a Bermuda limited partnership; owner of
the Voting Notes.
IP . . . . . . . . . . . . . . . . IP Bermuda and IP Delaware, collectively.
IPA . . . . . . . . . . . . . . . . See definition in "Proposal No. 1--Terms
of the Stock Issuance--Expenses and Fees."
IP Associates . . . . . . . . . . . See definition in "Proposal No. 1--Terms
of the Stock Issuance--Certain
Covenants--Covenants of IP."
IP Bermuda . . . . . . . . . . . . Insurance Partners Offshore (Bermuda),
L.P., a Bermuda limited partnership; one
of the Purchasers.
IP Delaware . . . . . . . . . . . . Insurance Partners, L.P., a Delaware
limited partnership; one of the
Purchasers.
IRS . . . . . . . . . . . . . . . . Internal Revenue Service.
Loss Ratio . . . . . . . . . . . . The ratio of claims and claim adjustment
expenses to net premiums earned.
Merger Sub . . . . . . . . . . . . SNTL Acquisition Corp., a Delaware
corporation and wholly-owned subsidiary
of the Company. Also referred to as
"SNTL."
NAIC . . . . . . . . . . . . . . . National Association of Insurance
Commissioners.
Nasdaq . . . . . . . . . . . . . . . The Nasdaq National Market.
Net premiums Earned . . . . . . . . The portion of net premiums written
applicable to the insurance coverage
provided in any particular accounting
period.
Net Premiums Written . . . . . . . Premiums retained by an insurance company
after deducting premiums on business
reinsured with others.
Newly Issued Stock . . . . . . . . The 2,390,438 shares of Common Stock to be
issued pursuant to the Stock Purchase
Agreement.
NOLs . . . . . . . . . . . . . . . Net Operating Loss Carryfowards under the
Code.
Ownership change . . . . . . . . . See discussion in "Proposal No. 2--The
Company's NOLs and Section 382."
P&C . . . . . . . . . . . . . . . . Property and casualty.
Pac Rim . . . . . . . . . . . . . . Pac Rim Holding Corporation.
Pac Rim Common Stock . . . . . . . Common stock of Pac Rim.
Pac Rim Acquisition Agreement . . . Agreement and Plan of Merger among the
Company, Pac Rim, and SNTL dated as of
September 17, 1996, attached as Annex C.
Pac Rim Warrants . . . . . . . . . Series 1, 2 and 3 Detachable Warrants to
purchase Pac Rim Common Stock issued by
Pac Rim.
Participating Policies . . . . . . Policies that provide for the
discretionary payment of dividends to
policyholders (as a refund of premiums).
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<PAGE> 13
Policy Acquisition Costs . . . . . Agents' or brokers' commissions, premium
taxes, and marketing, underwriting, and
other expenses associated with the
production of business.
Policyholder Dividend Ratio . . . . The ratio of policyholder dividends
incurred to net premiums earned.
Policyholder dividends are amounts
refunded by an insurance company to
policyholders.
Policyholders' Surplus . . . . . . The amount remaining after all liabilities
are subtracted from all admitted assets,
applying statutory accounting principles.
This sum is regarded as financial
protection to policyholders in the event
an insurance company suffers unexpected
or catastrophic losses.
Purchasers . . . . . . . . . . . . Parties purchasing the Newly Issued Stock
pursuant to the Stock Purchase Agreement,
comprised of IP Bermuda, IP Delaware,
TJS, and certain members of the Company's
management.
Record Date . . . . . . . . . . . . The close of business on November 8, 1996.
See "General Information--Record Date and
Voting."
Registration Rights Agreement . . . See definition in "Proposal No. 1--Terms
of the Stock Issuance--Registration
Rights Agreement."
Reincorporation . . . . . . . . . . The reincorporation of the Company in the
state of Delaware.
Reinsurance . . . . . . . . . . . . An agreement whereby an insurer transfers
("cedes") a portion of the insurance risk
to a reinsurer in exchange for the
payment of a premium. Reinsurance can be
effected by "treaties," which
automatically cover all risks of a
defined category, amount, and type, or by
"facultative reinsurance," which is
negotiated between an original insurer
and the reinsurer on an individual,
contract-by-contract basis.
SEC . . . . . . . . . . . . . . . . Securities and Exchange Commission.
Section 382 . . . . . . . . . . . . See definition in "Proposal No.1--Terms of
the Stock Issuance--Closing
Conditions--Conditions to Purchasers'
Obligations" and discussion in "Proposal
No. 2--The Company's NOLs and Section
382."
Securities Act . . . . . . . . . . Securities Act of 1933, as amended.
SNIC . . . . . . . . . . . . . . . Superior National Insurance Company, the
wholly-owned insurance subsidiary of SNIG.
SNIG . . . . . . . . . . . . . . . Superior National Insurance Group, Inc.
SNIG-Delaware . . . . . . . . . . . Superior National Insurance Group, Inc.,
a Delaware corporation to be formed for
the purpose of reincorporating the
Company. See "Proposal No.
3--Introduction."
SNIG-California . . . . . . . . . . The Company as currently constituted.
SNIG Merger . . . . . . . . . . . . Merger of SNIG-California and
SNIG-Delaware to accomplish the
Reincorporation.
SNIG Merger Agreement . . . . . . . Agreement effecting the SNIG Merger and,
hence, the Reincorporation, attached as
Annex E.
SNTL . . . . . . . . . . . . . . . SNTL Acquisition Corp, a Delaware
corporation and wholly-owned subsidiary
of the Company. Also referred to as
"Merger Sub."
Special Meeting . . . . . . . . . . The meeting of the Company's shareholders
to be held on Wednesday, December 11,
1996 at 10:00 a.m., Pacific Time, at the
Company's principle executive offices at
26601 Agoura Road, Calabasas, California
91302, and any adjournment or
postponement thereof.
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<PAGE> 14
Statutory Accounting Principles
("SAP") . . . . . . . . . . . . An accounting method prescribed or
permitted by state insurance regulators.
The more significant differences are:
(a) premium income is taken into
operations over the periods covered by the
policies, whereas the related acquisition
and commission costs are expensed when
incurred; (b) deferred income taxes are
not recognized; (c) certain assets such as
agents' balances over ninety days due and
prepaid expenses are nonadmitted assets
for statutory reporting purposes; (d)
policyholder dividends are accrued when
declared; (e) the cash flow statement is
not consistent with classifications and
the presentation under GAAP; (f) bonds
are recorded at amortized cost, regardless
of trading activities; (g) loss and loss
adjustment expense reserves and unearned
premium reserves are stated net of
reinsurance; and (h) minimum statutory
reserves for losses in excess of Company's
estimates are required.
Stock Issuance . . . . . . . . . . The issuance and sale of 2,390,438 shares
of Common Stock for $7.53 per share,
aggregating approximately $18 million,
pursuant to the Stock Purchase Agreement.
Stock Purchase Agreement . . . . . The Stock Purchase Agreement dated as of
September 17, 1996 among the Company,
Insurance Partners, L.P., a Delaware
limited partnership, Insurance Partners
Offshore (Bermuda), L.P., a Bermuda
limited partnership, TJS Partners, L.P., a
New York limited partnership, and certain
members of the Company's management,
attached hereto as Annex A.
Surviving Corporation . . . . . . . The combined entity following the merger
of Pac Rim and Merger Sub, which will be
named Superior Pacific Holding
Corporation, a Delaware corporation.
Term Loan . . . . . . . . . . . . . $44 million credit facility from one or
more banks including The Chase Manhattan
Bank, as agent.
TJS . . . . . . . . . . . . . . . . TJS Partners, L.P., a New York limited
partnership.
Transaction . . . . . . . . . . . . The Stock Issuance, the Acquisition, and
the Term Loan, collectively.
Transfer Restrictions . . . . . . . See definition in "Proposal No.
2--Introduction," and Annex D.
Treaty . . . . . . . . . . . . . . A reinsurance agreement. See
"Reinsurance," above.
Underwriting . . . . . . . . . . . The process whereby an insurer reviews
applications submitted for insurance
coverage, determines whether it will
accept all or part of the coverage
requested, and determines the premiums to
be charged.
Underwriting Expenses . . . . . . . The aggregate of commissions and other
policy acquisition costs, as well as the
portion of administrative, general, and
other expenses attributable to the
underwriting operations.
Underwriting Profit (Loss) . . . . The excess (deficiency) resulting from
the difference between net premiums earned
and the sum of claims and claims
adjustment expenses, underwriting
expenses, and policyholder dividends.
Unpaid Claims and Claim Adjustment An estimate of claims that have occurred,
Expenses . . . . . . . . . . . both reported and unreported (including
claim adjustment expenses), and have been
charged against earnings but remain
unpaid.
Voting Agreement . . . . . . . . . Voting Agreement dated as of September
17, 1996, among the Company and certain
stockholders and debenture holders of Pac
Rim, attached as Exhibit H to Annex C.
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<PAGE> 15
Voting Notes . . . . . . . . . . . See definition in "Proposal No.
1--Security Ownership of Certain
Beneficial Owners and Management After
the Stock Issuance--Security Ownership
of Certain Beneficial Owners."
Warrant Surrender Agreement . . . . Series 3 Detachable Warrant Surrender
Agreement dated as of September 17, 1996,
among Pac Rim and the individuals named
therein, attached as Exhibit E to Annex C.
WCIRB . . . . . . . . . . . . . . . Workers' Compensation Insurance Rating
Bureau.
ZRC . . . . . . . . . . . . . . . . Zurich Reinsurance Centre.
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<PAGE> 16
SUMMARY
The following is a brief summary of certain information contained
elsewhere in this Proxy Statement. This summary does not contain a complete
statement of all material features of the proposals to be voted on and is
qualified in its entirety by the more detailed information appearing elsewhere
in this Proxy Statement and in the accompanying Annexes.
GENERAL INFORMATION
THE COMPANIES
The Company . . . . . . . . . . . Superior National Insurance Group, Inc., a
California corporation (the "Company" or
"SNIG"), is a holding company that, through
its wholly owned subsidiary, Superior
National Insurance Company ("SNIC"), is
engaged in writing workers' compensation
insurance principally in the State of
California and, until September 30, 1993,
was engaged in writing commercial property
and casualty insurance. The Company's
principal executive offices are located at
26601 Agoura Road, Calabasas, California
91302 and its telephone number is (818)
880-1600. See "Company Information
--Business."
Pac Rim . . . . . . . . . . . . . Pac Rim Holding Corporation, a Delaware
corporation ("Pac Rim"), is engaged through
its wholly owned subsidiary, The Pacific Rim
Assurance Company, and the latter's wholly
owned subsidiary, Regional Benefits
Insurance Services, Inc., exclusively in the
writing and production of workers'
compensation insurance, primarily in the
State of California with an emphasis on the
Southern California market. Pac Rim's
principal executive offices are located at
6200 Canoga Avenue, Woodland Hills,
California 91367 and its telephone number
is (818) 226-6200. See "Proposal No.
1--Use of Proceeds: The Acquisition--Pac
Rim Holding Corporation."
SPECIAL MEETING OF SHAREHOLDERS OF THE COMPANY
Time, Date, Place, and Purpose . . The 1996 Special Meeting of Shareholders of
the Company (the "Special Meeting") will be
held on December 11, 1996 at 10:00 a.m.,
Pacific Time, at the Company's principal
executive offices at 26601 Agoura Road,
Calabasas, California 91302.
At the Special Meeting, the Company's
shareholders will be asked: (i) to consider
and vote to approve the issuance of
2,390,438 shares of the Company's Common
Stock pursuant to the Stock Purchase
Agreement; (ii) to consider and vote to
approve a charter amendment that would
establish restrictions on transfers of
Common Stock in the interest of preserving
certain tax benefits available to the
Company; (iii) to consider and vote to
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<PAGE> 17
approve the reincorporation of the Company
in the State of Delaware; (iv) to consider
and vote to approve an amendment to the
Bylaws of the Company that would increase
the size of the Board of Directors from
nine to eleven members; (v) to elect two
new directors to the Board of Directors to
fill the two newly created vacancies in the
event the Company's Bylaws are amended in
accordance with Proposal No. 4; and (vi) to
transact such other business as may properly
come before the Special Meeting, or any
adjournment or postponement thereof.
Record Date;
Quorum . . . . . . . . . . . . . The Record Date for determining the
shareholders of the Company entitled to
vote upon the matters set forth in this
Proxy Statement is the close of business on
November 8, 1996.
The presence, either in person or by
properly designated proxy, at the Special
Meeting of the holders of a majority of the
combined voting power of the outstanding
shares of Common Stock and the Company's
14.5% Senior Subordinated Voting Notes due
April 1, 2002 (the "Voting Notes") is
necessary to constitute a quorum. As to
all matters, except the election of
directors, each shareholder is entitled to
one vote for each share of Common Stock
held. With respect to the election of
directors, a shareholder may cumulate such
holder's votes in the manner described
under "General Information--Quorum and
Voting Requirements." Each holder of the
Voting Notes is entitled to vote only in
director elections, director removals,
changes in the number of authorized
directors, and votes on amendments to such
voting rights. With respect to amendments
to such voting rights, the Voting Notes
vote as a separate class.
As of November 8, 1996, directors and
executive officers of the Company
beneficially owned 400,277 shares of Common
Stock (representing approximately 13.6% of
the outstanding shares of Common Stock) and
had voting control over the Voting Notes.
See "Proposal No. 1--Security Ownership of
Certain Beneficial Owners and Management
After the Stock Issuance--Security Ownership
of Certain Beneficial Owners" and "General
Information--Quorum and Voting
Requirements." The Company believes that
all such directors and officers intend to
vote in favor of each Proposal presented
herein. See "General Information--Vote
Required" regarding approval by
disinterested shareholders.
Dissenters' or Appraisal Rights . California law provides that no dissenters'
or appraisal rights are available to
shareholders of the Company with respect to
any of the matters discussed in this Proxy
Statement.
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<PAGE> 18
PROPOSALS
PROPOSAL NO. 1 -- THE STOCK ISSUANCE
The Stock Purchase Agreement . . Pursuant to the Stock Purchase Agreement
dated as of September 17, 1996 (the "Stock
Purchase Agreement") among the Company,
Insurance Partners, L.P. ("IP Delaware"),
Insurance Partners Offshore (Bermuda), L.P.
("IP Bermuda" and, together with IP
Delaware, "IP"), and TJS Partners, L.P., and
certain members of the Company's
management (together with IP, the
"Purchasers"), the Company shall issue and
sell an aggregate of 2,390,438 shares of
Common Stock to the Purchasers (the "Stock
Issuance") for an aggregate purchase price
of approximately $18 million, the net
proceeds of which, in addition to the net
proceeds to be received by it under a $44
million Term Loan from one or more banks led
by Chase and cash on hand, shall be used by
the Company to acquire Pac Rim.
Effect of the Stock Issuance . . Based upon the Common Stock outstanding as
of the Record Date, and assuming that no
outstanding warrants or stock options
convertible into shares of Common Stock are
exercised prior to the Stock Issuance,
approximately 5,827,961 shares of Common
Stock will be outstanding upon consummation
of the Stock Issuance, of which the Company
believes 2,139,034 shares (approximately 37%
of the total number of shares of Common
Stock outstanding) will be held in the
aggregate by IP and its Associates (as
defined under "Certain Considerations
--Concentration of Ownership"). In
addition, Common Stock and warrants to
purchase Common Stock held by IP and its
Associates will represent approximately 40%
of the Company's equity securities on a
fully diluted basis. However, IP and its
Associates have agreed to certain
limitations on their voting power as
shareholders. See "Proposal No. 1--Security
Ownership of Certain Beneficial Owners and
Management After the Stock Issuance" and "
--Terms of the Stock Issuance--Certain
Covenants--Covenants of IP."
Terms of the Stock
Purchase Agreement . . . . . . In addition to customary terms and
provisions, including customary
representations and warranties, covenants,
and reciprocal indemnification provisions,
the Stock Purchase Agreement contains
certain covenants by IP that shall remain
effective so long as IP and its Associates
beneficially own an aggregate of 15% or more
of the outstanding Common Stock on a fully
diluted basis. One such covenant, with
certain limited exceptions, prohibits IP or
any of its Associates from acquiring any
additional shares of Common Stock, entering
into a merger or business combination
involving the Company, participating in any
solicitation of proxies, or
9
<PAGE> 19
participating in any group with respect to
the foregoing, without a two-thirds majority
vote of either the non-Associate and
non-employee directors or the shareholders
(excluding those shares held by executive
officers having to report transactions in
Common Stock under securities laws and by IP
and its Associates.) Another covenant
provides that IP and its Associates will not
elect more than five directors (or the
highest number that is less than a majority
of the Board of Directors). An additional
covenant provides that IP will not transfer
any of its shares except in certain types of
specified transactions.
The Company covenants under the Stock
Purchase Agreement that it shall present to
its shareholders a proposal to amend its
Bylaws to expand its Board of Directors from
nine to eleven members and, so long as the
Stock Purchase Agreement is in effect,
nominate one individual designated by IP
(so long as such person is reasonably
acceptable to the Board of Directors) for
election to the Board of Directors at each
annual meeting of shareholders.
Conditions to the Stock Issuance;
Termination of Stock
Purchase Agreement . . . . . . Notwithstanding shareholder approval of the
Stock Issuance, the Transfer Restrictions
(discussed below under Proposal No. 2), the
expansion of the Board of Directors, and the
election of two additional directors, the
consummation of the Stock Issuance is
subject to a number of additional
conditions, including without limitation,
conditions requiring the receipt of all
governmental authorizations required for
performance of each party's obligations
under the Stock Purchase Agreement, the
distribution by International Insurance
Investors, L.P., to its partners of certain
warrants to purchase Common Stock, the
absence of a material adverse effect on the
Company between July 1, 1996 and the
consummation of the Stock Issuance, the
agreement of certain warrant holders
(including those participating in the III
distribution) to refrain from exercising
their warrants so as to reduce risk of an
"ownership change" under Section 382 of the
Internal Revenue Code, and the simultaneous
consummation of the Term Loan and the
transactions contemplated by the Pac Rim
Acquisition Agreement.
Restrictions on Transfer of Shares The shares of Common Stock issued pursuant
to the Stock Issuance will not be registered
under the Securities Act and consequently
will be subject to standard restrictions on
transferability imposed by federal and state
securities laws on privately issued
securities. See "Proposal No. 1--Terms of
the Stock Issuance--Restrictions on Transfer
of Shares."
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<PAGE> 20
Governmental and Regulatory
Approvals of the Stock
Issuance . . . . . . . . . . . . The Company is not aware of any governmental
or regulatory approval that must be obtained
in order to consummate the Stock Issuance,
other than approval by the California
Department of Insurance (the "DOI"), whose
approval must be sought by IP in connection
with its purchase of shares thereunder. IP
has already filed a Form A Information
Statement ("Form A") with the DOI under
Section 1215.2 of the California Insurance
Code and Title 10, California Code of
Regulations Section 2683 et seq., in order
to obtain such approval. As of the date of
this Proxy Statement, such approval has not
been obtained.
Opinion of Financial Advisor . . . Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ") has been retained by the
Board of Directors to act as its financial
advisor in connection with the Stock
Issuance and the Acquisition (the Stock
Issuance, the Acquisition, and the Term Loan
are referred to collectively as the
"Transaction"). DLJ has delivered to the
Board of Directors its written opinion,
dated September 17, 1996, to the effect
that, as of such date and based upon and
subject to the matters described therein,
the Transaction, taken as a whole, is fair
to the Company, from a financial point of
view. Reference is made to the full text of
such opinion, a copy of which is set forth
in Annex B in its entirety. The Company's
shareholders are urged to read this opinion
carefully for a description of the
procedures followed, the factors considered,
and the assumptions made by DLJ. See
"Proposal No. 1--Overview--Opinion of
Financial Advisor."
The Board of Directors and
Management of the Company
Following the Stock Issuance . . It is a condition to the Stock Issuance that
one nominee designated by IP (so long as
such person is reasonably acceptable to the
Board of Directors) and one independent
nominee designated by the Company be elected
to the Board of Directors of the Company in
connection with the expansion of the Board
of Directors from nine to eleven members as
contemplated by "Proposal No. 4--Amendment
of Bylaws to Increase Authorized Number of
Directors" and "Proposal No. 5--Election of
Two Additional Directors."
The Acquisition . . . . . . . . . Pursuant to the Agreement and Plan of Merger
dated as of September 17, 1996 (the "Pac Rim
Acquisition Agreement") among the Company,
SNTL Acquisition Corp. ("SNTL" or the
"Merger Sub") and Pac Rim, the Company has
agreed to acquire Pac Rim (the
"Acquisition") for approximately $54 million
in cash. The Acquisition will be financed by
the Stock Issuance, if approved by the
Company's shareholders, the Term Loan, and
cash on hand. The Company is party to two
11
<PAGE> 21
additional agreements related to the Pac
Rim Acquisition Agreement: (i) a Debenture
Purchase Agreement, whereby part of the
consideration under the Pac Rim Acquisition
Agreement will be applied to the purchase of
outstanding convertible debentures and
warrants issued by Pac Rim; and (ii) a
Voting Agreement, whereby certain principal
holders of Pac Rim common stock and
convertible debentures having voting rights
have agreed to vote their shares in favor of
the Acquisition at a special meeting of the
stockholders of Pac Rim called for that
purpose. A simultaneous closing of the
Acquisition is a condition to consummation
of the Stock Issuance.
Effect of the Acquisition . . . . Under the Pac Rim Acquisition Agreement,
Merger Sub, a newly formed Delaware
subsidiary of the Company, will be merged
with and into Pac Rim. The corporation
resulting from this merger will be renamed
Superior Pacific Holding Corporation, and
will be a wholly owned subsidiary of the
Company. As a result, The Pacific Rim
Assurance Company, currently a wholly owned
subsidiary of Pac Rim, will become an
indirect operating subsidiary of the
Company. Each share of Pac Rim common stock
outstanding will be cancelled and converted
into a right to receive cash. On or
immediately prior to the Closing Date, in
order to satisfy certain conditions to the
Term Loan, the Company intends to contribute
all of its shares of SNIC to Merger Sub, so
that SNIC will also become an indirect
operating subsidiary of the Company. Thus,
upon the Closing Date, SNIC and The Pacific
Rim Assurance Company will be subsidiaries
of Superior Pacific Holding Corporation,
which, in turn, will be a subsidiary of the
Company.
Terms of the Pac Rim
Acquisition Agreement . . . . . The Pac Rim Acquisition Agreement contains
customary terms and conditions,
representations and warranties, covenants of
the parties, conditions to closing and
provisions requiring certain payments upon
termination under certain conditions, all as
more fully described herein.
Governmental and Regulatory
Approvals of the Acquisition. . The Acquisition requires the approval of
the DOI. The Company has already filed a
Form A with the DOI in order to obtain such
approval. As of the date of this Proxy
Statement, such approval has not been
obtained. All other approvals of which the
Company is aware have been obtained.
Pac Rim Board Approval;
Opinion of Pac Rim's
Financial Advisor . . . . . . . The board of directors of Pac Rim has
approved the Pac Rim Acquisition Agreement
and the transactions contemplated
thereunder, and has called a special meeting
of the stockholders of Pac Rim to obtain
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<PAGE> 22
stockholder approval of the Acquisition.
Salomon Brothers Inc has agreed to deliver
its written opinion to the board of
directors of Pac Rim that, as of the date of
the Acquisition, the consideration to be
received by the stockholders of Pac Rim is
fair to such stockholders, from a financial
point of view.
Inherent Uncertainties Relating
to Certain Effects of the
Acquisition . . . . . . . . . . The success of the Acquisition depends in
part on the ability of the management of the
Company to coordinate the operations of the
business enterprises of the Company and Pac
Rim. There can be no assurance that the
coordination necessary to realize the
expected benefits of the Acquisition will
be achieved. In addition, management of the
Company has identified reductions in pre-tax
expenses they believe can be achieved
through integration of functions. There can
be no assurance that the Company will be
able to realize the anticipated cost
reductions, and the failure to realize them
could adversely affect the Company's cash
flow and earnings before taxes. Finally,
there can be no assurance that the insurance
market will receive favorably the
combination of the two companies, or that
the two operating companies will be able to
maintain an acceptable percentage of their
combined historical volume of premiums
written. See "Certain Considerations."
Recommendation of the
Board of Directors . . . . . . The Board of Directors has unanimously
approved the Stock Issuance and recommends
a vote FOR Proposal No. 1. For a discussion
of the reasons considered by the Board of
Directors in approving the Stock Issuance
and all related transactions, see "Proposal
No. 1--Overview--Rationale for Stock
Issuance and Acquisition."
PROPOSAL NO. 2 -- TRANSFER RESTRICTIONS CHARTER AMENDMENT
Transfer Restrictions
Proposal . . . . . . . . . . . The Company's shareholders are being asked
to consider and vote to approve a provision
that would be adopted as part of the
Certificate of Incorporation of the Company
if "Proposal No. 3--Reincorporation of the
Company in the State of Delaware" is
adopted, or, alternatively, as an amendment
to the Amended and Restated Articles of
Incorporation of the Company if the Company
continues as a California corporation. The
provision would provide for certain
restrictions on the transferability of the
Company's Common Stock (the "Transfer
Restrictions") designed to prevent
transactions in Common Stock that might
prohibit the Company from utilizing a
substantial portion of the Net Operating
Loss Carryforwards ("NOLs") now available to
the Company to reduce federal income taxes
due. Under Section 382 of the Code, a
corporation that undergoes an "ownership
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<PAGE> 23
change" (as defined in Section 382) is
limited in the amount of NOLs it may utilize
in the tax years following such a change.
Adoption of "Proposal No. 2--Transfer
Restrictions Charter Amendment" is a
condition to the consummation of the Stock
Issuance.
Effect of the Transfer
Restrictions . . . . . . . . . The Transfer Restrictions, if adopted, would
prevent shareholders currently holding 4.90%
or more of the Common Stock (including stock
owned under applicable constructive
ownership rules) from acquiring any
additional equity securities of the Company.
Additionally, the Transfer Restrictions
would bar any additional person or group of
affiliated persons from acquiring an
aggregate of 4.90% or more of the Company's
equity securities (including stock owned
under applicable constructive ownership
rules). See "Proposal No. 2--Description of
the Transfer Restrictions."
Expiration of the
Transfer Restrictions . . . . . Under their terms, the Transfer Restrictions
would be effective on the date the Stock
Issuance occurs, and would expire on the
day following the third anniversary of their
effective date.
The Company's NOLs . . . . . . . As of December 31, 1995, the Company had
available NOLs of $82.9 million to offset
taxable income recognized by the Company in
periods after December 31, 1995. For
federal income tax purposes, these NOLs will
expire in material amounts beginning in the
year 2006.
Recommendation of the
Board of Directors . . . . . . The Board of Directors has unanimously
approved the Transfer Restrictions and
recommends a vote FOR Proposal No. 2. For
a discussion of the reasons considered by
the Board of Directors in approving Proposal
No. 2, see "Proposal No. 2--Purpose of the
Transfer Restrictions."
PROPOSAL NO. 3 -- REINCORPORATION OF THE COMPANY IN THE STATE OF DELAWARE
State of Delaware
Reincorporation Proposal . . . The Company's shareholders are being asked
to consider and vote to approve a proposal
to reincorporate the Company in the State of
Delaware. The Board of Directors believes
that the Reincorporation of the Company is
in the Company's best interests, having
considered that the State of Delaware has
been a leader in adopting, constructing and
implementing comprehensive and flexible
corporate laws that are responsive to the
legal and business needs of corporations,
and having weighed possible disadvantages.
Further, it is more likely that the Transfer
Restrictions can be enforced more
effectively in Delaware. See
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<PAGE> 24
"Proposal No. 3--Principal Reasons for the
Reincorporation" and "--Possible
Disadvantages."
Effect of Reincorporation . . . . The Reincorporation, taken by itself, will
NOT result in any change of the name,
business, management, fiscal year, assets or
liabilities, or location of the principal
facilities of the Company. Certain changes
to the Company that would occur as a result
of the Stock Issuance and the Acquisition
would take place without regard to the
Reincorporation. The Reincorporation may
have certain effects on the rights of
shareholders due to differences between
California and Delaware law and the adoption
in the Bylaws of the reincorporated Company
of provisions available to Delaware
corporations regarding the presentation of
proposals at stockholder meetings and the
solicitation of stockholder written
consents.
Recommendation of the
Board of Directors . . . . . . The Board of Directors has unanimously
approved the Reincorporation and recommends
a vote FOR Proposal No. 3. For a discussion
of the reasons considered by the Board of
Directors in approving Proposal No. 3, see
"Proposal No. 3--Principal Reasons for the
Reincorporation."
PROPOSAL NO. 4 -- AMENDMENT OF BYLAWS TO INCREASE AUTHORIZED NUMBER OF DIRECTORS
Bylaw Amendment Proposal . . . . The Company's shareholders are being asked
to consider and vote to approve an amendment
to the Bylaws of the Company (or, should the
Company be reincorporated in Delaware,
adoption of a provision of the Company's
Delaware Bylaws), that would increase the
number of directors of the Company from nine
to eleven, effective upon, and as a
precondition to, consummation of the Stock
Issuance. The holders of Voting Notes and
the holders of Common Stock, voting as
separate classes, must each approve this
Proposal No. 4.
Recommendation of the Board of
Directors . . . . . . . . . . . The Board of Directors has unanimously
approved the Bylaw amendment and recommends
a vote FOR Proposal No. 4. For a discussion
of the reasons considered by the Board of
Directors in approving Proposal No. 4, see
"Proposal No. 4--Amendment to Bylaws to
Increase Authorized Number of Directors."
PROPOSAL NO. 5 -- ELECTION OF TWO ADDITIONAL DIRECTORS
Election of Two
Additional Directors . . . . . Upon adoption of "Proposal No. 4--Amendment
of Bylaws to Increase Authorized Number of
Directors," the Company's shareholders will
be asked to vote to fill the vacancies to be
created on the Board of Directors upon
effectiveness of the Bylaw amendment or
Reincorporation, as the case may be. The
election to the
15
<PAGE> 25
Board of Directors of a designee of IP (so
long as such person is reasonably acceptable
to the Board of Directors) and an
unaffiliated nominee is a condition to
consummation of the Stock Issuance.
Recommendation of the Board of
Directors . . . . . . . . . . . The Board of Directors has nominated Steven
B. Gruber and Roger W. Gilbert to fill the
vacancies and recommends their election.
Steven B. Gruber currently serves as
Managing Partner of Insurance Partners
Advisors, L.P., Managing Director of Oakhill
Partners, L.P., and a Vice President of
Keystone Inc. and was designated for
nomination to the Board of Directors by IP
pursuant to the terms of the Stock Purchase
Agreement. Roger W. Gilbert served as Chief
Executive Officer of each of TIC Indemnity
Co. and TMIC Insurance Co., Inc. until his
retirement in 1993, and is unaffiliated with
the Company or any of its principal
shareholders.
SHAREHOLDERS ARE URGED TO CAREFULLY REVIEW THE MORE DETAILED INFORMATION
INCLUDED IN THIS PROXY STATEMENT AND THE ANNEXED MATERIALS, INCLUDING THE
SECTION ENTITLED "CERTAIN CONSIDERATIONS" FOLLOWING THIS SUMMARY.
16
<PAGE> 26
SUMMARY FINANCIAL DATA
THE COMPANY
<TABLE>
<CAPTION>
Six-Month Period
Ended June 30,
-------------- Year Ended December 31,
1996 1995 1995 1994 1993 1992 1991(2) 1990 1989 1988 1987 1986
-------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
REVENUES:
Net premiums earned . . . . $43,033 $45,554 $89,735 $110,418 $153,585 $55,892 $ 98,119 $124,114 $91,127 $71,780 $53,108 $22,312
Total Revenues . . . . . 47,298 50,354 99,519 119,467 163,135 66,694 103,886 129,635 96,313 74,475 55,355 23,581
EXPENSES:
Claims and claim
adjustment expenses,
net of reinsurance . . . 22,600 23,842 56,605 78,761 113,817 33,929 93,947 84,242 58,190 38,204 33,286 14,189
Underwriting and general
and administrative
expenses (e.g.,
commissions) . . . . . . 18,246 14,049 27,348 22,000 29,522 11,090 27,525 34,610 24,998 19,212 13,779 6,749
Total Expenses . . . . . 44,236 39,589 87,830 114,470 160,931 50,839 132,934 121,246 87,716 60,596 49,441 21,907
Income (loss) before
preferred securities
dividends and
accretion, discontinued
operations, extraordinary
items, and cumulative
effect of change in
accounting for
income taxes . . . . . . 2,014 11,105 11,701 3,599 2,734 10,549 (9,221) 7,118 7,603 10,535 4,877 1,195
Preferred securities
dividends and accretion,
net of income
tax benefit . . . . . . . (81) (723) (1,488) (683) -- -- -- -- -- -- -- --
Net income (loss) from
continuing operations . . $ 1,204 $10,382 $10,213 $ 2,916 $ 2,734 $10,549 $ (9,221) $ 7,118 $ 7,603 $10,535 $ 4,877 $ 1,195
========================================================================================================
Per common share(1):
Income (loss) from
continuing operations . . $ 0.27 $ 3.03 $ 2.98 $ 0.85 $ 0.79 $ 3.07 $ (2.69) $ 2.08 $ 2.22 $ 3.14 $ 1.47 $ 0.40
Weighted average shares
outstanding . . . . . . . 5,318 3,430 3,430 3,430 3,430 3,430 3,430 3,429 3,431 3,352 3,326 3,022
</TABLE>
______________________
(1) Adjusted to reflect a four-into-one reverse stock split effective as of
May 24, 1995.
(2) In 1991, several liabilities were revised upward including property and
casualty and workers' compensation claims and claim adjustment expense of
$22.6 million, policyholders dividends of $7.1 million, and employee
severance of $1.2 million. In addition, premiums receivables were written
down by $4.0 million.
<TABLE>
<CAPTION>
Six-Month Period
Ended June 30,
----------------- Year Ended December 31,
1996 1995 1995 1994 1993 1992 1991(1) 1990 1989 1988 1987 1986
----------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET
ASSETS:
Total cash and
investments
- carrying value . . . $157,033 $173,926 $168,360 $176,878 $150,179 $154,953 $ 82,285 $ 86,183 $102,193 $ 64,844 $48,277 $ 26,079
- market value . . . . 154,628 168,318 170,512 172,706 156,744 154,294 85,463 86,641 102,447 64,109 47,721 26,520
Reinsurance
receivables . . . . . 32,054 48,014 38,892 68,129 71,003 104,389 138,367 62,519 33,242 27,740 18,256 2,956
Total Assets . . . . 227,039 262,815 244,342 286,776 264,098 291,487 265,033 235,259 198,307 136,186 91,887 41,414
Liabilities and
Shareholders' Equity:
Claims and claim
adjustment expenses . 122,650 156,579 140,774 171,258 171,038 202,634 182,440 143,890 102,903 68,136 47,258 13,536
Total Liabilities . . . 160,836 199,599 179,817 227,622 224,044 253,012 227,025 188,293 157,892 104,077 71,412 29,637
Total Shareholders'
Equity . . . . . . . 43,931 43,330 43,480 40,364 40,055 38,475 38,003 46,966 40,415 32,109 20,475 11,777
</TABLE>
17
<PAGE> 27
SUMMARY FINANCIAL DATA
PAC RIM
<TABLE>
<CAPTION>
Six-Month Period
Ended June 30, Year Ended December 31,
------------------- -----------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
-------- -------- -------- -------- --------- -------- ---------
(In thousands, except per share data)
Restated Restated
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
REVENUES:
Net premiums earned . . . . . . . . . . . . . . . . . $ 41,259 $ 39,156 $ 76,016 $ 92,894 $ 99,917 $117,829 $ 100,952
Total Revenues . . . . . . . . . . . . . . . . . . 44,955 43,378 84,558 99,408 109,811 124,231 105,928
EXPENSES:
Claims and claim adjustment expenses,
net of reinsurance . . . . . . . . . . . . . . . . 31,132 22,873 50,957 63,788 87,689 100,595 75,311
Underwriting and general and administrative
expenses (e.g., commissions) . . . . . . . . . . . 13,424 16,876 30,309 31,492 24,903 25,511 22,964
Total Expenses . . . . . . . . . . . . . . . . . . 45,580 41,317 83,704 97,438 113,850 127,828 102,122
Income (loss) before preferred securities
dividends and accretion and extraordinary items . . $ (440) $ 1,344 $ 575 $ 1,158 $ (1,381) $ (292) $ 3,211
Net income (loss) from continuing operations . . . . $ (440) $ 1,344 $ 575 $ 1,158 $ (1,381) $ (292) $ 3,211
======== ======== ======== ======== ========= ======== =========
Per common share:
Income (loss) from continuing operations . . . . . . $ (0.05) $ 0.14 $ 0.06 $ 0.12 $ (0.14) $ (0.03) $ 0.35
Weighted average shares outstanding . . . . . . . . . 9,528 9,528 9,528 9,528 9,528 9,624 9,059
</TABLE>
<TABLE>
<CAPTION>
Six-Month Period
Ended June 30, Year Ended December 31,
------------------- -----------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
-------- -------- -------- -------- --------- -------- ---------
(In thousands, except per share data)
Restated Restated
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET
Assets:
Total Cash and investments - carrying value . . . . $118,547 $138,295 $129,804 $143,075 $ 17,173 $ 121,441 $104,080
- market value . . . . . . . . . . . . . . . . . 118,547 138,295 129,804 143,075 117,319 124,626 107,031
Reinsurance receivables . . . . . . . . . . . . . . 4,275 3,008 4,068 2,132 15,176 11,192 --
Total Assets . . . . . . . . . . . . . . . . . . . $163,489 $175,910 $169,051 186,570 $189,241 $ 198,501 $144,711
Liabilities and Shareholders' Equity:
Claims and claim adjustment expenses . . . . . . . $ 90,709 $104,002 $ 96,525 116,629 $135,965 $ 135,460 $ 86,702
Total Liabilities . . . . . . . . . . . . . . . . . 121,666 132,113 124,896 149,393 150,241 158,120 104,058
-------- -------- -------- -------- -------- -------- --------
Total Shareholders' Equity . . . . . . . . . . . . $ 41,823 43,797 $ 44,155 $ 37,177 $ 39,000 $ 40,381 $ 40,653
======== ======== ======== ======== ======== ======== ========
</TABLE>
18
<PAGE> 28
The unaudited pro forma combined financial data has been derived from the
unaudited pro forma combined financial statements and notes thereto included
elsewhere in this document and should be read in conjunction with those
financial statements and notes. The summary unaudited pro forma financial
information is not necessarily indicative of future operations and should not
be construed as representative of future operations of the combined companies.
SUMMARY UNAUDITED PRO FORMA FINANCIAL INFORMATION
ACQUISITION OF PAC RIM HOLDING CORPORATION BY SUPERIOR NATIONAL INSURANCE
GROUP, INC.
PURCHASE ACCOUNTING METHOD
UNAUDITED PRO FORMA CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31, 1995 Six Months Ended June 30, 1996
-------------------------------------------- -------------------------------------------
Pro Pro
Forma Pro Forma Pro
Adjust- Forma Adjust- Forma
SNIG Pac Rim ments(1) Combined SNIG Pac Rim ments(1) Combined
------ ------- -------- -------- ------ ------- -------- --------
Inc. Inc.
(Decr) (Decr)
(In thousands, except share and per share amounts)
Revenues:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net premiums earned . . . . $ 89,735 $ 76,016 $ 165,751 $ 43,033 $ 41,259 $ 84,292
Total Revenues . . . . 99,519 84,558 184,077 47,298 44,955 92,253
Expenses:
Claims and claim adjustment
expenses, net of
reinsurance . . . . . . 56,605 50,957 107,562 22,600 31,132 53,732
Underwriting and general
and administrative
expenses . . . . . . . 27,348 30,309 57,657 18,246 13,424 31,670
Total Expenses . . . . 87,830 83,704 443 171,977 44,236 45,580 170 89,986
Income (loss) before
preferred securities
dividends and accretion,
extraordinary items, and
cumulative effect of
change in accounting
treatment for income
taxes . . . . . . . . . 11,701 575 (292) 11,984 2,014 (440) (112) 1,462
Preferred securities
dividends and accretion,
net of income tax
benefit . . . . . . . . (1,488) -- -- (1,488) (810) -- -- (810)
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss) from
continuing operations . $ 10,213 $ 575 $ (292) $ 10,496 $ 1,204 $ (440) $ (112) $ 652
========= ========= ========= ========= ========= ========= ========= =========
Per common share:
Income (loss) from
continuing operations . $ 2.98 $ 0.06 $ 1.51 $ 0.27 $ (0.05) $ 0.10
Weighted average shares
outstanding . . . . . . 3,430,373 9,528,000 7,103,711 5,318,118 9,528,000 7,236,211
- - ----------------------
</TABLE>
(1) See explanatory notes to "Proposal No. 1--Unaudited Pro Forma Financial
Information."
19
<PAGE> 29
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
AS OF JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Purchase
SNIG Accounting Pro Forma
SNIG Pac Rim Adjustments(1) Adjustments(1) Combined
-------- -------- ------------- ------------- --------
<S> <C> <C> <C> <C> <C>
Assets:
Investments . . . . . . . . . . . . . . . . . $154,743 117,054 $ -- $ -- $271,797
Reinsurance receivables . . . . . . . . . . . 32,054 4,275 -- -- 36,329
Goodwill . . . . . . . . . . . . . . . . . . -- -- -- 1,062 1,062
Total Assets . . . . . . . . . . . . . . $227,039 163,489 $ 54,070 $(57,892) $386,706
Liabilities and Shareholders' Equity:
Claims and claim adjustment expenses . . . . $122,650 $90,709 $ -- $ -- $213,359
Term loan--The Chase Manhattan Bank . . . . . -- -- 44,000 -- 44,000
Total Liabilities . . . . . . . . . . . . 160,836 121,666 36,070 (16,069) 302,503
Total Shareholders' Equity . . . . . . . $ 43,931 $41,823 $ 18,000 $(41,823) $ 61,931
- - ----------------------
</TABLE>
(1) See explanatory notes to "Proposal No. 1--Unaudited Pro Forma Financial
Information."
The unaudited pro forma combined balance sheet data assumes the
Transaction took place on June 30, 1996, and combines the Company's June 30,
1996 balance sheet data with Pac Rim's June 30, 1996 balance sheet data using
the purchase method of accounting. The unaudited pro forma statements of
operations data assumes that the Transaction took place as of the beginning of
each of the periods presented using the allocation of the purchase information
calculated as of June 30, 1996, and combines the statement of operations data
for the Company and for Pac Rim for the year ended December 31, 1995 and for
the six-month period ended June 30, 1996. See "Proposal No. 1--Unaudited Pro
Forma Financial Information."
20
<PAGE> 30
This Proxy Statement contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act") and Section 21E of the Exchange Act. These statements are
found principally in the Sections of this Proxy Statement discussing the
reasons for the Stock Issuance, the Opinion of the Company's financial advisor,
and the Acquisition of Pac Rim (including the Summary), but may also be found
in various other sections of this Proxy Statement. Actual results could differ
materially from those projected in the forward-looking statements as a result
of certain considerations, including those set forth below.
CERTAIN CONSIDERATIONS
The following factors should be considered carefully in evaluating
Proposal No. 1, Proposal No. 2, Proposal No. 3, Proposal No. 4, and Proposal
No. 5. These considerations should be taken into account in conjunction with
the other information included or cross-referenced in this Proxy Statement.
INHERENT UNCERTAINTIES RELATING TO CERTAIN EFFECTS OF THE ACQUISITION
Coordination of Operations. The success of the Acquisition in
enhancing long-term shareholder value depends in part on the ability of the
management of the Company to coordinate and integrate the operations of the
business enterprises of the Company and Pac Rim. As in every business
combination, such coordination will require the dedication of management
resources, which may temporarily divert attention from the day-to-day business
of the Company. There can be no assurance that the coordination necessary to
realize the expected benefits of the Acquisition will be achieved.
Realization of Cost Reductions and Cash Flow Increases. The senior
management of the Company has identified cost reductions that they believe can
be achieved. The Board of Directors took into account this expectation in
deciding to approve the Pac Rim Acquisition Agreement and the transactions
contemplated thereby. See "Proposal No. 1--Use of Proceeds: The
Acquisition--Pac Rim Holding Corporation." In addition, DLJ considered these
savings in connection with rendering its fairness opinion. See "Proposal No.
1--Overview--Opinion of Financial Advisor." There can be no assurance that the
Company will be able to realize the expected cost reductions, or do so within
any particular time frame, or to generate additional revenue to offset any
unanticipated inability to realize such expected cost reductions.
Maintenance of Premium Volume. The strategic and financial benefits
expected to be realized as a result of the Acquisition are dependent on
insurance market reception to the combination of the two companies, and on
other factors beyond the Company's control. The ability of the combined
companies to maintain an acceptable percentage of the volume of premiums
historically written by the individual companies, as well as their ability to
maintain gross margins in the face of expected price competition, is uncertain.
REGISTRATION OF ADDITIONAL SHARES; SHARES ELIGIBLE FOR FUTURE SALE
The Company has agreed to provide the Purchasers with registration
rights. See "Proposal No. 1--Terms of the Stock Issuance--Registration Rights
Agreement." Future resales in the public market of Common Stock (whether
pursuant to registration rights or otherwise) that was issued in the Stock
Issuance could adversely affect the market price of the Common Stock.
CONCENTRATION OF OWNERSHIP
Based upon the Common Stock outstanding as of the Record Date, and
assuming no outstanding warrants or stock options convertible into shares of
Common Stock are exercised prior to the Stock Issuance, approximately 5,827,961
shares of Common Stock will be outstanding upon consummation of the Stock
Issuance, of which the Company believes 2,139,034 shares (approximately 37% of
the total number of shares of Common Stock outstanding) will be held in the
aggregate by IP and its Associates (which term is defined to mean any person or
entity that controls, is under common control with, or is controlled by another
person, and all individuals who are officers, directors, or control persons of
any of such entities). In addition, Common Stock and warrants to purchase
21
<PAGE> 31
Common Stock held by IP and its Associates will represent approximately 40% of
the Company's equity securities on a fully diluted basis. However, IP and its
Associates have agreed to certain limitations on their voting power as
shareholders. See "Proposal No. 1--Security Ownership of Certain Beneficial
Owners and Management After the Stock Issuance" and "--Terms of the Stock
Issuance--Certain Covenants--Covenants of IP." As a result, these
shareholders, acting together, have the ability to influence the vote on most
matters requiring approval by the shareholders of the Company, including the
election of a majority of the directors. Such a concentration of ownership may
have the effect of delaying or preventing a change in control of the Company.
However, other than with respect to the election of directors of the Company,
IP and its Associates have agreed that if the aggregate number of all shares
that are voted in like manner by IP and its Associates shall be greater than
35% of the total number of shares voted, then those votes that exceed such 35%
threshold shall be voted in the same proportion as the other shareholders voted
their shares with respect to the same matter. See "Proposal No. 1--Security
Ownership of Certain Beneficial Owners and Management After the Stock
Issuance."
DILUTION OF OWNERSHIP
Following the Stock Issuance, the Newly Issued Stock will represent
approximately 41% of the Common Stock outstanding. The issuance of such shares
of Common Stock will dilute the ownership interest in the Company of its
current shareholders. The $7.53 price per share being paid in the Stock
Issuance by the Purchasers was approximately the fair market value of the
Common Stock on September 17, 1996, the date of the Stock Purchase Agreement.
As of November 8, 1996, however, that price was less than the market price of
the Common Stock. See "Proposal No. 1--Terms of the Stock Issuance--Stock
Purchase Agreement: Parties and Amounts Committed."
INCREASED LEVERAGE
The Company intends, as part of the financing of the Acquisition, to
enter into the Term Loan and borrow $44 million thereunder. As a result of
this increased leverage, the Company's principal and interest obligations will
be increased substantially. The degree to which the Company is leveraged could
adversely affect the Company's ability to obtain additional financing for
working capital, acquisitions, or other purposes and could make it more
vulnerable to economic downturns and competitive pressures. See "Company
Information--Management's Discussion and Analysis of Financial Condition and
Results of Operations."
TRANSFER RESTRICTIONS--ANTITAKEOVER EFFECT
The Transfer Restrictions substantially in the form of Annex D hereto
that would be adopted if Proposal Nos. 1, 2, 3, 4, and 5 are approved and the
Stock Purchase Agreement and the Pac Rim Acquisition Agreement are consummated
in accordance with their terms (regardless of whether the Company is
reincorporated in Delaware), may be deemed to have an "antitakeover" effect
because they will restrict, for up to three years following the Closing Date,
the ability of a person or entity or group thereof from acquiring in the
aggregate 4.90% or more of the Company's equity securities (including equity
securities owned under applicable constructive ownership rules) and the ability
of persons, entities or groups now owning 4.90% or more of the Common Stock
(including stock owned under applicable constructive ownership rules) from
acquiring additional equity securities issued by the Company. The Transfer
Restrictions would discourage or prohibit accumulations of substantial blocks
of shares for which shareholders might receive a premium above market value.
The Transfer Restrictions restrict a shareholder's ability to acquire, directly
or indirectly, additional equity securities of the Company in excess of the
specified limitations. Furthermore, a shareholder's ability to dispose of his
Common Stock (or any other equity securities of the Company that such
shareholder may acquire) may be restricted as a result of the Transfer
Restrictions, and a shareholder's ownership of equity securities of the Company
may become subject to the Transfer Restrictions upon the actions taken by that
shareholder's related persons.
The indirect "antitakeover" effect of the Transfer Restrictions is not
the reason for the Transfer Restrictions. The Board of Directors considers the
Transfer Restrictions to be reasonable and in the best interests of the Company
and its shareholders because the Transfer Restrictions reduce certain risks
that the Company and its subsidiaries will be unable to utilize the tax
benefits described in Proposal No 2.
22
<PAGE> 32
TRANSFER RESTRICTIONS--CONTINUED RISK OF OWNERSHIP CHANGE
Notwithstanding the Transfer Restrictions, there remains a risk that
certain changes in relationships among shareholders or other events will cause
an ownership change of the Company under Section 382 of the Code, thus
resulting in substantial limitations on the ability of the Company to utilize
its NOLs.
Purchases by other shareholders of the Common Stock and other events
that occur prior to the Transfer Restrictions' becoming effective can effect a
percentage shift in the Company's ownership as determined for purposes of
Section 382, and any such acquisition could increase the likelihood the Company
will experience an ownership change if such shift, coupled with the
consummation of the Stock Purchase Agreement, causes the ownership of "5
percent shareholders" of the Company (as defined in Section 382) to increase.
There can be no assurance that holders of all of the Company's outstanding
warrants will enter into standstill agreements acceptable to the Company.
There also can be no assurance, in the event transfers in violation of the
Transfer Restrictions are attempted, that the Internal Revenue Service ("IRS")
will not assert such transfers have federal income tax significance
notwithstanding the Transfer Restrictions.
The Board of Directors has the discretion to approve a transfer of
equity securities that would otherwise violate the Transfer Restrictions. If
the Board of Directors decides to permit a transfer that would otherwise
violate the Transfer Restrictions, that transfer or later transfers may result
in an ownership change that would limit the use of the Company's NOLs. The
Board of Directors would only permit such an attempted transfer after making
the determination that such transfer is in the best interests of the Company,
after consideration of the risk that an ownership change might occur and any
additional factors that the Board of Directors deems relevant (including
possible future events).
As a result of the foregoing, the Transfer Restrictions serve to
reduce, but not necessarily eliminate, the risk that Section 382 will cause the
limitations described in more detail herein on the use of the Company's NOLs.
UNCERTAINTY AS TO MARKET PRICE OF THE COMMON STOCK
In light of the considerations set forth above, and the inherent
uncertainty as to future market prices of the stock of any public company, the
prices at which the Common Stock have traded in the past or are trading
immediately prior to the Closing Date will not necessarily be indicative of the
prices at which the Common Stock will trade following the Closing Date. See
"Company Information--Market Price of and Dividends on the Company's Common
Equity and Related Shareholder Matters."
23
<PAGE> 33
PROPOSAL NO. 1 -- THE STOCK ISSUANCE
OVERVIEW
INTRODUCTION
The Board of Directors believes that the best interests of the Company
and its shareholders will be served by the issuance and sale (the "Stock
Issuance") of 2,390,438 shares of Common Stock (the "Newly Issued Stock"), for
an aggregate purchase price of approximately $18 million, under the terms and
conditions of the Stock Purchase Agreement dated as of September 17, 1996 among
the Company, Insurance Partners, L.P., a Delaware limited partnership ("IP
Delaware"), Insurance Partners Offshore (Bermuda), L.P., a Bermuda limited
partnership ("IP Bermuda" and, together with IP Delaware, "IP"), and TJS
Partners, L.P., a New York limited partnership, and certain members of the
Company's management (together with IP, the "Purchasers"). The principal
reason for the Stock Issuance is to provide the Company a portion of the cash
it needs to fund its acquisition of Pac Rim (the "Acquisition" and, together
with the Stock Issuance and the Term Loan, the "Transaction"). For a
discussion of the Acquisition, see "--Use of Proceeds: The Acquisition."
Shareholders are urged to read carefully the following sections of this Proxy
Statement, including the related annexes, before voting on this proposal.
The simultaneous closing of the Acquisition is a condition to
consummation of the Stock Issuance. The Company has agreed to the Acquisition
for the reasons set forth in this Proxy Statement. See "--Use of Proceeds:
The Acquisition--Pac Rim Holding Corporation."
The affirmative vote of a majority of the outstanding shares of Common
Stock held by persons that are neither parties to the Stock Purchase Agreement
nor Associates of such parties voting at a meeting at which a quorum is present
is a precondition to the Stock Issuance. See "--Terms of the Stock
Issuance--Closing Conditions--Conditions to Purchasers' Obligations." The
Stock Issuance has been unanimously approved by the Company's Board of
Directors. In a separate vote, the disinterested directors of the Company
unanimously approved the Stock Issuance. Robert A. Spass, who is a director of
the Company and the President of the ultimate general partner of each of IP
Delaware and IP Bermuda, abstained from the formal partnership approval process
by IP Delaware and IP Bermuda of each such partnership's purchase of shares of
Newly Issued Stock. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE
SHAREHOLDERS VOTE IN FAVOR OF PROPOSAL NO. 1.
BACKGROUND OF STOCK ISSUANCE AND ACQUISITION
In July, 1996 and August, 1996, representatives of the Company spoke
at various times with representatives of Pac Rim to explore the possibility of
a business combination between the Company and Pac Rim.
To assist in the Company's evaluation of a possible acquisition of Pac
Rim, on July 30, 1996, the Company engaged Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ") to act as its financial advisor.
In late July and early August, 1996, representatives of the Company
initiated the Company's due diligence investigation of Pac Rim, and various
meetings between the principal executive officers of each of the Company and
Pac Rim were convened. To allow for the free flow of information relating to
the parties, the Company and Pac Rim entered into a confidentiality agreement
on August 22, 1996.
In early September, 1996, representatives of the Company, IP and each
of their respective legal advisors, and DLJ spoke at various times to discuss a
possible equity investment in the Company by IP and certain other investors,
the net proceeds of which would be used by the Company to pay a portion of the
purchase price for the outstanding shares of, and securities convertible into,
capital stock of Pac Rim.
At the regularly scheduled meetings of the Board of Directors held on
September 5, 1996 and September 6, 1996, the potential acquisition of Pac Rim
was presented to the Board of Directors by senior management of the Company.
At these meetings, the Board of Directors reviewed certain financial and
valuation information relating to Pac Rim that it deemed relevant, and it
authorized management to continue to investigate the possible acquisition
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of Pac Rim and to analyze various financial alternatives to finance any such
acquisition, including the incurrence of debt and the issuance and sale of the
Common Stock pursuant to the Stock Purchase Agreement. During the September 6,
1996 meeting, DLJ presented a financial analysis of the Transaction and orally
presented its opinion that the Transaction, taken as a whole, was fair to the
Company, from a financial point of view.
From September 6 to September 15, 1996, the Company's management and
its financial and legal advisors spoke with the management of Pac Rim and its
financial and legal advisors to negotiate the terms and conditions of a
definitive acquisition agreement. During this same period, the Company's
management and its financial and legal advisors conducted telephonic
conferences with representatives of IP and its legal advisors to negotiate the
terms and conditions of the definitive Stock Purchase Agreement pursuant to
which the Company would issue and sell to IP and certain other parties
approximately $18 million of the Company's Common Stock.
On September 15, 1996, a special telephonic meeting of the Company's
Board of Directors was held to update the Board of Directors with respect to
remaining open issues relating to the Acquisition and the Stock Issuance. The
Board approved the terms and conditions of the Stock Purchase Agreement and the
terms and conditions of the Pac Rim Acquisition Agreement and authorized the
transactions contemplated thereby, pending resolution by the Company's
management of all remaining open business issues.
On September 16 and September 17, 1996, executives of the Company and
Pac Rim and each of their respective legal advisors conducted telephonic
conferences to resolve all open business issues and to conclude the negotiation
of the Pac Rim Acquisition Agreement. During this same time period, executives
of the Company and IP and each of their respective legal and financial advisors
conducted telephonic conferences to resolve all open business issues and to
conclude the negotiation of the Stock Purchase Agreement. On September 17,
1996, the board of directors of Pac Rim approved the Pac Rim Acquisition
Agreement and the transactions contemplated thereby.
RATIONALE FOR STOCK ISSUANCE AND ACQUISITION
The Board of Directors has unanimously approved the Stock Issuance,
has determined the Stock Issuance is fair and in the best interests of the
Company and its shareholders, and recommends that the shareholders vote in
favor of "Proposal No. 1--The Stock Issuance." In reaching these conclusions,
the Board of Directors considered a number of factors that the Company's
shareholders should consider in deciding whether to vote in favor of Proposal
No. 1.
The Acquisition of Pac Rim provides the opportunity for the Company's
shareholders to recognize immediate strategic and financial benefits. The
consolidation of two mid-sized companies whose home offices are located only
eight miles apart should provide significant economies of scale that neither
company could achieve independently. The combined company will be able to
spread fixed costs over a wider premium base. In addition, Pac Rim's strong
presence in Southern California complements the Company's historical focus in
Northern and Central California. The Acquisition will also enable the Company
to more effectively utilize its $82.9 million of NOLs, a valuable corporate
asset. The foregoing statements contain forward-looking statements regarding
efficiencies and economies of scale that management believes may be achieved
through the acquisition of Pac Rim. Realization of management's beliefs and
projections will depend on a number of factors, including management's
successful execution of its business plan for integrating the operations of the
two companies, the insurance market's reception to the combination of the two
companies, and other factors beyond the Company's control. See "Certain
Considerations."
The principal reasons for the Stock Issuance are to provide: (i) a
portion of the cash necessary to consummate the Acquisition; and (ii) an equity
commitment sufficient to meet the requirements of prospective lenders in
conjunction with the Term Loan that will provide the remainder of the funds
needed to complete the Acquisition.
The Company investigated a number of transaction forms and terms
before selecting the Stock Issuance to raise the equity portion of the
Acquisition financing. The Company considered a shareholder rights offering
and various forms of public and private transaction structures, but rejected
them for various reasons, including
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complexity, timing uncertainties, dependence on market receptiveness, and the
expenses of placement fees, underwriting discounts, and other transaction
costs. Further, in negotiations with Pac Rim it became clear that the Company
would have to guarantee the availability of its financing. Thus, when the
Acquisition was to close, the Company would have to have committed financing
that it could call upon quickly and be confident that sufficient funds would be
available at the designated time. This need eliminated all transactions,
including a shareholder rights offering, that would rely upon the public market
(or a large group of people) determining at a future date whether to invest the
requisite sums needed to complete the Acquisition at or about the necessary
time. These transactions presented too much risk that the market would be
unfavorable and no transaction meeting the Company's needs could be completed
on a timely basis.
The Company determined, therefore, to complete a private equity
transaction, in the form of the Stock Issuance, with investors who have the
funds available to invest and who are known to the Company such that the
substantial equity ownership the investors would have at the completion of the
transaction would not be disruptive to the Company's future prospects.
IP, a related party to several 5 percent or greater shareholders of
the Company, was chosen as the primary investor for the equity transaction
because it had approached the Company in connection with the Acquisition and
communicated its desire and ability to enter quickly into a private equity
investment agreement with the Company committing it to provide a portion of the
Acquisition price. TJS Partners, L.P. ("TJS"), an 11.6% shareholder, was
chosen to participate in the Stock Issuance because it had, on a number of
occasions, communicated to the Company its willingness and ability to invest
equity in the Company. Because of the need to enter into an agreement quickly
with investors who had resources essentially "on hand" to commit to the
Company, and because no other practical alternatives were readily available,
the Company entered into serious negotiations with IP regarding the Stock
Issuance. Because IP was the largest investor by an overwhelming margin, IP,
in negotiations with the Company, determined the transaction terms from the
investors' side. Those terms were acceptable to TJS.
Members of the Company's management were asked to participate in the
Stock Issuance by IP because it is IP's policy to require the management of the
companies in which it makes investments to make a simultaneous, material
investment on the same terms as IP's investment as a confirmation of such
management's faith in their own ability to make IP's investment successful. IP
did, however, agree to purchase the entire $18 million of Common Stock to be
issued and sold in the Stock Issuance if any of TJS or any members of the
Company's management were unable to meet their investment commitment. Because
of the conflict of interest inherent in management's participation in the Stock
Issuance, none of the Company's management played a leading role in
negotiations regarding the terms and conditions of the Stock Issuance.
Instead, C. Len Pecchenino, an independent director of the Company who serves
as Chairman of the Board of Directors, was designated by the Board of Directors
to negotiate the Stock Purchase Agreement on behalf of the Company. Mr.
Pecchenino, in consultation with the Company's lawyers and investment bankers,
performed that function.
OPINION OF FINANCIAL ADVISOR
At the meeting of the Board of Directors on September 6, 1996, DLJ
gave a presentation, and subsequently delivered an opinion, to the effect that
the Transaction, taken as a whole, was fair to the Company, from a financial
point of view. No limitations were imposed by the Company with respect to the
investigations made or the procedures followed by DLJ in rendering its opinion.
THE FULL TEXT OF THE OPINION OF DLJ DATED SEPTEMBER 17, 1996, WHICH
SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITS ON THE REVIEW
UNDERTAKEN, IS ATTACHED AS ANNEX B TO THIS PROXY STATEMENT. THE COMPANY'S
SHAREHOLDERS ARE URGED TO READ SUCH OPINION IN ITS ENTIRETY. DLJ'S OPINION IS
DIRECTED ONLY TO THE FAIRNESS OF THE TRANSACTION, TAKEN AS A WHOLE, AND DOES
NOT CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER OF THE COMPANY AS TO HOW
SUCH SHAREHOLDER SHOULD VOTE WITH RESPECT TO THE STOCK ISSUANCE. THE SUMMARY
OF THE OPINION OF DLJ SET FORTH IN THIS PROXY STATEMENT IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
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In its role as financial advisor to the Company, DLJ was asked by the
Company to render its opinion to the Board of Directors as to the fairness,
from a financial point of view, to the Company of (i) the consideration to be
paid by the Company pursuant to: (a) the terms of the Pac Rim Acquisition
Agreement, among the Company, Merger Sub and Pac Rim pursuant to which Merger
Sub will be merged (the "Acquisition") with and into Pac Rim, and, (b) the
terms of the Series A Convertible Debentures and Series 1, 2 and 3 Detachable
Warrant Purchase Agreement dated as of September 17, 1996 (the "Debenture
Purchase Agreement") by and among the Company, Prac Limited Partnership and
Allstate Insurance Company pursuant to which the Company will purchase the
Series A Convertible Debentures of Pac Rim (the "Convertible Debentures") and
the Series 1, 2, and 3 Detachable Warrants of Pac Rim (the "Pac Rim Warrants"),
and (ii) the consideration to be received by the Company pursuant to the Stock
Purchase Agreement. On September 17, 1996, DLJ delivered its written opinion
(the "DLJ Opinion") to the Board of Directors to the effect that, as of the
date of such opinion and based upon and subject to the assumptions, limitations
and qualifications set forth in such opinion, the Transaction, taken as a
whole, was fair to the Company from a financial point of view.
A copy of the DLJ Opinion is attached hereto as Annex B. The
Company's shareholders are urged to read the opinion in its entirety for
assumptions made, procedures followed, other matters considered and limits of
the review by DLJ.
The DLJ Opinion was prepared for the Board of Directors and is
directed only to the fairness, from a financial point of view, to the Company,
and does not constitute a recommendation to any shareholder as to how to vote
at the Special Meeting.
In arriving at its opinion, DLJ reviewed the Pac Rim Acquisition
Agreement, the Stock Purchase Agreement, the Debenture Purchase Agreement, the
Series 3 Detachable Warrant Surrender Agreement, dated as of September 17, 1996
by and among Pac Rim and the individuals named therein, a draft of the
Registration Rights Agreement dated as of September 17, 1996 among the Company
and IP and the Voting Agreement dated as of September 17, 1996 by and among the
Company and the holders of Pac Rim Common Stock and Convertible Debentures
named therein. DLJ also reviewed financial and other information that was
publicly available or furnished to DLJ by the Company and Pac Rim including
information provided during discussions with their respective managements.
Included in the information provided during discussions with the respective
managements were certain financial projections of the Company for the period
beginning December 31, 1996 and ending December 31, 2001, prepared by the
management of the Company, certain financial projections of Pac Rim for the
period beginning December 31, 1996 and ending December 31, 2001 prepared by the
management of Pac Rim, and certain financial projections of the Company which
are pro forma for the Transaction and certain other actions contemplated by the
Company for the period beginning December 31, 1996 and ending December 31,
2001, prepared by the management of the Company. In addition, DLJ compared
certain financial and securities data of the Company and Pac Rim with various
other companies whose securities are traded in public markets, reviewed the
historical stock prices and trading volumes of the Company's Common Stock and
Pac Rim Common Stock, reviewed prices and premiums paid in certain other
business combinations, considered the Company's access to sources of equity
other than pursuant to the Stock Purchase Agreement and conducted such other
financial studies, analyses and investigations as it deemed appropriate for
purposes of this opinion. DLJ was not requested to, and did not, solicit the
interest of any other party in making an investment in the Company.
In rendering its opinion, DLJ relied upon and assumed the accuracy,
completeness and fairness of all of the financial and other information that
was available from public sources, that was provided by the Company and Pac Rim
or their respective representatives, or that was otherwise reviewed by DLJ. In
particular, DLJ relied upon the estimates of the management of the Company of
the operating synergies achievable as a result of the Acquisition and upon the
discussion of such synergies with the management of Pac Rim. With respect to
the financial projections supplied to DLJ, DLJ has assumed that they have been
reasonably prepared on a basis reflecting the best currently available
estimates and judgments of the management of the Company as to the future
operating and financial performance of the Company and Pac Rim. DLJ did not
make any independent evaluation of the Company's or Pac Rim's assets or
liabilities, nor did DLJ verify any of the information reviewed by it.
The DLJ Opinion is necessarily based on economic, market, financial
and other conditions as they exist on, and on the information made available to
DLJ as of the date of the DLJ Opinion. It should be understood that,
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<PAGE> 37
although subsequent developments may affect its opinion, DLJ does not have any
obligation to update, revise or reaffirm the DLJ Opinion.
The following is a summary of the presentation made by DLJ to the
Board of Directors on September 6, 1996 and subsequently included in DLJ's
opinion dated September 17, 1996.
Pac Rim Public Market Valuation Analysis. To provide contextual data
and comparative market information, DLJ compared selected share price and
operating and financial data and ratios for Pac Rim to the corresponding data
and ratios of the following publicly traded workers' compensation companies:
Argonaut Group, Fremont General, Zenith National and the Company (the "Publicly
Traded Companies"). Such ratios included, among others, the multiples of stock
price to shareholders' equity per share as of June 30, 1996, as well as the
ratios of the aggregate equity market capitalization plus the amount of debt
and preferred stock outstanding ("Enterprise Value") to statutory earnings for
the last fiscal year ("LFY") and Enterprise Value to statutory capital and
surplus as of the end of the LFY. Because Pac Rim's GAAP operating earnings
for the last twelve months ended June 30, 1996 ("LTM") were negative, a
multiple of this figure was not meaningful for comparative purposes.
Additionally, Pac Rim has no current publicly available earnings estimates from
the Institutional Brokers Estimate System. The range of multiples of price to
LTM shareholders' equity for the Publicly Traded Companies at the date of DLJ's
presentation to the Company's Board was 0.88x to 1.46x. The ranges of
Enterprise Value as a multiple of LFY statutory net income and Enterprise Value
as a multiple of LFY statutory capital and surplus were 12.2x to 35.5x and
0.75x to 4.57x, respectively. The average multiples of price to LTM
shareholders' equity, Enterprise Value to LFY statutory net income and
Enterprise Value to LFY statutory capital and surplus for the Publicly Traded
Companies were 1.16x, 23.3x and 2.18x, respectively. This analysis indicated
that the total consideration to be paid by the Company would result in
multiples of price to LTM shareholders' equity and Enterprise Value to LFY
statutory net income and Enterprise Value to LFY statutory capital and surplus
within or below the ranges detailed above. The total consideration to be paid
by the Company would result in a purchase price multiple to Pac Rim's June 30,
1996 shareholders' equity of 0.85x, an Enterprise Value multiple to Pac Rim's
LFY statutory net income of 12.3x and an Enterprise Value multiple to Pac Rim's
LFY statutory capital and surplus of 1.29x.
Pac Rim Merger Market Valuation Analysis. DLJ reviewed publicly
available information for selected transactions involving the acquisition of
property and casualty insurance companies since January 1, 1989 (the "Selected
Transactions"). In reviewing these transactions, several limitations on the
analysis existed, including: (i) the lack of publicly available information
for subsidiary and private company transactions which represent a significant
portion of the merger and acquisition activity within the property and casualty
industry; and (ii) the lack of directly comparable transactions. The Selected
Transactions were not intended to represent the complete list of property and
casualty insurance company transactions which have occurred over the period
contemplated. Rather, such transactions included only selected recent
transactions involving property and casualty insurance companies. Such
transactions were used in this analysis because the companies involved were
broadly deemed by DLJ to operate in similar businesses or have similar
financial characteristics to the Company and Pac Rim.
DLJ reviewed the consideration paid in such transactions in terms of
the price paid for the common stock plus the amount of debt and preferred stock
assumed, repaid or redeemed in such transactions (the "Transaction Value") as a
multiple of statutory operating earnings for the LFY ended prior to the
announcement of such transactions and as a multiple of statutory capital and
surplus as of the end of the LFY ended prior to the announcement of such
transactions. In analyzing acquisitions of property and casualty insurance
companies, the purchase price paid may be expressed as multiples of the
Transaction Value to statutory operating earnings and to statutory capital and
surplus. Variances in multiples for different transactions may reflect such
considerations as the consistency, quality and growth of earnings and the
company's capitalization, asset quality and return on surplus. Since statutory
operating earnings and statutory capital and surplus do not reflect the cost of
a company's debt or preferred stock financing, which are usually at the holding
company level rather than the insurance company level, multiples of statutory
operating earnings and statutory capital and surplus are appropriately based on
a Transaction Value which includes the cost of assuming, repaying or redeeming
such debt or preferred stock financing. Comparing the multiples of Transaction
Value to be paid for Pac Rim by the Company to the statutory operating earnings
and statutory capital and surplus of Pac Rim with the multiples paid in other
transactions indicates whether
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the valuation being placed on Pac Rim is within the range of values paid for
other property and casualty insurance companies.
The low, average and high multiples of Transaction Value to statutory
operating earnings for the LFY prior to the announcement of the Selected
Transactions were 6.3x, 16.3x and 62.5x, respectively. Based on the
consideration to be paid by the Company, the implied multiple of Transaction
Value to Pac Rim's statutory operating earnings for the LFY was 12.3x. The
low, average and high multiples of Transaction Value to statutory capital and
surplus as of the end of the LFY ended prior to the announcement of the
Selected Transactions were 0.56x, 1.79x and 5.00x, respectively. Based on the
consideration to be paid by the Company, the implied multiple of Transaction
Value to Pac Rim's LFY statutory capital and surplus was 1.29x. In both cases,
the consideration to be paid by the Company results in multiples within the
range of those multiples of the Selected Transactions.
Additionally, DLJ reviewed the consideration paid in the Selected
Transactions in terms of the price paid for the common stock in the Selected
Transactions as a multiple of GAAP operating earnings for the LTM ended prior
to the announcement of such transactions and as a multiple of shareholders'
equity as of the end of the last fiscal quarter ("LFQ") ended prior to the
announcement of such transactions. In analyzing acquisitions of property and
casualty insurance companies, the purchase price paid may be expressed as
multiples of the price paid for common stock to GAAP operating earnings and to
shareholders' equity. Variances in multiples for different transactions may
reflect such considerations as the consistency, quality and growth of earnings
and the company's capitalization, asset quality and return on capital. Since
GAAP operating earnings and shareholders' equity already reflect the cost of a
company's debt or preferred stock financing, multiples of GAAP operating
earnings or shareholders' equity are appropriately based on the price paid for
the company's common stock, which excludes the cost of assuming, repaying or
redeeming such debt or preferred stock financing. Comparing the multiples of
the price offered to be paid for Pac Rim Common Stock by the Company to the
GAAP operating earnings and shareholders' equity of Pac Rim with similar
multiples paid by acquirers in other transactions indicates whether the
valuation being placed on Pac Rim is within the range of values paid for other
property and casualty insurance companies.
The low, average and high multiples of price paid for common stock to
LTM GAAP operating earnings for the Selected Transactions were 2.1x, 19.4x and
57.3x, respectively. Based on the consideration to be paid by the Company, the
implied multiple of price paid for common stock to Pac Rim's LTM GAAP operating
earnings was not meaningful because Pac Rim's LTM operating earnings were
negative. The low, average and high multiples of price paid for common stock
to shareholders' equity as of the end of the LFQ ended prior to the
announcement of the Selected Transactions were 0.36x, 1.40x and 3.86x,
respectively. Based on the consideration to be paid by the Company, the
implied multiple of price paid for Pac Rim Common Stock to Pac Rim's LFQ
shareholders' equity was 0.85x.
DLJ also determined the percentage premium of the offer prices
(represented by the purchase price per share in cash transactions and the price
of the constituent securities times the exchange ratio in the case of
stock-for-stock mergers) over the public market trading prices one day, one
week and one month prior to the announcement date of seven selected merger and
acquisition transactions since January 5, 1993 where the acquired company's
stock was publicly traded and the merger consideration was in the form of both
cash and common stock (the "Selected Public Transactions"). The average
premiums of offer prices to public market trading prices one day, one week and
one month prior to the announcement date for the Selected Public Transactions
were 35.8%, 41.9% and 39.0% respectively. The consideration to be paid by the
Company represents premiums to the trading prices of Pac Rim Common Stock one
day, one week and one month prior to September 3, 1996 of 11.6%, 11.6% and
41.2%, respectively.
Analysis of Pac Rim Common Stock Trading History. DLJ also examined
the history of the trading prices for Pac Rim Common Stock, and the historical
multiple of price to shareholders' equity per share as represented by the
historical values of Pac Rim Common Stock. Since March 8, 1991, Pac Rim's
stock price has traded between $1.75 and $10.00. Since January 7, 1994, the
multiple of price to shareholders' equity per share of Pac Rim Common Stock has
ranged from 0.46x to 0.98x. The consideration to be paid for Pac Rim Common
Stock results in a multiple of June 30, 1996 shareholders' equity of 0.85x.
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Discounted Cash Flow Analysis. DLJ also performed a discounted cash
flow analysis, calculating the present value of terminal values of Pac Rim's
equity. Because actual cash flow for property and casualty insurance companies
is largely a function of state regulations, discounting actual cash flow may
provide a distorted picture of a given company's actual equity value. Terminal
values for the purpose of DLJ's analysis were based upon multiples of Pac Rim's
projected GAAP operating income and projected shareholders' equity. Terminal
values were calculated assuming the synergies projected by management. The
multiples used to obtain the terminal values were based on a range of multiples
reflecting the multiples of GAAP operating income and shareholders' equity
found among the Publicly Traded Companies. Assuming synergies as projected by
management and discounting the terminal value based on multiples of 2000
projected operating earnings from 8.0x to 12.0x by discount rates ranging from
10.0% to 15.0%, DLJ obtained a value for Pac Rim Common Stock of between $2.29
and $6.20 per share. Assuming synergies as projected by management and
discounting the terminal value based on multiples of 2000 projected
shareholders' equity from 0.80x to 1.60x by discount rates ranging from 10.0%
to 15.0%, DLJ obtained a value for Pac Rim Common Stock of between $1.69 and
$7.74 per share. The consideration to be paid for Pac Rim Common Stock fits
within these ranges.
Effect of the Transaction on the Company's Financial Position and
Expected Earnings. DLJ analyzed certain pro forma financial effects resulting
from the Transaction. In conducting its analysis, DLJ relied upon certain
assumptions and financial projections as described above. DLJ analyzed the pro
forma effect of the Transaction on the Company's operating earnings per share
and on the Company's leverage ratios. DLJ has incorporated estimates of
expense savings as provided by management of the Company for the years 1997 and
1998 in its analysis although DLJ does not express an opinion as to the
likelihood of such expense savings being realized. The results of the pro
forma merger analysis are not necessarily indicative of future operating
results or financial position. Based on this analysis, and relying on the
estimates provided by the Company, the Company's shareholders should realize
earnings per share ("EPS") accretion of 32.4% and 19.4% in 1997 and 1998,
respectively, versus the Company's projected results on a stand-alone basis.
Pro forma for the Transaction, the Company's ratios of debt to total
capitalization and debt and preferred stock to total capitalization as of March
31, 1996 would be 35.6% and 51.7%, respectively. On a stand-alone basis,
these ratios were 11.1% and 40.5%, respectively, as of March 31, 1996. These
ratios of debt to total capitalization and debt and preferred stock to total
capitalization are projected to decline to 28.8% and 48.3%, respectively, in
1997 and 22.4% and 41.3%, respectively, in 1998 assuming the projections put
together by management of the Company.
Public Market Valuation Analysis of the Company. To provide
contextual data and comparative market information, DLJ compared selected share
price and operating and financial data and ratios for the Company to the
corresponding data and ratios of the following publicly traded companies:
Argonaut Group, Fremont General, Zenith National and Pac Rim (the "Comparable
Companies"). Such ratios included, among others, the multiples of stock price
to shareholders' equity per share as of June 30, 1996, as well as the ratios of
the Enterprise Value to statutory earnings for the LFY and Enterprise Value to
statutory capital and surplus as of the end of the LFY. The range of price as
a multiple of LTM shareholders' equity per share for the Comparable Companies
at the date of the DLJ Opinion was 0.74x to 1.46x. DLJ found ranges of
Enterprise Value as a multiple of LFY statutory net income and Enterprise Value
as a multiple of LFY statutory capital and surplus of 9.0x to 31.3x and 0.94x
to 4.57x, respectively. The average multiples of price to LTM shareholders'
equity, Enterprise Value to LFY statutory net income and Enterprise Value to
LFY statutory capital and surplus for the Comparable Companies were 1.13x,
16.6x and 2.23x, respectively. This analysis indicated that the amount to be
paid by the Purchasers for the Common Stock would result in multiples of price
to LTM shareholders' equity and Enterprise Value to LFY statutory net income
within the ranges detailed above. The total amount to be paid by the
Purchasers would result in a multiple to the Company's LTM shareholders' equity
of 0.85x, an Enterprise Value multiple to the Company's LFY statutory net
income of 34.7x and an Enterprise Value multiple to the Company's LFY statutory
capital and surplus of 0.73x.
Analysis of the Company Ordinary Share Trading History. DLJ also
examined the history of the trading prices for the Common Stock, and the
historical multiples of price to shareholders' equity per share as represented
by the historical values of the Common Stock. Since March 5, 1996, the
Company's stock price has traded between $4.88 and $8.00. Since March 5, 1996,
the multiple of price to shareholders' equity per share of the Company's Common
Stock has moved in a range from 0.55x to 0.89x. The consideration to be paid
by the Purchasers for the Common Stock results in a multiple to the Company's
June 30, 1996 shareholders' equity of 0.85x.
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Limitations of Opinion. The summary set forth above does not purport
to be a complete description of the analyses performed by DLJ. The preparation
of fairness opinions involves various determinations as to the most appropriate
and relevant methods of financial analysis and the application of these methods
to the particular circumstances and, therefore, such opinions are not readily
susceptible to summary description. The preparation of a fairness opinion does
not involve a mathematical evaluation or weighing of the results of the
individual analyses performed, but requires DLJ to exercise its professional
judgment--based on its experience and expertise--in considering a wide variety
of analyses taken as a whole. Each of the analyses conducted by DLJ was
carried out in order to provide a different perspective on the transaction and
to add to the total mix of information available. DLJ did not form a
conclusion as to whether any individual analysis, considered in isolation,
supported or failed to support an opinion as to fairness. Rather, in reaching
its conclusion, DLJ considered the results of the analyses in light of each
other and ultimately reached its opinion based on the results of all analyses
taken as a whole. DLJ did not place particular reliance or weight on any
individual analysis, but instead concluded that its analyses, taken as a whole,
supported its determination. Accordingly, notwithstanding the separate factors
summarized above, DLJ believes that its analyses must be considered as a whole
and that selecting portions of its analyses and the factors considered by it,
without considering all analyses and factors, may create an incomplete view of
the evaluation process underlying its opinion. In performing its analyses, DLJ
made numerous assumptions with respect to industry performance, business and
economic conditions and other matters. The analyses performed by DLJ are not
necessarily indicative of actual values or future results, which may be
significantly more or less favorable than those suggested by such analyses.
Engagement and Fees Payable to DLJ. The Company selected DLJ as its
financial advisor because it is a nationally recognized investment banking firm
that has substantial experience in transactions similar to the Transaction and
is familiar with the Company, its business and the insurance industry.
Pursuant to the terms of an engagement letter dated July 29, 1996, the Company
has paid DLJ $375,000 for its services to date, including the delivery of the
DLJ Opinion. In addition, the Company has agreed to pay DLJ 1.25% of the
aggregate amount of consideration received by Pac Rim shareholders and
including in such consideration the amount of any debt of Pac Rim assumed,
acquired, retired or deceased or preferred stock redeemed or remaining
outstanding, less $375,000. The Company also agreed to reimburse DLJ for all
out-of-pocket expenses (including the reasonable fees and out-of-pocket expense
of counsel) incurred by DLJ in connection with its engagement and to indemnify
DLJ and certain related persons against certain liabilities in connection with
its engagement, including liabilities under the federal securities laws. The
terms of the fee arrangement with DLJ, which DLJ and the Company believe are
customary in transactions of this nature, were negotiated at arm's length
between the Company and DLJ, and the Company's Board of Directors was aware of
such arrangement.
DLJ has performed investment banking and other services for IP in the
past and has been compensated for such services. DLJ served as financial
advisor to IP in IP's investments in NACOLAH Holding Corporation, Highlands
Insurance Group, Inc., and Provident Companies, Inc. and as lead manager of the
initial public offering of the common stock of Unionamerica Holdings, plc, an
entity in which IP has an investment. Affiliates of DLJ, in the aggregate, own
less than 2% of the limited partnership interests in each of IP, IP Bermuda and
Insurance Partners Advisors, L.P.
MANAGEMENT AFTER THE STOCK ISSUANCE AND THE ACQUISITION
Directors. The Company's current directors will continue to serve as
directors if the Stock Issuance and Acquisition are consummated. Additionally,
pursuant to the terms of the Stock Purchase Agreement and assuming that (i) the
shareholders approve each of "Proposal No. 1--The Stock Issuance," "Proposal
No. 2--Transfer Restrictions Charter Amendment," "Proposal No. 4--Amendment of
Bylaws to Increase Authorized Number of Directors," and (ii) the other
conditions precedent to the consummation of the Stock Issuance and the
Acquisition are satisfied or waived, the Board of Directors will be expanded
from nine to eleven directors. The Board of Directors intends to present
Steven B. Gruber and Roger W. Gilbert as nominees to fill such newly-created
vacancies. If elected, Messrs. Gruber and Gilbert will serve until each of
their respective successors has been duly elected and qualified or otherwise as
provided by law. See "Proposal No. 5--Election of Two Additional Directors."
31
<PAGE> 41
Officers. Following the consummation of the Stock Issuance, all
executive officers of the Company will remain in their present positions.
Following the consummation of the Acquisition, the executive officers of Pac
Rim will be replaced with the executive officers of Superior Pacific Holding
Corporation, the successor by merger to Merger Sub and Pac Rim.
PRIOR RELATIONSHIPS
Prior to the commencement of negotiations regarding the Stock
Issuance, no business relationship existed between the Company and IP.
However, since 1992, the Company has had significant business relationships
with certain persons or entities related to IP, including International
Insurance Investors, L.P. ("III"), CentreLine Reinsurance Limited
("CentreLine"), Centre Reinsurance Limited ("Centre"), International Insurance
Advisors, Inc. ("IIA"), and Robert A. Spass, Steven D. Germain and Bradley E.
Cooper, who are directors of the Company. See "Proposal No. 5--Certain
Relationships and Related Transactions" and "Company Information--Security
Ownership of Certain Beneficial Owners and Management--Security Ownership of
Certain Beneficial Owners." Prior to the commencement of negotiations
regarding the Acquisition, no business relationship existed between the Company
and Pac Rim.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AFTER THE STOCK ISSUANCE
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information regarding an
estimate of the beneficial ownership of the Company's voting securities
immediately following the consummation of the Stock Issuance, currently
estimated to occur at some time during the period from mid-December, 1996, to
mid-January, 1997, by each person the Company expects to be a beneficial owner
of more than 5% of the indicated classes of the Company's voting securities.
On March 31, 1992, the Company issued its 14.5% Senior Subordinated Voting
Notes due April 1, 2002 (the "Voting Notes") in the aggregate principal amount
of $30,000 and 14.5% Senior Subordinated promissory notes in an aggregate
principal amount of $11 million, together with warrants to purchase
approximately 1,616,886 shares of the Company's Common Stock. The Company
redeemed all of those promissory notes with a prepayment, effective June 30,
1994, except for the Voting Notes, with respect to which prepayment is
prohibited. The outstanding principal amount of the Voting Notes is $30,000.
The number of votes attaching to the Voting Notes is equal to the number of
shares of Common Stock that may be purchased upon exercise of the warrants that
were issued in that March 31, 1992 transaction and that remain outstanding and
are unexercised as of the applicable record date for a shareholder vote. As a
result of the cancellation of a portion of the relevant warrants, the number of
common stock-equivalent votes held by the Voting Notes has decreased somewhat
since March 31, 1992. As of the Record Date, the number of votes held by the
holders of the Voting Notes was equivalent to 1,566,465 shares of Common Stock.
The Voting Notes are permitted to vote only in director elections, director
removals, changes to the number of authorized directors, and votes on amending
that right to vote. The specific voting rights of the Voting Notes are set
forth in the Company's Amended and Restated Articles of Incorporation and
Bylaws.
32
<PAGE> 42
<TABLE>
<CAPTION>
Certain Beneficial Owners After the Stock Issuance
--------------------------------------------------
Common Stock(1) Voting Notes
---------------------- ---------------------
Shares-
Name and Address Shares Percent(2) Equivalent Percent
---------------- ------ ---------- ---------- -------
<S> <C> <C> <C> <C>
"III" -- -- 1,566,465(3) 100%
International Insurance Investors, L.P.,
a Bermuda limited partnership
c/o International Insurance Investors
(Bermuda) Limited, General Partner
Cumberland House
One Victoria Street
Hamilton HM HX, Bermuda
"IP DELAWARE" 1,369,856(4) 23.52% -- --
Insurance Partners, L.P.
201 Main Street
Suite 2600
Ft. Worth, Texas 76102
"IP BERMUDA" 754,978(5) 12.96% -- --
Insurance Partners Offshore (Bermuda), L.P.
Cedar House
41 Cedar Avenue
P.O. Box HM 1179
Hamilton HM HX, Bermuda
"CENTRELINE" 579,356(6) 9.05% -- --
CentreLine Reinsurance Limited,
a Bermuda corporation
Cumberland House
One Victoria Street
Hamilton HM HX, Bermuda
"TJS" 529,752(7) 9.09% -- --
TJS Partners, L.P.
52 Vanderbilt Avenue, 5th Floor
New York, New York 10017
"CENTRE" 470,390(8) 7.47% -- --
Centre Reinsurance Limited
One Victoria Street
Seventh Floor
Hamilton HM HX, Bermuda
"BISHOP ESTATE" 388,752(9) 6.26% -- --
Trustees of the Estate of Bernice P. Bishop
567 South King Street
Suite 200
Honolulu, Hawaii 96813
</TABLE>
_________________
(1) Includes warrants expiring on April 1, 2002 to purchase 1,566,465
shares of Common Stock (the "Warrants") and a warrant expiring on June
30, 2001 to purchase 579,356 shares of Common Stock described more
fully in footnote 6, below. The Warrants were issued on March 31,
1992 in a transaction in which the Company issued (a) Warrants to
purchase approximately 1,616,886 shares of Common Stock and (b)
promissory notes in the aggregate principal amount of $11 million to
III, and certain members of the Company's management. The Warrants
are exercisable at $4.00 per share. The Warrants purchased by III,
exercisable into 1,474,306 shares of Common Stock, were issued to
International Insurance Advisors, Inc. ("IIA"), as agent for each of
the limited partners and the general partner of III. Pursuant to the
Stock Purchase Agreement, the Warrants will be distributed prior to
the consummation of the Stock Issuance to the partners of III, at
which time IIA's agency relationship with such partners will
terminate. The Company has retired certain Warrants issued to members
of management no longer employed by the Company.
(2) Percent ownership is based on the approximate number of shares
outstanding upon consummation of the Stock Issuance, which number is
5,827,961 shares, plus any shares issuable pursuant to warrants held
by the entity in question which may be exercised within 60 days after
December 12, 1996.
(3) Robert A. Spass, Craig F. Schwarberg, and Bradley E. Cooper, each of
whom is a director of the Company, beneficially owns limited
partnership interests in III of 0.583%, 0.225%, and 0.075%,
respectively.
33
<PAGE> 43
(4) Represents shares of Common Stock that will be purchased by IP
Delaware upon consummation of the Stock Issuance. Robert A. Spass, a
director of the Company, and Steven B. Gruber, a nominee for election
as director at the Special Meeting, are the President and a Vice
President, respectively, of Insurance GenPar MGP, Inc. ("GenPar
Inc."), the general partner of Insurance GenPar MGP, L.P. ("GenPar
MGP"), the general partner of Insurance GenPar, L.P. ("GenPar" and,
together with GenPar MGP and IP Delaware, the "Delaware
Partnerships"), which is the general partner of IP Delaware. Robert
A. Spass owns 40% and Messrs. Gruber and Daniel L. Doctoroff each own
30% of the voting capital stock of GenPar Inc. In addition, Messrs.
Spass, Gruber, Doctoroff, and Bradley E. Cooper, a director of the
Company, own direct or indirect limited partnership interests in
certain of the Delaware Partnerships. Each of Messrs. Spass, Gruber,
and Cooper, as well as Mr. Doctoroff, disclaims beneficial ownership
(as defined in Rule 13d-3 under the Exchange Act) of all shares of
Common Stock that will be held by IP Delaware.
(5) Represents shares of Common Stock that will be purchased by IP Bermuda
upon consummation of the Stock Issuance. Robert A. Spass, a director
of the Company, and Steven B. Gruber, a nominee for election as
director at the Special Meeting, are the President and a Vice
President, respectively, of Insurance GenPar (Bermuda) MGP, Ltd.
("GenPar (Bermuda) Ltd."), the general partner of Insurance GenPar
(Bermuda) MGP, L.P. ("GenPar (Bermuda) MGP"), the general partner of
Insurance GenPar (Bermuda), L.P. ("GenPar (Bermuda)" and, together
with GenPar (Bermuda) MGP and IP Bermuda, the "Bermuda Partnerships"),
which is the general partner of IP Bermuda. Robert A. Spass owns 40%
and Messrs. Gruber and Doctoroff each own 30% of the voting capital
stock of GenPar (Bermuda) Ltd. In addition, each of Messrs. Spass,
Gruber, Doctoroff, and Bradley E. Cooper, a director of the Company,
owns direct or indirect limited partnership interests in certain of
the Bermuda Partnerships. Each of Messrs. Spass, Gruber, and Cooper,
as well as Mr. Doctoroff, disclaims beneficial ownership (as defined
in Rule 13d-3 under the Exchange Act) of all shares of Common Stock
that will be held by IP Bermuda.
(6) Represents a warrant to purchase 579,356 shares of Common Stock issued
as of June 30, 1994 (the "CentreLine Warrant"). CentreLine is an
affiliate of Centre. See footnote 8 below for information regarding
Centre's beneficial ownership of securities of the Company. The
CentreLine Warrant was issued in connection with an investment in the
Company (and its affiliate, Superior National Capital, L.P.) by
CentreLine and a second Centre affiliate, Centre Reinsurance Services
(Bermuda) III Limited, aggregating $20 million. The CentreLine
Warrant is exercisable at $5.20 per share. Steven D. Germain, a
director of the Company, is an officer and a director of both Centre
and CentreLine. In addition to Mr. Germain, each of Steven M.
Gluckstern, Michael D. Palm, Laurence Cheng, David A. Brown and Jay S.
Ralph is an officer and a director of both Centre and CentreLine.
Messrs. Germain, Gluckstern, Palm, Cheng, Brown and Ralph disclaim any
beneficial interest in the CentreLine Warrant and the Common Stock
issuable upon its exercise, and in the Warrants issuable to Centre, as
described in footnote 8, below, and the shares of Common Stock
issuable upon the exercise of such Warrants. However, as officers and
directors of both Centre and CentreLine, such persons share voting
and/or investment power over such securities. Neither Robert A.
Spass, Steven B. Gruber, Craig F. Schwarberg nor Bradley E. Cooper has
any interest in or control over CentreLine or any power to vote or
dispose of the shares underlying the CentreLine Warrant.
(7) Includes 132,802 shares to be issued to and purchased by TJS upon
consummation of the Stock Issuance. Also includes 396,950 shares of
Common Stock of which TJS is currently the direct beneficial owner.
TJS Corporation and its controlling stockholder, sole director and
executive officer, Thomas J. Salvatore, are the general partners of
TJS Management, L.P., the general partner of TJS, and exercise voting
control and dispositive power over all shares presently owned, and all
shares that would be owned, upon consummation of the Stock Issuance
and are and would be the beneficial owners of all such shares. The
information contained in this footnote, other than that relating to
the Stock Issuance, is based on Form 4s filed with the SEC in July
1996.
(8) Represents Warrants to purchase shares of Common Stock that would be
received upon the distribution by III to its partners of the Warrants
as described in footnote 1 above. See footnote 6 above for
information concerning Centre's relationships with Mr. Steven D.
Germain and CentreLine.
(9) Represents Warrants to purchase shares of Common Stock that would be
received upon the distribution by III to its partners of the Warrants
as described in footnote 1 above. Richard S. H. Wong, Oswald K.
Stender, Lokelani Lindsey, Gerard A. Jervis and Henry H. Peters, the
trustees of the Bishop Estate, share voting and/or investment power
over securities held by the Bishop Estate. The number of shares
reported for the Bishop Estate is based on a Schedule 13G filed with
SEC in February 1996.
34
<PAGE> 44
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth certain information regarding an
estimate of the beneficial ownership of the Common Stock immediately following
consummation of the Stock Issuance, which for purposes of this table is
estimated to occur on or about December 12, 1996, by (i) each director and
certain executive officers of the Company and each person who the Company
expects to be elected as a director at the Special Meeting, individually, and
(ii) all directors and executive officers and all persons the Company expects
to be elected as directors at the Special Meeting, as a group:
<TABLE>
<CAPTION>
Ownership of Management After the Stock Issuance
------------------------------------------------
Percent of Common
Name Shares Owned Stock(1)
---- ------------ -----------------
<S> <C> <C>
William Gentz . . . . . . . . . . . 94,219(2) 1.61%
J. Chris Seaman . . . . . . . . . . 167,818(3) 2.83%
Joseph P. Wolonsky . . . . . . . . 58,538(4) 1.00%
Karl O. Johnson . . . . . . . . . . 51,368(5) *
Douglas R. Roche . . . . . . . . . 26,351(6) *
Thomas J. Jamieson . . . . . . . . 245,300(7) 4.21%
Gordon E. Noble . . . . . . . . . . 10,000 *
C.L. Pecchenino . . . . . . . . . . 14,250 *
Robert A. Spass . . . . . . . . . . 16,591(8) *
Craig F. Schwarberg . . . . . . . . 3,321(9) *
Bradley E. Cooper . . . . . . . . . 3,107(10) *
Steven D. Germain . . . . . . . . . 1,053,947(11) 15.32%
Steven B. Gruber . . . . . . . . . -- (12) --
Roger W. Gilbert . . . . . . . . . -- --
Directors and Executive Officers as
a Group (22 persons) . . . 2,821,650(13) 34.68%
- - -----------------
</TABLE>
* Less than 1%
(1) Percent ownership is based on the approximate number of shares outstanding
upon consummation of the Stock Issuance, which number is 5,827,961 shares,
plus any shares issuable pursuant to options or warrants held by the
person in question that may be exercised within 60 days after December 12,
1996.
(2) Includes 16,335 shares issuable upon exercise of stock options that are
exercisable within sixty days of December 12, 1996, in addition to 19,950
restricted stock grants awarded under the 1995 Plan in 1995 and 1996, of
which the restrictions have lapsed as to 1,149 shares. Also includes
25,234 shares of Common Stock to be issued to and purchased by Mr. Gentz
in connection with the Stock Issuance.
(3) Includes 58,795 shares issuable upon exercise of Warrants and 37,065
shares issuable upon exercise of stock options, each of which is
exercisable within sixty days of December 12, 1996, in addition to 15,163
restricted stock grants awarded under the 1995 Plan in 1995 and 1996, of
which the restrictions have lapsed as to 861 shares. Also includes 25,232
shares of Common Stock to be issued to and purchased by Mr. Seaman in
connection with the Stock Issuance.
(4) Includes 10,582 shares issuable upon exercise of Warrants and 19,260
shares issuable upon exercise of stock options, both of which are
exercisable within sixty days of December 12, 1996. Also includes 1,000
shares held by his spouse, the ownership of which is subject to community
property laws, in addition to 9,125 restricted stock grants awarded under
the 1995 Plan in 1995 and 1996, of which the restrictions have lapsed as
to 534 shares. Also includes 9,296 shares of Common Stock to be issued to
and purchased by Mr. Wolonsky in connection with the Stock Issuance.
(5) Includes 4,262 shares issuable upon exercise of Warrants and 14,060 shares
issuable upon exercise of stock options, both of which are exercisable
within sixty days of December 12, 1996, in addition to 7,625 restricted
stock grants awarded under the 1995 Plan in 1995 and 1996, of which the
restrictions have lapsed as to 362
35
<PAGE> 45
shares. Also includes 9,296 shares of Common Stock to be issued to and
purchased by Mr. Johnson in connection with the Stock Issuance.
(6) Includes 5,680 shares issuable upon exercise of stock options that are
exercisable within sixty days of December 12, 1996, in addition to 4,687
restricted stock grants awarded under the 1995 Plan in 1995 and 1996, of
which the restrictions have lapsed as to 284 shares. Also includes 9,296
shares to be purchased by Mr. Roche in connection with the Stock Issuance.
(7) Includes 98,050 shares owned of record by Jaco Oil Company, an entity
controlled by Mr. Jamieson.
(8) Represents 8,000 shares of Common Stock and Warrants to purchase 8,591
shares of Common Stock that Mr. Spass will receive upon the distribution
by III of the Warrants held by IIA as agent for the partners of III, as
described in footnote 1 of the preceding "Certain Beneficial Owners After
the Stock Issuance" table. Separately, 1,369,856 shares of Common Stock
will be held by IP Delaware and 754,978 shares of Common Stock will be
held by IP Bermuda upon consummation of the Stock Issuance. Mr. Spass is
the President of GenPar Inc. and GenPar (Bermuda) Ltd., the ultimate
general partners of IP Delaware and IP Bermuda, respectively. Mr. Spass
disclaims beneficial ownership (as defined in Rule 13d-3, under the
Exchange Act) of all shares of Common Stock that will be held by IP
Delaware and IP Bermuda. See footnotes 4 and 5 to the preceding "Certain
Beneficial Owners After the Stock Issuance" table for information
concerning such partnerships. Pursuant to the terms of the Stock Purchase
Agreement, so long as certain conditions apply, each of IP Delaware and IP
Bermuda has agreed that Mr. Spass will abstain from votes of the
investment committees of each of IP Delaware and IP Bermuda with respect
to each such entity's holdings of shares of Common Stock.
(9) Comprised of Warrants representing the right to purchase 3,321 shares of
Common Stock that Mr. Schwarberg will receive upon the distribution of the
Warrants, as described in footnote 1 of the preceding "Certain Beneficial
Owners After the Stock Issuance" table.
(10) Represents 2,000 shares of Common Stock. Also includes Warrants to
purchase 1,107 shares of Common Stock that Mr. Cooper will receive upon
the distribution by III of the Warrants, as described in footnote 1 of the
preceding "Certain Beneficial Owners After the Stock Issuance" table.
(11) Represents (i) 3,600 shares of Common Stock owned directly, (ii) 600
shares of Common Stock owned indirectly as custodian for the benefit of
his children under the New York Uniform Gift to Minors Act, and (iii)
warrants to purchase Common Stock, consisting of the CentreLine Warrant to
purchase 579,356 shares issued to CentreLine and the partnership interest
held by Centre in the Warrants issued to IIA as agent for III, issuable to
Centre upon revocation of the agency relationship and distribution of the
Warrants to the III limited partners and general partner. Based upon
Centre's interest in III, the Warrants distributable to it would be
exercisable to purchase 470,391 shares of Common Stock. See the preceding
"Certain Beneficial Owners After the Stock Issuance" table and footnotes 6
and 8 thereto. Mr. Germain is an officer and director of both Centre and
CentreLine. As such, he shares voting and/or dispositive control over
such securities (subject to the termination of the agency relationship
with IIA by III, with respect to the Warrant and underlying shares
distributable to Centre). Mr. Germain disclaims any beneficial interest
in the CentreLine Warrant, the Warrants issuable to Centre, and the Common
Stock issuable upon their exercise.
(12) Upon consummation of the Stock Issuance, 1,369,856 shares of Common Stock
will be held by IP Delaware and 754,978 shares of Common Stock will be
held by IP Bermuda. Mr. Gruber, a nominee for election as director at the
Special Meeting, is a Vice President of each of GenPar Inc. and GenPar
(Bermuda) Ltd., the ultimate general partners of IP Delaware and IP
Bermuda, respectively. Mr. Gruber disclaims beneficial ownership (as
defined in Rule 13d-3 under the Exchange Act) of all shares of Common
Stock that will be held by IP Delaware and IP Bermuda. See footnotes 4
and 5 to the preceding "Certain Beneficial Owners After the Stock
Issuance" table for information concerning such partnerships.
(13) Includes (i) 2,127,301 shares issuable upon exercise of warrants and (ii)
111,700 shares issuable upon exercise of stock options, each of which are
exercisable within sixty days of December 12, 1996. Also includes 74,411
shares subject to the Company's right of repurchase, of which the
restrictions have lapsed as to 4,078 shares. Also includes 107,906 shares
to be purchased by the executive officers in connection with the Stock
Issuance. Refer to footnotes 8 through 11 for information regarding
beneficial interests in the Warrants and the Centreline Warrant held by
certain directors.
36
<PAGE> 46
TERMS OF THE STOCK ISSUANCE
The detailed terms of, and conditions to, the Stock Issuance and certain
related transactions are contained in the Stock Purchase Agreement and its
material exhibits, a copy of which (including such exhibits) is attached to
this Proxy Statement as Annex A and incorporated herein by reference. The
statements made in this Proxy Statement with respect to the terms of the Stock
Issuance and such related transactions are qualified in their entirety by
reference to the more complete information set forth in Annex A, The Stock
Purchase Agreement.
STOCK PURCHASE AGREEMENT: PARTIES AND AMOUNTS COMMITTED
The "Purchase Price and Amounts" table below sets forth the names of the
Purchasers and the number of shares of Newly Issued Stock to be acquired by the
Purchasers from the Company under the Stock Purchase Agreement. The price to
be paid for each share of the Newly Issued Stock under the Stock Purchase
Agreement is $7.53 per share for an aggregate consideration of approximately
$18 million. This purchase price was determined by the Company, with the
advice of DLJ, by taking the average closing price of the Common Stock over the
20 trading days prior to and including September 6, 1996, a period that omits
the 5 trading days prior to the public announcement of the Acquisition. After
considering the advice of DLJ on such matter, in addition to other factors
deemed material by the Board, the disinterested directors of the Company
determined the price of $7.53 per share was fair to and in the best interests
of the Company and its shareholders. The Newly Issued Stock will not be
registered under the Securities Act or any state securities law. The total
number of shares of Newly Issued Stock to be sold to the Purchasers pursuant to
the Stock Purchase Agreement is 2,390,438 shares and will be purchased as
follows:
37
<PAGE> 47
<TABLE>
<CAPTION>
Purchase Price and Amounts
--------------------------
Number of Percent of
Shares of Shares of
Newly Newly Issued
Purchaser Issued Stock Stock Purchased
--------- ------------ ---------------
<S> <C> <C>
IP Delaware(1) 1,369,856 57.31%
IP Bermuda(1) 754,978 31.58
TJS 132,802 5.56
William L. Gentz(2) 25,234 1.06
J. Chris Seaman(2) 25,232 1.06
Joseph P. Wolonsky 9,296 *
Thomas I. Boggs, Jr. 3,320 *
Karl O. Johnson 9,296 *
Douglas R. Roche 9,296 *
Robert E. Nagle 3,984 *
James L. Cinney 6,640 *
Matthew Natalizio 5,976 *
Sue Binder 2,656 *
Harold Fedora 1,000 *
Jack Solomon 1,328 *
Robert J. Niebur 4,648 *
Other Members of Management
as a Group (17 members) 24,896 1.04
--------- ------
Total 2,390,438 100.00%
</TABLE>
_________________
(1) Robert A. Spass and Bradley E. Cooper, directors of the Company, and
Steven B. Gruber, a nominee for election as director at the Special
Meeting, own direct or indirect limited partnership interests in certain
of the Delaware Partnerships and Bermuda Partnerships. Messrs. Spass and
Gruber are Officers of GenPar Inc. and GenPar (Bermuda), Ltd., the
ultimate general partners of IP Delaware and IP Bermuda, respectively.
See "--Security Ownership of Certain Beneficial Owners and Management
After the Stock Issuance--Certain Beneficial Owners After the Stock
Issuance" table,--footnotes 4 and 5.
(2) Each of Messrs. Gentz and Seaman are directors of the Company.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Stock Purchase Agreement includes representations and warranties
by the Company as to (i) the corporate and, where applicable, the partnership
organization and good standing of the Company and its subsidiaries, (ii) the
Company's capitalization, (iii) the authorization of the Stock Purchase
Agreement, (iv) the valid issuance of the Newly Issued Stock, (v) pending or
threatened litigation, (vi) the Stock Purchase Agreement's non-contravention of
any agreement, law, charter or bylaw provision (except to the extent such
contravention would not have a material adverse effect on the financial
condition, results of operations, or prospects of the Company and its
subsidiaries (a "Material Adverse Effect")) and that (except as specified) no
governmental or third-party consents are required to execute, deliver, and
perform the Stock Purchase Agreement, (vii) certain tax matters, (viii) the
accuracy of financial statements and filings with the SEC, (ix) the conduct of
business in the ordinary course and the absence of any material adverse change
in the financial condition, results of operations, or prospects of the Company,
(x) the Company's and its subsidiaries' compliance with the requirements of
applicable laws, and (xi) the existence and identity of brokers and finders.
38
<PAGE> 48
REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS
The Stock Purchase Agreement contains various representations and
warranties by each of the Purchasers, severally but not jointly, as to (i) with
respect to Purchasers that are limited partnerships, such Purchaser's
organization and good standing and authorization of the Stock Purchase
Agreement, (ii) the Stock Purchase Agreement's non-contravention of any
agreement, law or charter provision (except to the extent contravention would
not have a Material Adverse Effect on such Purchaser) and that (except as
specified) no governmental or third-party consents are required to execute,
deliver, and perform the Stock Purchase Agreement, (iii) brokers and finders,
(iv) availability of funds to meet such Purchaser's obligation to purchase the
shares of the Newly Issued Stock, (v) state and federal securities laws
matters, and (vi) the abstention by Robert A. Spass, a director of the Company
and President of the ultimate general partner of each of IP Delaware and IP
Bermuda, from the formal partnership approval process by each such entity
regarding its purchase of shares of the Newly Issued Stock.
CERTAIN COVENANTS
COVENANTS OF ALL PARTIES
Each party to the Stock Purchase Agreement covenants that such party
shall use its reasonable best efforts to consummate the transactions
contemplated by the Stock Purchase Agreement and each other agreement
contemplated thereby. Each such party further covenants the information to be
supplied by such party for inclusion in this Proxy Statement and any related
registration statement will be accurate as of the date of the mailing of this
Proxy Statement and the Special Meeting.
COVENANTS OF THE COMPANY
The Company covenants that it shall take certain actions to cause the
due preparation and timely mailing of this Proxy Statement and all accompanying
documents to the Company's shareholders. The Company further covenants that
the Board of Directors shall recommend the approval of Proposals No. 1, No. 2,
No. 4 and No. 5 set forth in this Proxy Statement and take all reasonable,
lawful action to solicit such approval. In addition, the Company covenants
that it will use the net proceeds from the sale of the Newly Issued Stock to
consummate the transactions contemplated under the Acquisition Agreement. The
Company covenants further that during the term of the Stock Purchase Agreement,
the Board of Directors will nominate one individual designated by IP (so long
as such person is reasonably acceptable to the Board of Directors) for election
as a director at each annual meeting of shareholders.
COVENANTS OF IP
Standstill. Each of the "IP Associates" (which term is defined to
include CentreLine, Centre, III, IIA, and any person or entity that controls,
is under common control with, or is controlled by IP or such persons or
entities, and all individuals who are officers, directors, or control persons
of any such entities, including IP) that is a signatory to the Stock Purchase
Agreement covenants and agrees with respect to itself, and IP covenants and
agrees with respect to itself and those of its Associates that are not
signatories thereto, that neither it nor they will (i) acquire or offer or
agree to acquire, directly or indirectly, by purchase or otherwise, any shares
of Common Stock or voting securities of the Company (or direct or indirect
rights or options to acquire any such securities); (ii) enter, agree to enter
into, or propose to enter into, directly or indirectly, any merger or business
combination involving the Company; (iii) make, or in any way participate,
directly or indirectly, in any "solicitation" of "proxies" (as such terms are
used in the rules of the SEC) or consent to vote, or seek to advise or
influence any person or entity with respect to the voting of, any voting
securities of the Company; or (iv) form, join, or in any way participate in a
"group" (within the meaning of Section 13d-3 of the Exchange Act) with any
persons not referred to herein with respect to any of the foregoing; provided,
however, that none of the foregoing shall restrict IP or any of its Associates
from (A) acquiring shares of Common Stock or voting securities as a result of a
stock split, stock dividend, or similar recapitalization of the Company, (B)
exercising the Warrant issued to IIA on March 31, 1992, and the CentreLine
Warrant, (C) making, or in any way participating, directly or indirectly, in
any "solicitation" of "proxies" (as such terms are defined in Rule 14a-1 under
the Exchange Act) in connection with the election to the Board of Directors of
directors nominated by IP or any of its Associates (to the extent not
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otherwise inconsistent with the Stock Purchase Agreement), or (D) with respect
to a tender or exchange offer or a merger or other business combination
involving the Company (a "Business Combination"), that was initiated without
the encouragement by or the participation of IP or any of its Associates,
making a tender or exchange offer or a proposal with respect to a Business
Combination, or forming, joining or participating as a "group" to make such
offer or proposal, in either case upon more favorable terms than those of the
unsolicited tender or exchange offer or Business Combination; and provided
further, that none of the foregoing shall affect or impair the right of any
director of the Company to (x) act as a member of the Board of Directors or any
committee thereof or (y) take any action necessary or advisable to carry out
his obligations and duties as a director of the Company. Notwithstanding the
foregoing, no provision of the Stock Purchase Agreement shall prohibit or
restrict any Associate who is a director of the Company from acquiring, in one
or more transactions, in his individual capacity, an aggregate of 25,000 shares
of Common Stock so long as such acquisition does not violate any provision of
the Company's charter in effect from time to time.
The limitations set forth above and in "--Transfer of Shares"
below may be waived by the affirmative vote of the nearest whole number
representing 66 2/3% or more of (i) the directors of the Company, excluding
from the total number of directors voting those who are Associates of IP and
those who are employees of the Company, or (ii) the shares of the Company, not
including in such total number of shares voting those beneficially owned by
those executive officers of the Company subject to the reporting requirements
of Section 16 of the Exchange Act and those owned by IP and its Associates
(such approval shall be referred to herein as "Disinterested Approval").
In furtherance of the standstill covenants set forth above,
each of the Company and IP covenants and agrees that any material business
relationship between the Company and IP or any IP Associate must be approved by
Disinterested Approval.
Other than with respect to the election of directors of the
Company, IP covenants and agrees that, with respect to any vote of the
shareholders of the Company on a particular matter, if the aggregate number of
all shares that are voted in like manner by IP and its Associates shall be
greater than 35% of the total number of shares voted, then those votes that
exceed such 35% threshold shall be voted in the same proportion as the other
shareholders voted their shares with respect to such matter.
IP covenants and agrees that IP and its Associates will not
vote their shares of Common Stock, the Voting Notes, or shares of Common Stock
issued upon exercise of the Warrants, to elect as directors of the Company a
total of more than five persons (or the highest number that is less than a
majority of the Board of Directors, as the case may be), including the
individual designated by IP pursuant to the terms of the Stock Purchase
Agreement, who are Associates of IP or of any of the IP Associates.
The agreements described herein under "--Standstill" shall
continue so long as the shares of Common Stock owned by IP and its Associates,
directly or indirectly, represent 15% of the outstanding shares of the Company
on a fully diluted basis (including the Voting Notes).
Transfer of Shares. So long as the shares of Common Stock owned by IP
and its Associates, directly or indirectly, represent 15% of the shares of
Common Stock outstanding on a fully diluted basis (including the Voting Notes),
IP agrees not to transfer, assign, sell, or otherwise dispose of (each, a
"Transfer") any of its shares of Common Stock, except for Transfers described
herein under "--Transfer of Shares." IP may at any time Transfer any or all of
its shares of Common Stock (i) to any Associate of IP, if such Associate
executes and delivers to the Company, prior to any such Transfer, an instrument
in form and substance reasonably satisfactory to the Company pursuant to which
such Associate agrees to be bound by the provisions described above under
"--Standstill" and described herein under "--Transfer of Shares," (ii) pursuant
to Rule 144 under the Securities Act or any successor to such rule, (iii)
pursuant to a tender offer or exchange offer made by the Company or any
"Affiliate" (as such term is defined in Rule 12b-2 of the Exchange Act) of the
Company, (iv) pursuant to a tender offer or exchange offer initiated by any
person or "group" (within the meaning of Section 13d-3 of the Exchange Act)
other than IP or any Associate thereof or a Business Combination, which is
approved or recommended by the Board of Directors of the Company or with
respect to which the Board of Directors has announced its intention to remain
neutral, (v) so long as the shares of Common Stock to be Transferred represent,
in the aggregate, not greater than 10% of the
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outstanding Common Stock, in a transaction or series of transactions exempt
from the registration and prospectus delivery requirements of the Securities
Act, (vi) by the Transfer of greater than 10% of the outstanding shares of
Common Stock in a transaction or series of transactions exempt from the
registration and prospectus delivery requirements of the Securities Act to (x)
one purchaser, (y) one purchaser and its Affiliates, or (z) a "group" of
purchasers, if such purchaser or purchasers of Common Stock in any such
transaction or series of transactions execute and deliver to the Company prior
to any such purchase or purchases an instrument in form satisfactory to the
Company pursuant to which such purchaser or purchasers agree to be bound by the
provisions described above under "--Standstill" and described herein under
"--Transfer of Shares" (treating such purchaser or purchasers as an "Associate"
for purposes of such sections) or (vii) pursuant to a registration statement
filed under the Securities Act pursuant to the Registration Rights Agreement
(defined below), or otherwise.
IP Management. IP covenants that Robert A. Spass, a director of the
Company and President of the ultimate general partner of each of IP Delaware
and IP Bermuda, will abstain from the votes of the investment committees of
each of IP Delaware and IP Bermuda with respect to their purchase of shares of
the Newly Issued Stock.
Hart-Scott-Rodino Act Filings. If IP is required to file a premerger
notification report (an "HSR Report") under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), in connection with its
purchase of shares of Newly Issued Stock, then IP shall notify the Company in
writing and, shortly thereafter, each of IP and the Company shall file with the
Federal Trade Commission and the Antitrust Division of the Department of
Justice an HSR Report and any supplemental information that may be requested in
connection with such HSR Reports. As of the date of this Proxy Statement, no
such notice has been received by the Company.
CLOSING CONDITIONS
CONDITIONS TO EACH PARTY'S OBLIGATIONS
It is a condition to each party's obligations under the Stock Purchase
Agreement that the following conditions be satisfied or waived: (i) all
governmental authorizations required for performance of the obligations under
the Stock Purchase Agreement have been obtained, (ii) there shall be no
statute, rule, regulation, writ, order or injunction of any court or
governmental body that has the effect of prohibiting consummation of the
transactions contemplated by the Stock Purchase Agreement, (iii) the Pac Rim
Acquisition Agreement shall not have been materially amended, nor any provision
thereof waived by the Company without the consent of IP and (iv) the closing of
the Stock Purchase Agreement shall occur simultaneously with the closing of the
transactions contemplated by the Pac Rim Acquisition Agreement.
CONDITIONS TO THE COMPANY'S OBLIGATIONS
The obligations of the Company under the Stock Purchase Agreement are
subject to the fulfillment or waiver of the following additional conditions:
(i) each of the representations and warranties of the Purchasers contained in
the Stock Purchase Agreement (A) shall have been true in all material respects
when made and (B) shall be true in all material respects at the time of the
Closing as if such representations and warranties had been made at such time,
except to the extent that any such representation or warranty is made as of a
specified date, in which case such representation and warranty shall be true
and correct as of such date, (ii) at or prior to the Closing, each of the
Purchasers shall have performed in all material respects all obligations
required of such Purchaser pursuant to the Stock Purchase Agreement, (iii) the
Purchasers shall have delivered to the Company a certificate, dated as of the
Closing Date, certifying as to the fulfillment of the conditions specified in
clauses (i) and (ii) of this sentence, (iv) the Company shall have received a
legal opinion from counsel for IP reasonably satisfactory to the Company, (v)
the Company shall have received the favorable opinion of DLJ, financial advisor
for the Company, as contemplated by the Stock Purchase Agreement, (vi) all of
the conditions to the closing of the transactions contemplated by the Pac Rim
Acquisition Agreement shall have been satisfied or waived, (vii) the Warrants
issued to III and held by IIA as its agent shall be distributed to all partners
of III, (viii) at the Special Meeting, the majority of shares held by persons
who are neither parties to the Stock Purchase Agreement nor Associates of such
parties shall have been voted in favor of each of Proposal No. 1, Proposal No.
2, Proposal No. 4, and Proposal No. 5,
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and (ix) the Company shall have received fully executed copies of the Pac Rim
Acquisition Agreement, the Term Loan Facility, and the Registration Rights
Agreement.
CONDITIONS TO PURCHASERS' OBLIGATIONS
The Purchasers' obligations under the Stock Purchase Agreement are
subject to the fulfillment or waiver of the following additional conditions:
(i) each of the representations and warranties of the Company contained in the
Stock Purchase Agreement (A) shall have been true in all material respects when
made and (B) shall be true in all material respects at the time of the Closing
as if such representations and warranties had been made at such time, except to
the extent that any such representation or warranty is made as of a specified
date, in which case such representation and warranty shall be true and correct
as of such date, (ii) at or prior to the Closing, the Company shall have
performed in all material respects all obligations required of it pursuant to
the Stock Purchase Agreement, (iii) the Company shall have delivered to the
Purchasers a certificate dated the date of the Closing certifying as to the
fulfillment of the conditions specified in clauses (i) and (ii) of this
sentence, (iv) the Purchasers shall have received a legal opinion from counsel
for the Company, (v) no suit, action, proceeding, claim or dispute shall have
been brought or otherwise arisen before any governmental body against the
Company or any of its subsidiaries that would, if adversely determined, have a
Material Adverse Effect on the Company or have a material adverse effect on the
ability of the Company to perform its obligations under the Stock Purchase
Agreement, (vi) at the Special Meeting, the majority of shares held by persons
who are neither parties to the Stock Purchase Agreement nor Associates of such
parties shall have voted in favor of each of Proposal No. 1, Proposal No. 2,
Proposal No. 4 and Proposal No. 5, (vii) IP shall have received fully executed
copies of the Pac Rim Acquisition Agreement, the Term Loan, and the
Registration Rights Agreement, (viii) since June 30, 1996 there shall have been
no Material Adverse Effect upon the operations, financial condition, prospects
or results of operations of the Company, (ix) (A) the Company shall have
amended its Restated Articles of Incorporation or adopted a charter, in each
case in a manner satisfactory to IP and its counsel, to restrict the issuance
or transfer of any Common Stock by the Company or any of its shareholders so as
to reduce, to the extent practicable, the risk of an "ownership change" within
the meaning of Section 382 of the Code and the Treasury regulations promulgated
thereunder (collectively, "Section 382") and (B) the Company shall have entered
into agreements, in form and substance reasonably satisfactory to IP and its
counsel, with all of its warrant holders in which such holders shall agree not
to exercise any of their warrants in a manner that would cause, or increase the
risk of, an "ownership change" within the meaning of Section 382 or otherwise
conflict with the restrictions described in the immediately preceding
subsection (A), and (x) the Company shall have delivered to IP at the Closing a
schedule that has been prepared by the Company, solely in reliance upon its
review of its stock ledger, public filings of Schedules 13D and 13G under the
Exchange Act as they relate to ownership in the capital stock of the Company,
and other matters to which it has actual knowledge, presenting information
reasonably satisfactory to IP as of the Closing Date that there has been no
increase in the Common Stock owned directly, indirectly or constructively by a
"five percent shareholder" (as such term is defined in Section 382) over the
three-year period immediately preceding the Closing Date.
AMENDMENT/TERMINATION
The Stock Purchase Agreement may be amended by the parties thereto,
but no amendment shall be enforceable against any party that has not signed
such an amendment.
EXPENSES AND FEES
The Company will pay IP's costs, expenses, and reasonable legal fees
in connection with the Stock Issuance, whether or not consummated. The Company
has also agreed to pay upon the closing of the Stock Issuance to Insurance
Partners Advisors, L.P. ("IPA") a transaction fee of $625,000. If Pac Rim
shall pay to the Company a termination fee (see "--Use of Proceeds: The
Acquisition--Terms of the Acquisition and Related Transactions--Termination Fee
and Liquidated Damages") or if the Company shall collect any amount under the
Voting Agreement (see "--Use of Proceeds: The Acquisition--Terms of the
Acquisition and Related Transactions--Related Agreements--Voting Agreement")
then the Company shall pay to IPA that portion of the termination fee plus the
fee under the Voting Agreement equal to the percentage of voting securities of
the Company owned by IP on a fully diluted basis calculated as if the purchase
by IP of its portion of the Newly Issued Stock
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had occurred (notwithstanding that no such purchase shall have occurred). See
"Proposal No. 5--Certain Relationships and Related Transactions--Stock Issuance
to IP."
INDEMNIFICATION
The Company and each of the Purchasers have agreed to indemnify the
other, and each of the other's respective partners, employees, agents and
representatives, as the case may be, against, and hold them harmless from, all
claims, obligations, costs and expenses including, without limitation,
reasonable attorneys' fees and expenses incurred by the Purchasers in any
action between the Purchasers and the Company or between the Purchasers and any
third party and liabilities of and damages to the other party arising out of
the material breach by such indemnifying party of any representation, warranty,
covenant or agreement in the Stock Purchase Agreement.
RESTRICTIONS ON TRANSFER OF SHARES
The shares of Newly Issued Stock to be received by the Purchasers are
being offered and sold in a private transaction and will not be subject to a
registration statement under the Securities Act, except if prepared on a
subsequent date pursuant to the Registration Rights Agreement. See
"--Registration Rights Agreement." In that regard, each Purchaser has
represented and warranted to the Company, among other things, that such
Purchaser is an "accredited investor" as defined in Rule 501 promulgated as
part of Regulation D under the Securities Act and is not purchasing the shares
with a view to a distribution or resale of any of such securities in violation
of any applicable securities laws.
Since the Newly Issued Stock has not been registered under the
Securities Act, such stock is subject to the standard restrictions on
transferability imposed by federal and state securities law, including Rule 144
promulgated under the Securities Act. In general, under Rule 144 as currently
in effect, a person (or persons whose shares are aggregated) who has
beneficially owned restricted securities for at least two years, will be
entitled to sell in any three-month period a number of shares that does not
exceed the greater of (i) 1% of the then outstanding shares of the Company's
Common Stock or (ii) the average weekly trading volume in the over-the-counter
market during the four calendar weeks immediately preceding the date on which
notice of the sale is filed with the SEC. Sales pursuant to Rule 144 are
subject to certain requirements relating to manner of sale, notice and
availability of current public information about the Company. A person (or
persons whose shares are aggregated) who is not deemed to have been an
affiliate of the Company at any time during the 90 days immediately preceding
the sale and who has beneficially owned restricted securities for at least
three years is entitled to sell such shares pursuant to Rule 144(k) without
regard to the limitations described above. Rule 144(k) is not available to
affiliates of the Company. IP and its Associates are further restricted from
certain transfers of the Common Stock by certain covenants contained in the
Stock Purchase Agreement. See "--Terms of the Stock Issuance--Certain
Covenants--Covenants of IP."
REGISTRATION RIGHTS AGREEMENT
The Registration Rights Agreement to be entered into by the Company
and IP as a condition to the Stock Issuance ("Registration Rights Agreement")
provides that, with respect to the shares of Newly Issued Stock to be received
by IP pursuant to the Stock Purchase Agreement, IP and any Affiliate thereof
(as defined in Rule 12b-2 promulgated pursuant to the Exchange Act) to whom or
which such shares have been transferred may, on not more than three occasions
at any time commencing after the Closing Date, require the Company at its sole
expense to prepare and file with the SEC a registration statement under the
Securities Act covering the public offer and sale of such shares, in addition
to other shares requested to be so covered by other securities holders having
similar, preexisting registration rights, and use its best efforts to cause to
be declared effective and remain effective for up to the lesser of 180 days or
the period during which all of the shares requested to be so registered by IP
and any Affiliate thereof have been sold (a "Demand Registration").
Notwithstanding the terms described above, the Company is not required to file
a registration statement in response to a Demand Registration if certain
conditions are not met, including the anticipated failure of a Demand
Registration to earn an aggregate net offering price of $7.5 million or more.
In addition, IP's and its Affiliates' ability to request three Demand
Registrations shall be reduced to two such requests if the Company has
registered shares of Newly Issued Stock held by IP or any of its Affiliates
having an anticipated net offering price of not less than $5 million pursuant
to an exercise of their
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"piggyback rights." Under the Registration Rights Agreement, IP and IP's
Affiliates have customary "piggyback" registration rights allowing them to
register shares in the event the Company proposes to sell any of its stock or
other securities to the public in a transaction registered under the Securities
Act. The Registration Rights Agreement contains additional customary terms and
provisions, including reciprocal indemnification and contribution provisions
with respect to information furnished or provided by the Company or IP for
inclusion in any such registration statement.
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USE OF PROCEEDS: THE ACQUISITION
PAC RIM HOLDING CORPORATION
Pac Rim Holding Corporation, a Delaware corporation ("Pac Rim"), is an
insurance holding company that, through its wholly owned subsidiary, The
Pacific Rim Assurance Company, is engaged in the underwriting of workers'
compensation insurance in California, Arizona, Texas, and Georgia. For the
year ended December 31, 1995, Pac Rim had net premiums earned of $76 million
and operating income, excluding realized gains and interest charges, of
approximately $2.7 million. The Acquisition of Pac Rim provides the
opportunity for the Company's shareholders to recognize immediate strategic and
financial benefits. The consolidation of two mid-sized companies whose home
offices are located only eight miles apart should provide significant economies
of scale that neither company could achieve independently. The combined
company will be able to spread fixed costs over a wider premium base. In
addition, Pac Rim's strong presence in Southern California complements the
Company's historical focus in Northern and Central California. The Acquisition
will also enable the Company to more efficiently utilize its $82.9 million
NOLs, a valuable corporate asset. The foregoing statements contain
forward-looking statements regarding efficiencies and economies of scale that
management believes may be achieved through the acquisition of Pac Rim.
Realization of management's beliefs and projections will depend on a number of
factors, including management's successful execution of its business plan for
integrating the operations of the two companies, the insurance markets
reception to the combination of the two companies, and other factors beyond the
Company's control. See "Certain Considerations". Pac Rim is located at 6200
Canoga Avenue, Woodland Hills, CA 91367, and its telephone number is (818)
226-6200. The foregoing description of Pac Rim is qualified in its entirety by
reference to the more complete information set forth in the Annual Report of
Pac Rim for the year ending December 31, 1995, which is being delivered
together with this Proxy Statement as Annex H, as supplemented by the Quarterly
Report for the quarter ended June 30, 1996 and attached hereto as Annex I,
which documents are hereby incorporated into this Proxy Statement by this
reference. Shareholders are urged to carefully review the Pac Rim Annual
Report and Quarterly Report.
TERMS OF THE ACQUISITION AND RELATED TRANSACTIONS
The detailed terms of, and conditions to, the Acquisition and certain
related transactions are contained in the Pac Rim Acquisition Agreement and its
exhibits, a copy of which (including such exhibits) is attached to this Proxy
Statement as Annex C and incorporated herein by reference. The statements made
in this Proxy Statement with respect to the terms of the Acquisition and such
related transactions are qualified in their entirety by reference to the more
complete information set forth in Annex C.
STRUCTURE OF THE ACQUISITION
The Pac Rim Acquisition Agreement provides that SNTL Acquisition
Corp., a Delaware corporation and a wholly-owned subsidiary of the Company
("Merger Sub"), will be merged with and into Pac Rim and the separate existence
of Merger Sub will cease. The Company will pay a maximum of $54,021,032 to
acquire Pac Rim. That amount will be allocated among holders of the Pac Rim
Common Stock, holders of its Convertible Debentures, holders of its options and
holders of the Pac Rim Warrants immediately prior to the Closing Date, under a
formula that is itself dependant on the expected repricing of outstanding Pac
Rim Warrants immediately prior to the allocation. Therefore, the price per
each share of the Pac Rim Common Stock to be paid by the Company is variable,
although it is expected to be between $3.00 and $3.10 per share of Pac Rim
Common Stock. The outstanding shares of Pac Rim Common Stock will be converted
into the right to receive cash, and outstanding options and warrants to
purchase Pac Rim Common Stock will be surrendered in exchange for cash in an
amount equal to the "spread" between the exercise price of such options or
warrants and the price per share paid for the Pac Rim Common Stock. On the
Closing Date, at the time a certificate of merger as to Merger Sub and Pac Rim
is filed with the Delaware Secretary of State, the Company will acquire the
$20,000,000 principal amount Convertible Debentures and certain of the Series 1
and 2 Detachable Pac Rim Warrants under a Series A Convertible Debenture and
the Series 1, 2 and 3 Detachable Warrant Purchase Agreement among the Company,
Allstate Insurance Company ("Allstate") and Prac Limited Partnership ("Prac"),
dated as of September 17, 1996 (the "Debenture Purchase Agreement"). The
Convertible Debentures will be acquired for their common-stock-equivalent
price. The Series 1 and 2 Warrants held by Allstate and Prac will be acquired
for cash in an amount
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equal to the "spread" between the per share price paid for the Pac Rim Common
Stock and the warrant exercise price (including an adjustment to the Series 1
and Series 2 Warrant exercise price that is expected to occur prior to the
Effective Time based upon an evaluation of Pac Rim's loss reserves). It is
expected that all Series 3 Pac Rim Warrants held by Prac and Allstate will have
an exercise price greater than the underlying value of the Pac Rim Common Stock
("out of the money") and be cancelled without additional consideration. It is
likely the obligation to purchase the Convertible Debentures and the Pac Rim
Warrants will be assumed by Merger Sub in order to accommodate certain
conditions to the Term Loan. Certain other holders of Series 3 Pac Rim
Warrants that are expected to be "out of the money" have agreed to surrender
those warrants to Pac Rim at the Effective Time under a Series 3 Detachable
Warrant Surrender Agreement dated as of September 17, 1996 (the "Warrant
Surrender Agreement"), but would not receive any consideration for "out of the
money" warrants. The transactions will be consummated at a closing to be held
following the satisfaction or waiver of certain conditions precedent specified
in the Pac Rim Acquisition Agreement. See "--Conditions to the Acquisition"
below. The Acquisition will be consummated on the Closing Date, as follows:
(a) prior to closing, the Company will reincorporate in Delaware (assuming the
adoption of Proposal No. 3 by the shareholders); (b) next, the Company will
contribute its shares in SNIC to Merger Sub; (c) immediately prior to closing,
Chase and the Company will close the Term Loan and the Company and the
Purchasers will consummate the transactions under the Stock Purchase Agreement;
and (d) the merger of Merger Sub and Pac Rim will be consummated by filing a
certificate of merger with the Delaware Secretary of State, the Convertible
Debentures will be acquired and cancelled, and the combined entity (the
"Surviving Corporation") will be renamed Superior Pacific Holding Corporation,
a Delaware corporation. The Surviving Corporation will own all of the
outstanding shares in SNIC and The Pacific Rim Assurance Company, and will in
turn be 100% owned by the Company. The subsidiary operating companies will
remain separate entities immediately after the Acquisition.
PURCHASE PRICE
The consideration to be paid by the Company for all of the outstanding
securities of Pac Rim (including Pac Rim Common Stock, Convertible Debentures,
options and the Pac Rim Warrants) will not exceed $54,021,032. As explained in
"--Structure of the Acquisition," the allocation of this amount among Pac Rim's
outstanding shares of common stock, warrants, options and debentures is
dependent on a formula, which is used to calculate the per common share price
payable. The per common share price is variable because certain Pac Rim
Warrants are subject to repricing under their terms after an analysis of Pac
Rim's loss reserves immediately prior to or on the Closing Date. The total
consideration is expected to result in payment of approximately $3.00 to $3.10
per share to each of Pac Rim's common stockholders and Convertible Debenture
holders (based upon the number of shares of Pac Rim Common Stock into which the
Convertible Debentures are convertible). Holders of the Pac Rim Warrants and
options to purchase Pac Rim Common Stock will receive cash in an amount equal
to the spread between the exercise price of the warrants or options and the per
common share price. "Out of the money" warrants and options to acquire Pac Rim
Common Stock either will be surrendered to Pac Rim under the Warrant Surrender
Agreement or cancelled. A more complete description of the pricing formula is
set forth in Annex C, the Pac Rim Acquisition Agreement.
EFFECTIVENESS OF THE ACQUISITION
The Closing Date will occur on the first business day following the
satisfaction or waiver of all of the conditions to the Acquisition specified in
the Pac Rim Acquisition Agreement, or at such other time as the Company and Pac
Rim shall agree after the satisfaction or waiver of such conditions. See
"--Conditions to the Acquisition," below. It is anticipated that, if the
Acquisition is approved by Pac Rim's stockholders at a special meeting called
for that purpose, and all other conditions to the Acquisition have been
fulfilled or waived, the closing of the Acquisition will occur as soon as
practicable following the approval of the Acquisition by the DOI after
completion of its review under Section 1215 et seq. of the California Insurance
Code, which approval, if granted, is expected to occur in December 1996. The
Company has filed a Form A with the DOI seeking such approval.
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<PAGE> 56
CONDITIONS TO THE ACQUISITION
The obligations of the Company and Pac Rim to effect the Acquisition
are subject to, among other things, the satisfaction prior to the Closing Date
of the following conditions: (a) the approval by the stockholders of Pac Rim of
the Acquisition and the approval by the shareholders of the Company of the
Stock Issuance pursuant to the Stock Purchase Agreement (provided, however,
that if the Stock Purchase Agreement is not consummated the Company is required
to either consummate the Acquisition under an alternative financing arrangement
or to pay damages to Pac Rim for breach of the Pac Rim Acquisition Agreement);
(b) the now-completed termination of the waiting period under the HSR Act; (c)
the required state insurance regulatory approvals, including approval by the
DOI after completion of its review under Section 1215 et seq. of the
California Insurance Code, shall have been obtained; (d) neither party shall be
subject to any order or injunction of any court that would have the effect of
prohibiting the consummation of the Acquisition; and (e) all consents,
authorizations and approvals required to consummate the Acquisition shall have
been obtained.
The obligation of Pac Rim to effect the Acquisition is further subject
to, among other things, the satisfaction prior to the Closing Date of the
following conditions, unless waived by Pac Rim: (a) the Company shall have
performed its obligations under the Pac Rim Acquisition Agreement required to
be performed by it on or prior to the Closing Date; (b) the representations and
warranties of the Company contained in the Pac Rim Acquisition Agreement shall
be true and correct at and as of the Closing Date, except where the failure of
the Company's representations and warranties to be so true and correct,
individually or in the aggregate, would not have a "Parent Material Adverse
Effect" as defined in the Pac Rim Acquisition Agreement (see "--Representations
and Warranties" below); (c) Pac Rim shall have received a certificate executed
by the President or a Vice President of the Company confirming the matters set
forth in clauses (a) (performance of obligations by the Company) and (b) (the
accuracy of the representations and warranties of the Company) above; (d) Pac
Rim shall have received the opinion of Salomon Brothers Inc ("Salomon") dated
as of the date of delivery to the Pac Rim stockholders of Pac Rim's proxy
statement delivered in connection with the special meeting of Pac Rim
stockholders, that the consideration to be received in the Acquisition by the
stockholders of Pac Rim is fair to such stockholders from a financial point of
view; and (e) Pac Rim shall have received a legal opinion from Riordan &
McKinzie, counsel to the Company, in usual and customary form.
The obligation of the Company to effect the Acquisition is further
subject to, among other things, the satisfaction prior to the Closing Date of
the following conditions, unless waived by the Company: (a) Pac Rim shall have
performed its obligations under the Pac Rim Acquisition Agreement required to
be performed by it on or prior to the Closing Date; (b) the representations and
warranties of Pac Rim contained in the Pac Rim Acquisition Agreement shall be
true and correct at and as of the Closing Date, except where the failure of Pac
Rim's representations and warranties to be so true and correct, individually or
in the aggregate, would not have a "Pac Rim Material Adverse Effect" as defined
in the Pac Rim Acquisition Agreement (see "--Representations and Warranties"
below); (c) the Company shall have received a certificate executed by the
President or a Vice President of Pac Rim confirming the matters set forth in
clauses (a) (performance of obligations by Pac Rim) and (b) (the accuracy of
the representations and warranties of Pac Rim) above; (d) from the date of the
Pac Rim Acquisition Agreement through the Effective Time, there shall not have
occurred any changes in the financial condition, business, operations, or
prospects of Pac Rim, which changes, taken together, would have a "Pac Rim
Material Adverse Effect"; (e) the parties to the Debenture Purchase Agreement
and the Warrant Surrender Agreement shall have sold or transferred all
Convertible Debentures and Pac Rim Warrants to the Company or Pac Rim, as the
case may be, such that after the Closing Date the Company will own or control
all such Convertible Debentures and Pac Rim Warrants; and (f) the Company and
Merger Sub shall have received a legal opinion from Barger & Wolen, counsel to
Pac Rim, in usual and customary form.
REPRESENTATIONS AND WARRANTIES
The Pac Rim Acquisition Agreement contains various representations and
warranties by Pac Rim and the Company to the effect that, except as disclosed
and subject to certain exceptions (including exceptions that individually or in
the aggregate would not have a "Parent Material Adverse Effect" (in the case of
the Company) or a "Pac Rim Material Adverse Effect" (in the case of Pac Rim),
among other things: (a) each such party is duly organized and in good standing,
and has the requisite corporate power to own its properties and carry on its
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<PAGE> 57
business; (b) each such party has all requisite corporate power and authority
to enter into the Pac Rim Acquisition Agreement and to consummate the
Acquisition, and the Pac Rim Acquisition Agreement has been duly authorized by
and constitutes the valid and binding obligation of each such party; (c) the
execution, delivery and performance of the Pac Rim Acquisition Agreement by
each such party will not conflict with such party's articles or certificate of
incorporation or bylaws or violate any agreement or law to which such party or
its assets are bound; (d) each such party has no obligations in respect of any
fees or commissions to any broker, finder, investment banker, or other
intermediary, except with respect to DLJ, financial advisor to the Company, and
Salomon, financial advisor to Pac Rim; and (e) that information provided by
each party to the other for inclusion in a proxy statement will not contain any
untrue statement of material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading.
The Pac Rim Acquisition Agreement in addition contains various
representations and warranties by the Company to the effect that, except as
disclosed and subject to certain exceptions (including exceptions that
individually or in the aggregate would not have a "Parent Material Adverse
Effect"), among other things: (a) the Merger Sub was formed for the purpose of
consummating the Acquisition and conducts no other business; (b) the Company
has received the written commitment of Chase to undertake the Term Loan and has
entered into the Stock Purchase Agreement, and that the aggregate funds
obtained will be sufficient to consummate the Acquisition; (c) the Company has
received an opinion of DLJ that the financing arrangements are fair to the
Company from a financial point of view; (d) the Surviving Corporation will be
solvent at the Effective Time; and (e) the Company owns no more than five
percent (5%) of Pac Rim Common Stock.
The Pac Rim Acquisition Agreement in addition contains various
representations and warranties by Pac Rim to the effect that, except as
disclosed and subject to certain exceptions (including exceptions that
individually or in the aggregate would not have a "Pac Rim Material Adverse
Effect"), among other things: (a) Pac Rim and its subsidiaries are qualified to
do business in those jurisdictions in which the character of their business
requires them to be so qualified; (b) each subsidiary of Pac Rim has been duly
organized and possesses the requisite corporate power and authority to carry on
its business as now conducted; (c) Pac Rim has in force each governmental
license or permit required for the operation of its business; (d) Pac Rim is in
compliance with all laws applicable to its business and assets; (e) each
subsidiary of Pac Rim is in good standing, and all issued and outstanding
capital stock of each such subsidiary is owned by its parent company; (f) Pac
Rim has a certain number of authorized, issued and outstanding shares, and
shares reserved for issuance, and $20,000,000 Series A Convertible Debentures
outstanding; (g) the provisions of Section 203 of the Delaware General
Corporation Law do not apply to the Acquisition; (h) Pac Rim has no equity
investments in any entity not a subsidiary of Pac Rim; (i) Pac Rim has filed
since December 31, 1993, all reports required to be filed by it with the SEC
under the Exchange Act, such reports were accurate, and, except as disclosed in
the financial statements filed with such reports, Pac Rim has incurred no
liabilities, or since the date of the last financial statement filed with such
a report, incurred liabilities outside the ordinary course of business; (j)
there is no litigation pending or, to the best of Pac Rim's knowledge,
threatened against any party that would prevent or delay the consummation of
the Acquisition; (k) there have been no changes in its business since June 30,
1996; (l) its tax returns are accurate and it has paid all taxes due; (m) its
employee benefit plans are as disclosed and there are no undisclosed
liabilities in connection therewith; (n) there are no collective bargaining
agreements with Pac Rim's employees nor attempts to form a collective
bargaining unit pending; (o) Salomon has delivered an opinion to the effect
that the consideration to be received by the Pac Rim stockholders is fair from
a financial point of view; (p) there are no material liens on Pac Rim's
properties and assets; (q) Pac Rim is in compliance with and unaware of any
defaults under its leases for real property; (r) Pac Rim has no liability under
any environmental laws; (s) Pac Rim owns or has the right to use all
intellectual property utilized in its business; (t) Pac Rim is not party to any
powers of attorney or guaranties of obligations of third parties; and (u) Pac
Rim has disclosed to the Company all transactions between Pac Rim and its
"affiliates" or "associates" (as such terms are used under the Exchange Act).
The representations and warranties of each party to the Pac Rim
Acquisition Agreement are qualified to the extent their failure to be true
would not have a "Pac Rim Material Adverse Effect," in the case of Pac Rim, or
a "Parent Material Adverse Effect," in the case of the Company. As used in the
Pac Rim Acquisition Agreement, a "Pac Rim Material Adverse Effect" means an
adverse effect on the business, results of operations, prospects, or financial
condition of Pac Rim and its subsidiaries, taken as a whole, having an economic
value of $1 million or
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<PAGE> 58
more, excluding from the $1 million calculation (a) up to $4.5 million in
adverse development in The Pacific Rim Assurance Company's reserves; (b)
changes in the book value of Pac Rim or its subsidiaries based on an adjustment
in the market value of securities carried on the books of said entities; and
(c) bonus and severance payable to Pac Rim officers and employees upon
consummation of the Acquisition. As used in the Pac Rim Acquisition Agreement,
a "Parent Material Adverse Effect" means an adverse effect on the business,
results of operations, prospects, or financial condition of the Company and its
subsidiaries, taken as a whole, having an economic value of $1 million or more,
excluding from the $1 million calculation changes in the book value of the
Company or its subsidiaries based on an adjustment in the market value of
securities carried on the books of said entities.
The foregoing summary of the various representations and warranties of
the parties is qualified in its entirety by the full text of the
representations and warranties of Pac Rim and the Company set forth in Articles
V and VI, respectively, of the Pac Rim Acquisition Agreement attached to this
Proxy Statement as Annex C.
LIMITED SURVIVAL OF REPRESENTATIONS AND WARRANTIES
Although the accuracy of the representations and warranties of each
party is a condition to the obligation of the other to consummate the
Acquisition (See "--Conditions to the Acquisition" above), all representations
and warranties contained in the Pac Rim Acquisition Agreement shall terminate
and be extinguished upon, and shall not survive, the Closing. Accordingly,
following the Closing no party shall have any recourse against the other for
breach of any representation or warranty.
COVENANTS OF THE PARTIES
Under the terms of the Pac Rim Acquisition Agreement, Pac Rim has
agreed that neither it nor any of its subsidiaries, nor its or their officers,
directors, employees, agents, and representatives, shall initiate, solicit, or
encourage any proposal or offer with respect to an acquisition of, merger or
other business combination involving, or sale of significant assets of, Pac Rim
(an "Acquisition Proposal," as more fully defined in section 7.1 of Annex C),
and that it will immediately inform the Company if an Acquisition Proposal is
received; provided, however, that prior to the approval by Pac Rim's
stockholders of the Acquisition, if the board of directors of Pac Rim receives
an unsolicited Acquisition Proposal that is financially superior to the
Acquisition and not conditioned on the potential acquiror's obtaining
financing, and then determines, based on a written opinion of its legal
advisors, that it must consider such Acquisition Proposal, the Pac Rim board of
directors may conduct negotiations with such potential acquiror, provided that
the Company is informed prior to the commencement of, and kept apprised of the
status and terms of, such negotiations. If the Pac Rim board of directors
accepts such an Acquisition Proposal, it may terminate the Pac Rim Acquisition
Agreement, in which case it will be required to pay a termination fee to the
Company. See "--Termination Fee and Liquidated Damages," below.
Pac Rim and its subsidiaries have also covenanted, for the period from
the September 17, 1996 date of the Pac Rim Acquisition Agreement and continuing
until the earlier of its termination or the Closing Date, to conduct their
operations according to their usual, regular, and ordinary course in
substantially the same manner as heretofore conducted, except as disclosed to
and approved by the Company. Each party has covenanted to call a special
meeting of shareholders to obtain the approvals required to consummate the
Acquisition, and to prepare a proxy statement in connection therewith in
compliance with the Exchange Act. Each party has covenanted to make such
filings as may be required to obtain all governmental and regulatory consents
and approvals required to consummate the Acquisition, including the filing of a
Form A as required by Section 1215 et seq. of the California Insurance Code, to
take any further acts required to effect the Acquisition, and to use its best
efforts to take all actions required to consummate and make effective the
transactions contemplated by the Pac Rim Acquisition Agreement. Pac Rim has
covenanted to allow the Company access to Pac Rim's facilities, offices,
records, and files. Each party has agreed to bear its own expenses in
connection with the Acquisition.
The Company and the Surviving Corporation (as successor to Merger Sub)
have covenanted and agreed that, following the Closing Date, they will
indemnify and hold harmless each person who is now or has been an officer or
director of Pac Rim or of any subsidiary of Pac Rim, to the fullest extent
permitted under the Certificate of Incorporation and Bylaws of Pac Rim or any
indemnification agreement among Pac Rim and such persons (collectively, the
"Indemnification Documents"), from all losses against which they were
indemnified under the
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Indemnification Documents, including, without limitation, liabilities arising
in connection with the Acquisition. If such a claim is made against any of
such persons, the Company will pay for and control the defense of such person
except in the event of conflicts of interest, in which case such person may
select his or her own counsel. The Company and the Surviving Corporation have
agreed to keep in place for a minimum of three years from the Closing Date
provisions in the Certificate of Incorporation and Bylaws of the Surviving
Corporation indemnifying its officers and directors and eliminating their
liability to the Surviving Corporation to the fullest extent permitted under
Delaware law. The Company has also agreed to maintain officers' and directors'
liability insurance covering those current and former officers and directors of
Pac Rim who are currently covered under a similar policy held by Pac Rim, with
a policy limit of $20 million through February 16, 1997, and a policy limit of
$15 million from February 17, 1997 to three years after the Closing Date.
After the Closing Date, the Company and the Surviving Corporation have
agreed to honor the existing employee benefit plans of Pac Rim and its
subsidiaries while reserving the right to modify or terminate such plans in
accordance with applicable law. Each employee of Pac Rim and its subsidiaries
will receive credit for time served as an employee of Pac Rim and its
subsidiaries for purpose of receiving benefits as an employee of the Surviving
Corporation and its subsidiaries. Each employee of Pac Rim and its
subsidiaries not subject to an employment agreement with Pac Rim or its
subsidiaries will be hired by the Surviving Corporation or its subsidiaries on
an "at-will" basis. The Company and the Surviving Corporation have agreed for
a period of nine months to honor a severance program adopted by Pac Rim in
anticipation of the Acquisition that calls for an employee terminated without
cause to receive as a severance payment one month's salary for each year of
service to Pac Rim or its subsidiaries, and for an officer terminated without
cause to receive two months salary for each year of service to Pac Rim or its
subsidiaries. Employees and officers would also receive "COBRA" benefits. The
Company believes that it will be required to make severance payments after the
Closing Date but the extent of the potential liability cannot be stated
exactly.
CERTAIN PAYMENTS UNDER EXISTING PAC RIM COMPENSATION ARRANGEMENTS
If the Acquisition is consummated, the Surviving Corporation has
agreed to assume certain existing Pac Rim compensation arrangements. Under the
Pac Rim Holding Corporation and The Pacific Rim Assurance Company Compensation
Plan for Senior Management Team, the Surviving Corporation 90 days after the
Closing Date will be required to fund annuities with a present value of
$350,000, in the aggregate, or make cash payments of $350,000, in the
aggregate, to three senior officers of Pac Rim in recognition of services
performed in arranging the sale of Pac Rim prior to June 30, 1997. Under The
Pacific Rim Assurance Company 1996 Annual Incentive Plan, the Surviving
Corporation will be required to pay performance-based bonuses to certain
officers of Pac Rim, which bonuses are dependent on the achievement of
specified annual objectives by Pacific Rim Assurance Company through the
Closing Date or December 31, 1996, whichever is earlier, and the calculation of
which excludes any effects of the reevaluation of The Pacific Rim Assurance
Company's reserves or other purchase accounting as a result of the consummation
of the Acquisition. Any reserve adjustment may, however, be taken into
consideration by the Surviving Corporation if, upon review, it is determined
that such adjustment was required under generally accepted accounting
principles.
The Surviving Corporation has also agreed to assume the obligations of
Pac Rim under an employment agreement between Pac Rim and Stanley Braun, as
amended to date (the "Braun Employment Agreement"). The Company has agreed to
unconditionally guarantee the Surviving Corporation's obligations thereunder.
The Braun Employment Agreement is more fully described in the Annual Report of
Pac Rim for the year ending December 31, 1995, a copy of which is attached to
this Proxy Statement as Annex H, and the Braun Employment Agreement and all
amendments thereto are attached hereto as Exhibit K to Annex C. The Braun
Employment Agreement contains certain provisions set forth in the First
Amendment thereto that take effect upon a change of control of Pac Rim. The
Braun Employment Agreement would be extended pursuant to those provisions for
four years at an annual salary of $400,000. Although Mr. Braun need only
render services for two years, he would be bound by confidentiality and
non-competition proposals for four years. In addition, the Braun Employment
Agreement would require the Surviving Corporation to make a payment of $475,000
at the Closing Date and an additional $575,000 payment on January 10th of the
calendar year following the Closing Date. These payments, on an after-tax
basis, would be applied to repay a $450,000 loan by Pac Rim to Mr. Braun. Mr.
Braun would receive certain other benefits. The Company believes that the
Surviving Corporation would be obligated to pay to Mr. Braun, in
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consideration of services rendered and his covenant not to compete with the
Surviving Corporation, a total of $2.8 million over a four-year period.
TERMINATION, AMENDMENT AND WAIVER
The Pac Rim Acquisition Agreement may be terminated at any time by the
mutual written consent of the Company and Pac Rim. The Pac Rim Acquisition
Agreement may also be terminated by any party if the Closing of the Acquisition
has not occurred on or before March 1, 1997, provided that if the Closing
occurs after February 1, 1997 due to any action or inaction on the part of the
Company, the Company will pay interest of $5,000 per day to the common
stockholders of Pac Rim, as a group. The Pac Rim Acquisition Agreement may
also be terminated if this Proposal No. 1 is not approved by the Company's
shareholders or if the stockholders of Pac Rim fail to approve the Acquisition.
The affirmative vote of 70% of the stockholders of Pac Rim (including holders
of the Convertible Debentures voting the common stock equivalents thereof) is
required to approve the Acquisition. Pursuant to a Voting Agreement dated as
of September 17, 1996 (the "Voting Agreement"), among the Company and several
principal holders of Convertible Debentures and the Pac Rim Common Stock, 60%
of the outstanding shares of Pac Rim Common Stock eligible to vote are
committed to vote in favor of the Acquisition. A copy of the Voting Agreement
is attached hereto as Exhibit H to Annex C.
The Pac Rim Acquisition Agreement may be terminated by the Company
alone if there is a breach of any of the representations and warranties of Pac
Rim that would be reasonably likely to have a Pac Rim Material Adverse Effect
or if Pac Rim fails to comply in any material respect with any of its
respective covenants or agreements contained in the Pac Rim Acquisition
Agreement, which breach, if curable, is not cured within thirty (30) days. In
addition, the Company may terminate the Pac Rim Acquisition Agreement if
holders of more than 1 million shares of Pac Rim Common Stock exercise their
dissenters' rights with respect to the Acquisition under Delaware law.
Pac Rim may terminate the Pac Rim Acquisition Agreement if the board
of directors of Pac Rim believes, in the exercise of its good faith judgment as
to its fiduciary duties to the stockholders of Pac Rim, that the board should
accept an Acquisition Proposal, in which case Pac Rim would pay the Company a
termination fee as described below under "--Termination Fee and Liquidated
Damages." Pac Rim may also terminate the Pac Rim Acquisition Agreement if
there is a breach of any of the representations and warranties of the Company
that would be reasonably likely to have a Parent Material Adverse Effect or if
the Company fails to comply in any material respect with any of its respective
covenants or agreements contained in the Pac Rim Acquisition Agreement, which
breach, if curable, is not cured within thirty (30) days.
The Pac Rim Acquisition Agreement may be amended only by an instrument
in writing signed by each of the parties thereto. At any time prior to the
Closing, any party to the Pac Rim Acquisition Agreement may, in writing, (a)
extend the time for performance of any obligation of the other party, (b) waive
any inaccuracies in the representations and warranties made to such party in
the Pac Rim Acquisition Agreement or any document delivered in connection
therewith, and (c) waive compliance with any of the agreements or conditions
for the benefit of such party contained in the Pac Rim Acquisition Agreement.
TERMINATION FEE AND LIQUIDATED DAMAGES
In the event Pac Rim's board of directors terminates the Pac Rim
Acquisition Agreement by reason of an Acquisition Proposal or, after a public
announcement of an Acquisition Proposal, the stockholders of Pac Rim fail to
approve the Acquisition, upon execution of a definitive agreement for such
Acquisition Proposal, if such agreement is executed within six months of
termination, Pac Rim will pay to the Company a termination or "breakup" fee of
$5 million. A portion of this fee is payable by the Company to IPA. See
"--Terms of the Stock Issuance--Expenses and Fees."
In the event the Company or Merger Sub breach their representations
and warranties in the Pac Rim Acquisition Agreement or fail to comply with
certain covenants and conditions set forth therein, and thereby cause the Pac
Rim Acquisition Agreement to be terminated, or if the Company refuses to
consummate the Acquisition after Pac Rim has satisfied all conditions to
Closing, the Company will pay to Pac Rim liquidated damages of
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$5 million. In the event Pac Rim breaches its representations and warranties
in the Pac Rim Acquisition Agreement or fails to comply with certain covenants
and conditions set forth therein, and thereby causes the Pac Rim Acquisition
Agreement to be terminated, or if Pac Rim refuses to consummate the Acquisition
after the Company has satisfied all conditions to Closing, Pac Rim will pay to
the Company liquidated damages of $2.5 million.
THE COMPANY IS OBLIGATED UNDER THE PAC RIM ACQUISITION AGREEMENT TO
PROCEED WITH THE ACQUISITION REGARDLESS OF WHETHER THE STOCK PURCHASE AGREEMENT
IS APPROVED BY ITS SHAREHOLDERS AND CONSUMMATED IN ACCORDANCE WITH ITS TERMS.
IF THE STOCK PURCHASE AGREEMENT IS NOT APPROVED BY ITS SHAREHOLDERS, OR IS NOT
CONSUMMATED FOR ANY OTHER REASON, AND THE COMPANY IS UNABLE TO SECURE
ALTERNATIVE FINANCING SO AS TO BE ABLE TO PROCEED WITH THE ACQUISITION, IN THE
EVENT PAC RIM HAS SATISFIED CERTAIN CONDITIONS THE COMPANY MAY BE LIABLE TO PAC
RIM FOR LIQUIDATED DAMAGES IN THE AMOUNT OF $5 MILLION.
The Company will in any event be responsible for all of its own costs
and expenses incurred in connection with the Acquisition and the transactions
contemplated thereby, whether or not the Closing occurs.
EFFECT OF TERMINATION
Except to the extent the Company may be obligated to pay liquidated
damages, or Pac Rim may be obligated to pay a termination fee or liquidated
damages, in the event of a termination of the Pac Rim Acquisition Agreement it
shall become void and there will be no liability on the part of any party
thereto, except that no party shall be relieved of any liability for a breach
of a confidentiality agreement among the parties.
RELATED AGREEMENTS
Certain additional agreements to be consummated at the Closing are
attached as Exhibits to the Pac Rim Acquisition Agreement (attached as Annex C
to this Proxy Statement), consisting of: (a) the Debenture Purchase Agreement,
(attached hereto as Exhibit C to Annex C), and (b) the Warrant Surrender
Agreement (attached hereto as Exhibit E to Annex C). In addition, certain
holders of Pac Rim Common Stock and Convertible Debentures have entered into
the Voting Agreement.
Debenture Purchase Agreement. The Debenture Purchase Agreement
obligates Prac and Allstate to sell and transfer all of the outstanding
Convertible Debentures held by them to the Company for the "Debenture Purchase
Price," which is the value of the Convertible Debentures converted into Pac Rim
Common Stock. The $20 million outstanding Convertible Debentures of Pac Rim
are convertible into 7,272,727 shares of Pac Rim Common Stock. In addition,
the Company will acquire Series 1, 2 and 3 Detachable Warrants of Pac Rim from
Prac and Allstate at the "Warrant Purchase Price," which is the spread between
the exercise price of such warrants (including the adjustment to the Series 1
and Series 2 Warrant exercise price that is expected to occur at or prior to
the Closing based upon an evaluation of Pac Rim's loss reserves) and the price
per share paid for the Pac Rim Common Stock. It is expected that the Series 3
Warrants held by Pac and Allstate will be "out of the money" and cancelled.
The approximately $54 million purchase price for Pac Rim includes the Debenture
Purchase Price and the Warrant Purchase Price. Prac and Allstate have agreed
to forego any rights with respect to adjustments in the warrant exercise price
they may have under the agreements governing the Series 1 and 2 Detachable
Warrants that would cause the Warrant Purchase Price to exceed $3.5 million.
Each party to the Debenture Purchase Agreement has made standard
representations and warranties and has agreed to standard covenants. Prac and
Allstate have in addition agreed to release the Company, Merger Sub, the
Surviving Corporation, and any of their subsidiaries from any claims such
entities may have as creditors of Pac Rim, excepting rights to indemnification
to the extent they are preserved under the Pac Rim Acquisition Agreement. The
Debenture Purchase Agreement terminates in the event the Pac Rim Acquisition
Agreement terminates.
Warrant Surrender Agreement. The holders of Pac Rim's Series 3
Detachable Warrants, other than Prac and Allstate, have agreed to surrender
such warrants to Pac Rim at the Effective Time, with the expectation that they
will be "out of the money" at such time and therefore of no value. No payment
will be made for the surrendered warrants. Each Series 3 Warrant holder and
Pac Rim has made standard representations and warranties
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to the other parties. The Series 3 Warrant holders have in addition agreed to
release the Company, Merger Sub, the Surviving Corporation, and any of their
subsidiaries from any claims such holders may have as creditors of Pac Rim,
excepting rights to indemnification to the extent they are preserved under the
Pac Rim Acquisition Agreement. The Warrant Surrender Agreement terminates in
the event the Pac Rim Acquisition Agreement terminates.
Voting Agreement. The Company is party to the Voting Agreement with
certain Pac Rim Common Stockholders and holders of Convertible Debentures,
namely Prac, Allstate, Dito Caree Limited Partnership, a Nevada limited
partnership, Dito-Devcar Corporation, a Nevada corporation, and Richard H.
Pickup, in his capacity as trustee of each of the Pickup Family Trust, TMP
Charitable Unitrust, and DRP Charitable Unitrust (collectively, the "Principal
Stockholders"). The Principal Stockholders, who together hold 60% of the Pac
Rim Common Stock and common stock equivalents, have agreed vote in favor of the
Acquisition and against any competing proposals. The affirmative vote of 70%
of the issued and outstanding shares of Pac Rim Common Stock and common stock
equivalents are required in order to approve the Merger. However, the
Principal Stockholders' obligations under the Voting Agreement terminate in the
event the board of directors of Pac Rim recommends a competing Acquisition
Proposal to its stockholders, provided that if a termination fee becomes
payable under the Pac Rim Acquisition Agreement, the Convertible Debenture
holders (except Allstate) will pay to the Company upon consummation of the
competing transaction an amount equal to the difference between the price
received for such persons' Convertible Debentures and Pac Rim Warrants under
the competing transaction and the price that would have been paid under the
Debenture Purchase Agreement. A portion of this amount is payable by the
Company to IPA. See "--Terms of the Stock Issuance--Expenses and Fees." Each
Principal Stockholder has separately represented and warranted as to its
authority relative to the Voting Agreement, the absence of conflicts between
the Voting Agreement and its organizational documents, material agreements or
any laws, and as to its title to the securities being voted. Each Principal
Stockholder has covenanted that it will not sell or encumber the securities
held by it without the Company's consent. The Voting Agreement terminates upon
the earliest to occur of the termination of the Pac Rim Acquisition Agreement,
the Closing Date, or December 31, 1997.
TERM LOAN
The Company has obtained a commitment from The Chase Manhattan Bank
("Chase") for a Term Loan in the amount of $44,000,000. The Company intends to
use the proceeds of the Term Loan for the Acquisition and related expenses, and
to refinance or repay existing indebtedness. Chase may arrange for other banks
to participate in the Term Loan and if so will act as agent for the lending
banks. Merger Sub will be the borrower and, after the Closing Date, Superior
Pacific Holding Corporation (the Surviving Corporation) will be the obligor
under the Term Loan. The loan will be due six years from the Closing Date.
Principal payments will be due every six months beginning six months after the
Closing Date, and will be paid in eleven consecutive installments of $3,650,000
and a final installment of $3,850,000. The interest rate will be a LIBOR-based
variable rate, but will not exceed Chase's prime commercial lending rate unless
default interest becomes due. The loan documents will, when prepared and
delivered at the Closing Date, contain customary conditions and covenants,
including financial ratios and customary events of default. The loan will be
secured by the stock of the Company's subsidiaries. The closing of the Term
Loan will be subject to customary closing conditions, the repayment or
refinancing of indebtedness of the Company to be repaid or refinanced with the
proceeds of the Term Loan, and the simultaneous closing of the Acquisition.
CERTAIN OTHER ITEMS RELATED TO THE ACQUISITION
ACCOUNTING TREATMENT
The Acquisition is to be treated as a purchase for accounting
purposes. See "--Unaudited Pro Forma Financial Information."
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MARKET INFORMATION
As of Friday, September 13, 1996, the business day prior to the date
on which the Company announced its offer to acquire Pac Rim, the range of bid
and ask prices for Pac Rim Common Stock (Symbol: PRIM) on Nasdaq was $2.75 to
$3.125.
ADDITIONAL INFORMATION REGARDING PAC RIM
Shareholders are urged to review the Annual Report on Form 10-K of Pac
Rim for the year ended December 31, 1995 attached hereto as Annex H, and the
Quarterly Report on Form 10-Q of Pac Rim for the quarter ended June 30, 1996
attached hereto as Annex I, each incorporated herein by this reference, and the
financial information included therewith.
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UNAUDITED PRO FORMA FINANCIAL INFORMATION
The unaudited pro forma combined balance sheet data assumes the
Transaction took place on June 30, 1996, and combines the Company's June 30,
1996 balance sheet data with Pac Rim's June 30, 1996 balance sheet data using
the purchase method of accounting. The unaudited pro forma statements of
operations data assumes that the Transaction took place as of the beginning of
each of the periods presented using the allocation of the purchase information
calculated as of June 30, 1996, and combines the statement of operations data
for the Company and for Pac Rim for the year ended December 31, 1995 and for
the six-month period ended June 30, 1996.
The unaudited pro forma financial information is not necessarily
indicative of future operations and should not be construed as representative
of future operations of the combined companies.
PRO FORMA FINANCIAL INFORMATION
ACQUISITION OF PAC RIM HOLDING CORPORATION BY SUPERIOR NATIONAL INSURANCE
GROUP, INC.
PURCHASE ACCOUNTING METHOD
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
AS OF JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Purchase
SNIG Accounting Pro Forma
SNIG Pac Rim Adjustments Adjustments Combined
-------- -------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments:
Bonds and notes:
Available-for sale, at market . . $51,543 $112,277 $163,820
Equity securities, at market . . . 643 643
Funds withheld from reinsurers, at
amortized cost . . . . . . . . . 87,359 87,359
Invested cash . . . . . . . . . . . 15,198 4,777 19,975
-------- -------- -------- -------- --------
Total Investments . . . . . . . . 154,743 117,054 0 0 271,797
Cash . . . . . . . . . . . . . . . 2,290 1,493 54,070 (d) (57,100)(k) 753
Reinsurance receivables . . . . . . 32,054 4,275 36,329
Premiums receivable (less allowance
for doubtful accounts) . . . . . 15,513 13,650 29,163
Deferred policy acquisition costs . 3,062 1,241 4,303
Income taxes . . . . . . . . . . . 9,847 10,482 (139)(h) 20,190
Goodwill . . . . . . . . . . . . . -- -- 1,062 (l) 1,062
Other assets . . . . . . . . . . . 9,530 15,294 (1,265 (e) 23,109
(450 (f)
-------- -------- -------- -------- --------
Total Assets . . . . . . . . . . $227,039 $163,489 $54,070 $(57,892) $386,706
======== ======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Liabilities:
Claims and claim adjustment
expenses . . . . . . . . . . . . $122,650 $90,709 $213,359
Unearned premiums . . . . . . . . . 9,633 5,586 15,219
Long-term debt - Imperial Bank . . 7,930 (7,930)(a)
Debentures payable . . . . . . . . 18,769 (18,769)(g) 0
Term loan - The Chase Manhattan
Bank . . . . . . . . . . . . . . 44,000 (b) 44,000
Policyholder dividends . . . . . . 6,187 233 6,420
Accounts payable and other
liabilities . . . . . . . . . . . 14,436 6,369 2,700 (i) 23,505
-------- -------- -------- -------- --------
Total Liabilities . . . . . . . . 160,836 121,666 36,070 (16,069) 302,503
Preferred securities issued by
affiliate; authorized 1,100,000
shares: issued and outstanding
966,860 shares in 1996 . . . . . 22,272 22,272
Shareholders' Equity:
Common stock and additional paid-
in-capital . . . . . . . . . . . . 15,943 29,719 18,000 (c) (29,719)(j) 33,943
Unrealized (loss) on investments . (584) (270) 270 (j) (584)
Paid in capital - warrants . . . . 2,206 1,800 (1,800)(j) 2,206
Retained earnings . . . . . . . . . 26,366 10,574 (10,574)(j) 26,366
-------- -------- -------- -------- --------
Total Shareholders' Equity . . . 43,931 41,823 18,000 (41,823) 61,931
-------- -------- -------- -------- --------
Total Liabilities and
Shareholders' Equity . . . . . . $227,039 $163,489 $54,070 $(57,892) $386,706
======== ======== ======== ======== ========
</TABLE>
See accompanying explanatory notes to pro forma financial statements.
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<PAGE> 65
Explanatory Notes
1) Description of Pro Forma Adjustments
The following descriptions reference the adjustments as labeled on the
pro forma condensed balance sheet as of June 30, 1996:
(a) Adjustment to long-term debt to reflect the redemption of
SNIG's outstanding loan with Imperial Bank.
(b) Adjustment to senior debt payable to reflect a new Term Loan
provided by The Chase Manhattan Bank.
(c) Adjustment to reflect the Newly Issued Stock pursuant to the
terms of the Stock Purchase Agreement.
(d) The increase in cash represents total funds provided by the
$62 million obtained from the Term Loan and the Newly Issued Stock, less the
repayment of $7.930 million of Imperial Bank debt.
(e) Adjustment to other assets to write-off the unamortized
debenture issuance costs resulting from the redemption of Pac Rim's Convertible
Debentures.
(f) Adjustment to other assets reflects a netting of receivables
due from the Chief Executive Officer of Pac Rim against associated severance
payments.
(g) Adjustment to debentures payable to reflect the redemption of
Pac Rim's Covertible Debentures.
(h) Adjustment to deferred tax assets to write off the deferred
tax asset relating to the unrealized loss on investments.
(i) Adjustment to accounts payable and other liabilities to
reflect assumption of amounts payable to officers of Pac Rim, gross of the
receivable referred to in (f) above.
(j) Adjustment to common stock and additional paid-in-capital to
reflect the elimination of Pac Rim stockholder equity interest.
(k) Reduction of cash to reflect the following items: i) purchase
of Pac Rim Common Stock for $28.6 million, ii) redemption of the Pac Rim
Warrants and options for $3.5 million, iii) redemption of the Convertible
Debentures for $20.0 million, and iv) direct costs of acquisition of $5
million.
(l) The excess of the purchase price paid for Pac Rim over the
amounts assigned to identifiable assets acquired less liabilities assumed is
recorded as goodwill.
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<PAGE> 66
PRO FORMA FINANCIAL INFORMATION
ACQUISITION OF PAC RIM HOLDING CORPORATION BY SUPERIOR NATIONAL INSURANCE
GROUP, INC.
PURCHASE ACCOUNTING METHOD
UNAUDITED PRO FORMA CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31, 1995 Six Months Ended June 30, 1996
--------------------------------------------- ------------------------------------------------
Pro
Pro Forma Forma Pro Forma Pro Forma
SNIG(1) Pac Rim(1) Adjustments Combined SNIG Pac Rim Adjustment Combined
------ --------- ----------- -------- ---- ------- ---------- --------
Inc. (Decr) Inc. (Decr)
(In thousands, except for share and per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Net premiums earned . . $89,735 $76,016 $165,751 $43,033 41,259 $84,292
Net investment income
and capital gains . . 9,784 8,542 -- 18,326 4,265 3,696 7,961
-------- -------- -------- -------- -------- --------
Total Revenues . . . 99,519 84,558 184,077 47,298 44,955 92,253
EXPENSES:
Claims and claim
adjustment expenses,
net of reinsurance . 56,605 50,957 107,562 22,600 31,132 53,732
Underwriting and
general and
administrative
expenses . . . . . . 27,348 30,309 57,657 18,246 13,424 31,670
Policyholder dividends (5,742) 132 (5,610) (1,406) (141) (1,547)
Goodwill amortization . -- -- 39(a) 39 -- -- 20 (a) 20
Interest expense . . . 9,619 2,306 (2,306)(b) 12,329 4,796 1,165 1,165)(b) 6,111
(800)(c) (319)(c)
3,510(d) 1,634 (d)
-------- -------- -------- -------- -------- -------- -------- --------
TOTAL EXPENSES . . . 87,830 83,704 443 171,977 44,236 45,580 170 89,986
-------- -------- -------- -------- -------- -------- -------- --------
Income before income
taxes, preferred
securities dividends
and accretion,
discontinued
operations,
extraordinary items,
and cumulative effect
of change in
accounting for income
taxes . . . . . . . . 11,689 854 (443) 12,100 3,062 (625) (170) 2,267
Income tax expense
(benefit) . . . . . . (12) 279 (151)(e) 116 1,048 (185) (58)(e) 805
Income (loss) before
preferred securities
dividends and
accretion,
discontinued
operations,
extraordinary items,
and cumulative effect
of change in
accounting for income
taxes . . . . . . . . 11,701 575 (292) 11,984 2,014 (440) (112) 1,462
Preferred securities
dividends and
accretion, net of
income tax benefit . . (1,488) -- -- (1,488) (810) -- -- (810)
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) from
continuing operations $10,213 $575 $(292) $10,496 $1,204 $(440) $(112) $652
======== ======== ======== ======== ======== ======== ======== ========
Per common share:
Income (loss) from
continuing operations $2.98 $0.06 $1.51 $0.27 $(0.05) $0.10
Weighted average shares
outstanding . . . . . 3,430,373 9,528,000 7,103,711 5,318,118 9,528,000 7,236,211
</TABLE>
(1) Derived from audited financial statements.
See accompanying explanatory notes to pro forma financial statements.
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<PAGE> 67
Explanatory Notes
1) Description of Pro Forma Adjustments
The following descriptions reference the adjustments as labeled on the
pro forma condensed statements of operations for the year ended December 31,
1995 and six months ended June 30, 1996:
(a) Adjustment represents amortization of goodwill on a straight
line basis over an estimated 27-year period.
(b) Adjustment represents the elimination of interest expense on
Pac Rim's Convertible Debentures payable as if the redemption of Pac Rim's
Convertible Debentures had been effective on January 1, 1995.
(c) Adjustment represents the elimination of interest expense on
the Company's term loan with Imperial Bank as if the repayment of such term
loan had been effective on January 1, 1995.
(d) Adjustment represents the interest expense on the Company's
new Term Loan with Chase as if the Term Loan had been effective on January 1,
1995.
(e) Adjustment represents the tax effect of pro forma adjustments
at an effective tax rate of 34%.
CERTAIN OTHER ITEMS RELATED TO THE STOCK ISSUANCE
GOVERNMENTAL AND REGULATORY APPROVALS
Neither the Company nor Pac Rim is aware of any governmental or
regulatory approvals required for consummation of the Acquisition, other than
compliance with applicable securities laws, the premerger notification
requirements of the HSR Act (now completed), and the approval of the DOI under
Section 1215 et seq. of the California Insurance Code of both of the
Acquisition and the Stock Issuance. Each of the Stock Issuance and the
Acquisition is subject to the filing of a Form A with, and approval by, the DOI
under Section 1215.2 of the California Insurance Code and Title 10 California
Code of Regulations Section 2683 et seq. Such Form As have been filed. As of
the date of this Proxy Statement, approval has not been obtained. Further, due
to the number of shares of Newly Issued Stock to be issued under the Stock
Purchase Agreement, shareholder approval is required pursuant to Nasdaq Rule
4460(i)(1)(C)(ii).
FEDERAL INCOME TAX CONSEQUENCES
Neither the Stock Issuance nor the Acquisition will have any federal,
state or local income tax effect on any Company shareholder.
VOTE REQUIRED TO APPROVE THE STOCK ISSUANCE
Approval of "Proposal No. 1--The Stock Issuance" requires the
affirmative vote of the holders of a majority of the shares of Common Stock
represented and voting at a meeting at which a quorum is present (which shares
voting affirmatively also constitute at least a majority of the required
quorum). The holders of the Voting Notes are not entitled to vote on this
proposal. Abstentions will have no effect. A condition to the Stock Issuance
is that the majority of the outstanding shares held by persons who are neither
parties to the Stock Purchase Agreement nor Associates of such parties be voted
in favor of each of Proposals No. 1, No. 2, No. 4, and No. 5. See "--Terms of
the Stock Issuance--Closing Conditions--Conditions to Purchasers' Obligations."
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THIS PROPOSAL NO. 1.
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<PAGE> 68
PROPOSAL NO. 2--TRANSFER RESTRICTIONS CHARTER AMENDMENT
INTRODUCTION
The Board of Directors believes the best interests of the Company and
its shareholders will be served by adopting provisions (the "Transfer
Restrictions") in its articles of incorporation that are designed to restrict,
for a period of three years, direct and indirect transfers of the Company's
equity securities that could result in the imposition of limitations on the use
by the Company, for federal income tax purposes, of NOLs and other tax
attributes that are and will be available to the Company, as discussed more
fully below.
Under California law, the affirmative vote of a majority of the
outstanding shares of the Common Stock is required for approval of an amendment
to the Company's articles of incorporation. The Transfer Restrictions will be
adopted as an amendment to the California Articles of Incorporation of the
Company if "Proposal No. 3--Reincorporation of the Company in the State of
Delaware" is not adopted. If both Proposal No. 2 and Proposal No. 3 are
adopted, the Delaware Certificate of Incorporation of the Company will include
the Transfer Restrictions as Article Sixth. SHAREHOLDERS ARE URGED TO READ
CAREFULLY THE ATTACHED ANNEX D, WHICH SETS FORTH THE TRANSFER RESTRICTIONS.
Adoption of the Transfer Restrictions is a condition precedent to the
consummation of the Stock Purchase Agreement. See "Proposal No. 1--Terms of
the Stock Issuance--Closing Conditions--Conditions to Purchasers' Obligations."
The Transfer Restrictions have been approved by the Board of Directors.
The discussion set forth below is qualified in its entirety by
reference to the attached Annex D.
THE APPROVAL BY SHAREHOLDERS OF THE TRANSFER RESTRICTIONS WILL
CONSTITUTE APPROVAL OF AN AMENDMENT TO THE ARTICLES OF INCORPORATION OF THE
COMPANY, OR, SHOULD THE REINCORPORATION PROCEED, TO THE INCLUSION OF THE
TRANSFER RESTRICTIONS IN THE CERTIFICATE OF INCORPORATION OF THE COMPANY.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS
VOTE IN FAVOR OF THIS PROPOSAL NO. 2.
PURPOSE OF THE TRANSFER RESTRICTIONS
The Transfer Restrictions are designed to restrict direct and indirect
transfers of the Company's stock that could result in the imposition of
limitations on the use by the Company, for federal income tax purposes, of the
NOLs and other tax attributes that are and will be available to the Company, as
discussed more fully below.
THE COMPANY'S NOLS AND SECTION 382
As of December 31, 1995, the Company had available NOLs of $82.9
million to offset taxable income recognized by the Company in periods after
December 31, 1995. For federal income tax purposes, these NOLs will expire in
material amounts beginning in the year 2006. NOLs benefit the Company by
offsetting taxable income dollar-for-dollar by the amount of the NOLs, thereby
eliminating (subject to a relatively minor alternative minimum tax) the federal
corporate tax on such income. The maximum federal corporate tax rate is
currently 35%.
The benefit of a company's NOLs can be reduced or eliminated under
Section 382. Section 382 limits the use of losses and other tax benefits by a
company that has undergone an "ownership change," as defined in Section 382.
Generally, an ownership change occurs if one or more shareholders, each of whom
owns 5% or more in value of a company's capital stock, increase their aggregate
percentage ownership by more than 50 percentage points over the lowest
percentage of stock owned by such shareholders over the preceding three-year
period. For this purpose, all holders who each own less than 5% of a company's
capital stock are generally treated together as one or more 5 percent
shareholders. In addition, certain constructive ownership rules, which
generally attribute ownership of stock to the ultimate beneficial owner thereof
without regard to ownership by nominees, trusts, corporations, partnerships or
other entities, or to related individuals, are applied in determining the level
of stock ownership of a particular shareholder. Special rules, described
below, can result in the treatment of options (including warrants) as exercised
if such treatment would result in an ownership change. All percentage
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<PAGE> 69
determinations are based on the fair market value of a company's capital stock,
including any preferred stock that is voting or convertible or otherwise
participates in corporate growth.
Transactions in the public markets among shareholders owning less than
5% of the equity securities are not included in the calculation, but
acquisitions by a shareholder causing that person to become a 5% or more
shareholder are treated as a 5 percentage point change in ownership, regardless
of the size of the purchase that caused the threshold to be exceeded. As
examples, if a single shareholder owning 10% of the equity securities of the
Company acquired an additional 50% of the equity securities in a three-year
period, a change of ownership would occur. Similarly, if ten persons, none of
whom owned 5% or more of the equity securities at the beginning of the period,
each became an owner of at least 5% of the Company's equity securities within
the three-year period, an ownership change would have occurred.
If an ownership change of the Company were to occur, the amount of
taxable income in any year (or portion of a year) subsequent to the ownership
change that could be offset by NOLs or other carryovers existing (or
"built-in") prior to such ownership change could not exceed the product
obtained by multiplying (i) the aggregate value of the Company's stock
immediately prior to the ownership change with certain adjustments by (ii) the
federal long-term tax exempt rate (currently 5.80%). The Company would incur
corporate income tax on any taxable income during a given year in excess of
such limitation. Because the value of the Company's stock, as well as the
federal long-term tax-exempt rate, fluctuate, it is impossible to state exactly
the annual limitation upon the amount of taxable income of the Company that
could be offset by such NOLs or other items if an ownership change were to
occur on or subsequent to the Closing Date. However, at current values and
rates, an ownership change would result in the Company's having available less
than $2.5 million of NOLs for each year of the NOLs' remaining life. As the
Company's NOLs begin to expire in material amounts in ten years, an ownership
change at the current value of the Company's stock would mean that the Company
would lose the availability of a very substantial portion of its existing NOLs.
To continue the preceding example, a maximum of $25 million in NOLs would be
available to the Company over a ten-year period, as opposed to the current
$82.9 million. The effect of such an ownership change would be to
significantly defer the utilization of the NOLs, cause a substantial portion of
the NOLs to expire prior to their use, accelerate the payment of federal income
tax, reduce stockholders' equity, and slow the growth of statutory
policyholders' surplus.
EFFECT OF THE STOCK ISSUANCE
Approval and consummation of the Stock Issuance increases the risk
that the Company will undergo an "ownership change" under Section 382. The
significant change in ownership attributable to IP's acquisition of the Newly
Issued Stock, together with certain prior changes in ownership that may be
counted under Section 382, may be interpreted to be so large that certain
additional changes in ownership occurring during the three-year period
following consummation of the Stock Purchase Agreement may be counted for
Section 382 purposes and thus may well result in an ownership change within the
meaning of that Section. If such an ownership change were to occur, it would
result in a dramatic reduction in the Company's ability to use its NOLs.
Management believes that such a reduction would have a negative impact on the
Company's earnings per share and on the market for the Common Stock.
STANDSTILL ON EXERCISE OF OUTSTANDING WARRANTS
The Company believes that, assuming consummation of the Stock
Issuance, the exercise of any sizeable portion of the Company's outstanding
warrants in the three-year period following the Closing Date may well result in
the occurrence of an ownership change. In order to minimize the possibility of
an ownership change as a result of a warrant exercise, the Company intends to
enter into "standstill" agreements with its warrant holders whereby the warrant
holders will agree not to exercise any warrants to purchase Common Stock prior
to or during the three-year period in which the Transfer Restrictions are in
effect.
Under certain circumstances, the Treasury regulations issued under
Section 382 would require that "options" (which term includes, by definition,
warrants) be counted for change of ownership purposes when issued, not when
exercised. The Company believes that there is little risk that its outstanding
warrants would currently be deemed "exercised" for purposes of Section 382.
Regulations issued in March 1994 provide that an "option" (as
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<PAGE> 70
defined above to include warrants) will be treated as having been exercised at
the time of its issuance for purposes of Section 382 if it meets any one of
three tests, each of which will apply only if a "principal purpose" of the
issuance, transfer or structuring of the "option" was to avoid or ameliorate
the impact of an ownership change under Section 382. At the time the Company's
outstanding warrants were sold, Section 382 and the avoidance of an ownership
change were so remote to the issues then facing the Company that they played no
part in the issuance or structure of the warrants.
DESCRIPTION OF THE TRANSFER RESTRICTIONS
THE FOLLOWING IS A BRIEF SUMMARY OF THE PROPOSED TRANSFER
RESTRICTIONS. THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
FULL TEXT OF THE PROPOSED TRANSFER RESTRICTIONS. ALL SHAREHOLDERS ARE URGED TO
READ THE TRANSFER RESTRICTIONS SET FORTH IN ANNEX D HERETO IN THEIR ENTIRETY.
Upon the Reincorporation and adoption thereby of the SNIG-Delaware
Certificate of Incorporation, Article Sixth thereof (or, if Reincorporation
does not occur, a similar article in the Company's California Articles of
Incorporation) generally will restrict, until three years after the Closing
Date, any direct or indirect transfer of "stock" (which term, for purposes of
the Transfer Restrictions, includes the Common Stock and any other equity
security treated as "stock" under Section 382) of the Company if the effect
would be to increase the ownership of stock by any person who during the
preceding three-year period owned 4.90% or more of the Company's stock, would
otherwise increase the percentage of stock owned by a "5 percent shareholder"
(as defined in Section 382, substituting "4.90 percent" for "5 percent"), or
otherwise would cause an ownership change of the Company within the meaning of
Section 382. Transfers included under the Transfer Restrictions include sales
to persons whose resulting percent ownership would exceed the thresholds
discussed above, or to persons whose ownership of shares would by attribution
cause another person to exceed such thresholds, as well as sales by persons who
exceeded such thresholds prior to the Transfer Restrictions' becoming
effective. Numerous rules of attribution, aggregation, and calculation
prescribed under the Code (and related regulations) will be applied in
determining whether the 4.90% threshold has been met and whether a group of
less than 4.90% shareholders will be treated as a "public group" that is a 5
percent shareholder under Section 382. As a result of these attribution rules,
the Transfer Restrictions could result in prohibiting ownership of the
Company's stock as a result of a change in the relationship between two or more
persons or entities, or a transfer of an interest other than the Company's
stock, such as an interest in an entity that, directly or indirectly, owns the
Company's stock. The Transfer Restrictions may also apply to proscribe the
creation or transfer of certain "options" (which are broadly defined by Section
382) in respect of the Company's stock to the extent, generally, that exercise
of the option would result in a proscribed level of ownership.
Generally, the Transfer Restrictions will be imposed only with respect
to the amount of the Company's stock (or options with respect to the Company's
stock) purportedly transferred in excess of the threshold established in the
Transfer Restrictions. In any event, the restrictions will not prevent a
transfer if the purported transferee obtains the approval of the Board of
Directors, which approval shall be granted or withheld in the sole and absolute
discretion of the Board of Directors, after considering all facts and
circumstances including but not limited to future events deemed by the Board of
Directors to be reasonably possible.
The Company believes that, as of the date hereof, the only
shareholders that would, or may, be treated under Section 382 as beneficially
owning 4.90% or more of the Company's stock are Thomas J. Jamieson and the
persons or entities controlling CentreLine, Centre, the Bishop Estate, TJS or
The Ravenswood Investment Company. See "Proposal No. 1--Security Ownership of
Certain Beneficial Owners and Management after the Stock Issuance." In
addition, if the Stock Issuance is approved and consummated, IP Delaware and IP
Bermuda will each be a 4.90% shareholder on the Closing Date. There may be
other shareholders that beneficially own 4.90% or more of the Company's stock,
although the Company is not aware of any such shareholders. Except as
discussed below, the Transfer Restrictions would restrict any other person or
entity (or group thereof) from acquiring sufficient stock of the Company to
cause such person or entity to become the owner of 4.90% of the Company's
stock, and would prohibit persons that own over 4.90% of the Company's stock
generally from increasing their ownership of the Company's stock, without
obtaining the approval of the Board of Directors.
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Assuming adoption of the Transfer Restrictions, all certificates
representing the Company's stock, including the Newly Issued Stock and stock
issued on a negotiated or other transfer, would bear the following legend:
"THE TRANSFER OF THE SECURITIES REPRESENTED HEREBY IS SUBJECT TO RESTRICTIONS
PURSUANT TO ARTICLE SIXTH OF THE CERTIFICATE OF INCORPORATION OF SUPERIOR
NATIONAL INSURANCE GROUP, INC." or similar legend. The Board of Directors also
intends to issue instructions to or make arrangements with the transfer agent
of the Company (the "Transfer Agent") to implement the Transfer Restrictions.
The Transfer Restrictions provide that the Transfer Agent shall not record any
transfer of the Company's stock purportedly transferred in excess of the
threshold established in the Transfer Restrictions. The Transfer Agent also
has the right, prior to and as a condition to registering any transfers of the
Company's stock on the Company's stock transfer records, to request an
affidavit from the purported transferee of the stock regarding such purported
transferee's actual and constructive ownership of the Company's stock, and if
the Transfer Agent does not receive such affidavit or the affidavit evidences
that the transfer would violate the Transfer Restrictions, the Transfer Agent
is required to notify the Company and not to enter the transfer in the
Company's stock transfer records. These provisions may result in the delay or
refusal of certain requested transfers of the Company's stock.
Upon adoption and filing of the Transfer Restrictions, any direct or
indirect transfer of stock attempted in violation of the restrictions would be
void ab initio as to the purported transferee, and the purported transferee
would not be recognized as the owner of the shares owned in violation of the
restrictions for any purpose, including for purposes of voting and receiving
dividends or other distributions in respect of such stock, or in the case of
options, receiving stock in respect of their exercise. Stock acquired in
violation of the Transfer Restrictions is referred to as "Excess Stock."
Excess Stock automatically would be transferred to a trustee for the
benefit of a charitable beneficiary designated by the Company, effective as of
the close of business on the business day prior to the date of the violative
transfer. Any dividends or other distributions paid prior to discovery by the
Company that the stock has been transferred to the trustee are treated as held
by the purported transferee as agent for the trustee and must be paid to the
trustee upon demand, and any dividends or other distributions declared but
unpaid after such time shall be paid to the trustee. Votes cast by a purported
transferee with respect to Excess Stock prior to the discovery by the Company
that the Excess Stock was transferred to the trustee will be rescinded as void
and recast in accordance with the desire of the trustee acting for the benefit
of the charitable beneficiary. The trustee shall have all rights of ownership
of the Excess Stock. As soon as practicable following the receipt of notice
from the Company that Excess Stock was transferred to the trustee, the trustee
is required to sell such Excess Stock in an arms-length transaction that would
not constitute a violation under the Transfer Restrictions. The net proceeds
of the sale, after deduction of all costs incurred by the Company, the Transfer
Agent, and the trustee, will be distributed first to the violating shareholder
in an amount equal to the lesser of such proceeds or the cost incurred by the
shareholder to acquire such Excess Stock, and the balance of the proceeds, if
any, will be distributed to the charitable beneficiary together with any other
distributions with respect to such Excess Stock received by the trustee. If
the Excess Stock is sold by the purported transferee, such person will be
treated as having sold the Excess Stock as an agent for the trustee, and shall
be required to remit all proceeds to the trustee (less, in certain cases, an
amount equal to the amount such person otherwise would have been entitled to
retain had the trustee sold such shares).
If the violative transaction results from indirect ownership of stock,
the Transfer Restrictions provide a mechanism that is intended to invalidate
the ownership of the Company's stock actually owned by the violating
shareholder and any persons within such shareholder's control group. Only if
such provisions will not be effective to prevent a violation of the Transfer
Restrictions will ownership of stock by other persons be invalidated under the
Transfer Restrictions.
The Transfer Restrictions provide that any person who knowingly
violates the Transfer Restrictions or any persons in the same control group
with such person shall be jointly and severally liable to the Company for, and
shall indemnify and hold the Company harmless against, any and all damages
suffered as a result of such violation, including but not limited to damages
resulting from a reduction in or elimination of the Company's ability to use
its NOLs.
The Transfer Restrictions will not apply to (i) any transfer described
in Section 382(1)(3)(B) of the Code (relating to transfers upon death or
divorce and certain gifts) if the transferor held the stock transferred for
longer
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<PAGE> 72
than the entire three-year period preceding the date of the transfer, (ii) any
sale of Common Stock by a person who owns more than 4.90% of the outstanding
Common Stock on the date of this Proxy Statement if such sale would not result
in a net increase in the amount of stock owned by 5 percent shareholders (as
determined for purposes of Section 382) during the three-year period ending on
the date of such sale, provided such sale would not otherwise be prohibited
under the Transfer Restrictions but for such transferor's ownership of stock of
the Company, and (iii) any transfer which the Board of Directors has approved
in writing, which approval may be given in the sole and absolute discretion of
Board of Directors after considering all facts and circumstances, including but
not limited to future events the occurrence of which are deemed to be
reasonably possible.
If the Reincorporation is approved, the Company's Bylaws after the
Reincorporation will provide for the Transfer Restrictions and stock
certificate legend.
The Company does not believe that adoption of the Transfer
Restrictions will adversely affect the continued listing of the Common Stock on
Nasdaq.
ENFORCEABILITY OF THE TRANSFER RESTRICTIONS
THE COMPANY BELIEVES THE TRANSFER RESTRICTIONS ARE IN THE BEST
INTERESTS OF THE COMPANY AND ITS SHAREHOLDERS AND ARE REASONABLE, AND THE
COMPANY WILL ACT VIGOROUSLY TO ENFORCE THE RESTRICTIONS AGAINST ALL CURRENT AND
FUTURE HOLDERS OF THE COMPANY'S STOCK REGARDLESS OF HOW THEY VOTE ON THE
TRANSFER RESTRICTIONS. Among other things, the Transfer Restrictions require a
shareholder (and any persons in such shareholder's control group) who knowingly
violates the Transfer Restrictions to indemnify the Company for any damages
suffered as a result of such violation, including damages resulting from a
reduction in or elimination of the Company's ability to utilize the NOLs. Even
if both of the Transfer Restrictions and the Reincorporation are approved,
there can be no assurance that the Transfer Restrictions or portions thereof
will be enforceable in Delaware courts. However, the Company believes the
Transfer Restrictions are enforceable under Delaware law. If the
Reincorporation is approved, the Company will receive an opinion of Delaware
Counsel as to the enforceability of the Transfer Restrictions under Delaware
law. Because under Delaware law, the Transfer Restrictions are not enforceable
against a transferee of shares without knowledge of such restriction unless
such restriction is stated on the share certificate, a restrictive legend will
be placed on all shares of SNIG- Delaware that are issued to shareholders in
exchange for their shares of SNIG-California Common Stock.
The Company is uncertain as to enforceability of the Transfer
Restrictions under California law, although it would vigorously attempt to
enforce them should the Reincorporation not occur. For example, the Company
would place a restrictive legend on its Common Stock share certificates,
similar in text to that used by Delaware corporations, in order to place new
shareholders on notice of the Transfer Restrictions. If the Reincorporation is
not approved, under California law the Transfer Restrictions are not binding
with respect to shares issued prior to the adoption of the Transfer
Restrictions unless the holder of the shares voted in favor of the Transfer
Restrictions Charter Amendment. In the event the Reincorporation does not
occur, for the purpose of determining whether a shareholder is subject to the
Transfer Restrictions, the Company intends to take the position that all shares
were voted in favor of the Transfer Restrictions Charter Amendment unless the
contrary is established to its satisfaction. The Company also intends in
certain circumstances to assert the position that shareholders have waived the
right to challenge or are estopped from challenging the enforceability of the
Transfer Restrictions, regardless of whether they voted in favor of the
Transfer Restrictions Charter Amendment.
CONTINUED RISK OF OWNERSHIP CHANGE
Despite the adoption of the Transfer Restrictions, there still remains
a risk that certain changes in relationships among shareholders or other events
will cause an "ownership change" of the Company under Section 382.
The Company believes the Transfer Restrictions are enforceable under
Delaware law, and will receive an opinion of counsel as to enforceability at
such time as the Reincorporation occurs. However, similar Transfer
Restrictions have not been tested in Delaware courts. The Company is uncertain
as to enforceability of the Transfer
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Restrictions in California courts, but would vigorously attempt to enforce them
if the Reincorporation does not occur. See "--Enforceability of the Transfer
Restrictions," above. Purchases by other shareholders of the Common Stock and
other events that occur prior to the Transfer Restrictions' becoming effective
can effect the percentage shift in the Company's ownership as determined for
purposes of Section 382, and any such acquisition could increase the likelihood
that the Company will experience an ownership change if such shift, coupled
with the consummation of the Stock Issuance, causes the ownership of 5 percent
shareholders of the Company to increase. There can be no assurance that all
holders of warrants will enter into standstill agreements acceptable to the
Company. There also can be no assurance, in the event transfers in violation
of the Transfer Restrictions are attempted, that the IRS will not assert that
such transfers have federal income tax significance notwithstanding the
Transfer Restrictions.
The Board of Directors has the discretion to approve a transfer of
stock that would otherwise violate the Transfer Restrictions. If the Board of
Directors decides to permit a transfer that would otherwise violate the
Transfer Restrictions, that transfer or later transfers may result in an
ownership change that would limit the use of the Company's NOLs. The Board of
Directors would only permit such an attempted transfer after making the
determination that it is in the best interests of the Company, after
consideration of the risk that an ownership change might occur and any other
factors that the Board deems relevant (including possible future events).
As a result of the foregoing, the Transfer Restrictions serve to
reduce, but not necessarily eliminate, the risk that Section 382 will cause the
limitations described above on the use of tax attributes of the Company.
ANTITAKEOVER EFFECT
Because some corporate takeovers occur through the acquiror's
purchase, in the public market or otherwise, of sufficient stock to give it
control of a company, any provision that restricts the transferability of
shares can have the effect of preventing such a takeover. The Transfer
Restrictions therefore may be deemed to have an "antitakeover" effect because
they will restrict, for up to three years following the Closing Date, the
ability of a person or entity or group thereof from accumulating an aggregate
of 4.90% or more of the Company's Common Stock or Voting Notes and the ability
of persons, entities or groups now owning 4.90% or more of the Company's Common
Stock or Voting Notes from acquiring additional securities. The Transfer
Restrictions would discourage or prohibit accumulations of substantial blocks
of shares for which shareholders might receive a premium above market value.
The indirect "antitakeover" effect of the Transfer Restrictions is not
the reason for the Transfer Restrictions. The Board of Directors considers the
Transfer Restrictions to be reasonable and in the best interests of the Company
and its shareholders because the Transfer Restrictions reduce certain of the
risks that the Company will be unable to utilize its available NOLs. In the
opinion of the Board of Directors, the fundamental importance to the Company's
shareholders of maintaining the availability of the NOLs to the Company is a
more significant consideration than the indirect "antitakeover" effect the
Transfer Restrictions may have.
POSSIBLE EFFECT ON LIQUIDITY
The Transfer Restrictions will restrict a shareholder's ability to
acquire, directly or indirectly, additional stock of the Company in excess of
the specified limitations. Furthermore, a shareholder's ability to dispose of
his stock of the Company (or any other stock of the Company such shareholder
may acquire) may be restricted as a result of the Transfer Restrictions, and a
shareholder's ownership of stock of the Company may become subject to the
Transfer Restrictions upon the actions taken by related persons. Upon
completion the Reincorporation, the Company's shareholders will exchange their
certificates in the Company for new certificates of SNIG-Delaware bearing the
legend reflecting the Transfer Restrictions. If the Reincorporation is not
approved, the Company would impose a similar legend on certificates
representing newly issued or transferred shares. Either type of legend may
result in a decreased valuation of the Common Stock due to the resulting
restrictions on transfers to persons directly or indirectly owning or seeking
to acquire a significant block of the Common Stock.
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VOTE REQUIRED TO APPROVE THE TRANSFER RESTRICTIONS CHARTER AMENDMENT
Approval of "Proposal No. 2--Transfer Restrictions Charter Amendment"
requires the affirmative vote of the holders of a majority of the outstanding
shares of Common Stock entitled to vote thereon. The holders of the Voting
Notes are not entitled to vote on this proposal. Abstentions will have the
effect of a negative vote. A condition to the Stock Issuance is that the
majority of the outstanding shares held by persons who are neither parties to
the Stock Purchase Agreement nor Associates of such parties vote in favor of
each of Proposals No. 1, No. 2, No. 4, and No. 5. See "Proposal No. 1--Terms
of the Stock Issuance--Closing Conditions--Conditions to Purchasers'
Obligations."
Shareholders should be aware that a vote in favor of the Transfer
Restrictions Charter Amendment may result in a waiver of the shareholder's
ability to contest the enforceability of the Transfer Restrictions.
Consequently, all shareholders should carefully consider this in determining
whether to vote in favor of the Transfer Restrictions. The Company intends to
enforce vigorously the Transfer Restrictions against all current and future
holders of its stock.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THIS PROPOSAL
NO. 2. AN ABSTENTION WILL BE COUNTED AS A VOTE AGAINST THE PROPOSAL.
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PROPOSAL NO. 3--REINCORPORATION OF THE COMPANY IN THE STATE OF DELAWARE
INTRODUCTION
The Board of Directors believes the best interests of the
Company and its shareholders will be served by changing the state of
incorporation of the Company from California to Delaware (the
"Reincorporation"). Delaware has been a leading jurisdiction in adopting,
constructing, and implementing comprehensive and flexible corporate laws that
are responsive to the legal and business needs of corporations, including the
need to attract and retain qualified independent directors. Further, the
Company believes it is more likely to be able to enforce the Transfer
Restrictions and preserve its NOLs if the Company proceeds with a
reincorporation in Delaware. See "Proposal No. 2--Enforceability of the
Transfer Restrictions." Shareholders are urged to read carefully the following
sections of this Proxy Statement, including the related annexes, before voting
on this proposal.
Throughout this Proxy Statement, the term "SNIG-California"
refers to Superior National Insurance Group, Inc., a California corporation,
and the term "SNIG-Delaware" refers to Superior National Insurance Group, Inc.,
a new Delaware corporation to be formed as a wholly owned subsidiary of
SNIG-California, which is the proposed successor of SNIG-California pursuant to
the Reincorporation.
The Reincorporation will be effected by merging
SNIG-California into SNIG-Delaware (the "SNIG Merger"), which subsidiary will
be incorporated for this purpose pursuant to an Agreement of Plan and Merger
(the "SNIG Merger Agreement") attached hereto as Annex E. Upon consummation of
the SNIG Merger, SNIG-California will cease to exist and SNIG-Delaware will
continue to operate the business of the Company under the name Superior
National Insurance Group, Inc. It is anticipated that the SNIG Merger, and
thus the Reincorporation, will become effective (the "Effective Date") in
December 1996 or early 1997, immediately prior to the Acquisition. The SNIG
Merger and Reincorporation may, pursuant to the terms of the SNIG Merger
Agreement, be abandoned at the discretion of the Board of Directors if
circumstances make it inadvisable to proceed or if the Company does not proceed
with the Stock Issuance or the Acquisition.
If the Reincorporation is approved by the Company's
shareholders, upon the Effective Date, (i) each outstanding share of SNIG-
California Common Stock, no par value, will be converted into one share of
SNIG-Delaware Common Stock, $0.01 par value; and (ii) each outstanding
restricted stock grant and option to purchase SNIG-California Common Stock,
including options under SNIG-California's 1986 Non- Statutory Stock Option and
Non-Statutory Stock Purchase Plan and options and restricted stock grants under
SNIG-California's 1995 Stock Incentive Plan, and each outstanding warrant to
purchase SNIG-California Common Stock will be automatically assumed by
SNIG-Delaware and will represent an option or warrant to acquire an equal
number of shares of SNIG-Delaware Common Stock, $0.01 par value. If the
Reincorporation occurs, the Newly Issued Stock will be stock in SNIG-Delaware.
Under California law, the affirmative vote of a majority of
the outstanding shares of the Common Stock is required for approval of the SNIG
Merger Agreement and the other terms of the Reincorporation. The
Reincorporation has been approved by SNIG-California's Board of Directors. THE
BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE IN FAVOR OF THIS PROPOSAL NO.
3.
The discussion set forth below is qualified in its entirety by
reference to the SNIG Merger Agreement, the Certificate of Incorporation of
SNIG-Delaware (the "Certificate of Incorporation"), and the Bylaws of
SNIG-Delaware, copies of which are attached hereto as Annex E, Annex F, and
Annex G, respectively. Persons who own shares of capital stock in a
corporation are referred to as "shareholders" under California law and as
"stockholders" under Delaware law. Both terms are used where appropriate in
the following discussion.
THE APPROVAL BY SHAREHOLDERS OF THE REINCORPORATION REQUESTED
HEREBY WILL ALSO CONSTITUTE APPROVAL OF THE SNIG MERGER AGREEMENT ATTACHED
HERETO AS ANNEX E, THE CERTIFICATE OF INCORPORATION OF SNIG-DELAWARE ATTACHED
HERETO AS ANNEX F, AND THE BYLAWS OF SNIG- DELAWARE ATTACHED HERETO AS ANNEX G.
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PRINCIPAL REASONS FOR THE REINCORPORATION
For many years Delaware has followed a policy of encouraging
incorporation in that state and, in furtherance of that policy, has been a
leader in adopting, constructing, and implementing comprehensive and flexible
corporate laws that are responsive to the legal and business needs of
corporations. Many publicly and privately-held corporations initially choose
Delaware for their state of incorporation or subsequently change their
corporate domiciles to Delaware in a manner similar to that proposed by the
Company. Because of Delaware's prominence as the state of incorporation for
many major corporations, both the legislature and courts in Delaware have
demonstrated an ability and a willingness to act quickly and effectively to
meet changing business needs. The Delaware courts have thereby developed
considerable expertise in dealing with corporate issues, and a substantial body
of case law has developed construing Delaware law and establishing public
policies with respect to corporate legal affairs. On the other hand,
California adopted a new General Corporation Law, effective January 1, 1977,
many provisions of which have yet to be interpreted by the courts. Further,
the ballot initiative process in California has generated unpredictability as
to the future applicability of laws related to director and officer liability.
If developments in California law tend to increase liability, it would become
more difficult for the Company to attract and retain qualified directors.
Consequently, reincorporation in Delaware will provide greater predictability
with respect to the Company's corporate legal affairs.
In addition, the Company seeks to adopt the Transfer
Restrictions as part of a Certificate of Incorporation in Delaware. The
adoption of Transfer Restrictions is a condition to the Stock Issuance. The
Company believes it is more likely to be able to enforce the Transfer
Restrictions in an effective manner and preserve its NOLs if the Company
proceeds with a reincorporation in Delaware. See "Proposal No.
2--Enforceability of the Transfer Restrictions."
ANTITAKEOVER IMPLICATIONS
Delaware, like many other states, permits a corporation to
adopt a number of measures through amendment of its corporate charter, bylaws
or otherwise that are designed to reduce a corporation's vulnerability to
unsolicited takeover attempts. The Reincorporation is not being proposed in
order to prevent such a change in control, nor is it in response to any known
attempt to acquire majority share ownership or board representation. The
Transfer Restrictions may, incidentally, for a three-year period, have an
antitakeover effect. See "Proposal No. 2--Antitakeover Effect."
In the discharge of its fiduciary obligations to its
shareholders, the Board of Directors has evaluated, and will continue to
evaluate, the Company's vulnerability to potential unsolicited bidders, taking
into consideration in the future the adoption of certain defensive strategies
designed to enhance the Board's ability to negotiate with an unsolicited
bidder. These strategies may include, but are not limited to, the adoption of
a shareholder rights plan, severance agreements for management and key
employees that become effective upon a change in control of the Company, and
the issuance of preferred stock, the rights and preferences of which are
determined by the Board of Directors. Although some of these strategies are
permitted under current California law, reincorporation in Delaware may
ultimately have antitakeover effects because there is substantial judicial
precedent in the Delaware courts as to the legal principles applicable to these
defensive measures and as to the assessment of the conduct of boards of
directors under the business judgment rule with respect to unsolicited takeover
attempts. The Company does not anticipate any current antitakeover
implications and does not intend to adopt such strategies.
Certain effects of the Reincorporation may be considered to
have antitakeover implications. Section 203 of the Delaware General
Corporation Law ("Section 203") restricts certain "business combinations" with
"interested stockholders" for three years following the date that a person
becomes an interested stockholder, unless the Board of Directors approves the
business combination. Corporations may opt out of the provisions of Section
203 and thus decline its potential antitakeover protection; however, the
Company does not intend to do so. See "--Significant Differences Between the
Corporation Laws of California and Delaware--Stockholder Approval of Certain
Business Combinations," below.
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In addition, certain changes to the relative rights of
stockholders and management that have antitakeover implications may be
implemented under Delaware law, although, except as otherwise described in this
Proxy Statement, the Board of Directors does not currently plan to implement
any of these changes. Changes that the Board does not currently plan to
implement include the establishment of a staggered board of directors, the
elimination of the right of stockholders controlling at least ten percent (10%)
of the voting shares to call a special meeting of stockholders, and the
elimination of cumulative voting rights of the Company's stockholders for
election of directors. For a discussion of these and other differences between
the laws of California and Delaware, see "--Significant Differences Between the
Corporation Laws of California and Delaware," below.
POSSIBLE DISADVANTAGES
Despite the unanimous belief of the Board of Directors that
the Reincorporation is in the best interests of the Company and its
shareholders, some shareholders may find the proposal disadvantageous. For
example, Delaware law has been criticized by some on the grounds that it does
not afford minority stockholders the same substantive rights and protections as
are available in a number of other states. For a comparison of shareholders'
rights and the powers of management under Delaware and California law, see
"--Significant Differences Between the Corporation Laws of California and
Delaware."
The Board of Directors has considered these potential
disadvantages and has concluded that the potential benefits of the
Reincorporation outweigh the possible disadvantages.
NO CHANGE IN THE NAME, BOARD MEMBERS, BUSINESS, MANAGEMENT, EMPLOYEE PLANS, OR
LOCATION OF PRINCIPAL FACILITIES OF THE COMPANY
The Reincorporation will change only the legal domicile of the
Company and cause other changes of a legal nature, certain of which are
described in this Proxy Statement. The Reincorporation in itself will NOT
result in any change in the name, business, management, fiscal year, assets or
liabilities, or location of the principal facilities of the Company. Certain
changes to the Company that would occur as a result of the Stock Issuance and
the Acquisition would take place without regard to the Reincorporation. The
nine current directors of SNIG-California will continue as the directors of
SNIG-Delaware and if two additional directors are elected at the Special
Meeting, they will serve as directors of SNIG-Delaware. All employee benefit
and stock option plans of SNIG-California will be continued by SNIG-Delaware,
and each option or right to purchase SNIG-California Common Stock issued
pursuant to such plans will automatically be converted into an option or right
to purchase the same number of shares of SNIG-Delaware Common Stock, at the
same price per share, upon the same terms, and subject to the same conditions,
as set forth in such plans. SHAREHOLDERS SHOULD NOTE THAT APPROVAL OF THE
REINCORPORATION WILL ALSO CONSTITUTE APPROVAL OF THE ASSUMPTION OF THESE PLANS
BY SNIG-DELAWARE. SNIG-California's other employee benefit arrangements will
also be continued by SNIG-Delaware, upon the terms, and subject to the
conditions, currently in effect. SNIG-Delaware, however, will reserve the
right currently available to SNIG-California to revoke, replace or amend its
employee welfare or benefit plans or policies from time to time.
THE CHARTER AND BYLAWS OF SNIG-CALIFORNIA AND SNIG-DELAWARE
The provisions of the SNIG-Delaware Certificate of
Incorporation attached hereto as Annex F and Bylaws attached hereto as Annex G,
which will be in effect immediately following the Reincorporation, are similar
to those of the SNIG-California Articles of Incorporation and Bylaws in most
respects except that the Transfer Restrictions would be included if Proposal
No. 2 is approved. The material differences between the SNIG-California
Articles of Incorporation and Bylaws and the SNIG-Delaware Certificate of
Incorporation and Bylaws, respectively, are described below. AS NOTED ABOVE,
APPROVAL OF THE REINCORPORATION WILL BE DEEMED TO BE APPROVAL OF THE
SNIG-DELAWARE CERTIFICATE OF INCORPORATION AND BYLAWS.
Delaware law permits the implementation of certain provisions
in a corporation's certificate of incorporation or bylaws that would alter some
of the rights of shareholders and the powers of management permitted by
California law. Although the Board of Directors of SNIG-California has no
current plan to implement several of these provisions, certain changes will be
deemed approved by approval of the Reincorporation and further changes could be
implemented in the future by amendment of the Certificate of Incorporation or
Bylaws of SNIG-
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Delaware pursuant to stockholder approval and by amendment of the Bylaws of
SNIG-Delaware by the Board of Directors without stockholder approval. For a
discussion of such changes, see the discussion below and "--Significant
Differences Between the Corporation Laws of California and Delaware." The
discussion of the Certificate of Incorporation and Bylaws of SNIG-Delaware is
qualified in its entirety by reference to Annex F and Annex G hereto,
respectively.
COMPARISON OF THE CHARTERS OF SNIG-CALIFORNIA AND SNIG-DELAWARE
Authorized Stock. The Articles of Incorporation, as amended
to date, of SNIG-California (the "Articles of Incorporation") currently
authorize 25,000,000 shares of no-par value Common Stock.
The Certificate of Incorporation of SNIG-Delaware authorizes a
single class of 25,000,000 shares of Common Stock, $.01 par value.
Change in Number of Directors. Under Delaware law, the
authorized number of directors may be fixed by, or fixed in the manner provided
in, the Bylaws. The authorized number of directors may be changed by
resolution of the board of directors if permitted by the Certificate of
Incorporation or Bylaws. If the Certificate of Incorporation fixes the number
of directors, any change in the authorized number of directors must be made by
an amendment to the Certificate of Incorporation, requiring a stockholder vote.
Under California law, the directors can change the authorized number of
directors if the shareholders have adopted a provision in the articles of
incorporation or bylaws permitting the directors to fix their number, but only
within the bounds of stated minimum and maximum numbers that have been approved
by the shareholders. The Bylaws of SNIG-California currently provide for nine
directors and require the vote of the shareholders (including the holders of
the Voting Notes voting as a separate class) to change that number. The
Certificate of Incorporation and Bylaws of SNIG-Delaware would fix the number
of directors at nine if Proposal No. 4 is not adopted, or at eleven if Proposal
No. 4 is adopted. The provision in the Bylaws of SNIG-California requiring a
shareholder vote (including among them the holders of the Voting Notes voting
as a separate class) to change the number of authorized directors will be
retained in the Certificate of Incorporation and Bylaws of SNIG-Delaware.
If the Reincorporation is approved, the nine directors of
SNIG-California will serve as directors of SNIG-Delaware. If Proposal No. 4 is
adopted at the Special Meeting, the shareholders present at the meeting (in
person or by proxy) will immediately vote to fill the two vacancies. See
"Proposal No. 5--Election of Two Additional Directors."
Indemnification and Limitation of Liability. Under Delaware
law, Delaware corporations are permitted to adopt a provision in their
certificates of incorporation reducing or eliminating the liability of a
director to the corporation and its stockholders for monetary damages for
breach of fiduciary duty as a director, provided that such liability does not
arise from certain proscribed conduct (including intentional misconduct and
breach of the duty of loyalty). California has adopted a similar provision,
which is included in SNIG-California's current Articles of Incorporation.
SNIG-Delaware will adopt such a provision as part of its Certificate of
Incorporation.
The Delaware General Assembly adopted an amendment to the
Delaware General Corporation Law to add Section 102(b)(7), upon the
recommendation of the Delaware Bar Association, in response to changes in the
market for directors' liability insurance, resulting from significant increases
in the number and magnitude of lawsuits against directors and the difficulty of
obtaining such insurance on traditional terms, or on any terms at all. The
General Assembly considered this development a threat to the quality and
stability of the governance of Delaware corporations because of the
unwillingness of directors to serve without the protections traditionally
available to them against claims arising out of their services and of the
deterrent effect on entrepreneurial decision-making by directors who do serve.
Article Eleventh of the Certificate of Incorporation of SNIG-Delaware contains
the limitation on director liability permitted by Section 102(b)(7).
Article Eleventh eliminates director liability to
SNIG-Delaware or its stockholders for monetary damages arising out of a
director's breach of his fiduciary duties, including the duty of care. The
duty of care refers to the fiduciary duty of a director to be sufficiently
diligent and careful in considering a transaction or taking or refusing to take
some corporate action. A breach of the duty of care by a director may give
rise to liability for
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monetary damages caused to SNIG-Delaware or its stockholders. Liability for a
breach of the duty of care arises when directors have failed to exercise
sufficient care in reaching decisions or otherwise attending to their
responsibilities as directors. Article Eleventh of the Certificate of
Incorporation of SNIG-Delaware does not eliminate the duty of care; it only
eliminates monetary damage awards occasioned by a breach of that duty. Thus,
if the Reincorporation is approved and SNIG-California is merged with and into
SNIG-Delaware, a breach of the duty of care would remain a valid basis for a
suit seeking to stop a proposed transaction from occurring. After the
transaction has occurred, however, the stockholders would no longer have a
claim against directors for monetary damages based on the breach of the duty of
care, even if that breach involved gross negligence on the part of the
directors. See also "--Significant Differences Between the Corporation Laws of
California and Delaware--Indemnification and Limitation of Liability."
The Certificate of Incorporation of SNIG-Delaware does not
limit or eliminate liability based on the following types of claims:
1. Liability based on a breach of the director's duty of
loyalty to SNIG-Delaware or its stockholders;
2. Liability based on the payment of an improper
dividend or an improper repurchase of SNIG-Delaware's stock under Section 174
of the Delaware General Corporation Law;
3. Liability for actions or failures to act which the
director knew were in violation of law;
4. Liability arising out of intentional misconduct by
the director;
5. Liability arising out of any transaction pursuant to
which the director received some improper personal benefit; and
6. Liability for actions taken or failures to act by the
director not in good faith.
Article Eleventh of the Certificate of Incorporation of
SNIG-Delaware further provides that any repeal or modification of Article
Eleventh by SNIG-Delaware stockholders will not adversely affect any right or
protection of a director existing at the time of such repeal or modification.
The Company is not aware of any pending or threatened claim
that would be covered by Article Eleventh, nor has there been any litigation in
the recent past that would have been affected had Article Eleventh been in
place at the time of the conduct referred to in such litigation.
The Board of Directors believes that Article Eleventh of the
Certificate of Incorporation is in the best interests of SNIG- Delaware and its
stockholders because it maintains SNIG-Delaware's ability to attract and retain
qualified individuals to serve as directors of SNIG-Delaware by assuring
directors (and potential directors) that their good faith decisions will not be
second-guessed by a court evaluating decisions with the benefit of hindsight.
Article Eleventh, however, limits the remedies available to stockholders
dissatisfied with a Board of Directors decision that is protected by such
Article Eleventh. Directors will not be liable to the Company or its
stockholders for business decisions made in good faith, including decisions
made in connection with attempts to acquire SNIG-Delaware, even if such
decisions involve gross negligence on the part of the directors. In any such
case, the stockholders' only remedy would be to sue to stop the completion of
the Board of Directors' action. In many situations, this remedy may not be
effective due to prior completion of the Board of Directors' action.
The Board of Directors believes that the diligence exercised
by directors stems primarily from their desire to act in the best interests of
the Company, and not from a fear of monetary damage awards. Consequently, the
Board of Directors believes that the level of scrutiny and care exercised by
directors will not be lessened by the adoption of Article Eleventh of the
Certificate of Incorporation.
Loans to Officers and Employees. Under California law, any
loan or guaranty to or for the benefit of a director or officer of the
corporation or its parent requires approval of the shareholders unless such
loan or
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guaranty is provided under a plan approved by shareholders owning a majority of
the outstanding shares of the corporation. In addition, under California law,
shareholders of any corporation with 100 or more shareholders of record may
approve a bylaw authorizing the board of directors alone to approve loans or
guaranties to or on behalf of officers (whether or not such officers are
directors) if the board determines that any such loan or guaranty may
reasonably be expected to benefit the corporation. Under Delaware law, a
corporation may make loans to, guarantee the obligations of, or otherwise
assist its officers or other employees and those of its subsidiaries (including
directors who are also officers or employees) when such action, in the judgment
of the directors, may reasonably be expected to benefit the corporation.
Pursuant to the SNIG-Delaware Bylaws and in accordance with Delaware law,
SNIG-Delaware may make loans to, guarantee the obligations of, or otherwise
assist its officers or other employees and those of its subsidiaries (including
directors who are also officers or employees) when such action, in the judgment
of the directors, may reasonably be expected to benefit the corporation.
Voting by Ballot. California law provides that the election
of directors may proceed in the manner described in a corporation's bylaws.
SNIG-California's Bylaws provide that the election of directors at a
shareholders' meeting may be by voice vote or ballot, unless prior to such vote
a shareholder demands vote by ballot, in which case such vote must be by
ballot. Under Delaware law, the need to vote by written ballot may be
restricted if so provided in the certificate of incorporation. Article Ninth
of the Certificate of Incorporation of SNIG-Delaware provides that elections of
directors need not be by written ballot unless the Bylaws provide for written
ballot. The Bylaws of SNIG-Delaware do not currently provide for election of
directors by written ballot. It may be more difficult for a stockholder to
contest the outcome of a vote which has not been conducted by written ballot.
Stockholder Meetings and Written Consents. The proposed
Bylaws of SNIG-Delaware contain two provisions that do not have equivalents in
the Bylaws of SNIG-California, but that the Board of Directors believes will be
more conducive to the conduct of business at stockholder meetings and with
respect to the solicitation of stockholder written consents. The first such
provision is a requirement that prior notice be given of nominations to the
Board of Directors or matters to be voted upon at stockholder meetings. In the
case of annual meetings, a timely notice must be delivered between ninety and
seventy days prior to the anniversary of the previous year's annual meeting.
In the case of special meetings, timely notice must be delivered between ninety
days prior to and the later of the seventieth day prior to or the tenth day
after public announcement of the date of the special meeting. The second
provision governs the establishment of a record date for the solicitation of
written consents and limits the period of time in which consents may be
delivered to sixty days from the date of the earliest dated consent.
Shareholders are urged to carefully review Sections 1.8 and 1.9 of the Proposed
SNIG-Delaware Bylaws, attached hereto as Annex G, before voting on this
Proposal No. 3.
SIGNIFICANT DIFFERENCES BETWEEN THE CORPORATION LAWS OF CALIFORNIA AND DELAWARE
The General Corporation Laws of California and Delaware differ
in many respects. It is not practical to describe all the differences in this
Proxy Statement, but the principal differences that could materially affect the
rights of shareholders are discussed below.
Size of the Board of Directors. Under California law,
although changes in the number of directors must in general be approved by a
majority of the outstanding shares, the board of directors may fix the exact
number of directors within a stated range set forth in the articles of
incorporation or bylaws, if that stated range has been approved by the
shareholders. Delaware law permits the board of directors alone to change the
authorized number, or the range, of directors by amendment to the bylaws,
unless the directors are not authorized to amend the bylaws or the number of
directors is fixed in the certificate of incorporation (in which case a change
in the number of directors may be made only by amendment to the certificate of
incorporation following approval of such change by the stockholders). The
Certificate of Incorporation and Bylaws of SNIG-Delaware provide, consistent
with the Bylaws of SNIG-California, that the size of the Board may be changed
only with the approval of the stockholders, including holders of the Voting
Notes voting as a separate class. If the Reincorporation is approved, the nine
directors of SNIG-California who are currently serving will continue as
directors of SNIG-Delaware after the Reincorporation is consummated. If
Proposal No. 4 is adopted at the Special Meeting, the shareholders present at
the meeting (in person or by proxy) will immediately vote to fill the two
vacancies. See "Proposal No. 5--Election of Two Additional Directors."
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Cumulative Voting. Generally, under California law, if any
shareholder has given notice of his intention to cumulate votes for the
election of directors, he and any other shareholder of the corporation are
entitled to cumulate his or her votes at such election. Delaware law permits,
but does not require, cumulative voting in the election of directors. The
Certificate of Incorporation of SNIG-Delaware will permit cumulative voting.
The Bylaws of SNIG-California also permit cumulative voting.
Classified Board of Directors. A classified board is one to
which a certain number, but not all, of the directors are elected on a rotating
basis each year. This method of electing directors makes changes in the
composition of the board of directors, and thus a potential change in control
of a corporation, a lengthier and more difficult process. Under California
law, California corporations meeting certain qualifications may amend their
articles of incorporation to provide for a classified board, but for
corporations not so qualified directors must be elected annually and a
classified board is not permitted. Delaware law permits, but does not require,
a classified board of directors for all corporations, with staggered terms
under which one-half or one-third of the directors are elected for terms of two
or three years, respectively. SNIG-California does not have a classified board
of directors and the Certificate of Incorporation and Bylaws of SNIG- Delaware
do not provide for a classified board. The establishment of a classified board
following the Reincorporation would require the approval of the stockholders of
SNIG-Delaware.
Power to Call Special Stockholders' Meetings; Advance Notice
of Stockholder Business and Nominees. Under California law, a special meeting
of shareholders may be called by the board of directors, the chairman of the
board, the president, the holders of shares entitled to cast not less than ten
(10%) percent of the votes at such meeting, and such additional persons as are
authorized by the articles of incorporation or the bylaws. Under Delaware law,
a special meeting of stockholders may be called by the board of directors or by
any other person authorized to do so in the certificate of incorporation or the
bylaws. The Bylaws of SNIG-Delaware establish the right of stockholders or
corporate officers to call a special meeting of stockholders consistent with
the Bylaws of SNIG-California. However, the Board of Directors could in the
future approve the elimination of such right. Such a limitation in
stockholders' ability to call special meetings could make it more difficult for
stockholders to initiate action that is opposed by the Board of Directors.
Such action on the part of stockholders could include the removal of an
incumbent director, the election of a stockholder nominee as a director, or the
implementation of a rule requiring stockholder ratification of specific
defensive strategies that have been adopted by the Board of Directors with
respect to unsolicited takeover bids. In addition, Section 1.8 of the
SNIG-Delaware Bylaws requires timely advance notice in proper written form of
stockholder nominees for election as director or of stockholder business to be
brought before a meeting. The ability of the Board of Directors under Delaware
law to limit or eliminate the right of stockholders to initiate action at
stockholder meetings may make it more difficult to change the then-existing
Board of Directors and management.
Actions by Written Consent of Stockholders. Under California
and Delaware law, shareholders may execute an action by written consent in lieu
of a shareholder meeting. Delaware law permits a corporation to eliminate the
ability of stockholders to act by written consent in its certificate of
incorporation. Elimination of the ability of stockholders to act by written
consent could lengthen the amount of time required to take stockholder actions
because certain actions by written consent are not subject to the minimum
notice requirement of a stockholders' meeting. The elimination of the ability
of stockholders to act by written consent, however, would deter hostile
takeover attempts. Without the ability of stockholders to act by written
consent, a holder or group of holders controlling a majority in interest of
SNIG-Delaware's capital stock wishing to amend SNIG-Delaware's Bylaws or remove
directors would have to call a stockholders' meeting and wait the notice
periods determined by the Board of Directors pursuant to SNIG-Delaware's Bylaws
prior to taking any such action. The Certificate of Incorporation and Bylaws
of SNIG-Delaware permit actions by written consent of stockholders. The
SNIG-Delaware Bylaws, however, in Section 1.9, limit the period of time in
which written consents may be delivered to a period of sixty days from the
earliest dated consent.
Stockholder Approval of Certain Business Combinations. In the
last several years, a number of states (but not California) have adopted
special laws designed to make certain kinds of "unfriendly" corporate
takeovers, or other transactions involving a corporation and one or more of its
significant shareholders, more difficult. Under Section 203, certain "business
combinations" by Delaware corporations with "interested stockholders" are
subject to a three-year moratorium unless specified conditions are met. Under
Section 1203 of
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the California General Corporation Law, certain business combinations with a
majority shareholder are subject to specified conditions, but there is no
equivalent provision to Section 203, which addresses business combinations with
a significant but not majority stockholder.
Section 203 prohibits a Delaware corporation from engaging in
a "business combination" with an "interested stockholder" for three years
following the time that such person becomes an interested stockholder. With
certain exceptions, an interested stockholder is a person or group who or that
owns 15% or more of the corporation's outstanding voting stock (including any
rights to acquire stock pursuant to an option, warrant, agreement, arrangement
or understanding, or upon the exercise of conversion or exchange rights, and
stock with respect to which the person has voting rights only), or is an
affiliate or associate of the corporation and was the owner of 15% or more of
such voting stock at any time within the previous three years.
For purposes of Section 203, the term "business combination"
is defined broadly to include mergers with or caused by the interested
stockholder; sales or other dispositions to the interested stockholder (except
proportionately with the corporation's other stockholders) of assets of the
corporation or a subsidiary equal to ten percent or more of the aggregate
market value of the corporation's consolidated assets or its outstanding stock;
the issuance or transfer by the corporation or a subsidiary of stock of the
corporation or such subsidiary to the interested stockholder (except for
transfers in a conversion or exchange or a pro rata distribution or certain
other transactions, none of which increase the interested stockholder's
proportionate ownership of any class or series of the corporation's or such
subsidiary's stock); or receipt by the interested stockholder (except
proportionately as a stockholder), directly or indirectly, of any loans,
advances, guaranties, pledges, or other financial benefits provided by or
through the corporation or a subsidiary.
The three-year moratorium imposed on business combinations by
Section 203 does not apply if: (i) prior to the time on which such stockholder
becomes an interested stockholder the board of directors approves either the
business combination or the transaction that resulted in the person's becoming
an interested stockholder; (ii) the interested stockholder owns 85% of the
corporation's voting stock upon consummation of the transaction that made him
or her an interested stockholder (excluding from the 85% calculation shares
owned by directors who are also officers of the target corporation and shares
held by employee stock plans that do not permit employees to decide
confidentially whether to accept a tender or exchange offer); or (iii) at or
after such time the person becomes an interested stockholder, the board
approves the business combination and it is also approved at a stockholder
meeting by sixty-six and two-thirds percent (66-2/3%) of the voting stock not
owned by the interested stockholder.
Section 203 only applies to Delaware corporations that have a
class of voting stock that is listed on a national securities exchange, is
authorized for quotation on Nasdaq, or is held of record by more than 2,000
stockholders. Section 203 would apply to SNIG- Delaware immediately as
SNIG-Delaware is expected to be authorized for quotation on Nasdaq. A Delaware
corporation may elect not to be governed by Section 203 by a provision in its
original certificate of incorporation or an amendment thereto or to the bylaws,
which amendment must be approved by the affirmative vote of a majority of the
shares entitled to vote and may not be further amended by the board of
directors. SNIG-Delaware does not intend to opt out of the terms of Section
203.
The constitutionality of Section 203 is challenged from time
to time in lawsuits arising out of ongoing takeover disputes, and it is not yet
clear whether and to what extent its constitutionality will be upheld by the
courts. Although the United States District Court for the District of Delaware
has consistently upheld the constitutionality of Section 203, the Delaware
Supreme Court has not yet considered the issue. The Company believes that so
long as the constitutionality of Section 203 is upheld, Section 203 will
encourage any potential acquiror to negotiate with the Board of Directors.
Section 203 also has the effect of limiting the ability of a potential acquiror
to make a two-tiered bid for SNIG-Delaware, in which not all stockholders would
be treated equally. Shareholders should note that the application of Section
203 to SNIG-Delaware will confer upon the Board the power to reject a proposed
business combination, even though a potential acquiror may be offering a
substantial premium for SNIG-Delaware's shares over the then-current market
price. Section 203 should also discourage certain potential acquirors
unwilling to comply with its provisions. See also "--Stockholder Voting,"
below.
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Removal of Directors. Under California law, any director or
the entire board of directors may be removed, with or without cause, with the
approval of a majority of the outstanding shares entitled to vote; however, no
individual director may be removed (unless the entire board is removed) if the
number of votes cast against such removal would be sufficient to elect the
director under cumulative voting. Under Delaware law, a director of a
corporation that does not have a classified board of directors or cumulative
voting may be removed with or without cause with the approval of a majority of
the outstanding shares entitled to vote. In the case of a Delaware corporation
that has cumulative voting, as SNIG-Delaware will, if less than the entire
board is to be removed, a director may not be removed without cause if the
number of votes cast against such removal would be sufficient to elect the
director under cumulative voting. A director of a corporation with a
classified board of directors may be removed only for cause, unless the
certificate of incorporation otherwise provides. The Certificate of
Incorporation and Bylaws of SNIG-Delaware provide for cumulative voting but do
not provide for a classified board of directors, like the Articles of
Incorporation and Bylaws of SNIG-California.
Filling Vacancies on the Board of Directors. Under California
law, any vacancy on the board of directors other than one created by removal of
a director may be filled by the board. If the number of directors is less than
a quorum, a vacancy may be filled by the unanimous written consent of the
directors then in office, by the affirmative vote of a majority of the
directors at a meeting held pursuant to notice or waivers of notice, or by a
sole remaining director. A vacancy created by removal of a director may be
filled by the board only if the board is so authorized by a corporation's
articles of incorporation or by a bylaw approved by the corporation's
shareholders. SNIG- California's Articles of Incorporation and Bylaws do not
permit directors to fill vacancies created by removal of a director. Under
Delaware law, vacancies and newly-created directorships may be filled by a
majority of the directors then in office (even though less than a quorum)
unless otherwise provided in the certificate of incorporation or bylaws (and
unless the certificate of incorporation directs that a particular class is to
elect such director, in which case any other directors elected by such class,
or a sole remaining director, shall fill such vacancy). The Bylaws of
SNIG-Delaware provide, as do the Bylaws of SNIG-California, that only the
stockholders may fill a vacancy created by the removal of a director by the
stockholders.
Indemnification and Limitation of Liability. California and
Delaware have similar laws respecting indemnification by a corporation of its
officers, directors, employees, and other agents. The laws of both states also
permit corporations to adopt a provision in their charters eliminating the
liability of a director to the corporation or its shareholders for monetary
damages for breach of the director's fiduciary duty of care. There are
nonetheless certain differences between the laws of the two states with respect
to indemnification and limitation of liability.
The Articles of Incorporation of SNIG-California eliminate the
liability of directors to the fullest extent permissible under California law.
California law does not permit the elimination of monetary liability where such
liability is based on: (a) intentional misconduct or knowing and culpable
violation of law; (b) acts or omissions that a director believes to be contrary
to the best interests of the corporation or its shareholders, or that involve
the absence of good faith on the part of the director; (c) receipt of an
improper personal benefit; (d) acts or omissions that show reckless disregard
for the director's duty to the corporation or its shareholders, where the
director in the ordinary course of performing a director's duties should be
aware of a risk of serious injury to the corporation or its shareholders; (e)
acts or omissions that constitute an unexcused pattern of inattention that
amounts to an abdication of the director's duty to the corporation and its
shareholders; (f) interested transactions between the corporation and a
director in which a director has a material financial interest; and (g)
liability for improper distributions, loans or guaranties.
The Certificate of Incorporation of SNIG-Delaware likewise
eliminates the liability of directors to the fullest extent permissible under
Delaware law, as such law exists currently or as it may be amended in the
future. Under Delaware law, such provision may not eliminate or limit director
monetary liability for: (a) breaches of the director's duty of loyalty to the
corporation or its stockholders; (b) acts or omissions not in good faith or
involving intentional misconduct or knowing violations of law; (c) the payment
of unlawful dividends or unlawful stock repurchases or redemptions; and (d)
transactions in which the director received an improper personal benefit. Such
limitation of liability provisions may not limit a director's liability for
violation of, or otherwise relieve SNIG-Delaware or its directors from the
necessity of complying with, federal or state securities laws, or affect the
availability of non-monetary remedies such as injunctive relief or rescission.
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California law permits indemnification of expenses incurred in
derivative or third-party actions, except that with respect to derivative
actions (a) no indemnification may be made without court approval when a person
is adjudged liable to the corporation in the performance of that person's duty
to the corporation and its shareholders, unless a court determines such person
is entitled to indemnity for expenses, and then such indemnification may be
made only to the extent that such court shall determine, and (b) no
indemnification may be made without court approval in respect of amounts paid
or expenses incurred in settling or otherwise disposing of a threatened or
pending action or amounts incurred in defending a pending action that is
settled or otherwise disposed of without court approval.
Indemnification is permitted by Delaware law only for acts
taken in good faith and believed to be in or not opposed to the best interests
of the corporation and its stockholders (or in the case of a criminal
proceeding, if the accused had no reasonable cause to believe the conduct was
unlawful), as determined by a majority vote of a disinterested quorum of the
directors, independent legal counsel (if a quorum of independent directors is
not obtainable), a majority vote of a quorum of the stockholders (excluding
shares owned by the indemnified party), or the court handling the action.
California corporations may include in their charter a
provision that extends the scope of indemnification through agreements, bylaws
or other corporate action beyond that specifically authorized by statute. The
Bylaws of SNIG-California include a provision authorizing the Company to
indemnify the directors and officers of the Company to the fullest extent
permissible under California law.
A provision of Delaware law states that the indemnification
provided by statute shall not be deemed exclusive of any other rights under any
bylaw, agreement, vote of stockholders or disinterested directors or otherwise.
The Bylaws of SNIG-Delaware includes a provision providing that the Company
shall indemnify the directors of the Company to the fullest extent permissible
under Delaware law. The Company will in addition be bound under existing
indemnification agreements with the officers and directors of Pac Rim under the
terms of the Acquisition Agreement, and by indemnification provisions in
existing Pac Rim employment agreements.
California law requires indemnification when the individual
has successfully defended the action on the merits (as opposed to Delaware law,
which requires indemnification relating to a successful defense on the merits
or otherwise). Delaware law generally permits indemnification of expenses
incurred in the defense or settlement of a derivative or third-party action,
provided there is a determination by a disinterested quorum of the directors,
by independent legal counsel or by a majority vote of a quorum of the
stockholders that the person seeking indemnification acted in good faith and in
a manner reasonably believed to be in or (in contrast to California law) not
opposed to the best interests of the corporation (or in the case of a criminal
proceeding, if the accused had no reasonable cause to believe the conduct was
unlawful). Without court approval, however, no indemnification may be made in
respect of any derivative action in which such person is adjudged liable for
negligence or misconduct in the performance of his duty to the corporation.
Inspection of Shareholders List. Both California and Delaware
law allow any shareholder to inspect and copy the shareholders list for a
purpose reasonably related to such person's interest as a shareholder.
California law provides, in addition, for an absolute right to inspect and copy
the corporation's shareholders list by persons holding an aggregate of 5% or
more of a corporation's voting shares, or shareholders holding an aggregate of
1% or more of such shares who have filed a Schedule 14B with the SEC relating
to the solicitation of proxies for the election of directors. This provision
has not been updated to reflect the recent elimination of Schedule 14B.
Delaware law does not provide for any such absolute right of inspection, and no
such right is granted under the Certificate of Incorporation or Bylaws of
SNIG-Delaware. Restricted access to stockholder records, even access that is
unrelated to the stockholder's interests as a stockholder, could result in
impairment of the stockholder's ability to coordinate opposition to management
proposals, including proposals with respect to a change in control of the
Company.
Dividends and Repurchases of Shares. California law dispenses
with the concepts of par value of shares as well as statutory definitions of
capital, surplus and the like. The concepts of par value, capital and surplus
are retained under Delaware law.
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Under California law, a corporation may not make any
distribution (including dividends, whether in cash or other property, and
repurchases of its shares) unless either the corporation's retained earnings
immediately prior to the proposed distribution equal or exceed the amount of
the proposed distribution or, immediately after giving effect to such
distribution, the corporation's assets (exclusive of goodwill, capitalized
research and development expenses, and deferred charges) would be at least
equal to 1 1/4 times its liabilities (not including deferred taxes, deferred
income and other deferred credits), and the corporation's current assets would
be at least equal to its current liabilities (or 1 1/4 times its current
liabilities if the average pre-tax and pre-interest expense earnings for the
preceding two fiscal years were less than the average interest expense for such
years). Such tests are applied to California corporations on a consolidated
basis.
Delaware law permits a corporation to declare and pay
dividends out of surplus or, if there is no surplus, out of net profits for the
fiscal year in which the dividend is declared and/or for the preceding fiscal
year as long as the amount of capital of the corporation following the
declaration and payment of the dividend is not less than the aggregate amount
of the capital represented by the issued and outstanding stock of all classes
having a preference upon the distribution of assets. In addition, Delaware law
generally provides that a corporation may redeem or repurchase its shares only
if such redemption or repurchase would not impair the capital of the
corporation.
Stockholder Voting. Both California and Delaware law
generally require that a majority of the shareholders of both the acquiring and
target corporations must approve merger transactions. Delaware law does not
require a stockholder vote of the surviving corporation in a merger (unless the
corporation provides otherwise in its certificate of incorporation) if (a) the
merger agreement does not amend the existing certificate of incorporation, (b)
each share of the surviving corporation outstanding before the merger is an
identical outstanding or treasury share after the merger, and (c) either no
shares of common stock of the surviving corporation and no securities
convertible into such stock are to be issued under the plan of merger or the
number of shares to be issued by the surviving corporation in the merger does
not exceed 20% of the shares outstanding immediately prior to the merger.
California law contains a similar exception to its voting requirements for
reorganizations where shareholders or the corporation itself, or both,
immediately prior to the reorganization will own immediately after the
reorganization equity securities constituting more than five-sixths of the
voting power of the surviving or acquiring corporation or its parent entity.
Holding Company Reorganization. A new Section 251(g) has been
added to the Delaware General Corporation Law permitting a Delaware corporation
to reorganize as a holding company without stockholder approval. As
SNIG-Delaware is already a holding company, it is unlikely this provision would
ever be applied to it. The reorganization contemplated by the statute is
accomplished by merging the subject corporation with or into a direct or
indirect wholly owned subsidiary of the corporation and converting the stock of
the corporation into stock of another direct or indirect wholly owned
subsidiary of the corporation, which would be the new holding company. The
statute eliminates the requirement for a stockholder vote on such a merger but
contains several provisions designed to ensure that the rights of stockholders
are not changed by or as a result of the merger, except and to the extent that
such rights could be changed without stockholder approval under existing law.
Thus, the resulting holding company must be a Delaware
corporation and have the same certificate of incorporation (except for
provisions that could have been amended or deleted without stockholder
approval), bylaws, and directors that the corporation had prior to the
reorganization. The corporation or its successor must, as a result of the
reorganization, become a direct or indirect wholly owned subsidiary of the
holding company and must retain the same certificate of incorporation and
bylaws that the corporation had prior to the reorganization (except that the
capitalization may be reduced and except for the addition of the provision
described in the next sentence). To ensure that the voting rights of the
stockholders of the corporation are not changed or evaded as a result of the
reorganization, the statute requires that the certificate of incorporation of
the corporation provide that any extraordinary transactions involving the
corporation be approved by the stockholders of the holding company by the same
vote required of the stockholders of the corporation under the General
Corporation Law and/or by the corporation's certificate of incorporation. To
ensure that any restrictions on stockholders of the corporation imposed by
Section 203, or any exemption from such restrictions, remain unaffected by a
holding company reorganization, the statute further provides that the
provisions of Section 203 will apply to persons who are stockholders of the
holding company immediately after the effectiveness of a holding company
reorganization to the same extent that
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they applied to stockholders of the corporation immediately prior to the
reorganization. In order for no stockholder vote to be required, a holding
company reorganization must be tax-free for federal income tax purposes to
stockholders of the corporation. Appraisal rights are not available to
stockholders in a merger that qualifies as a holding company reorganization.
Stockholder Approval of Other Reorganizations. With certain
exceptions, California law requires that mergers, reorganizations, certain
sales of assets, and similar transactions be approved by a majority vote of
each class of shares outstanding. By contrast, Delaware law generally does not
require class voting, except in certain transactions involving an amendment to
the certificate of incorporation that adversely affects a specific class of
shares. Should the Company reincorporate in Delaware and should the Company
authorize and issue shares of a new class of capital stock, the holders thereof
would vote with the holders of the previously outstanding capital stock on
proposals not adversely affecting a particular class. In such event the
holders of the previously outstanding capital stock, if in the minority, would
be unable to control the outcome of a vote, and, if in the majority, would be
able to control the outcome of such a vote.
Both California and Delaware law also require that a sale of
all or substantially all of the assets of a corporation be approved by a
majority of the voting shares of the corporation transferring such assets.
California law also requires that holders of nonredeemable
common stock receive nonredeemable common stock in a merger of the corporation
with the holder of more than 50% but less than 90% of such common stock or its
affiliate unless all of the holders of such common stock consent to the
transaction. This provision of California law may have the effect of making a
"cash-out" merger by a majority shareholder more difficult to accomplish.
Although Delaware law does not parallel California law in this respect, under
some circumstances Section 203 does provide similar protection against coercive
two-tiered bids for a corporation in which the stockholders are not treated
equally. See "--Stockholder Approval of Certain Business Combinations," above.
California law also provides that, except in certain
circumstances, when a tender offer or a proposal for a reorganization or for a
sale of assets is made by an interested party (generally a controlling or
managing party of the target corporation), an affirmative opinion in writing as
to the fairness of the consideration to be paid to the shareholders must be
delivered to the shareholders. This fairness opinion requirement does not
apply to a corporation that does not have shares held of record by at least 100
persons, or to a transaction qualified under California state securities laws.
Furthermore, if a tender of shares or vote is sought pursuant to an interested
party's proposal and a later proposal is made by another party at least ten
days prior to the date of acceptance of the interested party proposal, the
shareholders must be informed of the later offer and be afforded a reasonable
opportunity to withdraw any vote, consent or proxy, or to withdraw any tendered
shares. Delaware law has no comparable provision, and the stockholders of
SNIG-Delaware might, therefore, be deprived of an opportunity to consider such
other proposal.
Interested Director Transactions. Under both California and
Delaware law, certain contracts or transactions in which one or more of a
corporation's directors has an interest are not void or voidable because of
such interest provided that certain conditions, such as obtaining the required
approval and fulfilling the requirements of good faith and full disclosure, are
met. With certain exceptions, the conditions are similar under California and
Delaware law. Under California and Delaware law, (a) either the shareholders
or the disinterested members of the board of directors must approve any such
contract or transaction after full disclosure of the material facts, and in the
case of board approval when there are no disinterested directors, the contract
or transaction must also be "just and reasonable" (in California) or "fair" (in
Delaware) to the corporation, or (b) the contract or transaction must have been
just and reasonable or fair as to the corporation at the time it was approved.
In the latter case, California law explicitly places the burden of proof on the
interested director. Under California law, if shareholder approval is sought,
the interested director is not entitled to vote his shares at a shareholder
meeting with respect to any action regarding such contract or transaction. If
board approval is sought, the contract or transaction must be approved by a
majority vote of a quorum of the directors, without counting the vote of any
interested directors (except that interested directors may be counted for
purposes of establishing a quorum).
Under Delaware law, if board approval is sought, the contract
or transaction must be approved by a majority of the disinterested directors
(even though less than a majority of a quorum). Therefore, certain
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transactions that the Board of Directors of SNIG-California would lack the
authority to approve, because of the number of interested directors, could be
approved by a majority of the disinterested directors of SNIG-Delaware, even if
they represented less than a majority of a quorum. Other than the Stock
Issuance, which is being presented by the Proxy Statement to the disinterested
shareholders of the Company for approval, the Company is not aware of any plans
to propose any transaction involving interested directors of the Company that
the Board of Directors would lack the authority to approve under California law
but could approve under Delaware law.
Shareholder Derivative Suits. California law provides that a
shareholder bringing a derivative action on behalf of a corporation need not
have been a shareholder at the time of the transaction in question, provided
that certain tests are met. Under Delaware law, a stockholder may only bring a
derivative action on behalf of the corporation if the stockholder was a
stockholder of the corporation at the time of the transaction in question or
his or her stock thereafter devolved upon him or her by operation of law.
California law also provides that the corporation or the defendant in a
derivative suit may make a motion to the court for an order requiring the
plaintiff shareholder to furnish a security bond. Delaware does not have a
similar bonding requirement.
Appraisal Rights. Under both California and Delaware law, a
shareholder of a corporation participating in certain major corporate
transactions may, under varying circumstances, be entitled to appraisal rights
pursuant to which such shareholder may receive cash in the amount of the fair
market value of his or her shares in lieu of the consideration he or she would
otherwise receive in the transaction. Under Delaware law, such appraisal
rights are not available (a) with respect to the sale, lease or exchange of all
or substantially all of the assets of a corporation, (b) with respect to a
merger or consolidation by a corporation the shares of which are either listed
on a national securities exchange or are held of record by more than 2,000
holders if such stockholders receive only shares of the surviving corporation
or shares of any other corporation that are either listed on a national
securities exchange or held of record by more than 2,000 holders, plus cash in
lieu of fractional shares or any combination thereof, or (c) to stockholders of
a corporation surviving a merger if no vote of the stockholders of the
surviving corporation is required to approve the merger because the merger
agreement does not amend the existing certificate of incorporation, each share
of the surviving corporation outstanding prior to the merger is an identical
outstanding or treasury share after the merger, and either no shares of common
stock of the surviving corporation and no securities convertible into such
stock are to be issued under the plan of merger or the number of shares to be
issued in the merger does not exceed 20% of the shares of the surviving
corporation outstanding immediately prior to the merger and if certain other
conditions are met.
The limitations on the availability of appraisal rights under
California law are different from those under Delaware law. Shareholders of a
California corporation whose shares are listed on a national securities
exchange or on a list of over-the-counter margin stocks issued by the Board of
Governors of the Federal Reserve System generally do not have appraisal rights
unless the holders of at least 5% of the class of outstanding shares claim the
right or unless the corporation or any law restricts the transfer of such
shares. Appraisal rights are unavailable, however, if the shareholders of a
corporation or the corporation itself, or both, immediately prior to the
reorganization will own immediately after the reorganization equity securities
constituting more than five-sixths of the voting power of the surviving or
acquiring corporation or its parent entity, and if the shares of the surviving
corporation have the same rights, preferences, privileges and restrictions as
the shares of the disappearing corporation that are surrendered in exchange.
California law does not make dissenters' rights available to
shareholders of a corporation that merges into a 90% or more owned subsidiary,
as will be the case in the Reincorporation. Dissenters' rights of appraisal
are, therefore, not available to shareholders of SNIG-California with respect
to the Reincorporation.
Dissolution. Under California law, shareholders holding 50%
or more of the total voting power may authorize a corporation's dissolution,
with or without the approval of the corporation's board of directors, and this
right may not be modified by the articles of incorporation. Under Delaware
law, unless the board of directors approves the proposal to dissolve, the
dissolution must be approved by stockholders holding 100% of the total voting
power of the corporation. Only if the dissolution is initiated by the board of
directors may it be approved by a simple majority of the corporation's
stockholders. In the event of such a board-initiated dissolution, Delaware law
allows a Delaware corporation to include in its certificate of incorporation a
supermajority voting requirement in connection with dissolutions. SNIG-
Delaware's Certificate of Incorporation contains no such supermajority voting
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<PAGE> 88
requirement, however; thus a majority of shares voting at a meeting at which a
quorum is present would be sufficient to approve a dissolution of SNIG-Delaware
that had previously been approved by its Board of Directors.
APPLICATION OF THE GENERAL CORPORATION LAW OF CALIFORNIA TO DELAWARE
CORPORATIONS
Under Section 2115 of the California General Corporation Law,
certain foreign corporations (i.e., corporations not organized under California
law) are placed in a special category if they have characteristics of ownership
and operation that indicate they have significant contacts with California. So
long as a Delaware or other foreign corporation is in this special category,
and it does not qualify for one of the statutory exemptions, it is subject to a
number of key provisions of the California General Corporation Law applicable
to corporations incorporated in states other than California. Among the more
important provisions are those relating to the election and removal of
directors, cumulative voting, prohibition of classified boards of directors,
standards of liability and indemnification of directors, distributions,
dividends and repurchases of shares, shareholder meetings, approval of certain
corporate transactions, dissenters' and appraisal rights, and inspection of
corporate records. See "--Significant Differences Between the Corporation Laws
of California and Delaware," above. Exemptions from Section 2115 are provided
for corporations whose shares are listed on a major national securities
exchange or are traded on Nasdaq and that have 800 or more shareholders
(including those holding shares in the name of a nominee) as of the record date
for its most recent annual meeting of shareholders.
Accordingly, following the Reincorporation, SNIG-Delaware may
become subject to Section 2115 and may become subject to a number of key
provisions of California law. However, as the Common Stock of SNIG-Delaware is
listed on Nasdaq, SNIG-Delaware will be exempt from the applicability of
Section 2115 at the first annual meeting of stockholders for which
SNIG-Delaware has 800 or more stockholders as of the record date for such
meeting. It is possible that SNIG-Delaware could have 800 or more owners of
the Common Stock (including those holding shares in the name of a nominee) as
of the record date for the first annual meeting of stockholders following the
Reincorporation.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a discussion of certain federal income tax
consequences to holders of SNIG-California Common Stock or Voting Notes who
receive SNIG-Delaware Common Stock or Voting Notes in exchange for their
SNIG-California Common Stock or Voting Notes as a result of the
Reincorporation. The discussion does not address all the tax consequences of
the Reincorporation that may be relevant to particular SNIG- California
shareholders (such as dealers in securities, holders of stock options or
warrants, or those SNIG-California shareholders who acquired their shares upon
the exercise of stock options or warrants). Furthermore, no foreign, state or
local tax consequences are addressed herein. IN VIEW OF THE VARYING NATURE OF
SUCH TAX CONSEQUENCES, SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS
AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE REINCORPORATION, INCLUDING
THE APPLICABILITY OF FEDERAL, STATE, LOCAL OR FOREIGN TAX LAWS.
The Company has not requested a ruling from the IRS with
respect to the federal income tax consequences of the Reincorporation under the
Code. The Company may solicit an opinion from its legal counsel substantially
to the effect that the Reincorporation will constitute a tax-free
reorganization under Section 368(a) of the Code.
Subject to the limitations, qualifications and exceptions
described herein, and assuming the Reincorporation qualifies as a
reorganization within the meaning of Section 368(a) of the Code, the following
federal income tax consequences should result:
(a) No gain or loss will be recognized by holders of
Common Stock or Voting Notes of SNIG-California upon receipt of Common Stock or
Voting Notes of SNIG-Delaware pursuant to the Reincorporation;
(b) The aggregate tax basis of the Common Stock or Voting
Notes of SNIG-Delaware received by each shareholder will be the same as the
aggregate tax basis of the Common Stock or Voting Notes of SNIG-California held
by such shareholder at the time of the Reincorporation; and
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<PAGE> 89
(c) The holding period of the Common Stock or Voting
Notes of SNIG-Delaware received by each shareholder of SNIG- California will
include the period during which such shareholder held the Common Stock or
Voting Notes of SNIG-California surrendered in exchange therefor, provided that
such SNIG-California Common Stock or Voting Notes was held by such shareholder
as a capital asset at the time of the Reincorporation.
The Company's belief will neither bind the IRS nor preclude it
from asserting a contrary position.
A successful IRS challenge to the reorganization status of the
Reincorporation would result in a shareholder's recognizing gain or loss with
respect to each share of SNIG-California Common Stock or principal amount of
Voting Notes surrendered equal to the difference between that shareholder's
basis in such share or note and the fair market value, as of the time of the
Reincorporation, of the SNIG-Delaware Common Stock or Voting Notes received in
exchange therefor. In such event, a shareholder's aggregate basis in the
shares of SNIG-Delaware Common Stock or Voting Notes received in the exchange
would equal such fair market value, and such shareholder's holding period for
such shares or Voting Notes would not include the period during which such
shareholder held SNIG-California Common Stock or Voting Notes.
State, local or foreign income tax consequences to
shareholders may vary from the federal tax consequences described above.
SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE EFFECT OF THE
REINCORPORATION UNDER APPLICABLE FEDERAL, STATE, LOCAL OR FOREIGN INCOME TAX
LAWS.
VOTE REQUIRED TO APPROVE THE REINCORPORATION
Approval of "Proposal No. 3--Reincorporation of the Company in
the State of Delaware" requires the affirmative vote of the holders of a
majority of the outstanding shares of Common Stock entitled to vote thereon.
The holders of the Voting Notes are not entitled to vote on this proposal.
Abstentions will have the effect of a negative vote. Reincorporation is not a
condition precedent to the Stock Issuance, but is recommended by the Board of
Directors.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THIS
PROPOSAL NO. 3. AN ABSTENTION WILL BE COUNTED AS A VOTE AGAINST THE PROPOSAL.
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PROPOSAL NO. 4--AMENDMENT OF BYLAWS
TO INCREASE AUTHORIZED NUMBER OF DIRECTORS
The shareholders of the Company are asked to consider and vote upon an
amendment to the Bylaws of the Company to change the authorized number of
directors from nine to eleven.
The Bylaws of SNIG-Delaware are presented for approval in Proposal No.
3. If "Proposal No. 3--Reincorporation of the Company in the State of
Delaware," is adopted and this Proposal No. 4 is rejected, the number of
authorized directors of the Company would be nine, although the Company may
then elect not to proceed with the Reincorporation. If both of Proposals No. 3
and No. 4 are adopted, the number of authorized directors of SNIG-Delaware will
be eleven.
The principal purpose of this proposed bylaw amendment is to satisfy
the condition to the Stock Purchase Agreement that two additional directors be
elected to the Board of Directors effective as of the Closing Date. See
"Proposal No. 1--Terms of the Stock Issuance--Closing Conditions--Conditions to
Purchasers' Obligations" and "Proposal No. 5--Election of Two Additional
Directors." The Voting Notes vote separately on a change in the authorized
number of directors, as set forth in Section 2.03 of the Bylaws of the Company,
as amended effective May 20, 1992.
The proposed increase in the authorized number of directors could have
a number of effects on the Company's shareholders, depending on various future
circumstances. The increase, coupled with the Company's agreement under the
Stock Purchase Agreement to nominate one individual designated by IP (so long
as such person is reasonably acceptable to the Board) as one of the two
additional directors, could have a potential, but very slight, antitakeover
effect, if the director aligned with IP were to vote against a hypothetical
proposal to acquire the Company. In addition, a larger board may make it
slightly more difficult for the Company to attract and retain qualified
directors. Additionally, it may be easier for a minority faction of
shareholders opposed to management to elect a director friendly to their
interests by utilizing their ability to cumulate votes for the election of
directors.
VOTE REQUIRED TO APPROVE BYLAW AMENDMENT
Approval of "Proposal No. 4--Amendment of Bylaws to Increase
Authorized Number of Directors" requires the affirmative vote of a majority of
the outstanding shares of Common Stock entitled to vote thereon and the
affirmative vote of a majority of the Common Stock equivalent votes held by the
Voting Notes as provided in the Amended and Restated Articles of Incorporation
and Bylaws of the Company, each voting as a separate class. Abstentions will
have the effect of a negative vote. A condition to the Stock Issuance is that
the majority of the outstanding shares held by persons who are neither parties
to the Stock Purchase Agreement nor Associates of such parties vote in favor of
each of Proposals No. 1, No. 2, No. 4, and No. 5. See "Proposal No. 1--Terms
of the Stock Issuance--Closing Conditions--Conditions to Purchasers'
Obligations."
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THIS PROPOSAL
NO. 4. AN ABSTENTION WILL BE COUNTED AS A VOTE AGAINST THE PROPOSAL.
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PROPOSAL NO. 5--ELECTION OF TWO ADDITIONAL DIRECTORS
Subject to the conditions described below, two directors are to be
elected at the Special Meeting to serve until the next annual meeting of
shareholders and until their respective successors have been duly elected and
qualified. The election of such two directors is contingent upon shareholder
approval of "Proposal No. 4--Amendment of Bylaws To Increase Authorized Number
of Directors," the effectiveness of which is in turn contingent upon
shareholder approval of "Proposal No. 1--The Stock Issuance," "Proposal No.
2--Transfer Restrictions Charter Amendment," and the satisfaction and waiver of
(i) all conditions to the consummation of the Acquisition as set forth in the
Pac Rim Acquisition Agreement and (ii) all conditions to the consummation of
the Stock Issuance as set forth in the Stock Purchase Agreement. See "Proposal
No. 1--Terms of the Stock Issuance--Closing Conditions--Conditions to the
Company's Obligations." In the event that any nominee for election as director
should become unavailable to serve, it is intended that votes will be cast,
pursuant to the enclosed proxy, for such substitute nominee as may be nominated
by the Company. Management has no present knowledge that either of the persons
named will be unavailable to serve.
The nominees of the Board of Directors are Steven B. Gruber and Roger
W. Gilbert.
No arrangement or understanding exists between either nominee and any
other person or persons pursuant to which either nominee was or is to be
selected as a director or nominee, except that under the terms of the Stock
Purchase Agreement, IP is entitled to designate (so long as such person is
reasonably acceptable to the Board of Directors) one nominee for appointment or
election to the Board of Directors. IP designated Mr. Gruber as such nominee.
The Stock Purchase Agreement requires that a second person be elected who is
unaffiliated with the Company. Prior to his nomination, Mr. Gilbert had no
affiliation with the Company. Neither of the nominees has any family
relationship to any other nominee or to any executive officer of the Company.
DIRECTORS
Information is set forth below concerning the two persons nominated by
the Board of Directors for election as directors at the Special Meeting and
each other director of the Company who is currently serving and shall continue
to serve after the Special Meeting and until the next annual meeting of
shareholders and until their successors have been duly elected and qualified.
Each nominee has furnished the information as to his beneficial ownership of
Common Stock as of October 24, 1996 and such nominee's principal occupation.
Each nominee has consented to being named in this Proxy Statement as a nominee
for director and has agreed to serve as a director if elected.
<TABLE>
<CAPTION>
Director
Nominees for Directors Age Position with the Company Since
- - ---------------------------- --- ------------------------- --------
<S> <C> <C> <C>
Steven B. Gruber 39 Nominee for Director --
Roger W. Gilbert 64 Nominee for Director --
</TABLE>
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<TABLE>
<CAPTION>
Director
Continuing Directors Age Position with the Company Since
- - ---------------------------- --- ------------------------- --------
<S> <C> <C> <C>
Steven D. Germain (2) 43 Director 1995
Thomas J. Jamieson (1)(3) 53 Director 1985
Gordon E. Noble (2) 68 Director 1990
C. Len Pecchenino (1) 69 Director 1988
Craig F. Schwarberg (1)(3) 40 Director 1992
Robert A. Spass 40 Director 1992
Bradley E. Cooper (2)(3) 30 Director 1992
William Gentz 55 President, Chief Executive 1994
Officer and Director
J. Chris Seaman (3) 41 Executive Vice President, 1993
Chief Financial Officer and
Director
</TABLE>
_________________
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Member of Investment Committee
Steven B. Gruber is a nominee for election as director of the Company.
He was the founder of, and since February 1994, has served as the Managing
Partner of, Insurance Partners Advisors, L.P. From May 1990 to present, Mr.
Gruber has served as the Managing Director of Oakhill Partners, L.P. and from
October 1992 to present, has served as a Vice President of Keystone, Inc. From
1981 to April 1990, he served as Managing Director and Co-Head of high-yield
securities of Lehman Brothers, Inc. He is also a director of Union American
Holdings plc and MVE Inc.
Roger W. Gilbert is a nominee for election as director of the Company.
From May 1988 until his retirement in June 1993, Mr. Gilbert served
simultaneously as the Chief Executive Officer and Chairman of the Board of TIC
Indemnity Co., the Chief Executive Officer of TMIC Insurance Co. Inc., and a
California Special Deputy Insurance Commissioner, a position to which he was
appointed by the California Insurance Commissioner. From 1974 to May 1988, Mr.
Gilbert served as Senior Vice President and director of Great American
Insurance Companies, and from 1983 to May 1988, also served as President of
Great America West Inc.
Steven D. Germain was elected to the Company's Board of Directors in
April 1995 to fill a vacancy resulting from the resignation of Donald J.
Peracchi from the Board. From 1988 to 1994 he served as General Counsel to the
Centre Reinsurance Group of Companies. Since 1994 he has served as Managing
Director of Centre ReSource Limited, a company that provides management
services to the Centre Reinsurance Group of Companies. Mr. Germain continues
to serve as a director and as Senior Vice President, General Counsel, and
Secretary to Centre and as a director, Senior Vice President, and Secretary of
CentreLine. Mr. Germain is also a director of Home Holdings, Inc.
Thomas J. Jamieson has been a director of the Company since December
1985. Since 1971, he has served as President of Jaco Oil Company. He is also
active as an independent investor. Mr. Jamieson has been a director of Berry
Oil Co. since 1993.
Gordon E. Noble became a director of the Company in October 1990.
Since July 1990, he has been Chairman and Chief Executive Officer of Commodore
Insurance Services. From January 1986 to January 1989, Mr. Noble served as
Executive Vice President and as a director and member of the Executive
Committee of Sedgwick James, an international insurance brokerage and risk
management firm.
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C. Len Pecchenino became a director of the Company in May 1988 and was
elected Chairman in June 1994. He served as the Company's Chief Executive
Officer from September 1991 to February 1992 and as the President and Chief
Executive Officer from February 1994 to May 1994. He also served as the
Chairman from September 1991 to August 1992. Mr. Pecchenino was President and
Chief Operating Officer of IC Industries, Inc. from November 1985 until he
retired in 1986. From 1984 to November 1985, he was President and Chief
Executive Officer of Pneumo Corporation, which was acquired by IC Industries in
October 1984. Prior to 1984, he was Executive Vice President of Pneumo
Corporation. IC Industries and Pneumo Corporation operated a number of
companies in various industries, including manufacturing, aerospace, and
retailing.
Craig F. Schwarberg was appointed to the Board of Directors in March
1992. From 1991 to the present, Mr. Schwarberg has worked for IIA, serving as
a Managing Director through February 1994. From 1994 to March 1996, Mr.
Schwarberg was a director and Chairman of the Board of NACOLAH Holding
Corporation. From 1983 to 1990, he was associated with Lehman Brothers, a
division of Shearson Lehman Brothers Inc. He was an associate from 1983 to
1986, Vice President from 1986 to 1990 and Senior Vice President during 1990.
Robert A. Spass was appointed to the Board of Directors in March 1992.
Since 1990, Mr. Spass has served as President and Chief Executive Officer, and
a director, of IIA. From 1994 to the present, Mr. Spass has been a Managing
Partner of Insurance Partners Advisors, L.P. and a director of Unionamerica
Holdings plc, and from 1994 to March 1996 was a director of NACOLAH Holding
Corporation. Since January 1996, he has served as a director of Highlands
Insurance Group, Inc. From 1984 to 1990, Mr. Spass was associated with Salomon
Brothers Inc, where he was an associate from 1984 to 1985, Vice President from
1985 to 1988, and a director from 1988 to 1990. Mr. Spass served from 1991 to
1995 as a director of Home Holdings, Inc., the parent company to The Home
Insurance Company. From 1990 to 1996 he served as a director of National
Reinsurance Holdings Corp., the holding company for National Reinsurance Corp.
In both these director positions he served as the designee of III pursuant to
separate shareholder agreements.
Bradley E. Cooper became a director of the Company in May 1992. From
1988 to 1990, Mr. Cooper was an analyst at Salomon Brothers Inc. From May 1990
to February 1994, Mr. Cooper served as Vice President of IIA. From 1994 to the
present, Mr. Cooper has been a Principal of Insurance Partners Advisors, L.P.
Since January 1996, he has served as a director of Highlands Insurance Group,
Inc.
William L. Gentz became a director of the Company in June 1994. Mr.
Gentz has held the position of President and Chief Executive Officer since
mid-1994. Mr. Gentz joined the Company after seventeen years at Zenith
Insurance Company, where he was responsible for marketing, underwriting, loss
control, and field operations for Zenith's workers' compensation operations.
Mr. Gentz began his insurance career in 1958, and before joining Zenith, he
worked in the marketing and underwriting departments of a variety of insurance
companies in the mid-west and California.
J. Chris Seaman became a director of the Company in March 1993. Mr.
Seaman has held the positions of Executive Vice President since February 1995
and Chief Financial Officer since July 1991. Prior to joining the Company, Mr.
Seaman was the CFO of a private company engaged in insurance company
acquisitions following ten years with Ernst & Whinney. Mr. Seaman previously
held staff and management positions at Industrial Indemnity Insurance Company
and Allianz of America Corporation, respectively.
COMMITTEES
The standing committees of the Board of Directors are the Audit
Committee, the Compensation Committee and the Investment Committee.
The Audit Committee recommends to the Board of Directors the
engagement or discharge of the Company's independent auditors; reviews with the
independent auditors the scope, timing and plan for the annual audit, any
non-audit services, and the fees for audit and other services; reviews
outstanding accounting and auditing issues with the independent auditors; and
supervises or conducts such additional projects as may be relevant to its
duties. The Audit Committee is also responsible for reviewing and making
recommendations with respect to the Company's financial condition, its
financial controls, and its accounting practices and procedures. The Audit
Committee, which
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presently consists of Messrs. Pecchenino, Jamieson and Schwarberg, held four
meetings during the fiscal year ended December 31, 1995.
The Compensation Committee reviews and approves the Company's
executive compensation policies and bonus distributions to officers and key
employees of the Company. The Compensation Committee, which during the fiscal
year ended December 31, 1995 held three meetings, consists of Messrs. Noble and
Cooper and Mr. Germain, who was appointed to the committee on April 12, 1995.
The Investment Committee reviews the investment practices of the
Company's primary insurance subsidiary, SNIC, and oversees the relationship
between SNIC and its investment manager. It carries out this function through
the fact that its members also are the directors of SNIC responsible for the
same oversight at SNIC. The Investment Committee, which presently consists of
Messrs. Jamieson, Cooper, Seaman and Schwarberg, held four meetings during the
fiscal year ended December 31, 1995.
MEETINGS AND REMUNERATION
During the fiscal year ended December 31, 1995, the Board of Directors
held four meetings and took various actions by unanimous written consent. Each
incumbent director during his incumbency attended at least 75% of the aggregate
of (i) the total number of meetings held by the Board of Directors during
fiscal 1995 and (ii) the total number of meetings held by all Committees of the
Board of Directors on which he served during that period.
Each director is elected to hold office until the next annual meeting
of shareholders and until his respective successor is elected and qualified.
Each incumbent director who is not an officer of the Company is paid a fee of
$4,000 for each regular Board of Directors meeting attended and $500 for each
committee meeting attended. The Board of Directors regularly meets once each
quarter. All directors are reimbursed for their out-of-pocket expenses in
serving on the Board.
Mr. Spass is an officer of IIA, which was paid $250,000 by the Company
during fiscal 1995 for investment banking and financial consulting services.
Mr. Germain is an officer and director of Centre, which during 1994 and 1995
was paid $15 million each year by the Company for reinsurance services. Such
reinsurance services were canceled effective January 1, 1996 and no further
reinsurance premium will be paid. The Company also engaged in a financing
transaction with a company affiliated with Centre during the 1995 fiscal year.
See "--Certain Relationships and Related Transactions."
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<PAGE> 95
EXECUTIVE OFFICERS
Set forth in the table below are the names, ages and current offices
held by all executive officers of the Company and SNIC. Unless specifically
noted, the positions named are held at both the Company and at SNIC.
<TABLE>
<CAPTION>
EXECUTIVE
NAME AGE POSITION WITH THE COMPANY OFFICER SINCE
- - ---- --- ------------------------- -------------
<S> <C> <C> <C>
William L. Gentz 55 President and Chief Executive Officer 1994
J. Chris Seaman 41 Executive Vice President and Chief Financial Officer 1991
Joseph P. Wolonsky 49 Senior Vice President 1989
Thomas I. Boggs, Jr. 50 Senior Vice-President-Underwriting, SNIC 1995
Richard D. Hotchkiss 64 Senior Vice President, SNIC 1990*
Karl O. Johnson 64 Senior Vice President, SNIC 1989
Douglas R. Roche 56 Senior Vice President 1990
Robert E. Nagle 47 Senior Vice President, General Counsel and Secretary 1996
James L. Cinney 55 Senior Vice President, SNIC 1994
Matthew Natalizio 41 Vice President 1994
Sue Binder 48 Vice President, SNIC 1992
Harold Fedora 46 Vice President, SNIC 1993
Jack Solomon 62 Resident Vice President, SNIC 1991
Robert J. Niebur 60 Resident Vice President, SNIC 1995
- - ----------------------
</TABLE>
* Retired from SNIC in June, 1996.
Executive officers of the Company are elected by and serve at the
discretion of the Board of Directors. No arrangement exists between any
executive officer and any other person or persons pursuant to which any
executive officer was or is to be selected as an executive officer. None of
the executive officers has any family relationship to any nominee for director
or to any other executive officer of the Company. Set forth below is a brief
description of the business experience for the previous five years of all of
the executive officers.
William L. Gentz has held the position of President and Chief Executive Officer
since mid-1994. Mr. Gentz joined the Company after seventeen years at Zenith
Insurance Company where he was responsible for marketing, underwriting, loss
control, and field operations for Zenith's workers' compensation operations.
Mr. Gentz began his insurance career in 1958, and from 1958 to 1968 worked in
the marketing and underwriting departments of a variety of insurance companies
in the mid-west and California.
J. Chris Seaman has held the positions of Executive Vice President since
February 1995 and Chief Financial Officer since July 1991, and has served as a
director of the Company since March 1993. Prior to joining the Company, Mr.
Seaman was the CFO of a private company engaged in insurance company
acquisitions following ten years with Ernst & Whinney. Mr. Seaman previously
held staff and management positions at Industrial Indemnity Insurance Company
and Allianz of America Corporation, respectively.
Joseph P. Wolonsky has held the position of Senior Vice President from 1989 to
the present. He was General Counsel and Secretary from 1989 to December 1995,
and has been Chief Claims Officer since December of 1992. Prior to joining the
Company, Mr. Wolonsky had 12 years of insurance industry experience as General
Counsel to a national credit life and accident and health general agency, and
served as General Counsel to the Insurance Division of Borg-Warner Corporation.
Thomas I. Boggs, Jr. was appointed Senior Vice President of Workers'
Compensation Underwriting of SNIC effective March 1995. Previously he was
Assistant Vice President of Fremont Compensation Insurance Company, and held
various underwriting and marketing positions at Fireman's Fund Insurance
Company, Cypress Insurance Company, Industrial Indemnity Insurance Company, and
Safeco.
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<PAGE> 96
Richard D. Hotchkiss was appointed Senior Vice President of Property and
Casualty Claims for SNIC in February 1990. Prior to joining the Company, Mr.
Hotchkiss was an Assistant Vice President and National Casualty Claims Director
for the Unigard Insurance Group where he held various other claim management
positions for twenty eight years. Mr. Hotchkiss retired from SNIC in June,
1996.
Karl O. Johnson has been responsible for SNIC's Central California Operations
since 1989. He was promoted to Senior Vice President in 1994. Mr. Johnson has
served with various insurance organizations in loss control and marketing
capacities since 1955; he joined the Company in 1987.
Douglas R. Roche was appointed Senior Vice President-Management Information
Systems in 1994, prior to which he served as Vice President of Internal
Operations from the time he joined the Company in 1990. From 1987 to 1990, Mr.
Roche sold software and provided systems consulting services to the insurance
industry. From 1969 to 1987 he held a variety of management positions in
various insurance companies' systems analysis operations.
Robert E. Nagle has held the positions of Senior Vice President, General
Counsel and Secretary since January 1996. From 1986 until he joined the
Company, Mr. Nagle was corporate counsel and senior corporate counsel for
Farmers Group, Inc.
James L. Cinney has held the position of Senior Vice President - Loss Control
of SNIC since 1994. Before joining the Company, Mr. Cinney was self-employed
in the hospitality industry for one year. Prior to that, he was Vice President,
responsible for loss control, at Industrial Indemnity Insurance Company. Mr.
Cinney has 30 years of workers' compensation loss control experience in a
variety of staff and management positions with Industrial Indemnity Insurance
Company, Zenith Insurance Company, Employee Benefits Insurance Company, and
Hanover Cal/Comp Insurance Company.
Matthew Natalizio has held the position of Vice President-Finance and Treasurer
since 1994. From 1988 until he joined the Company, Mr. Natalizio was employed
by KPMG Peat Marwick LLP.
Sue Binder has held the position of Home Office Claims Manager of SNIC since
1991 and was made a Vice President in 1992. Prior to 1991, Ms. Binder held a
variety of claims department staff and management positions at Fremont
Indemnity Company where she had been employed since 1977.
Harold ("Hal") J. Fedora, Jr. has held the position of Vice President Claims
Services of SNIC since 1993, prior to which he was Calabasas Branch Claims
Manager. From 1975 to 1987 Mr. Fedora was employed at several insurance
companies in various claims department staff and management positions.
Jack Solomon has held the position of Resident Vice President of SNIC, in
charge of the Phoenix branch since 1995 and was the Sacramento Branch Manager
from 1990 until 1995. Prior to joining the Company, Mr. Solomon had 30 years
experience in workers' compensation underwriting, marketing, and executive
level management in a variety of insurance companies, principally in the
mid-west.
Robert J. Niebur became Resident Vice President of SNIC, in charge of the South
San Francisco branch in July, 1995. Prior to joining the Company, he was
Workers' Compensation Manager for Flinn, Gray & Herterich, an insurance
brokerage, from 1994 to 1995, and operated his own insurance consulting
business from 1993 to 1994. For three years prior to that, Mr. Niebur was an
operating executive with Great States Insurance Company and, earlier, he held
various staff and executive positions for eleven years with Zenith Insurance
Company.
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the
compensation for services in all capacities to the Company for the fiscal years
ended December 31, 1995, December 31, 1994 and December 31, 1993, of those
persons who were, at December 31, 1995, (i) the chief executive officer, (ii)
the other four most highly compensated executive officers of the Company and
(iii) Edwin W. Wilson, the executive vice president of the Company until his
resignation from such position in May 1995.
87
<PAGE> 97
<TABLE>
<CAPTION>
Summary Compensation Table
--------------------------
Long Term Compensation
--------------------------
Annual Compensation Awards Payouts
-------------------------- --------- --------- ---------
Other
Annual Restricted Securities All Other
Compen- Stock Underlying LTIP Compen-
sation Awards Options/ Payouts sation
Name and Principal Position Year Salary(1) Bonus(2) ($) ($)(3) SARs(#) (#) ($)(7)
- - --------------------------- ---- --------- ------- ----- -------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William Gentz (4) 1995 $ 294,508 $ 200,000 -- $ 53,690 19,175 -- $2,250
President and 1994 168,755 100,000 -- -- 31,250 -- --
Chief Executive 1993 -- -- -- -- -- -- --
Officer
J. Chris Seaman(5) 1995 215,600 125,000 -- 40,170 39,325 -- 2,250
Executive Vice 1994 173,696 75,000 -- -- -- -- 2,250
President and 1993 176,455 75,000 -- -- 15,000 -- --
Chief Financial
Officer
Douglas R. Roche 1995 130,967 20,000 -- 13,000 4,650 -- 2,190
Vice President 1994 119,300 12,000 -- -- 6,250 -- 1,929
1993 86,417 -- -- -- 3,750 -- --
Joseph P. Wolonsky 1995 163,700 50,000 -- 24,700 20,050 -- 2,250
Senior Vice 1994 145,200 30,000 -- -- -- -- 2,250
President 1993 145,889 30,000 -- -- 10,000 -- --
and Corporate
Counsel
Karl O. Johnson 1995 135,200 27,000 -- 16,900 17,300 -- 2,250
Senior Vice 1994 131,108 27,000 -- -- -- -- 2,250
President 1993 101,225 23,000 -- -- 10,000 -- --
Edwin W. Wilson(6) 1995 93,203 -- -- -- -- -- 130,484
(Resigned) 1994 171,943 20,000 -- -- -- -- 2,250
1993 172,294 24,000 -- -- 15,000 -- --
</TABLE>
_________________
(1) The amounts set forth for fiscal year 1995 include salary and other
cash compensation paid in that year, other than amounts listed in the
column entitled "Bonus."
(2) Bonus amounts represent cash payments and are presented in the year in
which they are earned, although payment typically is made in the
subsequent year.
(3) Represents the fair market value of the underlying shares on the date
of grant.
(4) Mr. Furman K. Stanley resigned as President, Chief Executive Officer
and director of the Company in February 1994. Mr. Pecchenino served
as interim President, Chief Executive Officer and Chairman from
February 1994 until Mr. Gentz's appointment to those positions in June
1994. During his tenure, Mr. Pecchenino received a total of $136,858
in cash compensation, with no bonus, long term compensation or other
compensation earned or paid. Mr. Pecchenino was re-appointed as
Chairman in June 1994 and continues to serve in that capacity.
(5) Mr. Seaman's $75,000 bonus earned in 1993 will be disbursed over five
years, beginning in 1995, with interest at Northern Trust Co.'s prime
rate, pursuant to a deferred compensation arrangement.
(6) Mr. Wilson resigned as an officer of SNIC effective May 31, 1995. His
resignation was deemed a termination under the provisions of his
employment contract. Mr. Wilson's options expired following his
resignation. The amount set forth as "All Other Compensation" for
fiscal year 1995 represents post-termination severance payments which
commenced as of June 1, 1995 and will continue through May 31, 1997.
(7) Other than as specifically noted, represents the employer's
contribution under the Company's 401(k) Plan.
EMPLOYMENT AGREEMENTS
The Company has in effect employment agreements with the following
officers:
(1) William L. Gentz, President and Chief Executive Officer. Mr.
Gentz's agreement expires on June 1, 1997, but is subject to automatic renewal
in one-year increments unless notification of non-renewal is given sixty days
prior to the expiration of the then-current term. His salary was set as of
June 1, 1994 at $275,000 annually, plus benefits and incidentals generally
provided to officers of the Company, and is thereafter as determined by the
Board. Mr. Gentz's annual salary was increased to $287,500 effective August 1,
1995. If Mr. Gentz's
88
<PAGE> 98
employment is terminated by the Company other than for cause, he is entitled to
payments of his salary and benefits for the then-remaining term of his
agreement. In the event of a change in control of the Company, Mr. Gentz would
be deemed terminated without cause and his employment agreement would be deemed
to have a three-year remaining term.
(2) Edwin W. Wilson, Executive Vice President of SNIC, resigned as
an officer of SNIC effective May 31, 1995. His resignation was deemed a
termination under the provisions of his employment contract. Mr. Wilson is
entitled to payments of his salary and benefits for a two- year period from the
date of the termination.
(3) Matthew Natalizio, Vice President, Finance and Treasurer. Mr.
Natalizio's agreement is open-ended. His compensation and benefits are
determined by the Board. If Mr. Natalizio's employment is terminated by the
Company other than for cause, he is entitled to payments of his salary and
benefits for one year from the date of the termination. Mr. Natalizio's
agreement does not provide any special rights in the event of a change in
control.
(4) James L. Cinney, Senior Vice President, Loss Control, of SNIG.
Mr. Cinney entered into a letter agreement upon his employment with the Company
in December 1994 that provides that if Mr. Gentz departs from the Company prior
to December 31, 1996, Mr. Cinney will be deemed to have been terminated and
will be entitled to payments of his salary and benefits then in effect for a
period of eight months.
CHANGE-IN-CONTROL ARRANGEMENTS
In addition to the rights described above with respect to Mr. Gentz,
the only change-in-control arrangement in place is in connection with the
Company's stock incentives. Under the terms of the 1986 Non-Statutory Stock
Option and Non-Statutory Stock Purchase Plan (the "1986 Plan"), upon a change
of control of the Company, unless replacement options to purchase stock in the
new or recapitalized entity are offered, all option holders will have thirty
days to exercise their outstanding options, excluding those that have then not
yet vested. Under the terms of the 1995 Stock Incentive Plan (the "1995
Plan"), under similar circumstances, the Option Committee of the Board of
Directors (the "Option Committee") may, in its discretion, allow each person
holding an option or restricted stock who did not receive a replacement equity
incentive grant to exercise that option without regard to its vesting
provisions, or to retain that restricted stock without regard to the Company's
repurchase right, as applicable.
EQUITY INCENTIVE GRANTS
Key employees, including directors who are key employees, chosen by
the Compensation Committee (which acts as the Option Committee under the terms
of the 1986 Plan and 1995 Plan) are eligible to participate in the 1995 Plan.
Under the 1995 Plan, officers and key employees of the Company or its
subsidiaries may be granted options to purchase shares of Common Stock or they
may be given the opportunity to purchase restricted stock of the Company. The
1995 Plan permits the granting both of options that qualify for treatment as
incentive stock options ("Incentive Stock Options") under Section 422 of the
Code, and options that do not qualify as Incentive Stock Options ("Nonqualified
Stock Options").
In 1986, the Company adopted the 1986 Plan, which allowed the Company
to issue to employees of the Company and its subsidiaries Nonqualified Stock
Options and rights to purchase the Common Stock. The purchase right aspect of
the 1986 Plan was terminated by the Board of Directors in 1989. Following the
adoption of the 1995 Plan, the Board of Directors determined to make no further
grants pursuant to the 1986 Plan.
89
<PAGE> 99
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning options granted
during fiscal 1995 to each of the executive officers named in the Summary
Compensation Table set forth above under "--Executive Compensation."
<TABLE>
<CAPTION>
Individual Grants
-------------------------------------------------
Number of % of Total Potential Realizable Value at
Securities Options/ Assumed Annual Rates of Stock
Underlying SARs Price Appreciation
Options/SARs Granted to Exercise or for Option Term
Granted Employees Base Price Expiration -----------------------------
Name (#) in Fiscal ($/Sh)(1) Date 0%(2) 5%($)(3) 10%
- - ------------------ ---------- ---------- ---------- ---------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
William Gentz 19,175(4) 14.20 $5.20 2/22/05 0 $62,707 $195,915
J. Chris Seaman 39,325(5) 29.13 5.20 2/22/05 0 128,603 325,904
Joseph P. Wolonsky 20,050(6) 14.85 5.20 2/22/05 0 65,569 166,164
Karl O. Johnson 17,300(7) 12.81 5.20 2/22/05 0 56,575 143,373
Edwin W. Wilson 0 0 0 -- -- -- --
Douglas R. Roche 4,650(4) 3.44 5.20 2/22/05 0 15,207 38,537
</TABLE>
________________
(1) Represents the fair market value of the underlying shares of Common
Stock at the time of the grant.
(2) Unless the stock price increases, which will benefit all shareholders
commensurately, an option holder will realize no gain.
(3) Represents the value of the shares of Common Stock issuable upon the
exercise of the option, assuming the stated rates of price
appreciation for ten years, compounded annually, with the aggregate
exercise price deducted from the final appreciated value. The 5% and
10% rates are established by the SEC as examples only and are not
intended to forecast future appreciation in the Company's stock price.
(4) Represents a ten-year, incentive stock option grant, vesting at a rate
of 20% per year for five years, granted pursuant to the 1995 Plan.
(5) Represents ten-year, incentive stock option grants pursuant to the
1995 Plan, 14,325 of which vest at a rate of 20% per year for five
years. Of the remaining 25,000 options, 40% vest in the first
installment with the remaining options vesting in three equal annual
increments thereafter.
(6) Represents ten-year, incentive stock option grants pursuant to the
1995 Plan, 8,800 of which vest at a rate of 20% per year for five
years. Of the remaining 11,250 options, 40% vest in the first
installment with the remaining options vesting in three equal annual
increments thereafter.
(7) Represents ten-year, incentive stock option grants pursuant to the
1995 Plan, 6,050 of which vest at a rate of 20% per year for five
years. Of the remaining 11,250 options, 40% vest in the first
installment with the remaining options vesting in three equal annual
increments thereafter.
90
<PAGE> 100
OPTION EXERCISES AND YEAR END VALUE
The following table sets forth information concerning the aggregate
number of options exercised during fiscal 1995 by each of the executive
officers named in the Summary Compensation Table set forth above under
"--Executive Compensation," and outstanding options held by each such officer
as of December 31, 1995.
<TABLE>
<CAPTION>
Number of Securities Value of
Underlying Unexercised
Unexercised Options/ In-the-Money
SARs at Options/SARs at
Fiscal Year-End(#) Fiscal Year-End(1)
------------------ ------------------
Shares
Acquired Value Exercisable/ Exercisable/
Name on Exercise(#) Realized($) Unexercisable Unexercisable
- - ----------------------- -------------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
William Gentz -- -- 6,250/44,175 0/0
J. Chris Seaman -- -- 16,300/38,025 $7,560/10,440
Joseph P. Wolonsky -- -- 8,875/21,175 5,250/6,750
Karl O. Johnson -- -- 8,650/18,650 4,980/7,020
Edwin W. Wilson (2) -- -- -- --
Douglas R. Roche -- -- 2,750/11,900 2,050/3,700
</TABLE>
________________
(1) Uses a fair market value at December 31, 1995 of $5.20 per share, with the
aggregate exercise price deducted from the total value of the stock
underlying the options.
(2) Mr. Wilson's options expired following his resignation on May 31, 1995.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee during the fiscal year ended December 31,
1995 consisted of Messrs. Noble, Cooper and Germain, each of whom was a
non-employee director. Mr. Cooper is an employee and beneficial owner of less
than one percent of the equity securities of IIA, which was paid in excess of
$60,000 by the Company in fiscal 1995 for investment banking and financial
consulting services. Mr. Germain was elected to the Compensation Committee in
April 1995. Mr. Germain is an officer and a director of Centre, which was
involved in several transactions with the Company during 1995 involving
payments in excess of $60,000. See "--Certain Relationships and Related
Transactions."
During fiscal 1995, no officers participated in deliberations of the
Company's Compensation Committee concerning executive officer compensation,
except William Gentz, the Company's Chief Executive Officer.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
The Compensation Committee of the Board was comprised of Messrs.
Noble, Cooper and Germain during 1995. The Compensation Committee establishes
the general compensation policies of the Company, establishes the compensation
plans and specific compensation levels for executive officers, and administers
the 1986 Plan and the 1995 Plan.
As required by rules designated to enhance the disclosure of the
Company's executive compensation policies and practices, the following is the
Compensation Committee's report submitted to the Board addressing the
compensation of the Company's executive officers for fiscal 1995:
91
<PAGE> 101
The Compensation Committee of the Board of Directors establishes the
general compensation policies of the Company, establishes the compensation
plans, establishes the specific compensation of Mr. William Gentz, the
Company's Chief Executive Officer, reviews the Chief Executive Officer's
recommendations as to the specific compensation levels for the other executive
officers, and administers the Company's stock incentive plans.
Compensation Policy and Programs. The Compensation Committee's
responsibility is to provide a strong and direct link among shareholder values,
Company performance, and executive compensation through its oversight of the
design and implementation of a sound compensation program that will attract and
retain highly qualified personnel. Compensation programs are intended to
complement the Company's short and long-term business objectives and to focus
executive efforts on the fulfillment of these objectives.
The Compensation Committee, consistent with its standing policy, has
conducted a full review of the Company's executive compensation program and
will repeat this review annually. It is the Compensation Committee's practice
to establish target levels of compensation for senior officers consistent with
that of companies comparable in size and complexity to the Company, as well as
companies that are direct business competitors of the Company. After
considerable review of extensive data relating to all aspects of compensation
paid by such groups of companies, actual compensation of the Company's
executive officers is subject to increase or decrease by the Compensation
Committee from targeted levels according to the Company's overall performance
and the individual's efforts and contributions. As of 1995, a significant
portion of executive compensation is directly related to the Company's
financial performance and is therefore at risk. Total compensation for the
Company's senior management is composed of base salary, near-term incentive
compensation in the form of bonuses, and long-term incentive compensation in
the form of stock options and restricted stock grants. The Compensation
Committee retains the discretion to adjust the formula for certain items of
compensation so long as total compensation reflects overall corporate
performance and individual achievement.
Base Salary. In establishing base salary levels for senior officer
positions, the Compensation Committee and Mr. Gentz consider levels of
compensation at other similarly situated companies and at direct competitors,
levels of responsibility, and internal issues of consistency and fairness. In
determining the base salary of a particular executive, the Compensation
Committee and Mr. Gentz consider individual performance, including the
accomplishment of short- and long-term objectives, and various subjective
criteria including initiative, contribution to overall corporate performance,
and leadership ability.
In the fiscal year ended December 31, 1995, the annual base salary of
Mr. Gentz began at $275,000 and increased to $287,500 in September, a level
determined to be appropriate by the Compensation Committee based on comparable
chief executive salaries of a peer group of companies and of direct competitors
referred to above, the Company's overall performance and profitability in the
prior fiscal year, and Mr. Gentz's efforts and contributions to the Company.
Bonuses. The Company's executive officers are eligible for annual
bonuses based upon recommendations made by Mr. Gentz (as to the other executive
officers) and the Compensation Committee (as to Mr. Gentz) as to individual
performance and the Company's achievement of certain operating results.
Amounts of individual awards are based principally upon the results of
the Company's financial performance during the prior fiscal year. The awards
for senior officers are within guidelines established by the Compensation
Committee and Mr. Gentz as a result of their review of total compensation for
senior management of peer companies and competitors. The actual amount awarded
within these guidelines is determined principally by the Compensation
Committee's and Mr. Gentz's assessment of the individual's contribution to the
Company's overall financial performance. Consideration is also given to
factors such as the individual's successful completion of a special project,
any significant increase or decrease in the level of the participant's
executive responsibility, and the Compensation Committee's and Mr. Gentz's
evaluation of the individual's overall efforts and ability to discharge the
responsibilities of his position. In fiscal 1995, bonuses were paid with
respect to fiscal 1994 performance to all of the continuing executive officers
named in the Summary Compensation Table and to eleven executive officers in
total. During fiscal 1995, bonuses were earned by twelve executive officers,
with payment occurring during fiscal 1996. Officers named in the Summary
Compensation Table that received these bonuses were Messrs. Gentz, Johnson,
Roche, Seaman and Wolonsky.
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<PAGE> 102
In determining Mr. Gentz's bonus, the Compensation Committee gives
particular consideration to the following factors: (1) the Company's
underwriting results; (2) the Company's return on average equity during the
fiscal year; (3) the positive earnings growth of the Company during the fiscal
year; and (4) the efforts and contributions made by Mr. Gentz in discharging
his responsibilities as Chief Executive Officer. In 1995, the Compensation
Committee placed significant weight on the Company's strengthening of its
underwriting discipline and its growth in underwriting profits.
Stock Incentives. The Company currently has in place the 1986 Plan
and the 1995 Plan. The Company ceased providing options under the 1986 Plan in
April 1995. The purpose of the 1995 Plan is to provide incentives and reward
the contributions of key employees and officers for the achievement of
long-term Company performance, as measured by earnings per share and the market
value of the Common Stock. The Compensation Committee set guidelines for the
number and terms of stock option or restricted stock awards based on factors
similar to those considered with respect to the other components of the
Company's compensation program, including comparison with the practices of peer
group companies and direct competitors. In the event of unsatisfactory
corporate performance, the Compensation Committee may decide not to award stock
options or restricted stock in any given fiscal year although exceptions to
this policy may be made for individuals who have assumed substantially greater
responsibilities and other similar factors. The awards under the 1995 Plan are
designed to align the interests of executives with those of the shareholders.
Generally, stock options become exercisable in cumulative installments over a
period of five years, but the individual forfeits any installment that has not
vested during the period of his employment. Restricted stock grants generally
vest in equal installments over nine years with unvested shares subject to
repurchase by the Company at no gain to the officer upon the termination of his
or her employment.
Under the 1995 Plan, the Compensation Committee during 1995 approved a
set of stock option and restricted stock grants to nine executive officers.
These approvals were acted upon by the Compensation Committee in its capacity
as the "Option Committee" under the terms of the 1995 Plan, following approval
of the 1995 Plan by the shareholders at the Company's 1995 Annual Meeting of
Shareholders held on May 24, 1995. Agreements reflecting these option grants
and restricted stock grants have been prepared and delivered to the recipient
employees. The share certificates representing the restricted stock have not
yet been issued, hence those share grants are not reflected in the Company's
total outstanding shares number.
The Compensation Committee has reviewed the Company's executive
compensation policies and plans in light of the provisions of the Omnibus
Budget Reconciliation Act of 1993 and the rules recently promulgated under that
Act. This legislation amended Section 162 of the Code by limiting to $1
million the deductibility of compensation paid to certain executives. Recent
rulemaking has clarified the impact of the 1993 act on equity incentive plans.
It is the current policy of the Compensation Committee to maximize, to the
extent reasonably possible, the Company's ability to obtain a corporate tax
deduction for compensation paid to executive officers of the Company to the
extent consistent with the best interests of the Company and its shareholders.
BRADLEY E. COOPER
STEVEN D. GERMAIN
GORDON E. NOBLE
MEMBERS OF THE COMPENSATION COMMITTEE
93
<PAGE> 103
COMPANY PERFORMANCE
The graph below compares the cumulative total shareholder return of
the Company with the cumulative total return on the Nasdaq Stock Market (U.S.
Companies) Index and the Nasdaq Insurance Stocks Index for the period from June
30, 1995 (the date on which the Company's registration statement under Section
12 of the Exchange Act became effective) through December 31, 1995.
[CHART]
Comparison of Cumulative Total Return*
<TABLE>
<S> <C>
Superior National Insurance Group, Inc. Common Stock . . $113.89
Nasdaq Insurance Stocks Index . . . . . . . . . . . . . . 122.72
Nasdaq Stock Market (U.S. Companies) Index . . . . . . . 112.72
</TABLE>
Assumes that $100 was invested on June 30, 1995 (the date on which the
Company's registration statement under Section 12 of the Exchange Act
became effective) in each of the Company's Common Stock, the Nasdaq
Stock Market (U.S. Companies) Index, and the Nasdaq Insurance Stocks
Index, and that all dividends were reinvested.
* Pursuant to the proxy rules, this section of the Proxy Statement is
not deemed "Filed" with the SEC and is not incorporated by reference into the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1995.
94
<PAGE> 104
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH IIA
Messrs. Spass, Schwarberg and Cooper, directors of the Company, are
employees of IIA and are each the beneficial owner of less than one percent of
IIA's equity securities. Mr. Spass is also an officer and director of IIA.
IIA was acting as advisor to III and SNIG regarding the purchase by III of $10
million of debt securities, including the Voting Notes, in 1992. IIA was paid
$250,000 by the Company during fiscal 1995 for investment banking and financial
consulting services. That payment was made pursuant to a consulting agreement
entered into in 1992 that continues through 1998.
TRANSACTIONS WITH CENTRE AND ITS AFFILIATES
Mr. Germain, a director of the Company, is an officer and director of
Centre and of CentreLine. During 1995, the Company agreed to pay $15 million
to Centre for reinsurance services. Such reinsurance services were canceled
effective January 1, 1996 and no further reinsurance premium will be paid. The
amounts paid to Centre are subject to future reimbursement to the Company in
amounts that will depend upon the performance of the underlying insurance
contracts.
An affiliate of the Company, Superior National Capital, L.P., a
Bermuda limited partnership, issued an additional 83,337 shares of preferred
stock in 1995 for preferred securities dividends to an affiliate of Centre in
connection with the transaction described in Footnote 5 to the Security
Ownership of Certain Beneficial Owners table. See "Company
Information--Security Ownership of Certain Beneficial Owners and
Management--Security Ownership of Certain Beneficial Owners."
STOCK ISSUANCE TO IP
Mr. Spass, a director of the Company, and Mr. Gruber, a director
nominee, are executive officers of the ultimate general partner of each of IP
Delaware and IP Bermuda. If the Stock Issuance is approved and consummated, IP
will acquire 2,124,834 shares of Newly Issued Stock. In addition, each of
Messrs. Spass and Gruber are executive officers of IPA. If the Stock Issuance
is consummated, IPA will receive a transaction fee from the Company of
$625,000. Under certain circumstances, alternative fees would be paid. See
"Proposal No. 1--Terms of the Stock Issuance--Expenses and Fees."
COMPLIANCE WITH SECTION 16(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Exchange Act ("Section 16(a)") requires the
Company's Directors and certain of its officers, and persons who own more than
ten percent of a registered class of the Company's equity securities
(collectively, "Insiders"), to file reports of ownership and changes in
ownership with the SEC. Insiders are required by SEC regulations to furnish
the Company with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it,
or written representations from certain reporting persons that no Forms 5s were
required for those persons, the Company believes that its Insiders complied
with all applicable Section 16(a) filing requirements for fiscal 1995, with the
exception that Form 3s for all officers, directors and ten percent beneficial
owners listed in "--Directors" and "--Executive Officers" and in "Company
Information--Security Ownership of Certain Beneficial Owners and Management"
were not filed on a timely basis.
95
<PAGE> 105
<TABLE>
<CAPTION>
COMPANY INFORMATION
SELECTED FINANCIAL DATA
Six Months Ended June 30, 1996 and 1995 and Years Ended 1995 through 1986
-------------------------------------------------------------------------
(Amounts in thousands, except share and per share amounts.)
Six-Month Period
Ended June 30,
---------------- Operations for the Year Ended December 31,
1996 1995 1995 1994 1993 1992 1991
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Net premiums written $42,796 $46,251 $89,139 $105,946 $154,431 $59,827 $93,742
Net earned premiums 43,033 45,554 89,735 110,418 153,585 55,892 98,119
Net investment income
(excluding capital gains
and losses) 4,244 5,269 10,309 9,014 8,481 5,050 5,436
Net capital gain (loss) 21 (469) (525) 35 1,069 5,752 331
----------------------------------------------------------------------
Total revenues 47,298 50,354 99,519 119,467 163,135 66,694 103,886
----------------------------------------------------------------------
COMPONENTS OF NET INCOME
(LOSS):
Underwriting profit (loss)
(2) 3,204 11,097 12,060 5,014 (382 6,554 (20,912)
Investment income and
capital gains 4,265 4,800 9,784 9,049 9,550 10,802 5,767
Interest (expense) (4,796) (4,876) (9,619) (8,726) (6,22) (1,258) (158)
Other income (expense), net 389 (256) (536) (340) (743) (243) (456)
Federal income taxes
benefit (expense) (630) 5,782 5,849 (4) 2,304 --- 6,538
Preferred securities
(dividends and accretion)
- pre-tax (1,228) (1,095) (2,255) (1,035) --- --- ---
(Loss) from discontinued
operations - pre-tax (3) --- (14,912) (14,912) --- (4,532) (15,606) ---
Extraordinary (loss) - pre-
tax --- --- --- (3,064) (686) --- ---
Cumulative effect of change
in accounting for income
taxes --- --- --- --- 2,297 --- ---
----------------------------------------------------------------------
Net income (loss) $1,204 $540 $371 $894 $1,587 $249 ($9,221)
----------------------------------------------------------------------
PER SHARE:(1)
Income (loss) before items
below - after all taxes $0.42 $3.24 $5.12 $1.45 $1.31 $4.62 ($2.69)
----------------------------------------------------------------------
Preferred securities
(dividends and accretion)
- pre-tax (0.15) (0.21) (.66) (0.30) --- --- ---
(Loss) from discontinued
operations - pre-tax --- (2.87) (4.35) --- (1.32) (4.55) ---
Extraordinary (loss) - pre-
tax --- --- --- (0.89) (0.20) --- ---
Cumulative effect of change
in accounting for income
taxes --- --- --- --- 0.67 --- ---
Net income (loss) $0.27 $0.16 $.11 $0.26 $0.46 $0.07 ($2.69)
RATIOS FROM CONTINUING
OPERATIONS, NET OF
REINSURANCE:
Claim and claim adjustment
expense ratio 52.5% 52.3% 63.1% 71.3% 74.1% 60.7% 95.7%
Underwriting expense ratio 43.3% 30.3% 29.9% 19.6% 18.7% 19.4% 27.9%
Interest and other expense
ratio 10.2% 11.3% 11.3% 8.2% 4.5% 2.7% 0.6%
Policyholder dividends ratio -3.3% -7.0% -6.4% 4.5% 7.4% 8.2% 11.7%
----------------------------------------------------------------------
Continuing operations
combined ratios, net of
reinsurance 102.8% 86.9% 97.9% 103.6% 104.7% 91.0% 135.9%
----------------------------------------------------------------------
PRE-TAX NET INCOME (LOSS)
AS A PERCENT OF NET
EARNED PREMIUMS 4.3% -11.5% -6.1% 0.8% 0.5% 0.4% -16.1%
RATE OF RETURN ON BEGINNING
EQUITY 5.5% 2.7% 0.9% 2.2% 4.1% 0.7% -19.6%
FINANCIAL POSITION:
Total cash and investments
carrying value $157,033 $173,926 $168,360 $176,878 $150,179 $154,953 $82,285
market value 154,628 168,318 170,512 172,706 156,744 154,294 85,463
Total assets 227,039 262,815 244,342 286,776 264,098 291,487 265,033
Long-term debt 7,930 9,130 8,530 9,730 6,743 9,192 ---
Claim and claim adjustment
expense reserves 122,650 156,579 140,774 171,258 171,038 202,634 182,440
Total liabilities 160,836 199,599 179,817 227,622 224,044 253,012 227,025
Preferred securities issued
by affiliate 22,272 19,886 21,045 18,790 --- --- ---
Shareholders' equity 43,931 43,330 43,480 40,364 40,055 38,475 38,003
Book value per share(1) $12.81 $12.63 $12.68 $11.77 $11.68 $11.22 $11.08
Outstanding shares(1) 3,430,373 3,429,873 3,430,373 3,429,873 3,429,873 3,429,873 3,429,873
- - ----------------------
</TABLE>
(1) Adjusted to reflect a four-into-one reverse stock split effective as of
May 24, 1995.
(2) In 1991, several liabilities were revised upward including property and
casualty and workers' compensation claims and claim adjustment expense
of 422.6 million, policyholders dividends of $7.1 million, and employee
severance of 41.2 million. In addition, premiums receivables were
written down by $4.0 million.
(3) The Company's losses from discontinued operations resulted principally
from contractors' and developers' liability business underwritten from
1986 to 1991.
<TABLE>
<CAPTION>
COMPANY INFORMATION
SELECTED FINANCIAL DATA
Six Months Ended June 30, 1996 and 1995 and Years Ended 1995 through 1986
-------------------------------------------------------------------------
(Amounts in thousands, except share and per share amounts.)
Operations for the Year Ended December 31,
1990 1989 1988 1987 1986
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Net premiums written $124,957 $96,656 $75,229 $57,064 $28,942
Net earned premiums 124,114 91,127 71,780 53,108 22,312
Net investment income
(excluding capital gains
and losses) 5,744 4,398 3,245 2,414 792
Net capital gain (loss) (223) 788 (550) (167) 477
-------------------------------------------------------
Total revenues 129,635 96,313 74,475 55,355 23,581
-------------------------------------------------------
COMPONENTS OF NET INCOME
(LOSS):
Underwriting profit (loss)
(2) 3,978 4,994 12,433 4,260 691
Investment income and
capital gains 5,521 5,186 2,695 2,247 1,269
Interest (expense) (478) (603) (570) --- ---
Other income (expense), net) (162) (154) 152 (38 (95)
Federal income taxes
benefit (expense) (1,741) (1,820) (4,175) (1,592) (670)
Preferred securities
(dividends and accretion)
- pre-tax --- --- --- --- ---
(Loss) from discontinued
operations - pre-tax (3) --- --- --- --- ---
Extraordinary (loss) - pre-
tax --- --- --- --- ---
Cumulative effect of change
in accounting for income
taxes --- --- --- --- ---
-------------------------------------------------------
Net income (loss) $7,118 $7,603 $10,535 $4,877 $1,195
-------------------------------------------------------
PER SHARE:(1)
Income (loss) before items
below - after all taxes $2.08 $2.22 $3.14 $1.47 $0.40
-------------------------------------------------------
Preferred securities
(dividends and accretion)
- pre-tax --- --- --- --- ---
(Loss) from discontinued
operations - pre-tax --- --- --- --- ---
Extraordinary (loss) - pre-
tax --- --- --- --- ---
Cumulative effect of change
in accounting for income
taxes --- --- --- --- ---
Net income (loss) $2.08 $2.22 $3.14 $1.47 $0.40
RATIOS FROM CONTINUING
OPERATIONS, NET OF
REINSURANCE:
Claim and claim adjustment
expense ratio 67.9% 63.9% 53.2% 62.7% 63.6%
Underwriting expense ratio 27.9% 27.4% 26.8% 25.9% 30.2%
Interest and other expense
ratio 0.5% 0.8% 0.6% 0.1% 0.4%
Policyholder dividends ratio 1.9% 5.0% 4.4% 4.5% 4.3%
-------------------------------------------------------
Continuing operations
combined ratios, net of
reinsurance 98.2% 97.1% 85.0% 93.2% 98.5%
-------------------------------------------------------
PRE-TAX NET INCOME (LOSS)
AS A PERCENT OF NET
EARNED PREMIUMS 7.1% 10.3% 20.5% 12.2% 8.4%
RATE OF RETURN ON BEGINNING
EQUITY 17.6% 23.7% 51.5% 41.4% 10.9%
FINANCIAL POSITION:
Total cash and investments
carrying value $86,183 $102,193 $64,844 $48,277 $26,079
market value 86,641 102,447 64,109 47,721 26,520
Total assets 235,259 198,307 136,186 91,887 41,414
Long-term debt 2,635 4,500 5,000 --- ---
Claim and claim adjustment
expense reserves 143,890 102,903 68,136 47,258 13,356
Total liabilities 188,293 157,892 104,077 71,412 29,637
Preferred securities issued
by affiliate --- --- --- --- ---
Shareholders' equity 46,966 40,415 32,109 20,475 11,777
Book value per share(1) $13.70 $11.78 $9.58 $6.16 $3.90
Outstanding shares(1) 3,429,323 3,430,973 3,351,578 3,326,047 3,021,875
-------------------------------------------------------
- - ----------------------
</TABLE>
<PAGE> 106
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED
JUNE 30, 1996
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---------- ----------
ASSETS (Unaudited) (*)
<S> <C> <C>
Investments:
Bonds and notes:
Available-for-sale, at market (cost: 1996, $52,384; 1995, $41,800) $ 51,543 $ 42,053
Equity securities, at market
Common stock (cost: $686; 1996 and 1995) 643 689
Funds withheld from reinsurers, at amortized cost
Bonds and notes, at amortized cost (market: 1996, $84,954; 1995, $117,073) 87,359 114,921
Invested cash (certificates of deposit and other short-term instruments) 1,624 --
Invested cash (certificates of deposit and other short-term instruments) 11,994 6,045
Restricted investment 1,580 1,700
------------ ------------
TOTAL INVESTMENTS 154,743 165,408
Cash (Restricted cash: 1996, $1,030; 1995, $2,686) 2,290 2,952
Reinsurance recoverable 32,054 38,892
Premiums receivables (less allowance for doubtful
accounts: 1996, $300; 1995, $500) 15,513 14,724
Deferred policy acquisition costs 3,062 2,780
Income taxes 9,847 10,085
Other assets 9,530 9,501
------------ ------------
TOTAL ASSETS $ 227,039 $ 244,342
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Claims and claim adjustment expenses $ 122,650 $ 140,774
Unearned premiums 9,633 10,220
Long-term debt 7,930 8,530
Policyholder dividends 6,187 8,094
Repurchase transaction 3,553 --
Accounts payable and other liabilities 10,883 12,199
------------ ------------
TOTAL LIABILITIES 160,836 179,817
PREFERRED SECURITIES ISSUED BY AFFILIATE; authorized
1,100,000 shares; issued and outstanding 966,860 shares 22,272 21,045
in 1996 and 922,137 shares in 1995
Shareholders' Equity:
Common stock, no par value; authorized 25,000,000 shares;
issued and outstanding 3,430,373 shares in 1996 and 1995 15,943 15,943
Unrealized gain (loss) on investments, net of taxes (584) 169
Paid in capital - warrants 2,206 2,206
Retained earnings 26,366 25,162
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 43,931 43,480
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 227,039 $ 244,342
============ ============
</TABLE>
* Derived from audited financial statements.
See accompanying Notes to Condensed Consolidated Financial Statements.
97
<PAGE> 107
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES:
Premiums written, net of reinsurance ceded $24,153 $21,689 $42,796 $46,251
(Increase) decrease in net unearned premiums (17) 631 237 (697)
------- ------- ------- -------
Net premiums earned 24,136 22,320 43,033 45,554
Net investment income 2,074 2,034 4,265 4,800
------- ------- ------- -------
TOTAL REVENUES 26,210 24,354 47,298 50,354
EXPENSES:
Claims and claim adjustment expenses, net of
reinsurance recoveries 12,325 7,608 22,600 23,842
Commissions, net of reinsurance commissions 2,783 3,251 5,258 6,208
Policyholder dividends (1,705) (3,801) (1,406) (3,178)
Interest expense 2,268 2,786 4,796 4,876
General and administrative expenses
Underwriting 9,652 4,273 13,377 7,585
Other (519) 150 (389) 256
------- ------- ------- -------
TOTAL EXPENSES 24,804 14,267 44,236 39,589
------- ------- ------- -------
Income before income taxes and preferred
securities dividends and accretion and 1,406 10,087 3,062 10,765
discontinued operations
Income tax expense (benefit) 475 (530) 1,048 (340)
------- ------- ------- -------
Income before preferred securities dividends and
accretion and discontinued operations 931 10,617 2,014 11,105
Preferred securities dividends and accretion, net (405) (361) (810) (723)
of income taxes
Loss from operation of discontinued property
and casualty operations, net of income taxes -- (9,842) -- (9,842)
------- ------- ------- -------
NET INCOME $ 526 $ 414 $ 1,204 $ 540
======= ======= ======= =======
EARNINGS PER COMMON AND DILUTIVE COMMON
EQUIVALENT SHARES:
Income before preferred securities dividends and
accretion, and discontinued operations $ 0.20 $ 3.10 $ 0.42 $ 3.24
Preferred securities dividends and accretion (0.8) (0.11) (0.15) (0.21)
Loss from discontinued property and casualty -- -- (2.87)
operations
------- ------- ------- -------
NET INCOME $ 0.12 $ 0.12 $ 0.27 $ 0.16
======= ======= ======= =======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
98
<PAGE> 108
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Net
Unrealized
Gain (loss) Paid in Total
Common on Capital- Retained Shareholders'
Stock Investments Warrants Earnings Equity
---------- ----------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 15,943 $ 169 $ 2,206 $ 25,162 $ 43,480
Net income -- -- -- 1,204 1,204
Change in unrealized gain (loss)
on investments, net of taxes -- (753) -- -- (753)
---------- ------- -------- --------- ----------
Balance at June 30, 1996 $ 15,943 $ (584) $ 2,206 $ 26,366 $ 43,931
========== ======= ======== ========= ==========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
99
<PAGE> 109
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTH ENDED JUNE 30, 1996 AND 1995
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------
1996 1995
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,204 $ 540
--------- ----------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Amortization of bonds and preferred stock (386) (1,898)
(Gain)/loss on sale of investments (21) 469
(Gain) on sale of funds withheld investments (2,424) (203)
Preferred securities dividends and accretion 1,227 1,095
Decrease in reinsurance receivables 6,838 15,540
(Increase) decrease in premiums receivables (789) 5,297
(Increase) in deferred policy acquisition costs (282) (734)
Decrease (increase) in income taxes 626 (4,065)
(Decrease) in claims and claim adjustment expense reserves (18,124) (14,678)
(Decrease) increase in unearned premium reserves (587) 471
(Decrease) in policyholder dividends payable (1,907) (5,143)
(Decrease) in discontinued operations -- (4,223)
(Decrease) in other liabilities, net of other assets (1,345) (129)
--------- ----------
Total adjustments (17,174) (8,201)
--------- ----------
Net cash (used in) operating activities (15,970) (7,661)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Retirement of long-term debt (600) (600)
Proceeds from repurchase transaction 3,553 --
--------- ----------
Net cash provided by (used in) financing activities 2,953 (600)
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of bonds and notes:
Investments available-for-sale (28,960) (3,436)
Investment funds withheld from reinsurers (67,428) (27,631)
Investments allocated to discontinued operations -- (1,581)
Sales of bonds and notes: Investments available-for-sale 17,363 13,985
Maturities of bonds and notes: Investments available-for-sale 798 201
Sales and maturities of bonds and notes:
Funds withheld from reinsurers 98,011 33,221
Net (increase) in invested cash (5,805) (5,942)
Net (increase) in invested cash for funds withheld from reinsurers (1,624) --
--------- ----------
Net cash provided by investing activities 12,355 8,817
--------- ----------
Net increase (decrease) in cash (662) 556
Cash at beginning of period 2,952 2,533
--------- ----------
Cash at end of period $2,290 $3,089
========= ==========
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes $ 4 $ 4
========= ==========
Cash paid during the year for interest $ 331 $ 441
========= ==========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
100
<PAGE> 110
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(Unaudited)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A.1 BASIS OF PRESENTATION
Superior National Insurance Group, Inc. ("SNIG") is a holding company
that, through its wholly owned subsidiary, Superior National Insurance Company
("SNIC"), is engaged in writing workers' compensation insurance principally in
the State of California and, until September 30, 1993, was engaged in writing
commercial property and casualty insurance. The "Company" refers to SNIG and
its subsidiaries.
The accompanying unaudited condensed consolidated financial statements
of 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 footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments, including normally occurring accruals,
considered necessary for a fair presentation have been included. Certain
reclassifications of prior year amounts have been made to conform with the 1996
presentation. Operating results for the six months ended June 30, 1996 are not
necessarily indicative of the results to be expected for the year ended
December 31, 1996. For further information, refer to the consolidated
financial statements and footnotes thereto included in SNIG's annual report on
Form 10-K for the year ended December 31, 1995.
A.2 EARNINGS PER SHARE ("EPS")
Earnings per common and dilutive common equivalent shares for the
three and six months ended June 30, 1996 and 1995 are based on the average
number of common shares outstanding during each period and assume conversion of
all stock options and warrants which are common stock equivalents. Common
share equivalents included in the computation represent shares issuable upon
assumed exercise of stock options and warrants which would have a dilutive
effect. If the calculation of income per share including all common stock
equivalents is antidilutive, such common stock equivalents are excluded from
the EPS amounts. The number of shares used in the EPS calculations are
5,318,118 shares for the three and six months ended June 30, 1996, and
3,429,873 shares for the three and six months ended June 30, 1995.
The number of shares used in the EPS calculation increased
substantially during the second quarter primarily due to the dilutive effect of
options becoming "in the money" as a result of the increase in the market value
of Common Stock. See "--Market Price of and Dividends on Common Equity and
Related Shareholder Matters."
A.3 CLAIMS AND CLAIM ADJUSTMENT EXPENSES RESERVES
The liability for unpaid claims and claim adjustment expenses is based
on an evaluation of reported losses and on estimates of incurred but unreported
losses. The reserve liabilities are determined using adjusters' individual
case estimates and statistical projections, which can be affected by many
external factors that are difficult to predict, including changes in the
economy, trends in medical treatments and litigation, changes in regulatory
environment, medical services, and employment rights. The liability is
reported net of estimated salvage and subrogation recoverable. Adjustments to
the liability resulting from subsequent developments or revisions to the
estimate are reflected in results of operations in the period during which such
adjustment become known. While there can be no assurance that reserves at any
given date are adequate to meet SNIG's obligations, the amounts reported on the
balance sheet are management's best estimate of that amount.
101
<PAGE> 111
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information that
management believes to be relevant to an understanding of the Company's
consolidated results of operations and financial condition. The discussion
should be read in conjunction with the consolidated financial statements and
the notes thereto.
OVERVIEW
The Company's net income was $1,204,000 for the six months ended June
30, 1996 as compared to $540,000 for the same period in 1995. Net income per
share for the six months ended June 30, 1996 was $0.27 versus $0.16 in 1995.
Income before preferred securities accretion, discontinued operations, and
extraordinary loss was $2,014,000 for the six months ended June 30, 1996 versus
$11,105,000 in 1995. The decrease in the 1996 period is due principally to
favorable workers' compensation reserve development and adjustments to
policyholder dividend reserves totalling $9.1 million recorded in the 1995
period. Income before preferred securities accretion, discontinued operations,
and extraordinary loss, excluding the above discussed adjustments, was
$2,014,000 for the six months ended June 30, 1996 as compared to $2,005,000 for
the comparable period in 1995. The improvement in the 1996 period is due
primarily to net claims and claim adjustment expense margins on the 1996
accident year.
The Company's net income was $371,000 for the year ended December 31,
1995, versus $894,000 in 1994. Net income per share was $0.11 for 1995 versus
$0.26 in 1994. Income before preferred securities accretion, discontinued
operations, and extraordinary loss was $11,701,000 for 1995 versus $3,599,000
in 1994, due principally to favorable adjustments relating to prior year income
effects totaling $13.7 million, consisting of favorable workers' compensation
reserve development, adjustments to policyholder dividend reserves, and tax
benefits resulting from an IRS settlement. Net income for both 1995 and 1994
was impacted by extraordinary items, including a $9,842,000 net of tax charge
to discontinued operations in the second quarter of 1995, and $2,022,000 net of
tax charge associated with the retirement of the Company's 1992 debt, effective
June 30, 1994.
Net income from 1995 accident and policy year operations was generally
lower versus 1994 due to decreased premium production before and after
reinsurance, increased commission expense caused by reductions in ceded
commissions, increased overhead expenses, and accrued preferred securities
accretion.
The operating results of the workers' compensation insurance industry
are subject to significant fluctuations from quarter to quarter and from year
to year due to the effect of competition on pricing, the frequency and severity
of losses incurred in connection with general economic conditions and changes
in regulatory environment. Fluctuations in interest rates also have a
significant impact on the Company's operating results, as over 68% of the
Company's total assets were investments at June 30, 1996 and December 31, 1995.
SNIC is domiciled in the State of California and prepares its
statutory financial statements in accordance with accounting practices
prescribed or permitted by the DOI. SNIC received written approval from the
DOI as to the accounting for certain aspects of its Centre aggregate excess of
loss contracts and the accounting of the assets of its subsidiary, Western
Select Service Corp. See Note 10 to the Consolidated Financial Statements.
In 1994, after the Company's decision to withdraw from the property
and casualty markets late in 1993, the Company's management focused its effort
on its workers' compensation operations. Also during 1994, several major
financing transactions were completed as discussed under "--Financial
Condition," below.
In September 1993, in addition to discontinuing its property and
casualty business, the Company also discontinued writing workers' compensation
insurance through its Calabasas Branch due to its poor underwriting results.
Management attributed this situation to the prolonged recession in Southern
California as well as the litigious nature of the area which, in addition to
increasing overall claim costs, had a greater prevalence of fraudulent claims
than other geographical areas in California. Management does not expect the
adverse developments experienced during 1993 and 1992 on prior years' Southern
California business to continue in the future. As of June 30, 1996, the
discontinued Calabasas Branch continued to "run off" in accordance with
management's expectations.
102
<PAGE> 112
During the first half of 1995, the Company re-entered the Southern
California market with a new marketing and underwriting team targeting
different producers, insureds and industries. The effect of this new operation
has not been material, with net premiums written totalling $3.7 million, less
than 4% of the total premium written, for 1995. Net premiums written for the
first six months of 1996 were $3.1 million, indicating continued growth in the
Southern California market.
FINANCIAL CONDITION
Total assets decreased $17.3 million during the first six months of
1996, to reach $227.0 million at June 30, 1996. The decrease was primarily due
to decreases in reinsurance recoverables of $6.8 million and investments of
$10.7 million.
Reinsurance recoverable on unpaid losses decreased $6.8 million in the
first half of 1996 due to the following factors: (a) funds withheld to Centre
increased by $12.1 million, consisting of the 1996 interest on funds withheld
of $4.4 million, costs related to settlement of funds withheld associated with
a reinsurance contract in the amount of $5.3 million, and return of Centre's
capital gains of $2.4 million, and (b) $5.3 million of claims activity.
Total liabilities decreased $19.0 million during the first six months
of 1996, reaching $160.8 million at June 30, 1996. The decrease was due to
decreases in claims and claim adjustment expenses reserves of $18.1 million and
in policyholder dividends liability of $1.9 million. These decreases were
partially offset by an increase in repurchase transaction balance of $3.6
million as of June 30, 1996. The accumulative effect of miscellaneous charges
in other liability accounts was $2.6 million.
Total assets decreased by $41.3 million during 1995 to end the year at
$244.3 million. The decrease was primarily due to decreases in reinsurance
recoverables of $28.2 million, investments of $8.9 million, and premiums
receivable of $6.9 million.
Reinsurance recoverable on unpaid losses decreased $28.2 million in
1995 due to the following factors: (a) an additional $9.0 million reinsurance
recoverable was contributed to discontinued operations due to adverse loss
development, (b) funds withheld to Centre increased by $13.7 million,
consisting of the 1995 interest on funds withheld of $8.8 million and return of
Centre's capital gains of $4.9 million, and (c) a decrease of ceded reserves
for the 1995 cession. The decrease in investments was due primarily to cash
used in claims payments and operations. Premiums receivable decreased due to
lower writings in 1995 and improved collection efforts by the Company.
Policyholder dividends liability decreased $9.8 million during 1995,
due to 1995 dividend payments to policyholders of $4.1 million and adjustment
to policyholders dividend reserves of $5.7 million in response to the market
change in pricing from a statutory basis to an open rating basis. At June 30,
1996, the policyholder dividends liability had decreased an additional $1.9
million. The decline in policyholder dividends liability was due to a
reduction of $1.4 million in the ultimate liability to policyholders and the
payment of $500,000 in such dividends. On September 1, 1996, the Company
declared a moratorium on policyholder dividend payments, which will delay the
payment of the ultimate liability.
RESULTS OF OPERATIONS
Premiums have been declining due both to strategic considerations,
which are intended ultimately to improve income and return on equity, and
external competitive factors, which may depress both revenue and income.
Regardless of premium decreases, management is committed to maintaining
operating margins by avoiding exchanging margins for market share.
During the six months ended June 30, 1996, underwriting profit from
continuing operations was $3.2 million as compared to $11.1 million during the
first six months of 1995. The change in underwriting results for the first six
months of 1996 is attributable to a $6 million decrease in workers'
compensation reserves and a $3.1 million reduction in policyholder dividends
recorded in the first six months of 1995. The underwriting results for the
first six months of 1996 also included $5.3 million in accrued costs related to
the settlement of funds
103
<PAGE> 113
withheld amounts associated with a reinsurance contract, which was partially
offset by a $2 million reduction in policyholder dividends reserves.
Underwriting profits for the six months ended June 1996 and 1995, excluding the
above discussed adjustments, were $6.5 million and $2.0 million, respectively.
The improvement of $4.5 million in the first six months of 1996 is due
primarily to improved net claims and claim adjustment expense margins on the
1996 accident year.
Over the past three years, the underwriting results have fluctuated
significantly. The 1995 and 1994 years returned an underwriting profit of
$12.1 million and $5.0 million, respectively, compared to an underwriting loss
of $0.4 million in 1993. The 1995 improvement was due to decreases in workers'
compensation reserves of $2.2 million and policyholders dividend reserves of
$5.7 million. These decreases were partially offset by increased underwriting,
overhead, and general and administrative expenses. The 1994 improvement was
due primarily to the Company's plan, effective late 1993, to substantially
curtail its writings in Southern California due to increased frequency and
severity of claims incurred resulting from the prolonged recession and
increased fraudulent claim activities in Southern California. In addition, the
1994 underwriting results also benefitted from the re-estimation of prior
years' loss reserves.
During the second quarter of 1995, the Company received a $1.7 million
tax refund from the IRS, which confirmed the Company's NOL tax position.
Accordingly, the valuation allowance that was established with the adoption of
Statement of Financial Accounting Standards 109 in 1993 is no longer deemed
necessary. The Company's management has reviewed its deferred tax asset
balance and concluded it is more likely than not that the entire deferred tax
asset will be realized. Management's conclusion is based on the utilization of
its NOLs and its expectation that sufficient taxable income will be generated
in future periods. The Company is expected to be profitable in the future and
has demonstrated such for each of the last three years through December 31,
1995 and the first six months of 1996. During the second quarter of 1995, the
Company recorded a tax benefit of $4.0 million from the change in valuation
allowance.
During the second quarter of 1995, the Company increased by
approximately $15 million its reserves for discontinued operations for 1994 and
prior years. This increase in claims and claim adjustment expenses ("LAE")
from the original estimate at the measurement date resulted from increased
frequency and severity of claims incurred from those years, relative to
previous expectations, which in turn caused an increase in the estimated
ultimate claims and LAE reserves related to 1994 and prior years.
104
<PAGE> 114
SELECTED FINANCIAL DATA AS REPORTED FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND
1995
The following selected financial data and analysis provide an
assessment of SNIG's financial results for the six months ended June 30, 1996
as compared to the six months ended June 30, 1995. Certain prior period
amounts have been reclassified to conform to the current period presentation.
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------------
(Dollars in thousands) 1996 1995
- - --------------------- --------------- -------------
<S> <C> <C>
Gross premiums written $ 47,129 $ 49,882
Net premiums written $ 42,796 $ 46,251
Net premiums earned $ 43,033 $ 45,554
Less: Net claims and claim adjustment expenses (22,600) (23,842)
Underwriting expenses (18,635) (13,793)
Policyholder dividends 1,406 3,178
-------------- --------------
Underwriting profit 3,204 11,097
Net investment income 4,244 5,269
Net investment gains (losses) 21 (469)
Interest expense (4,796) (4,876)
Other 389 (256)
-------------- --------------
Income before income taxes 3,062 10,765
Income tax expense (benefit) 1,048 (340)
-------------- --------------
Income before preferred securities dividends and accretion and
discontinued operations 2,014 11,105
Preferred securities dividends and accretion, net of taxes (810) (723)
Loss from operation of discontinued property and casualty, net
of taxes - (9,842)
-------------- --------------
Net Income $ 1,204 $ 540
============== ==============
Underwriting ratios (GAAP Basis):
Net claims and claim adjustment expense ratio 52.5% 52.3%
Underwriting expense ratio 43.3% 30.3%
Policyholder dividends ratio (3.3%) (7.0%)
-------------- --------------
Combined ratio 92.5% 75.6%
=============== ===============
</TABLE>
Gross premiums written decreased $2.8 million or 6% in the first six
months of 1996 as compared to the same period in 1995. Although premiums
written for the second quarter of 1996 were higher than the prior year quarter,
the premium shortfall of $5.6 million during the first quarter of 1996 as
compared to the prior year quarter, caused the year-to-date premiums for 1996
to fall below last year's level. The decrease was expected as a result of the
lack of mandated rates due to the replacement of California's minimum rate law
by an open rating system
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<PAGE> 115
effective January 1, 1995. The competitive market conditions have been further
intensified by certain carriers who are willing to underwrite business at rates
that in management's opinion are inadequate. For the six months ended June 30,
1996, estimated annual premium decreased 5% as compared to the corresponding
period in 1995, but production measured in policy counts associated to those
premiums increased by 23%. The Company's average policy size decreased 27% to
$9,481 as of June 1996 from $13,020 as of June 1995. While it appears the
decline in premium volume has reversed, because of continued volatility of
premium pricing, regulatory changes, or changes in competition, it is uncertain
whether this stabilization of premium rates will be continued. The Company
chooses not to sacrifice margin and shareholder return for the sake of market
share, and the Company will remain cautious in its premium production
consistent with its disciplined underwriting philosophy. The Company will
remain focused on small to medium size customers, employing a pricing strategy
adequate to produce a reasonable profit. SNIC believes the rates it has filed
with the DOI are adequate, but it is unable to predict the degree to which such
rates are competitive in the marketplace given the intense competition among
insurers.
Net premiums written decreased $3.5 million or 7% in the first six
months of 1996 compared to the prior year period. The decrease in net premiums
written is reflective of the decrease in gross premiums written as discussed
above.
Net premiums earned decreased $2.5 million or 6% in the first six
months of 1996 compared to the prior year period. The decrease in net premiums
earned reflects the decrease in net premiums written, as described above.
Net claims and claim adjustment expenses decreased $1.2 million or 5%
to $22.6 million in the first six months of 1996 from $23.8 million in the same
period in 1995. The net claims and claim adjustment expense ratio increased to
52.5% in the first six months of 1996 from 52.3% in the same period of 1995.
However, the 1995 claims and claim adjustment expenses include a $6 million
decrease in the estimated ultimate claims and claim adjustment expenses on
accident years prior to 1995 as a result of continued decreases in Company's
estimates of frequency and severity of claims incurred for those years. The
net claims and claim adjustment expense ratio, excluding the $6 million
favorable development, was 65.5% for the six months ended June 1995, as
compared to 52.5% for the same period in 1996. The 13.0 percentage point
improvement in 1996 (after excluding the 1995 favorable development adjustment)
was due primarily to improved net claims and claim adjustment expense margins
on the 1996 accident year.
Underwriting expenses, excluding policyholder dividends, increased
$4.8 million or 35% in the first six months of 1996 as compared to the same
period in 1995. The increase was due primarily to a $5.3 million adjustment
recorded in the second quarter of 1996 for accrued costs related to the
settlement of funds withheld amounts associated with a reinsurance contract.
Underwriting expenses for the first six months of 1996, excluding the $5.3
million in accrued costs, were $13.3 million as compared to $13.8 million for
the same period in 1995. The underwriting expense ratio, excluding the $5.3
million in accrued costs, increased to 30.9% in the first six months of 1996
from 30.3% for the corresponding period in 1995, due primarily to a decrease in
premium production without a commensurate decrease in general and
administrative expenses.
Policyholder dividends reductions in the first six months of 1996
increased income by $1.4 million as compared to $3.2 million for the same
period in 1995. Prior to open rating, policyholder dividends served both as an
economic incentive to employers for safe operations and as a means of price
differentiation. As a result of consumers' preference for the lowest net price
at the policy's inception under open rating, dividend paying is no longer a
significant factor in the marketing or selling of workers' compensation
insurance in California. Consequently, the Company has adjusted its
policyholder dividends reserves downward by $2.0 million in the first six
months of 1996 and $3.1 million in the corresponding period of 1995. The
Company is continuing to observe, analyze and react to the issue of
policyholder dividends in the context of varying pricing philosophies emerging
from open rating.
Underwriting profit from continuing operations decreased $7.9 million
to $3.2 million in the first six months of 1996 from $11.1 million in the same
period in 1995. The change in underwriting results for the first six months of
1996 is attributable to a $6 million decrease in workers' compensation reserves
and a $3.1 million reduction in policyholder dividends recorded in the first
six months of 1995. The underwriting results for the first six months
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<PAGE> 116
of 1996 also included $5.3 million in accrued costs related to the settlement
of funds withheld amounts associated with a reinsurance contract, which was
partially offset by a $2 million reduction in policyholder dividends reserves.
Underwriting profits for the six months ended June 1996 and 1995, excluding the
above discussed adjustments, were $6.5 million and $2.0 million, respectively.
The improvement of $4.5 million in the first six months of 1996 is due
primarily to improved net claims and claim adjustment expense margins on the
1996 accident year. The improved underwriting results also reflect the
Company's focus on maintaining underwriting margins by controlling writings
that are not within the Company's underwriting guidelines, curtailing writings
in unprofitable agencies, and emphasizing loss control management.
Net investment income decreased $1.0 million or 19% in the first six
months of 1996 as compared to the same period in 1995. The decrease is
attributable to a decrease in the average investable assets of $12.5 million
and a decline in the average portfolio investment yield as a result of
generally lower market interest rates in the first six months of 1996 as
compared to the same period in 1995.
A summary of net investment income, excluding capital gains (losses),
for the six months ended June 30, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
Six months ended June 30,
---------------------------
(Dollars in thousands) 1996 1995
------------ ------------
<S> <C> <C>
Interest on debt $ 4,151 $ 4,695
instrument
Interest on invested cash 332 746
------------ ------------
Total investment income 4,483 5,441
Investment expense 239 172
------------ ------------
Net investment income $ 4,244 $ 5,269
============ ============
</TABLE>
The distribution of SNIG's consolidated investment portfolio is as
follows (in thousands):
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
----------------------- ---------------------
Amortized Market Amortized Market
--------- ------ ---------- ------
Available for Sale: Cost Value Cost Value
------------------- ------------- ------------ ----- -----
<S> <C> <C> <C> <C>
U.S. Government
Agencies & Authorities $33,922 $33,427 $22,549 $22,524
Collateralized Mortgage Obligations 10,250 9,858 10,753 10,779
Corporate Instruments 7,112 7,131 7,398 7,612
State & Political Subdivisions 1,100 1,127 1,100 1,138
------------- ------------ ------- --------
Total Available for Sale $52,384 $51,543 $41,800 $42,053
============= ============ ======= =======
</TABLE>
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
---------------------- ---------------------
Amortized Market Amortized Market
--------- ------ --------- ------
Funds Withheld from Reinsurers Cost Value Cost Value
------------------------------ ---- ----- ----- -----
<S> <C> <C> <C> <C>
U.S. Government
Agencies & Authorities $80,140 $78,167 $103,496 $105,554
Collateralized Mortgage Obligations 2,001 2,001 2,306 2,316
Special Revenue - - 2,118 2,183
Corporate Instruments 5,218 4,786 7,001 7,020
------- -------- --------- ---------
Total Bonds and Notes 87,359 84,954 114,921 117,073
Invested Cash 1,624 1,624 - -
------- -------- --------- ---------
Total Funds Withheld From Reinsurers $88,983 $ 86,578 $114,921 $117,073
======= ======== ======== ========
</TABLE>
107
<PAGE> 117
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
---------------------------- ----------------------------
Market Market
Equity Securities Cost Value Cost Value
- - --------------------------- ------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Corporate $ 686 $ 643 $ 686 $ 689
------------- ------------- ------------- -----------
Total $ 686 $ 643 $ 686 $ 689
============= ============= ============= ===========
</TABLE>
The Company's management monitors the matching of assets and
liabilities and attempts to maintain its investment duration at the mid- point
of the length of its net claim and claim adjustment expenses payout pattern.
Investment duration is the weighted average measurement of the current maturity
of a fixed income security, in terms of time, of the present value of the
future payments to be received from that security. However, in selecting
assets to purchase for its investment portfolio, the Company considers each
security's modified duration and the effect of that security's modified
duration on the portfolio's overall modified duration. Modified duration is a
measurement that estimates the percentage change in market value of an
investment for a small change in interest rates. The modified duration of
fixed maturities at June 30, 1996 was 2.38 years compared to 4.69 years at
December 31, 1995. At June 30, 1996, 98% of the carrying values of investments
in the fixed maturities portfolio were rated as investment grade by the
Securities Valuation Office of the National Association of Insurance
Commissioners.
Interest expense for the first six months of 1996 was $4.8 million as
compared to $4.9 million for the same period in 1995. The decrease of $0.1
million was due to lower interest expense on the bank term loan as a result of
principal paydown.
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<PAGE> 118
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Selected financial data as reported for the year ended December 31, 1995 and
1994 are presented below.
<TABLE>
<CAPTION>
Fiscal Year Ended
December 31,
---------------------------
1995 1994
------------- ------------
(Dollars in thousands)
<S> <C> <C>
Gross premiums written $ 96,122 $ 134,769
Net premiums written 89,139 105,946
Net premiums earned 89,735 110,418
Claims and claim adjustment expense 56,605 78,761
Underwriting expenses 26,812 21,660
Policyholder dividends (5,742) 4,983
Underwriting profit 12,060 5,014
Net investment income 9,784 9,049
Underwriting ratios (GAAP Basis)
- - --------------------------------
Claims and claim adjustment expense 63.1% 71.3%
ratio
Underwriting expense ratio 29.8% 19.7%
Policyholder dividends ratio (6.4)% 4.5%
------------- ------------
Combined ratio 86.5% 95.5%
============= ============
</TABLE>
Underwriting profit from continuing operations increased $7.0 million
for the year ended December 31, 1995. The improvement was primarily due to
$7.8 million in underwriting profit attributable to a $2.2 million decrease in
workers' compensation reserves and a $5.7 million reduction in policyholder
dividends. In 1995, the Company, based upon internally developed estimates,
decreased workers' compensation reserves by $2.2 million due to continued
favorable loss reserve development on accident years prior to 1995. The
Company's estimates are consistent with reserve estimates of its outside
independent actuaries. Also, in 1995, the Company adjusted its reserves for
policyholder dividends downward by $5.7 million. The Company will continue to
observe, analyze and react to the issue of policyholder dividends in the
context of varying pricing philosophies emerging from the transition of a
statutory system to an open rating system effective January 1, 1995.
Underwriting results for the year ended December 31, 1995, excluding the usual
items discussed earlier, decreased $0.9 million from 1994 results due primarily
to decreased premium production not commensurate with the decrease in
commission and overhead expenses.
Gross premiums written decreased $38.6 million or 29% in 1995 from
1994. The significant decrease in premium production was due to competitive
effects of the open rating system in California that replaced California's
minimum rate law effective January 1, 1995. In 1995, production measured in
policy counts was 8% higher than the 1994 period, but the estimated annual
premium associated with those policies was down 26%. The Company's strategy is
to continue to focus on profitable operating margins first and market share
second. The Company is making strenuous efforts to increase production,
subject to the constraints of sound underwriting standards, and to reduce the
Company's fixed and semi-fixed expense ratios commensurate with premium levels.
The Company will pursue new markets and distribution channels to increase
market share in profitable niches, such as Phoenix, Arizona, where the Company
commenced operations October 1, 1995.
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<PAGE> 119
Net premiums written decreased $16.8 million or 16% in 1995 from 1994.
The decrease in net premiums written is reflective of the decrease in gross
premiums written as discussed above, but was partially offset by a decrease in
ceded premiums of $21.8 million for the twelve months ended December 31, 1995.
The decrease in ceded premiums of $20.9 million was related to a reduction in
the ceding rate from 20% in 1994 to 5% in 1995 in the quota-share contract with
Zurich Reinsurance Centre ("ZRC") and lower direct premium production in 1995
compared to 1994.
Net premiums earned decreased $20.7 million or 19% in 1995 from 1994.
The decrease in net premiums earned reflects the decrease in net premiums
written described above.
Claims and claim adjustment expense decreased $22.2 million or 28% in
1995 from 1994. The claims and LAE ratio decreased 8.2 percentage points to
63.1% in 1995 from 71.3% in 1994. The 1995 claims and LAE include a $2.2
million decrease in the estimated ultimate claims and LAE on accident years
prior to 1995 as a result of continued decreases in the Company's estimates of
frequency and severity of claims incurred for those years. The Company's
estimates are consistent with those of its outside actuaries. This favorable
development provided 2.5 percentage points improvement in 1995. The remaining
decrease of 5.7% in claims and LAE ratio was due to the decline in frequency
and severity of the reporting claims to the Company that continued through the
1995 accident year.
Underwriting expenses, excluding policyholder dividends, increased
$5.2 million or 24% in 1995 from 1994. The increase was primarily due to a
$4.7 million decrease in ceding commissions in 1995 from the quota-share
contract with ZRC offset, in part, by a decrease in direct commission expense
of $3.2 million due to lower premium production. The remaining increase in
underwriting expenses was due to higher general and administrative expenses in
1995.
Policyholder dividends decreased $10.7 million in 1995 from 1994. The
decrease was primarily due to a $5.7 million reduction in the policyholder
dividend accrual in 1995 compared to a policyholder dividend accrual of $5.1
million in 1994. The Company is continuing to observe, analyze and react to
the issue of policyholder dividends in the context of varying pricing
philosophies emerging from open rating.
Net investment income increased $0.7 million or 8.1% for the year
ended December 31, 1995. Of the $0.7 million increase, $0.1 million was
attributable to a 10 basis point increase in the investment yield to 5.70% for
the twelve months of 1995 from 5.60% for the 1994 period, resulting from
general increases in interest rates beginning during the second half of 1994.
The remaining $0.6 million increase occurred as a result of a 6.3% increase in
average investible assets at December 31, 1995 versus December 31, 1994.
110
<PAGE> 120
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Selected financial data as reported for the fiscal year ended December 31, 1994
and 1993 are presented below.
<TABLE>
<CAPTION>
Fiscal Year Ended
December 31,
--------------------------
1994 1993
------------ -----------
(Dollars in thousands)
<S> <C> <C>
Gross premiums written $ 134,769 $ 157,986
Net premiums written 105,946 154,431
Net premiums earned 110,418 153,585
Claims and claim adjustment expense 78,761 113,817
Underwriting expenses 21,660 28,778
Policyholder dividends 4,983 11,371
Underwriting profit (loss) 5,014 (381)
Net investment income 9,049 9,550
Underwriting ratios (GAAP Basis)
- - --------------------------------
Claims and claim adjustment expense ratio 71.3% 74.1%
Underwriting expense ratio 19.7% 18.7%
Policyholder dividends ratio 4.5% 7.4%
------------ -----------
Combined ratio 95.5% 100.2%
============ ===========
</TABLE>
Gross premiums written decreased 14.7% to $134,769,000 in 1994 from
$157,986,000 in 1993. The decrease in premiums written is attributable to
discontinued writings in Southern California, which account for a $10.6 million
decrease, as well as decreases in minimum rates mandated by the California
state legislature and the DOI. Average rate level decreases in 1994 of
approximately 16% contributed approximately $25.5 million of the decline in
premiums. Partially offsetting these decreases was an increase in new business
of $12.9 million.
Net premiums earned decreased 28% to $110,418,000 in 1994 from
$153,585,000 in 1993. The 20% quota-share cession of $25,875,000 of premium to
ZRC in 1994 (versus none in 1993) and the decrease in direct premiums written
(described above) account for 16 percentage points and 12 percentage points,
respectively, of the total 28% decrease in net premiums earned. See
"--Business--Reinsurance," below.
Net claims and claim adjustment expense decreased 31% to $78,761,000
in 1994 from $113,817,000 in 1993. Of the total decrease, $8.4 million (or
24%) was due to the discontinued Calabasas Branch. The claims and claim
adjustment expense ratio as a percentage of net earned premium decreased
slightly to 71.3% in 1994 from 74.1% in 1993. The improvement in net claims
and claim adjustment expenses was the net result of a significant decrease in
claim severity and a modest decline in new indemnity claim frequency. 1994
claims and claim adjustment expenses were favorably impacted by the
re-estimation of loss reserves for the 1993 and 1992 accident years. In 1993,
SNIC experienced significant adverse development on 1992 accident year claims.
In addition to adjusting the 1992 accident year claims estimates to levels
indicated by 1990 and 1991 accident year experience, SNIC also established
initial reserves for the 1993 accident year above the level of initial reserves
established for prior years. In hindsight from 1995, management
under-estimated the favorable effects of workers' compensation law reforms
passed by the California legislature in July 1993 and the stabilization of the
California recession, and overstated the projected accident year 1992 adverse
development and the initial estimate of accident year 1993
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<PAGE> 121
claims. See "--Business--Regulation," below. The $25.8 million of adverse
development actually recorded in 1993 is currently re-estimated as $12.8
million.
Underwriting expense, excluding policyholder dividends, decreased $7.1
million or 25% in 1994 from 1993. Direct commissions increased 5% to
$16,258,000 in 1994 from $15,467,000 in 1993, resulting in an increase in the
direct commission ratio to 11.7% in 1994 from 9.8% in 1993. The increase in
direct commissions was attributable to increased competition for workers'
compensation premium. Premium taxes decreased $1.8 million in 1994 from 1993
due to lower production.
Policyholder dividends decreased 56% to $4,983,000 in 1994 from
$11,371,000 in 1993 as a result of dividends ceded to ZRC and a lower accrual
rate versus 1993 taking into account the effect of declining premium rates and
other market effects. Direct dividends decreased 45% to $6,256,000 in 1994
from $11,371,000 in 1993.
Interest expense increased 40% to $8,726,000 in 1994 from $6,221,000
in 1993 due to increases in interest paid on premium payments withheld from
Centre, partially offset by decreases in interest paid on long-term
indebtedness.
Net investment income and realized investment gains decreased 5% to
$9,049,000 in 1994 from $9,550,000 in 1993. Realized investment gains
decreased to $35,000 in 1994 from $1,069,000 in 1993. Average investments
increased 8% to $159,562,000 during 1994 from $148,066,000 during 1993 while
pre-tax investment yields on average investments, before realized investment
gains, was 5.7% for both 1994 and 1993.
The effective tax rate, including the effective rate on extraordinary
items, was zero for 1994 and 76% for 1993.
Preferred securities dividends and accretion increased to $683,000 net
of tax, and $1,035,000 before tax, in 1994 from zero in 1993 following the sale
of $20 million face amount of such securities to an affiliate of Centre
effective June 30, 1994.
Loss from discontinued operations was zero in 1994 compared to
$2,991,000 net of tax, and $4,532,000 before tax, in 1993 due to the lack of
development in 1994 of ultimate property and casualty ("P&C") losses versus the
estimates of those losses at September 30, 1993.
An extraordinary loss from early extinguishment of debt of $2,022,000,
net of income tax benefit of $1,042,000, recorded during 1994 was principally
due to the refinancing of the Company's 1992 Senior Subordinated Notes ("1992
Notes") with bank indebtedness, which was completed June 30 and July 1, 1994.
A portion of the loss was also due to the termination of several members of
management holding SNIG's 1992 Notes under an agreement requiring mandatory
redemption in the event of their departure from the Company.
The cumulative effect of a change in accounting for income taxes in
the amount of $2,297,000 was recorded in 1993 to reflect the effects of
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes. See "--Taxes," below.
Net income decreased 44% to $894,000 in 1994 from $1,587,000 in 1993
due to the factors outlined above.
DISCONTINUED OPERATIONS
Discontinued operations claims stabilized during the second quarter of
1996 after seven months of heavy activity beginning September 1995 associated
with a California Supreme Court decision affecting construction defect claim
coverage. The Company has significant exposure to construction defect
liabilities on casualty insurance policies underwritten from 1986 to 1991.
Management continues to closely monitor the Company's potential
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<PAGE> 122
exposure to construction defect claims. Management believes the Comapny's
current reserves are adequate to cover this increase in claims activity
depending on the length of time the recent reporting trends continue. There
can be no assurance, however, that further upward development of ultimate loss
costs associated with construction defect claims will not occur. The Company
will continue to closely monitor the adequacy of its loss reserves in the
discontinued operations.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure of an entity's ability to secure sufficient
cash to meet its contractual obligations and operating needs. The Company's
cash inflows are generated from cash collected for policies sold, investment
income on the existing portfolio, and sales and maturities of investments. The
Company's cash outflows consist primarily of payments for policyholders'
claims, operating expenses and dividend obligations.
During the first six months of 1996, the Company used $16.0 million in
its operations versus $7.7 million during the same period in 1995. SNIG
believes that it has adequate short-term investments and readily marketable
investment grade securities to cover both claim payments and expenses. As of
June 30, 1996, the Company had total cash, cash equivalents and investments of
$157.0 million. This amount includes $89.0 million in funds withheld from
Centre and $1.6 million in restricted cash. The Company's remaining invested
assets were comprised of $51.5 million in bonds and notes, held at market
value; $0.6 million in equity securities; $12.0 million in invested cash,
including certificates of deposit with maturities less than one year and money
market deposits; and $2.3 million in cash.
Cash flow used in operations for the six months ended June 30, 1996
was $16.0 million compared to $7.7 million for the corresponding period in
1995. The $8.3 million increase in cash used in operating activities was due
primarily to a $3.7 million decrease in premiums received, $1.3 million in
increased claims payments for workers' compensation, and $3.3 million in
increased claims payments for the property and casualty operations.
The Company generated $3.0 million in cash from financing activities
for the six months ended June 30, 1996 and used $0.6 million for the
corresponding period in 1995. The cash generated by financing activities in
the first six months of 1996 was funded by the proceeds received from a
repurchase transaction that was partially offset by the principal paydown of
the bank term note. The use of cash in the first quarter of 1995 was related
to the principal paydown of the bank term loan.
Early in 1995, SNIC entered into an agreement with a national
brokerage house to allow it to enter into $5 million in repurchase agreements
that are secured by either U.S. treasuries or government agency bonds. This
type of financing allows SNIC a great deal of flexibility to manage short-term
investments, avoiding the unnecessary realization of losses to satisfy
short-term cash needs. As of June 30, 1996, the book value including accrued
interest for repurchase agreements outstanding was $3.6 million. The market
value of the security underlying the agreement was $3.5 million. The agreement
matured on July 24, 1996 with an interest rate of 5.40% and was extended to
November 21, 1996 at an interest rate of 5.30%.
Because SNIG depends on dividends from its insurance subsidiary for
its net cash flow requirements, absent other sources of cash flow, SNIG cannot
pay dividends materially in excess of the amount of dividends that could be
paid by SNIC to SNIG. Insurance companies are also subject to restrictions
affecting the amount of shareholder dividends and advances that may be paid
within any one year without the prior approval of the DOI. The California
Insurance Code provides that amounts may be paid as dividends on an annual
noncumulative basis (generally based on the greater of (1) net income for the
preceding year or (2) 10% of statutory surplus as regards policyholders as of
the preceding December 31) without prior notice to, or approval by, the DOI.
No ordinary dividends were paid during the six months ended June 30, 1996.
SNIC is a party to various leases principally associated with the
Company's home and branch office space. Such leases contain provisions for
scheduled lease charges and escalations in base rent over the lease term. The
113
<PAGE> 123
Company's minimum commitment with respect to these leases in 1996 is
approximately $1.9 million. These leases expire at various times from 1997 to
2001.
Other than the Company's obligations to pay claims, policyholder
dividends, ceded reinsurance premiums, lease expenses, and principal and
interest on its debt, the Company has no significant cash commitments.
TAXES
In February 1992, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes ("SFAS 109"). SFAS 109 requires a change from the deferred method of
accounting for income taxes of APB Opinion 11 to the asset and liability method
of accounting for income taxes. Under the asset and liability method, deferred
income taxes are recognized for the tax consequences of "temporary differences"
by applying the applicable tax rate to differences between the financial
statement carrying amounts and the tax bases of existing assets and
liabilities. Under SFAS 109, the effect on deferred taxes of a change in tax
rates is recognized in income in the period that includes the enactment date.
The Company adopted SFAS 109 in 1993 and reported the $2,297,000
cumulative effect of that change in the method of accounting for income taxes
in the 1993 Consolidated Statement of Income.
ACCOUNTING STANDARD ISSUED AND ADOPTED
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), which establishes financial accounting and
reporting standards for stock-based employee compensation plans. SFAS 123 is
effective for fiscal years beginning in 1996. The Company has adopted the
disclosures method of accounting for SFAS 123 and therefore SFAS would not have
a material impact on the consolidated statements.
114
<PAGE> 124
BUSINESS
OVERVIEW
SNIG is a holding company that, through its wholly owned subsidiary
SNIC, is engaged in writing workers' compensation insurance principally in the
State of California and, until September 30, 1993, was engaged in writing
commercial property and casualty insurance. In the following discussion, where
the context requires, the "Company" refers to SNIG and its subsidiaries.
SNIG was incorporated in California on March 29, 1985, under the name
Coastal Holdings, Ltd. to raise the capital necessary to acquire SNIC and
increase SNIC's capital and surplus for the expansion of its operations. SNIG
received gross proceeds of approximately $11.1 million from a private offering
of common stock (including $3,274,000 from insurance brokers) and acquired SNIC
for $1.6 million on September 30, 1985. The remainder of the private offering
proceeds after expenses ($9.1 million) was contributed to SNIC's paid in
capital. SNIG issued 2,773,250 shares of common stock associated with the
initial private offering. As of the acquisition date, SNIC was substantively
inactive, with fewer than 200 policies in force and approximately 60 open
claims. SNIC did not commence significant operations until early 1986.
During 1987, SNIG issued 218,825 shares of Common Stock in a secondary
private offering and received net proceeds of approximately $4.3 million,
approximately $4.1 million of which was contributed to SNIC's paid in capital.
On May 25, 1995, a four-into-one reverse stock split of SNIG's Common Stock
became effective. All shares and per share figures used herein have been
adjusted to reflect that reverse stock split.
SNIC specializes in providing workers' compensation coverage for
California businesses. Historically, SNIC specialized in insuring medium-sized
($20,000 to $75,000 in annual premium) workers' compensation accounts that it
believed would be receptive to limited loss control consulting and active claim
management. More recently it has focused on insuring smaller accounts ($3,500
to $20,000 in annual premium) in classifications that SNIC's management
believes to have been historically profitable. SNIC management believes that
by maintaining its focus on a limited number of employment classifications it
can provide claim management and standardized loss control services to such
smaller accounts at a level appropriate to the size and business classification
of the policyholder. At June 30, 1996, SNIC's average premium per policy was
$9,481, while as of December 31, 1995, the average was $11,000. A total of 62%
of SNIC's current premium in force, and 97% of SNIC's policy count, is
concentrated in 7,600 policies having less than $50,000 of estimated annual
premium. SNIC historically competed with other workers' compensation insurers
principally on the basis of loss control expertise, claim management services,
and policyholder dividends. Under the open rating system that became effective
in California on January 1, 1995, SNIC management has witnessed a significant
shift to pure price competition for SNIC's larger and middle-sized accounts.
As shown under "--Selected Financial Data," above, this price competition has
had a significant impact on SNIG's reserves over the last three years. See
"--Company Strategy--Focus on Middle Market" and "--Regulation," below, and
"--Management's Discussion and Analysis," above. Competition for small
accounts is dependent on the Company's relationships with insurance brokers
("producers") and on SNIC's ability to provide low-cost servicing for large
groups of small accounts.
From SNIC's inception until September 30, 1993, SNIC underwrote
commercial property and casualty ("P&C") risks. Former SNIC management
believed it was possible to link the production of profitable P&C risks to
workers' compensation risks within SNIC's base of producers, and the combined
workers' compensation and P&C experience of some producers ultimately justified
this strategy. In general, however, former management underwrote P&C business
for a large number of producers who brought little or no profitable workers'
compensation business to SNIC, and significantly under-priced certain groups
and classes of P&C business, in particular, contractors' and developers'
general liability business. In addition, the per-risk excess of loss
reinsurance purchased to cover P&C risks was inappropriate for the exposure
assumed by SNIC. Despite remedial action begun in 1991 to reduce aggregate P&C
exposure, renewed concentration on the strategy of combined workers'
compensation and P&C production within the existing producer plant, and
re-underwriting of the book of business, SNIC continued to incur significant
losses in its P&C operations. Effective October 1, 1993, SNIC withdrew from
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all P&C lines, the operating results of which are now recorded as discontinued
operations. See "--Discontinued P&C Operations," below.
For the years ended December 31, 1995, 1994, and 1993, 100%, 98%, and
95%, respectively, of the Company's consolidated net premiums earned were
attributable to workers' compensation policies and the remaining premiums were
attributable to its commercial P&C lines of business. As a result of the
Company's discontinuation of its P&C operations, none of the Company's premium
in force at December 31, 1995, is attributable to P&C business. Property and
casualty insurance companies (including workers' compensation insurance
companies) are evaluated by regulators and rating organizations, among others,
with respect to the amount of net premiums they can write based on certain
leverage guidelines established by insurance regulators. The most common
measurement of leverage is the ratio of net premiums written (or premium
retained after cessions to reinsurers) to statutory surplus. SNIC's leverage
for 1995, 1994 and 1993 was 1.5x, 1.4x and 3.0x, respectively. Although the
1995 leverage remained almost the same as the 1994 leverage, net premiums
decreased 18.5% in 1995 but were offset by a 21% decrease in statutory surplus.
The decrease in net premiums was due primarily to lower premium production as a
result of open rating. The decrease in statutory surplus was due to an
extraordinary dividend of 100% of SNIC's shares in Superior (Bermuda) Ltd. to
SNIG constituting $15 million of SNIC's statutory capital and surplus. See
paragraphs following for further discussion. The decrease in the 1994 ratio of
net premiums written to statutory surplus was due to the combination of a
decrease in net premiums written and an increase in surplus. The decrease in
net premiums written in 1994 was a result of discontinuing the P&C operations
and reduced workers' compensation premiums resulting from increased price
competition and a reduction in the statutory minimum premium rates. The
increase in surplus was primarily due to $15.0 million contributed by SNIG to
SNIC in 1994 and added to SNIC's paid-in-capital.
SNIC is currently rated "BBB" by Standard and Poor's, an independent
insurance rating agency. Insurance companies rated "BBB" are considered by
Standard and Poor's to offer adequate financial security, but capacity to meet
policyholder obligations is susceptible to adverse economic and underwriting
conditions. A.M. Best Company, an independent insurance rating agency, has
rated SNIC "B+." Insurance companies rated "B+" by A.M. Best are considered by
A.M. Best to have demonstrated very good overall performance and a good ability
to meet their obligations to policyholders over a long period of time. A.M.
Best's ratings represent an independent opinion of a company's financial
strength and ability to meet its obligations to policyholders.
SNIC is currently licensed to write business in Arizona, Arkansas,
California, Colorado, the District of Columbia, Indiana, Iowa, Kentucky,
Maryland, Mississippi, Missouri, Montana, Nevada, New Mexico, Oregon, South
Dakota, Utah, and Wyoming, but virtually all of SNIC's current premium is
generated in California, with immaterial operations in Oregon and approximately
$1.3 million of premium in force in Arizona as of June 30, 1996.
The profitability and financial position of the Company are affected
by many factors including competition, the severity and frequency of claims,
state regulation of SNIC's premium rates and policy benefits, and general
economic conditions. The net effect on the Company of these factors cannot be
predicted.
The profitability of workers' compensation insurers is affected by
many factors, such as premium rate competition, the severity and frequency of
claims, state regulation, and court decisions that define the extent of
coverage and the amount of compensation due for injuries or losses. One of the
features of the workers' compensation insurance business is that its products
must be priced before the costs are known, as premium rates generally are set
before losses are reported. Accordingly, workers' compensation insurers have
experienced significant year to year fluctuations in operating results.
SNIG has five wholly owned subsidiaries in addition to SNIC: InfoNet
Management Systems, Inc. ("InfoNet"), SN Insurance Services, Inc. ("SNIS"),
Pacific Insurance Brokerage, Inc. ("Pacific"), Superior National Capital
Holding Corporation ("SNCHC"), and Superior (Bermuda) Ltd. ("SBL"). InfoNet
provides data processing purchasing services to SNIG and its subsidiaries.
SNIS and Pacific are inactive. SNCHC's sole function is to act as a general
partner of Superior National Capital, L.P. ("SNCLP"), a Bermuda limited
partnership that issued
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$20.0 million face amount of preferred securities to an affiliate of Centre
effective June 30, 1994. The proceeds of that transaction were loaned to SNIG
and partially contributed by SNIG to the capital of SNIC. See "Proposal No.
5--Certain Relationships and Related Transactions--Transactions with Centre and
its Affiliates" and Note 9 to the Consolidated Financial Statements, "Preferred
Securities Issued by Affiliate."
In September 1995, following approval from the DOI, SNIC formed SBL, a
wholly owned subsidiary domiciled in Bermuda. SBL was capitalized by SNIC with
$15 million in long-term reinsurance receivables. Following the formation of
SBL, SNIC ceded approximately $23 million in P&C reserves to SBL and as
consideration SBL received from SNIC $23 million of premium on a funds withheld
basis. All reinsurance between SNIC and SBL will be accounted for on a funds
withheld basis. After SNIC ceded the P&C reserves to SBL, SNIC paid to SNIG an
extraordinary dividend of 100% of its shares in SBL constituting $15 million of
SNIC's statutory capital and surplus. In addition, SNIG paid $1.5 million to
SBL as a capital contribution making SBL's total capitalization equal to $16.5
million.
SNIC's only subsidiary is wholly owned Western Select Service Corp.
("WSSC"), which was established in 1987 under the name Superior Western
Insurance Company. WSSC was formed and capitalized to underwrite property,
casualty, and workers' compensation insurance, but never received a charter to
commence insurance operations from the DOI. WSSC currently provides vocational
rehabilitation and legal, paralegal, and other services to SNIC.
SNIG relies on dividends from SNIC for its income. Insurance
companies are subject to restrictions affecting the amount of shareholder
dividends and advances that may be paid within any one year without the prior
approval of the DOI. The California Insurance Code provides that amounts may
be paid as dividends on an annual noncumulative basis (generally based on the
greater of (1) net income for the preceding year or (2) 10% of statutory
surplus as regards policyholders as of the preceding December 31) without prior
notice to, or approval by, the DOI. At December 31, 1995, Superior could have
paid approximately $5.2 million in dividends and advances to the Company
without the DOI's prior approval based on 10% of reported statutory surplus.
In 1995, following approval from the DOI, SNIC made an extraordinary dividend
distribution of 100% of its shares in SBL to SNIG, constituting $15 million of
SNIC's statutory capital and surplus. No other dividends (in cash or
otherwise) were paid by SNIC in 1995. In addition, no cash dividends were paid
by SNIC to SNIG in 1995.
Cash dividends of $850,000 were paid by SNIC to SNIG in 1994.
COMPANY STRATEGY
The Company's objective is to maintain and enhance SNIC's market
position in California, specializing in workers' compensation insurance. The
Company believes that it is well-positioned to identify and pursue specialized
areas in the insurance marketplace. The key elements of its strategy are as
follows:
Relationship with Producers. The Company markets SNIC's insurance
products through approximately 190 producers. The Company's producers are
state licensed independent insurance brokers that are licensed to sell workers'
compensation insurance in the states (jurisdictions) where they represent SNIC.
SNIC's producers are primarily medium-sized firms, most having an ongoing
relationship with the Company's executives. As a regional insurer, the Company
believes that SNIC has the flexibility to respond promptly to the business
needs of its producers and to provide the specialty coverages needed by their
customers. The Company considers the producers as SNIC's marketing target and
delivers service the Company believes exceeds industry standards. The Company
believes that SNIC has a good relationship with its producers and has favorably
distinguished itself from its competitors by providing producers with a
commitment to superior service levels and easy access to SNIC executives.
Focus on Middle Market. The Company focuses its marketing efforts on
smaller businesses with premiums per policy of between $3,500 and $20,000,
principally to avoid the extreme price competition associated with larger
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insureds and the high administrative costs associated with very small accounts.
The Company also targets certain agriculture and hospitality specialized
industry groups.
Expense Controls. The Company monitors and controls its operating
expenses as an important part of its business. Although the Company's
operating expenses are in line with its competitors, management continues to
seek ways to further reduce operating expenses.
Pricing Controls. The Company utilizes a proprietary software system
to maintain an easily accessible record of its policy pricing. The system
generates daily reports that allow the Company to monitor both SNIC's pricing
activities for specific lines of insurance in particular geographic areas and
the activities of SNIC's producers.
Management Information Services. The Company believes its investment
in up-to-date computer systems will increase personnel productivity and
underwriting and claims processing effectiveness. Additionally, the Company
has developed a proprietary management system to monitor its operations and
provide quality, detailed and timely information to management for pricing and
claims reporting purposes.
WORKERS' COMPENSATION INSURANCE
Overview. Workers' compensation is a no-fault statutory system under
which an employer is required to provide its employees with medical care or
other specified benefits for work-related injuries or diseases. There are four
types of benefits payable under workers' compensation policies: disability,
vocational rehabilitation, medical, and death benefits. The amounts of
benefits payable for various types of claims are established by statute and
vary with the nature and severity of the injury or disease and wages, and
occupation, and age of the employee. While no dollar limitations are set for
medical benefits and limited dollar amounts are set for vocational
rehabilitation benefits, reinsurance typically covers liability in excess of a
specified dollar amount.
Insurers must compensate policyholders' employees injured in the
course and scope of their employment, even though the injuries may have
resulted from the negligence or wrongs of any person (including the employee).
Subrogation procedures exist, however, which, in certain circumstances, allow
an insurer to recover from third parties all or a portion of the benefits the
insurer has paid. SNIC proceeds against such third parties when it believes
the circumstances so warrant.
Premiums. Effective January 1, 1995, under California's workers'
compensation open rating law, the DOI sets "pure premium" rates (effectively
the estimated pure loss cost) for each employment classification based on its
evaluation of many factors, including the recommendations of the Workers'
Compensation Insurance Rating Bureau ("WCIRB"), and the political effects of
any recommended rate change. Pure premium rates are generally applied per $100
of payroll for each employment classification. Changes in pure premium rates
are subject to review and public hearing by the DOI and are changed from time
to time to reflect industry experience. SNIC's "manual rates" are the WCIRB
pure premium rates modified by a pure premium "multiplier," the purpose of
which is to gross-up the pure premium for SNIC's anticipated loss adjustment
and underwriting expenses. SNIC's manual rates may subsequently be modified by
a "loss rating" factor to reward a policyholder for consistently superior
historical loss experience; an "adjustment to expense provision" factor to
modify the manual rate depending on the policy's dividend and commission plan;
a "schedule rating" factor to modify the rate if a policyholder meets certain
financial conditions or safety program requirements; flat charges for
reinsurance or surcharges; adjustments to bring premium to certain minimum
rates established in SNIC's rate filing; and an "experience modification"
factor established by the WCIRB for each policyholder.
The WCIRB determines the experience modification factors for each
eligible employer. The experience rating plan governs all policyholders whose
annual premiums for the preceding three years exceed an amount equal to $16,200
multiplied by SNIC's pure premium multiplier. The modification factors are
based upon the employer's own loss experience as compared to the loss
experience of other employers of similar size and with the same payroll
classifications applicable to its business. The applicable loss experience
covers a three-year period commencing four
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years and nine months prior to, and terminating one year and nine months prior
to, the date for which the experience modification is applied.
Prior to 1995, the DOI set minimum premiums for each employment
classification, which were the minimum rates all workers' compensation carriers
were obligated to charge. The DOI approved rate increases averaging 5.8%
effective January 1, 1991 for all new and renewal policies on or after that
date, and a further increase of 3.9% effective January 1, 1991 for the
unexpired portion of all policies outstanding on that date. A rate increase of
1.2% was approved effective January 1, 1992 for all new and renewal policies on
or after that date, and a further increase of 1.0% was approved effective
January 1, 1992 for the unexpired portion of all policies outstanding on that
date. A 6.7% rate increase was approved effective July 1, 1992 for all new and
renewal policies with inception dates on or after January 1, 1992. Effective
January 1, 1993 a 0.5% rate increase was approved for all new and renewal
policies on or after that date.
In July 1993, the California legislature enacted a series of bills to
significantly change the California workers' compensation system (collectively,
the "1993 Reforms"). See "--Regulation," below. The 1993 Reforms addressed
various aspects of the system then in effect, including: limitation of
employees' post-termination claims and claims for psychiatric injuries; managed
care alternatives; restrictions on vocational rehabilitation benefits;
additional penalties for fraud and abuse of the system; scheduled increases in
disability benefits beginning July 1, 1994; implementation of a 7.0% decrease
in minimum rates effective July 16, 1993; and replacement of California's
minimum rate law with a competitive rating law effective January 1, 1995. A
further average 12.7% reduction in minimum rates was ordered by the DOI in late
1993, which became effective January 1, 1994. Effective October 1, 1994, the
DOI ordered an additional reduction in minimum rates of 16.0%. Beginning
January 1, 1995, the WCIRB began publishing advisory pure premium rates that
provide for losses and loss adjustment costs as indicated by prior history and
an actuarial projection of future losses and loss expenses. California
workers' compensation underwriters can adopt these rates and apply their own
expense factor or file their own actuarially sound rates. SNIC chose to adopt
the WCIRB pure premium rates grossed-up by a company expense factor of 1.35.
In July 1995, SNIC removed commissions from the expense factor in order to more
accurately negotiate its rates and adjusted the final rate to reflect the
actual commission paid while maintaining the advisory pure premium portion of
the filed rates supplied by the WCIRB. California workers' compensation
underwriters are allowed to file plans that provide credit and/or debit
criteria to be applied to their filed rates. SNIC has filed such a credit and
debit plan and applies these factors in a non- discriminatory manner.
The WCIRB provided 1996 pure premium rates that were in total 11.3%
higher than 1995 and SNIC has adopted these rates.
Insurance Underwriting. SNIC historically concentrated on insuring
workers' compensation accounts with annual premiums between $20,000 and $75,000
based on the belief that this type of insured would be receptive to limited
loss control consulting and active claim management while avoiding the
intensive competition that historically existed for larger accounts. In late
1991, SNIC developed and began marketing a workers' compensation product
targeted at accounts with annual premiums below $10,000 to diversify the size
of risks in its book of business. Under this program, SNIC developed
pre-determined underwriting rules, acceptable risk characteristics, pricing
guidelines and qualifying employment classifications, for the purpose of
assisting both SNIC and its producers with risk selection. Producers submitted
a complete application for coverage to SNIC's underwriting department
confirming the accuracy of the information presented and proper application of
underwriting rules before SNIC bound coverage and issued a policy. This small
risk program was successfully marketed through a California agents' association
from mid-1991 through mid-1994, when the relationship with the association was
terminated by mutual consent. Starting in 1995, the Company reactivated the
program on its own in the general workers' compensation marketplace. See
"--Marketing," below.
Because the types of accounts that SNIC insures vary among different
geographic regions in California, SNIC conducts its underwriting activities
through branch offices. SNIC's branch offices are typically allowed to write
accounts with estimated annual premiums of less than $250,000 whereas accounts
with estimated annual premiums above that amount or with certain risk
characteristics must be approved by SNIC's principal underwriting
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officer. SNIC writes insurance for risks in over 400 of the approximately 450
employment classifications established by the DOI. The Company generally
avoids underwriting in the remaining classifications because of the
historically higher risk exposure they represent. Classifications generally
avoided include, among others, the manufacturing, handling and shipping of
explosives; oil rig and derrick work; subway construction; and navigation of
marine vessels. Classifications that require the approval of SNIC's principal
underwriting officer include those representing potential exclusions from
SNIC's reinsurance treaties, unusual hazards, or catastrophic exposures such as
taxicab fleets, carnivals, ski resorts, and detective agencies. Certain risks,
such as the transportation of groups of employees, are generally ceded to
reinsurers under separate reinsurance agreements. SNIC's workers' compensation
business is diverse in terms of employment classifications, with no single
classification accounting for more than seven percent of SNIC's workers'
compensation premiums in force as of June 30, 1996.
In mid-1990, SNIC introduced restricted underwriting standards for Los
Angeles, Orange, San Bernardino, and Riverside counties because SNIC believed
that these counties were adversely affected by the California recession and
were susceptible to the activities of fraudulent and abusive medical providers.
This resulted in a substantial reduction in workers' compensation premiums on
business previously underwritten in those California counties. SNIC has since
re-entered those markets and now is achieving satisfactory results, but at
significantly lower premium volumes.
Prior to insuring an account, SNIC's underwriting department reviews,
inter alia, the employer's prior loss experience and safety record, premium
payment and credit history, operations, geographic location, and employment
classifications. SNIC verifies employment classifications principally through
information provided by the WCIRB and, in many instances, through its own
on-site surveys of the employer's place of business.
If the underwriting department determines that an account is one that
SNIC may be willing to insure, a SNIC loss control consultant may review the
employer's prior loss patterns and communicate with the policyholder on the
extent to which such losses may be prevented and the commitment of the
employer's management to safety in the work place. By helping reduce an
employer's losses, SNIC believes it can reduce the policyholder's ultimate net
cost of insurance as well as help improve its own profit potential on the risk.
See "--Loss Control," below.
Support Specialists. To further facilitate its underwriting and
claims management functions, SNIC has a full complement of additional support
specialists. Specifically, SNIC is staffed with a rehabilitation department
that interprets and implements new workers' compensation reforms along with
monitoring existing rules and regulations regarding rehabilitation claims; an
audit department that monitors premiums and payroll; and a bill review
department that insures provider invoices are within statutory fee schedules
and that contracted--for discounts are applied.
DATA PROCESSING
The Company uses its proprietary, personal computer-based management
information system to satisfy its data processing requirements. The system is
operated on off-the-shelf computer hardware, including a commercial local area
network communications system, and uses the Company's internally-developed,
proprietary computer software. The key advantage of the Company's approach to
data processing is that personal computer technology provides flexibility at
relatively low cost. The Company believes that the structure of its system
makes it expandable well beyond the Company's current or projected needs.
MARKETING
The Company's principal marketing strategy is to meet the business
needs of SNIC's producers by providing the insurance coverage and services
needed by their customers. SNIC's insurance policies are sold exclusively
through producers who also represent one or more competing insurance companies.
SNIC views the producers as its marketing target and delivers service that the
Company believes surpasses normal industry levels.
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SNIC's producers are primarily medium-sized insurance brokerage firms
located in Central and Northern California. However, SNIC has re-entered the
Southern California market on a limited basis through producers that are
generally new to SNIC. SNIC's percentage of business with each of its
producers, in terms of premium volume, has a significant effect on a producer's
efforts, because management believes that companies that represent a
significant volume of a producer's business typically receive the highest
quality business. SNIC believes that each of its producers recognizes SNIC as
one of its lead carriers. Additionally, no single policy accounted for more
than 1% of net earned premiums in 1995 or during the first half of 1996, and no
single producer generated more than 10% of written premiums.
SNIC closely monitors its producers through its on-line management
information systems, with special attention given to the volume and
profitability of business written through SNIC. Producers who consistently
write unprofitable business, or do not meet the minimum guideline of annual
premium per year, may be canceled. SNIC believes that by continually
monitoring and improving the quality of its producers, long term profitability
will be enhanced.
Marketing staff, along with the branch office managers and the
underwriting, loss control, and regional claim staffs, work closely with
producers and frequently make joint presentations with producers to potential
workers' compensation policyholders. SNIC conducts its marketing by territory
to enable its marketing representatives to better address the specific types of
accounts on which they focus in each region. Producer commissions are
generally determined by negotiation and are dependent on the size and profit
potential of the producer's accounts. Commissions for the size of account SNIC
has targeted over the past three years generally range from 10% to 12% of
premiums.
SNIC's average direct commission rate was approximately 11.0% for the
first six months of 1996. The rate was 12.0% in 1995, 11.7% in 1994, and 9.8%
in 1993. SNIC's producers are not permitted to bind SNIC with respect to any
account. All new and renewal policyholder applications must be submitted to
SNIC for approval. SNIC is not committed to accept a fixed portion of any
producer's business.
LOSS CONTROL
In addition to its responsibility for risk evaluation as part of the
underwriting process, SNIC's loss control department may assist SNIC's workers'
compensation policyholders in developing and maintaining safety programs and
procedures to minimize on-the-job injuries and health hazards. After analyzing
the policyholder's loss profile, SNIC's loss control consultants will help
develop a loss control program and establish accident reporting and claim
follow-up activities for the policyholder. SNIC's loss control personnel may
also consult with policyholder management about safety and health issues, as
well as about the effectiveness of the policyholder's loss prevention
procedures. Prior to the end of the policy period, loss control personnel
typically provide a report to the larger premium-size policyholder's senior
management summarizing the programs instituted by the employer over the policy
period and the effect such programs and procedures have had on reducing the
number and severity of employee claims. SNIC's loss control consultants may
also conduct special training seminars for the policyholder's employees on such
subjects as the prevention of back injuries, general first aid and industrial
hygiene.
CLAIM MANAGEMENT
SNIC's policy is to work closely with policyholders to return injured
workers to the job quickly, while avoiding litigation. SNIC maintains four
full-service Claims Servicing Offices in California ("CSO") located in
Calabasas, Fresno, South San Francisco, and Sacramento. Each CSO is managed by
a claims manager and, with the exception of Sacramento, due to its smaller
size, an assistant claims manager. The claims technical staffs in each CSO are
organized into units with, generally, one supervisor supervising four claims
examiners and two claims assistants per unit.
Each CSO also has specialized claims units, the size of which are
dependent upon the size of the CSO. The Calabasas CSO has a Special
Investigation Unit staffed with two senior examiners. The other CSOs each have
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one senior examiner dedicated to Special Investigations. SNIC has responded to
fraud by training and dedicating its claims staff to handle potentially
fraudulent claims. Except Sacramento, each CSO has a vocational
rehabilitation/disability management unit staffed by vocational rehabilitation
counselors and coordinators and disability management ("DMU") specialists. The
sole purpose of the DMU staff is to provide effective and efficient handling of
vocational rehabilitation plans and to maximize SNIC's early return-to-work
efforts with employers. These efforts provide significant benefits to insureds
and SNIC when considering that each claimant whose return-to-work is
successfully accelerated results in substantial indemnity wage benefit savings.
SNIC's claims department relies extensively on the Company's data
processing systems. The Company's data processing systems were internally
developed by claims staff and data processing personnel, with three main goals
in mind: the capture of timely and meaningful data, the creation of a minimal
processing error environment by means of numerous system prompts and edit
checks, and the automation of many otherwise manual functions. An additional
benefit resulting from the claims system is increased productivity resulting
from the claims examiners' ability to handle a higher case load without
negatively impacting claims processing results.
SNIC's claims handling also includes a specialized subrogation
function. Claims examiners are responsible for the identification of potential
recoupments from third parties responsible for a work-related accident, after
which the examiner notifies a subrogation specialist of this potential. The
subrogation specialist determines whether a subrogation situation exists, and,
if so, assumes responsibility for all aspects of subrogation to finalization.
The subrogation specialists report to an experienced in-house subrogation
attorney.
POLICYHOLDER DIVIDENDS
California law permits workers' compensation insurers to issue
participating policies, which allow the insurer to declare and pay dividends to
a policyholder after the expiration of the policy. Historically, approximately
85% of SNIC's workers' compensation premiums were attributable to participating
policies. At December 31, 1994, 65% of SNIC's workers' compensation premiums
in force were participating policies. The percent of participating policies
declined to 24% at December 31, 1995 and further to less than 1% at June 30,
1996. Insurers are prohibited by law from promising policyholders that future
dividends will be paid to them, or stating the amount or rate of dividends to
be paid. However, an insurance carrier is required to disclose its historical
policyholder dividend payment practices and procedures to a prospective
participating policyholder by means of a policyholder dividend disclosure
statement. The disclosure statement must state that there is no guarantee to
the potential policyholder that any of the factors shown in the disclosure
statement will actually be used in determining policyholder dividends for a
specified period. In fact, when an insurance company calculates the dividend a
number of months after the expiration of the policy, conditions may have
changed from the time of the original proposal and the Company may decide not
to pay any or all of the indicated dividend. Any payment of dividends to
policyholders is determined by the board of directors of an insurance company
subject to the legal requirements in California that such dividends may not
exceed the earned surplus on such company's California workers' compensation
policies, may not be unfairly discriminatory, and may not be declared or paid
until after the expiration of the policy period (when there are more facts
available for determining loss experience).
SNIC evaluates the value of dividends on one-year policies in two
different time frames. The initial payout limitation, which is 70% of
dividends liability, is calculated approximately nineteen months after the
policy expiration date, and paid twenty-two months after expiration or later.
The second and final valuation of the remaining 30% of dividends liability is
done approximately one year after the first valuation, and paid approximately
three months after the final calculations. The SNIC Board of Directors
considers a number of factors in connection with the declaration of
policyholder dividends, including loss ratio, class of business, geographical
location and premium payment history of the policyholder, risk and expense
factors, competition, and the overall loss ratio and financial condition of
SNIC.
Prior to open rating, policyholder dividends served both as an
economic incentive to employers for safe operations and as a means of price
differentiation. As a result of consumers' preference for the lowest net price
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at the policy's inception under open rating, however, a dividend paying feature
is no longer a significant factor in the marketing or selling of workers'
compensation insurance in California.
CLAIMS AND CLAIM ADJUSTMENT EXPENSE RESERVES
Several years or more may elapse between the occurrence of a workers'
compensation loss, the reporting of the loss, and final payment of the loss.
Claims and claim adjustment expense reserves are estimates of what an insurer
expects to pay claimants. SNIC is required to maintain reserves for payment of
estimated claims and claim adjustment expense for both reported claims and
claims that have been incurred but have not yet been reported ("IBNR"). SNIC's
ultimate liability may be materially more or less than current reserve
estimates.
Reserves for reported claims are established on a case-by-case basis.
Case-by-case reserve amounts are determined by claim examiners, based on the
examiner's judgment and experience, and on SNIC's reserving practices, which
take into account the type of risk, the circumstances surrounding the claim or
policy provisions relating to the type of loss, and historical paid claim and
claim adjustment expense data for similar claims. Case-by-case reserves are
not established for claim (loss) adjustment expense ("LAE"), and the entire
reserve for LAE is established based upon the Company's historical paid data.
SNIC's claims department regularly monitors reserve adequacy for claims that
have occurred and been reported to it and adjusts such reserves as necessary.
Claims and claim adjustment expense reserves for IBNR are estimated
based on many variables including historical and statistical information,
inflation, legal developments, the regulatory environment, benefit levels,
economic conditions, judicial administration of claims, general frequency and
severity trends, medical costs, and other factors affecting the adequacy of
loss reserves. The senior officers of the Company review and adjust IBNR
reserves monthly.
SNIC utilizes the services of an independent actuarial firm to assist
in its evaluation of the sufficiency of loss and loss adjustment reserves for
purposes of meeting state insurance regulatory requirements. SNIC considers
the estimates of the independent actuarial firm as corroborative evidence as to
the reasonableness of its reserves. To the extent SNIC's reserves differ from
those estimated by the independent actuary, management uses its best efforts to
identify reasons for such differences and determine if modifications are
necessary to its initial reserve estimates. No assurance can be given that the
ultimate liability will not vary from such estimates.
Adjustments in aggregate reserves are reflected in the operating
results of the period during which such adjustments are made. Although claims
for which reserves are established may not be paid for several years or more,
the reserves are not discounted, except as required by the Code to calculate
taxable income.
123
<PAGE> 133
RECONCILIATION OF LIABILITY FOR CLAIMS AND CLAIM ADJUSTMENT EXPENSE
The following table provides a reconciliation of the beginning and
ending loss and loss adjustment expense reserves for each of the years in the
three-year period ended December 31, 1995, computed in accordance with GAAP.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
(Amounts in thousands)
<S> <C> <C> <C>
Beginning reserve, gross of reinsurance . . . . . . . . . . . . . . . $ 171,258 $ 171,038 $ 136,102
Less: Reinsurance recoverable on unpaid losses . . . . . . . . . . . 66,241 70,860 74,004
--------- --------- ---------
Beginning reserve, net of reinsurance . . . . . . . . . . . . . . . . 105,017 100,178 62,098
Provision for net claims and claim adjustment expenses
For claims occurring in current year . . . . . . . . . . . . . . 58,842 72,457 87,997
For claims occurring in prior years . . . . . . . . . . . . . . (2,237) 6,304 25,820
--------- --------- ---------
Total claims and claim adjustment expenses . . . . . . . . . . . 56,605 78,761 113,817
--------- --------- ---------
Payments for net claims and claim adjustment expense:
Attributable to insured events incurred in current year . . . . (19,732) (23,061) (23,420)
Attributable to insured events incurred in prior years . . . . . (42,033) (58,406) (57,008)
--------- --------- ---------
Total claims and claim adjustment expense payments . . . . . . . (61,765) (81,467) (80,428)
--------- --------- ---------
Change in funds withheld . . . . . . . . . . . . . . . . . . . . . . 2,892 7,545 4,691
--------- --------- ---------
Ending reserves, net of reinsurance . . . . . . . . . . . . . . . . . 102,749 105,017 100,178
Reinsurance recoverable on unpaid losses . . . . . . . . . . . . . . 38,025 66,241 70,860
--------- --------- ---------
Ending reserves, gross of reinsurance . . . . . . . . . . . . . . . . $ 140,774 $ 171,258 $ 171,038
========= ========= =========
</TABLE>
124
<PAGE> 134
ANALYSIS OF DIRECT CLAIMS AND CLAIM ADJUSTMENT EXPENSE DEVELOPMENT
The following table discloses the development of direct workers'
compensation claims and claim adjustment expense reserves of SNIC from December
31, 1986 through December 31, 1995.
<TABLE>
<CAPTION>
Calendar Years Ended December 31,
--------------------------------------------------------------------------------------------------------
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserve for Direct
Unpaid Claims and
Adjustment
Expenses, Gross of
Reinsurance
Recoverables
Reserve . . . . . . $6,788 $21,969 $42,268 $60,615 $88,270 $116,811 $136,102 $171,038 $171,258 $140,774
Re-estimated as of:
One Year Later . . 7,313 24,241 43,581 68,718 112,160 144,676 162,634 171,960 162,635
Two Years Later . . 8,585 26,120 46,788 79,059 111,151 143,912 148,906 161,262
Three Years Later . 10,085 29,140 50,955 74,619 117,506 138,607 152,420
Four Years Later . 10,321 29,423 47,696 78,112 113,029 137,939
Five Years Later . 10,385 29,541 49,297 75,475 112,840
Six Years Later . . 10,484 29,082 47,554 75,913
Seven Years Later . 10,222 27,759 49,470
Eight Years Later . 10,055 27,846
Nine Years Later 10,053
Cumulative
Deficiency
(Redundancy) . . . 3,265 5,877 7,202 15,298 24,570 21,128 16,318 (9,776) (8,623)
Cumulative Amount of
Reserve Paid
through
One Year Later . . $3,619 $9,447 $17,698 $24,478 $36,975 $53,914 $57,348 $60,726 $67,757
Two Years Later . . 6,154 14,482 19,879 35,195 45,561 56,299 61,648 66,077
Three Years Later . 7,859 15,777 25,830 38,067 52,811 63,354 63,523
Four Years Later . 8,721 18,666 26,165 38,261 56,369 64,703
Five Years Later . 9,385 19,384 26,026 40,794 57,768
Six Years Later . . 9,630 19,660 27,181 42,032
Seven Years Later . 9,541 20,707 27,202
Eight Years Later . 9,712 20,803
Nine Years Later . 9,830
Gross Reserve - December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136,102 171,038 171,258 140,774
Reinsurance Recoverables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74,004 70,860 66,241 38,025
-------- -------- -------- --------
Net Reserve - December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,098 100,178 105,017 102,749
======== ======== ======== ========
Gross Re-estimated Reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152,420 161,262 162,635
Re-estimated Reinsurance Recoverables . . . . . . . . . . . . . . . . . . . . . . . 71,801 65,621 59,855
-------- -------- --------
Net Re-estimated Reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,619 95,641 102,780
======== ======== ========
Net Cumulative Deficiency (Redundancy) . . . . . . . . . . . . . . . . . . . . . . $ 18,521 $ (4,537) $ (2,237)
======== ======== ========
</TABLE>
The first line of the preceding table depicts the estimated liability
for unpaid claims and claim adjustment expense recorded at the balance sheet
date for each of the indicated periods. This liability represents the
estimated amount of claims and claim adjustment expense for claims arising in
all prior years that are unpaid as of the balance sheet date, gross of
reinsurance recoverables reserve, including losses that had been incurred but
not yet reported to SNIC. The preceding table also shows the re-estimated
amount of the previously recorded liability based on experience as of the end
of each succeeding year, including cumulative payments made for such claims
since the end of the respective year. The lower portion of the table shows the
cumulative amounts paid as of successive years for such claims. The estimates
change as more information becomes known about the frequency and severity of
claims for each year. A (redundancy) deficiency exists when the initial
liability estimate is (greater) less than the re-estimated liability at each
December 31.
<PAGE> 135
The increase in estimated ultimate claims and claim adjustment expense
from 1986 to 1988 was due to the lack of Company history, which prevented
management from accurately estimating ultimate loss costs. For years 1989 to
1992, the increase in estimated ultimate claims and claim adjustment expense
was driven by continuing litigation in the workers' compensation market and the
economic recession, which encouraged the filing of both stress claims and
fraudulent claims.
Currently, the Company prepares on a monthly basis a comprehensive
analysis of workers' compensation experience and the reserving process is
continually modified to consider additional information regarding trends in
pricing, frequency, and severity.
In 1995, and continuing into the first half of 1996, the Company
experienced decreased frequency and severity with respect to claims incurred
during such periods, and favorable development emerged on prior accident years'
losses as well. The Company's 1995 accident year net claim and claim
adjustment expense ratio for accident year 1995 at the end of calendar year
1995 was 65.6%, versus 65.6% for accident year 1994, and 57.3% for accident
year 1993, at the respective calendar year ends. Further, during calendar year
1995, the Company recorded a $2.2 million decrease in prior accident year
claims and claim adjustment expense. Management decreased the provision for
IBNR losses ceded under per-risk excess of loss contracts by $6.4 million based
upon its historical experience.
During 1995, the Company experienced approximately $8.6 million of
favorable development on direct claim and claim adjustment expense reserves
estimated at December 31, 1994. Management believes the favorable development
resulted from the Company's improved claims management controls and decreased
claim severity, particularly in the medical component of the workers'
compensation line. Similar favorable development on pre-1995 losses has been
experienced elsewhere in the California workers' compensation industry.
Offsetting the favorable direct development in large part was the re-estimation
during 1995 of reinsurance receivables recorded at December 31, 1994 from
approximately $66.2 million to approximately $59.9 million at December 31,
1995.
In 1993, SNIC experienced significant adverse development on 1992
accident year claims. In addition to adjusting the 1992 accident year claims
estimates to levels indicated by 1990 and 1991 accident year experience, SNIC
also established initial reserves for the 1993 accident year above the level of
initial reserves established for prior years. During 1995, the Company
recognized approximately $10.7 million of favorable development on direct claim
and claim adjustment expense reserves estimated at December 31, 1994 pertaining
to years prior to 1994. Management believes the favorable development resulted
from the Company's improved claims management controls and decreased claim
severity, in both the medical and vocational rehabilitation components of the
workers' compensation line. Similar favorable development on pre-1994 losses
has been experienced elsewhere in the California workers' compensation
industry.
SNIC significantly increased its direct reserves in 1992 based on the
results of an independent actuarial review effective June 30, 1992, of
outstanding claims. The review was commenced primarily because SNIC was
experiencing higher than anticipated costs for claims, including increases in
vocational rehabilitation, medical expenses, and claim adjustment expense, on
the 1990 and 1991 accident years, partially offset by modest improvement in
prior accident years. Management believes the workers' compensation laws in
effect during 1990 and 1991 encouraged claimants to file fraudulent or abusive
claims, causing the increase in claims costs, and SNIC responded by increasing
net of reinsurance reserves for prior accident years' claims by $12.5 million
in 1992. Accident year 1992 reserves, however, were recorded at levels
consistent with pre-1990 and 1991 experience. During 1995, the Company's
direct claims and claim adjustment expenses for years 1992 and prior increased
from $149 million in 1994 to $152.5 million in 1995, an increase of $3.5
million.
Conditions and trends that have historically affected SNIC's claims
may not necessarily be indicative of conditions and trends that will affect
future claims. Accordingly, it would not be appropriate to extrapolate future
redundancies or deficiencies based on the results set forth above.
126
<PAGE> 136
DISCONTINUED P&C OPERATIONS
SNIC's discontinued operations consist of P&C business that was
discontinued effective September 30, 1993. The discontinued operations
liabilities principally pertain to contractors' general liability policies
underwritten from 1986-1990. There is often a significant lag between the date
of loss of construction-related claims and the date such claims are reported to
SNIC. SNIC believes the existing reserve provision, and the assets allocated
to support the discontinued operations, are sufficient to cover future claims,
but there is significant uncertainty associated with the reporting and severity
of construction claims.
In 1993, the Company recorded a pre-tax charge to income of $3.0
million for estimated operating losses during the phase-out period. During the
second quarter of 1995, the Company increased by approximately $15 million its
reserves for discontinued operations for accident years 1994 and prior. This
increase in claims and claim adjustment expense reserves from the original
estimate at the measurement date resulted from increased frequency and severity
of claims incurred from those years, relative to previous expectations, which
in turn caused an increase in the estimated ultimate claims and claim
adjustment expense reserves related to 1994 and prior years.
SNIC supports discontinued operations with $40.6 million of
reinsurance receivables and other assets. At December 31, 1995, discontinued
operations assets consisted of $28.5 million of reinsurance receivables
associated with the 1991 Centre Aggregate Excess of Loss Contract, and $12.0
million of other reinsurance recoverables on paid and unpaid losses. As of
June 30, 1996, those reinsurance recoverables had decreased to $21.8 million
and the other reinsurance recoverables had decreased to $9.7 million. To the
extent that cash recoveries under the Centre contracts do not match cash
requirements of SNIC's discontinued operations, reinsurance receivables will be
substituted with cash from continuing operations, and the reinsurance
receivables will be re-established in continuing operations. Management
estimates that the discontinued operations will essentially have "run off" by
the year 2000.
RECONCILIATION OF LIABILITY FOR DISCONTINUED OPERATIONS CLAIMS AND CLAIM
ADJUSTMENT EXPENSE
The following table provides a reconciliation of the beginning and
ending loss and loss adjustment expense reserves for discontinued operations
for each of the years in the three-year period ended December 31, 1995,
computed in accordance with GAAP.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1995 1994 1993
-------- -------- --------
(Amounts in thousands)
<S> <C> <C> <C>
Beginning reserve, gross of reinsurance . . . . . . . . . . . . . . . . . $ 36,410 $ 54,898 $ 66,532
Less: Reinsurance recoverable on unpaid losses . . . . . . . . . . . . . 28,259 27,861 30,384
-------- -------- --------
Beginning reserve, net of reinsurance . . . . . . . . . . . . . . . . . . 8,151 27,037 36,148
Provision for net claims and claim adjustment expenses
For claims occurring in current year . . . . . . . . . . . . . . . . . - 4,482 7,182
For claims occurring in prior years . . . . . . . . . . . . . . . . . 15,006 (2,294) 5,945
-------- -------- --------
Total claim and claims adjustment expenses . . . . . . . . . . . . . . 15,006 2,188 13,127
-------- -------- --------
Payments for net claims and claim adjustment expense
For claims occurring in current year . . . . . . . . . . . . . . . . . - (3,019) (1,969)
For claims occurring in prior years . . . . . . . . . . . . . . . . . (11,272) (18,055) (20,269)
-------- -------- --------
Total claim and claims adjustment expense payments . . . . . . . . . . (11,272) (21,074) (22,238)
-------- -------- --------
Change in funds withheld . . . . . . . . . . . . . . . . . . . . . . . . (8,968) - -
-------- -------- --------
Ending reserves, net of reinsurance . . . . . . . . . . . . . . . . . . . 2,917 8,151 27,037
Reinsurance recoverable on unpaid losses . . . . . . . . . . . . . . . . 37,609 28,259 27,861
-------- -------- --------
Ending reserves, gross of reinsurance . . . . . . . . . . . . . . . . . . $ 40,526 $ 36,410 $ 54,898
======== ======== ========
</TABLE>
127
<PAGE> 137
ANALYSIS OF DISCONTINUED OPERATIONS DIRECT CLAIMS AND CLAIM ADJUSTMENT EXPENSE
DEVELOPMENT
The following table discloses the development of direct discontinued
operations claims and claim adjustment expense reserves from December 31, 1986
through December 31, 1995.
<TABLE>
<CAPTION>
Calendar Year Ended December 31,
----------------------------------------------------------------------------------------------
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
----------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserve for Direct
Unpaid Claims and
Claim Adjustment
Expenses, Gross of
Reinsurance
Recoverables $ 4,115 $12,678 $25,935 $41,088 $56,735 $65,629 $66,532 $54,898 $36,410 $40,526
Reserve . . . . .
Re-estimated as of:
One Year Later . 7,077 19,879 32,395 56,092 73,295 83,770 73,298 56,041 54,855
Two Years Later . 7,669 25,865 43,160 60,679 89,336 91,453 73,067 75,703
Three Years Later 10,421 30,455 43,585 72,860 98,206 90,717 96,531
Four Years Later 9,761 30,134 52,261 82,218 102,538 117,215
Five Years Later 9,914 34,215 61,539 84,304 126,431
Six Years Later . 12,385 38,051 63,072 103,326
Seven Years Later 14,037 38,844 77,080
Eight Years Later 13,667 44,129
Nine Years Later 15,230
Cumulative 11,115 31,451 51,145 62,238 69,696 51,586 29,999 20,805 18,445
Deficiency . . .
Cumulative Amount of
Reserve Paid
Through
One Year Later . $ 1,528 $ 7,529 $13,754 $19,839 $26,587 $29,274 $26,473 $23,043 $14,329
Two Years Later . 3,253 13,146 15,301 26,399 31,124 29,165 23,483 16,203
Three Years Later 4,553 15,900 19,844 32,188 39,486 28,136 18,380
Four Years Later 5,828 18,915 23,007 37,758 42,399 23,255
Five Years Later 6,751 22,329 28,609 38,798 40,990
Six Years Later . 8,308 26,129 31,715 37,585
Seven Years Later 11,486 27,645 31,247
Eight Years Later 13,138 27,791
Nine Years Later 13,456
Gross Reserve - December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . 66,532 54,898 36,410 40,526
Reinsurance Recoverables . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,384 27,861 28,259 37,609
-------- -------- -------- --------
Net Reserve - December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,148 27,037 8,151 2,917
======== ======== ======== ========
Gross Re-estimated Reserve . . . . . . . . . . . . . . . . . . . . . . . . . . 96,531 75,703 54,855
Re-estimated Reinsurance Recoverables . . . . . . . . . . . . . . . . . . . . . 35,470 32,643 31,698
-------- -------- --------
Net Re-estimated Reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,061 43,060 23,157
======== ======== ========
Net Cumulative Deficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . $24,913 $16,023 $15,006
======== ======== ========
</TABLE>
The first line of this table depicts the estimated liability for
unpaid claims and claim adjustment expense for discontinued operations recorded
for each of the indicated periods. The table follows the form of the table
depicting workers' compensation reserve development in "--Analysis of Direct
Claim and Claim Adjustment Expense Development," above.
From 1986 to 1990, the increase in ultimate claims and claim
adjustment expense for discontinued operations was due to the lack of Company
history, as well as changes in economic and legal environments that prevented
management from reasonably estimating ultimate loss costs. Thereafter, a full
actuarial analysis has been performed semi-annually taking into account the
Company's history of reserve development, industry claim experience, and the
effects of litigation on future loss costs.
A significant percentage of the Company's pre-1991 ultimate loss costs
and reserve development are attributable to construction defect claims
associated with commercial package policies sold to general contractors,
128
<PAGE> 138
developers, and artisan contractors from 1986 to 1991. Other carriers writing
these same lines of business have also been negatively affected by the
unfavorable increase in claims frequency and severity that occurred as a result
of changes in the economic and legal environment during this time. At December
31, 1995, approximately $29 million of the total $40.5 million (approximately
72%) of direct reserves for discontinued operations, and approximately 500 of
the Company's 600 (approximately 83%) incurred-but-not-reported claim counts,
were attributable to expected future reports of construction defect claims.
Approximately $4.9 million of the total $40.5 million of direct reserves for
discontinued operations at December 31, 1995 was attributable to a single claim
paid shortly after year end. At June 30, 1996, direct reserves for
discontinued operations had decreased $9.0 million to $31.5 million.
The Company began to separately monitor the effects of construction
defect claims beginning in 1993. Prior to 1993 the effects of construction
defect claims were combined with all other general liability business for
reserve valuation purposes. The frequency, severity, and time lag between the
occurrence and reporting dates of such claims varies significantly from the
statistics associated with all other lines and sublines of the Company's claims
and claim adjustment expense reserves for discontinued operations. Effective
June 30, 1995, the Company recorded on approximately $15 million pre-tax ($9.8
million net of tax) charge for discontinued property and casualty operations
due principally to an increase in management's estimates of
incurred-but-not-recorded construction defect claims.
The frequency of newly-reported construction defect claims increased
significantly from July through December 31, 1995. This trend slowed during
the first six months of 1996. Management believes the increase in new
construction defect claims was attributable to the California Supreme Court
decision in Montrose Chemical Corporation v. Admiral Insurance Company
("Montrose") handed down in July 1995. The Montrose decision effectively
broadened the definition of "loss occurrence" to include the entire period
beginning with the construction date and ending with the date litigation
associated with defective construction is finally resolved. Since July 1995
the Company has been served with lawsuits on allegedly defective construction
projects where the manifestation of the loss, the immediate cause of the loss,
and the first report of the loss, all fall outside of the Company's policy
terms. Regardless, under the Supreme Court's ruling, the Company is compelled
to defend the "insured" and contribute to loss settlements.
Management believes its current reserves are adequate to cover this
increase in claims activity, depending on the length of time the recent
reporting trends continue. Management cannot predict the volume of future
Montrose-related claims, the cost of handling the claims, or the ultimate
severity of loss associated with such claims. Further, the approximately $15
million pre-tax charge to discontinued operations recorded effective June 30,
1995, was estimated before the effects of the Montrose decision were reflected
in the Company's loss experience. There can be no assurance, therefore, that
further upward development of ultimate loss costs associated with construction
defect claims will not occur.
The Company has also experienced significant development with respect
to loss costs for components of discontinued operations other than construction
defect claims. While these other claims are generally more predictable than
construction defect claims, there can be no assurance that further upward
development of loss costs associated with such claims will not occur.
REINSURANCE
Reinsurance is generally used to reduce the liability on individual
risks and to protect against individual risk or aggregate catastrophic losses.
SNIC follows industry practice of reinsuring a portion of its risks. The
availability and cost of reinsurance are subject to prevailing market
conditions and may affect SNIC's profitability. SNIC believes the terms of its
contracts are consistent with industry practice and its reinsurance program is
based on security of the reinsurers, coverage, and price. SNIC monitors its
reinsurers' financial condition carefully and recoverable losses are pursued
aggressively. Occasionally SNIC is involved in disputes with reinsurers,
which, if not settled, may be resolved in arbitration. As of June 30, 1996,
SNIC was not involved in disputes with any of its reinsurers related to the
workers' compensation operations.
129
<PAGE> 139
Effective June 30, 1991 SNIC entered into an aggregate excess of loss
reinsurance contract ("1991 Contract") with Centre. Under the 1991 Contract,
SNIC purchased for $50 million reinsurance for claims and claim adjustment
expense incurred on or prior to June 30, 1991 to the extent that these amounts
were unpaid at June 30, 1991. The coverage obtained was $87.5 million in
excess of SNIC's retention equal to $55.7 million. Additionally, SNIC ceded
approximately $69.1 million of earned premiums and $78.1 million of claims and
claim adjustment expense to Centre through December 31, 1992. Total claims and
claim adjustment expenses occurring prior to December 31, 1992 were ceded to
Centre in the amount of $165.6 million under the 1991 Contract. Prospective
cessions of premium and claims were effectively terminated by mutual consent of
SNIC and Centre effective December 31, 1992; however, all other terms of the
1991 Contract remain in effect until the treaty terminates on January 1, 1998.
During the first six months of 1996 and fiscal year 1995, $24 million
and $19.8 million of ceded losses, respectively, were recovered under the 1991
Contract. Reinsurance recoverable (anticipated future cash reimbursements from
reinsurers) of $121.8 million, $145.8 million and $165.6 million for the six
months ended June 30, 1996 and the years ended December 31, 1995 and 1994,
respectively, is expected under the 1991 Contract. Under related reinsurance
agreements with Centre, SNIC holds funds withheld collateral of $93.9 million,
$105.7 million and $111.7 million for the six months ended June 30, 1996 and
the years ended December 31, 1995 and 1994, respectively, and irrevocable
letters of credit of $37.7 million, $27.6 million and $62.3 million for the six
months ended June 30, 1996 and the years ended December 31, 1995 and 1994,
respectively.
Effective January 1, 1993, SNIC entered into an aggregate excess of
loss reinsurance contract ("1993 Contract") with Centre. From SNIC's
perspective the 1993 Contract substantively operated as a one year contract
with at least four one year options to renew exercisable solely at SNIC's
election during the first five years of the contract. Subsequent to January 1,
1998, the 1993 Contract could have been terminated by either SNIC or Centre
upon 30 days' notice. The 1993 Contract required SNIC to cede not less than
$15.0 million and not more than $20.0 million of premiums to Centre with
respect to any covered accident year. Claims and allocated claim adjustment
expenses occurring during the accident year are ceded to Centre in excess of a
variable percentage of earned premium (57.5%, 56.5% and 60% for the 1993, 1994
and 1995 accident years, respectively) and are subject to a limit of 130% of
ceded earned premium, not to exceed $26.0 million for any accident year.
Effective January 1, 1996, the 1993 Contract was canceled at SNIC's election.
The termination of the 1993 Contract did not result in either a profit or loss
being recognized by SNIC.
SNIC maintains excess of loss reinsurance contracts with various
reinsurers and a quota-share contract with ZRC. Under its current excess of
loss contracts (with multiple reinsurers), various reinsurers collectively
assume liability on that portion of each loss that exceeds $500,000 on a per
occurrence basis, up to a maximum of $150 million per occurrence.
Effective January 1, 1994, SNIC entered into a quota-share reinsurance
contract ("Quota Share Contract") with ZRC. Under the Quota Share Contract,
ZRC provides SNIC with an Assumption of Liability Endorsement ("ALE") facility
(based on a 50% quota-share cession during 1995 and 25% during 1996) and has
the option to modify its percentage participation in subsequent years. The
ceding rate under the contract was 20% for 1994, and ZRC and SNIC mutually
agreed to reduce the quota-share participation to 5% for 1995 and 1996.
Further, SNIC receives ceding commissions ranging between 22.5% and 24.5% for
premiums ceded to ZRC. The purpose of the ceding commission is to cover SNIC's
cost of acquiring new business and it may be changed as a result of changes in
market conditions on a quarterly basis. All other terms of the contract remain
in effect for 1996.
Reinsurance makes the assuming reinsurer liable to the insurer to the
extent of the reinsurance ceded, but it generally does not legally discharge an
insurer of its primary liability for the full amount of the policy liability
(except for ALEs). If a reinsurer fails to meet its obligations under the
reinsurance agreement, the ceding company is required to pay the loss. With
respect to policies with an ALE, however, in the event that SNIC is unable to
meet its claim payment obligations, ZRC assumes all responsibility for the
payment of losses related to the policy. All of the excess of loss reinsurance
is with non-affiliated reinsurers.
130
<PAGE> 140
SNIC's reinsurance contracts are generally entered into on an annual
basis. SNIC has maintained reinsurance treaties with many reinsurers for a
number of years. In general, SNIC's reinsurance contracts are of the treaty
variety and cover underwritten risks specified in the treaties. SNIC also from
time to time purchases facultative reinsurance covering specific liabilities or
policies underwritten. As of June 30, 1996, Centre, ZRC, and General
Reinsurance Corporation accounted for 78%, 5% and 8%, respectively, of total
amounts recoverable by SNIC from all reinsurers on paid and unpaid claims and
claim adjustment expenses. At December 31, 1995, these percentages were 79%,
5%, and 7%, respectively. No other reinsurer accounted for more than 10% of
such recoverable amounts.
INVESTMENTS
The amount and types of investments that may be made by the Company
are regulated under the California Insurance Code and rules and regulations
promulgated by the DOI. The investments of the Company are primarily managed
internally, although SNIC hires an outside investment management company as
needed on a fee for service basis. The Company's consolidated portfolio
consisted almost entirely of fixed income securities as of December 31, 1995.
The bond portfolio is heavily weighted toward short to intermediate term,
investment grade securities rated A or better, with approximately 96% rated AA
or better.
Funds withheld assets having carrying and market values of $114.9 and
$117.1 million, respectively, at December 31, 1995, are withheld from Centre as
collateral under the 1991 and 1993 Contracts. All investment income and market
value risk associated with such assets is Centre's. Interest expense in the
amount of $8.8 million and $7.5 million was paid to Centre during 1995 and
1994, respectively. At such time that Centre is obligated to pay SNIC under
the 1991 and 1993 contracts, SNIC will be reimbursed for the carrying of the
funds withheld assets. Funds withheld assets are carried as held-to-maturity.
The table below contains information concerning the composition of the
Company's investment portfolio at December 31, 1995:
<TABLE>
<CAPTION>
Carrying Market
Type of Investment Amount(1) Value
------------------ ----------- ----------
Bonds(2) (In thousands)
-----
<S> <C> <C>
U.S. government and agencies . . . . . . . . $ 33,303 $ 33,303
AA/Aa rated . . . . . . . . . . . . . . . . . 1,976 1,976
A rated . . . . . . . . . . . . . . . . . . . 3,628 3,628
BBB/Baa rated . . . . . . . . . . . . . . . . 3,146 3,146
-------- --------
Total Bonds . . . . . . . . . . . . . 42,053 42,053
Invested cash and short-term investments . . 7,745 7,745
Common stocks . . . . . . . . . . . . . . . . 689 689
Funds withheld from reinsurers . . . . . . . 114,921 117,073
-------- --------
Total . . . . . . . . . . . . . . . . $165,408 $167,560
======== ========
- - ----------------------
</TABLE>
(1) Carrying amount is amortized cost for bonds held to maturity, and
market value for bonds held for sale, common stocks, and short-term
investments.
(2) Standard & Poor's Corporation defines "AAA" rated securities as
"highest rating, extremely strong security," "AA" rated securities as "very
strong security," "A" as "strong security," "BBB" as adequate security," and
"BB" as "low quality." Moody's Investor Services, Inc. defines "Aaa" rated
securities as "best quality," "Aa" as "high quality," "A" as "strong security,"
"Baa" as "adequate security," and "Ba" as "low quality."
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<PAGE> 141
The table below reflects investments and interest earned thereon and
average annual yield on investments for each year in the five-year period ended
December 31, 1995.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C>
Total investments at end of period . . . . . . . . $165,408 $174,345 $144,778 $151,354 $80,261
Net investment income before taxes . . . . . . . . $ 9,784 $ 9,049 $ 9,550 $ 10,802 $ 5,911
Average annual yield on ending investment portfolio
(before taxes) . . . . . . . . . . . . . . 5.9% 5.2% 6.6% 7.1% 7.4%
</TABLE>
The Company in monitoring its asset and liability match attempts to
keep the investment duration at the mid-point of the payout pattern. As of
December 31, 1995, the investments under the Company's management (i.e.,
excluding funds withheld) have a duration of 3.49 years.
The table below sets forth the maturity profile of the Company's bond
portfolio at market value as of December 31, 1995:
<TABLE>
<CAPTION>
Bonds Rated(1)
-------------------------------------------------
Maturity AAA/Aaa AA/Aa A BBB/Baa Total
-------- ------- ------- ------- ------- -------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C>
1 year or less . . . . . . . . . . . . . . . . . $ 30,646 $ 30,646
More than 1 year, through 3 years . . . . . . . . 25,948 $1,138 $3,146 30,232
More than 3 years, through 5 years . . . . . . . 28,372 2,489 30,861
More than 5 years, through 10 years . . . . . . . 19,536 $1,976 21,512
More than 10 years, through 15 years . . . . . . 25,452 25,452
More than 15 years . . . . . . . . . . . . . . . 20,423 20,423
------- ------- ------- ------- -------
Total . . . . . . . . . . . . . . . . . . . . . . $150,377 $1,976 $3,627 $3,146 $159,126
======= ======= ======= ======= =======
</TABLE>
- - ----------------------
(1) Ratings as assigned by Standard & Poor's Corporation and Moody's
Investor Services, Inc., except securities issued by the U.S. government and
agencies are included in the "AAA/Aaa" rating category.
INFORMATION SERVICES
The Company emphasizes the development of personal computer based
information and processing systems for use in all areas of its business.
Management believes that personal computer based processing systems enable the
Company to compete more effectively through enhanced policyholder services,
efficient underwriting, more effective claim support systems, reduced
processing costs, and timely management information. One of the Company's key
strategic initiatives is the maintenance of a creative, flexible, and dynamic
data processing ("DP") capability. The Company has historically invested 1% to
2% of direct written premiums annually in its DP operations, but that
percentage is expected to increase to approximately 3% during 1996.
SNIC management believes that personnel productivity, and underwriting
and claims processing effectiveness, can be greatly improved through its
computer systems. Beginning in late 1991, the Company began to upgrade its DP
operations to take advantage of the new technologies and switched to a current
generation database engine to maintain the claims and underwriting databases.
The claims processing system was placed in service in early 1992, and is
continually modified to reflect new procedural and regulatory requirements. A
new Windows(R) based underwriting and policy issue system was placed in service
in mid-1993.
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<PAGE> 142
Concurrent with the enhancements of the claims and underwriting
systems, management commenced a project to enhance the quality, quantity, and
timeliness of information available to management to monitor the Company's
operations, and to feedback corrections to the operations personnel.
Management believes most insurance companies monitor their operations, and
feedback corrections to their staff, quarterly; a large minority do this
annually, and a small minority do it monthly. SNIC management views quarterly
or less frequent monitoring and feedback as insufficient, and from 1992 to
mid-1994 systems were implemented to permit management to control the Company
using batch processed reports, mostly printed on paper, that were prepared no
less frequently than monthly and, to a major extent in the claims department,
weekly.
Beginning with the installation of SNIC's proprietary SWAMI(SM) system
in mid-1994, SNIC adjusted the Company's monitor and feedback cycle to no less
frequently than weekly, and in many respects to a daily basis. Management
believes this to be necessary due to the information intensive nature of the
insurance business; lack of information represents a major aspect of
underwriting risk. The role of SWAMI(SM) is to provide quality, detailed,
timely information to management as needed to reduce the risk represented by
lack of information. The SWAMI(SM) system has been constantly enhanced since
its implementation.
Management considers information monitoring to be meaningful only if
the result is a thorough understanding of the Company's experience; generally,
that means a need to understand claim frequency and severity by workers'
compensation line components, and paid, reported, and ultimate losses, all
available by producing office, claims servicing office, agent, and underwriter.
Management must also have immediate access to the details behind the numbers,
and that information has to be accessible to, and understandable by,
non-actuarial and non-data processing personnel and executives. SWAMI(SM)
provides information of sufficient type and quality such that virtually all of
the routine data processing generated paper reports historically used by the
Company have been rendered obsolete.
SWAMI(SM) provides a variety of underwriting information as well.
SNIC management has the ability to monitor producer production and
profitability, selected by branch, whether or not in force, and quickly review
any producer's experience in a variety of ways. Detailed information for each
producer can be instantaneously reviewed on an accident year, policy year, or
calendar year basis. The system provides analytical analysis as to producers,
underwriters, or branch operations, which management uses to take corrective
action with respect to unprofitable producers or ineffective staff. The system
permits management to evaluate commissions, in-force business, collections
activity, and product pricing, in detail, utilizing information that is no more
than 24 hours old.
The Company has comprehensive physical and virtual safeguards for its
information and processing systems. Disaster recovery programs and back-up
procedures include nightly back-up storage of all transactions and changes to
the system's database. At the end of each business day, the Company transfers
this information to tapes that are stored off site. The Company maintains
back-up systems in the branch offices to use if the main system fails.
Computer access is restricted by use of codes and passwords.
COMPETITION
California is the largest single-state workers' compensation insurance
market in the United States. For 1995, the latest period for which data are
available, the total direct workers' compensation written premiums in the State
of California were approximately $6.9 billion, of which SNIC wrote
approximately $102 million, or 1.5%. Approximately 300 companies reported to
the WCIRB that they wrote workers' compensation insurance in 1994.
The workers' compensation insurance industry in California is
extremely competitive. Many of SNIC's competitors have been in business
longer, have a larger volume of business, offer more diversified types of
insurance coverage, have greater financial resources, and have greater
distribution capabilities than SNIC. SNIC believes that the dominant
competitor in the California workers' compensation industry is the State
Compensation Insurance Fund. SNIC historically concentrated on insuring medium
to small workers' compensation accounts with less than $75,000 in annual
premiums, where it competed primarily on the basis of limited loss control
services to insureds who were not generally offered such services, and claim
management services. In late 1991, SNIC
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<PAGE> 143
developed and began marketing a small workers' compensation product targeted at
accounts with annual premiums below $10,000 where the underlying payroll is
predominately concentrated in specific employment classifications.
The workers' compensation market is commodity-oriented, highly
fragmented, and reflective of intense price competition. Nevertheless, because
each risk is somewhat unique in terms of insurance exposure, different insurers
can develop widely divergent estimates of prospective losses. Most insurers
attempt to segment classes within markets so that they target the more
profitable sub-classes with lower, although adequate, rates given the estimated
profitability of the segment. In some cases, no statistics are available for
the sub-classes involved, and the insurer implements discounted rate structures
based solely on theoretical judgment. Finally, different insurers have widely
divergent internal expense positions resulting from differing distribution
methods, economies of scale, and efficiency of operations. Therefore, although
workers' compensation insurance is a commodity, the price of insurance does not
necessarily reflect commodity pricing.
Beginning in mid-1994 many of SNIC's competitors began offering bonus
commissions to their producers ranging from five to ten percentage points or
more above the standard commissions historically paid. Some of SNIC's
competitors continue to offer bonus commission plans in spite of the
significant decline in rate levels experienced since January 1, 1995. To date,
SNIC has not offered bonus commission programs generally to its producers, but,
when appropriate, SNIC will negotiate with individual producers on a case by
case basis.
SNIC's ability to attract and retain customers (and therefore,
producers) results from price structures that have been tailored to attract
certain sub-segments of the workers' compensation insurance market.
Nevertheless, SNIC's existing and prospective customer bases are vulnerable to
competition, especially from larger insurers that at any time are capable of
penetrating SNIC's markets with products priced at levels substantially below
SNIC's.
REGULATION
SNIG and its subsidiaries are subject to extensive governmental
regulation and supervision. Regulations relate to such matters as prior
approval of rates, adequacy of reserves, types and quality of investments,
minimum capital and surplus requirements, deposit of securities for the
protection of policyholders, statutory financial reporting requirements, and
restrictions on shareholder dividends. SNIG and its insurance subsidiaries are
also subject to periodic examination by the DOI and must file annual and other
reports on their financial condition and other financial matters. In addition,
assessments are made against SNIC to cover liabilities to policyholders of
insolvent insurance companies and various state regulated involuntary or
assigned risk pools have been created to provide insurance coverage for
insureds that are unable to obtain insurance from private companies. The
regulation and supervision of insurance companies by state agencies is designed
principally for the benefit of their policyholders, not their shareholders.
SNIG believes that it and its subsidiaries are in compliance with state
regulatory requirements that are relevant to their respective businesses.
During the fourth quarter of 1995, the DOI started the tri-annual
audit of SNIC covering the three years ended December 31, 1994. The audit has
been completed and the draft of the DOI's report provided to management in
March 1996, indicated no material issues or actions needed to be taken by SNIC
in either its operations or financial statements.
The California Insurance Code requires the DOI to approve any proposed
change of control of the Company. For such purposes, "control" is presumed to
exist if any person, directly or indirectly, owns, controls, holds the power to
vote, or holds proxies representing more than 10% of the voting securities of
the Company.
The California Insurance Code also limits the amount of dividends or
distributions an insurance subsidiary may pay in any 12-month period to the
greater of (a) net income for the preceding year or (b) 10% of statutory
policyholders' surplus as of the preceding December 31. Payments of greater
amounts require the approval of the DOI.
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<PAGE> 144
The California Workers' Compensation Reform Act passed into law in
1989 (the "Reform Act") provided for substantial changes to the California
workers' compensation system beginning January 1, 1990. The changes included
an increase of 50% in maximum temporary disability and permanent total
disability benefits over two years and smaller increases in maximum death
benefits and maximum vocational rehabilitation allowances. In addition, the
Reform Act created an arbitration process that was intended to streamline the
resolution of contested claims and reduce the number of medical opinions
allowed in such claims. A bill clarifying and amending certain provisions of
the Reform Act became effective on January 1, 1991. The legislation was
intended to provide technical corrections for the administrative costs of the
Reform Act. The legislation revised the standards for the use of qualified
medical evaluators and allows the injured worker, the employer, and any
attorney involved, to use one expert, thus reducing the costs of defense and
medical and legal costs. The bill also revised the standard for psychiatric
injuries and vocational rehabilitation services. Further, payments of
temporary disability, partial disability, permanent disability and death
benefits were also increased. The increased benefits and inadequate controls
over medical service providers under the Reform Act significantly increased
SNIC's loss payments during 1990, 1991, and 1992.
In July 1993, the California legislature enacted a series of bills to
significantly change the California workers' compensation system ("1993
Reforms"). The 1993 Reforms were intended to provide substantial cost savings
as a result of: (i) a higher compensability standard for psychiatric injuries
through a requirement that work be the predominant cause (more than 50%) in
contrast to the previously existing 10% cause standard; (ii) a provision that
psychiatric injuries are not compensable if they arise from lawful personnel
actions; (iii) restrictions on post-termination claims unless, among other
things, notice of an injury prior to termination is given; (iv) possible
extension of the employers' control of medical treatment of up to one year; (v)
imposition of a cap of $16,000 on vocational rehabilitation costs, which
previously were not subject to maximum dollar limitations; (vi) restrictions on
the number and timing of medical-legal evaluations; (vii) a prohibition on
referrals by physicians and other providers to facilities in which they have a
financial interest; (viii) a requirement that a schedule of medical-legal fees
be developed; and (ix) a strengthening of provisions intended to combat
fraudulent claims and abuse of the system by providing for felony penalties,
restitution and civil liability. In each case, these provisions contain
various qualifications and conditions.
The 1993 Reforms also increase insurers' costs as a result of benefit
increases commencing July 1, 1994, and continuing through July 1, 1996. In
addition, the 1993 Reforms reduced revenue through an immediate 7% reduction in
minimum rates. The legislation permitted the DOI to approve even lower rates,
and, effective January 1, 1994, the DOI ordered a further 12.7% reduction in
minimum rates. Minimum rates were once again reduced by 16.0% effective
October 1, 1994.
Effective January 1995, California's minimum rate law was replaced by
an open rating system. Under this new rating system, individual insurance
companies file rates and rules not less than 30 days prior to their effective
date, and such rates can only be disapproved by the DOI after a hearing and
only on the basis of solvency, market share, or improper filing. The 1993
Reforms also permit certain large entities or groups in the construction
business to establish alternative workers' compensation programs. The 1993
Reforms contain numerous other provisions, including limitations on grounds for
cancellation of policies.
While the first 18 months of open rating have seen intense price
competition, leading to lower average premiums per policy, SNIC cannot predict
the ultimate effect of open rating on its workers' compensation business. The
specified benefit increases are scheduled to occur gradually over a three-year
period. The potential cost savings from the other reforms discussed above may
not be realized for some period of time, and there can be no assurance that the
intended benefits of the cost savings provisions will materialize. SNIC
believes the rates it has filed with the DOI are adequate, but it is unable to
predict the degree to which such rates will continue to be competitive in the
marketplace.
The California legislature passed, and the DOI has issued its
guidelines with respect to the implementation of, Assembly Bill 1913 ("AB
1913"). AB 1913, among other things, causes the experience modification factor
of a current workers' compensation policy and the immediately preceding two
policies (regardless of carrier) to be
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<PAGE> 145
subject to revision if a claim used in a modification closes on or after
January 1, 1995 for a value of 60% or less than its highest earlier reported
value, if the highest reported incurred value was $10,000 or more. Such a
change in the experience modification factor will require the current workers'
compensation carrier to return a portion of a policyholders' premium for the
current and preceding two policies' periods regardless if the current carrier
was the insured's previous carrier. WCIRB estimates of the ultimate cost to
California workers' compensation underwriters range from 1% to 2.5% of 1996
premium; however, these estimates are based upon broad industry estimates and
could vary significantly from company to company based upon the type of claims
incurred, size of employer, and employer industry group. Because of the
uncertainty and variability regarding the effects of AB 1913, no reasonable
estimate of the cost can be made. The Company's management is monitoring the
situation and will book reserves as necessary.
Proposed federal legislation has been introduced from time to time in
recent years that would provide the federal government with substantial power
to regulate P&C insurers including state workers' compensation systems,
primarily through the establishment of uniform solvency standards. Proposals
also have been discussed to modify or repeal the antitrust exemption for
insurance companies provided by the McCarran-Ferguson Act. The adoption of
such proposals could have a material adverse impact upon the operations of the
Company.
Proposition 103, a ballot initiative passed by California voters on
November 8, 1988, requires rate rollbacks and prior approval of rates and
imposes other requirements on P&C insurers. Proposition 103, by its terms,
does not apply to workers' compensation insurance, but does apply to the types
of property and casualty insurance that SNIC wrote prior to 1994. Effective
October 1993, SNIC reached an agreement with the DOI under which SNIC's
Proposition 103 rate rollback liability was established, and permanently
settled, at a zero dollar amount.
A risk-based capital formula was adopted by the National Association
of Insurance Commissioners ("NAIC") in December 1993 for the purpose of helping
regulators identify P&C insurers that may be in financial difficulty. Each
insurer is required to report to regulators the quality of its capital as
measured by the company's Authorized Control Level Risk Based Capital
("ACLRBC") and the relationship of its modified capital base to the level of
risk assumed in specific aspects of its operations. The formula does not
address all of the risks associated with the operations of an insurer, but does
provide a minimum threshold measure of capital adequacy by individual insurance
companies. The formula does not purport to compute a target level of capital.
Companies falling below the threshold will be placed into one of four
categories: Company Action Level (ACLRBC multiplied by a factor of 2.0),
where the insurer must submit a plan of corrective action; Regulatory Action
Level (ACLRBC multiplied by a factor of 1.5), where the insurer must submit
such a plan and the regulator will issue a corrective order; Authorized Control
Level (ACLRBC multiplied by 1.0), which includes the above actions and may
include rehabilitation or liquidation; and Mandatory Control Level (ACLRBC
multiplied by a factor of 0.7), where the regulator must rehabilitate or
liquidate the insurer. The Company has calculated its Risk Based Capital
requirements at December 31, 1995 and has exceeded its highest level Risk Based
Capital requirement.
The NAIC's Insurance Regulatory Information System ("IRIS") was
developed by a committee of state insurance regulators and is primarily
intended to assist state insurance departments in executing their statutory
mandates to oversee the financial condition of insurance companies operating in
their respective states. IRIS identifies eleven industry ratios and specifies
"usual values" for each ratio. Departure from the usual values on four or more
of the ratios generally leads to inquiries from individual state insurance
commissioners. Based on the 1995 statutory financial statements, SNIC was
outside the usual range on four IRIS tests: 1) change in surplus; 2) one-year
reserve development to surplus; 3) two-year reserve development to surplus; and
4) estimated current reserve deficiency to surplus. The first usual value
deviation is the result of an extraordinary dividend distribution of 100% of
SNIC's shares in SBL to SNIG, constituting $15 million of SNIC's statutory
capital and surplus, while the latter three result principally from the effects
of the aggregate excess of loss reinsurance contracts with Centre. As the
Company received prior approval from the DOI for the extraordinary dividend and
the DOI is well informed concerning the effects of SNIC's aggregate excess of
loss reinsurance contracts, the Company does not anticipate any adverse
regulatory consequences as a result of being outside the range on these usual
values. See "--Claims and Claim Adjustment Expense Reserves" and
"--Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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<PAGE> 146
EMPLOYEES
As of June 30, 1996, the Company had approximately 340 employees, none
of whom was covered by a collective bargaining agreement.
137
<PAGE> 147
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The table below sets forth certain information regarding the
beneficial ownership of the Company's voting securities as of October 31, 1996
by each person who is known by the Company to be the beneficial owner of more
than 5% of the indicated classes of the Company's voting securities. The
Voting Notes were issued on March 31, 1992 in connection with a transaction
wherein the Company issued its 14.5% Senior Subordinated promissory notes in an
aggregate principal amount of $11 million, together with warrants to purchase
approximately 1,616,886 shares of the Company's Common Stock. The Company
redeemed all of those promissory notes with a prepayment, effective June 30,
1994, except for the Voting Notes, with respect to which prepayment is
prohibited. The outstanding principal amount of the Voting Notes is $30,000.
The number of votes attaching to the Voting Notes is equal to the number of
shares of Common Stock that may be purchased upon exercise of the warrants that
were issued in that March 31, 1992 transaction and remain outstanding and are
unexercised as of the applicable record date for a shareholder vote. As of the
Record Date, the number of votes held by the holders of the Voting Notes was
equivalent to 1,566,465 shares of Common Stock. The Voting Notes are permitted
to vote only in director elections, director removals, votes on amending that
right to vote, and changes to the number of authorized directors. As a result
of the cancellation of a portion of the relevant warrants, the number of common
stock equivalent votes held by the Voting Notes has decreased somewhat since
March 31, 1992. The specific voting rights of the Voting Notes are set forth
in the Company's Articles of Incorporation and Bylaws. This table does not
reflect the number of shares of Common Stock to issued and sold by the Company
in connection with the Stock Issuance. See "Proposal No. 1--Security Ownership
of Certain Beneficial Owners and Management After the Stock Issuance."
<TABLE>
<CAPTION>
Common Stock(1) Voting Notes
---------------------- ----------------------
Shares-
Name and Address Shares Percent(2) Equivalent Percent
- - ---------------------------------------- ------ ---------- ---------- -------
<S> <C> <C> <C> <C>
"III" -- -- 1,566,465(3) 100%
International Insurance Investors, L.P.,
a Bermuda limited partnership
c/o International Insurance Investors
(Bermuda) Limited, General Partner
Cumberland House
One Victoria Street
Hamilton HM HX, Bermuda
"IIA" 1,474,306(4) 30.03% -- --
International Insurance Advisors, Inc.
One Chase Manhattan Plaza
44th Floor
New York, New York 10005
"CENTRELINE" 579,356(5) 14.45% -- --
CentreLine Reinsurance Limited,
a Bermuda corporation
Cumberland House
One Victoria Street
Hamilton HM HX, Bermuda
"CENTRE" 470,390(4) 12.05% -- --
Centre Reinsurance Limited
One Victoria Street
Seventh Floor
Hamilton HM HX, Bermuda
"TJS" 396,950(6) 11.56% -- --
TJS Partners, L.P.
52 Vanderbilt Avenue, 5th Floor
New York, New York 10017
</TABLE>
(Table continued on next page)
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<PAGE> 148
<TABLE>
<CAPTION>
Common Stock(1) Voting Notes
---------------------- -----------------------
Shares-
Name and Address Shares Percent(2) Equivalent Percent
- - ---------------------------------------- ------ ---------- ---------- -------
<S> <C> <C> <C> <C>
"BISHOP ESTATE" 388,752(4) 10.17% -- --
Trustees of the Estate of Bernice P. Bishop
567 South King Street
Suite 200
Honolulu, Hawaii 96813
Thomas J. Jamieson 245,300(7) 7.14% -- --
Jaco Oil Company
P.O. Box 1807
Bakersfield, California 93303
The Ravenswood Investment Company 206,046(8) 6.00% -- --
104 Gloucester Road
Massapequa, New York 11758
- - -----------------
</TABLE>
(1) Includes warrants expiring on April 1, 2002 to purchase 1,566,465
shares of Common Stock (the "Warrants") and a warrant expiring on June
30, 2001 to purchase 579,356 shares of Common Stock described more
fully in footnote 5, below. The Warrants were issued on March 31,
1992 in a transaction in which the Company issued (a) Warrants to
purchase approximately 1,616,886 shares of Common Stock and (b)
promissory notes in the aggregate principal amount of $11 million to
III and certain members of the Company's management. The Warrants are
exercisable at $4.00 per share. The Warrants purchased by III, now
exercisable into 1,474,306 shares of Common Stock, were issued to IIA,
as agent for each of the limited partners and the general partner of
III. Pursuant to the Stock Purchase Agreement, the Warrants will be
distributed prior to the consummation of the Stock Issuance to the
partners of III, at which time IIA's agency relationship with such
partners will terminate. The Company has retired certain Warrants
issued to members of management no longer employed by the Company.
(2) Percent ownership is based on the number of shares outstanding as of
October 31, 1996, which number was 3,437,523 shares, plus any shares
issuable pursuant to options or warrants held by the person in
question that may be exercised within 60 days after October 31, 1996.
(3) Robert A. Spass, Craig F. Schwarberg and Bradley E. Cooper, directors
of the Company, beneficially own limited partnership interests in III
of 0.583%, 0.225%, and 0.075%, respectively.
(4) Represents Warrants to purchase shares of Common Stock. Warrants to
purchase 1,474,306 shares of Common Stock are held of record by IIA,
as agent for each of the limited partners and for the general partner
of III. As agent for such partners, IIA has the revocable authority
to exercise rights set forth in the Warrants and to vote any shares of
Common Stock issuable upon exercise of the Warrants. Robert A. Spass,
a director of the Company, is an officer of IIA and as such has the
authority to exercise these rights. In the event any limited partner
or the general partner of III revokes IIA's authority to exercise
rights set forth in the Warrants and to vote any shares of Common
Stock issued upon exercise of the Warrants, such partner would be
entitled to exercise such rights with respect to its proportionate
shares of the Warrants or Common Stock. See footnote 1 above
regarding the termination of IIA's agency relationship in connection
with the distribution of the Warrants to the partners of III. The
limited partners who, upon revocation of IIA's authority as described
above, would be entitled to exercise Warrants covering more than 5% of
the Common Stock are Centre and Bishop Estate, in the share amounts
and percentages stated. The trustees of Bishop Estate are Richard S.
H. Wong, Oswald K. Stender, Lokelani Lindsey, Gerard A. Jervis and
Henry H. Peters, each of whom shares voting and/or investment power
over securities held by Bishop Estate. Mr. Peters is a director of
IIA. Neither IIA nor any of Robert A. Spass or Steven B. Gruber, a
nominee for election as director at the Special Meeting, has any
interest in or control over CentreLine or any power to vote or dispose
of the shares underlying the "CentreLine Warrant," as defined in
footnote 5, below. The numbers of shares reported for Centre and
Bishop Estate are based on a Schedule 13G filed with the SEC in
February 1996.
(5) Represents a warrant to purchase 579,356 shares of Common Stock issued
as of June 30, 1994 (the "CentreLine Warrant"). CentreLine is an
affiliate of Centre. The CentreLine Warrant was issued in connection
with an investment in the Company (and its affiliate, Superior
National Capital, L.P.) by CentreLine and a second
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<PAGE> 149
Centre affiliate, Centre Reinsurance Services, aggregating $20
million. The CentreLine Warrant is exercisable at $5.20 per share.
Steven D. Germain, a director of the Company, is an officer and a
director of both Centre and CentreLine. In addition to Mr. Germain,
each of Steven M. Gluckstern, Michael D. Palm, Laurence Cheng, David
A. Brown and Jay S. Ralph is an officer and a director of both Centre
and CentreLine. Messrs. Germain, Gluckstern, Palm, Cheng, Brown and
Ralph disclaim any beneficial interest in the CentreLine Warrant and
the Common Stock issuable upon its exercise, or in the Warrant
issuable to Centre, as described in footnote 4, above, or the shares
of Common Stock issuable upon the exercise of such Warrant. However,
as officers and directors of both Centre and CentreLine, such persons
share voting and/or investment power over such securities (subject to
the agency appointment described in footnotes 1 and 4 above).
(6) Based on a Form 4 filed with the SEC in July 1996, TJS Partners, L.P.
is the direct beneficial owner of 396,950 shares of Common Stock. TJS
Corporation and its controlling stockholder, sole director and
executive officer, Thomas J. Salvatore, are the general partners of
TJS Management, L.P., the general partner of TJS Partners, L.P., and
exercise voting control and dispositive power over all 396,950 shares
presently owned, and are beneficial owners of those shares.
(7) Includes 98,050 shares owned of record by Jaco Oil Company, an entity
controlled by Mr. Jamieson.
(8) According to a report on Schedule 13D dated July 5, 1995, The
Ravenswood Investment Company is the direct beneficial owner of 83,546
shares of Common Stock and has a contractual right to buy 122,500
additional shares from the receiver of AMS Life Insurance Company, an
Arizona insurer in liquidation. The Company believes that acquisition
has occurred. The general partners of The Ravenswood Investment
Company, Robert E. Robotti and Kenneth R. Wasiak, exercise voting
control and dispositive power over all 206,046 shares presently owned
or subject to the contract to purchase, and are beneficial owners of
those shares.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock as of October 31, 1996 by (i) each
director and certain executive officers of the Company, individually, and (ii)
all directors and executive officers as a group. This table does not reflect
the number of shares of Common Stock that will be issued and sold by the
Company in connection with the Stock Issuance, in which members of the
Company's management have agreed to participate and in which several directors
of the Company have certain interests. See "Proposal No. 1--Security Ownership
of Certain Beneficial Owners and Management After the Stock Issuance."
<TABLE>
<CAPTION>
Percent of Common
Name Shares Owned Stock(1)
- - ----------------------------------- ------------ ------------
<S> <C> <C>
William Gentz . . . . . . . . . . . 68,985(2) 2.00%
J. Chris Seaman . . . . . . . . . . 142,586(3) 4.02%
Joseph P. Wolonsky . . . . . . . . 49,242(4) 1.42%
Karl O. Johnson . . . . . . . . . . 42,072(5) *
Douglas R. Roche . . . . . . . . . 17,055(6) *
Thomas J. Jamieson . . . . . . . . 245,300(7) 7.14%
Gordon E. Noble . . . . . . . . . . 10,000 *
C.L. Pecchenino . . . . . . . . . . 14,250 *
Robert A. Spass . . . . . . . . . . 1,482,306(8) 30.18%
Craig F. Schwarberg . . . . . . . . 3,321(9) *
Bradley E. Cooper . . . . . . . . . 3,107(10) *
Steven D. Germain . . . . . . . . . 1,053,947(11) 23.49%
Directors and Executive Officers as
a Group (20 persons) . . . 2,713,689(12) 47.22%
- - -----------------
* Less than 1%
</TABLE>
140
<PAGE> 150
(1) Percent ownership is based on the number of shares outstanding as of
October 31, 1996, which number was 3,437,523 shares, plus any shares
issuable pursuant to options or warrants held by the person in
question which may be exercised within 60 days after October 31, 1996.
(2) Includes 16,335 shares issuable upon exercise of stock options that
are exercisable within sixty days of October 31, 1996. Also includes
19,950 restricted stock grants awarded under the 1995 Plan in 1995 and
1996, of which the restrictions have lapsed as to 1,149 shares.
(3) Includes 58,795 shares issuable upon exercise of Warrants and 37,065
shares issuable upon exercise of stock options, each of which is
exercisable within sixty days of October 31, 1996. Also includes
15,163 restricted stock grants awarded under the 1995 Plan in 1995 and
1996, of which the restrictions have lapsed as to 861 shares.
(4) Includes 10,582 shares issuable upon exercise of Warrants and 19,260
shares issuable upon exercise of stock options, both of which are
exercisable within sixty days of October 31, 1996. Also includes
1,000 shares held by his spouse, the ownership of which is subject to
community property laws. Also includes 9,125 restricted stock grants
awarded under the 1995 Plan in 1995 and 1996, of which the
restrictions have lapsed as to 534 shares.
(5) Includes 4,262 shares issuable upon exercise of Warrants and 14,060
shares issuable upon exercise of stock options, each of which is
exercisable within sixty days of October 31, 1996. Also includes
7,625 restricted stock grants awarded under the 1995 Plan in 1995 and
1996, of which the restrictions have lapsed as to 362 shares.
(6) Includes 5,680 shares issuable upon exercise of stock options
exercisable within sixty days of October 31, 1996. Also includes
4,687 restricted stock grants awarded under the 1995 Plan in 1995 and
1996, of which the restrictions have lapsed as to 284 shares.
(7) Includes 98,050 shares owned of record by Jaco Oil Company, an entity
controlled by Mr. Jamieson.
(8) Represents 8,000 shares of Common Stock owned directly by Mr. Spass as
well as Warrants to purchase Common Stock held by IIA. IIA is the
registered owner of Warrants to purchase 1,474,306 shares of Common
Stock, exercisable within sixty days of October 31, 1996, that are
held by IIA as agent for each of the limited partners and the general
partner of III. As agent for such partners, IIA has the revocable
authority to exercise rights set forth in the Warrants and to vote any
shares of Common Stock issuable upon exercise of the Warrants. As
discussed in footnote 1 to the preceding "Security Ownership of
Certain Beneficial Owners" table, pursuant to the Stock Purchase
Agreement, the Warrants held by III will be distributed to each of its
partners prior to the Stock Issuance, at which time the agency
relationship of IIA with such partners will be terminated and IIA will
cease to be the holder of record of such Warrants. Mr. Spass is an
officer of IIA and is the beneficial owner of less than one percent of
the equity securities of IIA. In addition, Mr. Spass is the
beneficial owner of a 0.583% limited partnership interest in III. Mr.
Spass claims beneficial ownership in Warrants representing the right
to purchase 8,591 shares of Common Stock.
(9) Mr. Schwarberg is the beneficial owner of less than one percent of the
equity securities of IIA and the beneficial owner of a 0.225% limited
partnership interest in III. Mr. Schwarberg claims beneficial
ownership in Warrants representing the right to purchase 3,321 shares
of Common Stock.
(10) Represents 2,000 shares of Common Stock owned directly by Mr. Cooper.
Mr. Cooper is the beneficial owner of less than one percent of the
equity securities of IIA. In addition, Mr. Cooper is the beneficial
owner of a 0.075% limited partnership interest in III. Mr. Cooper
claims beneficial ownership in Warrants representing the right to
purchase 1,107 shares of Common Stock.
(11) Represents (i) 3,600 shares of Common Stock owned directly, (ii) 600
shares of Common Stock owned indirectly as custodian for the benefit
of his children under the New York Uniform Gift to Minors Act, and
(iii) warrants to purchase Common Stock, consisting of the CentreLine
Warrant to purchase 579,356 shares issued to CentreLine and the
partnership interest held by Centre in the Warrants issued to IIA as
agent for the partners of III, issuable to Centre upon revocation of
the agency relationship and distribution of the Warrants to the III
limited partners and general partner. As discussed in footnote 1 to
the preceding "Security Ownership of Certain Beneficial Owners" table,
such revocation and distribution are expected to occur prior to the
Stock Issuance. Based upon Centre's interest in III, the Warrants
distributable to it would be exercisable to purchase 470,391 shares of
Common Stock. See the preceding "Security Ownership of Certain
Beneficial Owners" table and footnotes 4 and 5 thereto. Mr. Germain
is an officer and director of both Centre and CentreLine. As such, he
shares voting and/or dispositive control over such securities (subject
to the
141
<PAGE> 151
termination of the agency relationship with IIA by III, with respect
to the Warrant and underlying shares distributable to Centre). Mr.
Germain disclaims any beneficial interest in the CentreLine Warrant,
the Warrants issuable to Centre, and the Common Stock issuable upon
their exercise.
(12) Includes (i) 2,127,301 shares issuable upon exercise of warrants and
(ii) 111,700 shares issuable upon exercise of stock options, each of
which is exercisable within sixty days of October 31, 1996. Also
includes 74,411 shares subject to the Company's right of repurchase,
of which restrictions have lapsed as to 4,078 shares. Refer to
footnotes 8 and 11 for information regarding beneficial interests in
the Warrants and the Centreline Warrant held by certain directors.
MARKET PRICE OF AND DIVIDENDS ON THE COMPANY'S
COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Common Stock is listed and traded on Nasdaq under the trading
symbol "SNTL". The Nasdaq Stock Market is a highly-regulated electronic
securities market comprised of competing "market makers" whose trading is
supported by a communications network linking them to quotation dissemination,
trade reporting, and order execution systems. This market also provides
specialized automation services for screen-based negotiations of transactions,
on-line comparison of transactions, and a range of informational services
tailored to the needs of the securities industry, investors and issuers. The
Nasdaq Stock Market consists of two distinct market tiers, The Nasdaq National
Market (where the Company's shares are traded, referred to in this Proxy
Statement as "Nasdaq") and The Nasdaq SmallCap Market, and is operated by The
Nasdaq Stock Market, Inc., a wholly owned subsidiary of the National
Association of Securities Dealers, Inc. Set forth below are the quarterly high
and low closing sale prices for the Common Stock as reported to the Company by
those broker-dealers believed by the Company to be most active in making a
market in the Common Stock. As the Common Stock was not approved for listing
on Nasdaq until March 5, 1996, these quotations reflect inter-dealer prices
(giving effect to the May 25, 1995 four-into-one reverse stock split) without
retail mark-up, mark-down or commission and may not necessarily represent
actual transactions.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C> <C>
1996
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . $7.75 $4.88
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . $5.62 $5.00
1995
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . $6.00 $4.75
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . $5.50 $4.75
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . $5.00 $4.00
First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . $5.40 $4.60
1994
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . $5.00 $4.60
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . $5.00 $4.60
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . $5.00 $4.00
First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . $4.00 $3.00
1993
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . $4.00 $3.00
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . $3.00 $2.00
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . $3.00 $2.00
First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . $3.00 $2.00
</TABLE>
As of November 8, 1996, the number of shareholders of record of Common
Stock was 335; such shareholders held a total of 3,437,523 shares of Common
Stock on that date.
142
<PAGE> 152
The Company's current policy is to retain its earnings for use in its
business; it has paid no cash dividends to its shareholders in its two most
recent fiscal years and has no present intention of paying cash dividends in
the foreseeable future. The payment of dividends in the future is subject to
the discretion of the Board of Directors and will depend on the Company's
operating results, financial condition and capital requirements, general
business conditions, and other relevant factors, including legal restrictions
applicable to the payment of dividends by SNIC. The California Insurance Code
restricts the dividends or distributions an insurance subsidiary may pay in any
12-month period to the greater of (a) net income for the preceding year, or (b)
10% of statutory policyholders' surplus as of the preceding December 31.
Payments of greater amounts require the approval of the DOI. Because the
Company conducts no substantial business other than through SNIC, SNIG would be
dependent upon dividends from SNIC in order to pay dividends to SNIG's
shareholders.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents filed by Pac Rim are incorporated herein by
reference:
(1) The Annual Report of Pac Rim on Form 10-K for the year ended
December 31, 1995.
(2) The Quarterly Report of Pac Rim on Form 10-Q for the quarter
ended June 30, 1996.
Such documents are attached to this Proxy Statement as Annex H and Annex I,
respectively.
OTHER BUSINESS
The Company is not aware of any other business to be presented at the
Special Meeting. All shares represented by proxies (other than "restricted
proxies") delivered to the Company will be voted in favor of the proposals of
the Board of Directors described herein unless otherwise indicated on the form
of proxy. If any other matters properly come before the meeting, the proxy
holders whose names appear on the enclosed proxy card will vote thereon
according to their best judgment.
By Order of the Board of Directors
Robert E. Nagle,
Secretary
Calabasas, California
November 11, 1996
143
<PAGE> 153
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1995 and 1994 . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Income for the Years Ended December 31, 1995, 1994 and 1993 . . . F-4
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, F-5
1995, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993 . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . F-7
Financial Statement Schedules:
Schedule I: Summary of Investments - Other than Investments in Related Parties . . . . F-25
Schedule II: Condensed Financial Information of the Registrant, Superior National F-26
Insurance Group, Inc. . . . . . . . . . . . . . . . . . . . . . . . . .
Schedule III: Supplemental Insurance Information . . . . . . . . . . . . . . . . . . . . F-30
Schedule IV: Reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-31
Schedule V: Valuation and Qualifying Accounts and Reserves . . . . . . . . . . . . . . F-32
Schedule VI: Supplemental Property and Casualty Insurance Information . . . . . . . . . F-33
</TABLE>
F-1
<PAGE> 154
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Superior National Insurance Group, Inc.:
We have audited the consolidated financial statements of Superior National
Insurance Group, Inc. and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedules as listed in the accompanying
index. These consolidated financial statements and financial statement
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and the financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Superior National
Insurance Group, Inc. and subsidiaries as of December 31, 1995 and 1994, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1995, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly, in all material
respects, the information set forth therein.
As discussed in Note (1) to the consolidated financial statements, the Company,
in 1994, adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," and in 1993, Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes."
KPMG Peat Marwick LLP
Los Angeles, California
March 25, 1996
F-2
<PAGE> 155
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
(In thousands, except per share data)
<TABLE>
<CAPTION>
-------- --------
ASSETS 1995 1994
-------- --------
<S> <C> <C>
Investments:
Bonds and notes:
Held-to-maturity, at amortized cost (market: 1994, $4,179) - $4,183
Available-for-sale, at market (cost: 1995, $41,800; 1994, $55,405) $42,053 51,504
Equity securities, at market
Common stock (cost: 1995, $686; 1994, $6) 689 7
Funds withheld from reinsurers, at amortized cost
(market: 1995, $117,073; 1994, $104,115) 114,921 108,283
Invested cash (certificates of deposit and other short-term instruments) 6,045 7,218
Restricted investment 1,700 3,150
-------- --------
TOTAL INVESTMENTS 165,408 174,345
Cash (Restricted cash: 1995, $2,686; 1994, $234) 2,952 2,533
Reinsurance recoverable:
Paid and unpaid claims and claim adjustment expense 38,051 66,166
Policyholder dividends 841 1,963
Premiums receivable (less allowance for doubtful
accounts of $500 in 1995 and $900 in 1994) 11,574 18,475
Earned but unbilled premiums receivable 3,150 6,486
Accrued investment income 1,827 1,336
Deferred policy acquisition costs 2,780 2,905
Current income taxes - 1,721
Deferred income taxes 10,085 5,645
Funds held by reinsurer 972 -
Prepaid reinsurance premiums 625 537
Prepaid and other 6,077 4,664
-------- --------
TOTAL ASSETS $244,342 $286,776
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Claims and claim adjustment expenses $140,774 $171,258
Unearned premiums 10,220 10,728
Reinsurance payable 370 3,205
Long-term debt 8,530 9,730
Policyholder dividends 8,094 19,064
Discontinued operations - 4,223
Accounts payable and other liabilities 11,829 9,414
-------- --------
TOTAL LIABILITIES 179,817 227,622
PREFERRED SECURITIES ISSUED BY AFFILIATE; authorized
1,100,000 shares; issued and outstanding 922,137 shares in 1995 and 21,045 18,790
838,800 shares in 1994
SHAREHOLDERS' EQUITY
Common stock, no par value; authorized 25,000,000 shares;
issued and outstanding 3,430,373 shares in 1995 and 3,429,873 shares in 1994 15,943 15,941
Unrealized gain on equity securities, net of taxes 2 -
Unrealized gain(loss) on available-for-sale investments, net of income taxes 167 (2,574)
Paid in capital - warrants 2,206 2,206
Retained earnings 25,162 24,791
-------- --------
TOTAL SHAREHOLDERS' EQUITY 43,480 40,364
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $244,342 $286,776
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 156
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
REVENUES:
<S> <C> <C> <C>
Premiums written, net of reinsurance ceded $ 89,139 $105,946 $154,431
Net change in unearned premiums (596) (4,472) 846
-------- -------- --------
Net premiums earned 89,735 110,418 153,585
Net investment income 9,784 9,049 9,550
-------- -------- --------
TOTAL REVENUES 99,519 119,467 163,135
-------- -------- --------
EXPENSES:
Claims and claim adjustment, net of reinsurance recoveries 56,605 78,761 113,817
Commissions, net of reinsurance ceding commissions of $1,136,
$5,854 and none in 1995, 1994 and 1993, respectively 11,881 10,404 15,467
Policyholder dividends (5,742) 4,983 11,371
Interest 9,619 8,726 6,221
General and administrative
Underwriting 14,931 11,256 13,311
Other 536 340 744
-------- -------- --------
Total Expenses 87,830 114,470 160,931
INCOME BEFORE INCOME TAXES, PREFERRED SECURITIES DIVIDENDS
AND ACCRETION, DISCONTINUED OPERATIONS, EXTRAORDINARY ITEM,
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES 11,689 4,997 2,204
Income tax expense (benefit) (12) 1,398 (530)
-------- -------- --------
INCOME BEFORE PREFERRED SECURITIES DIVIDENDS AND ACCRETION,
DISCONTINUED OPERATIONS, EXTRAORDINARY ITEM AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES 11,701 3,599 2,734
Preferred securities dividends and accretion, net of income tax
benefit of $767 in 1995 and $352 in 1994 (1,488) (683) -
Loss from operations of discontinued property and casualty
operations, net of income tax benefit of $5,070 and
$1,541 in 1995 and 1993, respectively (9,842) - (2,991)
Extraordinary loss on retirement of long-term debt, net of
income tax benefit of $1,042 in 1994 and $233 in 1993 - (2,022) (453)
Cumulative effect of change in accounting for income taxes - - 2,297
$1,042 in 1994 and $233 in 1993
NET INCOME $ 371 $ 894 $ 1,587
======== ======== ========
EARNINGS PER SHARE:
INCOME BEFORE PREFERRED SECURITIES DIVIDENDS AND ACCRETION,
DISCONTINUED OPERATIONS, EXTRAORDINARY ITEM AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES $ 3.41 $ 1.05 $ 0.79
Preferred securities dividends and accretion, net of income taxes (0.43) (0.20) -
Loss from operations of discontinued property and casualty
operations, net of income tax benefit (2.87) - (0.87)
Extraordinary loss on retirement of long-term debt, net
of income tax benefit - (0.59) (0.13)
Cumulative effect of change in accounting for income taxes - - 0.67
-------- -------- --------
NET INCOME $ 0.11 $ 0.26 $ 0.46
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 157
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(Amounts in thousands)
<TABLE>
<CAPTION>
Net Unrealized
Common Stock Unrealized Gain (Loss)
------------------- Gain (Loss) on Available- Paid in Total
Shares No Par on Equity for-sale Capital- Retained Shareholder
Issued Value Securities Investments Warrants Earnings Equity
<S> <C> <C> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------
Balance at December 31, 1992 3,429,873 $15,941 $ 6 - $ 217 $22,310 $38,474
Net income - - - - - 1,587 1,587
Retirement of warrants - - - - (1) - (1)
Unrealized gain (loss) on equity securities - - (6) - - - (6)
------------------------------------------------------------------------------------
Balance at December 31, 1993 3,429,873 15,941 - - 216 23,897 40,054
------------------------------------------------------------------------------------
Net income - - - - - 894 894
Retirement of warrants - - - - (10) - (10)
Issuance of warrants - - - - 2,000 - 2,000
Adjustment for change in accounting
for available-for-sale investments,
net of taxes - - - $ 289 - - 289
Change in unrealized gain (loss) on
available-for-sale investments,
net of taxes - - - (2,863) - - (2,863)
------------------------------------------------------------------------------------
Balance at December 31, 1994 3,429,873 15,941 - (2,574) 2,206 24,791 40,364
------------------------------------------------------------------------------------
Net income - - - - - 371 371
Unrealized gain on equity
Securities - - 2 - - - 2
Change in unrealized loss on
available-for-sale
investments, net of taxes - - - 2,741 - - 2,741
Common stock issued 500 2 - - - - 2
------------------------------------------------------------------------------------
Balance at December 31, 1995 3,430,373 $15,943 $ 2 $ 167 $2,206 $25,162 $43,480
====================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 158
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(Amounts in thousands)
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 371 $ 894 $ 1,587
---------------------------------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Amortization of bonds and preferred stock (3,575) (2,770) (2,335)
Amortization of long-term debt - 1,151 86
(Gain)/loss on sale of investments 525 (35) (1,069)
(Gain)/loss on sale of CentreRe investments (4,891) - -
Cumulative effect of change in accounting for income taxes - - (2,297)
Preferred securities dividends and accretion 2,255 1,035 -
Decrease in reinsurance balances receivable 29,237 2,874 33,386
Decrease (increase) in premiums receivable 6,901 208 (2,777)
Decrease (increase) in earned but unbilled premiums receivable 3,336 2,580 (5,466)
Decrease (increase) in accrued investment income (491) 138 (165)
Decrease (increase) in deferred policy acquisition costs 125 446 (121)
Decrease (increase) in income taxes receivable 1,721 - (23)
Decrease (increase) in deferred taxes (5,853) - (2,209)
(Increase) in funds held by reinsurer (972) - -
Decrease (increase) in prepaid reinsurance premiums (88) (537) 2,796
(Increase) in other assets (1,413) (362) (508)
Increase (decrease) in claims and claim adjustment
expense reserves (30,484) 220 (31,596)
(Decrease) in unearned premium reserves (508) (3,935) (5,264)
Increase (decrease) in reinsurance payable (2,835) 2,161 (1,163)
Increase (decrease) in policyholder dividends payable (10,970) 1,163 4,739
Increase (decrease) in discontinued operations (4,223) - 4,223
Increase in accounts payable and other liabilities 2,415 984 2,368
---------------------------------
Total adjustments (19,788) 5,321 (7,395)
---------------------------------
Net cash provided by (used in) operating activities (19,417) 6,215 (5,808)
---------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Retirement of long-term debt (1,200) (8,165) (2,362)
Proceeds from long-term debt - 10,000 -
Proceeds from issuance of preferred securities - 17,755 -
Paid-in capital - new warrants issued - 2,000 -
Paid-in capital - warrants - (10) (1)
Paid-in capital - stock options taken 2 - -
---------------------------------
Net cash provided by (used in) financing activities (1,198) 21,580 (2,363)
---------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of bonds and notes:
Investments held-to-maturity - (4,179) -
Investments available-for-sale (4,611) (15,025) -
Investments - - (33,397)
Investments funds withheld from reinsurers (204,577) (16,982) (40,342)
Purchases of common stock (680) - -
Investments and cash allocated to discontinued operations (1,581) (19,034) 21,413
Sales of bonds and notes: Investments available for sale 17,643 4,047 -
Maturities of bonds and notes:
Investments held-to-maturity 2,250 - -
Investments available-for-sale 3,035 9,179 -
Sales and maturities of bonds and notes - - 58,869
Sales and maturities of funds withheld from reinsurers 191,238 14,949 243
Sales of common stock - 27 -
Net decrease (increase) in invested cash 18,317 (3,645) 3,187
---------------------------------
Net cash provided by (used in) investing activities 21,034 (30,663) 9,973
---------------------------------
Net increase (decrease) in cash 419 (2,868) 1,802
Cash at beginning of period 2,533 5,401 3,599
---------------------------------
Cash at end of period $2,952 $2,533 $5,401
=================================
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes $ 4 $4 ($72)
=================================
Cash paid during the year for interest $808 $1,222 $630
=================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 159
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
(Dollar amounts in thousands, except per share data)
(1) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Superior
National Insurance Group, Inc. and all subsidiaries (the Company). The
Company's principal insurance subsidiary, Superior National Insurance Company
(Superior) is licensed to write workers' compensation insurance and commercial
property and casualty insurance in 17 states and the District of Columbia.
During the third quarter of 1993, the Company adopted a plan to
discontinue underwriting commercial property and casualty risks. Therefore,
earned premiums reported in 1995, 1994, and 1993, reflect workers' compensation
premium from policies that were primarily located in California.
The Company's consolidated financial statements have been prepared on
the basis of generally accepted accounting principles that vary in certain
respects from accounting practices prescribed or permitted by state insurance
regulatory authorities. The results of all significant intercompany
transactions have been eliminated.
Certain reclassifications have been made to prior year financial
statements to conform to the 1995 presentation.
Reverse Stock Split
Effective May 25, 1995, shareholders of Superior National Insurance
Group, Inc. approved a four-into-one reverse split of the Company's Common
Stock. The purpose of the reverse split is to increase the per-share price of
the Company's Common Stock in order to enhance public trading of the Common
Stock upon the effectiveness of the Company's registration with the Securities
and Exchange Commission. Consequently, the shares of common stock and stock
options information included in the accompanying consolidated financial
statements were prepared assuming the reverse stock split had been outstanding
at the beginning of all periods presented.
Cash
Cash includes currency on hand and demand deposits with financial
institutions. Invested cash represents short-term, highly liquid investments,
readily convertible to known amounts of cash and near maturity such that there
is insignificant risk of changes in value because of changes in interest rates.
Invested cash is carried at cost, which approximates market.
Investments
Investments in debt instruments consist primarily of bonds and
collateralized mortgage obligations. Effective January 1, 1994, the Company
adopted Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" (SFAS 115). Under SFAS 115
debt instruments and equities are classified as (i) "held-to-maturity" (carried
at amortized cost); (ii) "trading" (carried at market with differences between
cost and market being reflected in the results of operations); or (iii) if not
otherwise classified, as "available for sale" (carried at market with
differences between cost and market being reflected as a separate component of
shareholders' equity, net of the applicable income tax effect). The premium
and discount on fixed maturities and collateralized mortgage obligations are
amortized using the scientific method. Amortization and accretion of premiums
and discounts on collateralized mortgage obligations are adjusted for principal
paydowns and changes in expected maturities. Current market values of
investments are obtained from published sources.
F-7
<PAGE> 160
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Declines in market value that are considered other than temporary are charged
to operations. The adoption of SFAS 115 resulted in an increase in reported
shareholders' equity of approximately $289 net of deferred income taxes in
1993. The Company's adoption of SFAS 115 may result in substantial
fluctuations in reported shareholders' equity.
Upon adoption of SFAS 115 the Company designated assets withheld under
certain reinsurance contracts as held to maturity. The Company does not own
any investments that qualify as derivatives as defined by Statement of
Financial Accounting Standard No. 119, "Disclosure About Derivative Financial
Investments and Fair Value of Financial Investments." Securities not
designated as held to maturity have been designated as available for sale. The
Company did not have any investments categorized as trading securities. Both
prior and subsequent to adoption of SFAS 115, declines in market value below
cost that are considered other than temporary are charged to income. For
determining realized gains or losses on securities sold, cost is based on
average cost. Unrealized gain (loss) on investments at December 31, 1995 and
1994, net of deferred income taxes, were $167 and $(2,574), respectively.
During 1995, the Financial Accounting Standards Board allowed
companies the opportunity to re-designate their investments between (i) held
to maturity; (ii) trading; and, (iii) available for sale without penalty.
During the grace period given by the FASB, the Company re-designated $2 million
from held to maturity to available for sale.
Investments in equity securities are carried at market value.
Unrealized gains or losses on equity securities are reflected, net of
applicable tax, in shareholders' equity.
Premiums Receivable
Superior records premiums receivable for both billed and unbilled
amounts. Unbilled premiums receivable, which are substantially all earned,
primarily represent Superior's estimate of the difference between amounts
earned ratably on installment billed policies and the amount to be billed on
the policy. Unbilled premiums receivable also include estimated billings on
payroll reporting policies which were earned but not billed prior to year end.
Superior uses its historical experience to estimate earned but unbilled amounts
which are recorded as premiums receivable. These unbilled amounts are
estimates, and while the Company believes such amounts are reasonable, there
can be no assurance that the ultimate amounts received will equal the recorded
unbilled amounts.
The ultimate collectability of the unbilled receivables can be
affected to a greater degree by general changes in the economy and the
regulatory environment than billed receivables due to the increased time
required to determine the billable amount. The Company attempts to consider
these factors when estimating the receivable for unbilled premiums.
Deferred Policy Acquisition Costs
Acquisition costs, consisting principally of commissions, premium
taxes and certain marketing, policy issuance, and underwriting costs, related
to the production of Superior's workers' compensation business, are deferred
and amortized ratably over the terms of the policies. If recoverability of
such costs is not anticipated, the amounts not considered recoverable are
charged to income. In determining estimated recoverability, the computation
gives effect to the premium to be earned, related investment income, claims and
loss expenses, and certain other costs expected to be incurred as the premium
is earned.
F-8
<PAGE> 161
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Policy acquisition costs incurred and amortized into income are as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ----------
<S> <C> <C> <C>
Balance as of beginning of year $ 2,905 $ 3,351 $ 3,229
Cost deferred during the year 18,163 16,300 23,155
Amortization charged to expense (18,288) (16,746) (23,033)
--------- --------- ----------
Balance at end of year $ 2,780 $ 2,905 $ 3,351
========= ========= ==========
</TABLE>
Claims and Claim Adjustment Expenses
Claims and claim adjustment expenses are based on case-basis estimates
of reported claims and on estimates, based on experience and industry data, for
unreported claims and claim adjustment expenses. The provision for unpaid
claims and claim adjustment expenses, net of estimated salvage and subrogation,
has been established to cover the estimated net cost of incurred claims. The
amounts are necessarily based on estimates, and accordingly, there can be no
assurance that the ultimate liability will not exceed such estimates.
Policyholder Dividends
Participating policies represented 24%, 65%, and 81%, of Superior's
workers' compensation premiums in force at December 31, 1995, 1994, and 1993,
respectively. Estimated amounts to be returned to policyholders are accrued
when the related premium is earned by Superior. Dividends may be paid to the
extent that a surplus is accumulated from premiums on workers' compensation
policies.
Premium Income Recognition
Insurance premiums are earned ratably over the terms of the policies.
Unearned premiums are computed on a daily pro-rata basis.
Income Taxes
The Company files a consolidated Federal income tax return which
includes all qualifying subsidiaries.
Deferred income taxes are provided for temporary differences between
financial statement and tax return bases using the asset and liability method.
This method was adopted as of January 1, 1993 in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). Financial statements for prior periods have not been restated. Under
the deferred method, deferred taxes are not adjusted for subsequent changes in
tax rates while under SFAS 109, tax rate changes are accounted for in the year
in which the tax law is enacted.
Earnings per Share ("EPS")
The EPS calculations for the years ended December 31, 1995, 1994 and
1993 were calculated based upon the weighted average number of shares of common
stock after giving effect to the four-into-one reverse stock split, and
adjusted for the effect, if any, of options and warrants considered to be
common stock equivalents. Stock options and warrants are considered to be
common stock equivalents, except when their effect is antidilutive. The
calculations assume that the reverse stock split, effective May 25, 1995, had
been outstanding at the beginning of all periods presented. The number of
shares used in the earnings per share calculations are 3,430,373 shares for
1995 and 3,429,873 shares for 1994 and 1993.
F-9
<PAGE> 162
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Property, Equipment and Leasehold Improvements
Property, equipment, and leasehold improvements are stated at cost,
net of accumulated depreciation and amortization (approximately $3,918 and
$3,390 at December 31, 1995 and 1994, respectively). Depreciation and
amortization are provided principally on the straight-line method over the
estimated useful lives of the assets or, if less, the term of the lease.
Property, equipment, and leasehold improvements are included as a component of
"Prepaid and other assets" on the consolidated balance sheet.
Use of Management Estimations
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the amounts of assets, liabilities, and disclosures of
contingent assets and liabilities at the date of the financial statements. The
Company has provided such estimates for its workers' compensation claims and
claim adjustment expenses; discontinued operations; policyholder dividends; and
deferred taxes balances in its financial statements. While, these estimates
are based upon analyses performed by management, outside consultants and
actuaries, the amounts the Company will ultimately pay may differ materially
from the amounts presently estimated.
(2) Investments
The amortized cost and market values of bonds and notes classified as
held to maturity and investments classified as available for sale at December
31, 1995 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Available for sale:
- - ------------------
United States government
agencies and authorities $ 22,549 $ 129 $ (154) $ 22,524
Collateralized mortgage
obligations 10,753 88 (62) 10,779
Corporate instruments 7,398 214 - 7,612
State and political
subdivisions 1,100 38 - 1,138
----------- ---------- --------- --------
Total available for sale $ 41,800 $ 469 $ (216) $ 42,053
=========== ========== ========= ========
</TABLE>
At December 31, 1994, the bond portfolio comprised of three securities
categorized as held to maturity with a combined amortized cost and market value
of $4.2 million. During 1995, two securities with an amortized cost of $2.2
million matured and one security with an amortized cost and market value of
$1.9 million was reclassified as available for sale during the FASB 115 grace
period. There was no effect on the shareholders' equity as a result of the
reclassification. As of December 31, 1995, there are no securities in the
held-to-maturity portfolio.
F-10
<PAGE> 163
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The amortized cost and market values of bonds and notes and invested
cash for funds withheld from reinsurers as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Funds withheld from reinsurer:
- - -----------------------------
United States government
agencies and authorities $103,496 $2,132 $(74) $105,554
Collateralized mortgage
obligations 2,306 10 - 2,316
Special revenue 2,118 65 - 2,183
Corporate instruments 7,001 19 - 7,020
-------- ------ ---- --------
Total funds withheld from
reinsurers $114,921 $2,226 $(74) $117,073
======== ====== ==== ========
</TABLE>
The market value of equity securities as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Market
Equity Securities: Cost Gains Losses Value
- - ------------------ ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Corporate Instruments $ 686 $ 3 $ - $ 689
----------- ----------- ----------- -----------
Total Equity Securities $ 686 $ 3 $ - $ 689
=========== =========== =========== ===========
</TABLE>
The amortized cost and estimated market values of investments
classified as available for sale and funds withheld from reinsurers at December
31, 1995, by contractual maturity are shown below. Expected maturities are
likely to differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without penalty.
<TABLE>
<CAPTION>
Funds Withheld From
Available for Sale Reinsurers
------------------------------ --------------------------
Amortized Market Amortized Market
Cost Value Cost Value
---------- ------- --------- --------
<S> <C> <C> <C> <C>
Due in one year or less $ 1,304 $ 1,306 $ 29,301 $ 29,340
Due after one year
through five years 22,852 22,714 35,236 35,233
Due after five years
through ten years 9,063 9,370 15,172 15,289
Due after ten years 8,581 8,663 35,212 37,211
------- ------- -------- --------
Total $41,800 $42,053 $114,921 $117,073
======= ======= ======== ========
</TABLE>
F-11
<PAGE> 164
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The amortized cost and market values of bonds and notes classified as
held to maturity and investments classified as available for sale at December
31,1994 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
Held to maturity:
- - ----------------
Corporate instruments $4,183 $9 $(13) $4,179
------ -- ---- ------
Total held to maturity $4,183 $9 $(13) $4,179
====== == ==== ======
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Available for sale:
- - ------------------
United States government
agencies and authorities $38,920 $1 $(2,795) $36,126
Collateralized mortgage
obligations 7,916 - (784) 7,132
Special revenue 250 5 - 255
Corporate instruments 7,219 - (330) 6,889
State and political
subdivisions 1,100 2 - 1,102
------- -- ------- -------
Total available for sale $55,405 $8 $(3,909) $51,504
======= == ======= =======
</TABLE>
The amortized cost and market values of bonds, notes and invested cash
for funds withheld from reinsurers as of December 31, 1994 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Funds withheld from reinsurer:
- - -----------------------------
United States government
agencies and authorities $ 80,987 $ - $(3,514) $ 77,473
Collateralized mortgage
obligations 7,913 - (228) 7,685
Special revenue 2,171 - (289) 1,882
Corporate instruments 2,367 $ - (137) 2,230
-------- -------- ------- --------
Total funds withheld from
reinsurers - bonds and notes 93,438 - (4,168) 89,270
Invested cash 14,845 - - 14,845
-------- -------- ------- --------
Total funds withheld from
reinsurers $108,283 $ - $(4,168) $104,115
======== ======== ======= ========
</TABLE>
F-12
<PAGE> 165
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The market value of equity securities as of December 31, 1994 are as follows:
<TABLE>
<CAPTION>
Cost Gross Gross
Unrealized Unrealized Market
Gains Losses Value
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Equity Securities:
- - ------------------
Corporate Instruments $ 6 $ 1 $ - $ 7
----------- ------------ ----------- -----------
Total Equity Securities $ 6 $ 1 $ - $ 7
=========== ============ =========== ===========
</TABLE>
A summary of net investment income for the years ended December 31, are as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ---------- -----------
<S> <C> <C> <C>
Interest on bonds and notes $ 9,310 $ 8,738 $ 8,337
Interest on invested cash 1,297 597 389
Realized gains (losses) (525) 35 1,069
Other - 3 7
----------- ---------- -----------
Total investment income 10,082 9,373 9,802
Investment expense 298 324 252
----------- ---------- -----------
Net investment income $ 9,784 $ 9,049 $ 9,550
=========== ========== ===========
</TABLE>
Realized gains (losses) on investments for the years ended December
31, are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ---------- -----------
<S> <C> <C> <C>
Bonds and notes $ (525) $ 55 $ 1,069
Equity securities - (20) -
----------- ---------- -----------
Total $ (525) $ 35 $ 1,069
=========== ========== ===========
</TABLE>
The changes in unrealized gains (losses) on debt instruments held as
available-for-sale and equity security investments at December 31, are as
follows:
<TABLE>
<CAPTION>
1995 1994
----------- ----------
<S> <C> <C>
Bonds and notes $4,154 $(14,637)
Equity securities 2 -
----------- ----------
Total $4,156 $(14,637)
=========== ==========
</TABLE>
Proceeds from sales of investments held as available for sale for the
year ended December 31, 1995 and 1994 were $17,643 and $4,047, respectively.
Proceeds from sales of investments for 1993 was $56,970. Gross gains of $4 and
gross losses of $529 were realized on those sales in 1995. Gross gains of $63
and gross losses of $8 were realized on those sales in 1994. Gross gains of
$1,069 were realized on those sales in 1993.
Bonds and other securities with a market value of $143,462 at December
31, 1995 and $127,130 at December 31, 1994, were on deposit with various
insurance regulatory authorities. Additionally, see Note (6) regarding
investments held related to reinsurance contracts.
F-13
<PAGE> 166
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(3) Fair Value of Financial Instruments
The following table represents the carrying amounts and estimated fair
values of the Company's financial instruments at December 31, 1995 and 1994.
FASB Statement No. 107, Disclosure about Fair Value of Financial Instruments,
defines the fair value of a financial instruments as the amount at which the
instrument could be exchanged in a current transaction between willing parties.
The carrying amounts shown in the table below are included in the
Consolidated Balance Sheets under the indicated options.
<TABLE>
<CAPTION>
1995 1994
--------------------------- ---------------------------
Carrying Fair Carrying Fair
($ in thousands) Amount Value Amount Value
- - --------------------------------- ---------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Financial liabilities
Long-term debt $ 8,530 $ 8,769 $ 9,730 $ 9,730
Preferred securities issued by affiliate $ 21,045 $ 22,035 $ 18,790 $ 17,400
========== ============= ============ ============
</TABLE>
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
Long-term debt: The fair value of the Company's long-term debt is
estimated based on the quoted market prices for similar issues or by
discounting expected cash flows at the rates currently offered to the Company
for debt of the same remaining maturities.
Preferred securities issued by affiliate: The fair value of the
Company's preferred securities issued by affiliate is estimated based on the
quoted market prices for similar issues or by discounting expected cash flows
at the rates currently offered to the Company for financial instruments of the
same remaining maturities.
(4) Claim and Claim Adjustment Expense Reserves
The activity in the claim and claim adjustment expense reserve account
is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Beginning reserve, gross of reinsurance . . . . . . . . . . . $171,258 $171,038 $136,102
Less: Reinsurance recoverable on unpaid losses . . . . . . . 66,241 70,860 74,004
----------- ----------- -----------
Beginning reserve, net of reinsurance . . . . . . . . . . . . 105,017 100,178 62,098
Provision for net claims and claim adjustment expenses
For claims occurring in current year . . . . . . . . 58,842 72,457 87,997
For claims occurring in prior years . . . . . . . . (2,237) 6,304 25,820
----------- ----------- -----------
Total claims and claim adjustment expenses . . . . . 56,605 78,761 113,817
----------- ----------- -----------
Payments for net claims and claim adjustment expense:
Attributable to insured events incurred in current
year . . . . . . . . . . . . . . . . . . . . . . . . (19,732) (23,061) (23,420)
Attributable to insured events incurred in prior
years . . . . . . . . . . . . . . . . . . . . . . . (42,033) (58,406) (57,008)
----------- ----------- -----------
Total claims and claim adjustment expense payments . (61,765) (81,467) (80,428)
----------- ----------- -----------
Change in funds withheld . . . . . . . . . . . . . . . . . . 2,892 7,545 4,691
----------- ----------- -----------
Ending reserves, net of reinsurance . . . . . . . . . . . . . 102,749 105,017 100,178
Reinsurance recoverable on unpaid losses . . . . . . . . . . 38,025 66,241 70,860
----------- ----------- -----------
Ending reserves, gross of reinsurance . . . . . . . . . . . . $140,774 $171,258 $171,038
=========== =========== ===========
</TABLE>
In 1995, the Company experienced decreased frequency and severity with
respect to claims incurred during 1995, and favorable development emerged on
prior accident years' losses as well. The Company's 1995 accident year net
claim and claim adjustment expense ratio for accident year 1995 at the end of
calendar year 1995 was
F-14
<PAGE> 167
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
65.6%, versus 65.6% for accident year 1994, and 57.3% for accident year 1993,
at the respective calendar year ends. Further, during calendar year 1995, the
Company recorded a $2.2 million decrease in prior accident year claims and
claim adjustment expense. Management decreased the provision for IBNR losses
ceded under per-risk excess of loss contracts by $6.4 million based upon its
historical experience.
During 1995, the Company experienced approximately $8.6 million of
favorable development on direct claim and claim adjustment expense reserves
estimated at December 31, 1994. Management believes the favorable development
resulted from the Company's improved claims management controls and decreased
claim severity, particularly in the medical component of the workers'
compensation line. Offsetting the favorable direct development in large part
was the re-estimation during 1995 of reinsurance receivables recorded at
December 31, 1994 from approximately $66.2 million to approximately $59.9
million at December 31, 1995.
(5) Discontinued Operations
During the third quarter of 1993, the Company adopted a plan to
discontinue underwriting commercial property and casualty risks. As a result,
the Company recorded a pre-tax charge to income of $2,991 for estimated
operating losses during the phase-out period.
During the second quarter of 1995, the Company increased its reserves
by approximately $15 million for discontinued operations for accident years
1994 and prior. This increase in claims and claim adjustment expense reserves
from the original estimate at the measurement date resulted from increased
frequency and severity of claims incurred from those years, relative to
previous expectations, which in turn caused an increase in the estimated
ultimate claims and claim adjustment expense reserves related to 1994 and prior
years.
At December 31, 1995 and 1994, the net assets and liabilities of
discontinued operations, consisting primarily of reinsurance receivables,
securities, and unpaid claims and claim adjustment expenses, have been
reclassified in the balance sheet at estimated net realizable or payable value.
Management estimates that the discontinued operations will be "run off" by the
year 2000. The assets and liabilities of discontinued operations are
summarized below.
<TABLE>
<CAPTION>
December 31,
-------------------------
1995 1994
---------- ----------
<S> <C> <C>
Assets:
Reinsurance recoverables $40,495 $32,187
Investments and other assets 57 1,701
---------- ----------
Total Assets $40,552 $33,888
========== ==========
Liabilities:
Loss and LAE reserves $40,526 $36,410
Other liabilities 26 1,701
---------- ----------
Total liabilities $40,552 $38,111
========== ==========
Net assets (liabilities) of discontinued operations $- $(4,223)
========== ==========
</TABLE>
There is a high level of uncertainty inherent in the evaluation of the
required claims and claim adjustment expense reserves for the discontinued
business. The long-tailed nature of the property and casualty claims affects
the level of precision that management can attain in estimating the ultimate
liability. Management has selected ultimate claim and claim adjustment expense
that it believes will reasonably reflect anticipated ultimate experience. The
ultimate costs of such claims are dependent upon future events, the outcomes of
which are affected by many
F-15
<PAGE> 168
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
factors. Claims reserving procedures and settlement philosophy, current and
perceived social and economic factors, inflation, current and future court
rulings and jury attitudes, and many other economic, scientific, legal,
political, and social factors all can have significant effects on the ultimate
costs of claims. Changes in Company operations and management philosophy also
may cause actual developments to vary from the past. Since the emergence and
disposition of the discontinued operations claims are subject to uncertainties,
the net amounts that will ultimately be paid to settle the liability may vary
significantly from the estimated amounts provided for in the consolidated
financial statements.
(6) Income Taxes
The Company adopted SFAS 109 beginning January 1, 1993 on a
prospective basis. The cumulative effect of adopting SFAS 109 has been
recorded as a change in accounting principle in the accompanying consolidated
statements of income.
Under SFAS 109, deferred income taxes are provided for temporary
differences between financial statement and tax return basis using the asset
and liability method. Pursuant to the deferred method under APB Opinion 11
that was applied in 1992 and prior years, deferred income taxes were recognized
for income and expense items that are reported in different years for financial
statement reporting purposes and for income tax purposes using the tax rate
applicable in the year of the calculation.
Under the deferred method, deferred taxes are not adjusted for
subsequent changes in tax rates while under SFAS 109, tax rate changes are
accounted for in the year in which the tax law is enacted.
Total income tax expense (benefit) for the years ended December 31,
1995, 1994, and 1993, was allocated as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ---------- -----------
<S> <C> <C> <C>
Continuing operations $(12) $1,398 $(530)
Dividend accrued on preferred securities (767) (352) -
Discontinued operations (5,070) - (1,541)
Extraordinary item - (1,042) (233)
----------- ---------- -----------
Total $(5,849) $4 $(2,304)
=========== ========== ===========
</TABLE>
Income tax expense (benefit) from continuing operations for the years
ended December 31, 1995, 1994, and 1993 is composed of the following amounts:
<TABLE>
<CAPTION>
1995 1994 1993
------------ ---------- -----------
<S> <C> <C> <C>
Current $ 4 $ 4 $ -
Deferred (16) 1,394 (530)
------------- ------------- -------------
Total $ (12) $ 1,398 $ (530)
============= ============= =============
</TABLE>
F-16
<PAGE> 169
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Taxes computed at the statutory rate of 34% varied from the amounts
reported in the consolidated statements of operations at December 31, as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Income taxes at statutory rates $ 3,974 $1,699 $ 749
Effect of tax-exempt interest (15) (15) (93)
Effect of meals and entertainment 38 37 -
Change in valuation allowance for tax assets (4,013) (237) (1,191)
Internal Revenue Service settlement - 15 -
Change in AMT credit carryforward - (101) -
Other 4 - 5
-------- -------- --------
Total $ (12) $1,398 $ (530)
======== ======== ========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, are
presented below:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Deferred tax assets:
Original issue discount $ 22,908 $ 21,439
Net operating loss carryforward 26,919 16,595
Alternate minimum tax carryforward 701 701
Capital loss carryforward 1,042 1,042
Salvage and subrogation recoverable - 153
Unearned premium liability 686 730
Policyholder dividends 2,326 5,468
Unrealized loss on available for sale securities - 1,326
Other 391 574
-------- --------
Total gross deferred tax assets 54,973 48,028
Less: Valuation allowance - (4,013)
-------- --------
Total 54,973 44,015
-------- --------
Deferred tax liabilities:
Loss reserves (22,197) (16,862)
Discontinued operations (5,850) (9,212)
Reinsurance experience refund (15,300) (10,200)
Deferred acquisition costs (945) (1,008)
Direct collection allowance (510) (1,088)
Unrealized gain on available-for-sale (86) -
-------- --------
Total gross deferred tax liabilities (44,888) (38,370)
-------- --------
Net deferred tax asset $ 10,085 $ 5,645
======== ========
</TABLE>
During the second quarter of 1995, the Company received $1.7 million
tax refund from the Internal Revenue Service which confirmed the Company's tax
net operating loss (NOL) position. As a result, it is the Company's belief the
valuation allowance that was established with the adoption of FAS 109 in 1993
is no longer necessary.
The Company believes the net deferred tax asset is recoverable based
on available anticipated future taxable income and tax planning strategies. At
December 31, 1995, the Company has a tax net operating loss carryforward of
$79.9 million that begins to expire in the year 2006, and a capital loss
carryforward of $3.0 million that expires in 1999.
F-17
<PAGE> 170
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(7) Reinsurance
Superior cedes claims and claim adjustment expenses to reinsurers
under various contracts that cover individual risks, classes of business, or
claims that occur during specified periods of time. Reinsurance is ceded on
pro rata, per-risk excess-of-loss, and aggregate bases. These reinsurance
arrangements provide greater diversification of risk and limit Superior's
claims arising from large risks or from hazards of an unusual nature. Superior
is contingently liable to the extent that any reinsurer becomes unable to meet
its contractual obligations. Therefore, the Company evaluates the financial
condition of its reinsurers and monitors concentrations of credit risks arising
from reinsurance activities and economic characteristics to minimize its
exposure to significant losses from reinsurer insolvencies.
Effective June 30, 1991, Superior entered into an aggregate excess of
loss reinsurance contract (1991 Contract) with Centre Reinsurance Limited
(Centre). Under the 1991 Contract, Superior purchased for $50 million
reinsurance for claims and claim adjustment expense incurred on or prior to
June 30, 1991, to the extent that these amounts were unpaid at June 30, 1991.
The coverage obtained amounted to $87.5 million in excess of Superior's
retention. Additionally, Superior ceded approximately $69.1 million of earned
premiums to Centre through December 31, 1992. Claims and claim adjustment
expenses occurring prior to December 31, 1992 were ceded to Centre in the
amount of $165.6 million under the 1991 Contract. Prospective cessions of
premium and claims were terminated by mutual consent of Superior and Centre
effective December 31, 1992; however, all other terms of the 1991 Contract
remain in effect until the treaty terminates January 1, 1998.
Effective January 1, 1993, Superior entered into an aggregate excess
of loss reinsurance contract (1993 Contract) with Centre. From SNIC's
perspective the 1993 Contract substantively operated as a one year contract
with at least four one year options to renew that were exercisable solely at
the Company's election during the first five years of the contract. Subsequent
to January 1, 1998, the 1993 Contract could have been terminated by either
Superior or Centre upon 30 days notice. The 1993 Contract required the Company
to cede not less than $15 million and not more than $20 million of premium to
Centre with respect to any covered accident year. Claims and allocated claim
adjustment expenses occurring during the accident year are ceded to Centre in
excess of a variable percentage of earned premium (60%, 56.5% and 57.5% for the
1995, 1994 and 1993 accident years, respectively) and are subject to a limit of
130% of ceded earned premium, such limit not to exceed $26 million for any
accident year. Effective January 1, 1996, the 1993 Contract was canceled at the
Company's election. The cancellation of the 1993 Contract did not result in
either a gain or loss being recognized by SNIC.
The 1993 contract was canceled prospectively effective January 1,
1996, as a result of which SNIC will not cede premium or loss under the 1993
contract to Centre subsequent to accident year 1995. The cancellations of the
1993 contract does not affect the measurement or recognition of income or loss
previously recorded in the Company's financial statements at any time the 1993
contract was in force. The reinsurance premiums ceded and experience account
balance due from Centre with respect to accident years 1993-1995 are not
affected by the cancellation of the contract. SNIC retains the right, however,
to exercise its option to commute the 1993-1995 accident year at a future date
in accordance with the terms of the contract.
Reinsurance recoverable of $145.8 million and $165.6 million for the
years ended December 31, 1995 and 1994, respectively, were associated with
Centre. Under related reinsurance agreements with Centre, the Company holds
collateral in the form of funds withheld of $105.7 million and $111.7 million
for the years ended December 31, 1995 and 1994, respectively, and irrevocable
letters of credit of $27.6 million and $62.3 million for the years ended
December 31, 1995 and 1994, respectively. Centre realized $4.9 million in
capital gains in 1995 and none in 1994 and 1993. The investment risk of
investments related to the funds withheld account is Centre's. Additionally,
investment income on the funds withheld account inures to the benefit of
Centre.
Effective January 1, 1994, the Company entered into a 20% quota-share
reinsurance agreement with Zurich Reinsurance Centre (ZRC), an affiliate of
Centre. Under the terms of the treaty, the Company is to receive a ceding
commission to cover its costs of acquisition, and ZRC has the option to reduce
its participation level in subsequent years. Policies covered under this
contract include statutory workers' compensation and employers liability
in-force at January 1, 1994, and new and renewal policies occurring on or after
January 1, 1994. On
F-18
<PAGE> 171
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
December 31, 1994, ZRC elected to reduce its quota share participation to 5%;
however, all other terms of the treaty remain in effect.
Superior's contracts are generally entered into on an annual basis.
Superior has maintained reinsurance treaties with many reinsurers for a number
of years. In general, Superior's reinsurance contracts are of the treaty
variety, and cover underwritten risks specified in the treaties. Superior also
from time to time purchases facultative reinsurance covering specific
liabilities or policies underwritten. As of December 31, 1995, Centre, ZRC,
and General Reinsurance Corporation account for 79%, 5% and 7%, respectively,
of total amounts recoverable from all reinsurers on paid and unpaid claims and
claim adjustment expenses.
Amounts included in the income and expense accounts in continuing
operations in connection with all ceded reinsurance at December 31, are as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Net Premiums written:
Premiums written $ 96,122 $ 134,769 $ 157,986
Premiums ceded (6,983) (28,823) (3,555)
-------------- -------------- -------------
Net premiums written $ 89,139 $ 105,946 $ 154,431
============== ============== =============
Net change in unearned premiums:
Direct $ (508) $ (3,935) $ 846
Ceded (88) (537) -
Net change in unearned premiums $ (596) $ (4,472) $ 846
============== ============== =============
Net claims and claim adjustment expenses:
Claims and claim adjustment expenses $ 58,151 $ 87,163 $ 115,705
Reinsurance recoveries (1,546) (8,402) (1,888)
-------------- -------------- --------------
Net claims and claim adjustment
expenses $ 56,605 $ 78,761 $ 113,817
============== ============== =============
</TABLE>
Funds withheld interest charges relating to the Centre treaties were
recorded in the amount of $8,815, $7,545 and $4,691 for the years ended
December 31, 1995, 1994, and 1993, respectively. Additionally, these interest
charges have been included in the funds withheld liability and interest expense
in the accompanying consolidated financial statements. The funds withheld
liability and interest accrual have been offset against amounts due from
reinsurers.
(8) Long Term Debt
Effective June 30, 1994, the Company entered into a $10 million term
loan agreement (the "1994 Loan") with Imperial Bank, which was used to retire
subordinated notes issued during 1992. This term loan is to be fully amortized
over seven years with quarterly payments of $300 plus interest per quarter for
years one and two, $350 plus interest per quarter for years three and four, and
$400 plus interest per quarter for years five, six and seven. Effective July
1, 1995, the borrowing rate was changed from Imperial Bank's prime rate plus
one half percent to a fixed rate of 8% per annum. Additionally, under the
amended terms of the 1994 Loan, the Company may not prepay the Loan until July
1, 1996. At which time, the Loan may be prepaid based upon an agreed upon
premium which varies by year. The premium for 1996 is 4.0%; 1997 is 3.5%; 1998
is 2.5%; 1999 is 1%; and 2000 is none.
The Company must adhere to certain requirements and provisions to be
in compliance with the terms of the notes. The provisions require Superior to
maintain certain financial ratios and Superior National Insurance Group, Inc.
the holding company, to maintain Imperial Bank time certificates of deposit in
an amount equal to 20% of SNIG's outstanding balance under the 1994 Loan. At
December 31, 1995, the Imperial Bank time certificates
F-19
<PAGE> 172
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
of deposit were $1.8 million of which $1.7 million is restricted. The Company
is in compliance with all loan covenants as of December 31, 1995.
The following is a summary of the long-term debt balances at December
31:
<TABLE>
<CAPTION>
1995 1994
------- ------
<S> <C> <C>
Long term debt with Imperial Bank $ 8,500 $9,700
Voting Notes 30 30
------- ------
Balance at end of period $ 8,530 $9,730
======= ======
</TABLE>
On June 30, 1994, the Company retired all of its 14.5% Senior
Subordinated Series A Notes and Series B Notes. Voting Notes of $30 are still
outstanding as of December 31, 1995. As a result of the prepayment of the
debt, the Company recognized an extraordinary loss of $2,022, net of an income
tax benefit of $1,042. For the year ended December 31, 1994, amounts paid to
International Insurance Investors (III), an affiliate of Centre, and Company
officers for prepayment penalty related to the early extinguishment of debt are
$1,397 and $153, respectively. Interest expense incurred in 1995, 1994, and
1993, was $804, $1,181, and $1,530, respectively.
On March 31, 1993 the Company prepaid $2,750 of Series A Notes held by
III and certain Company management. As a result of the prepayment of debt, the
Company recognized an extraordinary loss of $453, net of an income tax benefit
of $233. The effect of the prepayment was to reduce aggregate interest expense
by seven thousand dollars in 1993 and by $3,955 over the remaining life of the
Notes.
The warrants related to the Series A and B notes remain outstanding
and provide their holders the right to purchase 1,569,363 shares of common
stock at a strike price of $4 per share. The warrants are currently
exercisable and expire on April 1, 2002. The warrants are held by senior
management and a nominee for III.
In February 1995, Superior entered into an agreement with a national
brokerage house to allow it to enter into $5 million in reverse repurchase
transactions that must be secured by either U.S. treasuries or government
agency bonds. There were no outstanding transactions at December 31, 1995.
(9) Preferred Securities Issued by Affiliate
On June 30, 1994, the Company completed the sale of $20 million of
preferred securities and warrants to affiliates of Centre Re in a transaction
approved by the shareholders and the DOI. The preferred securities are
subordinate to the Imperial Bank term debt. A special purpose investment
partnership, Superior National Capital, L.P. (the Limited Partnership), was
formed in Bermuda to issue $20 million face amount of 9.7% redeemable preferred
securities to Centre Reinsurance Services (Bermuda) III, Limited in exchange
for $18 million. CentreLine Reinsurance Limited paid the Company $2 million
for warrants to purchase 579,357 shares of the Company's common shares at $5.20
per share, representing a fully-diluted 10 percent interest in the Company.
The warrants are currently exercisable and expire on June 30, 2001.
The proceeds received from the sale of preferred securities by the
Limited Partnership were loaned to Superior National Insurance Group, Inc.
Interest on the debt is to be paid to the Limited Partnership, which in turn
will make the required dividend payments on the preferred securities. The
Limited Partnership is accounted for as a subsidiary in the Company's
consolidated financial statements. The debt between Superior National
Insurance Group, Inc. and the Limited Partnership eliminates in consolidation.
The preferred securities issued by the Limited Partnership and are presented
between the liability and shareholders' equity sections of the balance sheet,
net of transaction costs.
The difference between the face value and the carrying value is
amortized over the seven year maturity of the preferred securities using the
scientific method. The amortization, net of tax benefits, and accrued
dividends, is charged to current year income after continuing operations, net
of taxes.
F-20
<PAGE> 173
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The following is a summary of the preferred securities balance as of
December 31:
<TABLE>
<CAPTION>
1995 1994
------------ -------------
<S> <C> <C>
Beginning balance $ 18,790 $ 18,000
Less: Transaction costs - (245)
Add: Dividends and accretion 2,255 1,035
------------ -------------
Balance at end of period $ 21,045 $ 18,790
============ =============
</TABLE>
For the first three years, the preferred securities will pay dividends
in the form of additional face value of the preferred securities at the coupon
rate of 9.7%.
(10) Statutory Surplus and Dividend Restrictions
Superior is domiciled in the State of California and prepares its
statutory financial statements in accordance with accounting practices
prescribed or permitted by the State of California Department of Insurance
(DOI). Prescribed statutory accounting practices include a variety of
publications of the National Association of Insurance Commissioners (NAIC), as
well as state laws, regulations, and general administrative rules. Permitted
statutory accounting practices encompass all accounting practices not so
prescribed.
Superior has also been permitted to account for certain funds received
under the Centre excess of loss reinsurance contract as a recovery on paid
losses in presenting its statutory claims and claims adjustment expense, and
funds withheld balances reflected in its statutory balance sheet and Schedule
P. Accounting for the Centre aggregate excess of loss contract in this manner
does not affect Superior's statutory surplus at December 31, 1995. Had
Superior not received the benefits of the Centre aggregate excess of loss
contract, statutory surplus would have been reduced by a $13.8 million Schedule
P penalty at December 31, 1994.
In addition to the above, Superior has been permitted to record the
assets of its subsidiary Western Select Service Corporation (WSSC) at its book
value of $361. Substantially all of WSSC's assets relate to software, which
are normally non-admitted assets.
Superior has been permitted to record its experience rated refund at
its estimated realizable value, which may be different from its current market
value as a result of fluctuations in interest rates and future yields on
certain U.S. Treasury Bonds.
Superior's statutory policyholders' surplus as reported to regulatory
authorities was $51,895 and $65,526 at December 31, 1995, and 1994,
respectively. Superior's statutory net income, as reported to regulatory
authorities, was $1,050, $3,917 and $1,097 for the years ended December 31,
1995, 1994, and 1993 respectively.
Insurance companies are subject to insurance laws and regulations
established by the states in which they transact business. The laws of the
various states establish supervisory agencies with broad administrative and
supervisory powers. Most states have also enacted legislation regulating
insurance holding company systems, including acquisitions, extraordinary
dividends, the terms of affiliate transactions and other related matters. The
Company and Superior have registered as holding company systems pursuant to
such legislation in California. The NAIC has formed committees and appointed
advisory groups to study and formulate regulatory proposals on such diverse
issues as the use of surplus debentures, and accounting for reinsurance
transactions. It is not possible to predict the future impact of changing state
and federal regulation on the operations of the Company and Superior.
The Risk Based Capital Model (RBC) for property and casualty insurance
companies was adopted by the NAIC in December 1993, and starting in 1995,
companies are required to report their RBC ratios to the NAIC. Superior has
calculated and met its RBC requirement.
F-21
<PAGE> 174
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Insurance companies are also subject to restrictions affecting the
amount of stockholder dividends and advances that may be paid within any one
year without the prior approval of the DOI. The California Insurance Code
provides that amounts may be paid as dividends on an annual noncumulative basis
(generally based on the greater of (1) net income for the preceding year or (2)
10% of statutory surplus as regards policyholders as of the preceding December
31) without prior notice to, or approval by, the DOI. At December 31, 1995,
Superior could pay approximately $5.2 million in dividends and advances to the
Company without the DOI's prior approval based on 10% of reported statutory
surplus.
In 1995, Superior made an extraordinary dividend distribution of 100%
of its shares in Superior (Bermuda) Limited to Superior National Insurance
Group, Inc., after receiving prior approval from the DOI, constituting $15
million of Superior's statutory capital and surplus. Cash dividends of $850
were paid in 1994.
(11) Employee Benefit Plans
During August 1985, the Company adopted a non-qualified stock option
plan, pursuant to which it has reserved an aggregate of 225,000 shares of
common stock for issuance upon the exercise of options to be granted under the
plan to certain of the Company's officers at the discretion of the Board of
Directors or committee thereof. Options under the plan are granted for terms
up to ten years at a price not less than 100% of the estimated fair market
value at the date of grant. Options granted under the option plan are not
intended to qualify as incentive stock options within the meaning of section
422A of the Internal Revenue Code (the "Code") of 1986.
The following is a summary of the transactions under the stock option
plan for the years ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
------------------------ ------------------------ ------------------------
Number Option Number Option Number Option
of Shares Price of Shares Price of Shares Price
------------------------ ------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
Stock options outstanding
beginning of year 138,750 $4.00-5.20 146,250 $4.00 110,750 $4.00-$20.00
Stock options granted 10,000 5.20 57,500 5.00-5.20 146,250 4.00
Stock options exercised (500) 4.00 - - - -
Stock options canceled (20,750) 4.00 (65,000) 4.00 (110,750) 4.00-20.00
------------------------ ------------------------ ------------------------
Stock options outstanding,
end of year 127,500 $4.00-$5.20 138,750 $4.00-$5.20 146,250 $4.00
======================== ======================== ========================
</TABLE>
At December 31, 1995, 37,690 vested options were exercisable and no
additional options or purchase rights will be granted under the 1986 plan.
During 1995, the Company adopted the 1995 Stock Incentive Plan (the
"1995 Plan"). The 1995 Plan permits the granting of both options that qualify
for treatment as incentive stock options under Section 422 of the Code, and
options that do not qualify as Incentive Stock Options. Under the 1995 Plan,
officers and key employees of the Company may be granted options to purchase
shares of Common Stock of the Company or they may by given the opportunity to
purchase Restricted Stock of the Company. The number of shares of Common Stock
in respect to which options or restricted stock may be granted under the 1995
Plan shall not exceed 625,000 shares. The following is a summary of the
transactions under the 1995 Plan for the year ended December 31, 1995.
<TABLE>
<CAPTION>
------------------------------
Stock Options: Number Option
-------------- of Shares Price
------------------------------
<S> <C> <C>
Options outstanding at January 1, 1995 - -
Options granted 125,000 $5.20
------------------------------
Options outstanding at December 31, 1995 125,000 $5.20
==============================
</TABLE>
F-22
<PAGE> 175
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
<TABLE>
<CAPTION>
------------------------------
Number Option
Restricted Stock: of Shares Price
----------------- ------------------------------
<S> <C> <C>
Shares outstanding at January 1, 1995 - -
Shares granted 36,350 $5.20
------------------------------
Shares outstanding at December 31, 1995 36,350 $5.20
==============================
</TABLE>
At December 31, 1995, 19,000 vested options were exercisable and none
of the restricted stock granted in 1995 were vested. 463,650 shares were
available for future grants under the 1995 plan at December 31, 1995.
Effective January 1, 1990, the Company implemented a 401(k) Plan (the
"Plan") which is available for substantially all employees under which the
Company matches a percentage of the participant's compensation. The employer
contributions are discretionary and vested over a five year period. The
employer contributions for plan years 1995, 1994 and 1993 were $150, $82 and
$0, respectively.
The Company has no formal post-employment retirement benefit plans;
however, the Company has entered into severance contracts with certain former
employees for which approximately $322, $284 and $732 of accrued expenses were
recorded at December 31, 1995, 1994, and 1993, respectively.
(12) Commitments
The Company and its subsidiaries occupy offices under various
operating leases. The future minimum lease payments at December 31, 1995 are
as follows:
<TABLE>
<S> <C>
1996 $1,858
1997 1,877
1998 1,458
1999 1,470
2000 391
Aggregate lease commitments thereafter $ 43
</TABLE>
Rental expenses totaled approximately $1,772, $1,780, and $1,408, for
the years ended December 31, 1995, 1994, and 1993, respectively.
During December 1993, the Company sold and leased back furniture,
fixtures, and equipment in the amount of $1 million. No gain or loss was
recognized on the transaction. The Company can, after the initial lease term,
or any modified term mutually agreed upon in writing, exercise the option to
purchase the assets, provided that all rental and other sums payable over the
term of the lease have been paid in full. In June 1995, the Company exercised
the option and repurchased the assets. No gain or loss was recognized on the
repurchasing transaction. The capital lease liability was included as a
component of "Accounts payable and other liabilities" on the consolidated
balance sheet for 1994.
In a transaction associated with the sale of Senior Subordinated Notes
to III, the Company and Superior agreed to pay International Insurance
Advisors, Inc., agent for each of the III limited partners and for the general
partner of III, a consulting fee in the amount of $250 beginning on April 1,
1993, and on each April 1 thereafter, to and including April 1, 1998. The
retirement of the 1992 Notes in 1994 did not affect the obligation of the
Company and Superior to pay the consulting fee.
F-23
<PAGE> 176
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(13) Litigation
The Company is subject to various litigation which arises in the
course of doing business. Based upon discussions with counsel, management is of
the opinion that such litigation will have no material adverse effect on the
consolidated financial position of the Company or its consolidated results of
operations.
(14) Prepaid and Other Assets
A summary of prepaid and other assets at December 31, are as follows:
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Furniture and fixtures, net $1,151 $ 971
Data processing equipment, net 2,767 2,419
Prepaid and advances 1,540 579
Other 619 695
------ ------
$6,077 $4,664
====== ======
</TABLE>
(15) Accounts Payable and Other Liabilities
A summary of accounts payable and other liabilities at December 31,
are as follows:
<TABLE>
<CAPTION>
1995 1994
------- ------
<S> <C> <C>
Escheatment payable $ 1,423 $1,372
Rent and lease liability 662 1,829
Capital lease - 826
Accounts payable 5,157 2,673
Other liabilities 4,587 2,714
------- ------
$11,829 $9,414
======= ======
</TABLE>
F-24
<PAGE> 177
SCHEDULE I
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1995
<TABLE>
<CAPTION>
Column A Column B Column C Column D
----------------------------------------------------- -------- -------- --------
Amount at which
shown in the
Type of investment Cost Value balance sheet
----------------------------------------------------- -------- -------- ---------------
<S> <C> <C> <C>
Investments Available for Sale:
Bonds and notes:
U.S. Government agencies and authorities . . $ 33,302 $ 33,303 $ 33,303
States, municipalities, and political 1,100 1,138 1,138
subdivisions . . . . . . . . . . . . . .
All other corporate bonds . . . . . . . . . 7,398 7,612 7,612
-------- -------- --------
Total bonds and notes available for sale . . . 41,800 42,053 42,053
Funds Withheld from Reinsurers:
Bonds and notes:
U.S. Government agencies and authorities . . 103,496 105,554 103,496
Foreign government . . . . . . . . . . . . . 2,118 2,183 2,118
All other corporate bonds . . . . . . . . . 9,307 9,336 9,307
-------- -------- --------
Total bonds and notes funds withheld . . . . . 114,921 117,073 114,921
Equity Securities:
Industrial, miscellaneous, and all other . . . . . 686 689 689
-------- -------- --------
Total equity securities . . . . . . . . . . . . . 686 689 689
-------- -------- --------
Invested Cash . . . . . . . . . . . . . . . . . . . . 7,745 7,745 7,745
-------- -------- --------
Total investments . . . . . . . . . . . . . . . . $165,152 $167,560 $165,408
======== ======== ========
</TABLE>
F-25
<PAGE> 178
SCHEDULE II
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SUPERIOR NATIONAL INSURANCE GROUP, INC.
BALANCE SHEET
(Amounts in thousands, except par value)
<TABLE>
<CAPTION>
December 31,
-----------------
1995 1994
------ ------
<S> <C> <C>
Assets
- - ------
Investments:
Bonds and Notes at market (amortized cost: $1,497 in 1995) . . . . . . . . . . . . $ 1,500 $ -
Invested cash (certificates of deposit and other short-term instruments) . . . . . 2,868 5,605
------- -------
Total Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,368 5,605
======= =======
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 468
Accrued investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 10
Investment in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,695 60,051
Intercompany receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 91
Current income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 1,721
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,526 1,526
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 83
------- -------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $73,804 $69,555
======= =======
Liabilities and Shareholders' Equity
- - ------------------------------------
Liabilities:
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,530 $ 9,730
Accounts payable and other liabilities . . . . . . . . . . . . . . . . . . . . . . 749 671
------- -------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,279 10,401
======= =======
Preferred securities issued by affiliate; authorized 1,100,000 shares; issued and
outstanding 922,137 shares in 1995 and 838,800 shares in 1994 . . . . . . . . 21,045 18,790
Shareholders' Equity:
Common stock, no par value; authorized 25,000,000 shares: issued and outstanding
3,430,373 shares in 1995 and 3,429,873 shares in 1994 . . . . . . . . . . . . . . 15,943 15,941
Unrealized gain (loss) on investments, net of income taxes . . . . . . . . . . . . 169 (2,574)
Paid in capital - warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,206 2,206
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,162 24,791
------- -------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . 43,480 40,364
------- -------
Total liabilities and shareholders' equity . . . . . . . . . . . . . . . . . . $73,804 $69,555
======= =======
</TABLE>
See accompanying note to condensed financial information
F-26
<PAGE> 179
SCHEDULE II
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SUPERIOR NATIONAL INSURANCE GROUP, INC.
STATEMENTS OF INCOME
(Amounts in thousands)
<TABLE>
<CAPTION>
Twelve Months Ended
December 31,
---------------------------
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Revenues:
- - --------
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 330 $ 90 $ 85
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 330 90 85
Expenses:
- - --------
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 804 1,108 1,531
General and administrative expenses . . . . . . . . . . . . . . . . . . . . 304 116 567
------- ------- -------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,108 1,224 2,098
------- ------- -------
Loss from operations before federal income tax expense, equity in net
income of subsidiaries, extraordinary item and cumulative effect of
change in accounting for income taxes, and preferred securities dividends
and accretion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (778) (1,134) (2,013)
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . 767 1,394 234
------- ------- -------
Loss from operations before equity in net income of subsidiaries,
extraordinary item, cumulative effect of change in accounting for income
taxes, and preferred securities dividend and accretion . . . . . . . . . (1,545) (2,528) (2,247)
Equity in net income of subsidiaries . . . . . . . . . . . . . . . . . . . 3,404 6,127 2,590
Extraordinary loss on retirement of long-term debt, net of income tax
benefit of $1,042 in 1994 and $233 in 1993 . . . . . . . . . . . . . . . - (2,022) (453)
Cumulative effect of change in accounting for income taxes . . . . . . . . - - 1,697
Preferred securities dividends and accretion, net of income tax benefit of
$767 in 1995 and $352 in 1994 . . . . . . . . . . . . . . . . . . . . . . (1,488) (683) -
------- ------- -------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 371 $ 894 $ 1,587
======= ======= =======
</TABLE>
See accompanying note to condensed financial information
F-27
<PAGE> 180
SCHEDULE II
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SUPERIOR NATIONAL INSURANCE GROUP, INC.
STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<TABLE>
<CAPTION>
Twelve Months Ended December 31,
------------------------------------
1995 1994 1993
------- -------- ------
<S> <C> <C> <C>
Cash flows from operating activities:
- - ------------------------------------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 371 $ 894 $1,587
------- -------- ------
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Amortization of bonds and preferred stock . . . . . . . . . . . . . . (1) 55 3
Amortization of long-term debt . . . . . . . . . . . . . . . . . . . - 1,151 (86)
Income from subsidiaries . . . . . . . . . . . . . . . . . . . . . . (3,404) (6,127) (2,590)
Gain on sale of investments . . . . . . . . . . . . . . . . . . . . . - 68 -
Preferred securities dividends and accretion . . . . . . . . . . . . 2,255 1,035 -
Decrease (increase) in accrued investment income . . . . . . . . . . 1 11 (22)
(Increase) in income taxes receivable . . . . . . . . . . . . . . . . 1,721 - (1,721)
Decrease in deferred taxes . . . . . . . . . . . . . . . . . . . . . - - -
(Decrease) increase in other assets . . . . . . . . . . . . . . . . . (11) 157 321
(Decrease) increase in accounts payable and other liabilities . . . . 78 (271) 805
------- -------- ------
Total adjustments . . . . . . . . . . . . . . . . . . . . . . . . 639 (3,921) (3,290)
------- -------- ------
Net cash provided by (used in) operating activities . . . . . . . 1,010 (3,027) (1,703)
------- -------- ------
Cash flows from financing activities:
- - ------------------------------------
Retirement of long-term debt . . . . . . . . . . . . . . . . . . . . . . - (8,164) (2,363)
Repayment of bank loans . . . . . . . . . . . . . . . . . . . . . . . . . (1,200) - -
Proceeds from long-term debt . . . . . . . . . . . . . . . . . . . . . . - 10,000 -
Proceeds from issuance of preferred securities . . . . . . . . . . . . . - 17,755 -
Paid-in capital - new warrants issued . . . . . . . . . . . . . . . . . . - 2,000 -
Paid-in capital - warrants . . . . . . . . . . . . . . . . . . . . . . . - (10) -
Paid-in capital - stock options . . . . . . . . . . . . . . . . . . . . . 2 - -
Net cash provided by (used in) financing activities . . . . . . . . . (1,198) 21,581 (2,363)
------- -------- ------
Cash flows from investing activities:
- - ------------------------------------
Purchases of bonds and notes:
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,496) - (975)
Dividends received from subsidiaries . . . . . . . . . . . . . . . . . . - 850 850
Sales of bonds and notes:
Investments available for sale . . . . . . . . . . . . . . . . . . . - 923 -
Capital contribution to subsidiaries . . . . . . . . . . . . . . . . . . (1,500) (15,000) -
Sales of common & preferred stock . . . . . . . . . . . . . . . . . . . . - 24 -
Net (increase) decrease in invested cash . . . . . . . . . . . . . . . . 2,737 (4,937) 4,240
------- -------- ------
Net cash provided by (used in) investing activities . . . . . . . . . (259) (18,140) 4,115
------- -------- ------
Net increase (decrease) in cash . . . . . . . . . . . . . . . . . . . (447) 414 49
Cash at beginning of period . . . . . . . . . . . . . . . . . . . . . . . 468 54 5
------- -------- ------
Cash at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21 $ 468 $ 54
======= ======== ======
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes . . . . . . . . . . . . . $ 1 $ 1 $ 1
======= ======== ======
Cash paid during the year for interest . . . . . . . . . . . . . . . $ 808 $ 1,222 $ 630
======= ======== ======
See accompanying note to condensed financial information
</TABLE>
F-28
<PAGE> 181
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SUPERIOR NATIONAL INSURANCE GROUP, INC.
NOTE TO CONDENSED FINANCIAL INFORMATION
The parent only financial statements present the Company's balance
sheet, operations and cash flows by accounting for the investment in its
subsidiaries on the equity method.
The accompanying condensed financial information should be read in
conjunction with the consolidated financial statements and notes to
consolidated financial statements.
F-29
<PAGE> 182
SCHEDULE III
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTAL INSURANCE INFORMATION
(Amounts in thousands)
<TABLE>
<CAPTION>
COLUMN COLUMN COLUMN COLUMN COLUMN COLUMN COLUMN COLUMN COLUMN COLUMN COLUMN
A B C D E F G H I J K
-------- ----------- ---------- -------- ---------- ------- ---------- --------- ------------ --------- ---------
Future
Policy Amortiza-
Benefits, Other tion of
Deferred Losses, Policy Deferred
Policy Claims and Claims and Policy Other
Acquisition Loss Unearned Benefits Premium Net Benefits, Acquisitions Operating Premium
Costs Expenses Premium Payable Revenue Investment Claims Costs Expenses Written
----------- ---------- -------- ---------- ------- ---------- --------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995
- - ----
Workers'
Compensation $ 2,780 $ 140,774 $ 10,220 $ -- $ 89,735 $ 9,784 $ 56,605 $ 18,288 $ 18,679 $ 89,139
======== ========= ======== ========== ========= ======== ========= ========= ========= =========
1994
- - ----
Workers'
Compensation $ 2,905 $ 171,258 $ 10,728 $ -- $ 110,418 $ 9,049 $ 78,761 $ 16,746 $ 13,980 $ 105,946
======== ========= ======== ========== ========= ======== ========= ========= ========= =========
1993
- - ----
Workers'
Compensation $ 3,351 $ 171,038 $ 14,663 $ -- $ 153,585 $ 9,550 $ 113,817 $ 23,033 $ 12,710 $ 154,431
======== ========= ======== ========== ========= ======== ========= ========= ========= =========
</TABLE>
F-30
<PAGE> 183
SCHEDULE IV
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
REINSURANCE
(In thousands)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
-------- -------- -------- -------- -------- --------
Assumed From Percentage of
Ceded to Other Other Amount
Description Gross Amount Companies Companies Net Amount Assumed to Net
----------- ------------ --------- --------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995
- - ----------------------------
Premiums:
Workers' compensation
insurance . . . . . . . . . . $96,630 $6,895 $ --- $89,735 $---
--------- ------ ------- -------- ----
Total premiums . . . . . . . $96,630 $6,895 $ --- $89,735 $---
========= ====== ======= ======== ====
Year ended December 31, 1994
- - ----------------------------
Premiums:
Workers' compensation
insurance . . . . . . . . . . $138,704 $28,286 $ --- $110,418 $---
--------- ------ ------- -------- ----
Total premiums . . . . . . . $138,704 $28,286 $ --- $110,418 $---
========= ====== ======= ======== ====
Year ended December 31, 1993
- - ----------------------------
Premiums:
Workers' compensation
insurance . . . . . . . . . . $ 157,140 $3,555 $ --- $153,585 $---
--------- ------ ------- -------- ----
Total premiums . . . . . . . $ 157,140 $3,555 $ --- $153,585 $---
========= ====== ======= ======== ====
</TABLE>
F-31
<PAGE> 184
SCHEDULE V
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(Amounts in thousands)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
------------------------- ------------ -------------------------- ------------ ------------
Additions
--------------------------
Balance at Charged to Charged to Balance
Beginning Costs Other at End
Description of Period and Expenses Accounts Deductions of Period
-------------------------- ----------- -------------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995
- - ----------------------------
Allowance for possible
losses on premiums
receivable . . . . . . . . $ 900 $1,531 --- ($1,931) $ 500
===== ====== ===== ======= =====
Allowance for possible
losses on reinsurance
recoverable . . . . . . . --- --- --- --- ---
===== ====== ===== ======= =====
Year ended December 31, 1994
- - ----------------------------
Allowance for possible
losses on premiums
receivable . . . . . . . . $ 900 $2,697 --- ($2,697) $ 900
===== ====== ===== ======= =====
Allowance for possible
losses on reinsurance
recoverable . . . . . . . --- --- --- --- ---
===== ====== ===== ======= =====
Year ended December 31, 1993
- - ----------------------------
Allowance for possible
losses on premiums
receivable . . . . . . . . $ 625 $4,903 --- ($4,628) $ 900
===== ====== ===== ======= =====
Allowance for possible
losses on reinsurance
recoverable . . . . . . . --- --- --- --- ---
===== ====== ===== ======= =====
</TABLE>
F-32
<PAGE> 185
SCHEDULE VI
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTAL PROPERTY AND CASUALTY INSURANCE INFORMATION
(Amounts in thousands)
<TABLE>
<CAPTION>
COLUMN COLUMN COLUMN COLUMN COLUMN COLUMN COLUMN COLUMN COLUMN COLUMN
A B C D E F G H I J
----------- ---------- -------- --------- --------- -------- ----------------- -------- -------- ---------
Discount,
if any,
Deducted Claims and Claim
Reserves in Reserves Adjustment Amortiza-
for Unpaid or Unpaid Expenses Incurred tion of Paid
Deferred Claims and Claims and related to: Deferred Claims and
Policy Claim Claim Net ---------------- Policy Claim
Acquisition Adjustment Adjustment Unearned Earned Investment Current Prior Acquisition Adjustment Premium
Costs Expenses Expenses Premium Premium Income Year Year Costs Expenses Written
----------- ---------- -------- --------- --------- -------- -------- ------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995
- - ----
Workers'
Compensation $ 2,780 $ 140,774 $ -- $ 10,220 $ 89,735 $ 9,784 $ 58,842 $(2,237) $ 18,288 $ 61,765 $ 89,139
========= ========== ======== ========= ========= ======== ======== ======= ======== ======== =========
1994
- - ----
Workers'
Compensation $ 2,905 $ 171,258 $ -- $ 10,728 $ 110,418 $ 9,049 $ 72,457 $ 6,304 $ 16,746 $ 81,467 $ 105,946
========= ========== ======== ========= ========= ======== ======== ======= ======== ======== =========
1993
- - ----
Workers'
Compensation $ 3,351 $ 171,038 $ -- $ 14,663 $ 153,585 $ 9,550 $ 87,997 $ 25,820 $ 23,033 $ 80,428 $ 154,431
========= ========== ======== ========= ========= ======== ======== ======= ======== ======== =========
</TABLE>
F-33
<PAGE> 186
ANNEX A
_____________________________________________________________________
STOCK PURCHASE AGREEMENT
among
SUPERIOR NATIONAL INSURANCE GROUP, INC.,
INSURANCE PARTNERS, L.P.,
INSURANCE PARTNERS OFFSHORE (BERMUDA), L.P.
AND
THE PERSONS OR ENTITIES ON THE SIGNATURE PAGES TO
THE SUBSCRIPTION AGREEMENTS ATTACHED HERETO
_________________________________________________________________
Dated as of September 17, 1996
_________________________________________________________________
<PAGE> 187
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I
THE TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.1 Purchase and Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.2 Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.3 Closing Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.4 The Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.5 Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.1 Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.2 Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.3 No Violation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.4 Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.5 Funds Available . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.6 Securities Act Representation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.7 Participation by Robert A. Spass . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.1 Corporate Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.2 Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.3 Newly Issued Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.4 Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.5 No Violation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.6 SEC Filings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.7 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.8 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.9 No Material Adverse Change; Ordinary Course of Business . . . . . . . . . . . . . . . . . . . . . . . 9
3.10 Private Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.11 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.12 Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
</TABLE>
A-i.
<PAGE> 188
TABLE OF CONTENTS (Continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE IV
COVENANTS AND AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
4.1 Proxy Statement and Meeting of Company's Shareholders . . . . . . . . . . . . . . . . . . . . . . . . 10
4.2 Standstill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.3 Transfer of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
4.4 Board Representation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
4.5 IP Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4.6 Best Efforts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4.7 Indemnification by the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4.8 Indemnification by the Purchasers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
4.9 Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
4.10 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
4.11 HSR Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ARTICLE V
CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
5.1 Conditions to Each Party's Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
5.2 Conditions to the Obligations of the Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
5.3 Conditions to the Obligations of Purchasers. . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
ARTICLE VI
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
6.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
6.2 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
6.3 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
6.4 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
6.5 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
6.6 Headings; Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.7 Publicity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.8 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
6.9 Conveyance Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
6.10 Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
6.11 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
6.12 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
6.13 Third Party Beneficiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
6.14 Costs and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
</TABLE>
A-ii.
<PAGE> 189
EXHIBITS
Exhibit A Form of Subscription Agreement
Exhibit B Purchasers of the Shares of Common Stock
Exhibit C Registration Rights Agreement
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STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT ("Agreement") dated as of September
17, 1996 by and among Superior National Insurance Group, Inc., a California
corporation (the "Company"), Insurance Partners, L.P., a Delaware limited
partnership ("IP Delaware"), Insurance Partners Offshore (Bermuda), L.P., a
Bermuda limited partnership ("IP Bermuda" and together with IP Delaware,"IP"),
and such other persons or entities who execute the form of Stock Subscription
Agreement (the "Subscription Agreement") attached hereto as Exhibit A (the
"Subscribing Shareholders" and together with IP, the "Purchasers").
R E C I T A L S:
WHEREAS, the Purchasers wish to purchase from the Company, and
the Company wishes to issue and sell to the Purchasers, the number of shares of
common stock, no par value, of the Company (the "Common Stock") as is set forth
in Section 1.1 below, on the terms and subject to the conditions set herein;
WHEREAS, it is a standard and customary practice of IP, in
connection with transactions substantially similar to those contemplated
herein, to require certain members of senior management of the issuer to make a
contemporaneous, personal, financial commitment to the issuer;
WHEREAS, in order to comply with such practice of IP, certain
members of management of the Company have agreed to make a contemporaneous,
personal, financial commitment to the Company by purchasing shares of Common
Stock and by consummating the transactions contemplated herein on the terms and
conditions set forth below;
WHEREAS, concurrently with the execution of this Agreement,
the Company, the Purchasers, Pac Rim Holding Corporation ("Pac Rim"), SNTL
Acquisition Corp. ("SNTL"), The Chase Manhattan Bank, N.A., Chase Securities
Inc. (collectively, "Chase") and the Subscribing Shareholders shall enter into
among themselves certain agreements relevant thereto as set forth below; and
WHEREAS, the Board of Directors of the Company has approved
this Agreement and the transactions contemplated hereby, upon the terms and
subject to the conditions set forth herein.
A G R E E M E N T:
NOW, THEREFORE, in consideration of the foregoing and the
respective representations, warranties, covenants, agreements and conditions
contained herein, the sufficiency of which is hereby acknowledged, and in order
to set forth the terms and
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conditions of the transactions described herein and the mode of carrying the
same into effect, the parties hereby agree as follows:
ARTICLE I
THE TRANSACTIONS
1.1 Purchase and Sale. Subject to the terms and
conditions of this Agreement, each of the Purchasers agrees to purchase from
the Company and the Company agrees to issue and sell to each of the Purchasers
(the "Purchase") at the Closing (as defined below) the aggregate number of
shares of Common Stock (the "Shares") set forth opposite such Purchaser's name
on Exhibit B hereto, for the aggregate purchase price set forth opposite such
Purchaser's name on Exhibit B hereto. Each Subscription Agreement executed by
a Purchaser shall be attached hereto and become part of this Agreement.
1.2 Purchase Price. The purchase price to be paid for
each Share of Common Stock shall be Seven Dollars and Fifty-Three Cents ($7.53)
(the "Share Price"), constituting an aggregate purchase price for the Shares of
Eighteen Million Dollars ($18,000,000) (the "Purchase Price").
1.3 Closing Matters. At the Closing each of the
Purchasers shall wire transfer or otherwise make available in same day funds to
the Company its portion of the Purchase Price and the Company shall deliver to
such Purchaser certificates representing the Shares purchased by such
Purchaser.
1.4 The Closing. Subject to the fulfillment of the
conditions precedent specified in Article V (any or all of which may be waived
in writing by the respective parties whose performance is conditioned upon
satisfaction of such conditions precedent), the purchase and sale of the Shares
shall be consummated at a closing (the "Closing") to be held at the offices of
Barger & Wolen LLP, 515 South Flower Street, 34th Floor, Los Angeles,
California 90071 at 9:00 a.m., local time, or as soon as practicable, following
the satisfaction or waiver of all conditions precedent specified in Article V,
or at such other place and time as the Company and IP shall mutually agree in
writing after the satisfaction or waiver of all conditions precedent specified
in Article V, provided that in no circumstance shall the Closing occur on or
after March 1, 1997 (such date and time being herein referred to as the
"Closing Date").
1.5 Fee. At the Closing, the Company shall pay to
Insurance Partners Advisors, L.P. ("IPA") a transaction fee of Six Hundred and
Thirty-Five Thousand Dollars ($635,000), by wire transfer of immediately
available funds to an account or accounts designated by IPA. If Pac Rim shall
pay to the Company the Breakup Fee (as defined in Section 10.3 of the Merger
Agreement, dated as of the date hereof, among Pac Rim, the Company and SNTL
(the "Merger Agreement")) in accordance with Section 10.3 of the
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Merger Agreement, then the Company shall pay to IP that portion of the Breakup
Fee equal to the percentage of voting securities of the Company owned by IP on a
fully diluted basis (excluding the Voting Notes, as hereinafter defined) as if
the purchase by IP of the Shares shall have occurred (notwithstanding that no
such purchase shall have taken place).
ARTICLE II
REPRESENTATIONS AND WARRANTIES
OF THE PURCHASERS
Each of the Purchasers, severally but not jointly, represents
and warrants to the Company, solely as to such Purchaser, as to all matters
relevant thereto, as follows:
2.1 Organization. Each of the Purchasers is either (a) a
limited partnership duly organized, validly existing and in good standing under
the laws of its respective jurisdiction of formation or (b) a natural person
(or nominee of a natural person) who is a resident of the State of California.
2.2 Authority. With respect to the Purchasers that are
limited partnerships (the "Partnerships"), (i) each such Partnership has full
partnership power and authority to execute and deliver this Agreement and each
other agreement contemplated hereby to which it is a party, to carry out its
obligations hereunder and thereunder and to consummate the transactions
contemplated on its part hereby and thereby, (ii) the execution, delivery and
performance by such Partnership of this Agreement and each other agreement
contemplated hereby to which it is a party have been duly authorized by all
necessary partnership action on the part of such Partnership and (iii) no other
action on the part of such Partnership or its respective partners is necessary
to authorize the execution and delivery of this Agreement and each other
agreement contemplated hereby by such Partnership or the performance by such
Partnership of its obligations hereunder. With respect to all Purchasers, this
Agreement has been duly executed and delivered by such Purchaser and
constitutes a legal, valid and binding agreement of such Purchaser, enforceable
against it in accordance with its terms, subject to applicable bankruptcy,
insolvency, moratorium, reorganization or similar laws affecting creditors'
rights generally and subject to general equitable principles (regardless of
whether such enforceability is considered in a proceeding in equity or at law).
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Each other agreement to be executed by such Purchaser to which it is a party in
connection with this Agreement on or prior to the Closing Date will be duly
executed and delivered by such Purchaser, and (assuming due execution and
delivery by the other party or parties thereto) will constitute a legal, valid
and binding obligation of such Purchaser, enforceable against it in accordance
with its terms, subject to applicable bankruptcy, insolvency, moratorium,
reorganization or similar laws affecting creditors' rights generally and subject
to general equitable principles (regardless of whether such enforceability is
considered in a proceeding in equity or at law).
2.3 No Violation. The execution and delivery of this
Agreement and each other agreement contemplated hereby, the performance by each
Purchaser of its obligations hereunder and the consummation by it of the
transactions contemplated hereby and thereby will not (a) violate any provision
of law, rule, regulation, order, writ, judgment, injunction, decree,
determination or award applicable to such Purchaser, (b) require the consent,
waiver, approval, license or authorization of or any filing by such Purchaser
with any person or governmental authority except for, (i) filings to be made in
connection with or in compliance with the provisions of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), Regulation D as promulgated under
the Securities Act of 1933, as amended (the Securities Act") and applicable
state securities laws, (ii) with respect to IP, if required, the filing of a
pre-merger notification report under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (an "HSR Report"), and (iii) with respect
to TJS Partners, L.P. ("TJS"), if required, and IP, the filing of a Form A
Information Statement ("Form A") with the California Department of Insurance
under Section 1215.2 of the California Insurance Code and Title 10, California
Code of Regulations Section 2683 et seq. or (c) violate, result (with or
without notice or the passage of time, or both) in a breach of or give rise to
the right to accelerate, terminate or cancel any obligation under or constitute
(with or without notice or the passage of time, or both) a default under, any
of the terms or provisions of any charter or bylaw, partnership agreement,
indenture, mortgage, agreement, contract, order, judgment, ordinance,
regulation or decree to which such Purchaser is subject or by which such
Purchaser is bound, except for any of the foregoing matters which would not
have, individually or in the aggregate, a material and adverse effect upon the
operations, financial condition, prospects or results of operations of such
party (a "Material Adverse Effect").
2.4 Brokers. Such Purchaser has not paid or become
obligated to pay any fee or commission to any broker, finder, investment banker
or other intermediary in connection with this Agreement.
2.5 Funds Available. Such Purchaser has funds available,
or commitments from third parties to provide funds, sufficient to pay such
Purchaser's respective portion of the Purchase Price.
2.6 Securities Act Representation. Such Purchaser is an
"accredited investor" as defined in Rule 501 promulgated as part of Regulation
D under the Securities Act and an "excluded purchaser" under Title 10,
California Code of Regulations Section 260.102.13. Such Purchaser is not
purchasing such Purchaser's respective portion of the Shares with a view to a
distribution or resale of any of such securities in violation of any
applicable securities laws.
2.7 Participation by Robert A. Spass. Robert A. Spass
abstained from the formal partnership approval process by IP of its investment
in the Company.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY
The Company represents and warrants to the Purchasers as
follows:
3.1 Corporate Organization. Each of the Company and its
Subsidiaries is a corporation or limited partnership duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation or formation, with all requisite corporate power and authority to
lease the properties it operates as lessee and to carry on its business as it
is now being conducted as described in the SEC Filings (as defined herein), and
is duly qualified or licensed to do business and is in good standing in each
jurisdiction in which it currently carries on business, except where the
failure to be so qualified or licensed or be in good standing would not
reasonably be expected, individually or in the aggregate, to have a Material
Adverse Effect on the Company. With respect to the Company, a "Material
Adverse Effect" shall refer to the Company and its Subsidiaries on a
consolidated basis. True and complete copies of the Amended and Restated
Articles of Incorporation and the Bylaws of the Company, each as amended to
date, have been delivered to IP. "Subsidiaries" means, with respect to the
Company, a corporation or other entity of which 50% or more of the voting power
of the outstanding voting securities or 50% or more of the outstanding equity
interests is held, directly or indirectly, by the Company.
3.2 Capital Stock. The authorized capital stock of the
Company consists in its entirety of 25,000,000 shares of Common Stock, of
which, as of the date hereof, 3,433,446 are issued and outstanding. All of the
outstanding shares of Common Stock have been duly and validly authorized and
issued, are fully paid and nonassessable and were issued in compliance with all
applicable federal and state securities laws. Except for warrants described in
the SEC Filings and except for options and other stock rights authorized for
issuance pursuant to the Company's stock plans and employee stock purchase
plans described in the SEC Filings, there are no options, warrants, conversion
privileges or other rights presently outstanding to purchase or otherwise
acquire any authorized but unissued shares of capital stock or other securities
of the Company or any of the Subsidiaries.
3.3 Newly Issued Shares. The Shares to be sold and
issued by the Company to the Purchasers in accordance with the terms of this
Agreement have been duly authorized and, when issued as contemplated hereby at
the Closing, will be validly issued, fully paid and non-assessable and no other
person has any preemptive right, option, warrant, subscription agreement or
other right with respect to such Shares, other than the preemptive rights held
by the holders of the Common Stock Purchase Warrants issued under each of the
Note Purchase Agreement, dated as of March 31, 1992 (the "Note Purchase
Agreement") and the Preferred Securities Purchase Agreement, dated as of June
30, 1994 (the "Preferred
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Securities Purchase Agreement"). At the Closing, the Purchasers will acquire
good and marketable title to the Shares free and clear of any and all liens,
encumbrances, security interests, preemptive rights, adverse claims or equities
or rights in favor of another ("Encumbrances"), except such Encumbrances as may
be created pursuant to this Agreement.
3.4 Authority. The Company has full corporate power and
authority to execute and deliver this Agreement and each other agreement
contemplated hereby, to carry out its obligations hereunder and thereunder and
to consummate the transactions contemplated on its part hereby and thereby.
The execution, delivery and performance by the Company of this Agreement and
each other agreement contemplated hereby and the consummation of the
transactions contemplated on its part hereby have been duly authorized by the
Board, and no other corporate proceedings on the part of the Company, except
for the approval by the shareholders of the Company of those matters for which
such approval is required as specified in Article V hereof, are necessary to
authorize the execution and delivery of this Agreement and each other agreement
contemplated hereby by the Company or the performance by the Company of its
obligations hereunder or thereunder. This Agreement has been duly executed and
delivered by the Company and constitutes the legal, valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms, subject to applicable bankruptcy, insolvency, moratorium,
reorganization or similar laws affecting creditors' rights generally and
subject to general equitable principles (regardless of whether such
enforceability is considered in a proceeding in equity or at law). Each other
agreement to be executed by the Company in connection with this Agreement on or
prior to the Closing Date will be duly executed and delivered by the Company,
and (assuming due execution and delivery by the other party or parties thereto)
will constitute a legal, valid and binding obligation of the Company,
enforceable against the Company in accordance with their respective terms,
subject to applicable bankruptcy, insolvency, moratorium, reorganization, or
similar laws affecting creditors' rights generally and subject to general
equitable principles (regardless of whether such enforceability is considered
in a proceeding in equity or at law).
3.5 No Violation. The execution, delivery and
performance of this Agreement and each other agreement contemplated hereby by
the Company and the consummation by it of the transactions contemplated hereby
and thereby do not (a) violate any provision of law, rule, regulation, order,
writ, judgment, injunction, decree, determination or award (collectively,
"Requirements of Law") applicable to the Company or any of the Subsidiaries,
(b) require the consent, waiver, approval, license or authorization of or any
notice or filing by the Company or any of the Subsidiaries with any person or
governmental authority except for, (i) filings to be made in connection with or
in compliance with the provisions of the Exchange Act, Regulation D as
promulgated under the Securities Act and applicable state securities laws and
(ii) the filing of (A) HSR Reports by Pac Rim and the Company in connection
with the transactions contemplated by the Merger Agreement (the "Merger"), (B)
HSR Reports by IP, if required, and the Company (only if IP is required to file
such a report) in connection with this Agreement, (C) a Form A by the Company
in
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connection with the Merger and (D) a Form A by each of TJS (if required) and IP
in connection with this Agreement or (c) violate, result (with or without
notice or the passage of time, or both) in a breach of or give rise to the
right to accelerate, terminate or cancel any obligation under or constitute
(with or without notice or the passage of time, or both) a default under, any
of the terms or provisions of any charter or bylaw, indenture, mortgage,
agreement, contract, order, judgment, ordinance, regulation or decree to which
the Company or any of its Subsidiaries is subject or by which the Company or
any of its Subsidiaries is bound, except for any of the foregoing matters which
would not have, individually or in the aggregate, a Material Adverse Effect on
the Company. Neither the Company nor any of the Subsidiaries previously
entered into any agreement which is currently in effect, or by which the
Company or any of the Subsidiaries is currently bound, granting any rights to
any person which are inconsistent with the rights to be granted by the Company
in this Agreement and each other agreement contemplated hereby, other than the
registration rights granted to the holders of the Common Stock Purchase
Warrants issued pursuant to the Note Purchase Agreement and the Preferred
Securities Purchase Agreement.
3.6 SEC Filings. The Company has filed all SEC Filings
required to be filed by it since the date of its Registration Statement (as
hereinafter defined) under the Securities Act or the Exchange Act, and all
amendments thereto. The Company heretofore has delivered to each Partnership
true and complete copies of (a) its audited consolidated financial statements
of the Company and the Subsidiaries (balance sheet and statements of
operations, cash flows and shareholders' equity, together with the notes
thereto) for the fiscal year ended and as at December 31, 1995 (as such
financial statements appear in the Company's Form 10-K for the fiscal year
ended December 31, 1995, which was filed with the Commission on April 1, 1996,
the "Audited Financial Statements"), and the unaudited consolidated financial
statements (balance sheet and statement of operations) for the six (6) months
ended and as at June 30, 1996 (as such financial statements appear in the
Company's Form 10-Q for the fiscal quarter ended June 30, 1996, which was filed
with the Commission on August 15, 1996, the "Unaudited Financial Statements";
the Audited Financial Statements and Unaudited Financial Statements being
collectively referred to as the "Financial Statements"), (b) the final form,
including all amendments, of the Company's Registration Statement on Form 10
(the "Registration Statement"), (c) its Quarterly Reports on Form 10-Q for the
quarters ended June 30, 1995 and September 30, 1995 and March 31, 1996 and June
30, 1996, (d) its Annual Report on Form 10-K for the fiscal year ended December
31, 1995, (e) its Proxy Statement on Schedule 14A under the Exchange Act, dated
April 26, 1996 and (f) all other reports, statements, registration statements
and other documents (including Current Reports on Form 8-K) filed by it with
the Securities and Exchange Commission (the "Commission") under the Securities
Act or the Exchange Act, and all amendments and supplements thereto, subsequent
to the filing of the Registration Statement, if any (the foregoing subsections
(a) through (f), including all exhibits and Schedules thereto and documents
incorporated by reference therein, are referred to in this Agreement as the
"SEC Filings"). As of the respective date that it was filed with the
Commission, each of the SEC Filings complied as to form and content, in all
material respects, with the requirements
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of the Securities Act or the Exchange Act, as the case may be, and the rules and
regulations promulgated thereunder, and did not contain any untrue statement of
a material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. The Financial Statements included in the
SEC Filings were prepared in accordance with generally accepted accounting
principles, consistently applied, and (except as may be indicated therein or in
the notes thereto) present fairly the consolidated financial position, results
of operations and cash flows of Company as of the dates and for the respective
periods indicated (subject, in the case of Unaudited Financial Statements, to
normal recurring year-end adjustments and any other adjustments described
therein). The Company has (i) delivered to IP true and complete copies of (x)
all correspondence relating to the Company between the Commission and the
Company or its legal counsel and, to the Company's knowledge, accountants since
the date of the Registration Statement (other than routine filing package cover
letters) and (y) all correspondence between the Company or its counsel and the
Company's auditors since the date of the Registration Statement, relating to any
audit, financial review or preparation of financial statements of the Company
(other than correspondence which the Company reasonably believes is subject to a
privilege), and (ii) disclosed to IP the content of all material discussions
between the Commission and the Company or its legal counsel and, to the
Company's knowledge, accountants concerning the adequacy or form of any SEC
Filings filed with the Commission since the date of its Registration Statement.
The Company is not aware of any issues raised by the Commission with respect to
any of the SEC Filings, other than those disclosed to IP pursuant to this
paragraph.
3.7 Litigation. Except as set forth in the SEC Filings,
there are no actions, suits, proceedings, claims, complaints, disputes or
investigations pending or, to the knowledge of the Company, threatened, at law,
in equity, in arbitration or before any governmental authority against the
Company or any of its Subsidiaries and with respect to which the Company or any
of its Subsidiaries is responsible by way of indemnity or otherwise, that
would, if adversely determined, (a) have a Material Adverse Effect on the
Company or (b) have a material adverse effect on the ability of the Company to
perform its obligations under this Agreement and each other agreement
contemplated hereby. No injunction, writ, temporary restraining order, decree
or order of any nature has been issued by any court or other governmental
authority against the Company or any of its Subsidiaries purporting to enjoin
or restrain the execution, delivery or performance of this Agreement or each
other agreement contemplated hereby.
3.8 Compliance with Laws.
(a) Each of the Company and the Subsidiaries is
in compliance with all Requirements of Law in all respects, except to the
extent that the failure to comply with such Requirements of Law would not have
a Material Adverse Effect on the Company.
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(b) (i) Each of the Company and the Subsidiaries
has all licenses, permits, orders or approvals of any governmental authority
(collectively, "Permits") that are material to or necessary for the conduct of
the business of the Company in the manner described in the SEC Filings filed
with the SEC prior to the date hereof, except to the extent that the failure to
have such Permits would not have a Material Adverse Effect on the Company; (ii)
such Permits are in full force and effect; and (iii) no material violations are
recorded in respect to any Permit.
3.9 No Material Adverse Change; Ordinary Course of
Business. Except as set forth in the SEC Filings and except as previously
disclosed to IP in writing, since June 30, 1996, (i) there has not been any
material adverse change in operations, financial condition, prospects or
results of operations of the Company and the Subsidiaries, taken as a whole and
(ii) neither the Company nor any of the Subsidiaries has participated in any
transaction or acted outside the ordinary course of business.
3.10 Private Offering. No form of general solicitation or
general advertising was used by the Company or the Subsidiaries or their
respective representatives in connection with the offer or sale of the Shares.
No registration of the Shares, pursuant to the provisions of the Securities Act
or any state securities or "blue sky" laws, will be required by the offer, sale
or issuance of the Shares.
3.11 Taxes. The Company and its Subsidiaries have filed
or caused to be filed, or have properly filed extensions for, all income tax
returns that are required to be filed and have paid or caused to be paid all
taxes as shown on said returns and on all assessments received by it to the
extent that such taxes have become due, except taxes the validity or amount of
which is being contested in good faith by appropriate proceedings and with
respect to which adequate reserves, in accordance with generally accepted
accounting principles, have been set aside. The Company and its Subsidiaries
have paid or caused to be paid, or have established reserves in accordance with
generally accepted accounting principles that the Company or such Subsidiaries
reasonably believes to be adequate in all material respects, for all income tax
liabilities applicable to the Company and its Subsidiaries for all fiscal years
that have not been examined and reported on by the taxing authorities (or
closed by applicable statutes). United States federal income tax returns of
the Company and its Subsidiaries have been examined and closed through the
fiscal year ended December 31, 1991. The Company has delivered to IP (a)
copies of any tax sharing agreements to which it or any of its Subsidiaries is
party and such agreements have not been amended in any manner and (b) an
analysis of the ownership of capital stock of the Company by "5-percent
shareholders" as such term is defined in Section 382 of the Internal Revenue
Code of 1986, as amended, and the Treasury regulations promulgated thereunder
(collectively, "Section 382").
3.12 Brokers. Except with respect to any investment
banking fee due to Donaldson, Lufkin & Jenrette ("DLJ"), the Company has not
paid or become obligated to
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pay any fee or commission to any broker, finder, investment banker or other
intermediary in connection with this Agreement.
ARTICLE IV
COVENANTS AND AGREEMENTS
4.1 Proxy Statement and Meeting of Company's
Shareholders.
(a) As soon as reasonably practicable following
the date hereof, the Company shall (i) prepare and file with the Commission,
(ii) use its reasonable best efforts to cause to be cleared by the Commission
and (iii) within five (5) business days following clearance with the
Commission, mail to its shareholders the Proxy Statement (as defined below)
with respect to a special meeting of the Company's shareholders (the "Special
Meeting") to consider and vote, among other things, upon (A) the issuance of
the Shares as contemplated hereby and (B) the amending or adopting of the
Company's charter, the amending of its Bylaws and the election of certain
nominees to be directors that are referred to in Section 5.3(e) and Section
5.3(l). The Board of Directors of the Company shall recommend such approval
and take all reasonable lawful action to solicit such approval. Each Purchaser
agrees to assist and cooperate with the Company in the preparation of the Proxy
Statement with respect to information therein concerning any such Purchaser.
(b) The Company, on the one hand, and each
Purchaser, on the other hand, hereby represents, warrants and agrees with the
other that the Proxy Statement will not, at the time the Proxy Statement is
mailed, and at the date of the Special Meeting, contain any untrue statement of
a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they are made, not misleading, or to correct any
statement made in any earlier communication with respect to the solicitation of
any proxy or approval of the transactions contemplated by this Agreement in
connection with which the Proxy Statement shall be mailed, except that no
representation or warranty is being made by either with respect to information
supplied in writing by the other for inclusion in the Proxy Statement. The
Company further represents, warrants and agrees that the Proxy Statement will
comply as to form in all material respects with the provisions of the Exchange
Act. The letter to shareholders, notice of meeting, proxy statement and form
of proxy, or any information statement filed under the Exchange Act, as the
case may be, that may be provided to shareholders of the Company in connection
with the transactions contemplated by this Agreement (including any
supplements), and any schedules required to be filed with the Commission in
connection therewith, as from time to time amended or supplemented, are
collectively referred to as the "Proxy Statement."
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(c) The Company shall take all actions necessary
in accordance with the California Corporations Code and the bylaws of the
Company to duly call, give notice of, convene and hold the Special Meeting
within forty-five (45) calendar days after the mailing of the Proxy Statement
to approve the matters set forth therein.
4.2 Standstill.
(a) Each of IP's "Associates" (which term shall be
defined for this purpose to include CentreLine Reinsurance Limited, Centre
Reinsurance Limited, International Insurance Investors, L.P. ("III"),
International Insurance Advisors, Inc. ("IIA") and any person or entity that
controls, is under common control with, or is controlled by IP or such persons
or entities, and all individuals who are officers, directors or control persons
of any such entities, including IP) that is a signatory hereto covenants and
agrees with respect to itself, and IP covenants and agrees with respect to
itself and its Associates that are not signatories hereto, that it or they will
not (i) acquire or offer or agree to acquire, directly or indirectly, by
purchase or otherwise, any shares of Common Stock or voting securities of the
Company (or direct or indirect rights or options to acquire any such
securities); (ii) enter, agree to enter into or propose to enter into, directly
or indirectly, any merger or business combination involving the Company; (iii)
make, or in any way participate, directly or indirectly, in any "solicitation"
of "proxies" (as such terms are used in the rules of the Commission) or consent
to vote, or seek to advise or influence any person or entity with respect to the
voting of, any voting securities of the Company; or (iv) form, join or in any
way participate in a "group" (within the meaning of Section 13d-3 of the
Exchange Act) with any persons not referred to herein with respect to any of the
foregoing; provided, however, that nothing in this Section 4.2(a) shall restrict
IP or any of its Associates from (A) acquiring shares of Common Stock or voting
securities as a result of a stock split, stock dividend or similar
recapitalization of the Company, (B) exercising the warrant issued to IIA
pursuant to the Note Purchase Agreement and the warrant issued to CentreLine
pursuant to the Preferred Securities Purchase Agreement, (C) making, or in any
way participating, directly or indirectly, in any "solicitation" of "proxies"
(as such terms are defined in Rule 14a-1 under the Exchange Act) in connection
with the election to the Board of Directors of directors nominated by IP or any
of its Associates (to the extent not otherwise inconsistent with this Agreement)
or (D) with respect to a tender or exchange offer or a merger or other business
combination involving the Company (a "Business Combination"), which was
initiated without the encouragement by or the participation of IP or any of its
Associates, making a tender or exchange offer or a proposal with respect to a
Business Combination, or forming, joining or participating as a "group" to make
such offer or proposal, in either case upon more favorable terms than those of
the unsolicited tender or exchange offer or Business Combination; and provided
further, that nothing contained in this Section 4.2(a) shall affect or impair
the right of any director of the Company to (x) act as a member of the Board of
Directors or any committee thereof or (y) take any action necessary or advisable
to carry out his obligations and duties as a director of the Company.
Notwithstanding anything to the contrary contained in this Agreement, nothing in
this Section 4.2(a) shall prohibit or restrict any Associate who
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is a director of the Company from acquiring, in one or more transactions, in his
individual capacity, an aggregate of 25,000 shares of Common Stock so long as
such acquisition does not violate any provision of the Company's charter as in
effect from time to time.
(b) The limitations set forth in Section 4.2(a)
above and Section 4.3 below may be waived by the affirmative vote of the
nearest whole number representing 66 2/3% or more of (i) the directors of the
Company, excluding from the total number of directors voting, those who are
Associates of IP and those who are employees of the Company or (ii) the shares
of the Company, not including in such total number of shares voting, those
beneficially owned by those executive officers of the Company subject to the
reporting requirements of Section 16 of the Exchange Act and those owned by IP
and its Associates.
(c) In furtherance of the standstill covenants
set forth in this Section 4.2, each of the Company and IP covenants and agrees
that any material business relationship between the Company and IP or any
Associate of IP must be approved in the manner provided in Section 4.2(b)
above.
(d) Other than with respect to the election of
directors of the Company, IP covenants and agrees that, with respect to any
vote of the shareholders of the Company on a particular matter, if the
aggregate number of all shares that are voted in like manner by IP and its
Associates shall be greater than 35% of the total number of shares voted, then
those votes that exceed such 35% threshold shall be voted in the same
proportion as the other shareholders voted their shares with respect to such
matter.
(e) IP covenants and agrees that IP and its
Associates will not vote their shares of Common Stock, the Voting Notes issued
pursuant to the Note Purchase Agreement (the "Voting Notes") or shares of
Common Stock issued upon exercise of the Common Stock Purchase Warrants issued
to them under the Note Purchase Agreement and the Preferred Securities Purchase
Agreement, to elect a total of more than five (5) persons (or the highest
number that is less than a majority of the Board of Directors, as the case may
be), including the person nominated pursuant to Section 4.4 below, who are
Associates of IP or its Associates to be directors of the Company.
(f) The agreements set forth in this Section 4.2
shall continue so long as the shares of Common Stock owned by IP and its
Associates, directly or indirectly, represent 15% of the outstanding shares of
the Company on a fully diluted basis (including, without limitation, the Voting
Notes).
4.3 Transfer of Shares. So long as the shares of Common
Stock owned by IP and its Associates, directly or indirectly, represent 15% of
the shares of Common Stock outstanding on a fully diluted basis (including,
without limitation, the Voting Notes), IP shall not transfer, assign, sell or
otherwise dispose of (each, a "Transfer") any of its shares of
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Common Stock, except for Transfers made in accordance with this Section 4.3. IP
may at any time Transfer any or all of its shares of Common Stock (i) to any
Associate of IP, if such Associate executes and delivers to the Company, prior
to any such Transfer, an instrument in form and substance reasonably
satisfactory to the Company pursuant to which such Associate agrees to be bound
by the provisions of Section 4.2 above and this Section 4.3, (ii) pursuant to
Rule 144 under the Securities Act or any successor to such rule, (iii) pursuant
to a tender offer or exchange offer made by the Company or any "Affiliate" (as
such term is defined in Rule 12b-2 of the Exchange Act) of the Company, (iv)
pursuant to a tender offer or exchange offer initiated by any person or "group"
(within the meaning of Section 13d-3 of the Exchange Act) other than IP or any
Associate thereof or a Business Combination, which is approved or recommended by
the Board of Directors of the Company or with respect to which the Board of
Directors of the Company has announced its intention to remain neutral, (v) so
long as the shares of Common Stock to be Transferred represent, in the
aggregate, not greater than 10% of the outstanding Common Stock, in a
transaction or series of transactions exempt from the registration and
prospectus delivery requirements of the Securities Act, (vi) by the Transfer of
greater than 10% of the outstanding shares of Common Stock in a transaction or
series of transactions exempt from the registration and prospectus delivery
requirements of the Securities Act to (x) one purchaser, (y) one purchaser and
its Affiliates or (z) a "group" of purchasers, if such purchaser or purchasers
of Common Stock in any such transaction or series of transactions execute and
deliver to the Company prior to any such purchase or purchases an instrument in
form satisfactory to the Company pursuant to which such purchaser or purchasers
agree to be bound by the provisions of Section 4.2 above and this Section 4.3
(treating such purchaser or purchasers as an "Associate" for purposes of such
sections) or (vii) pursuant to a registration statement filed under the
Securities Act pursuant to the Registration Rights Agreement, in the form
attached hereto as Exhibit C (the "Registration Rights Agreement"), or
otherwise.
4.4 Board Representation. The Company shall present two
proposals relating to the Board of Directors of the Company to its shareholders
at the Special Meeting, one of which shall provide for the amendment of the
Bylaws of the Company to increase the size of the Board of Directors of the
Company from nine (9) members to eleven (11) members and the other of which
shall nominate for election to such newly created vacancies, an independent
director of the Company and a director who is a designee of IP. The Board of
Directors shall recommend approval of each proposal and take all reasonable
lawful action to solicit approval of them. During the term of this Agreement,
the Board of Directors shall nominate one individual designated by IP (provided
that such individual is reasonably acceptable to the Board of Directors) for
election as a director of the Company at each annual meeting of shareholders,
provided that the person nominated to be director shall not be in addition to
the number of directors that IP has agreed to elect pursuant to Section 4.2(e)
hereof. If the director designated by IP shall cease to be a director of the
Company for any reason, the Board of Directors of the Company shall, promptly
upon the request of IP, elect a replacement designated by IP, provided that
such individual is reasonably acceptable to the Board of Directors.
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4.5 IP Management. Robert Spass will abstain from the
votes of the Investment Committees of each of IP Delaware and IP Bermuda with
respect to their investment in the Company.
4.6 Best Efforts. Upon the terms and subject to the
conditions herein provided, each of the Purchasers and the Company agrees to
use its reasonable best efforts to take, or cause to be taken, all action, and
to do, or cause to be done, all things necessary, proper or advisable to
consummate the transactions contemplated by this Agreement and each other
agreement contemplated hereby including (a) to lift or rescind any injunction
or restraining order or other order adversely affecting the ability of the
parties to consummate the transactions contemplated hereby and (b) to fulfill
all conditions on its part to be fulfilled under this Agreement and each other
agreement contemplated hereby. In case at any time after the Closing Date any
further action is reasonably necessary or desirable to carry out the purposes
of this Agreement and each other agreement contemplated hereby, each party to
this Agreement who is a natural person and the proper partners, officers or
directors of all other parties to this Agreement shall take all such reasonably
necessary action. No party hereto will take any action for the purpose of
delaying, impairing or impeding the receipt of any required consent,
authorization, order or approval or the making of any required filing. Each
party hereto shall give prompt notice to all other parties of (i) the
occurrence, or failure to occur, of any event which occurrence or failure would
be likely to cause any representation or warranty of such party contained in
this Agreement, as the case may be, to be untrue or inaccurate in any material
respect any time from the date hereof to the Closing Date and (ii) any material
failure of such party, as the case may be, to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it
hereunder, and such party shall use all reasonable efforts to remedy such
failure.
4.7 Indemnification by the Company.
(a) The Company agrees to indemnify the Purchasers,
and each of the Purchaser's respective partners, employees, agents and
representatives, against and hold the Purchasers, and each of the Purchaser's
respective partners, employees, agents and representatives, harmless from all
claims, obligations, costs and expenses (including, without limitation,
reasonable attorneys' fees and expenses incurred by the Purchasers in any
action between the Purchasers and the Company or between the Purchasers and any
third party or otherwise) and liabilities of and damages to the Purchasers
arising out of the material breach of any representation, warranty, covenant or
agreement of the Company in this Agreement.
(b) The Purchasers agree to give the Company
prompt written notice of any claim, assertion, event or proceeding by or in
respect of a third party of which they
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have knowledge concerning any liability or damage as to which they may request
indemnification hereunder. The Company shall have the right to direct, through
counsel of its own choosing, the defense or settlement of any such claim,
assertion, event or proceeding (provided that the Company shall have first
acknowledged its indemnification obligations hereunder specifically in respect
of such claim, assertion, event or proceeding) at its own expense, which
counsel shall be reasonably satisfactory to the Purchasers. If the Company
elects to assume the defense of any such claim, assertion, event or proceeding,
the Purchasers may participate in such defense, but in such case the expenses
of the Purchasers incurred in connection with such participation shall be paid
by the Purchasers. The Purchasers shall cooperate with the Company in the
defense or settlement of any such claim, assertion, event or proceeding. If
the Company elects to direct the defense of any such claim or proceeding, the
Purchasers shall not pay, or permit to be paid, any part of any claim or demand
arising from such asserted liability, unless the Company consents in writing to
such payment or unless the Company withdraws from the defense of such asserted
liability, or unless a final judgment from which no appeal may be taken by or
on behalf of the Company is entered against the Purchasers for such liability.
If the Company shall fail to defend, or if, after commencing or undertaking any
such defense, the Company fails to prosecute or withdraws from such defense,
the Purchasers shall have the right to undertake the defense or settlement
thereof at the Company's expense.
4.8 Indemnification by the Purchasers.
(a) Each of the Purchasers, severally and not
jointly, agrees to indemnify the Company, and each of the Company's officers,
directors, employees, agents and representatives, against and hold the Company,
and each of the Company's officers, directors, employees, agents and
representatives, harmless from all claims, obligations, costs and expenses
(including, without limitation, reasonable attorneys' fees and expenses
incurred by the Company in any action between the Company and such Purchaser or
between the Company and any third party or otherwise) and liabilities of and
damages to the Company arising out of the material breach of any
representation, warranty, covenant or agreement of such Purchaser in this
Agreement.
(b) The Company agrees to give the Purchasers
prompt written notice of any claim, assertion, event or proceeding by or in
respect of a third party of which it has knowledge concerning any liability or
damage as to which it may request indemnification hereunder. The indemnifying
Purchasers shall have the right to direct, through counsel of their own
choosing, the defense or settlement of any such claim, assertion, event or
proceeding (provided that such Purchasers shall have first acknowledged their
indemnification obligations hereunder specifically in respect of such claim,
assertion, event or proceeding) at their own expense, which counsel shall be
reasonably satisfactory to the Company. If the indemnifying Purchasers elect
to assume the defense of any such claim, assertion, event or proceeding, the
Company may participate in such defense, but in such case the expenses of the
Company incurred in connection with such participation shall be paid by the
Company. The Company shall cooperate with the indemnifying Purchasers in the
defense or settlement of any such claim, assertion, event or proceeding. If
the indemnifying Purchasers elect to direct the defense of any such claim,
assertion, event or proceeding, the Company shall not pay, or permit to be
paid, any part of any claim or
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demand arising from such asserted liability, unless such Purchasers consent in
writing to such payment or unless such Purchasers withdraw from the defense of
such asserted liability, or unless a final judgment from which no appeal may be
taken by or on behalf of such Purchasers is entered against the Company for such
liability. If the indemnifying Purchasers shall fail to defend, or if, after
commencing or undertaking any such defense, such Purchasers fail to prosecute or
withdraw from such defense, the Company shall have the right to undertake the
defense or settlement thereof at such Purchaser's expense.
4.9 Consents. The Company and each of the Purchasers
will use its reasonable best efforts to obtain all necessary waivers, consents
and approvals of all third parties and governmental authorities necessary to
the consummation of the transactions contemplated by this Agreement and each
agreement contemplated hereby, including, but not limited to, those required in
connection with the filing of any required HSR Reports and Forms A and any
filings to be made in connection with or in compliance with the provisions of
each of the Securities Act, the Exchange Act and any applicable state
securities laws.
4.10 Use of Proceeds. The Company covenants and agrees
that it will use the proceeds from the sale of the Shares hereunder to
consummate the transactions contemplated by the Merger Agreement.
4.11 HSR Reports. If IP is required to file an HSR Report
in connection with the Purchase by IP pursuant to the terms of this Agreement,
then IP shall so notify the Company in writing and, within five (5) business
days from the receipt by the Company of such notice, each of IP and the Company
shall file with the Federal Trade Commission and the Antitrust Division of the
Department of Justice, an HSR Report and any supplemental information which may
be requested in connection with such HSR Reports. IP and the Company shall
cooperate fully in the preparation of such filings.
ARTICLE V
CONDITIONS PRECEDENT
5.1 Conditions to Each Party's Obligations. The
respective obligations of each party to effect the transactions contemplated by
this Agreement shall be subject to the fulfillment or waiver by IP and the
Company on or prior to the Closing Date of the following conditions:
(a) No United States or state governmental
authority or other agency or commission or United States or state court of
competent jurisdiction shall have enacted, issued, promulgated, enforced or
entered any statute, rule, regulation, injunction or other order (whether
temporary, preliminary, or permanent) which is in effect and has the effect of
prohibiting consummation of the transactions contemplated by this Agreement or
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restricting the operation of the business of the Company and the Subsidiaries
as conducted on the date hereof in a manner that would have a Material Adverse
Effect on the Company.
(b) Any waiting period applicable to the
transactions contemplated by this Agreement and each agreement contemplated
hereby, including, without limitation, those applicable to any HSR Report or
Form A or any filing in connection with or in compliance with the provisions of
each of the Securities Act, the Exchange Act and any applicable state
securities laws shall have expired or been terminated.
(c) The Merger Agreement, dated as of the date
hereof (the "Merger Agreement"), among the Company, SNTL and Pac Rim shall not
have been materially amended or modified, nor any material provision thereof
waived by the Company, except upon the consent of IP in its sole discretion
(such consent not to be unreasonably withheld), and the Closing provided for in
Section 1.4 hereof shall occur simultaneously with the closing of the
transactions contemplated by the Merger Agreement.
5.2 Conditions to the Obligations of the Company. The
obligation of the Company to effect the transactions contemplated by this
Agreement shall be subject to the fulfillment or waiver by the Company on or
prior to the Closing Date of the following additional conditions:
(a) The Purchasers shall have performed in all
material respects their obligations under this Agreement required to be
performed by them on or prior to the Closing Date pursuant to the terms hereof.
(b) The representations and warranties of the
Purchasers contained in this Agreement shall be true and correct in all
material respects at and as of the Closing Date as if made at and as of such
date, except to the extent that any such representation or warranty is made as
of a specified date in which case such representation or warranty shall have
been true and correct as of such date. The Purchasers shall have delivered a
certificate to the effect set forth in Sections 5.2(a) and (b).
(c) The Company shall have received fully
executed copies of the Merger Agreement, the term loan facility to be entered
into between the Company, Chase and certain other lenders as contemplated by
the Commitment Letter from Chase to the Company dated September 14, 1996 (the
"Term Loan Facility"), the Subscription Agreements, the Registration Rights
Agreement and any and all other agreements, documents, certificates or
instruments contemplated by this Agreement and any of the foregoing.
(d) All of the conditions to Closing set forth in
Article 8 of the Merger Agreement shall have been satisfied or waived.
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(e) The warrants issued to III and held by IIA as
its agent shall be distributed to all limited partners of III.
(f) The shareholders of the Company (including,
without limitation, the holders of the Voting Notes) shall have duly approved
at the Special Meeting (i) the issuance of the Shares pursuant to this
Agreement, (ii) the amendment of the Bylaws of the Company, in form and
substance reasonably satisfactory to IP, to increase the size of the Board of
Directors from nine (9) to eleven (11) members, (iii) the election to such
newly created vacancies of one independent director of the Company and a
director designated by IP and (iv) the amendment to, or adoption of, its
charter as contemplated by Section 5.3(l) hereof; provided, however, that a
majority of shares held by persons not party to this Agreement or Associates of
parties to this Agreement shall have voted in favor of each of such proposals.
(g) The Company shall have received, in a form
reasonably satisfactory to the Company, the favorable opinions of Paul, Weiss,
Rifkind, Wharton & Garrison, counsel to IP.
(h) The Company shall have received, in a form
reasonably satisfactory to the Company, the favorable opinion of DLJ, as of the
date of the mailing of the Proxy Statement, financial advisor to the Company,
as to the fairness on a financial basis of the terms of the Purchase and the
transactions contemplated by this Agreement.
(i) All necessary waivers or consents to,
approvals of and notices or filings with respect to the transactions
contemplated by this Agreement and each agreement contemplated hereby shall
have been obtained or made.
(j) The Company shall have received such other
documents and instruments in connection with the Closing as are reasonably
requested by it.
5.3 Conditions to the Obligations of Purchasers. The
obligations of the Purchasers to effect the transactions contemplated by this
Agreement shall be subject to the fulfillment or waiver by IP on or prior to
the Closing Date of the following additional conditions:
(a) The Company shall have performed in all
material respects its obligations under this Agreement required to be performed
by it on or prior to the Closing Date pursuant to the terms hereof.
(b) The representations and warranties of the
Company contained in this Agreement shall be true and correct in all material
respects at and as of the Closing Date as if made at and as of such date,
except to the extent that any such representation or warranty is made as of a
specified date in which case such representation or warranty shall
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have been true and correct as of such date. The Company shall have delivered
to IP a certificate to the effect set forth in Sections 5.3(a) and (b).
(c) Since June 30, 1996, there shall have been no
Material Adverse Effect on the Company.
(d) The Company shall have delivered to each of
the Purchasers stock certificates in definitive form representing the number of
Shares set forth opposite such Purchaser's name on Exhibit B hereto, registered
in the name of such Purchaser.
(e) The shareholders of the Company (including,
without limitation, the holders of the Voting Notes) shall have duly approved
at the Special Meeting (i) the issuance of the Shares pursuant to this
Agreement, (ii) the amendment of the Bylaws of the Company, in form and
substance reasonably satisfactory to IP, to increase the size of the Board of
Directors from nine (9) to eleven (11) members and (iii) the election to such
newly created vacancies of one independent director of the Company and a
director designated by IP; provided, however, that a majority of shares held by
persons not party to this Agreement or Associates of parties to this Agreement
shall have voted in favor of each of such proposals.
(f) IP shall have received fully executed copies
of the Merger Agreement, the Term Loan Facility, the Registration Rights
Agreement and any and all other agreements, documents, certificates or
instruments contemplated by this Agreement and any of the foregoing.
(g) The Purchasers shall have received fully
executed copies of this Agreement and the Subscription Agreements.
(h) The Purchasers shall have received, in a form
reasonably satisfactory to the Company, the favorable opinions of Riordan &
McKinzie, counsel to the Company.
(i) The Purchasers shall have received such other
documents and instruments in connection with the Closing as are reasonably
requested by them.
(j) All necessary waivers or consents to,
approvals of and notices or filings with respect to the transactions
contemplated by this Agreement and each other agreement contemplated hereby and
thereby shall have been obtained, including, without limitation, the waiver of
all preemptive rights arising under the Common Stock Purchase Warrants issued
pursuant to the Note Purchase Agreement and the Preferred Securities Purchase
Agreement.
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(k) No action, suit, proceeding, claim or dispute
shall have been brought or otherwise arisen at law, in equity, in arbitration
or before any governmental authority against the Company or any of its
Subsidiaries which would, if adversely determined, (a) have a Material Adverse
Effect on the Company or (b) have a material adverse effect on the ability of
the Company to perform its obligations under this Agreement or each of the
agreements contemplated hereby.
(l) (i) The Company shall have amended its
Restated Articles of Incorporation or adopted a charter, in each case in a
manner satisfactory to IP and its counsel, to restrict the issuance or transfer
of any Common Stock by the Company or any of its shareholders so as to reduce,
to the extent practicable, the risk of an "ownership change" within the meaning
of Section 382 of the Internal Revenue Code of 1986, as amended, and the
Treasury regulations promulgated thereunder (collectively, "Section 382") and
(ii) the Company shall have entered into agreements, in form and substance
reasonably satisfactory to IP and its counsel, with all of its warrant holders
in which such holders shall agree not to exercise any of their warrants in a
manner that would cause, or increase the risk of, an "ownership change" within
the meaning of Section 382 or otherwise conflict with the restrictions
described in the immediately preceding subsection (i).
(m) The Company shall have delivered to IP at the
Closing a schedule that has been prepared by the Company solely in reliance
upon its review of its stock ledger, public filings of Schedules 13D and 13G
under the Exchange Act as they relate to ownership in the capital stock of the
Company and other matters to which it has actual knowledge, presenting
information reasonably satisfactory to IP as of the Closing Date that there has
been no increase in the Common Stock owned directly, indirectly or
constructively by a "5-percent shareholder" (as such term is defined in Section
382) over the three-year period immediately preceding the Closing Date.
ARTICLE VI
MISCELLANEOUS
6.1 Termination. This Agreement shall terminate and the
transactions contemplated hereby may be abandoned at any time simultaneous with
or following the termination of the Merger Agreement. This Agreement shall
terminate at such time as, by their terms, all of the obligations under
Sections 4.2 and 4.3 are no longer in effect.
6.2 Amendment. This Agreement may be amended by the
parties hereto. This Agreement may be amended by an instrument in writing
without each party's written agreement, but no such amendment shall be
enforceable against any party which has not signed such amendment.
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6.3 Waiver. At any time prior to the Closing Date, the
Company or IP may (a) extend the time for the performance of any of the
obligations or other acts of the other parties, (b) waive any inaccuracies in
the representations and warranties contained herein or in any document
delivered pursuant hereto, and (c) waive compliance with any of the agreements
or conditions herein, provided that any such waiver of or failure to insist on
strict compliance with any such representation, warranty, agreement or
condition shall not operate as a waiver of, or estoppel with respect to, any
subsequent or other failure. Any agreement on the part of the Company or IP to
any such extension or waiver shall be valid only if set forth in an instrument
in writing signed on behalf of such party.
6.4 Survival. The representations, warranties, covenants
and agreements set forth in Articles II, III and IV shall survive the Closing.
6.5 Notices. All notices and other communications given
or made pursuant hereto shall be in writing and shall be deemed to have been
given or made if in writing and delivered personally, sent by commercial
carrier or registered or certified mail (postage prepaid, return receipt
requested) or transmitted by facsimile with automated receipt confirmation to
the parties at the following addresses and numbers:
If to the Company, to:
Superior National Insurance Group, Inc.
26601 Agoura Road
Calabasas, California 91302
Fax: (818) 880-8615
Attention: J. Chris Seaman
with copies to:
Riordan & McKinzie
5473 Corsa Avenue, Suite #116
Westlake Village, California 91362
Fax: (818) 706-2956
Attention: Dana M. Warren, Esq.
If to IP, to:
Insurance Partners, L.P.
201 Main Street, Suite 2600
Fort Worth, TX 76102
Fax: (817) 338-2047
Attention: Mr. Charles Irwin
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and
Insurance Partners Offshore (Bermuda), L.P.
Cedar House
41 Cedar Avenue
P.O. Box HM 1179
Hamilton, HM-EX, Bermuda
Fax: (809) 292-7768
Attention: Kenneth E.T. Robinson, Esq.
with copies to:
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, NY 10019-6064
Fax: (212) 757-3990
Attention: Judith R. Thoyer, Esq.
and
Insurance Partners Advisors, L.P.
One Chase Manhattan Plaza
44th Floor
New York, NY 10005
Fax: (212) 898-8720
Attention: Mr. Steven B. Gruber
If to the Purchasers who executed the Subscription
Agreements, to the address and facsimile number set forth in their respective
Subscription Agreement, or at such other addresses as shall be furnished by the
parties by like notice, and such notice or communication shall be deemed to
have been given or made as of the date actually received.
6.6 Headings; Agreement. The headings contained in this
Agreement are inserted for convenience only and do not constitute a part of
this Agreement. The term "Agreement" for purposes of representations and
warranties hereunder shall be deemed to include the Exhibits hereto to be
executed and delivered by parties relevant thereto.
6.7 Publicity. So long as this Agreement is in effect,
except as required by law, regulation or stock exchange requirements, the
parties hereto shall not, and shall cause their affiliates not to, issue or
cause the publication of any press release or other announcement with respect
to the transactions contemplated by this Agreement or the other agreements
contemplated hereby without the consent of the other parties, which consent
shall
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not be unreasonably withheld or delayed or without consulting with the other
parties as to the content of such press release or other announcement.
6.8 Entire Agreement. This Agreement (including all
Exhibits hereto) constitutes the entire agreement among the parties and
supersedes all other prior agreements and understandings, both written and
oral, among the parties, or any of them, with respect to the subject matter
hereof.
6.9 Conveyance Taxes. The Company agrees to assume
liability for and to hold the Purchasers harmless against any sales, use,
transfer, stamp, stock transfer, real property transfer or gains, and value
added taxes, any transfer, registration, recording or other fees, and any
similar taxes incurred as a result of the issuance and sale of the Shares as
contemplated hereby.
6.10 Assignment. This Agreement and all of the provisions
hereof shall be binding upon and inure to the benefits of the parties hereto
and their respective successors and permitted assigns. Except as otherwise
provided in the Exhibits to this Agreement or the other agreements contemplated
hereby, neither this Agreement nor any of the rights, interests or obligations
shall be assigned by any of the parties hereto without the prior written
consent of the other parties.
6.11 Counterparts. This Agreement, including the
Subscription Agreements, may be executed in one or more counterparts, all of
which shall be considered one and the same agreement and each of which shall be
deemed an original.
6.12 Governing Law. The validity and interpretation of
this Agreement shall be governed by the laws of the State of California,
without reference to the conflict of laws principles thereof.
6.13 Third Party Beneficiaries. This Agreement is not
intended to confer upon any other person any rights or remedies hereunder.
6.14 Costs and Expenses. The Company will pay all costs
and expenses incurred by IP in connection with the transactions contemplated
hereby, including without limitation, the reasonable legal fees and expenses of
Paul, Weiss, Rifkind, Wharton & Garrison and any filing fees paid in connection
with the filing of HSR Reports by IP, whether or not the transactions
contemplated hereby are consummated.
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IN WITNESS WHEREOF, each of the Purchasers and the Company has
caused this Agreement to be duly signed as of the date first written above.
SUPERIOR NATIONAL INSURANCE GROUP, INC.,
a California corporation
By: /s/ J. Chris Seaman
-------------------------------------
Name: J. Chris Seaman
Title: Executive Vice President and
Chief Financial Officer
INSURANCE PARTNERS, L.P.,
a Delaware limited partnership
By: Insurance GenPar, L.P., its
General Partner
By: Insurance GenPar MGP, L.P., its
General Partner
By: Insurance GenPar MGP, Inc., its
General Partner
By: /s/ Steven B. Gruber
---------------------------------
Name: Steven B. Gruber
Title: Vice President
INSURANCE PARTNERS OFFSHORE (BERMUDA),
L.P., a Bermuda limited partnership
By: Insurance GenPar (Bermuda), L.P.,
its General Partner
By: Insurance GenPar (Bermuda) MGP, L.P.,
its General Partner
By: Insurance GenPar (Bermuda) MGP, Ltd.,
its General Partner
By: /s/ Steven B. Gruber
---------------------------------
Name: Steven B. Gruber
Title: Vice President
[Acknowledgment and Agreement on Following Page]
A-24
<PAGE> 214
Acknowledgement and Agreement:
Each of the undersigned acknowledges that this Agreement affects
its rights and by its signature below, the undersigned covenants and agrees
that it and its officers, directors and managing partners shall be bound by the
terms of this Agreement to the extent such terms apply to them. Each of the
undersigned hereby provides the waiver required by Section 5.3(j) hereof.
CENTRELINE REINSURANCE LIMITED,
a Bermuda corporation
By: /s/ Steven D. Germain
------------------------------
Name: Steven D. Germain
Title: Senior Vice President
CENTRE REINSURANCE LIMITED,
a Bermuda corporation
By: /s/ Steven D. Germain
------------------------------
Name: Steven D. Germain
Title: Senior Vice President
INTERNATIONAL INSURANCE INVESTORS, L.P.,
a Bermuda limited partnership
By: International Insurance Investors
(Bermuda) Limited, a Bermuda
corporation
Its: General Partner
By: /s/ Robert Spass
--------------------
Name: Robert Spass
Title: President
INTERNATIONAL INSURANCE ADVISORS, INC.,
a Delaware corporation
By: /s/ Robert Spass
----------------------------
Name: Robert Spass
A-25
<PAGE> 215
AMENDMENT NO. 1
TO
STOCK PURCHASE AGREEMENT
This Amendment No. 1 to Stock Purchase Agreement is dated as
of September 20, 1996 (this "Amendment") and amends that certain Stock Purchase
Agreement (the "Stock Purchase Agreement") dated as of September 17, 1996 by
and among Superior National Insurance Group, Inc., a California corporation
(the "Company"), Insurance Partners, L.P., a Delaware limited partnership,
Insurance Partners Offshore (Bermuda), L.P., a Bermuda limited partnership, and
such other persons or entities who execute the form of Stock Subscription
Agreement attached thereto as Exhibit A. Capitalized terms used herein, but
otherwise not defined herein, shall have the meanings ascribed to such terms in
the Stock Purchase Agreement.
R E C I T A L S
WHEREAS, the Company has determined that it is in its
best interest to decrease by $4 million the amount of the commitment it has
received from Chase in connection with the Term Loan Facility;
WHEREAS, the transaction fee IPA is to receive under
the Stock Purchase Agreement (the "Fee") is based in part on the aggregate
amount of money the Company shall receive pursuant to the Term Loan Facility;
and
WHEREAS, the Company and IP desire to clarify the
manner in which the Fee shall be calculated if Pac Rim were to terminate the
Merger Agreement pursuant to Section 10.3 thereof.
NOW, THEREFORE, in consideration of the foregoing and
the mutual covenants and agreements herein contained, the parties hereto agree
to amend the Stock Purchase Agreement as follows:
A G R E E M E N T
1. Amendment of Section 1.5 of the Stock Purchase
Agreement. Section 1.5 of the Stock Purchase Agreement, entitled "Fee," is
hereby deleted in its entirety and the following is hereby substituted
therefor:
1.5 Fee. At the Closing, the Company shall pay
to Insurance Partners Advisors, L.P. ("IPA") a transaction fee
of Six Hundred Twenty-Five Thousand Dollars ($625,000), by
wire transfer of immediately available funds to an account or
accounts designated by IPA. If Pac Rim shall pay to the
Company the Breakup Fee (as defined in Section 10.3 of the
Merger Agreement, dated as of the date hereof, among Pac Rim,
the Company and SNTL (the "Merger Agreement")) in accordance
with Section 10.3 of the Merger Agreement, then the Company
shall pay to IPA, promptly following the Company's receipt
of the Breakup Fee, that portion of the Breakup Fee equal to
the percentage of voting securities of the Company owned by
IP (the
A-26
<PAGE> 216
"IPA Fee Ratio") on a fully diluted basis (excluding the Voting
Notes, as hereinafter defined) as if the purchase by IP of the
Shares shall have occurred (notwithstanding that no such
purchase shall have taken place). In addition, if the Company
shall receive the payments (the "Disgorgement Payments") owed
to it under Section 1.2 of the Voting Agreement dated as of
September 17, 1996 by and among the Company and the holders
listed on the signature pages thereto, then the Company shall
pay to IPA, promptly after receipt of all Disgorgement
Payments, the amount that results from multiplying the
aggregate Disgorgement Payments received by the Company by the
IPA Fee Ratio (notwithstanding that no purchase by IP of the
Shares shall have taken place hereunder). Notwithstanding the
provisions of Section 6.4 hereof, this Section 1.5 shall
survive the termination of this Agreement.
2. Amendment of Section 6.13 of the Stock Purchase
Agreement. Section 6.13 of the Stock Purchase Agreement, entitled "Third Party
Beneficiaries," is hereby deleted in its entirety and the following is hereby
substituted therefor:
6.13 Third Party Beneficiaries. Subject to
Sections 1.5, 4.7 and 4.8, this Agreement is not intended to
confer upon any other person any rights or remedies hereunder.
3. Full Force and Effect. Except as provided in this
Amendment, all of the terms and provisions of the Stock Purchase Agreement
shall remain unmodified and in full force and effect and are hereby ratified
and confirmed.
4. Counterparts. This Amendment may be executed in
counterparts, each of which shall be deemed an original, and all of which shall
constitute one and the same instrument.
A-27
<PAGE> 217
IN WITNESS WHEREOF, each of the undersigned has caused this
Amendment to be duly signed as of the date first written above.
SUPERIOR NATIONAL INSURANCE GROUP, INC.,
a California corporation
By: /s/ J.Chris Seaman
----------------------------------
Name: J. Chris Seaman
Title: Executive Vice President and
Chief Financial Officer
INSURANCE PARTNERS, L.P.,
a Delaware limited partnership
By: Insurance GenPar, L.P., its
General Partner
By: Insurance GenPar MGP, L.P., its
General Partner
By: Insurance GenPar MGP, Inc., its
General Partner
By: /s/ Steven B. Gruber
----------------------------------
Name: Steven B. Gruber
Title: Vice President
INSURANCE PARTNERS OFFSHORE (BERMUDA),
L.P., a Bermuda limited partnership
By: Insurance GenPar (Bermuda), L.P.,
its General Partner
By: Insurance GenPar (Bermuda) MGP, L.P.,
its General Partner
By: Insurance GenPar (Bermuda) MGP, Ltd.,
its General Partner
By: /s/ Steven B. Gruber
---------------------------------
Name: Steven B. Gruber
Title: Vice President
A-28
<PAGE> 218
EXHIBIT A
STOCK SUBSCRIPTION AGREEMENT
THIS STOCK SUBSCRIPTION AGREEMENT (this "Subscription
Agreement") is made and entered into as of September 17, 1996 by and between
Superior National Insurance Group, Inc., a California corporation (the
"Company"), and _______________ (the "Purchaser"). All Capitalized terms used
herein shall have the meaning ascribed to such terms in the Stock Purchase
Agreement (as defined below) to which this Subscription Agreement is attached
as an Exhibit.
R E C I T A L S
WHEREAS, The Company desires to issue and sell to the
Purchaser, and the Purchaser desires to subscribe for and purchase from the
Company, the number of Shares set forth below in Section 1 hereof on the terms
and conditions set forth in this Subscription Agreement and the Stock Purchase
Agreement (the "Stock Purchase Agreement") dated as of September 17, 1996 by
and among the Company, IP and such other persons or entities that execute the
Subscription Agreements attached thereto.
A G R E E M E N T
NOW, THEREFORE, in consideration of the foregoing recitals and
the mutual covenants and conditions contained herein and in the Stock Purchase
Agreement, the parties hereto agree as follows:
A. Sale and Purchase of Stock. The Company hereby
agrees to issue and sell to the Purchaser, and the Purchaser agrees to purchase
from the Company, subject to the terms and conditions set forth in this
Subscription Agreement and the Stock Purchase Agreement, __________ Shares, at
a price of Seven Dollars and Fifty-Three Cents ($7.53) per Share, for an
aggregate purchase price of $__________________.
B. One Agreement. This Subscription Agreement, when
fully executed, shall be attached as an Exhibit to the Stock Purchase Agreement
and become a part of the Stock Purchase Agreement. The Purchaser agrees (i)
that he/she/it is a "Purchaser" as such term is defined in the Stock Purchase
Agreement and (ii) to be bound by all terms, provisions and conditions of the
Stock Purchase Agreement applicable to such Purchaser.
C. Notices. Any notice or other writing given by either
party hereto to the other party relating to the subject matter of this
Agreement shall be delivered in the manner set forth in Section 6.5 of the
Stock Purchase Agreement. Any such notice, if to the Purchaser, shall be
delivered to:
A-29
<PAGE> 219
_________________________
_________________________
_________________________
D. Amendments. This Subscription Agreement may be
amended only by a written agreement executed by the Company and the Purchaser.
E. Counterparts. This Agreement may be executed in two
counterparts, each of which shall be deemed an original and both of which, when
taken together, shall constitute one and the same Agreement.
A-30
<PAGE> 220
IN WITNESS WHEREOF, the parties hereto have duly executed this
Subscription Agreement as of the day and year first above written.
THE COMPANY:
SUPERIOR NATIONAL INSURANCE GROUP, INC.,
a California corporation
By:
----------------------------------
PURCHASER:
-------------------------------------------
A-31
<PAGE> 221
EXHIBIT B
PURCHASERS OF THE SHARES OF COMMON STOCK
<TABLE>
<CAPTION>
Number Aggregate
Purchaser of Shares Purchase Price
--------- --------- --------------
<S> <C> <C>
IP Delaware 1,369,856 $ 10,315,015.00
IP Bermuda 754,978 5,684,984.00
TJS Partners, L.P. 132,802 1,000,000.00
William L. Gentz 25,234 190,012.02
Robert J. Niebur 4,648 34,999.44
James L. Cinney 6,640 49,999.20
Joseph P. Wolonsky 9,296 69,998.88
Karl O. Johnson 9,296 69,998.88
Douglas R. Roche 9,296 69,998.88
Robert E. Nagle 3,984 29,999.52
Matthew Natalizio 5,976 44,999.28
Brian Fraher 1,992 14,999.76
Sue Binder 2,656 19,999.68
William Thomas 2,000 15,060.00
Allen Goodwin 1,328 9,999.84
George Moreno 1,328 9,999.84
Robert Henry 1,992 14,999.76
Vicki Principe 1,324 9,969.72
Michael Anderson 996 7,499.88
Virgil Anderson 2,324 17,499.72
Thomas I. Boggs, Jr. 3,320 24,999.60
Phillip Bok 1,000 7,530.00
Mona Davis 1,000 7,530.00
Harold Fedora 1,000 7,530.00
William Ferrier 1,300 9,789.00
Cyndi Galhouse 664 4,999.92
Henry Hulse 1,000 7,530.00
Robert Hunter 1,000 7,530.00
Susan Laffer 2,324 17,499.72
Dale O'Brien 1,000 7,530.00
J. Chris Seaman 25,232 189,996.96
Robert Sholes 2,324 17,499.72
Jack Solomon 1,328 9,999.84
</TABLE>
A-32
<PAGE> 222
ANNEX B
[DONALDSON, LUFKIN & JENRETTE LETTERHEAD]
Donaldson, Lufkin & Jenrette Securities Corporation
277 Park Avenue, New York, New York 10172 . (212) 892-3000
September 17, 1996
Board of Directors
Superior National Insurance Group, Inc.
26601 Agoura Road
Calabasas, CA 91302
Dear Sirs:
You have requested our opinion as to the fairness from a
financial point of view to Superior National Insurance Group, Inc. (the
"Company" or "SNTL") of (i) the consideration to be paid by SNTL pursuant to:
(a) the terms of the Agreement and Plan of Merger, dated as of September 17,
1996 (the "Agreement"), among the Company, SNTL Acquisition Corp. ("Merger
Subsidiary") and Pac Rim Holding Corporation ("PRIM") pursuant to which Merger
Subsidiary will be merged (the "Merger") with and into PRIM; and, (b) the terms
of the Series A Convertible Debentures and the Series 1, 2 and 3 Detachable
Warrant Purchase Agreement dated as of September 17, 1996 (the "Debentures and
Warrant Purchase Agreement") by and among the Company, PRAC Limited
Partnership, Allstate Insurance Company and trusts managed by Richard H. Pickup
pursuant to which the Company will purchase the Series A Convertible Debentures
of PRIM (the "Convertible Debentures") and the Series 1, 2, and 3 Detachable
Warrants of PRIM (the "Warrants") and, (ii) the consideration to be received by
the Company pursuant to the Stock Purchase Agreement dated as of September 17,
1996 (the "Investor Agreement") among the Company, Insurance Partners L.P.
("IP"), Insurance Partners Offshore (Bermuda), L.P. ("IP Bermuda"), TJS
Partners, L.P. ("TJS"), and certain members of the management of SNTL
(together, with IP, IP Bermuda and TJS, the "Investor Group").
Pursuant to the Agreement, subject to certain exceptions,
holders of (i) the common stock, par value $0.01 per share, of PRIM ("PRIM
Common Stock"), (ii) the Convertible Debentures; and, (iii) the Warrants will
receive, in the aggregate, $54.0 million in cash. Pursuant to the Investor
Agreement, the Investor Group will purchase $18.0 million of common stock, no
par value ("SNTL Common Stock") of the Company at a price of $7.53 per share
(the Investor Group purchase, together with the consideration to be paid by the
Company to holders of each of the PRIM Common Stock, Convertible Debentures and
Warrants, the "Transaction").
<PAGE> 223
Superior National Insurance Group, Inc.
Page 2 September 17, 1996
In arriving at our opinion, we have reviewed the Agreement,
the Investor Agreement, the Debentures and Warrant Purchase Agreement, the
Series 3 Detachable Warrant Surrender Agreement dated as of September 17, 1996
by and among PRIM and the Individuals named therein, a draft of the
Registration Rights Agreement dated as of September 17, 1996 among the Company,
IP and IP Bermuda and the Voting Agreement dated as of September 17, 1996 by
and among the Company and the holders of PRIM Common Stock and Convertible
Debentures named therein. We also have reviewed financial and other
information that was publicly available or furnished to us by the Company and
PRIM including information provided during discussions with their respective
managements. Included in the information provided during discussions with the
respective managements were certain financial projections of the Company for
the period beginning December 31, 1996 and ending December 31, 2001, prepared
by the management of the Company, certain financial projections of PRIM for the
period beginning December 31, 1996 and ending December 31, 2001 prepared by the
management of PRIM, and certain financial projections of the Company which are
pro forma for the Transaction and certain other actions contemplated by the
Company for the period beginning December 31, 1996 and ending December 31,
2001, prepared by the management of the Company. In addition, we have compared
certain financial and securities data of the Company and PRIM with various
other companies whose securities are traded in public markets, reviewed the
historical stock prices and trading volumes of SNTL Common Stock and PRIM
Common Stock, reviewed prices and premiums paid in certain other business
combinations, considered the Company's access to sources of equity other than
pursuant to the Investor Agreement and conducted such other financial studies,
analyses and investigations as we deemed appropriate for purposes of this
opinion. We were not requested to, nor did we, solicit the interest of any
other party in making an investment in the Company.
In rendering our opinion, we have relied upon and assumed the
accuracy, completeness and fairness of all of the financial and other
information that was available to us from public sources, that was provided to
us by the Company and PRIM or their respective representatives, or that was
otherwise reviewed by us. In particular, we have relied upon the estimates of
the management of the Company of the operating synergies achievable as a result
of the Merger and upon our discussion of such synergies with the management of
PRIM. With respect to the financial projections supplied to us, we have
assumed that they have been reasonably prepared on a basis reflecting the best
currently available estimates and judgments of the management of the Company as
to the future operating and financial performance of the Company and PRIM. We
have not assumed any responsibility for making an independent evaluation of the
B-2
<PAGE> 224
Superior National Insurance Group, Inc.
Page 3 September 17, 1996
Company's assets or liabilities or for making any independent verification of
any of the information reviewed by us.
Our opinion is necessarily based on economic, market,
financial and other conditions as they exist on, and on the information made
available to us as of the date of this letter. It should be understood that,
although subsequent developments may affect this opinion, we do not have any
obligation to update, revise or reaffirm this opinion. Our opinion does not
constitute a recommendation to any member of the Board of Directors of the
Company or shareholder as to how such member or shareholder should vote on the
proposed transaction.
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"),
as part of its investment banking services, is regularly engaged in the
valuation of businesses and securities in connection with mergers,
acquisitions, underwritings, sales and distributions of listed and unlisted
securities, private placements and valuations for estate, corporate and other
purposes. DLJ has performed investment banking and other services for IP in
the past and has been compensated for such services. DLJ served as financial
advisor to in IP's investments in NACOLAH, Highlands Insurance Group, Inc., and
Provident Companies and as lead manager of the initial public offering of the
common stock of Unionamerica Holdings, plc, an entity in which IP has an
investment. Affiliates of DLJ, in the aggregate, own less than 2% of the
limited partnership interests in each of IP, IP Bermuda and Insurance Partners
Advisors, L.P.
Based upon the foregoing and such other factors as we deem
relevant, we are of the opinion that the Transaction as a whole is fair to the
Company from a financial point of view.
Very truly yours,
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: /s/ Mark K. Gormley
----------------------------
Mark K. Gormley
Managing Director
B-3
<PAGE> 225
ANNEX C
_______________________________________________________________________________
_______________________________________________________________________________
_________________________________________________
AGREEMENT AND PLAN OF MERGER
_________________________________________________
AMONG
SUPERIOR NATIONAL INSURANCE GROUP, INC.,
SNTL ACQUISITION CORP.
AND
PAC RIM HOLDING CORPORATION
Dated as of September 17, 1996,
_______________________________________________________________________________
_______________________________________________________________________________
<PAGE> 226
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
----
ARTICLE 1 - THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 The Merger . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 The Closing . . . . . . . . . . . . . . . . . . . . . . . 1
1.3 Effective Time . . . . . . . . . . . . . . . . . . . . . . 2
ARTICLE 2 - CERTIFICATE OF INCORPORATION AND BYLAWS
OF THE SURVIVING CORPORATION . . . . . . . . . . . . . . . . 2
2.1 Certificate of Incorporation . . . . . . . . . . . . . . . 2
2.2 Bylaws . . . . . . . . . . . . . . . . . . . . . . . . . . 2
ARTICLE 3 - DIRECTORS AND OFFICERS OF THE SURVIVING
CORPORATION . . . . . . . . . . . . . . . . . . . . . . . . 2
3.1 Directors . . . . . . . . . . . . . . . . . . . . . . . . 2
3.2 Officers . . . . . . . . . . . . . . . . . . . . . . . . . 2
ARTICLE 4 - CONVERSION OF PAC RIM COMMON STOCK . . . . . . . . . . . . 3
4.1 Conversion of Pac Rim Common Stock . . . . . . . . . . . . 3
4.2 Exchange of Certificates Representing Pac Rim Common
Stock . . . . . . . . . . . . . . . . . . . . . . . . . . 3
4.3 Dissenting Shares . . . . . . . . . . . . . . . . . . . 3
4.4 Warrants . . . . . . . . . . . . . . . . . . . . . . . . 4
4.5 Definitions . . . . . . . . . . . . . . . . . . . . . . 4
4.6 Exchange of Certificates Representing
Pac Rim Common Stock . . . . . . . . . . . . . . . . . . 5
4.7 Dissenting Shares . . . . . . . . . . . . . . . . . . . 6
ARTICLE 5 - REPRESENTATIONS AND WARRANTIES OF PAC RIM . . . . . . . . 7
5.1 Existence; Good Standing; Corporate Authority;
Compliance With Law . . . . . . . . . . . . . . . . . . 7
5.2 Authorization, Validity and Effect of Agreements . . . . 8
5.3 Capitalization . . . . . . . . . . . . . . . . . . . . . 8
5.4 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . 9
5.5 Other Interests . . . . . . . . . . . . . . . . . . . . 10
5.6 No Violation . . . . . . . . . . . . . . . . . . . . . . 10
5.7 SEC Documents . . . . . . . . . . . . . . . . . . . . . 11
5.8 Litigation . . . . . . . . . . . . . . . . . . . . . . . 11
5.9 Absence of Certain Changes . . . . . . . . . . . . . . . 12
5.10 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.11 Certain Employee Plans . . . . . . . . . . . . . . . . . 15
5.12 Labor Matters . . . . . . . . . . . . . . . . . . . . . 16
5.13 No Brokers . . . . . . . . . . . . . . . . . . . . . . . 16
5.14 Fairness Opinion . . . . . . . . . . . . . . . . . . . . 16
5.15 Liens . . . . . . . . . . . . . . . . . . . . . . . . . 16
5.16 Leased Real Property . . . . . . . . . . . . . . . . . . 17
5.17 Environment Matters . . . . . . . . . . . . . . . . . . 17
5.18 Intellectual Property . . . . . . . . . . . . . . . . . 18
5.19 Powers of Attorney; Guarantees . . . . . . . . . . . . . 18
5.20 Related Party Transactions . . . . . . . . . . . . . . . 18
5.21 Information in Proxy Statements . . . . . . . . . . . . . 19
</TABLE>
C-ii
<PAGE> 227
<TABLE>
<S> <C>
ARTICLE 6 - REPRESENTATIONS AND WARRANTIES OF PARENT
AND MERGER SUB . . . . . . . . . . . . . . . . . . . . . 19
6.1 Existence; Good Standing; Corporate Authority;
Compliance With Law . . . . . . . . . . . . . . . . . . . 19
6.2 Authorization, Validity and Effect of Agreements . . . . . 19
6.3 No Violation . . . . . . . . . . . . . . . . . . . . . . . 19
6.4 Interim Operations of Merger Sub . . . . . . . . . . . . . 20
6.5 Financing . . . . . . . . . . . . . . . . . . . . . . . . 20
6.6 No Brokers . . . . . . . . . . . . . . . . . . . . . . . . 20
6.7 Fairness Opinion . . . . . . . . . . . . . . . . . . . . . 21
6.8 Surviving Corporation After the Merger . . . . . . . . . . 21
6.9 No Ownership of Company Capital Stock . . . . . . . . . . 21
6.10 Information in Proxy Statement . . . . . . . . . . . . . 21
ARTICLE 7 - COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . 21
7.1 Acquisition Proposals . . . . . . . . . . . . . . . . . . 21
7.2 Conduct of Businesses . . . . . . . . . . . . . . . . . . 21
7.3 Meeting of Stockholders . . . . . . . . . . . . . . . . . 25
7.4 Filings; Other Action . . . . . . . . . . . . . . . . . . 26
7.5 Inspection of Records; Access . . . . . . . . . . . . . . 27
7.6 Publicity . . . . . . . . . . . . . . . . . . . . . . . . 27
7.7 Proxy Statement . . . . . . . . . . . . . . . . . . . . . 27
7.8 Further Action . . . . . . . . . . . . . . . . . . . . . . 28
7.9 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . 28
7.10 Indemnification and Insurance. . . . . . . . . . . . . . . 28
7.11 Certain Benefits. . . . . . . . . . . . . . . . . . . . . 30
7.12 Restructuring of Merger . . . . . . . . . . . . . . . . . 31
7.13 Additional Agreements; Best Efforts . . . . . . . . . . . 32
ARTICLE 8 - CONDITIONS . . . . . . . . . . . . . . . . . . . . . . . 32
8.1 Conditions of Each Party's Obligation to Effect
the Merger . . . . . . . . . . . . . . . . . . . . . . . . 32
8.2 Conditions to Obligations of Pac Rim to Effect the
Merger . . . . . . . . . . . . . . . . . . . . . . . . . . 33
8.3 Conditions to Obligation of Parent and Merger Sub to
Effect the Merger . . . . . . . . . . . . . . . . . . . . 33
ARTICLE 9 - TERMINATION . . . . . . . . . . . . . . . . . . . . . . . 34
9.1 Termination by Mutual Consent . . . . . . . . . . . . . . 34
9.2 Termination by Either Parent or Pac Rim . . . . . . . . . 34
9.3 Termination by Pac Rim . . . . . . . . . . . . . . . . . . 35
9.4 Termination by Parent . . . . . . . . . . . . . . . . . . 35
9.5 Effect of Termination and Abandonment . . . . . . . . . . 36
9.6 Extension; Waiver . . . . . . . . . . . . . . . . . . . . 36
ARTICLE 10 - LIQUIDATED DAMAGES AND BREAKUP FEE . . . . . . . . . . . . 36
10.1 Payment of Liquidated Damages by Parent . . . . . . . . . 36
10.2 Payment of Liquidated Damages by Pac Rim . . . . . . . . . 37
10.3 Payment of Breakup Fee By Pac Rim . . . . . . . . . . . . 37
ARTICLE 11 - GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . 37
11.1 Nonsurvival of Representations, Warranties and
Agreements . . . . . . . . . . . . . . . . . . . . . . . . 37
11.2 Notices . . . . . . . . . . . . . . . . . . . . . . . . . 37
</TABLE>
C-iii
<PAGE> 228
<TABLE>
<S> <C>
11.3 Assignment; Binding Effect; Benefit . . . . . . . . . . . 38
11.4 Entire Agreement . . . . . . . . . . . . . . . . . . . . . 39
11.5 Amendment . . . . . . . . . . . . . . . . . . . . . . . . 39
11.6 Governing Law . . . . . . . . . . . . . . . . . . . . . . 39
11.7 Venue . . . . . . . . . . . . . . . . . . . . . . . . . . 39
11.8 Counterparts . . . . . . . . . . . . . . . . . . . . . . . 39
11.9 Headings . . . . . . . . . . . . . . . . . . . . . . . . . 39
11.10 Interpretation . . . . . . . . . . . . . . . . . . . . . . 39
11.11 Waivers . . . . . . . . . . . . . . . . . . . . . . . . . 40
11.12 Incorporation of Exhibits . . . . . . . . . . . . . . . . 40
11.13 Severability . . . . . . . . . . . . . . . . . . . . . . . 40
11.14 Enforcement of Agreement . . . . . . . . . . . . . . . . . 40
11.15 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . 40
11.16 Material Adverse Effect . . . . . . . . . . . . . . . . . 41
11.17 Attorney's Fees . . . . . . . . . . . . . . . . . . . . . 41
11.18 Performance by Merger Sub . . . . . . . . . . . . . . . . . 41
SCHEDULE 7.11(e) Severance Program . . . . . . . . . . . . . . . . . . 43
Exhibit A Certificate of Incorporation of SNTL
Acquisition Corporation . . . . . . . . . . . . . . . . . . . . . 45
Exhibit B Bylaws of SNTL Acquisition Corp. . . . . . . . . . . . . 46
Exhibit C Series A Convertible Debentures and Series
1, 2 and 3 Detachable Warrant Purchase Agreement . . . . . . . . . 47
Exhibit D Option . . . . . . . . . . . . . . . . . . . . . . . . . 48
Exhibit E Series 3 Warrant Surrender Agreement . . . . . . . . . . 49
Exhibit F Chase Manhattan Bank Commitment Loan Letter . . . . . . . 50
Exhibit G Executed Insurance Partners Stock
Purchase Agreement . . . . . . . . . . . . . . . . . . . . . . . . 51
Exhibit H Voting Agreement . . . . . . . . . . . . . . . . . . . . 52
Exhibit I Compensation Plan for Senior Management Plan . . . . . . 53
Exhibit J 1996 Annual Incentive Plan Plan Document . . . . . . . . 54
Exhibit K Stanley Braun Employment Agreement and
Amendments Thereto . . . . . . . . . . . . . . . . . . . . . . . . 55
</TABLE>
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AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER (this "Agreement") is entered into as of
September 17, 1996, by and among SUPERIOR NATIONAL INSURANCE GROUP, INC., a
California corporation ("Parent"), SNTL ACQUISITION CORP., a Delaware
corporation and a wholly-owned subsidiary of Parent ("Merger Sub"), and PAC RIM
HOLDING CORPORATION, a Delaware corporation ("Pac Rim"), with reference to the
following recitals:
R E C I T A L S
A. The Boards of Directors of Parent and Pac Rim each have determined
that a business combination between Parent and Pac Rim is in the best interests
of their respective companies and stockholders and presents an opportunity for
their respective companies to achieve long-term strategic and financial
benefits and, accordingly, have agreed to effect the merger provided for herein
upon the terms and subject to the condition set forth herein.
B. Parent, Merger Sub and Pac Rim desire to make certain
representations, warranties, covenants and agreements in connection with the
merger.
NOW, THEREFORE, in consideration of the foregoing, and of the
representations, warranties, covenants and agreements contained herein, the
parties hereto hereby agree as follows:
ARTICLE 1
THE MERGER
1.1 The Merger. Subject to the terms and conditions of this
Agreement, at the Effective Time (as defined in Section 1.3), Merger Sub shall
be merged with and into Pac Rim in accordance with this Agreement and the
separate corporate existence of Merger Sub shall thereupon cease (the
"Merger"). Pac Rim shall be the surviving corporation in the Merger (sometimes
hereinafter referred to as the "Surviving Corporation"). The Merger shall have
the effects specified in Section 259 of the Delaware General Corporation Law
(the "DGCL").
1.2 The Closing. Subject to the terms and conditions of this
Agreement, the closing of the Merger ("the "Closing") shall take place at the
offices of Barger & Wolen LLP, 515 South Flower Street, 34th Floor, Los
Angeles, California 90071 at 9:00 a.m., local time, on the first business day
immediately following the day on which the last to be fulfilled or waived of
the conditions set forth in Article 8 shall be fulfilled or waived in
accordance herewith, or at such other time, date or place as Parent and Pac Rim
may agree. The date on which the Closing occurs is hereinafter referred to as
the "Closing Date."
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1.3 Effective Time. If all the conditions to the Merger set forth in
Article 8 shall have been fulfilled or waived in accordance herewith and this
Agreement shall not have been terminated as provided in Article 9, the parties
hereto shall cause a Certificate of Merger meeting the requirements of Section
251 of the DGCL to be properly executed and filed in accordance with such
Section on the Closing Date. The Merger shall become effective at the time of
filing of the Certificate of Merger with the Secretary of State of the State of
Delaware in accordance with the DGCL or at such later time which the parties
hereto shall have agreed upon and designated in such filing as the effective
time of the Merger (the "Effective Time").
ARTICLE 2
CERTIFICATE OF INCORPORATION AND BYLAWS OF THE SURVIVING CORPORATION
2.1 Certificate of Incorporation. The Certificate of Incorporation
of Merger Sub (a copy of which is attached hereto as Exhibit A) in effect
immediately prior to the Effective Time shall be the Certificate of
Incorporation of the Surviving Corporation until duly amended in accordance
with applicable law.
2.2 Bylaws. The Bylaws of Merger Sub (a copy of which is attached
hereto as Exhibit B) in effect immediately prior to the Effective Time shall be
the Bylaws of the Surviving Corporation, until duly amended in accordance with
applicable law.
ARTICLE 3
DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION
3.1 Directors. The directors of Merger Sub immediately prior to the
Effective Time shall be the directors of the Surviving Corporation as of the
Effective Time to serve until the earlier of their resignation or removal or
until their respective successors are duly elected and qualified, as the case
may be.
3.2 Officers. The officers of Merger Sub immediately prior to the
Effective Time shall be the officers of the Surviving Corporation as of the
Effective Time to serve until the earlier of their resignation or removal or
until their respective successors are duly elected and qualified, as the case
may be.
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ARTICLE 4
CONVERSION OF PAC RIM COMMON STOCK AND
OPTIONS; DEBENTURES AND WARRANTS
4.1 Conversion of Pac Rim Common Stock. (a) At the Effective Time,
each share of the common stock, $0.01 par value, of Merger Sub outstanding
immediately prior to the Effective Time shall be converted into and become one
share of common stock, $0.01 par value, of the Surviving Corporation.
(b) At the Effective Time, each share of the common stock, $0.01 par
value, of Pac Rim (the "Pac Rim Common Stock") issued and outstanding
immediately prior to the Effective Time, other than the Dissenting Shares (as
defined below), shall, by virtue of the Merger and without any action on the
part of the holder thereof, be converted into the right to receive cash in the
amount of "Merger Price Per Share" (as defined in Section 4.5(c) hereof),
without interest except for that certain interest payable under Section 9.2
hereof, which interest shall be distributed pro rata on a per share basis.
(c) As a result of the Merger and without any action on the part of
the holders thereof, all shares of Pac Rim Common Stock shall cease to be
outstanding and shall be cancelled and retired and shall cease to exist, and
each holder of a certificate (a "Certificate") representing any shares of Pac
Rim Common Stock shall thereafter cease to have any rights with respect to such
shares of Pac Rim Common Stock, except the right to receive the Merger Price
Per Share upon the surrender of such Certificate.
(d) Each share of Pac Rim Common Stock issued and held in Pac Rim's
treasury at the Effective Time shall, by virtue of the Merger, cease to be
outstanding and shall be cancelled and retired without payment of any
consideration therefor.
4.2 Convertible Debentures. At the Effective Time and in accordance
with the terms of the certain Series A Convertible Debentures and Series 1, 2
and 3 Detachable Warrant Purchase Agreement of even date herewith, a copy of
which is attached hereto as Exhibit C (the "Purchase Agreement"), the holders
of the Convertible Debentures (as defined in Section 5.3 hereof) shall be
entitled to receive consideration in an amount equal to the number of shares of
Pac Rim Common Stock issuable upon conversion of the Convertible Debentures
pursuant to the "Debenture/Purchase Agreement" (as defined in Section 5.3
hereof) multiplied by the Merger Price Per Share. All amounts payable under
this Section 4.2 shall hereinafter be referred to as the "Debenture
Consideration."
4.3 Options. At the Effective Time, each holder of a then
outstanding "In The Money Option" (as defined in Section 4.5(a) hereof) to
purchase shares of Pac Rim Common Stock under the Pac Rim Holding Corporation
1987 Stock Option Plan (the "1987 Plan") and the Pac Rim Holding Corporation
1988 Stock Option Plan (the "1988 Plan")
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(the 1987 Plan and 1988 Plan, collectively, the "Pac Rim Stock Option Plans")
shall, in settlement thereof, receive from Pac Rim for each share of Pac Rim
Common Stock subject to such option an amount (subject to applicable
withholding tax) in cash equal to the excess of the Merger Price Per Share over
the per share exercise or strike price of such option as of the Effective Time,
multiplied by the total number of shares of Pac Rim Common Stock issuable upon
the exercise of such option (such amount being hereinafter referred to as the
"Option Consideration"). At the Effective Time, each In The Money Option shall
be cancelled and converted into the right to receive Option Consideration. The
surrender of an In The Money Option shall be deemed a release of any and all
rights the holder had or may have had in respect of such option. Each "Out Of
The Money Option" (as defined in Section 4.5(g) hereof) shall be cancelled
without consideration.
4.4 Warrants. At the Effective Time, each holder of a then
outstanding "In The Money Warrant" (as defined in Section 4.5(a) hereof) to
purchase shares of Pac Rim Common Stock pursuant to the terms of the
Debenture/Warrant Agreement shall, in settlement thereof and pursuant to the
terms of the Purchase Agreement, receive from Pac Rim for each share of Pac Rim
Common Stock subject to such warrant an amount in cash equal to the excess of
the Merger Price Per Share over the per share exercise or strike price of such
warrant as of the Effective Time (after adjustment of the exercise or strike
price, if applicable, under the Debenture/Warrant Agreement), multiplied by the
total number of shares issuable upon the exercise of such warrant (such amount
being hereinafter referred to as the "Warrant Consideration"). At the
Effective Time, each In The Money Warrant shall be cancelled and converted into
the right to receive Warrant Consideration. The surrender of a warrant shall
be deemed a release of any and all rights the holder had or may have had in
respect of such warrant. Each Out Of The Money Warrant (as defined in Section
4.5(h) hereof) shall be cancelled without consideration. All amounts payable
under this Section 4.4 shall hereinafter be referred to as the Warrant
Consideration.
4.5 Definitions. The following terms shall, when used in this
Agreement, have the following meanings:
(a) "In The Money Option" means an option issued under the Pac Rim
Stock Option Plans whose exercise price per share as of the Effective Time is
less than the Merger Price Per Share.
(b) "In The Money Warrant" means a warrant issued pursuant to the
Debenture-Purchase Agreement whose exercise price per share as of the Effective
Time is less than the Merger Price Per Share.
(c) "Preliminary Merger Price Per Share" is $54,021,032 (the
"Purchase Price") plus the aggregate exercise price for the In The Money
Options and In The Money Warrants divided by the "Deemed Number of Shares" (as
defined in Section 4.5(e) hereof).
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(d) "Merger Price Per Share" shall be the Preliminary Merger Price
Per Share rounded to the nearest $0.0025. In no event will the Merger Price
Per Share cause the amounts calculated pursuant to Sections 4.1, 4.2, 4.3 and
4.4 hereof to exceed $54,021,032 in the aggregate, subject to the effect of
rounding discussed in the preceding sentence.
(e) "Deemed Number of Shares" is the actual number of outstanding
shares of Pac Rim Common Stock as of the Effective Time plus the number of
shares of Pac Rim Common Stock into which the Convertible Debentures may be
converted plus the total number of shares of Pac Rim Common Stock that would be
issued upon exercising all of the In The Money Options and In The Money
Warrants outstanding as of the Effective Time.
(f) "Out Of The Money Options" means all options issued under the Pac
Rim Stock Option Plans that are not In The Money Options.
(g) "Out Of The Money Warrants" means all warrants issued under the
Debenture/Purchase Agreement that are not In The Money Warrants.
4.6 Exchange of Certificates Representing Pac Rim Common Stock.
(a) On the Closing Date, Parent shall deposit, or shall cause to be
deposited, with a bank or trust company selected by Parent, which shall be
Parent's paying and transfer agent (the "Exchange Agent"), for the benefit of
the holders of shares of Pac Rim Common Stock and to settle the In The Money
Options, for payment in accordance with this Article 4, $54,021,032 less that
Debenture Consideration, the Warrant Consideration, and any amounts
attributable to the Dissenting Shares (as hereinafter defined), such amount
being hereinafter referred to as the ("Exchange Fund"), to be paid pursuant to
this Section 4.6 in exchange for outstanding shares of Pac Rim Common Stock and
pursuant to Section 4.3 upon settlement of the In The Money Options.
(b) Promptly after the Effective Time, Parent shall cause the
Exchange Agent to mail to each holder of record of a Certificate or
Certificates (i) a letter of transmittal which shall specify that delivery of
such Certificates shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the Exchange
Agent and shall be in such form and have such other provisions as Parent may
reasonably specify and (ii) instructions for use in effecting the surrender of
the Certificates in exchange for payment of the Merger Price Per Share
hereunder. Upon surrender of a Certificate for cancellation to the Exchange
Agent together with such letter of transmittal, duly executed and completed in
accordance with the instructions thereto, the holder of such Certificate shall
be entitled to receive in exchange therefor, in cash, the product of (x) the
Merger Price Per Share and (y) the number of shares of Pac Rim Common Stock
represented by such Certificates so surrendered by such holder, and the
Certificate so
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surrendered shall forthwith be cancelled. In the event of a transfer of
ownership of Pac Rim Common Stock which is not registered in the transfer
records of Pac Rim, the Exchange Agent may condition payment hereunder upon the
surrender of the Certificate representing such Pac Rim Common Stock to the
Exchange Agent, accompanied by all documents required to evidence and effect
such transfer and to evidence that any applicable stock transfer taxes have
been paid.
(c) At or after the Effective Time, there shall be no transfers on
the stock transfer books of Pac Rim of the shares of Pac Rim Common Stock which
were outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates are presented to the Surviving Corporation, they
shall be cancelled and exchanged for payment in accordance with the procedures
set forth in this Article 4.
(d) Any portion of the Exchange Fund (including the proceeds of any
investments thereof) that remains unclaimed by the former stockholders of Pac
Rim nine (9) months after the Effective Time shall be delivered to the
Surviving Corporation. Any former stockholders of Pac Rim who have not
theretofore complied with this Article 4 shall thereafter look only to the
Surviving Corporation as general creditors thereof for payment of the Purchase
Price in respect of each share of Pac Rim Common Stock that such stockholder
holds as determined pursuant to this Agreement, in each case, without any
interest thereon.
(e) None of Parent, Pac Rim, the Exchange Agent or any other person
shall be liable to any former holder of shares of Pac Rim Common Stock for any
amount properly delivered to a public official pursuant to applicable abandoned
property, escheat or similar laws.
(f) In the event any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Certificate to be lost, stolen or destroyed and, if required by the
Surviving Corporation, the posting by such person of a bond in such reasonable
amount as the Surviving Corporation may direct as indemnity against any claim
that may be made against it with respect to such Certificate, the Exchange
Agent will pay in exchange for such lost, stolen or destroyed Certificate the
Merger Price Per Share as provided in Section 4.6(a), deliverable in respect
thereof pursuant to this Agreement.
4.7 Dissenting Shares.
(a) Notwithstanding anything in this Agreement to the contrary,
shares of Pac Rim Common Stock which are held by any recordholder who has not
voted in favor of the Merger or consented thereto in writing and who has
demanded appraisal rights in accordance with Section 262 of the DGCL ("the
Dissenting Shares") shall not be converted into the right to receive the Merger
Price Per Share hereunder but shall become the right to receive such
consideration as may be determined due in respect of such Dissenting
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Shares pursuant to the DGCL; provided, however, that any holder of Dissenting
Shares who shall have failed to perfect, or shall have withdrawn or lost, his
rights to appraisal of such Dissenting Shares, in each case under the DGCL,
shall forfeit the right to appraisal of such Dissenting Shares, and such
Dissenting Shares shall be deemed to have been converted into the right to
receive, as of the Effective Time, the Merger Price Per Share in accordance
with this Article 4, without interest. Notwithstanding anything contained in
this Section 4.7, if (i) the Merger is rescinded or abandoned or (ii) if the
stockholders of Pac Rim revoke the authority to effect the Merger, then the
right of any stockholder to be paid the fair value of such stockholder's
Dissenting Shares shall cease. The Surviving Corporation shall be the only
obligor with respect to and shall comply with all of its obligations under the
DGCL with respect to holders of Dissenting Shares.
(b) Pac Rim shall give Parent (i) prompt notice of any demands for
appraisal, and any withdrawals of such demands, received by Pac Rim and any
other related instruments served pursuant to the DGCL and received by Pac Rim,
and (ii) the opportunity to direct all negotiations and proceedings with
respect to demands for appraisal under the DGCL. Pac Rim shall not, except
with the prior written consent of Parent, make any payment with respect to any
demands for appraisal or offer to settle any such demands.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF PAC RIM
Except as set forth in the disclosure letter delivered by or on behalf
of Pac Rim to Parent at or prior to the execution hereof in form and substance
satisfactory to Parent (the "Pac Rim Disclosure Letter") and except to the
extent qualified by Section 11.16(b) hereof, Pac Rim represents and warrants to
Parent as of the date of this Agreement as follows:
5.1 Existence; Good Standing; Corporate Authority; Compliance With
Law. Pac Rim is a corporation duly incorporated, validly existing and in good
standing under the laws of the State of Delaware. Pac Rim is duly licensed or
qualified to do business as a foreign corporation and is in good standing under
the laws of any other state of the United States in which the character of the
properties owned or leased by it therein or in which the transaction of its
business makes such qualification necessary. Pac Rim has all requisite
corporate power and authority to own, operate and lease its properties and
carry on its business as now conducted. Each of Pac Rim's "Subsidiaries" (as
defined in Section 11.15 hereof) is a corporation duly organized, validly
existing and in good standing under the laws of its respective jurisdiction of
incorporation or organization, has the corporate power and authority to own its
properties and to carry on its business as it is now being conducted, and is
duly licensed or qualified to do business and is in good standing in each
jurisdiction in which the ownership of its
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property or the conduct of its business requires such qualification. The Pac
Rim Disclosure Letter sets forth the states in which Pac Rim and its
Subsidiaries are incorporated and licensed or qualified to do business.
Neither Pac Rim nor any of its Subsidiaries is in violation of any order of any
court, governmental authority or arbitration board or tribunal. Neither Pac
Rim nor any of its Subsidiaries is in violation of any law, ordinance,
governmental rule or regulation to which Pac Rim or any Pac Rim Subsidiary or
any of their respective properties or assets is subject. Pac Rim and its
Subsidiaries have obtained all licenses, permits and other authorizations and
have taken all actions required by applicable law or governmental regulations
in connection with their business as now conducted. The copies of Pac Rim's
Certificate of Incorporation and Bylaws previously delivered to Parent are true
and correct.
5.2 Authorization, Validity and Effect of Agreements.
(a) Pac Rim has the requisite corporate power and authority to
execute and deliver this Agreement and all agreements and documents
contemplated hereby. Subject only to the approval of this Agreement and the
transactions contemplated hereby by the affirmative vote of at least seventy
percent (70%) in the aggregate of (i) the issued and outstanding shares of Pac
Rim Common Stock and (ii) the number of shares of Pac Rim Common Stock into
which the outstanding Convertible Debentures (as hereinafter defined) may be
converted, voting together, the consummation by Pac Rim of the transactions
contemplated hereby has been duly authorized by all requisite corporate action.
This Agreement constitutes, and all agreements and documents contemplated
hereby (when executed and delivered pursuant hereto) will constitute, the valid
and legally binding obligations of Pac Rim, enforceable in accordance with
their respective terms, subject to applicable bankruptcy, insolvency,
moratorium or other similar laws relating to creditors' rights and general
principles of equity.
(b) The provisions of Section 203 of the DGCL do not apply to the
transactions contemplated by this Agreement.
5.3 Capitalization. The authorized capital stock of Pac Rim consists
of 35,000,000 shares of Pac Rim Common Stock, and 500,000 shares of preferred
stock (the "Pac Rim Preferred Stock"). As of August 31, 1996, there were
9,528,200 shares of Pac Rim Common Stock issued and outstanding and no shares
of Pac Rim Preferred Stock issued and outstanding. Since such date, no
additional shares of capital stock of Pac Rim have been issued, except pursuant
to the Pac Rim Stock Option Plans. All options outstanding under the Pac Rim
Stock Option Plans and the exercise price and vesting status thereof (assuming
a Closing occurs) is set forth in Exhibit D. In addition, pursuant to the
terms of that certain Agreement to Purchase Series A Convertible Debentures and
Series 1, 2 and 3 Detachable Warrants dated as of April 15, 1994, as amended
(the "Debenture/Warrant Agreement"), Pac Rim has issued and outstanding (i)
TWENTY MILLION AND NO/100 DOLLARS ($20,000,000.00) aggregate amount of its
eight percent (8%) Series A Convertible Debentures
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(the "Convertible Debentures"); (ii) 1,500,000 detachable warrants each
exercisable at the price of $2.50 for one share of Pac Rim Common Stock (the
"Series 1 Warrants"); (iii) 1,500,000 detachable warrants each exercisable at
the price of $3.00 for one share of Pac Rim Common Stock (the "Series 2
Warrants"); and (iv) 800,000 detachable warrants each exercisable at the price
of $3.50 for one share of Pac Rim Common Stock (the "Series 3 Warrants"). The
Series 1 Warrants, Series 2 Warrants and Series 3 Warrants shall be referred
to, collectively, as the "Warrants." The Series 3 Detachable Warrant Surrender
Agreement attached hereto as Exhibit E and the Purchase Agreement will
transfer, if consummated, title to all the outstanding Warrants and Convertible
Debentures.
Except as set forth above, Pac Rim has no outstanding bonds,
debentures, notes or other obligations the holders of which have the right to
vote (or which are convertible into or exercisable for securities having the
right to vote) with the stockholders of Pac Rim on any matter. All such issued
and outstanding shares of Pac Rim Common Stock are duly authorized, validly
issued, fully paid, nonassessable and free of preemptive rights. Other than as
contemplated by this Agreement, the Pac Rim Stock Option Plans, the Convertible
Debentures and the Warrants, there are not at the date of this Agreement any
existing options, warrants, calls, subscriptions, convertible securities, or
other rights, agreements or commitments which obligate Pac Rim or any of its
Subsidiaries to issue, transfer or sell any shares of capital stock of Pac Rim
or any of its Subsidiaries. As of June 30, 1996, 12,487,730 shares of Common
Stock were reserved for issuance and are issuable upon or otherwise deliverable
in connection with options outstanding under the Pac Rim Stock Option Plans,
the Convertible Debentures and the Warrants; since that date, no options have
been granted under the Pac Rim Stock Option Plans, no new option plans have
been authorized or adopted and no new warrants or convertible debenture with
respect to the Common Stock have been issued. After the Effective Time, the
Surviving Corporation will have no obligation to issue, transfer or sell any
shares of capital stock of Pac Rim or the Surviving Corporation pursuant to any
Pac Rim Benefit Plans (as defined in Section 5.11). There are no outstanding
obligations of Pac Rim or any of its Subsidiaries to purchase, redeem or
otherwise acquire any shares of Pac Rim Common Stock, any capital voting
securities or securities convertible into or exchangeable for capital stock or
voting securities of Pac Rim. No shares of Pac Rim Common Stock are held in
the Pac Rim Benefit Plans.
5.4 Subsidiaries. Pac Rim owns directly or indirectly each of the
outstanding shares of capital stock of each of Pac Rim's Subsidiaries. Each of
the outstanding shares of capital stock of each of Pac Rim's Subsidiaries is
duly authorized, validly issued, fully paid and nonassessable, and is owned,
directly or indirectly, by Pac Rim free and clear of all liens, pledges,
security interests, claims or other encumbrances. The following information
for each Subsidiary of Pac Rim is set forth in the Pac Rim Disclosure Letter:
(i) its name and jurisdiction of incorporation or organization; (ii)
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its authorized capital stock or share capital; and (iii) the number of issued
and outstanding shares of capital stock or share capital.
5.5 Other Interests. Except for interests in the Pac Rim
Subsidiaries and The Pacific Rim Assurance Company's (the "Assurance Company")
interest in its wholly-owned subsidiary, Regional Benefits Insurance Services,
Inc., a California corporation, neither Pac Rim nor any Pac Rim Subsidiary owns
directly or indirectly any interest or investment (whether equity or debt) in
any corporation, partnership, joint venture, business, trust or entity.
5.6 No Violation. Neither the execution and delivery by Pac Rim of
this Agreement nor the consummation by Pac Rim of the transactions contemplated
hereby in accordance with the terms hereof will: (i) conflict with or result
in a breach of any provisions of the respective certificates of incorporation
or bylaws (or similar governing documents) of Pac Rim or its Subsidiaries; (ii)
except as disclosed in the Pac Rim Reports (as defined in Section 5.7), result
in a breach or violation of, a default under, or the triggering of any payment
or other obligations pursuant to, or accelerate vesting under, any of its
existing Pac Rim Stock Option Plans, or any grant or award made under any of
the foregoing other than accelerated vesting of outstanding options under stock
option agreements in existence on the date hereof with certain employees of Pac
Rim or any of its Subsidiaries by reason of, in whole or in part, the
consummation of the Merger; (iii) violate, or conflict with, or result in a
breach of any provision of, or constitute a default (or an event which, with
notice or lapse of time or both, would constitute a default) under, or result
in the termination or in a right of termination or cancellation of, or
accelerate the performance required by, or result in the creation of any lien,
security interest, charge or encumbrance upon any of the properties of Pac Rim
or its Subsidiaries under, or result in being declared void, voidable, or
without further binding effect, any of the terms, conditions or provisions of
any note, bond, mortgage, indenture, deed of trust or any license, franchise,
permit, lease, contract, agreement or other instrument, commitment or
obligation to which Pac Rim or any of its Subsidiaries is a party, or by which
Pac Rim or any of its Subsidiaries or any of their properties is bound or
affected; (iv) violate any order, writ, injunction, decree, law, statute, rule
or regulation applicable to Pac Rim or any of its Subsidiaries or any of their
respective properties or assets; or (v) other than the filings provided for in
Article 1, certain federal, state and local regulatory filings, filings
required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the
"HSR Act"), state insurance law (including California Insurance Code Sections
1215 et seq.), the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), or applicable state securities and "Blue Sky" laws or filings in
connection with the maintenance of qualification to do business in other
jurisdictions (collectively, the "Regulatory Filings"), require any consent,
approval or authorization of, or declaration, filing or registration with, any
domestic governmental or regulatory authority.
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5.7 SEC Documents. Pac Rim has delivered to Parent each registration
statement, report, proxy statement or information statement prepared by it
since December 31, 1993, including, without limitation, (i) its Annual Report
on Form 10-K for the years ended December 31, 1993, 1994 and 1995, (ii) its
Quarterly Report on Form 10-Q for the periods ended March 31 and June 30, 1996,
and (iii) its Proxy Statements for the Annual Meeting of Stockholders held in
1994, 1995 and on July 10, 1996, each in the form (including exhibits and any
amendments thereto) filed with the Securities and Exchange Commission (the
"SEC") (collectively, the "Pac Rim Reports"), which constitute all such Reports
that were required to be filed during such period. As of their respective
dates, the Pac Rim Reports (including, without limitation, any financial
statements or schedules included or incorporated by reference therein) (i) were
prepared in all respects in accordance with the applicable requirements of the
Exchange Act and the rules and regulations thereunder and (ii) did not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements made therein,
in the light of the circumstances under which they were made, not misleading.
Each of the consolidated balance sheets of Pac Rim included in or incorporated
by reference into the Pac Rim Reports (including the related notes and
schedules) fairly presents the consolidated financial position of Pac Rim and
the Pac Rim Subsidiaries as of its date and each of the consolidated statements
of income, retained earnings and cash flows of Pac Rim included in or
incorporated by reference into the Pac Rim Reports (including any related notes
and schedules) fairly presents the results of operations, retained earnings or
cash flows, as the case may be, of Pac Rim and the Pac Rim Subsidiaries for the
periods set forth therein (subject, in the case of unaudited statements, to
normal year-end audit adjustments which would not be material in amount or
effect), in each case in accordance with generally accepted accounting
principles consistently applied during the periods involved, except as may be
noted therein. Except as reflected or reserved against or disclosed in the
financial statements of Pac Rim (and the notes thereto) included in the Pac Rim
Reports and incurred subsequent to June 30, 1996 in the ordinary course of
business consistent with past practice, neither Pac Rim nor any of its
Subsidiaries has any liabilities, of any nature, whether accrued, absolute,
contingent or otherwise, whether due or to become due and whether required to
be recorded or reflected on a balance sheet (or the notes thereto) under
generally accepted accounting principles. Except as described in the Pac Rim
Disclosure Letter, since June 30, 1996, neither Pac Rim nor any Subsidiary of
Pac Rim has incurred any liabilities other than liabilities which have been
incurred in the ordinary course of business consistent with past practice.
5.8 Litigation. Except as disclosed in the Pac Rim Reports filed
with the SEC prior to the date hereof and as otherwise set forth in this
Section 5.8, neither Pac Rim nor its Subsidiaries have been notified that any
governmental investigations are being conducted with respect to their
respective properties, assets, permits or licenses, and there are no actions,
suits or proceedings
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pending against Pac Rim or the Pac Rim Subsidiaries or, to the knowledge of Pac
Rim, threatened against Pac Rim or the Pac Rim Subsidiaries or any of their
respective properties or assets, at law or in equity, or before or by any
federal or state commission, board, bureau, agency or instrumentality, that
would prevent or delay the consummation of the transactions contemplated by
this Agreement. Except as disclosed in the Pac Rim Reports filed with the SEC
prior to the date hereof, neither Pac Rim nor any of its Subsidiaries are
subject to any outstanding order, writ, injunction or decree which, would
prevent or delay the consummation of the transactions contemplated hereby. The
California Department of Insurance (the "California Department") is currently
conducting a triennial examination of the Assurance Company and the Assurance
Company was named as a defendant in the following actions: (1) NPI Medical
Group, et al. v. State Compensation Insurance Fund, et al., Case No. BC
116099, Superior Court of the State of California, Los Angeles County; and (2)
FWHC Medical Group, et al. v. State Compensation Insurance Fund, et al, Case
No. BC 089361, Superior Court of the State of California, Los Angeles County.
5.9 Absence of Certain Changes. Since June 30, 1996, each of Pac Rim
and its Subsidiaries has conducted its business only in the ordinary course of
such business and there has not been (i) any event or changes with respect to
Pac Rim and its Subsidiaries, (ii) any declaration, setting aside or payment of
any dividend or other distribution with respect to its capital stock or any
repurchase, redemption or other acquisition by Pac Rim or its Subsidiaries of
any outstanding shares of capital stock or other securities in, or other
ownership interests in, Pac Rim or any of its Subsidiaries, (iii) any change in
its accounting principles, practices or methods or (iv) any event or changes or
action taken which would constitute a breach of Section 7.2 of this Agreement
if it had occurred or been taken after the date hereof; provided, however, this
Section 5.9(iv) shall not apply to subsections (c) or (e) of Section 7.2.
5.10 Taxes.
(a) Filing of Tax Returns. Pac Rim (including, for purposes of this
Section 5.10, each of its Subsidiaries from time to time) has timely filed with
the proper taxing or other governmental authorities all returns (including,
without limitation, information returns and other tax-related information) in
respect of Taxes (as such term is defined in Section 5.10(e)) required to be
filed through the date hereof. Such returns and information filed are, to the
knowledge of Pac Rim, complete, correct and accurate in all respects. Pac Rim
has delivered to Parent complete and accurate copies of all of Pac Rim's
federal, state and local Tax returns filed for its taxable years ended 1991
through 1994. Pac Rim has not filed any federal, state or local tax returns
for its taxable years ended December 31, 1995 and 1996, or has delivered to
Parent complete and accurate copies of all such returns that have been filed
for such taxable years.
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(b) Payment of Taxes. All Taxes for which Pac Rim is shown as owing
on any Tax return for any period or portion thereof ending on or before the
Closing Date, shall have been paid, or an adequate reserve (in conformity with
generally accepted accounting principles applied on a consistent basis and in
accordance with Pac Rim's past custom and practice) has been established
therefor, and Pac Rim has no liability (whether or not due and payable) for
Taxes in excess of the amounts so paid or reserves so established. All Taxes
that Pac Rim has been required to collect or withhold have been duly collected
or withheld and, to the extent required when due, have been or will be duly
paid to the proper taxing or other governmental authority. Pac Rim had, as of
December 31, 1995, a net operating loss carryover of $2,676,000 for federal
income tax purposes (the "NOL").
(c) Audit History. Except as set forth in the Pac Rim Disclosure
Letter:
(i) No deficiencies for Taxes or adjustments to the NOL of
Pac Rim have been claimed, proposed or assessed by any taxing or
other, governmental authority.
(ii) There are no pending or, to the best of Pac Rim's
knowledge, threatened audits, investigations or claims for or relating
to any liability in respect of Taxes of Pac Rim, and there are no
matters under discussion with any taxing or other governmental
authority with respect to Taxes of Pac Rim.
(iii) All audits of federal, state and local returns for
Taxes by the relevant taxing or other governmental authority have been
completed for all periods.
(iv) Pac Rim has not been notified in writing that any taxing
or other governmental authority intends to audit a return for any
other period.
(v) No extension of a statute of limitations relating to
Taxes is in effect with respect to Pac Rim.
(d) Tax Elections. Except as set froth in Pac Rim Disclosure Letter:
(i) There are no material elections with respect to Taxes
affecting Pac Rim.
(ii) Pac Rim has not made an election and is not required to
treat any asset of Pac Rim as owned by another person or as tax-
exempt bond financed property or tax-exempt use property within the
meaning of Section 168 of the Internal Revenue Code of 1986, as
amended (the "Code"), or under any comparable state or local income
Tax or other Tax provision.
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(iii) Pac Rim is not a party to or bound by any binding tax
sharing, tax indemnity or tax allocation agreement or other similar
arrangement with any other person or entity.
(iv) Pac Rim has not filed a consent pursuant to the
collapsible corporation provisions of Section 341(f) of the Code (or
any corresponding provision of state or local law) or agreed to have
Section 341(f)(2) of the Code (or any corresponding provision of state
or local law apply to any disposition of any asset owned by it.
(e) Additional Tax Representations. Except as set forth in the Pac
Rim Disclosure Letter:
(i) There are no liens for Taxes (other than for Taxes not
yet delinquent upon the assets of Pac Rim).
(ii) Pac Rim has never been a member of an affiliated group
of corporations within the meaning of Section 1504 of the Code, nor
has Pac Rim or any present or former Subsidiary of Pac Rim, or any
predecessor or affiliate of any of them, become liable (whether by
contract, as transferee or successor, by law or otherwise) for the
Taxes of any other person or entity under Treasury Regulation Section
1.1502-6 or any similar provision of state, local or foreign law.
(iii) Pac Rim has not made, requested or agreed to make, nor
is it required to make, any adjustment under Section 481(a) of the
Code by reason of a change in accounting method or otherwise for any
taxable year.
(iv) Pac Rim is not a party to any agreement, contract,
arrangement or plan that has resulted or would result, separately or
in the aggregate, in the payment of any "excess parachute payments"
within the meaning of Section 280G of the Code or would require
payment of any amount as to which a deduction may be denied under
Section 162(m) of the Code.
(v) Pac Rim is not a party to any joint venture, partnership,
or other arrangement or contract which could be treated as a
partnership for federal, state, local or foreign Tax purposes.
(vi) Pac Rim has prepared and made available to Parent all of
Pac Rim's books and working papers that clearly demonstrate the income
and activities of Pac Rim for the last full reporting period ending
prior to the date hereof.
(vii) Pac Rim has not been a "United States real property
holding corporation" within the meaning of Section 897(c)(2) of the
Code during the applicable period specified in Section
897(c)(1)(A)(ii).
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(f) Definition of Taxes. For purposes of this Agreement, the term
"Taxes" shall mean all federal, state, local, foreign and other taxes,
assessments or other governmental charges, including, without limitation,
income, estimated income, gross receipts, profits, occupation, franchise,
capital stock, real or personal property, sales, use, value added, transfer,
license, commercial rent, payroll, employment or unemployment, social security,
disability, withholding, alternative or add-on minimum, customs, excise, stamp
or environmental taxes, and further including all interest, penalties and
additions in connection therewith for which Pac Rim may be liable.
5.11 Certain Employee Plans.
(a) With respect to each employee benefit plan (including, without
limitation, any "employee benefit plan," as defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA")), and any
bonus, profit sharing, deferred compensation, incentive compensation, stock
ownership, stock purchase, stock option, phantom stock, vacation, severance,
death benefit, insurance or other plan, arrangement or understanding (whether
or not legally binding), in each case maintained or contributed to for the
benefit of employees of Pac Rim or any of its Subsidiaries (all the foregoing
being herein called the "Pac Rim Benefit Plans"), individually and in the
aggregate, no event has occurred, and to the knowledge of Pac Rim or any of its
Subsidiaries, there exists no condition or set of circumstances, in connection
with which Pac Rim or any of its Subsidiaries could be subject to any liability
(except liability for benefits claims and funding obligations payable in the
ordinary course), under ERISA or any other applicable law.
(b) With respect to the Pac Rim Benefit Plans, individually and in
the aggregate, there are no funded benefit obligations for which contributions
have not been made or properly accrued and there are no unfunded benefit
obligations which have not been accounted for by reserves, established in
accordance with generally accepted accounting principles, or otherwise properly
footnoted in accordance with generally accepted accounting principles, on the
financial statements of Pac Rim or any of its Subsidiaries. Pac Rim has not
been nor is it currently obligated under any multi-employer plans as defined in
ERISA.
(c) Except as required by applicable law, neither Pac Rim nor any of
its Subsidiaries provides any health, welfare or life insurance benefits to any
of their former or retired employees.
(d) Except for changes due to increases in the length of employment,
Schedule 5.11(d) of the Pac Rim Disclosure Letter lists the employees of Pac
Rim and its Subsidiaries who are eligible for severance benefits and the
amounts that would be due such employees if they were terminated as of July 24,
1996.
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5.12 Labor Matters.
(a) Neither Pac Rim nor any of its Subsidiaries is a party to, or
bound by, any collective bargaining agreement, contract or other agreement or
understanding with a labor union or labor organization. There is no unfair
labor practice or labor arbitration proceeding pending or, to the knowledge of
Pac Rim, threatened against Pac Rim or its Subsidiaries relating to their
business. To the knowledge of Pac Rim, there are no organizational efforts
with respect to the formation of a collective bargaining unit presently being
made or threatened involving employees of Pac Rim or any of its Subsidiaries.
(b) Pac Rim has delivered to Parent copies of all employment
agreements, consulting agreements, severance agreements, bonus and incentive
plans, profit-sharing plans and other agreements, plans or arrangements with
respect to compensation of the employees or arrangements with respect to
compensation of the employees of Pac Rim and its Subsidiaries (the
"Compensation Arrangements") and, to the extent required by applicable
regulation, all Compensation Arrangements are described in the Pac Rim Reports.
5.13 No Brokers. Pac Rim has not entered into any contract,
arrangement or understanding with any person or firm which may result in the
obligation of Pac Rim or Parent to pay any finder's fees, brokerage or agent's
commissions or other like payments in connection with the negotiations leading
to this Agreement or the consummation of the transactions contemplated hereby,
except that Pac Rim has retained Salomon Brothers Inc. ("Salomon"), whose fees
and expenses will be paid by Pac Rim, as its financial advisor to render a
fairness opinion with respect to the Purchase Price, which arrangement has been
disclosed in writing to Parent prior to the date hereof. Other than the
foregoing arrangement, Pac Rim is not aware of any claim for payment of any
finder's fees, brokerage or agent's commissions or other like payments in
connection with the negotiations leading to this Agreement or the consummation
of the transaction contemplated hereby.
5.14 Fairness Opinion. Pac Rim has received the opinion of Salomon
to the effect that the consideration to be received in the Merger by the
stockholders of Pac Rim is fair to such stockholders from a financial point of
view.
5.15 Liens. Other than liens, mortgages, security interests, pledges
and encumbrances which do not materially interfere with Pac Rim's or any of its
Subsidiaries' use and enjoyment of their property or assets or diminish or
detract from the value thereof, neither Pac Rim nor any of its Subsidiaries has
granted, created or suffered to exist with respect to any of its assets, any
mortgage, pledge, charge, hypothecation, collateral, assignment, lien
(statutory or otherwise), encumbrance or security agreement of any kind or
nature whatsoever.
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5.16 Leased Real Property. Neither Pac Rim nor any Subsidiary owns
any real property. The Pac Rim Disclosure Letter sets forth a list of all of
the leases and subleases (the "Real Property Leases") under which, as of the
date hereof, Pac Rim or any of its Subsidiaries has the right to occupy space.
Pac Rim has heretofore delivered to the Parent a true, correct and complete
copy of all of the Real Property Leases, including all amendments thereto. All
Real Property Leases and leases pursuant to which Pac Rim or any of its
Subsidiaries leases personal property from others are valid, binding and
enforceable in accordance with their terms; neither Pac Rim nor any Subsidiary
has received notice of any default by Pac Rim or any Subsidiary under any Real
Property Lease; there are no existing defaults, or any condition or event which
with the giving of notice or lapse of time would constitute a default, by any
party to the Real Property Leases.
5.17 Environmental Matters. Attached to the Pac Rim Disclosure
Letter are copies of all environmental audits or other studies or reports that
Pac Rim has in its possession, which were prepared by third parties to assess
Hazardous Material (as hereinafter defined) risks at any site or facility owned
or leased presently or within the last three (3) years by Pac Rim or any of its
Subsidiaries (a "Site"). Pac Rim and each of its Subsidiaries is in compliance
with all, and has no liability under, any Environmental Laws (as defined
below). Neither Pac Rim nor any of its Subsidiaries has been alleged to be in
violation of, or has been subject to any administrative or judicial proceeding
pursuant to, such Environmental Laws either now or any time during the past
three (3) years. There are no facts or circumstances which Pac Rim reasonably
expects could form the basis for the assertion of any Claim (as defined below)
against Pac Rim or any of its Subsidiaries relating to environmental matters
including, but not limited to, any Claim arising from past or present
environmental practices asserted under any Environmental Laws.
For purposes of this Section 5.17, the following terms shall have the
following meanings:
(a) "Hazardous Materials" shall mean asbestos, petroleum
products, underground tanks of any type and all other materials now or
hereafter defined as "hazardous substances," "hazardous wastes,"
"toxic substances" or "solid wastes," or otherwise now or hereafter
listed or regulated pursuant to (collectively, the "Environmentally
Laws"): the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, 42 U.S.C. Section 9601 et seq., and any
amendments thereto; the Resource Conservation and Recovery Act, 42
U.S.C. Section 6901 et seq., and any amendments thereto; the Hazardous
Materials Transportation Act, 49 U.S.C. Section 1801 et seq.; and any
other similar federal, state or local statute, regulation, ordinance,
order, decree, or any other law, common law theory or reported
decision of any state or federal court, as now or at any time
hereafter in effect, relating to, or imposing liability or standards
of conduct
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concerning, any hazardous, toxic or dangerous waste, substance or
material.
(b) "Claim" shall mean any and all claims, demands, causes of
actions, suits, proceedings, administrative proceedings, losses,
judgments, decrees, debts, damages, liabilities, court costs,
attorneys' fees and any other expenses incurred, assessed or sustained
by or against Pac Rim or any of its Subsidiaries.
5.18 Intellectual Property. The Pac Rim Disclosure Letter identifies
all registered trademarks, copyrights and patents owned or licensed by Pac Rim
and its Subsidiaries as of the date hereof. To Pac Rim's best knowledge, Pac
Rim or its Subsidiaries own, or are licensed or otherwise have adequate right
to use, all patents, patent rights, trademarks, trademark rights, service
marks, service mark rights, trade names, trade name rights, copyrights,
know-how, technology, trade secrets and other proprietary information
(collectively, the "Intellectual Property") which are material to the conduct
of the business of Pac Rim and its Subsidiaries. Neither Pac Rim nor any of
its Subsidiaries have received any written claims by any person, and neither
Pac Rim nor any of its Subsidiaries has asserted a claim against any person,
with respect to any of the Intellectual Property owned or used by Pac Rim or
its Subsidiaries or challenging or questioning the validity or effectiveness of
any license or agreement relating thereto to which Pac Rim or any Subsidiary is
a party.
5.19 Powers of Attorney; Guarantees. Neither Pac Rim nor any of its
Subsidiaries has any power of attorney outstanding, nor any liability as
guarantor, surety, co-signer, endorser (other than for purposes of collection
in the ordinary course of business) or co-maker in respect of the obligation of
any person, corporation (other than wholly-owned Subsidiaries of Pac Rim),
partnership, joint venture, association, organization or other entity.
5.20 Related Party Transactions. No director, officer, partner,
employee, "affiliate" or "associate" (as such terms are defined in rule 12b-2
under the Exchange Act) of Pac Rim or any of its Subsidiaries (i) has borrowed
any monies from or has outstanding any indebtedness or other similar
obligations to Pac Rim or any of its Subsidiaries; (ii) except as disclosed in
Pac Rim's Proxy Statement for its 1996 annual meeting, owns, directly or
indirectly, any interest of any kind in, or is a director, officer, employee,
partner, affiliate or associate of, or consultant or lender to, or borrower
from or has the right to participate in the management, operations or profits
of, any person or entity which is (x) a competitor, supplier, customer,
distributor, lessor, tenant, creditor or debtor of Pac Rim or any of its
Subsidiaries, (y) engaged in a business related to the business of Pac Rim or
any of its Subsidiaries or (z) participating in any transaction to which Pac
Rim or any of its Subsidiaries is a party; or (iii) is otherwise a party to any
contract, arrangement or understanding with Pac Rim or any of its Subsidiaries.
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5.21 Information in Proxy Statement. None of the information
supplied by Pac Rim or its Subsidiaries for inclusion or incorporation by
reference in Parent's "Proxy Statement" (as herein after defined) for the
special meeting of its stockholders to be called to consider the Stock Purchase
Agreement referred to in Section 6.5 hereof will, at the date mailed to
stockholders and at the time of the meeting of Parent's stockholders to be held
in connection with the such Stock Purchase Agreement, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they are made, not misleading.
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Except as set forth in the disclosure letter delivered by or on behalf
of Parent and Merger Sub to Pac Rim at or prior to the execution hereof in form
and substance satisfactory to Pac Rim (the "Parent Disclosure Letter") and
except to the extent qualified by Section 11.16(b) hereof, Parent and Merger
Sub represent and warrant to Pac Rim as of the date of this Agreement as
follows:
6.1 Existence; Good Standing; Corporate Authority; Compliance With
Law. Each of Parent and Merger Sub is a corporation duly incorporated, validly
existing and in good standing under the laws of its jurisdiction of
incorporation. Parent has all requisite corporate power and authority to own,
operate and lease its properties and carry on its business as now conducted.
6.2 Authorization, Validity and Effect of Agreements. Each of Parent
and Merger Sub has the requisite corporate power and authority to execute and
deliver this Agreement and all agreements and documents contemplated hereby.
Subject only to the approval of the Stock Purchase Agreement described in
Section 6.5 hereof by the holders of a majority of the outstanding shares of
Parent's common stock, the consummation by Parent and Merger Sub of the
transactions contemplated hereby has been duly authorized by all requisite
corporate action. This Agreement constitutes, and all agreements and documents
contemplated hereby (when executed and delivered pursuant hereto for value
received) will constitute, the valid and legally binding obligations of Parent
and Merger Sub, enforceable in accordance with their respective terms, subject
to applicable bankruptcy, insolvency, moratorium or other similar laws relating
to creditors' rights and general principles of equity.
6.3 No Violation. Neither the execution and delivery by Parent and
Merger Sub of this Agreement, nor the consummation by Parent and Merger Sub of
the transactions contemplated hereby in accordance with the terms hereof, will:
(i) conflict with or result in a breach of any provisions of the Articles of
Incorporation of Parent, the Certificate of Incorporation of Merger Sub or
Bylaws of
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Parent or Merger Sub; (ii) violate, or conflict with, or result in a breach of
any provision of, or constitute a default (or an event which, with notice or
lapse of time or both, would constitute a default), under or result in the
termination or in a right of termination or cancellation of, or accelerate the
performance required by, or result in the creation of any lien, security
interest, charge or encumbrance upon any of the properties of Parent or its
"Subsidiaries" (as defined in Section 11.14 hereof) under, or result in being
declared void, voidable, or without further binding effect, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, deed of trust
or any license, franchise, permit, lease, contact, agreement or other
instrument, commitment or obligation to which Parent or any of its Subsidiaries
is a party, or by which Parent or any of its Subsidiaries or any of their
properties is bound or affected; or (iii) other than the Regulatory Filings,
require any consent, approval or authorization of, or declaration, filing or
registration with, any domestic governmental or regulatory authority.
6.4 Interim Operations of Merger Sub. Merger Sub was formed solely
for the purpose of engaging in the transactions contemplated hereby, has
engaged in no other business activities and has conducted its operations only
as contemplated hereby.
6.5 Financing. In obtaining the funds necessary to enable Parent and
Merger Sub to consummate the Merger on the terms contemplated by this
Agreement, Parent and Merger Sub have received a written loan commitment from
Chase Manhattan Bank N.A., a copy of which commitment is attached hereto as
Exhibit F, and Parent has simultaneously herewith entered into a "Stock
Purchase Agreement" with Insurance Partners, L.P., a Delaware limited
partnership ("IP") and Insurance Partners Offshore (Bermuda), L.P., a Bermuda
limited partnership ("IP Bermuda") (IP and IP Bermuda, collectively, "Insurance
Partners"), and the additional equity investors party thereto, for the sale of
shares of Parent's common stock, an executed copy of which is attached hereto
as Exhibit G. At the Effective Time, Parent and the Merger Sub will have
available all funds necessary (a) for the acquisition of all the Convertible
Debentures and In The Money Warrants, (b) for the acquisition of all shares of
Pac Rim Common Stock and In The Money Options pursuant to the Merger and (c) to
perform their respective obligations under this Agreement.
6.6 No Brokers. Parent has not entered into any contract,
arrangement or understanding with any person or firm which may result in the
obligation of Pac Rim or Parent to pay a finder's fees, brokerage or agent's
commissions or other like payments in connection with the negotiations leading
to this Agreement or the consummation of the transactions contemplated hereby,
except that Parent has retained Donaldson, Lufkin, Jenrette Securities
Corporation ("DLJ"), whose fees and expenses will be paid by Parent, as its
financial advisor and to render a fairness opinion with respect to the sale of
Parent's common stock pursuant to the Stock Purchase Agreement, which
arrangement has been disclosed in writing
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to Pac Rim prior to the date hereof. Other than the foregoing arrangement,
Parent is not aware of any claim for payment of any finder's fees, brokerage or
agent's commissions or other like payments in connection with the negotiations
leading to this Agreement or the consummation of the transactions contemplated
hereby.
6.7 Fairness Opinion. Parent has a received the opinion of DLJ to
the effect that the financing arrangements described in Section 6.5 hereof are
fair to Parent's stockholders from a financial point of view.
6.8 Surviving Corporation After the Merger. Immediately after the
Effective Time and after giving effect to any change in the Surviving
Corporation's assets and liabilities as a result of the Merger, the Surviving
Corporation will not (i) be insolvent (either because its financial condition
is such that the sum of its debts is greater than the fair value of its assets
or because the fair saleable value of its assets is less than the amount
required to pay its probable liability on existing debts as they become
absolute and mature), (ii) have unreasonably small capital with which to engage
in its business or (iii) have incurred liabilities beyond its ability to pay as
they become due.
6.9 No Ownership of Company Capital Stock. Neither Parent nor Merger
Sub own, directly or indirectly, more that five percent (5%) of Pac Rim Common
Stock.
6.10 Information in Proxy Statement. None of the information
supplied by Parent or Merger Sub for inclusion or incorporation by reference in
Pac Rim's "Proxy Statement" (as herein after defined) for the special meeting
of its stockholders to be called to consider the Merger will, at the date
mailed to stockholders and at the time of the meeting of Pac Rim's stockholders
to be held in connection with the Merger, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading.
ARTICLE 7
COVENANTS
7.1 Acquisition Proposals. Prior to the Effective Time, Pac Rim
agrees (a) that neither Pac Rim nor any of its Subsidiaries nor its or their
officers, directors, employees, agents and representatives (including, without
limitation, any investment banker, attorney or accountant retained by it or any
of its Subsidiaries) shall (except to the extent necessary to comply with
fiduciary duties to stockholders as provided in this Section 7.1) initiate,
solicit or encourage, directly or indirectly, any inquiries or the making or
implementation of any proposal or offer (including, without limitation, any
proposal or offer to its
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stockholders) with respect to a merger, acquisition, consolidation, tender
offer, exchange offer, business combination or similar transaction involving,
or any purchase of more than forty percent (40%) of the assets or any equity
securities of, Pac Rim or any of its Subsidiaries (any such proposal or offer
being hereinafter referred to as an "Acquisition Proposal") or engage in any
negotiations concerning, or provide any confidential information or data to, or
have any discussions with, any person relating to an Acquisition Proposal, or
otherwise facilitate any effort or attempt to make or implement an Acquisition
Proposal; (b) that it will immediately cease and cause to be terminated any
existing activities, discussions or negotiations with any parties conducted
heretofore with respect to any of the foregoing and will inform any individuals
or entities with whom an Acquisition Proposal is currently being discussed or
hereinafter making an Acquisition Proposal of the obligations undertaken in
this Section 7.1; and (c) that it will notify Parent immediately if any such
inquiries or proposals are received by, any such information is requested from,
or any such negotiations or discussions are sought to be initiated or continued
with Pac Rim or its Subsidiaries; provided, however, that nothing contained in
this Section 7.1 shall, prior to approval of the transaction described herein
by the holders of Pac Rim Common Stock, prohibit the Board of Directors of Pac
Rim from (i) furnishing information to or entering into discussions or
negotiations with, any person or entity that makes an unsolicited bona fide
written Acquisition Proposal, if, and only to the extent that, (A) such
Acquisition Proposal is on terms that the Board of Directors of Pac Rim
determines, with the assistance of its financial advisors, represents a
financially superior transaction to the holders of Pac Rim Common Stock
compared with the Merger, (B) such Acquisition Proposal is not conditioned upon
the acquiror obtaining financing, (C) the Board of Directors of Pac Rim
determines in good faith, based as to legal matters on the written opinion of
outside legal counsel, that such action is required for the Board of Directors
to comply with its fiduciary duties to stockholders imposed by law, (D) two (2)
business days prior to furnishing such information to, or entering into
discussions or negotiations with, such person or entity, Pac Rim provides
written notice to Parent to the effect that it is furnishing information to, or
entering into discussions or negotiations with, such person or entity, and
furnishes Parent with the terms of and a copy of such Acquisition Proposal and
(E) thereafter, Pac Rim keeps Parent informed of the status (and the terms) of
any such discussions or negotiations; and (ii) to the extent applicable,
complying with Rule 14e-2(a) promulgated under the Exchange Act with regard to
an Acquisition Proposal. Nothing in this Section 7.1 shall (x) permit any
party to terminate this Agreement (except as specifically provided in Article 9
hereof) or (z) affect any other obligation of any party under this Agreement.
7.2 Conduct of Businesses. From the date hereof to the Effective
Time, except as set forth in the Pac Rim Disclosure Letter or as contemplated
by any other provision of this Agreement, unless
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Parent has consented in writing thereto, Pac Rim and its Subsidiaries:
(a) shall conduct their operations according to their usual,
regular and ordinary course in substantially the same manner as
heretofore conducted;
(b) shall use their best commercial efforts to preserve
intact their business organization and goodwill, keep available the
services of their officers and employees and maintain satisfactory
relationships with those persons having business relationships with
them;
(c) shall confer on a regular basis with one or more
representatives of Parent to report operational matters of materiality
and any proposals to engage in material transactions;
(d) shall not amend their Certificates of Incorporation or
Articles of Incorporation, as the case may be, or Bylaws;
(e) shall promptly notify Parent of (i) any material
emergency or other material change in the condition (financial or
otherwise), of Pac Rim's or any of its Subsidiary's business,
properties, assets, liabilities, prospects or the normal course of its
businesses or in the operation of its properties, (ii) any material
litigation or material governmental complaints, investigations or
hearings, or (iii) the breach in any respect of any representation or
warranty or covenant contained herein;
(f) shall timely file all reports required by applicable
securities laws, rules or regulations to be filed with the SEC and
promptly deliver to Parent true and correct copies of any report,
statement or schedule filed by Pac Rim with the SEC subsequent to the
date of this Agreement;
(g) shall not (i) except pursuant to the exercise of options,
warrants, conversion rights and other contractual rights existing on
the date hereof and disclosed pursuant to this Agreement, issue any
shares of its capital stock, effect any stock split or otherwise
change its capitalization as it exists on the date hereof, (ii) grant,
confer or award any option, warrant, conversion right or other right
not existing on the date hereof to acquire any shares of its capital
stock from Pac Rim, (iii) increase any compensation or enter into or
amend any employment severance, termination or similar agreement with
any of its present or future officers or directors, except for normal
increases in compensation to employees not earning more than $85,000
in annual base compensation consistent with past practice and the
payment of cash bonuses to employees pursuant to and consistent with
existing plans or programs; provided, however, any such increases in
annual base compensation shall not exceed five
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percent (5%) of such employees' current annual base compensation
without the prior consent of Parent, which consent shall not be
unreasonably withheld, or (iv) adopt any new employee benefit plan
(including any stock option, stock benefit or stock purchase plan) or
amend any existing employee benefit plan in any respect, except for
changes which may be required by applicable law;
(h) shall not (i) declare, set aside or pay any dividend or
make any other distribution or payment with respect to any shares of
its capital stock for purposes other than satisfying its obligation to
pay interest when due under the Debenture/Warrant Agreement; provided,
however, on the Closing Date, Pac Rim shall pay all interest accrued
but unpaid as of such date under the Debenture/Warrant Agreement; (ii)
except in connection with the use of shares of capital stock to pay
the exercise price or tax withholding in connection with stock-based
Pac Rim Benefit Plans, directly or indirectly redeem, purchase or
otherwise acquire any shares of its capital stock or capital stock of
any of its Subsidiaries, or make any commitment for any such action or
(iii) split, combine or reclassify any of its capital stock;
(i) shall not acquire, sell, lease or otherwise dispose of
any of its assets (including capital stock of Subsidiaries) which are
material, individually or in the aggregate, except in the ordinary
course of business, consistent with past practice;
(j) shall not (i) incur or assume any long-term or short-term
debt or issue any debt securities except for borrowings under existing
lines of credit in the ordinary course of business; (ii) except for
obligations of wholly-owned Subsidiaries of Pac Rim; assume, guaranty,
endorse or otherwise become liable or responsible (whether directly,
indirectly, contingently or otherwise) for the obligations of any
other person except in the ordinary course of business consistent with
past practices in an amount not material to Pac Rim and its
Subsidiaries, taken as a whole; (iii) other than wholly-owned
Subsidiaries of Pac Rim, make any loans, advances or capital
contributions to or investments in, any other person; (iv) pledge or
otherwise encumber shares of capital stock of Pac Rim or its
Subsidiaries; (v) except for purchase money liens, mortgage or pledge
any of its assets, tangible or intangible, or create or suffer to
create any mortgage, lien, pledge, charge, security interest or
encumbrance of any kind of respect to such asset; or (vi) forgive any
loans to officers, directors, employees or their affiliates and
associates;
(k) Except as provided in Section 7.1 hereof, enter into any
commitment, contract or transaction outside the ordinary course of
business consistent with past practices which would be material to Pac
Rim and its Subsidiaries taken as a whole;
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(l) except as may be required as a result of a change in law
or in generally accepted accounting principles shall not change any of
the accounting principles or practices used by Pac Rim;
(m) shall not (i) acquire (by merger, consolidation or
acquisition of stock or assets) any corporation, partnership or other
business organization or division thereof or any equity interest
therein; (ii) enter into any contract or agreement other than in the
ordinary course of business consistent with past practice which would
be material to Pac Rim and its Subsidiaries taken as a whole; (iii)
without the prior consent of Parent, which consent shall not be
unreasonably withheld, authorize any new capital expenditure or
expenditures which, individually, is in excess of $25,000 or, in the
aggregate, are in excess of $750,000; provided, that none of the
foregoing shall limit any capital expenditure within the aggregate
amount previously authorized by Pac Rim's Board of Directors for
capital expenditures; or (iv) enter into or amend any contract,
agreement, commitment or arrangement providing for the taking of any
action which would be prohibited hereunder;
(n) shall not make any tax election or settle or compromise
any income tax liability material to Pac Rim and its Subsidiaries
taken as a whole;
(o) shall not pay, discharge or satisfy any claims,
liabilities or obligations (absolute, accrued, asserted or unasserted,
contingent or otherwise), other than the payment, discharge or
satisfaction of business of liabilities reflected or reserved against
in, and contemplated by, the consolidated financial statements (or the
notes thereto) of Pac Rim and its Subsidiaries or incurred in the
ordinary course of business consistent with past practice;
(p) shall not settle or compromise any pending or threatened
suit, action or claim relating to the transaction contemplated hereby;
or
(q) shall not take, or agree in writing or otherwise to take,
any of the actions described in Sections 7.2(a) through 7.2(p) or any
action that would make any of the representations and warranties of
Pac Rim contained in this Agreement untrue and incorrect as of the
date when made.
7.3 Meeting of Stockholders. Pac Rim and Parent (to the extent and
if required on the part of Parent) shall each take all action necessary in
accordance with applicable law and their Certificate of Incorporation or
Articles of Incorporation, as the case may be, and Bylaws to convene a meeting
of their stockholders as promptly as practicable to consider and vote upon the
approval, in the case of Pac Rim, of this Agreement and the transactions
contemplated hereby, and, in the case of Parent, the Stock Purchase Agreement
in connection with the transaction contemplated hereby.
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The Boards of Directors of Pac Rim and Parent shall each recommend such
approval and take all lawful action to solicit such approval, including,
without limitation, timely mailing of the Proxy Statements (as defined in
Section 7.7); provided, however, that Pac Rim's Board of Directors'
recommendation or solicitation is subject to any action taken by, or upon
authority of, the Board of Directors of Pac Rim in the exercise of its good
faith judgment as to its fiduciary duties to its stockholders imposed by law
and as permitted in Section 7.1 hereof. In connection with the vote of Pac Rim
Common Stock, holders of the Convertible Debentures shall execute that certain
Voting Agreement as of the date hereof, a copy of which is attached hereto as
Exhibit H (the "Voting Agreement"). Pursuant to the terms thereof, the parties
to the Voting Agreement shall agree to vote in favor of this Agreement and the
Merger at a meeting of Pac Rim's stockholders; provided, however, if Pac Rim's
Board of Directors, in the exercise of its good faith judgment as to its
fiduciary duties to its stockholders imposed by law and in accordance with
Section 7.1 hereof, recommends an Acquisition Proposal, the obligation to vote
in favor of this Agreement and the Merger pursuant to the Voting Agreement
shall terminate.
7.4 Filings; Other Action. Subject to the terms and conditions
herein provided, Pac Rim and Parent shall: (a) promptly make their respective
filings and thereafter make any other required submissions under the HSR Act
with respect to the Merger; (b) use all reasonable efforts to cooperate with
one another in (i) determining which Regulatory Filings are required to be made
prior to the Effective Time with, and which consents, approvals, permits or
authorizations are required to be obtained prior to the Effective Time from,
third parties or governmental or regulatory authorities of the United States,
the several states and foreign jurisdictions in connection with the execution
and delivery of this Agreement and the consummation of the transactions
contemplated hereby and (ii) timely making all such filings and timely seeking
all such consents, approvals, permits or authorizations; and (c) use all
reasonable efforts to take, or cause to be taken, all other action and do, or
cause to be done, all other things necessary, proper or appropriate to
consummate and make effective the transactions contemplated by this Agreement.
Each of Parent and Pac Rim will use its best efforts to resolve such
objections, if any, as may be asserted with respect to the Merger under the HSR
Act or other antitrust laws. In the event a suit is instituted challenging the
Merger as violative of the HSR Act or other antitrust laws, each of Parent and
Pac Rim will use its best efforts to resist or resolve such suit. Each of
Parent and Pac Rim and will use its best efforts to take such action as may be
required (a) by the Antitrust Division of the Department of Justice or the
Federal Trade Commission in order to resolve such objections as either of them
may have to the Merger under the HSR Act or other antitrust Laws or (b) by any
federal or state court of the United States, in any suit challenging the Merger
as violative of the HSR Act or other antitrust laws, in order to avoid the
entry of, or to effect the dissolution of, any injunction, temporary
restraining order or other order which has the effect of preventing the
consummation of the Merger. In complying with the foregoing,
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each of Parent and Pac Rim shall use all reasonable and appropriate measures
available to them, including, if appropriate, "hold-separate" agreements or
divestitures of Subsidiaries, assets or operations if necessary to consummate
the transactions contemplated hereby, so long as such actions do not, in the
aggregate, have a Pac Rim Material Adverse Effect (after giving effect to the
Merger). If, at any time after the Effective Time, any further action is
necessary or desirable to carry out the purpose of this Agreement, the proper
officers and directors of Parent and Pac Rim shall take all such necessary
action. Within twenty (20) days following the date of this Agreement, Parent
and Merger Sub shall make all necessary filings with state insurance regulatory
authorities, including the filing with the California Department of a Form A
Information Statement pursuant to California Insurance Code Section 1215 et
seq. Parent and Merger Sub shall use their respective best efforts to promptly
resolve any objections and respond to any inquiries that may arise in
connection with any such filings. Pac Rim shall cooperate with Parent in
connection with the preparation and filing of the Form A.
7.5 Inspection of Records; Access. From the date hereof to the
Effective Time, Pac Rim shall allow all designated officers, attorneys,
accountants and other representatives of Parent ("Parent's Representatives")
access, during normal business hours during the period prior to the Effective
Time, to all employees, offices and other facilities and to the records and
files, including claim files and litigation files, correspondence, audits and
properties, to the accountants and auditors of Pac Rim and their work-papers,
and to all information relating to commitments, contracts, titles and financial
position, or otherwise pertaining to the business and affairs, of Pac Rim and
its Subsidiaries; provided, however, Parent's Representatives shall use their
reasonable best efforts to avoid interfering with, hindering or otherwise
disrupting the employees of Pac Rim in the execution of their employment duties
during any visit to, or inspection of, Pac Rim's facilities or offices;
provided, further, that with respect to the work-papers of Pac Rim's
accountants and auditors, Parent's Representatives shall execute all necessary
documents reasonably required and satisfy all conditions reasonably imposed by
such accountants and auditors in order to obtain such documentation.
7.6 Publicity. Pac Rim and Parent shall, subject to their respective
legal obligations (including requirements of stock exchanges and other similar
regulatory bodies), consult with each other, and use reasonable efforts to
agree upon the text of any press release, before issuing any such press release
or otherwise making public statements with respect to the transactions
contemplated hereby and in making any filings with any federal or state
governmental or regulatory agency or with any national securities exchange with
respect thereto.
7.7 Proxy Statement. Pac Rim and Parent (to the extent and if
required on the part of Parent) shall each promptly prepare and then file with
the SEC their respective proxy statements with respect to
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the meetings of their respective stockholders as provided in Section 7.3 hereof
(collectively, the "Proxy Statements"). Pac Rim and Parent shall each cause
their respective Proxy Statements to comply as to form in all material respects
with the applicable provisions of the Exchange Act and the rules and regulations
thereunder. Pac Rim and Parent each agree that their respective Proxy
Statements and each amendment or supplement thereto at the time of mailing
thereof and at the time of the meeting of the stockholders of Pac Rim or
Parent, as the case may be, will not include an untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
7.8 Further Action. Each party hereto shall, subject to the
fulfillment at or before the Effective Time of each of the conditions of
performance set forth herein or the waiver thereof, perform such further acts
and execute such documents as may be reasonably required to effect the Merger.
7.9 Expenses. Whether or not the Merger is consummated, except as
provided in Article 10 hereof, all costs and expenses incurred in connection
with this Agreement and the transactions contemplated hereby shall be paid by
the party incurring such costs and expenses.
7.10 Indemnification and Insurance.
(a) For a period of three (3) years from and after the Effective
Time, Parent and the Surviving Corporation shall indemnify, defend and hold
harmless to the fullest extent permitted under the Certificate of Incorporation
or Bylaws (as amended or restated, as the case may be) of Pac Rim and any
indemnification agreement among Pac Rim, its Subsidiaries and their respective
officers and directors (whether current or former) (collectively, the
"Indemnification Documents") each person who is now, or has been at any time
prior to the date hereof, an officer or director of Pac Rim (or any Subsidiary
or division thereof), including, without limitation, each person controlling
any of the foregoing persons (individually, an "Indemnified Party" and
collectively, the "Indemnified Parties"), against all losses to which they are
indemnified under the Indemnification Documents, whether commenced, asserted or
claimed before or after the Effective Time and including, without limitation,
liabilities arising under the Securities Act of 1933, the Exchange Act and
state corporation laws in connection with the Merger. In the event of any
indemnifiable claim, action, suit, proceeding or investigation, the Indemnified
Party shall promptly notify the Surviving Corporation thereof (the failure to
give notice, however, shall not relieve the Surviving Corporation of its duty
to indemnify the Indemnified Party unless the failure to give notice causes the
Surviving Corporation to be unable to assume the defense of such claim, action,
suit, proceeding or investigation reasonably promptly or otherwise prejudices
the Surviving Corporation). Upon receipt of notice (i) the Surviving
Corporation shall have the right to assume the defense thereof and
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shall not be liable to such Indemnified Party for any legal expenses of other
counsel or any other expenses subsequently incurred by the Indemnified Party in
connection with the defense thereof, except that if the Surviving Corporation
elects not to assume the defense thereof or counsel for the Indemnified Party
advises in writing that there are issues which raise conflicts of interest
between Parent or Surviving Corporation and the Indemnified Party, the
Indemnified Party may retain counsel satisfactory to it, and the Surviving
Corporation shall pay all reasonable fees and expenses of such counsel for the
Indemnified Party; provided, however, that in no event shall the Surviving
Corporation be required to pay fees and expenses, including disbursements or
other charges, for more than one firm of attorneys in any one legal action or
group of related legal actions unless (A) counsel for the Indemnified Party
advises that there is a conflict of interest that requires more than one firm
of attorneys, or (B) local counsel of record is needed in any jurisdiction in
which any such action is pending, (ii) the Surviving Corporation and the
Indemnified Party shall cooperate in the defense of any matter, and (iii) the
Surviving Corporation shall not be liable for any settlement effected without
its prior written consent (which consent shall not be unreasonably withheld);
and provided, further, that the Surviving Corporation shall not have any
obligation hereunder to any Indemnified Party if and to the extent a court of
competent jurisdiction ultimately determines, and such determination shall have
become final, that the indemnification of such Indemnified Party in the manner
contemplated hereby is prohibited by applicable law or beyond the scope of this
Agreement.
(b) For a period of three (3) years from and after the Effective
Time, Parent shall cause the Surviving Corporation to keep in effect provisions
in its Certificate of Incorporation and Bylaws providing for exculpation of
director and officer liability and indemnification of the Indemnified Parties
to the fullest extent permitted under the DGCL, which provisions shall not be
amended except as required by applicable law or except to make changes
permitted by law that would enlarge the Indemnified Parties' right of
indemnification.
(c) For a period of three (3) years after the Effective Time, Parent
shall cause to be maintained officers' and directors' liability insurance
covering the Indemnified Parties who are currently covered, in their capacities
as officers and directors, by Pac Rim and its Subsidiaries' existing officers'
and directors' liability insurance policies on terms substantially no less
advantageous to the Indemnified Parties than such existing insurance; provided,
however, through February 16, 1997, the policy limits of such coverage shall
not be less than $20 million and from February 17, 1997 until three (3) years
after the Effective Time, the policy limits of such coverage shall not be less
than the higher of $15 million or such policy limits then provided by Parent
for its officers and directors.
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(d) Parent shall pay all expenses, including attorneys' fees, that
may be incurred by any Indemnified Parties in enforcing the indemnity and other
obligations provided for in this Section 7.10.
(e) The provisions of this Section shall survive the consummation of
the Merger and expressly are intended to benefit each of the Indemnified
Parties.
7.11 Certain Benefits.
(a) From and after the Effective Time, subject to applicable law, and
except as contemplated hereby with respect to the Pac Rim Stock Option Plans,
Parent and its Subsidiaries will honor in accordance with their terms, all Pac
Rim Benefit Plans; provided, however, that nothing herein shall preclude any
change effected on a prospective basis following the Effective Time in any Pac
Rim Benefit Plan in accordance with applicable law. With respect to the
employee benefit or compensation plan or arrangement, including each "employee
benefit plan" as defined in Section 3(3) of ERISA maintained by Parent or any
of its Subsidiaries (the "Parent Benefit Plans"), Parent and the Surviving
Corporation shall grant all Pac Rim employees from and after the Effective Time
credit for all service with Pac Rim and its affiliates and predecessors prior
to the Effective Time for all purposes for which such service was recognized by
Pac Rim. To the extent Parent Benefit Plans provide medical or dental welfare
benefits after the Effective Time to Pac Rim and its Subsidiaries' employees,
Parent or the Surviving Corporation, as the case may be, shall use reasonable
and best efforts to ensure that such plan shall waive any pre-existing
conditions and actively-at-work exclusions and shall provide that any expenses
incurred on or before the Effective Time shall be taken into account under
Parent Benefit Plans for purposes of satisfying applicable deductible,
coinsurance and maximum out-of-pocket provisions.
(b) Parent agrees to employ at the Effective Time all employees of
Pac Rim and its Subsidiaries who are employed on the ClosingDate at- will,
with all material terms of their employment at Pac Rim, under Parent's
then-current employment practices and policies. Such employment
shall be at-will and Parent shall be under no obligation to continue to employ
any such individuals.
(c) For purposes of this Section 7.11, the term "employees" shall
mean all current employees of Pac Rim and its Subsidiaries (including those on
lay-off, disability or leave of absence, paid or unpaid).
(d) Notwithstanding the provisions of Section 7.11(a), at the
Effective Time, Surviving Corporation shall perform its obligations as the
surviving corporation of the Merger under:
(i) the "Pac Rim Holding Corporation and The Pacific Rim
Assurance Company Compensation Plan For Senior Management" (the "SMT
Plan") (a copy of which is attached hereto as Exhibit I);
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(ii) "The Pacific Rim Assurance Company 1996 Annual Incentive
Plan" (a copy of which is attached hereto as Exhibit J) (the "1996
Incentive Plan"); provided, however, purchase accounting related
adjustments made by the Surviving Corporation following the Effective
Time and any adjustments in the Assurance Company's reserves, to the
extent that such adjustment shall not result in a Pac Rim Material
Adverse Effect, shall not be included in incurred losses of the
Assurance Company in calculating the combined ratio exhibit of the
matrix ("Matrix") referred to in the 1996 Incentive Plan; provided,
further, such reserve adjustment shall be taken into consideration in
calculating the combined ratio exhibit of the Matrix if, upon year-end
review, it is determined that such adjustment was required under
generally accepted accounting principles; and
(iii) that certain Employment Agreement dated as of April 15,
1994 (the "Employment Agreement") by and among Pac Rim, Assurance
Company and Stanley Braun ("Braun"), the Amendment to Employment
Agreement dated as of March 27, 1995 (the "First Amendment") and the
Second Amendment to Employment Agreement dated as of March 30, 1996
(the "Second Amendment") with respect thereto (copies of which are
attached hereto as Exhibit K). The Employment Agreement, the First
Amendment and the Second Amendment shall hereinafter be referred to,
collectively, as the "Employment Documents." Parent and its
Subsidiaries unconditionally guaranty the obligations of Pac Rim,
Assurance Company, Surviving Corporation and any successors to any of
them (each, an "Employer") under the Employment Documents. If any
Employer breaches any of its obligations or otherwise fails to perform
under the Employment Documents, Parent and its Subsidiaries
unconditionally promises to perform such obligations.
On and following the Closing Date and for a period of one (1) year
thereafter, neither Parent nor the Surviving Corporation shall, without the
prior written consent of each of the respective parties or participants
thereto, amend or modify the terms of the SMT Plan, 1996 Annual Incentive Plan,
or Severance Program (as defined in Section 7.11(e) hereof).
(e) At the Closing, Pac Rim shall provide Parent with a list of all
persons employed by Pac Rim and its Subsidiaries on the Closing Date (each, a
"Pac Rim Employee" and, collectively, the "Pac Rim Employees"). In accordance
with Pac Rim and its Subsidiaries' Severance Program, a copy of which is
attached hereto as Schedule 7.11(e) (the "Severance Program"), Parent or
Surviving Corporation, as appropriate, shall pay funds due thereunder in order
to satisfy the severance obligations with respect to any Pac Rim Employees that
are terminated within nine (9) months following the Closing Date.
7.12 Restructuring of Merger. Upon the mutual agreement of Parent
and Pac Rim, the Merger shall be restructured in the form of a forward
triangular merger of Pac Rim into Merger Sub, with Merger
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Sub being the surviving corporation, or as a merger of Pac Rim into Parent,
with Parent being the surviving corporation. In such event, this Agreement
shall be deemed appropriately modified to reflect such form of merger.
7.13 Additional Agreements; Best Efforts. Subject to the terms and
conditions of this Agreement, each of the parties hereto agrees to use best
efforts to take, or cause to be taken, all action and to do, or cause to be
done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated by
this Agreement, including cooperating fully with the other party, including by
provision of information and making of all necessary filings under the HSR Act
and state insurance laws. In case at any time after the Effective Time any
further action is necessary or desirable to carry out the purposes of this
Agreement or to vest the Surviving Corporation with full title to all
properties, assets, rights, approvals, immunities and franchises of either Pac
Rim or Merger Sub, the proper officers and directors of each party to this
Agreement shall take all such necessary action.
ARTICLE 8
CONDITIONS
8.1 Conditions of Each Party's Obligation to Effect the Merger. The
respective obligation of each party to effect the Merger shall be subject to
the fulfillment at or prior to the Closing Date of the following conditions:
(a) This Agreement and the transactions contemplated hereby
shall have been approved in the manner required by applicable law or
by applicable regulations of any stock exchange or other regulatory
body by the holders of the issued and outstanding shares of capital
stock of Pac Rim entitled to vote thereon and the issuance of Parent's
common stock under the Stock Purchase Agreement shall have been
approved in the manner required by applicable law or by applicable
regulations of any stock exchange or other regulatory body by the
holders of the issued and outstanding shares of capital stock of
Parent entitled to vote thereon.
(b) The waiting period applicable to the consummation of the
Merger under the HSR Act shall have expired or been terminated.
(c) The required state insurance regulatory approvals,
including the California Department's approval of the consummation of
the transaction contemplated hereunder pursuant to California
Insurance Code Section 1215 et seq., shall have been obtained.
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(d) Neither of the parties hereto shall be subject to any
order or injunction of a court of competent jurisdiction which
prohibits the consummation of the transactions contemplated by this
Agreement. In the event any such order or injunction shall have been
issued, each party agrees to use its reasonable efforts to have any
such injunction lifted.
(e) All consents, authorizations, orders and approvals of (or
filings or registrations with) any governmental commission, board or
other regulatory body required in connection with the execution,
delivery and performance of this Agreement shall have been obtained or
made, except for filings in connection with the Merger and any other
documents required to be filed after the Effective Time and except
where the failure to have obtained or made any such consent,
authorization, order, approval, filing or registration would not have
a Pac Rim Material Adverse Effect following the Effective Time.
8.2 Conditions to Obligations of Pac Rim to Effect the Merger. The
obligation of Pac Rim to effect the Merger shall be subject to the fulfillment
at or prior to the Closing Date of the following condition:
(a) Parent shall have performed its agreements contained in
this Agreements required to be performed on or prior to the Closing
Date and the representations and warranties of Parent and Merger Sub
contained in this Agreement and in any document delivered in
connection herewith shall be true and correct as of the Closing Date,
and Pac Rim shall have received a certificate of the President or a
Vice President of Parent, dated the Closing Date, certifying to such
effect; provided, however, that notwithstanding anything herein to the
contrary, this Section 8.2(a) shall be deemed to have been satisfied
even if such representations or warranties are not true and correct,
unless the failure of the representations or warranties to be so true
and correct, individually or in the aggregate, would have or would be
reasonably likely to have a Parent Material Adverse Effect.
(b) Pac Rim shall have received the opinion of Salomon, dated
as of the date of delivery of Pac Rim's Proxy Statement, to the effect
that, as of such date, the consideration to be received in the Merger
by the stockholders of Pac Rim is fair to such stockholders from a
financial point of view.
(c) Pac Rim shall have received, on and as of the Closing
Date, an opinion of Riordan & McKinzie, counsel to Parent and Merger
Sub, in usual and customary form reasonably acceptable to Pac Rim.
8.3 Conditions to Obligation of Parent and Merger Sub to Effect the
Merger. The obligations of Parent and Merger Sub to effect the Merger shall be
subject to the fulfillment at or prior to the Closing Date of the following
conditions:
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(a) Pac Rim shall have performed its agreements contained in
this Agreement required to be performed on or prior to the Closing
Date and the representations and warranties of Pac Rim contained in
this Agreement and in any document delivered in connection herewith
shall be true and correct as of the Closing Date and Parent shall have
received a certificate of the President or a Vice President of Pac
Rim, dated the Closing Date, certifying to such effect; provided,
however, that notwithstanding anything herein to the contrary, this
Section 8.3(a) shall be deemed to have been satisfied even if such
representations or warranties are not true and correct, unless the
failure of the representations or warranties to be so true and
correct, individually or in the aggregate, would have or would be
reasonably likely to have a Pac Rim Material Adverse Effect.
(b) From the date of this Agreement through the Effective
Time, there shall not have occurred any changes in the financial
condition, business, operations or prospects of Pac Rim and its
Subsidiaries, taken as a whole, which changes taken together, would
have or would be reasonably likely to have a Pac Rim Material Adverse
Effect.
(c) The parties to that certain Series A Convertible
Debentures and Series 1, 2 and 3 Detachable Warrants Purchase
Agreement shall have sold and transferred to Parent all of such
parties' right, title and interest in and to the Convertible
Debentures and Warrants and the parties to that certain Series 3
Detachable Warrants Surrender Agreement shall have surrendered and
transferred to Pac Rim all of their right, title and interest in and
to the Series 3 Warrants, and Parent, thereby, upon the Effective
Time, will own or control all of the Convertible Debentures and
Warrants.
(d) Parent and Merger Sub shall have received, on and as of
the Closing Date, an opinion of Barger & Wolen, counsel to Pac Rim, in
usual and customary form reasonably acceptable to Parent and Merger
Sub.
ARTICLE 9
TERMINATION
9.1 Termination by Mutual Consent. This Agreement may be terminated
and the Merger may be abandoned at any time prior to the Effective Time, before
or after the approval of this Agreement by the stockholders of Pac Rim, by the
mutual consent of Parent and Pac Rim.
9.2 Termination by Either Parent or Pac Rim. This Agreement may be
terminated and the Merger may be abandoned by action of the Board of Directors
of either Parent or Pac Rim if (a) the Merger shall not have been consummated
by March 1, 1997 (the "Termination
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Date") or (b) the required approval of Pac Rim and Parent's respective
stockholders required by Section 7.3 shall not have been obtained at meetings
duly convened therefor or at any adjournments thereof, or (c) a United States
or state court of competent jurisdiction or United States federal or state
governmental, regulatory or administrative agency or commission shall have
issued an order, decree or ruling or taken any other action permanently
restraining, enjoining or otherwise prohibiting the transactions contemplated
by this Agreement and such order, decree, ruling or other action shall have
become final and nonappealable; provided, that the party seeking to terminate
this Agreement pursuant to this clause (c) shall have used all reasonable
efforts to remove such injunction, order or decree; and provided, in the case
of a termination pursuant to clause (a) above, that the terminating party shall
not have breached in any material respect its representations or obligations
under this Agreement in any manner that shall have proximately contributed to
the occurrence of the failure referred to in said clause. If the Merger shall
not have been consummated on or before February 1, 1997 and as of such date Pac
Rim has satisfied its conditions to effect the Merger set forth in Article 8
hereof and is prepared to consummate the Merger, Parent shall pay interest of
$5,000.00 per day, without offset or deduction for amounts Parent claims owed
to it by Pac Rim or any of its Subsidiaries, for the benefit of the holders of
shares of Pac Rim Common Stock (the "Extension Consideration") for each day
commencing on February 2, 1997 and ending with the earlier to occur of the
Closing Date or the termination of this Agreement. Parent shall pay the
Extension Consideration to the Exchange Agent on the Closing Date in order to
effect pro rata distribution of such amount to the holders of shares of Pac Rim
Common Stock, or if the Closing does not occur and this Agreement is
terminated, Parent shall promptly, but in no event later than two (2) days
after such termination, pay the same by wire transfer to Pac Rim of same day
funds.
9.3 Termination by Pac Rim. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, before the
adoption and approval by the stockholders of Pac Rim referred to in Section
7.3, by action of the Board of Directors of Pac Rim, if (i) in the exercise of
its good faith judgment as to its fiduciary duties to its stockholders imposed
by law the Board of Directors of Pac Rim determines that such termination is
required by reason of an Acquisition Proposal complying with Section 7.1 hereof
being made, or (ii) there have been breaches by Parent or Merger Sub of
representations or warranties contained in this Agreement which, in the
aggregate, would have or would be reasonably likely to have a Parent Material
Adverse Effect, or (iii) there has been a material breach of any of the
covenants or agreements set forth in this Agreement on the part of Parent,
which breach is not curable or, if curable, is not cured within thirty (30)
days after written notice of such breach is given by Pac Rim to Parent.
9.4 Termination by Parent. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time by action of
the Board of Directors of Parent, if (a) there
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have been breaches by Pac Rim of representations or warranties contained in
this Agreement which, in the aggregate, would have or would be reasonably
likely to have a Pac Rim Material Adverse Effect, (b) there has been a material
breach of any of the covenants or agreements set forth in this Agreement on the
part of Pac Rim, which breach is not curable or, if curable, is not cured
within thirty (30) days after written notice of such breach is given by Parent
to Pac Rim or (c) the holders of more than 1,000,000 shares of Pac Rim Common
Stock have demanded appraisal rights in accordance with Section 4.7 hereof.
9.5 Effect of Termination and Abandonment. In the event of
termination of this Agreement and the abandonment of the Merger pursuant to
this Article 9, all obligations of the parties hereto shall terminate, except
the obligations of the parties pursuant to this Section 9.5 and Sections 7.9,
Article 10 and Sections 11.3, 11.4, 11.6, 11.10, 11.13 and 11.17 and the
Confidentiality Agreement referred to in Section 11.4.
9.6 Extension; Waiver. At any time prior to the Effective Time, the
parties hereto, by action taken or authorized by their respective Board of
Directors, may, to the extent legally allowed, (a) extend the time for the
performance of any of the obligations or other acts of the other parties
hereto, (b) waive any inaccuracies in the representations and warranties made
to such party contained herein or in any document delivered pursuant hereto and
(c) waive compliance with any of the agreements or conditions for the benefit
of such party contained herein. Any agreement on the part of a party hereto to
any such extension or waiver shall be valid only if set forth in an instrument
in writing signed by or on behalf of the party granting such extension or
waiver.
ARTICLE 10
LIQUIDATED DAMAGES AND BREAKUP FEE
10.1 Payment of Liquidated Damages by Parent. The parties hereto
agree that if this Agreement shall not be consummated in accordance with its
terms and conditions as a result of: (a) the occurrence of the events described
in Section 9.3(ii) and (iii); (b) Parent or Merger Sub's failure to comply with
the covenants described in Sections 7.3, 7.4, 7.7, 7.8 or 7.13 or the
conditions described in Section 8.2(a) or (c); or (c) Parent refusing to
consummate the transaction contemplated hereunder after satisfying each of the
covenants, conditions and events referred to in subsections (a) and (b) of this
Section 10.1, then the resulting damages would be impracticable or extremely
difficult to determine. Because of the difficulty in determining the damages
resulting from the acts described in subsections (a), (b) and (c) of this
Section 10.1, the parties hereto agree that in such event, Parent must pay the
sum of $5,000,000.00 to Pac Rim immediately upon demand therefor as liquidated
damages.
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10.2 Payment of Liquidated Damages by Pac Rim. The parties hereto
agree that if this Agreement shall not be consummated in accordance with its
terms and conditions as a result of: (a) the occurrence of the events described
in Section 9.4(a) or (b); (b) Pac Rim's failure to comply with the covenants
described in Sections 7.2, 7.3, 7.4, 7.5, 7.7, 7.8 or 7.13, or the conditions
described in Section 8.3(a) or (d); or (c) Pac Rim refusing to consummate the
transaction contemplated hereunder after satisfying each of the covenants,
conditions or events referred to in subsections (a) and (b) of this Section
10.2, then the resulting damages would be impracticable or extremely difficult
to determine. Because of the difficulty in determining the damages resulting
from the acts described in subsections (a), (b) and (c) of this Section 10.2,
the parties hereto agree that in the event of such breach, Pac Rim must pay the
sum of $2,500,000.00 to Parent immediately upon demand therefor as liquidated
damages.
10.3 Payment of Breakup Fee By Pac Rim. In the event that (a) Pac
Rim's Board of Directors terminates this Agreement pursuant to Section 9.3(i)
hereof by reason of an Acquisition Proposal or (b) following public
announcement of an Acquisition Proposal, Pac Rim's Board of Directors
terminates this Agreement pursuant to Section 9.2(b) due to the failure to
obtain the required vote in favor of this Agreement from the holders of Pac Rim
Common Stock and Convertible Debentures at a meeting duly called therefor, and,
in either event, the definitive transaction document with respect to such
Acquisition Proposal is executed by Pac Rim within six (6) months following any
such termination, Pac Rim shall pay Parent a breakup fee of $5 million (the
"Breakup Fee"). The Breakup Fee is not separately payable in the event that
liquidated damages are due and paid under Section 10.2 hereof.
ARTICLE 11
GENERAL PROVISIONS
11.1 Nonsurvival of Representations, Warranties and Agreements. All
representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall be deemed to the extent
expressly provided herein to be conditions to the Merger and shall not survive
the Merger, provided, however, that the agreements contained in Article 4 and
in Sections 7.10, 7.11 and 7.13 and this Article 11 and the agreements
delivered pursuant to this Agreement shall survive the Merger.
11.2 Notices. Any notice required to be given hereunder shall be
sufficient if in writing, and sent by facsimile transmission and by courier
service (with proof of service), hand delivery or certified or registered mail
(return receipt requested and first-class postage prepaid), addressed as
follows:
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(a) if to Parent or Merger Sub, to
Superior National Insurance
Group, Inc.
26601 Agoura Road
Calabasas, California 91302
Attention: William L. Gentz
Telecopy No.: 818-880-8615
with a copy to
Dana M. Warren, Esq.
Riordan & McKinzie
5743 Corsa Avenue
Suite 116
Westlake Village, California 91362
Telecopy No.: 818-706-2956
(b) if to Pac Rim, to
Pac Rim Holding Corporation
6200 Canoga Avenue
Woodland Hills, California 91367
Attention: Stanley Braun
Telecopy No.: 818-595-0099
with a copy to
Dennis W. Harwood, Esq.
Barger & Wolen LLP
19800 MacArthur Boulevard
8th Floor
Irvine, California 92612
Telecopy No. 714-752-6313
or to such other address as any party shall specify by written notice so given,
and such notice shall be deemed to have been delivered as of the date so
telecommunicated, personally delivered or mailed.
11.3 Assignment; Binding Effect; Benefit. Neither this Agreement nor
any of the rights, interests or obligations hereunder shall be assigned by any
of the parties hereto (whether by operation of law or otherwise) without the
prior written consent of the other parties. Subject to the preceding sentence,
this Agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors and assigns. Notwithstanding
anything contained in this Agreement to the contrary, except for the provisions
in Article 4 and Sections 7.10, 7.11, and 7.13 (collectively, the "Third Party
Provisions"), nothing in this Agreement, expressed or implied, is intended to
confer on any person other than the parties hereto or their respective heirs,
successors, executors, administrators and assigns any rights, remedies,
obligations or liabilities under or by reason of this Agreement, and
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no Third Party Provision shall be enforceable until after the Effective Time.
11.4 Entire Agreement. This Agreement, the Exhibits, the Pac Rim
Disclosure Letter, the Parent Disclosure Letter, the Confidentiality Agreement
between Pac Rim and Parent and any documents delivered by the parties in
connection herewith constitute the entire agreement among the parties with
respect to the subject matter hereof and supersede all prior agreements and
understandings (oral and written) among the parties with respect thereto. No
addition to or modification of any provision of this Agreements shall be
binding upon any party hereto unless made in writing and signed by all parties
hereto. During the term of this Agreement, neither party hereto shall
terminate the foregoing Confidentiality Agreement.
11.5 Amendment. This Agreement may be amended by the parties hereto,
by action taken by their respective Board of Directors, at any time before or
after approval of matters presented in connection with the Merger by the
stockholders of Pac Rim, but after any such stockholder approval, no amendment
shall be made which by law requires the further approval of stockholders
without obtaining such further approval. This Agreement may not be amended
except by an instrument in writing signed by or on behalf of each of the
parties hereto.
11.6 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware without regard
to its rules of conflict of laws.
11.7 Venue. Any action concerning or dispute arising out of or
concerning this Agreement, regarding the interpretation of this Agreement, or
regarding the relationships among the parties created pursuant to this
Agreement shall be filed only in the United States District Court for the
Central District of California or in the Superior Court of the State of
California for the County of Los Angeles.
11.8 Counterparts. This Agreements may be executed by the parties
hereto in separate counterparts, each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute one
and the same instrument. Each counterpart may consist of a number of copies of
this Agreement, each of which may be signed by less than all of the parties
hereto, but together all such copies are signed by all of the parties hereto.
11.9 Headings. Headings of the Articles and Sections of this
Agreement are for the convenience of the parties only, and shall be given no
substantive or interpretive effect whatsoever.
11.10 Interpretation. In this Agreement, unless the context
otherwise requires, words describing the singular number shall include the
plural and vice versa, and words denoting any gender
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shall include all genders and words denoting natural persons shall include
corporations and partnerships and vice versa.
11.11 Waivers. Except as provided in this Agreement, no action taken
pursuant to this Agreement, including, without limitations, any investigation
by or on behalf of any party, shall be deemed to constitute a waiver by the
party taking such action of compliance with any representations, warranties,
covenants or agreements contained in this Agreement. The waiver by any party
hereto of a breach of any provision hereunder shall not operate or be construed
as a waiver of any prior or subsequent breach of the same or any other
provision hereunder.
11.12 Incorporation of Exhibits. The Pac Rim Disclosure Letter, the
Parent Disclosure Letter and all Exhibits and Schedules attached hereto and
referred to herein are hereby incorporated herein and made a part hereof for
all purposes as if fully set forth herein.
11.13 Severability. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or otherwise affecting the validity or enforceability of any of the
terms or provisions of this Agreement in any other jurisdiction. If any
provision of this Agreement is so broad as to be unenforceable, the provision
shall be interpreted to be only so broad as is enforceable.
11.14 Enforcement of Agreement. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with its specific terms or was
otherwise breached. It is accordingly agreed that the parties shall be
entitled to an injunction or injunctions to prevent breaches of this Agreement
and to enforce specifically the terms and provisions hereof in any California
Court, this being in addition to any other remedy to which they may be entitled
at law or in equity.
11.15 Subsidiaries. As used in this Agreement, the word "Subsidiary"
when used with respect to any party means any corporation or other
organization, whether incorporated or unincorporated, of which such party
directly or indirectly owns or controls at least a majority of the securities
or other interests having by their terms ordinary voting power to elect a
majority of the board of directors or others performing similar functions with
respect to such corporation or other organization, or any organization of which
such party is a general partner. When a reference is made in this Agreement to
Significant Subsidiaries, the words "Significant Subsidiaries" shall refer to
Subsidiaries (as defined above) which constitute "significant subsidiaries"
under Rule 405 promulgated by the SEC under the Securities Act.
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11.16 Material Adverse Effect. (a) As used in this Agreement, the
term "Pac Rim Material Adverse Effect" means an adverse effect on the business,
results of operations, prospects or financial condition of Pac Rim and its
Subsidiaries, taken as a whole, having an economic value of $1,000,000 or more;
provided, however, based upon the reserves booked by the Assurance Company, no
adverse development in Assurance Company's reserves, to the extent that such
adverse development does not exceed the sum of (i) the $4,500,000 and (ii)
$1,000,000, shall be included in determining whether a Pac Rim Material Adverse
Effect exists; provided, further, any change in the book value of Pac Rim or
any of its Subsidiaries based on an adjustment of the market value of
securities valued at book value on such companies' books and records shall not
be included in determining if a Pac Rim Material Adverse Effect exists;
provided, further, any amounts that may be payable under the SMT Plan, the 1996
Incentive Plan, the Employment Documents or the Severance Program that are not
reflected in Pac Rim's financial statements shall not be included in
determining if a Pac Rim Material Adverse Effect exists. As used in this
Agreement, the term "Parent Material Adverse Effect" means an adverse effect on
the business, results of operations, prospects or financial condition of Parent
and its Subsidiaries, taken as a whole, having an economic value of $1,000,000
or more; provided, however, any change in the book value of Parent or any of
its Subsidiaries based on an adjustment of the market value of securities
valued at book value on such companies' books and records shall not be included
in determining if a Parent Material Adverse Effect exists.
(b) The existence of facts or circumstances which constitute a breach
of the representations and warranties set forth in Article 5 hereof shall not
be considered to be a breach of any representation and warranty if all such
facts and circumstances do not have, individually or in the aggregate, a Pac
Rim Material Adverse Effect. The existence of facts or circumstances which
constitute a breach of the representations and warranties set forth in Article
6 hereof shall not be considered to be a breach of any representation and
warranty if all such facts and circumstances do not have, individually or in
the aggregate, a Parent Material Adverse Effect.
11.17 Attorney's Fees. In any legal action to enforce this Agreement
or any provision hereof, the prevailing party in such action shall, in addition
to any other remedy to which it may be entitled hereunder, receive from the
party from which enforcement was sought reasonable attorney's fees and its
court costs in connection with such action.
11.18 Performance by Merger Sub. Parent hereby agrees to cause
Merger Sub to comply with its obligations hereunder and to cause Merger Sub to
consummate the Merger as contemplated herein.
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IT WITNESS WHEREOF, the parties have caused this Agreement and caused
the same to be duly delivered on their behalf as of the day and year first
written above.
PARENT: SUPERIOR NATIONAL INSURANCE GROUP, INC.
By: /s/ J. CHRIS SEAMAN
--------------------------------
Name: J. CHRIS SEAMAN
Title: Executive Vice President
MERGER SUB: SNTL ACQUISITION CORP.
By: /s/ J. CHRIS SEAMAN
--------------------------------
Name: J. CHRIS SEAMAN
Title: Executive Vice President
PAC RIM: PAC RIM HOLDING CORPORATION
By: /s/ TIMOTHY R. BUSCH
--------------------------------
Name: TIMOTHY R. BUSCH
Title:
By: /s/ STANLEY BRAUN
--------------------------------
Name: STANLEY BRAUN
Title:
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EXHIBIT C TO ANNEX C
SERIES A CONVERTIBLE DEBENTURES AND
SERIES 1, 2 AND 3 DETACHABLE WARRANT PURCHASE AGREEMENT
This SERIES A CONVERTIBLE DEBENTURES AND SERIES 1, 2 AND 3 DETACHABLE
WARRANT PURCHASE AGREEMENT (this "Agreement") is entered into as of September
17, 1996 (the "Effective Date") by and among SUPERIOR NATIONAL INSURANCE GROUP,
INC., a California corporation ("Superior"), PRAC LIMITED PARTNERSHIP, a Nevada
limited partnership ("Prac") and ALLSTATE INSURANCE COMPANY, a Illinois
insurance company ("Allstate") (Prac and Allstate, each, a "Security Holder"
and, collectively, the "Security Holders"), with reference to the following
recitals:
R E C I T A L S
A. The Security Holders own Series 1, 2 and 3 Detachable Warrants
(the "Warrants) and own, collectively, all of the Series A Convertible
Debentures (the "Debentures") (the Debentures and Warrants, collectively, the
"Securities") issued by Pac Rim Holding Corporation, a Delaware corporation
("Pac Rim"), pursuant to that certain Agreement to Purchase Series A
Convertible Debentures and Series 1, 2 and 3 Detachable Warrants dated as of
April 15, 1994, as amended (the "Debenture/Warrant Agreement").
B. Copies of the certificates representing each Security Holder's
Securities that are subject to this Agreement are attached hereto as Exhibits
A-1 and A-2.
C. Superior and Pac Rim have entered into an Agreement and Plan of
Merger (the "Merger Agreement") dated as of the Effective Date pursuant to the
terms of which Superior will acquire all the issued and outstanding shares of
Pac Rim's common stock. Capitalized terms used but not defined herein have the
respective meanings set forth in the Merger Agreement.
D. The sale of the Securities to Superior by the Security Holders is
a condition to Superior's obligation to consummate the transaction contemplated
pursuant to the Merger Agreement.
E. Subject to the terms and conditions stated in this Agreement,
Superior desires to purchase all of the Securities from the Security Holders
and the Security Holders desire to sell all of Securities to Superior.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained in this Agreement and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
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ARTICLE 1
PURCHASE AND SALE OF SECURITIES
1.1 Purchase and Sale of Securities. Subject to the terms,
conditions, covenants, representations, warranties and other obligations set
forth or incorporated herein, on the Closing Date (as defined in Section 1.2 of
the Merger Agreement) the Security Holders shall each sell, assign, transfer
and convey to Superior and Superior shall purchase from the Security Holders
all of the Security Holders' respective right, title and interest in and to the
Securities, which Securities shall be subject to and held in accordance with
the terms of the Debenture/Warrant Agreement.
1.2 Purchase Price. The total purchase price to be paid for the
Debentures to be purchased by Superior hereunder shall be the Debenture
Consideration, as defined in the Merger Agreement (the "Debenture Purchase
Price") and the total purchase price to be paid for the Warrants to be
purchased by Superior hereunder shall be the Warrant Consideration, as defined
in the Merger Agreement (the "Warrant Purchase Price") (the Debenture Purchase
Price and the Warrant Purchase Price, collectively, the "Purchase Price"),
payable by direct wire transfer in immediately available funds to a bank
account to be designated by each Security Holder and in accordance with the
percentages set forth in Schedule 1.2 hereof. The Purchase Price is payable
without duplication notwithstanding the references to such consideration in the
Merger Agreement.
1.3 Closing Date. At the Closing (as defined in Section 1.2 of the
Merger Agreement), the Security Holders shall deliver to Superior all
certificates for the Securities, duly assigned and endorsed to Superior in good
form for transfer, and Superior shall deliver to each Security Holder its
respective portion of the Purchase Price, payable by direct wire transfer in
immediately available funds to a bank account designated by each Security
Holder for its account.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF EACH SECURITY HOLDER
Each of the Security Holders represents and warrants, severally and
not jointly, to Superior as of the Effective Date and the Closing Date that:
2.1 Authority Relative to this Agreement. Such Security Holder has
all necessary power and authority to execute and deliver this Agreement, to
perform its obligations hereunder and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement by the
Security Holder and the consummation by the Security Holder of the transactions
contemplated hereby have been duly and validly authorized by the Board of
Directors or other governing body of such Security Holder, and no
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other corporate or other proceedings on the part of such Security Holder are
necessary to authorize this Agreement or to consummate such transactions. This
Agreement has been duly and validly executed and delivered by such Security
Holder and constitutes a legal, valid and binding obligation of such Security
Holder, enforceable against such Security Holder in accordance with its terms
subject to applicable bankruptcy, insolvency, moratorium or other similar laws
relating to creditors' rights and general principles of equity.
2.2 No Conflicts. (1) The execution and delivery of this Agreement
by such Security Holder do not, and the performance of this Agreement by such
Security Holder will not, (i) conflict with or violate the organizational
documents of such Security Holder, (ii) conflict with or violate any law, rule,
regulation, order, judgment or decree applicable to such Security Holder or by
which such Security Holder's Securities are bound or affected, or (iii) result
in any breach of or constitute a default (or an event that with notice or lapse
of time or both would constitute a default) under, or give to others any rights
of termination, amendment, acceleration or cancellation of, or result in the
creation of a lien or encumbrance on any of such Security Holder's Securities
pursuant to any note, bond, mortgage, indenture, contract, agreement, lease,
license, permit, franchise or other instrument or obligation to which such
Security Holder is a party or by which such Security Holder or such Security
Holder's Securities are bound or affected except, in the case of clauses (i),
(ii) and (iii) of this Section 2.2(a), for any such conflicts, violations,
breaches, defaults or other occurrences which would not prevent or delay the
performance by such Security Holder of its obligations under this Agreement.
(b) Except for the Regulatory Filings (as defined and referred to in
Section 5.6 of the Merger Agreement) and the consents to transfer required
under the Debenture/Warrant Agreement, the execution and delivery of this
Agreement by such Security Holder do not, and the performance of this Agreement
by such Security Holder will not, require any consent, approval, authorization
or permit of, or filing with or notification to, any third party or
governmental entity, except where the failure to obtain such consents,
approvals, authorizations or permits, or to make such filings or notifications,
would not (i) prevent or delay the performance by such Security Holder of its
obligations under this Agreement or (ii) result in any costs or liabilities on
the part of Superior or the Surviving Corporation (as defined in the Merger
Agreement).
2.3 Title to the Securities. Such Security Holder is the record and
beneficial owner of the Securities issued to and held by it, copies of which
are attached hereto as Exhibit A-1 and A-2, as appropriate. Such Security
Holder's Securities are the only Securities owned by such Security Holder. The
Securities of such Security Holder are owned free and clear of all security
interests, liens, claims, pledges, options, rights of first refusal,
agreements, limitations on such Security Holder's voting rights,
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charges and other encumbrances of any nature whatsoever. Such Security Holder
has not appointed or granted any proxy, which appointment or grant is still
effective, with respect to the Security Holder's Securities.
2.4 Litigation. There are no actions, suits, proceedings or
arbitrations pending, or to the knowledge of such Security Holder threatened,
against such Security Holder or with respect to the Securities held by such
Security Holder that could reasonably be expected to prevent or delay the
consummation of the transactions contemplated by this Agreement. Such Security
Holder and the Securities held by such Security Holder are not subject to any
outstanding order, writ, injunction or decree which could reasonably be
expected to prevent or delay the consummation of the transactions contemplated
by this Agreement.
2.5 No Brokers. No Security Holder has entered into any contract,
commitment, agreement or understanding with any person or firm which may result
in the obligation of any Security Holder, Pac Rim or Superior to pay any
finder's fees, brokerage or agent's commissions or other like payments in
connection with the negotiations leading to this Agreement or the transactions
contemplated hereby or by the Merger Agreement. Except as provided in Sections
5.13 and 6.6 of the Merger Agreement, no Security Holder is aware of any claim
for payment of any finder's fees, brokerage or agent's commissions or other
like payments in connection with the negotiations leading to this Agreement or
the transactions contemplated hereby or by the Merger Agreement.
2.6 No Defaults. The Debenture/Warrant Agreement and the
instruments issued thereunder are valid, binding and enforceable against such
Security Holder in accordance with their terms. There are no existing
defaults, or any condition or event which with the giving of notice or lapse of
time would constitute a default, by such Security Holder to the
Debenture/Warrant Agreement or any instrument issued thereunder. Such Security
Holder has not given or received notice of any default by Pac Rim or by any
Subsidiary of Pac Rim under the Debenture/Warrant Agreement or any instrument
issued thereunder.
2.7 No Conversion or Exercise. Such Security Holder has not
converted any principal amount of outstanding Debentures into Pac Rim Common
Stock (as defined in the Merger Agreement) or exercised any Warrant, and each
Security Holder hereby covenants and agrees that no conversion or exercise
shall occur on or prior to the Closing Date.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF SUPERIOR
Superior hereby represents and warrants to each of the Security
Holders as of the Effective Date and the Closing Date that:
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3.1 Investment Representation. Superior is acquiring the Securities
for its own account, for investment purposes only and not with a view to the
distribution thereof. Superior is aware that the sale of the Securities to
Superior has not been registered under the Securities Act of 1933, as amended
(the "1933 Act"), or registered or qualified under any state securities law,
and therefore must be held indefinitely and cannot be sold or transferred
unless the Securities are subsequently so registered (which the Security
Holders are not obligated to undertake or accomplish) or an exemption from such
registration is available. Superior understands and acknowledges that the sale
of the Securities to Superior without registration or qualification is
dependent, in part, on the accuracy of Superior's representations and
warranties herein. Superior is an "accredited investor" as that term is
defined in Regulation D under the 1933 Act. Superior understands and
acknowledges that federal and state securities laws require that certain
restrictions against transfer including legends and stop transfer instructions
will be imposed on the Securities, and substantially the following legend will
be placed on the certificates representing such Securities:
"The securities represented hereby have not been
registered under the Securities Act of 1933, as amended, the Trust
Indenture Act of 1939 or applicable state securities laws. Such
securities may not be sold, transferred, assigned, pledged or
hypothecated in the absence of such registration or an exemption
therefrom under said Acts and applicable state securities laws
and, if necessary, receipt of an opinion of counsel satisfactory
to Pac Rim Holding Corporation that registration is not required.
Such securities may not be transferred except upon the conditions
specified in certain agreements, dated as of April 15, 1994,
between Pac Rim Holding Corporation and PRAC Limited Partnership,
complete and correct copies of which are available for inspection
at the office of Pac Rim Holding Corporation and a conformed copy
of which will be furnished to the holder of such securities upon
written request and without charge. No transfer of such
securities shall be valid or effective unless and until the
conditions so specified shall have been complied with.";
provided, however, the Legend on the certificates representing the Warrants
shall not contain a reference to the Trust Indenture Act.
3.2 Compliance with Law and Other Instruments. Neither the execution
and delivery by Superior of this Agreement, nor the consummation by Superior of
the transactions contemplated hereby in accordance with the terms hereof, will:
(i) conflict with or result in a breach of any provisions of the Articles of
Incorporation or Bylaws of Superior; (ii) violate, or conflict with, or result
in a breach of any provision of, or constitute a default (or an event which,
with notice or lapse of time or both, would constitute a
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default), under or result in the termination or in a right of termination or
cancellation of, or accelerate the performance required by, or result in the
creation of any lien, security interest, charge or encumbrance upon any of the
properties of Superior under, or result in being declared void, voidable, or
without further binding effect, any of the terms, conditions or provisions of
any note, bond, mortgage, indenture, deed of trust or any license, franchise,
permit, lease, contact, agreement or other instrument, commitment or obligation
to which Superior is a party, or by which Superior or any of its properties is
bound or affected (except for any of the foregoing, the occurrence of which
would not have a material adverse effect on Superior or its Subsidiaries, taken
as a whole); or (iii) other than the Regulatory Filings (as defined in Section
5.6 of the Merger Agreement), require any consent, approval or authorization
of, or declaration, filing or registration with, any domestic governmental or
regulatory authority (except for any of the foregoing where the failure to
obtain such consent or make such filing would not have a material adverse
effect on Superior taken as a whole).
3.3 Organization. Superior is a corporation duly organized, validly
existing and in good standing under the laws of the State of California with
full corporate power and authority to carry on its business as it is now being
conducted and to own or lease the properties and assets which it now owns or
leases.
3.4 Authority. The execution, delivery and performance of this
Agreement and the transactions contemplated by this Agreement by Superior have
been duly authorized by any necessary corporate action, including, without
limitation, any necessary director or shareholder approval. Superior has full
power and authority to execute and deliver this Agreement and to perform its
obligations hereunder and thereunder.
3.5 Binding Agreement. This Agreement is a legal, valid and binding
obligation of Superior, enforceable against Superior in accordance with its
terms, subject to applicable bankruptcy, insolvency, moratorium or other
similar laws relating to creditors' rights and general principles of equity.
ARTICLE 4
COVENANTS
4.1 Regulatory Filings; Consents.
(a) To the extent any Security Holders may be deemed to be, or may be
deemed to be part of a group constituting, an "Ultimate Parent Entity" of Pac
Rim, as such term is used in the Hart-Scott-Rodino Act of 1976 and the
regulations promulgated thereunder, each such Security Holder, with the
exception of Allstate, hereby covenants and agrees to comply in all respects
with Section 7.4 of the Merger Agreement as if a party thereto and bound
thereby.
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(b) Each party to this Agreement shall use reasonable efforts and
cooperate with the other parties hereto in timely making all filings with all
federal, state and local governmental or regulatory agencies, timely seeking
all consents, approvals or authorizations of third parties or governmental or
regulatory agencies that may be required in connection with, and shall use
reasonable efforts to take, or cause to be taken, all other action and to do,
or cause to be done, all other things necessary, proper or appropriate to
effect, the consummation of the transactions contemplated by this Agreement.
4.2 Release. (a) As of the Closing Date, each of the Security
Holders, on behalf of itself and its respective affiliates, successors, assigns
and heirs (each a "Releasing Party" and collectively, the "Releasing Parties"),
hereby agrees to release, remise, discharge and hold harmless, absolutely and
forever, Superior, SNTL Acquisition Corp., a Delaware corporation, Pac Rim as
the "Surviving Corporation" after the Effective Time of the Merger, and each of
their respective direct and indirect subsidiaries, and each of such parties'
successors, directors, officers, employees, agents and all persons acting by,
through, under or in concert with them, or any of them (collectively, the
"Released Parties") of and from any and all manner of action or actions, cause
or causes of action, in law or in equity, suits, debts, liens, contracts,
agreements, promises, liabilities, claims, demands, damages, losses, costs or
expenses of any nature whatsoever, known or unknown, fixed or contingent, based
on any circumstances or state of facts existing on or prior to the Closing
Date, to the extent arising out of such Security Holder's status as an
employee, director, officer, stockholder, agent, representative or creditor of
Pac Rim or its subsidiaries, other than (i) as provided in the provisions with
respect to indemnification and elimination of liability in the Restated
Certificate of Incorporation or Bylaws of Pac Rim and all amendments thereto or
the Articles of Incorporation or Bylaws of The Pacific Rim Assurance Company, a
California corporation, and all amendments thereto, or (ii) arising from or
related to this Agreement, the Merger Agreement or the transactions
contemplated thereby which the Releasing Party has or may hereafter have
against the Released Parties, including rights to indemnification as provided
in Section 7.10 of the Merger Agreement.
(b) If a Security Holder is a resident of California, the Security
Holder is, notwithstanding that this Agreement is governed by Delaware law,
waiving, to the extent provided in Section 4.2(a) hereof, certain rights with
respect to unknown or undiscovered claims. In connection therewith, each
Security Holder expressly waives the benefit of California Civil Code section
1542, which reads:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES
NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING
THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE
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MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.
The parties acknowledge that the foregoing waiver was separately
bargained for and expressly consent that this release shall be given full force
and effect in accordance with its express terms and provisions.
4.3 Maximum Warrant Consideration. Notwithstanding anything to the
contrary in the Debenture/Warrant Agreement, each Security Holder covenants and
agrees that in the event that the exercise price of the Warrants is adjusted
pursuant to the terms of the Debenture/Warrant Agreement, and such adjustment
would result in the aggregate Warrant Consideration payable hereunder exceeding
$3.5 million, the Security Holders shall each waive their respective portions
of any such adjustment in excess of such amount.
ARTICLE 5
CONDITIONS OF EACH PARTY'S OBLIGATION
5.1 Conditions. The respective obligations of each party hereto to
effect the purchase and sale of the Securities provided hereunder shall be
subject to the fulfillment at or prior to the Closing Date of the conditions
set forth in Article 8 of the Merger Agreement. In addition, each of the
respective representations and warranties of the Security Holders and Superior
contained in this Agreement shall be true and correct on and as of the Closing
Date with the same force and effect as though such representations and
warranties had been made on and as of such date.
5.2 Legal Opinion. If requested of Prac by Pac Rim, Superior and Pac
Rim shall have received at Closing an opinion of counsel to Prac (which counsel
shall be reasonably acceptable to Pac Rim). Such opinion shall comply in form
and substance with the provisions of the Debenture/Warrant Agreement applicable
to Prac's transfer of Securities.
ARTICLE 6
TERMINATION
6.1 Termination. This Agreement shall be terminated in the event
that the Merger Agreement is terminated as provided in Sections 9.1, 9.2, 9.3
or 9.4 of the Merger Agreement.
6.2 Effect of Termination and Abandonment. In the event of
termination of this Agreement pursuant to this Article 6, all obligations of
the parties hereto shall terminate, except the obligations of the parties
pursuant to this Section 6.2 and Sections 7.1, 7.3, 7.4, 7.5, 7.7, 7.9 and 7.10
hereof.
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ARTICLE 7
MISCELLANEOUS
7.1 Expenses. All costs and expenses incurred in connection with
this Agreement shall be paid by the party incurring such cost or expense.
7.2 Nonsurvival of Representations, Warranties and Agreements. All
representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall not survive the Closing.
7.3 Notices. Any notice required to be given hereunder shall be
sufficient if in writing, and sent by facsimile transmission and by courier
service (with proof of service), hand delivery or certified or registered mail
(return receipt requested and first-class postage prepaid), addressed as
follows:
(i) if to Superior, to
Superior National Insurance
Group, Inc.
26601 Agoura Road
Calabasas, California 91302
Attention: William L. Gentz
Telecopy No.: 818-880-8615
with a copy to
Dana M. Warren, Esq.
Riordan & McKinzie
5743 Corsa Avenue
Suite 116
Westlake Village, California 91362
Telecopy No.: 818-706-2956
(ii) if to Allstate, to
Allstate Insurance Company
2775 Sanders Road, Suite A3
Northbrook, Illinois 60062-6127
Attention: Caryn E. Hank, Strategic
Development Manager
Telecopy No.: 847-402-0588
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with a copy to
Allstate Insurance Company
Investment Law Department
3075 Sanders Road, Suite G5A
Northbrook, Illinois 60062-7127
Attention: Elizabeth J. Lapham, Esq.
Telecopy No.: 847-402-6639
(iii) if to Prac, to
Wedbush Morgan Securities
500 Newport Center Drive
Suite 550
Newport Beach, California 92660
Attention: Mr. Richard H. Pickup
Telecopy No.: 714-759-9539
or to such other address as any party shall specify by written notice so given,
and such notice shall be deemed to have been delivered as of the date so
telecommunicated, personally delivered or mailed.
7.4 Assignment; Binding Effect; Benefit. Neither this Agreement nor
any of the rights, interests or obligations hereunder shall be assigned by any
of the parties hereto (whether by operation of law or otherwise) without the
prior written consent of the other parties; provided, however, that Superior
may assign all of its rights, interests and obligations hereunder to any
wholly-owned direct or indirect subsidiary of Superior. Subject to the
preceding sentence, this Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and assigns.
Nothing in this Agreement, expressed or implied, is intended to confer on any
person other than the parties hereto or their respective heirs, successors,
executors, administrators and assigns any rights, remedies, obligations or
liabilities under or by reason of this Agreement.
7.5 Entire Agreement. This Agreement contains the entire
understanding of the parties hereto relating to the subject matter hereof and
supersedes all prior and collateral agreements, understandings, statements and
negotiations of the parties. Each party acknowledges that no representations,
inducements, promises, or agreements, oral or written, with reference to the
subject matter hereof have been made other than as expressly set forth herein.
7.6 Amendment. This Agreement may be supplemented, amended or
modified only by the mutual agreement of the parties hereto. No supplement,
amendment or modification of this Agreement shall be binding unless it is in
writing signed by all the parties hereto.
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7.7 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware without regard to its
rules of conflict of laws.
7.8 Counterparts. This Agreements may be executed by the parties
hereto in separate counterparts, each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute one
and the same instrument. Each counterpart may consist of a number of copies of
this Agreement, each of which may be signed by less than all of the parties
hereto, but together all such copies are signed by all of the parties hereto.
7.9 Headings. Headings of the Articles and Sections of this
Agreement are for the convenience of the parties only, and shall be given no
substantive or interpretive effect whatsoever.
7.10 Interpretation. In this Agreement, unless the context otherwise
requires, words describing the singular number shall include the plural and
vice versa, and words denoting any gender shall include all genders and words
denoting natural persons shall include corporations and partnerships and vice
versa.
7.11 Waivers. Except as provided in this Agreement, no action taken
pursuant to this Agreement, including, without limitations, any investigation
by or on behalf of any party, shall be deemed to constitute a waiver by the
party taking such action of compliance with any representations, warranties,
covenants or agreements contained in this Agreement. The waiver by any party
hereto of a breach of any provision hereunder shall not operate or be construed
as a waiver of any prior or subsequent breach of the same or any other
provision hereunder.
7.12 Severability. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or otherwise affecting the validity or enforceability of any of the
terms or provisions of this Agreement in any other jurisdiction. If any
provision of this Agreement is so broad as to be unenforceable, the provision
shall be interpreted to be only so broad as is enforceable.
7.13 Enforcement of Agreement. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with its specific terms or was
otherwise breached. It is accordingly agreed that the parties shall be
entitled to an injunction or injunctions to prevent breaches of this Agreement
and to enforce specifically the terms and provisions hereof in any California
Court, this being in addition to any other remedy to which they may be entitled
at law or in equity.
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7.14 Legal Action. In the event of any litigation between or among
the parties hereto respecting or arising out of this Agreement, the prevailing
party or parties shall be entitled to recover reasonable attorneys' fees and
costs, whether or not such litigation proceeds to final judgment or
determination.
7.15 Venue. Any action concerning a dispute arising out of or
concerning this Agreement, regarding the interpretation of this Agreement, or
regarding the relationships among the parties created pursuant to this
Agreement shall be filed only in the United States District Court for the
Central District of California or in the Superior Court of the State of
California for the County of Los Angeles.
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IN WITNESS WHEREOF, the parties have caused this Agreement and caused
the same to be duly delivered on their behalf as of the day and year first
written above.
SUPERIOR: SUPERIOR NATIONAL INSURANCE GROUP, INC.
By: /s/ J. CHRIS SEAMAN
----------------------------------------
Name: J. Chris Seaman
Title: Executive Vice President & CFO
ALLSTATE: ALLSTATE INSURANCE COMPANY
By: /s/ DOUG R. WENDT
----------------------------------------
Name: Doug R. Wendt
Title: Vice President
By: /s/ LOREN HALL
----------------------------------------
Name: Loren Hall
Title: Assistant Vice President
PRAC: PRAC LIMITED PARTNERSHIP,
a Nevada limited partnership
By: Somme, Inc., a Nevada corporation
Its: General Partner
By: /s/ DAVID B. HEHN
----------------------------------------
Name: David B. Hehn
Title: President
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SCHEDULE 1.2
<TABLE>
<CAPTION>
Security Holder Amount
--------------- ------
<S> <C>
Prac 90%
Allstate 10%
</TABLE>
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EXHIBIT E TO ANNEX C
SERIES 3 DETACHABLE WARRANT SURRENDER AGREEMENT
This SERIES 3 DETACHABLE WARRANT SURRENDER AGREEMENT (this
"Agreement") is entered into as of September 17, 1996 (the "Effective Date") by
and among PAC RIM HOLDING CORPORATION, a Delaware corporation ("Pac Rim"), and
DENNIS W. HARWOOD, an individual ("Harwood"), THE BUSCH FAMILY TRUST (the
"Busch Trust"), Timothy R. Busch ("Busch"), Trustee of the Busch Trust, ROBERT
M. ANDERSON, an individual ("Anderson"), and CARL A. STRUNK, an individual
("Strunk") (Harwood, the Busch Trust, Anderson and Strunk, each a "Warrant
Holder" and collectively, the "Warrant Holders"), with reference to the
following recitals:
R E C I T A L S
A. The Warrant Holders own beneficially and of record Series 3
Detachable Warrants ("Warrants") issued by Pac Rim pursuant to that certain
Agreement to Purchase Series A Convertible Debentures and Series 1, 2 and 3
Detachable Warrants dated as of April 15, 1994, as amended (the
"Debenture/Warrant Agreement"), as follows:
<TABLE>
<CAPTION>
Warrant Holder Warrants
-------------- --------
<S> <C>
Harwood 103,500
The Busch Trust 205,500
Anderson 205,500
Strunk 205,500
</TABLE>
B. Superior National Insurance Group, Inc., a California corporation
("Superior") and Pac Rim have entered into an Agreement and Plan of Merger (the
"Merger Agreement") dated as of the Effective Date pursuant to the terms of
which Superior will acquire all the issued and outstanding shares of Pac Rim's
common stock. Capitalized terms used but not defined herein have the
respective meanings set forth in the Merger Agreement.
C. The surrender of the Warrants to Pac Rim by the Warrant Holders is
a condition to Superior's obligation to consummate the transaction contemplated
pursuant to the Merger Agreement.
D. Harwood, Strunk and Busch are currently members of Pac Rim's Board
of Directors and Anderson was formerly a member of such board.
E. In order to facilitate the transaction contemplated under the
Merger Agreement and as the Warrants are "out-of-the-money" thereunder, the
Warrant Holders desire to surrender their respective Warrants to Pac Rim for
cancellation and Pac Rim desires to accept such surrender.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained in this Agreement and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
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ARTICLE 1
SURRENDER OF WARRANTS
1.1 Surrender of Warrants. Subject to the terms, conditions,
covenants, representations, warranties and other obligations set forth or
incorporated herein, on the Closing Date (as defined in Section 1.2 of the
Merger Agreement) the Warrants Holders shall each surrender, assign, transfer
and convey to Pac Rim all of the Warrant Holders' right, title and interest in
and to the Warrants.
1.2 Closing Date. At the Closing (as defined in Section 1.2 of the
Merger Agreement), the Warrant Holders shall deliver to Pac Rim all
certificates for the Warrants, duly assigned and endorsed to Pac Rim in good
form for transfer.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF EACH WARRANT HOLDER
Each of the Warrant Holders represents and warrants, severally and not
jointly, to Pac Rim as of the Effective Date and the Closing Date that:
2.1 Authority Relative to this Agreement. Such Warrant Holder has all
necessary power and authority to execute and deliver this Agreement, to perform
its obligations hereunder and to consummate the transactions contemplated
hereby. If the Warrant Holder is a corporate, partnership or trust entity, the
execution and delivery of this Agreement by the Warrant Holder and the
consummation by the Warrant Holder of the transactions contemplated hereby have
been duly and validly authorized by the Board of Directors or other governing
body of such Warrant Holder, and no other corporate or other proceedings on the
part of such Warrant Holder are necessary to authorize this Agreement or to
consummate such transactions. This Agreement has been duly and validly
executed and delivered by such Warrant Holder and constitutes a legal, valid
and binding obligation of such Warrant Holder, enforceable against such Warrant
Holder in accordance with its terms, subject to applicable bankruptcy,
insolvency, moratorium or other similar laws relating to creditors' rights and
general principles of equity.
2.2 No Conflicts. 1. The execution and delivery of this Agreement by
such Warrant Holder do not, and the performance of this Agreement by such
Warrant Holder will not, (i) where such Warrant Holder is a trust entity,
conflict with or violate the organizational documents of such Warrant Holder,
(ii) conflict with or violate any law, rule, regulation, order, judgment or
decree applicable to such Warrant Holder or by which such Warrant Holder's
Warrants are bound or affected or (iii) result in any breach of or constitute a
default (or an event that with notice or lapse of time or both would constitute
a default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of,
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or result in the creation of a lien or encumbrance on any of such Warrant
Holder's Warrants pursuant to, any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument or obligation
to which such Warrant Holder is a party or by which such Warrant Holder or such
Warrant Holder's Warrants are bound or affected, except, in the case of clauses
(i), (ii) and (iii) of this Section 2.2(a), for any such conflicts, violations,
breaches, defaults or other occurrences which would not prevent or delay the
performance by such Warrant Holder of his obligations under this Agreement.
2. The execution and delivery of this Agreement by such Warrant
Holder do not, and the performance of this Agreement by such Warrant Holder
will not, require any consent, approval, authorization or permit of, or filing
with or notification to, any governmental entity or other third party, except
where the failure to obtain such consents, approvals, authorizations or
permits, or to make such filings or notifications, would not (i) prevent or
delay the performance by such Warrant Holder of his obligations under this
Agreement or (ii) result in any costs or liabilities on the part of Superior or
the Surviving Corporation.
2.3 Title to the Warrants. Such Warrant Holder is the record and,
except for any Warrant Holder that is a trust, beneficial owner of such
Warrants listed opposite the name of such Warrant Holder in Recital A, above.
Such Warrant Holder's Warrants are the only Warrants owned by such Warrant
Holder. The Warrants of such Warrant Holder are owned free and clear of all
security interests, liens, claims, pledges, options, rights of first refusal,
charges and other encumbrances of any nature whatsoever, except that the
Warrants held by a Warrant Holder that is a trust are held subject to the
applicable trust documents, which trust documents will not prevent or delay the
performance by such Warrant Holder of its obligations under this Agreement.
Such Warrant Holder has not appointed or granted any proxy, which appointment
or grant is still effective, with respect to the Warrant Holder's Warrants.
2.4 Litigation. There are no actions, suits, proceedings or
arbitrations pending, or to the knowledge of such Warrant Holder threatened,
against such Warrant Holder or with respect to the Warrants held by such
Warrant Holder that could reasonably be expected to prevent or delay the
consummation of the transactions contemplated by this Agreement. Such Warrant
Holder and the Warrants held by such Warrant Holder are not subject to any
outstanding order, writ, injunction or decree which could reasonably be
expected to prevent or delay the consummation of the transactions contemplated
by this Agreement.
2.5 No Brokers. No Warrant Holder has entered into any contract,
commitment, agreement or understanding with any person or firm which may result
in the obligation of any Warrant Holder, Pac Rim or Superior to pay and
finder's fees, brokerage or agent's commissions or other like payments in
connection with the negotiations leading to this Agreement or the transactions
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contemplated hereby or by the Merger Agreement. Except as provided in Sections
5.13 and 6.6 of the Merger Agreement, no Warrant Holder is aware of any claim
for payment of any finder's fees, brokerage or agent's commissions or other
like payments in connection with the negotiations leading to this Agreement or
the transactions contemplated hereby or by the Merger Agreement.
2.7 No Conversion or Exercise. No Warrant Holder has exercised
any Warrant, and each Warrant Holder hereby covenants and agrees that no
exercise shall occur on or prior to the Closing Date.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF PAC RIM
Pac Rim hereby represents and warrants to each of the Warrant Holders
as of the Effective Date and the Closing Date that:
3.1 Compliance with Law and Other Instruments. The execution and
delivery of this Agreement and compliance with the provisions hereof by Pac Rim
will not violate any provision of law or any regulation or order applicable to
Pac Rim and will not conflict with, result in any breach of any of the terms,
conditions or provisions of, or constitute a default under or result in the
creation of any lien, charge or encumbrance upon, any of the properties or
assets or outstanding stock of Pac Rim pursuant to any charter provision,
bylaw, indenture, mortgage, lease, loan agreement or other instrument to which
Pac Rim is a party or to which it is bound.
2.2 Organization. Pac Rim is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware with full
power and authority, corporate and other, to carry on its business as it is now
being conducted and to own or lease the properties and assets which it now owns
or leases and has all licenses or certificates necessary to conduct the
business it now conducts.
3.3 Authority. The execution, delivery and performance of this
Agreement and the transactions contemplated by this Agreement by Pac Rim have
been duly authorized by any necessary corporate action, including, without
limitation, any necessary director or shareholder approval. Pac Rim has full
power and authority to execute and deliver this Agreement, and to perform its
obligations hereunder and thereunder.
3.4 Binding Agreement. This Agreement is a legal, valid and binding
obligation of Pac Rim, enforceable against Pac Rim in accordance with its
terms, subject to applicable bankruptcy, insolvency, moratorium or other
similar laws relating to creditors' rights and general principles of equity.
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ARTICLE 4
CONDITIONS OF EACH PARTY'S OBLIGATION
The respective obligations of each party hereto to effect the
surrender of the Warrants provided hereunder shall be subject to the
fulfillment at or prior to the Closing Date of the conditions set forth in
Article 8 of the Merger Agreement. In addition, each of the respective
representations and warranties of the Warrant Holders and Pac Rim contained in
this Agreement shall be true and correct on and as of the Closing Date with the
same force and effect as though such representations and warranties had been
made on and as of such date.
ARTICLE 5
TERMINATION
5.1 Termination. This Agreement shall be terminated in the event that
the Merger Agreement is terminated as provided in Sections 9.1, 9.2, 9.3 or 9.4
of the Merger Agreement.
5.2 Effect of Termination and Abandonment. In the event of termination
of this Agreement pursuant to this Article 5, all obligations of the parties
hereto shall terminate, except the obligations of the parties pursuant to this
Section 5.2 and Sections 6.4 through 6.8, 6.10 through 6.13, 6.15 and 6.16
hereof.
ARTICLE 6
MISCELLANEOUS
6.1 Expenses. All costs and expenses incurred in connection with this
Agreement shall be paid by the party incurring such cost or expense.
6.2 Nonsurvival of Representations, Warranties and Agreements. All
representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall not survive the Closing.
6.3 Release. (a) As of the Closing Date, each of the Warrant Holders,
on behalf of themselves and their respective affiliates, successors, assigns and
heirs (each a "Releasing Party" and collectively, the "Releasing Parties"),
hereby agrees to release, remise, discharge and hold harmless, absolutely and
forever, Superior, SNTL Acquisition Corp., a Delaware corporation, Pac Rim as
the "Surviving Corporation" after the Effective Time of the Merger, and each of
their respective direct and indirect subsidiaries, and each of such parties'
successors, directors, officers, employees, agents and all persons acting by,
through, under or in concert with them, or any of them (collectively, the
"Released Parties") of and
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from any and all manner of action or actions, cause or causes of action, in law
or in equity, suits, debts, liens, contracts, agreements, promises,
liabilities, claims, demands, damages, losses, costs or expenses of any nature
whatsoever, known or unknown, fixed or contingent, based on any circumstances
or state of facts existing on or prior to the Closing Date, to the extent
arising out of such Warrant Holder's status as an employee, director, officer,
stockholder, agent, representative or creditor of Pac Rim or its subsidiaries,
other than (i) as provided in the provisions with respect to indemnification
and elimination of liability, the Restated Certificate of Incorporation and
Bylaws of Pac Rim and all amendments thereto and the Articles of Incorporation
or Bylaws of The Pacific Rim Assurance Company, a California corporation, and
all amendments thereto, or (ii) arising from or related to this Agreement, the
Merger Agreement or the transactions contemplated by the Merger Agreement which
the Releasing Party has or may hereafter have against the Released Parties,
including rights to indemnification as provided in Section 7.10 of the Merger
Agreement.
(b) If a Warrant Holder is a resident of California, the Warrant
Holder is, notwithstanding that this Agreement is governed by Delaware law,
waiving certain rights with respect to unknown or undiscovered claims. In
connection therewith each Warrant Holder expressly waives the benefit of
California Civil Code section 1542, which reads:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR
DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF
EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE
MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.
The parties acknowledge that the foregoing waiver was separately
bargained for and expressly consent that this release shall be given full force
and effect in accordance with its express terms and provisions.
6.4 Notices. Any notice required to be given hereunder shall be
sufficient if in writing, and sent by facsimile transmission and by courier
service (with proof of service), hand delivery or certified or registered mail
(return receipt requested and first-class postage prepaid), addressed as
follows:
(i) if to Pac Rim, to
Pac Rim Holding Corporation
6200 Canoga Avenue
Woodland Hills, California 91367
Attention: Stanley Braun
Telecopy No.: 818-595-0099
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with a copy to
Michael L. Rosenfield, Esq.
Barger & Wolen LLP
515 South Flower Street
34th Floor
Los Angeles, California 90071
Telecopy No. 213-614-7399
(ii) if to Harwood, to
Dennis W. Harwood, Esq.
c/o Barger & Wolen
19800 MacArthur Boulevard
8th Floor
Irvine, California 92715
Telecopy No.: 714-752-6313
(iii) if to The Busch Trust, to
Timothy R. Busch, Esq.
c/o The Busch Firm
2532 Dupont Drive
Irvine, California 92715
Telecopy No.: 714-474-7732
(iv) if to Strunk, to
Carl A. Strunk
c/o Fidelity National Title Insurance
17911 Von Karman
Irvine, California 92714
Telecopy No.: 714-622-4153
(v) if to Anderson, to
Robert M. Anderson
c/o Anderson & Anderson
2495 Campus Drive
Irvine, California 92715-1583
Telecopy No.: 714-752-7587
or to such other address as any party shall specify by written notice so given,
and such notice shall be deemed to have been delivered as of the date so
telecommunicated, personally delivered or mailed.
6.5 Assignment; Binding Effect; Benefit. Neither this Agreement
nor any of the rights, interests or obligations hereunder
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shall be assigned by any of the parties hereto (whether by operation of law or
otherwise) without the prior written consent of the other parties. Subject to
the preceding sentence, this Agreement shall be binding upon and shall inure to
the benefit of the parties hereto and their respective successors and assigns.
Nothing in this Agreement, expressed or implied, is intended to confer on any
person other than the parties hereto or their respective heirs, successors,
executors, administrators and assigns any rights, remedies, obligations or
liabilities under or by reason of this Agreement.
6.6 Entire Agreement. This Agreement contains the entire
understanding of the parties hereto relating to the subject matter hereof and
supersedes all prior and collateral agreements, understandings, statements and
negotiations of the parties. Each party acknowledges that no representations,
inducements, promises, or agreements, oral or written, with reference to the
subject matter hereof have been made other than as expressly set forth herein.
6.7 Amendment. This Agreement may be supplemented, amended or
modified only by the mutual agreement of the parties hereto. No supplement,
amendment or modification of this Agreement shall be binding unless it is in
writing and signed by all the parties hereto.
6.8 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware without regard
to its rules of conflict of laws.
6.9 Counterparts. This Agreements may be executed by the parties
hereto in separate counterparts, each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute one
and the same instrument. Each counterpart may consist of a number of copies of
this Agreement, each of which may be signed by less than all of the parties
hereto, but together all such copies are signed by all of the parties hereto.
6.10 Headings. Headings of the Articles and Sections of this
Agreement are for the convenience of the parties only, and shall be given no
substantive or interpretive effect whatsoever.
6.11 Interpretation. In this Agreement, unless the context
otherwise requires, words describing the singular number shall include the
plural and vice versa, and words denoting any gender shall include all genders
and words denoting natural persons shall include corporations and partnerships
and vice versa.
6.12 Waivers. Except as provided in this Agreement, no action
taken pursuant to this Agreement, including, without limitations, any
investigation by or on behalf of any party, shall be deemed to constitute a
waiver by the party taking such action of compliance with any representations,
warranties, covenants or agreements contained in this Agreement. The waiver by
any party hereto of a breach of any provision hereunder shall not operate or be
construed
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as a waiver of any prior or subsequent breach of the same or any other
provision hereunder.
6.13 Severability. Any term or provision of this Agreement which
is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction,
be ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or otherwise affecting the validity or enforceability of any of the
terms or provisions of this Agreement in any other jurisdiction. If any
provision of this Agreement is so broad as to be unenforceable, the provision
shall be interpreted to be only so broad as is enforceable.
6.14 Enforcement of Agreement. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with its specific terms or was
otherwise breached. It is accordingly agreed that the parties shall be
entitled to an injunction or injunctions to prevent breaches of this Agreement
and to enforce specifically the terms and provisions hereof in any California
Court (as provided in Section 6.15 hereof), this being in addition to any other
remedy to which they may be entitled at law or in equity.
6.15 Legal Action. In the event of any litigation between or among
the parties hereto respecting or arising out of this Agreement, the prevailing
party or parties shall be entitled to recover reasonable attorneys' fees and
costs, whether or not such litigation proceeds to final judgment or
determination.
6.16 Venue. Any action concerning a dispute arising out of or
concerning this Agreement, regarding the interpretation of this Agreement, or
regarding the relationships among the parties created pursuant to this
Agreement shall be filed only in the United States District Court for the
Central District of California or in the Superior Court of the State of
California for the County of Los Angeles.
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IN WITNESS WHEREOF, the parties have caused this Agreement and caused
the same to be duly delivered on their behalf as of the day and year first
written above.
PAC RIM: PAC RIM HOLDING CORPORATION
By: /s/ STANLEY BRAUN
----------------------------------
Name: STANLEY BRAUN
Title:
WARRANT HOLDERS:
/s/ DENNIS W. HARWOOD /s/ TIMOTHY R. BUSCH
- - -------------------------- ----------------------------------
DENNIS W. HARWOOD TIMOTHY R. BUSCH, in his capacity
as Trustee of The Busch Family
Trust
/s/ CARL A. STRUNK /s/ ROBERT M. ANDERSON
- - -------------------------- ----------------------------------
CARL A. STRUNK ROBERT M. ANDERSON
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EXHIBIT H TO ANNEX C
VOTING AGREEMENT
This VOTING AGREEMENT (this "Agreement") is entered into as of
September 17, 1996 (the "Effective Date") by and among Superior National
Insurance Group, Inc., a California corporation ("Superior"), and the holders
listed on the signature pages hereof (each, a "Security Holder" and
collectively, the "Security Holders") of (1) shares of common stock, par value
$.01 per share (the "Pac Rim Shares"), and (2) Series A Convertible Debentures
(the "Pac Rim Debentures") of Pac Rim Holding Corporation, a Delaware
corporation ("Pac Rim").
WHEREAS, in order to induce Superior to enter into an Agreement and
Plan of Merger with Pac Rim dated as of the Effective Date (the "Merger
Agreement"), Superior has requested that each of the Security Holders, and each
of the Security Holders has agreed to, enter into this Agreement.
Capitalized terms used but not defined herein have the respective
meanings set forth in the Merger Agreement.
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE 1.
VOTING AND OTHER COVENANTS
1.1 Agreement to Vote. (a) Except as set forth in Section 1.1(b)
below, each of the Security Holders hereby agrees that during the time that
this Agreement is in effect, at any meeting of the stockholders of Pac Rim,
however called, and in any action by written consent of the stockholders of Pac
Rim, and at any other relevant time, such Security Holder shall:
(i) vote any Pac Rim Shares or Pac Rim Debentures
presently owned by such Security Holder and any additional Pac Rim
Shares acquired by such Security Holder (whether by purchase or
otherwise) after the Effective Date (collectively, the "Security
Holder Shares") in favor of the Merger, the Merger Agreement, as
amended from time to time, and the transactions contemplated by the
Merger Agreement;
(ii) vote any Security Holder Shares against any
Acquisition Proposal (as defined in the Merger Agreement) and any
other action or agreement that would result in a breach in any
material respect of any covenant, representation or warranty or any
other obligation of Pac Rim under the Merger Agreement (including the
Exhibits thereto) or which is reasonably likely to result in any
conditions to Pac Rim's obligations under the Merger Agreement not
being fulfilled; and
(iii) Each Security Holder shall, during the time this
Agreement is in force, conduct him, herself or itself, as the case may
be, in accordance with Section 7.1 of the Merger Agreement as if a
party thereto and bound thereby.
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(b) The obligations of each of the Security Holders to vote its
respective Security Holder Shares in accordance with Section 1.1(a) of this
Agreement shall terminate if Pac Rim's Board of Directors, to the extent, and
only to the extent, permitted by Section 7.1 of the Merger Agreement,
recommends an Acquisition Proposal to its stockholders.
1.2 Competing Transaction. In the event under the terms of
Section 10.3 of the Merger Agreement a Breakup Fee (as defined therein) becomes
payable to Superior, whether or not such Breakup Fee has been paid, upon
consummation of the transaction contemplated by the Acquisition Proposal, each
Security Holder, with the exception of Allstate Insurance Company, an Illinois
insurance company, agrees to pay to Superior, in cash, an amount equal to the
amount by which (x) the aggregate consideration for the Pac Rim Debentures and
the Series 1, 2 and 3 Detachable Warrants of Pac Rim (the "Pac Rim Warrants")
(which, if other than in cash, shall be based on the fair market value thereof)
paid to or received by such Security Holder in respect of the Competing
Transaction exceeds (y) the aggregate consideration for the Pac Rim Debentures
and Pac Rim Warrants payable to such Security Holder under that certain Series
A Convertible Debenture and Series 1, 2 and 3 Detachable Warrant Purchase
Agreement of even date herewith. Such payment shall be made by wire transfer
of immediately available funds within two (2) business days of such Security
Holder's receipt of such consideration to a bank account designated by
Superior.
ARTICLE 2.
REPRESENTATIONS AND WARRANTIES OF EACH SECURITY HOLDER
Each of the Security Holders represents and warrants, severally and
not jointly, to Superior that:
2.1 Authority Relative to this Agreement. Such Security Holder
has all necessary power and authority to execute and deliver this Agreement, to
perform its obligations hereunder and to consummate the transactions
contemplated hereby. If the Security Holder is a corporate or trust entity,
the execution and delivery of this Agreement by the Security Holder and the
consummation by the Security Holder of the transactions contemplated hereby
have been duly and validly authorized by the Board of Directors or other
governing body of such Security Holder, and no other corporate or other
proceedings on the part of such Security Holder are necessary to authorize this
Agreement or to consummate such transactions. This Agreement has been duly and
validly executed and delivered by such Security Holder and constitutes a legal,
valid and binding obligation of such Security Holder, enforceable against such
Security Holder in accordance with its terms, subject to applicable bankruptcy,
insolvency, moratorium or other similar laws relating to creditors' rights and
general principles of equity.
2.2 No Conflicts. (a) The execution and delivery of this Agreement
by such Security Holder do not, and the performance of
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this Agreement by such Security Holder will not, (i) where such Security Holder
is a corporate, partnership or trust entity, conflict with or violate the
organizational documents of such Security Holder, (ii) conflict with or violate
any law, rule, regulation, order, judgment or decree applicable to such
Security Holder or by which such Security Holder Shares are bound or affected,
or (iii) result in any breach of or constitute a default (or an event that with
notice or lapse of time or both would constitute a default) under, or give to
others any rights of termination, amendment, acceleration or cancellation of,
or result in the creation of a lien or encumbrance on any of such Security
Holder Shares pursuant to any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument or obligation
to which such Security Holder is a party or by which such Security Holder or
such Security Holder Shares are bound or affected, except, in the case of
clauses (i), (ii) and (iii) of this Section 2.2(a), for any such conflicts,
violations, breaches, defaults or other occurrences which would not prevent or
delay the performance by such Security Holder of its obligations under this
Agreement.
(b) The execution and delivery of this Agreement by such Security
Holder do not, and the performance of this Agreement by such Security Holder
will not, require any consent, approval, authorization or permit of, or filing
with or notification to, any governmental entity, except for applicable
requirements, if any, of the Securities Exchange Act of 1934, as amended, and
except where the failure to obtain such consents, approvals, authorizations or
permits, or to make such filings or notifications, would not prevent or delay
the performance by such Security Holder of its obligations under the Agreement.
2.3 Title to the Shares. As of the date hereof, such Security
Holder is the record and, except for any Security Holder which is identified as
a trust in Exhibit A hereto (collectively, the "Trust Security Holders"),
beneficial owner of such Security Holder Shares listed opposite the name of
such Security Holder on Exhibit A hereto. Such Security Holder Shares set
forth opposite the name of such Security Holder on Exhibit A hereto are the
only Security Holder Shares owned by such Security Holder. The Security Holder
Shares of such Security Holder are, or, if acquired after the date hereof, will
be, owned free and clear of all security interests, liens, claims, pledges,
options, rights of first refusal, agreements, limitations on such Security
Holder's voting rights, charges and other encumbrances of any nature
whatsoever, except that the Security Holder Shares held by Trust Security
Holders are held subject to the applicable trust documents, which will not
prevent or delay the performance by such Security Holder of its obligations
under this Agreement. Such Security Holder has not appointed or granted any
proxy, which appointment or grant is still effective, with respect to the
Security Holder Shares.
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ARTICLE 3.
COVENANTS OF EACH SECURITY HOLDER
Each of the Security Holders hereby covenants and agrees that:
3.1 No Sales of or Encumbrances on Security Holder Shares. Except
pursuant to the terms of this Agreement or the Merger Agreement, for so long as
such Security Holder is obligated to vote such Security Holder's Security
Holder Shares in accordance with Section 1.1(a) hereof, each Security Holder
shall not directly or indirectly sell, encumber, suffer a lien to exist upon,
convey or transfer or record beneficial ownership of any such Security Holder
Shares by any means whatsoever to any other person, except with the consent of
Superior; provided, however, that Trust Security Holders may transfer ownership
of Security Holder Shares as required by applicable governing instruments if
the transferee of any Security Holder Shares shall, prior to such transfer,
execute a counterpart to this Agreement and shall have agreed to be bound by
the terms of this Agreement, including, but not limited to, the obligation to
vote the Security Holder Shares in accordance with Section 1.1(a) hereof.
Subject to the foregoing, the Security Holders shall not (without limitation),
directly or indirectly (i) grant any proxies or enter into any voting trust or
other agreement or arrangement with respect to the Security Holder Shares or
(ii) sell, assign, transfer, encumber or otherwise dispose of, or enter into
any contract, option or other arrangement or understanding with respect to the
direct or indirect sale, assignment, transfer, encumbrance or other disposition
of any Security Holder Shares during the term of this Agreement.
ARTICLE 4.
MISCELLANEOUS
4.1 Expenses. All costs and expenses incurred in connection with
this Agreement shall be paid by the party incurring such cost or expense.
4.2 Further Assurances. Each of the Security Holders will execute
and deliver or cause to be executed and delivered all further documents and
instruments and use its best efforts to secure such consents and take all such
further action as may be reasonably necessary in order to consummate the
transactions contemplated hereby.
4.3 Additional Agreements. Subject to the terms and conditions of
this Agreement, each of the parties hereto agrees to use all reasonable efforts
to take, or cause to be taken, all action and to do, or cause to be done, all
things necessary, proper or advisable under applicable laws and regulations and
which may be required under any agreements, contracts, commitments,
instruments, understandings, arrangements or restrictions of any kind to which
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such party is a party or by which such party is governed or bound, to
consummate and make effective the transactions contemplated by this Agreement,
to obtain all necessary waivers, consents and approvals and effect all
necessary registrations and filings, and submission of information requested by
governmental authorities, and to rectify any event or circumstances which could
impede consummation of the transactions contemplated hereby.
4.4 Specific Performance. The parties hereto agree that Superior
would be irreparably damaged if for any reason the Security Holders failed to
perform any of their obligations under this Agreement, and that Superior would
not have an adequate remedy at law for money damages in such event.
Accordingly, Superior shall be entitled to specific performance and injunctive
and other equitable relief to enforce the performance of this Agreement by the
Security Holders. This provision is without prejudice to any other rights that
Superior may have against the Security Holders for any failure to perform their
obligations under this Agreement.
4.5 Action in Security Holder Capacity Only. Each of the Security
Holders makes no agreement or understanding herein as director or officer of
Pac Rim. Each of the Security Holders signs solely in his, her or its
capacity, as the case may be, as a recordholder and, except for the Trust
Security Holders, beneficial owner of the Security Holder Shares of such
Security Holder, and nothing herein shall limit or affect any action taken in
his, her or its capacity, as the case may be, as an officer or director of Pac
Rim.
4.6 Notices. All notices, requests, claims, demands and other
communications hereunder shall be deemed to have been duly given when delivered
in person, by facsimile or by registered or certified mail (postage prepaid,
return receipt requested) to such party at its address set forth on the
signature page hereto.
4.7 Amendments; Termination. (a) This Agreement may not be
modified, amended, altered or supplemented, except upon the execution and
delivery of a written agreement executed by Superior and any Security Holders
adversely affected thereby.
(b) This Agreement shall terminate on the earlier to occur of (i)
the date of the termination of the Merger Agreement in accordance with its
terms, (ii) the Effective Time of the Merger, or (iii) December 31, 1997,
unless the parties to this Agreement have been notified that the Termination
Date (as defined in the Merger Agreement) has been extended in accordance with
the terms thereof. Notwithstanding the foregoing, the Security Holders'
obligation under Section 1.2 hereof shall survive the termination of this
Agreement.
4.8 Successors and Assigns; Third Party Beneficiary. The
provisions of this Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and assigns. No party may
assign, delegate or otherwise transfer any of
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its rights or obligations under this Agreement without the consent of Superior
and the transferring Security Holder, provided that Trust Security Holders may
assign, delegate or otherwise transfer such rights or obligations in connection
with any transfer pursuant to Section 3.1 hereof as required under applicable
governing instruments, provided that the assignee, delegatee, or transferee
shall be required to execute a counterpart to this Agreement, and shall agree
to be bound by the terms of this Agreement, including, but not limited to, the
obligation to vote the Security Holder Shares in accordance with Section
1.1(a).
4.9 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware without regard
to its principles of conflict of law.
4.10 Venue. Any action concerning a dispute arising out of or
concerning this Agreement, regarding the interpretation of this Agreement, or
regarding the relationships among the parties created pursuant to this
Agreement shall be filed only in the United States District Court for the
Central District of California or in the Superior Court of the State of
California for the County of Los Angeles.
4.11 Counterparts. This Agreement may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if
the signatures thereto and hereto were upon the same instrument.
4.12 Entire Agreement. This Agreement constitutes the entire
agreement between Superior and each Security Holder with respect to the subject
matter hereto.
4.13 Severability. If any term, condition or provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other terms, conditions and provisions of this Agreement
shall nevertheless remain in full force and effect so long as the economic or
legal substance of this Agreement is not affected in any manner materially
adverse to any party. Upon such determination that any term or other provision
is invalid, illegal or incapable of being enforced, the parties hereto shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible to the fullest extent permitted by
applicable law in a mutually acceptable manner in order that the terms of this
Agreement remain as originally contemplated to the fullest extent possible;
provided, however, that any such determination will not relieve any of the
parties hereto of liability for breach of any warranty or representation set
forth herein.
4.14 Legal Action. In the event of any litigation between or among
the parties hereto respecting or arising out of this Agreement, the prevailing
party or parties shall be entitled to recover reasonable attorneys' fees and
costs, whether or not such litigation proceeds to final judgment or
determination.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the day and year first above written.
SUPERIOR NATIONAL INSURANCE GROUP, INC.
By: /s/ J. CHRIS SEAMAN
------------------------------------------
Name: J. CHRIS SEAMAN
Title: Executing Vice President
Address for Notice: Superior National Insurance
Group, Inc.
26601 Agoura Road
Calabasas, California 91302
Attention: William L. Gentz
ALLSTATE INSURANCE COMPANY
By: /s/ DOUG R. WENDT
------------------------------------------
Name: DOUG R. WENDT
Title: Vice President
By: /s/ LOREN HALL
------------------------------------------
Name: LOREN HALL
Title: Assistant Vice President
Address for Notice: Allstate Insurance Company
2775 Sanders Road, Suite A3
Northbrook, Illinois 60062-6127
Attention: Caryn E. Hank, Strategic
Development Manager
with a copy to
Allstate Insurance Company
Investment law Department
3075 Sanders Road, Suite G5A
Northbrook, Illinois 60062-7127
Attention: Elizabeth J. Lapham, Esq.
DITO-DEVCAR CORPORATION, DITO CAREE LIMITED PARTNERSHIP,
a Nevada corporation a Nevada limited partnership
By: GAMEBUSTERS, INC.
a Nevada corporation
Its: General Partner
By: /s/ DAVID B. HEHN By: /s/ DAVID B. HEHN
------------------------- --------------------------
Name: DAVID B. HEHN Name: DAVID B. HEHN
Title: President Title: President
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PRAC LIMITED PARTNERSHIP,
a Nevada limited partnership
By: Somme, Inc.
a Nevada corporation
Its: General Partner
By: /s/ DAVID B. HEHN
----------------------------------
Name: DAVID B. HEHN
Title: President
/s/ RICHARD H. PICKUP
----------------------------------
RICHARD H. PICKUP, in his capacity as
Trustee of: Pickup Family Trust,
TMP Charitable Unitrust, and
DRP Charitable Unitrust
Address for Notices for: Dito-Devcar Corporation,
Dito Caree Limited Partnership
Prac Limited Partnership
3753 Howard Hughes Parkway, Suite 200
Las Vegas, Nevada 89109
Address for Notices for: Pickup Family Trust
TMP Charitable Unitrust
DRP Charitable Unitrust
c/o Wedbush Morgan Securities
610 Newport Center Drive, Suite 1300
Newport Beach, California 92660
Attention: Mr. Richard H. Pickup
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EXHIBIT A
<TABLE>
<CAPTION>
SECURITY HOLDER SECURITY HOLDER SHARES AMOUNT
--------------- ---------------------- ------
<S> <C> <C>
Dito-Devcar Corporation Pac Rim Shares 1,421,550
Dito Caree Limited
Partnership Pac Rim Shares 896,000
Pickup Family Trust Pac Rim Shares 92,000
TMP Charitable Unitrust Pac Rim Shares 29,000
Richard H. Pickup Trustee
DRP Charitable Unitrust Pac Rim Shares 30,000
Richard H. Pickup Trustee
Prac Limited Partnership Pac Rim Debentures $18,000,000
Allstate Insurance Company Pac Rim Debentures $2,000,000
</TABLE>
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EXHIBIT K TO ANNEX C
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT, executed this 15th day of April, 1994, but
except as specified herein, effective as of the Effective Date, is entered into
by and between PAC RIM HOLDING CORPORATION, a Delaware corporation (the
"Corporation"), THE PACIFIC RIM ASSURANCE COMPANY, a California corporation
("Employer"), and STANLEY BRAUN, an individual ("Employee").
1.0 RECITALS
1.1 Employer, Corporation, and Employee have previously
entered into that certain Employment Agreement dated as of January 1, 1991,
that Amendment No. 1 to the Employment Agreement, such Amendment effective
January 1, 1992, and an Amendment to Employment Agreement and Consulting
Agreement dated as of January 1, 1993 (the "Prior Agreements").
1.2 As of the Effective Date, the Prior Agreements
constituted the entire understanding concerning Employee's employment with
Employer.
1.3 Employer, Corporation, and Employee desire to enter
into this Employment Agreement upon the terms and conditions set forth herein,
and to supersede the Prior Agreements upon the effectiveness hereof.
1.4 Employer and Employee also desire to maintain
Employer's confidential and proprietary trade secrets by entering into the
Confidentiality Agreement contemporaneously herewith.
NOW THEREFORE, IN CONSIDERATION of the mutual covenants and agreements
contained herein and for other good and valuable consideration, the receipt and
adequacy of which is hereby admitted and acknowledged, the parties hereto agree
as follows:
2.0 DEFINITIONS
2.1 Agreement: "Agreement" shall mean this Employment
Agreement.
2.2 Business of Employer: "Business of Employer" shall
mean the business of worker's compensation insurance and such other business or
businesses substantially similar to the business of worker's compensation
insurance as the Employer may, in the future, engage in. For purposes of this
definition, the parties agree that because of the possibility that the nature
of worker's compensation insurance may be altered or included within other
types of insurance coverages, any system, type of insurance or coverage under
which the Employer provides its employees with the costs of medical care and
other specified benefits for work related injuries and illnesses without regard
to whether
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said system, type of insurance or coverage is called worker's compensation
insurance, shall be deemed to be a "Business of Employer" for purposes of this
Agreement. Without limiting the generality of the foregoing, each of the
businesses of health maintenance organizations, health care management,
worker's compensation and reinsurance and worker's compensation reinsurance
brokerage shall be deemed to be a "Business of Employer."
2.3 Confidential Information: "Confidential Information"
shall mean Employer's trade secrets as defined in the Confidentiality
Agreement.
2.4 Confidentiality Agreement: "Confidentiality
Agreement" shall mean that certain Confidentiality and Non-Disclosure Agreement
by and between the Employer, Corporation, and Employee entered into
concurrently herewith.
2.5 Corporation: "Corporation" shall mean Pac Rim
Holding Corporation, a Delaware corporation.
2.6 Covenant Territory: "Covenant Territory" shall mean
every city or county in the State of California, provided that the Employer
conducts its business in such city or county as the case may be.
2.7 Covenant Term: "Covenant Term" shall mean a period
beginning on the Effective Date and ending when Employee is no longer receiving
Base Salary under Section 7.1.
2.8 Definitive Agreement: "Definitive Agreement" shall
mean the Agreement To Purchase Series A Convertible Debentures and Series 1, 2
and 3 Detachable Warrants entered into by and between the Corporation and PRAC
Limited Partnership, a Nevada limited Partnership, dated April __, 1994.
2.9 Disability: "Disability" shall mean a determination
by the Board of Directors of Employer that, due to physical or mental illness,
Employee is unable to perform his customary duties hereunder for a period in
excess of (i) ninety (90) consecutive days, or (ii) one hundred twenty (120)
days in any consecutive twelve (12) month period.
2.10 Discharge for Cause: "Discharge for Cause" shall
mean: (a) a violation or termination of employment for proven embezzlement,
intoxication or illegal drug use which materially interferes with job
performance, absenteeism in excess of two (2) times normal corporate policy,
wrongful disclosure of the Employer's Confidential Information (including but
not limited to violation of the Confidentiality Agreement), gross
insubordination, conviction of a felony adversely affecting the ability of the
Employee to carry on his normal duties, breach of Sections 4.4 and/or 4.5
hereof, receipt of any rebate,
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kickback or other remuneration of consideration from any party that conducts
business with Employer, or other material breach of this Agreement, or (b)
failure to perform competently, in the Board's sole discretion, the customary
duties of those positions specified in Section 2.18(b) for businesses similar
to the Business of Employer.
2.11 Effective Date: "Effective Date" shall mean the date
final funding occurs pursuant to the terms of the Definitive Agreement. If
funding pursuant to the Definitive Agreement does not occur by September 1,
1994, this Agreement will not take effect and the Prior Agreements and each
party's rights and remedies thereunder shall be controlling for all purposes.
2.12 Employee: "Employee" shall mean STANLEY BRAUN, an
individual.
2.13 Employer: "Employer" shall mean THE PACIFIC RIM
ASSURANCE COMPANY, a California corporation.
2.14 Employment Agreement: "Employment Agreement" shall
mean that certain Employment Agreement dated January 1, 1991, including all
amendments thereto, by and among the Employer, Corporation, and Employee.
2.15 Option: "Option" shall mean the stock options
granted under the terms of the Option Agreement dated concurrently herewith, a
copy of which is attached hereto as EXHIBIT B.
2.16 Prior Agreements: "Prior Agreements" shall mean that
certain Employment Agreement dated as of January 1, 1991, that Amendment No. 1
to the Employment Agreement, such Amendment effective January 1, 1992, and an
Amendment to Employment Agreement and Consulting Agreement dated as of January
1, 1993.
2.17 Stock Pledge Agreement: "Stock Pledge Agreement"
shall mean that certain Stock Pledge Agreement dated February 25, 1992, as
amended on January 1, 1994 and April __, 1994, by and between the Employee and
the Corporation.
2.18 Termination Without Cause: "Termination Without
Cause" shall mean any of the following:
(a) termination of Employee's services during the
term of this Agreement for reasons other than Discharge for Cause;
(b) a material change in the duties of the
Employee beyond those duties that he is currently performing as President and
Chief Executive Officer of
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Employer. However, if Employee serves as Employer's or Corporation's Chairman,
Vice-Chairman, CEO, or President, with responsibilities commensurate with those
of senior management, Employee's duties shall be deemed not to have changed
materially.
(c) repeated gross harassment, malicious
ridicule, or malicious statements that repudiate the integrity or professional
standing of the Employee in a manner that materially impairs Employee's
performance of Employee's duties hereunder. In the case of any of the
foregoing, Employee shall provide Employer with written notice of the foregoing
items to provide Employer with an opportunity to investigate and rectify same.
Employer shall have thirty (30) days to cure such items, and no "Termination
Without Cause" shall occur until the expiration of such period without action
by Employer.
Termination initiated by the Employee by reason of Paragraphs
(b) or (c) shall constitute "Termination Without Cause."
3.0 EMPLOYMENT
The Employer hereby employs the Employee as of the Effective
Date, and the Employee hereby accepts employment with Employer, upon the terms
and conditions contained in this Agreement.
4.0 CAPACITIES AND DUTIES
4.1 Employee is hereby employed in the capacity of Chief
Executive Officer and President of Employer and Corporation, rendering such
services and having such managerial and, subject to Section 2.18(b), other
duties and responsibilities usual to executive management as may be assigned to
Employee from time to time by the Board of Directors of the Employer.
4.2 The Employee shall render these services as
determined by the Employer at 6200 Canoga Avenue, Woodland Hills, California
91367 or at such other home office for senior executives as Employer may
designate from time to time.
4.3 Corporation may also cause Employee to be elected to
Employer's and/or Corporation's Board of Directors, and/or be appointed as
Chairman or Vice-Chairman of either board, but same shall not entitle Employee
to any additional compensation hereunder.
4.4 Employee agrees to devote his best efforts and
exclusive time to rendering services to Employer and Corporation. The Employee
is specifically restricted from being employed by any other employer while
under the employ of the Employer and/or
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Corporation pursuant to the terms and conditions of this Agreement without
prior written approval of the Board of Directors of the Corporation and
Employer.
4.5 If Employee engages in other work activities in
breach of the exclusivity provisions of this Section, for compensation or other
consideration, or receives ancillary compensation for activities associated
with his employment with Employer or Corporation from sources unrelated to the
Employer or Corporation, it shall be grounds for immediate Discharge for Cause
and abatement of all accrued and unpaid bonuses, commissions, deferred
compensation, stock option rights and other benefits.
5.0 INTERIM COVENANTS
5.1 Until the Effective Date, as an inducement for
Corporation's and Employer's entry into this Agreement, Employee agrees that
the Prior Agreements shall remain in full force and effect pursuant to the
terms thereof; provided however, that (i) Employee covenants that Employee
shall be entitled to no loans in excess of FOUR HUNDRED FIFTY THOUSAND DOLLARS
($450,000) and (ii) each party agrees to take no action against the other
respecting any disputes concerning the loans. Said loans shall be frozen at
$450,000, but all other terms and provisions of the Prior Agreements shall
continue to apply. If this Agreement does not become operative (due to lack of
funding under the Definitive Agreement by September 1, 1994 or otherwise), the
Prior Agreements shall continue in full force and effect, Employee's covenant
freezing loans to Employee as provided above shall cease, and neither party
shall have any obligations to the other pursuant to this Agreement. As
collateral for the loans, on the Effective Date the Employee shall initially
pledge two hundred thousand (200,000) shares of common stock of the Corporation
pursuant to the Stock Pledge Agreement, as amended. For purposes of this
Agreement and the Stock Pledge Agreement Employee shall, on a yearly basis,
increase the number of shares if, based upon the current market price of such
shares, same is required to collateralize one hundred percent (100%) of
Employee's loan balance.
5.2 On the Effective Date, the Prior Agreements shall be
superseded by this Agreement and have no further force or effect.
6.0 TERM
6.1 Subject to the rights of parties to prior termination
and Employer's right to extend Employee's employment under the terms hereof,
the term of this Agreement shall be three (3) years, commencing on the
Effective Date.
6.2 This Agreement shall terminate upon the following
events:
(a) Employee's death;
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(b) Employee's Disability; or
(c) At either Employer's or Corporation's option
and in either of their discretion, upon Employee's breach of any of Employee's
covenants or obligations hereunder, other than those which would constitute a
Discharge for Cause. In order to terminate this Agreement pursuant to this
Subparagraph (c), either Employer or Corporation shall give Employee thirty
(30) days written notice of termination specifying the ground therefor.
Employee's termination will take effect upon expiration of said thirty (30) day
period, unless Employee fully cures the breach specified in such notice during
the thirty (30) day period following either Employer's or Corporation's giving
of such notice to Employee.
6.3 Upon the expiration of this Agreement for any reason,
this Agreement may be extended at Employer's option for up to four (4)
additional one (1) year periods. If Employer so specifies, Employee shall
continue to serve in one of the capacities described in Section 2.18(b) hereof
during any extension period. In such case, Employee shall continue to be
entitled to all benefits under this Agreement, including but not limited to all
benefits and stock options. Any extensions (whether or not Employer specifies
that Employee shall continue to serve in one of the capacities described in
Section 2.18(b) hereof) shall occur separately on each anniversary date
following the original expiration date by Employer's provision of written
notice to Employee, at least thirty (30) days prior to the expiration date, of
Employer's intent to extend this Agreement for one (1) year. If Employee is
terminated, and as a result of such termination is entitled to severance pay
under Section 7.6 hereof, any extension under this Section 6.3 shall take
effect at the end of the period for which Employee is entitled to severance
pay, and the required notice hereunder shall occur at least thirty (30) days
prior to the expiration of such period. Employer and Employee acknowledge that
one of the purposes of Employer's extension option is to give Employer the
benefit of Employee's skills, advice, and experience, even if, during the
period of any extension options, Employee is not serving in a full time
capacity, or not serving in one of the capacities described in Section 2.18(b)
hereof. If Employee terminates employment for any reason, and Employer
exercises the option granted herein but specifies that Employee's duties shall
no longer involve serving Employer in one of the capacities described in
Section 2.18(b) hereof, Employer's sole obligation to Employee shall be to pay
Employee the Base Salary provided in Section 7.1, in accordance with Employer's
normal payroll practices, and to provide Employee with medical benefits. If
Employer exercises its option to extend and specifies that Employee's duties
shall no longer include serving Employer in one of the capacities described in
Section 2.18(b) hereof, Employee will remain reasonably available for
consultation to Employer, and agrees to protect Employer's trade secrets in
accordance with the provisions of the Confidentiality Agreement. In such
circumstances, Employee shall be entitled to engage in activities that would
otherwise breach Section 4.4 hereof so long as such activities do not violate
the provisions of Section 11.0 hereof. For purpose hereof, Employee shall not
be obligated to render more than fifty (50)
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hours of service to Employer each month, nor more than six hundred (600) hours
of services in the aggregate per year. Further, if Employer exercises its
rights to extend following a Discharge With or Without Cause or if there is no
Discharge With or Without Cause but Employer specifies that Employee's duties
shall no longer include serving Employer in one of the capacities described in
Section 2.18(b) hereof, Employee shall not be deemed to be "employed" by
Employer during the period of any employment extensions solely for purposes of
determining Employee's rights under any stock options. Notwithstanding the
foregoing, if Employee is Discharged for Cause under Section 2.10(b), or
Discharge Without Cause, Employee shall have one (1) year beyond the effective
date of such discharges to exercise all options and such options shall continue
to vest in accordance with their terms until such one (1) year period expires.
6.4 Employee may terminate this Agreement prior to the expiration
of its term only if Employer and/or Corporation breaches any of its material
covenants or obligations hereunder. In such circumstances, Employee shall
provide Employer and/or Corporation with written notice, specifying Employer's
and/or Corporation's alleged breach, at least thirty (30) days prior to
Employee's termination. Said termination will take effect only if Employer
and/or Corporation fails to cure or correct the breach specified in the
Employee's written termination notice within thirty (30) days of Employer's
and/or Corporation's receipt thereof. Even in the case of a breach by
Employer, Employer may exercise the extension options provided in Section 6.3;
provided however, that any such extension will be treated as if Employer has
specified that Employee's duties shall no longer include serving Employer in
one of the capacities described in Section 2.18(b) hereof. Further, if
Employee terminates this Agreement under circumstances constituting a
"Termination Without Cause" that entitles Employee to severance pay under
Section 7.6 hereof, Employer's extension option under Section 6.3 shall take
effect only after the expiration of the period for which Employee is entitled
to severance pay under Section 7.6, with Employer's notice of any extension to
be provided to Employee at least thirty (30) days prior to the expiration of
the period for which Employee is entitled to severance benefits.
6.5 Employer or Corporation may unilaterally terminate this
Agreement in the following circumstances:
(a) Upon a Discharge for Cause, which shall take effect
immediately upon either Employer's or Corporation's written notification to
Employee, outlining the reasons for cause. For Discharges for Cause under
Section 2.10(a), Employee shall not be entitled to any further benefits under
this Agreement. In such circumstances, Employee shall be entitled to retain
and exercise all vested unexercised stock options, but any unvested unexercised
stock options granted to Employee shall immediately and automatically
terminate. For Discharges for Cause under Section 2.10(b), Employee may
exercise options in accordance with the last sentence of Section 6.3.
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(b) In Employer's or Corporation's sole discretion in the
absence of a Discharge for Cause. In such circumstances, Employee shall be
entitled to the severance pay set forth in Subsection 7.6.
7.0 BASE COMPENSATION AND NORMAL BENEFITS
For the service of Employee, the Employer agrees to pay to
Employee compensation as follows:
7.1 Base Salary: Annual base compensation of FOUR
HUNDRED THOUSAND DOLLARS ($400,000.00), paid according to the general payroll
practices of Employer as same exists from time to time.
7.2 Annual Bonus:
(a) In addition to other compensation payable
hereunder, Employer's Board of Directors may, in its sole and absolute
discretion, grant Employee an annual bonus for each calendar year (or portion
thereof in the case of a period of less than twelve (12) months) during the
term hereof. If granted, any bonus shall be paid by Employer to employee
promptly after the first meeting of the Employer's Board of Directors following
the previous calendar year, but in no case later than April 30th of each year.
(b) In addition to the bonus delineated in
Paragraph (a), if there is a pool of bonuses for all senior executives of the
Employer or Corporation, the Employee shall be included in said pool. The
amount of the bonus from said pool payable to the Employee, if any, shall be
determined in the sole discretion of the Board of Directors. However, if the
Board of Directors authorizes payments out of the pool to other senior
executives who have been employed for at least a full year by Employer,
Employee shall receive an amount from the bonus pool that is at least equal to
the lowest bonus paid to other senior executives out of the pool.
7.3 Reasonable Expenses: The Employer shall pay or
reimburse the Employee for any reasonable expenses incurred by the Employee in
the business of the Employer for the promotion of its business, on the basis
consistent with policies and guidelines approved by the Board of Directors of
the Employer and in effect from time to time; provided, however, that in any
event the following expenses shall be borne by the Employer.
(a) The Employer will pay or will reimburse the
Employee for an automobile used primarily in business travel by Employee on
behalf of the Employer, and shall pay for the reasonable cost of a driver for
all of Employee's business-related use of the automobile.
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(b) The Employer will pay or will reimburse the
Employee for the cost of insurance, maintenance, repairs, and operating
expenses reasonably and actually incurred on behalf of the Employer in
connection with said automobile and for the business-related car phone usage in
the same; provided, however, that the Employee shall pay to the Employer (by
withholding or otherwise) the sum of ONE HUNDRED DOLLARS ($100.00) per month to
reimburse the Employer for the Employee's personal use of said automobile.
(c) The Employer will pay or will reimburse the
Employee for monthly or other periodic (non-initiation) fees and dues for the
Employee's membership in and other business-related charges reasonably and
actually incurred by the Employee for business promotion and entertainment at
the Calabasas Country and Golf Club and the Palm Valley Country Club.
(d) The Employer will pay or will reimburse the
Employee for the actual cost of his personal income tax preparation; up to a
maximum of TWO THOUSAND FIVE HUNDRED DOLLARS ($2,500.00) per annum.
(e) The Employer will pay to the Employee as
additional compensation, annually, during the term of this Agreement, an amount
equal to one hundred forty percent (140%) of the amount of accrued interest
with respect to loans pursuant to Section 9.0.
7.4 Additional Benefits: The Employee shall have the
right to participate in any medical, vision, dental, life (including accidental
death and dismemberment) and long-term disability group insurance plans or
similar employee benefit plans now in effect or hereinafter established or
ratified by the Employer's Board of Directors for the benefit of managerial or
salaried employees (but not including any stock option plan unless specifically
permitted to participate in such plan by permission of the Employer's Board of
Directors) for so long as such plan is maintained in effect for the benefit of
such employees, with the Employee's participation or share therein being
determined by the terms, provisions, and requirements of the respective plans
as in effect from time to time; provided, however, that notwithstanding the
foregoing provisions of this Section 7.0, the following provisions will apply:
(a) The cost of Employee's coverage under the
group insurance plans and additional benefits mentioned in Subsection 7.4
above, as well as the coverage of the Employee's spouse and dependent minor
children under the medical and dental group insurance plans, will be borne by
the Employer.
(b) To the extent that, because of a deductible
or co-insurance provision of the insurance policy, the group insurance plan
referred to herein does
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not pay all medical and dental expenses of the Employee, the Employee's spouse
or the Employee's dependent minor children, then the Employer shall pay any
such deductible or co-insurance sum that is not covered upon verification or
the lack of insurance payment of said expense, not to exceed TWENTY-FIVE
THOUSAND DOLLARS ($25,000.00) per year.
(c) The Employer will purchase long-term
disability insurance providing the Employee with payments of NINETEEN THOUSAND
DOLLARS ($19,000.00) per month until age sixty-five (65) provided the cost of
such long-term disability insurance does not exceed TWELVE THOUSAND DOLLARS
(12,000.00) per year; provided, however, that any amounts received by Employee
under such policy shall be offset against any salary payable to the Employee
hereunder and further provided in the event the costs of such long-term
disability insurance exceeds TWELVE THOUSAND DOLLARS ($12,000.00) per year, at
the Employee's option; (i) the Employer will purchase only that amount of
long-term disability coverage premium for which is TWELVE THOUSAND DOLLARS
($12,000.00) per year; or (ii) the Employee will pay for the premium in excess
of TWELVE THOUSAND DOLLARS ($12,000.00) per year.
7.5 Vacation:
(a) Employee shall be entitled a vacation on an
annual basis for six (6) weeks; provided, however, that upon termination of
employment hereunder, except as provided in Paragraph (c) below, Employee shall
be in no event entitled to compensation for accrued vacation and time in excess
of the number of days of vacation that the Employee accrued during his last
twelve (12) months of employment with the Employer and which has not been used.
(b) Employee and Employer acknowledge that
currently a dispute exists as to the amount of vacation that Employee has
accrued prior to the Effective Date. To settle this dispute, Employee agrees
that he is entitled to vacation that Employee has accrued since January 1,
1993, and which remains unused as of the Effective Date.
(c) Notwithstanding the preceding, should the
Employee be Terminated Without Cause before the first anniversary date of the
Effective Date, then the Employee shall be entitled to six (6) weeks of accrued
vacation for 1993.
7.6 Severance: In the event the Employee is Terminated
Without Cause during the first two (2) years of the initial three (3) year
term, the Employer shall pay Employee compensation equal to one (1) year's Base
Salary, plus medical benefits under Section 7.4. If Employee is Terminated
Without Cause after the first two (2) years of the initial three (3) year term,
Employee shall be entitled to continue to receive Base Salary and medical
benefits until the expiration of the initial three (3) year term. All amounts
paid
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under this Section 7.6 shall be paid in accordance with the Employer's usual
payroll practices as they exist from time to time. During the period any
severance benefits are being paid pursuant to this Section 7.6, Employee shall
still be deemed to be employed by Employer for purposes of Section 11.0 hereof.
8.0 STOCK OPTIONS
Employee shall be eligible for non-qualified stock options on
the terms and conditions hereinafter stated:
8.1 Grant of Options:
(a) Subject to the limitations set forth in
Section 8.3, on the Effective Date Corporation hereby grants Employee the right
to purchase an aggregate of five hundred thousand (500,000) shares of
Corporation's common voting stock. Said grant shall be evidenced by the Option
Agreement in a form substantially identical to EXHIBIT B, attached hereto and
made a part hereof.
(b) The options shall be granted in two (2)
increments designated Option A and Option B. Each of such options gives
Employee the right to purchase two hundred fifty thousand (250,000) shares.
8.2 Option Price: The purchase price under each option
are as follows:
(a) For Option A, TWO AND 75/100 DOLLARS ($2.75)
per share, for an aggregate purchase price of SIX HUNDRED EIGHTY-SEVEN THOUSAND
FIVE HUNDRED DOLLARS ($687,500.00) if Option A is exercised in its entirety.
(b) For Option B, FIVE AND 50/100 DOLLARS ($5.50)
per share, for an aggregate purchase price of ONE MILLION THREE HUNDRED
SEVENTY-FIVE THOUSAND AND 00/100 DOLLARS ($1,375,000) if Option B is exercised
in its entirety.
8.3 Vesting and Exercise: Options A and B shall vest and
become exercisable as follows:
(a) Option A:
(1) Option A shall vest equally, without
any proration and on an annual basis, over the two (2) year period beginning on
the first anniversary of the
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Effective Date. Employee shall thus have the right to purchase one hundred
twenty-five thousand (125,000) shares on the first anniversary of the Effective
Date; and one hundred twenty-five thousand (125,000) shares exercisable on the
second anniversary of the Effective Date.
(2) So long as Employee is employed
hereunder (but not including any extensions of this Agreement made at
Employer's option pursuant to Section 6.3, unless Employer, in exercising such
extension option, has specified that Employee shall continue to serve Employer
in one of the capacities set forth in Section 2.18(b)), Employee may exercise
the vested portion of Option A any time prior to the fourth anniversary
following the Effective Date. Any options subject to Option A that are not
exercised by the earlier of (i) the fourth anniversary following the Effective
Date, or (ii) one (1) year following the Effective Date of Employee's
termination, shall automatically lapse, regardless of whether Employee's
employment is extended pursuant to Section 6.3.
(b) Option B:
(1) Option B shall vest equally, without
any proration and on an annual basis, over the two (2) year period beginning on
the third anniversary of the Effective Date. Employee shall thus have the
right to purchase one hundred twenty-five thousand (125,000) shares on the
third anniversary of the Effective Date and one hundred twenty-five thousand
(125,000) shares exercisable on the fourth anniversary of the Effective Date.
(2) So long as Employee is employed
hereunder (but not including any extensions of this Agreement made at
Employer's option pursuant to Section 6.3), unless Employer, is exercising such
extension option, has specified that Employee shall continue to serve Employer
in one of the capacities set forth in Section 2.18(b), Employee may exercise
the vested portion of Option B any time prior to the fifth anniversary of the
Effective Date. Any shares subject to Option B that are not exercised by the
earlier of (i) the fifth anniversary of the Effective Date, or (ii) one (1)
year following the effective date of Employee's termination, shall
automatically lapse, regardless of whether Employee's employment is extended
pursuant to Section 6.3.
(c) Accelerated Vesting: Notwithstanding the
preceding, in the event the Employee is Terminated Without Cause following a
merger, sale, or change of more than fifty-one percent (51%) control (occurring
as part of one transaction) of the Corporation, all granted and unvested
options shall immediately vest and shall become immediately exercisable by
Employee. For purposes of the preceding, Investor's (as that term is defined
in the Definitive Agreement) conversion of the Corporation's debentures it owns
into common stock of the Corporation or exercise of any Warrants required
pursuant to
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the Definitive Agreement shall not be considered for purposes of determining if
there has been a greater than fifty-one percent (51%) change in control.
8.4 Payment: The full consideration for any shares
purchased by Employee pursuant to either Option A or B shall be paid in cash.
8.5 Employee's Breach:
(a) Employee acknowledges that the purpose of
Corporation's grant of Option A and Option B to Employee is to provide Employee
with incentives to carry out Employee's obligations to Employer and the
Corporation under the terms hereof, and that Employee's failure to do so
constitutes a material failure of consideration for Corporation's grant of
Options A and B.
(b) Therefore, notwithstanding any other
provisions hereof, the unvested portions of Options A and B shall automatically
lapse and have no further force and effect for any of the following reasons:
(1) If Employee is Discharged for Cause
under Section 2.10(a);
(2) Employee's uncured breach of this
Agreement including the Covenant Not to Compete; or
(3) Employee's breach of the
Confidentiality Agreement.
(c) If Employee is Discharged for Cause under
Section 2.10(b), Employee shall have those exercise rights set forth in the
last sentence of Section 6.3.
8.6 Prior Stock Options:
(a) The following options shall continue in force
in accordance with their terms and shall not be affected by the options granted
herein:
(1) Incentive stock option for fifty
thousand (50,000) shares at TWO AND 50/100 DOLLARS ($2.50) per share; and
(2) Non-qualified stock option for fifty
thousand (50,000) shares at SEVEN AND 50/100 DOLLARS ($7.50) per share.
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(b) The prior option granting the Employee the
right to purchase four hundred seventy-five thousand shares (475,000) of the
Corporation's common stock granted on October 4, 1991, is hereby amended to
provide that said stock option will expire according to its terms upon the
granting of Option A and Option B under Section 8.3.
9.0 EMPLOYEE LOANS
9.1 Loan Amount: The Employee acknowledges that the
Corporation has previously loaned the Employee the sum of FOUR HUNDRED FIFTY
THOUSAND DOLLARS ($450,000.00) (the "Loan").
9.2 Interest Rate: The Loan currently bears interest at
the rate of ten percent (10%) per annum.
9.3 Stock Pledge Agreement: As collateral for the Loan,
the Employee has entered into the Stock Pledge Agreement, as amended, with the
Corporation by which the Employee has pledged approximately one hundred eighty
thousand (180,000) shares of common stock of the Corporation as security for
the Loan. On the Effective Date, Employee agrees to initially pledge a total
of two hundred thousand (200,000) shares to the Corporation under the Stock
Pledge, with the number of pledged shares subject to upward adjustment on an
annual basis so that the value of the pledged shares equals one hundred percent
(100%) of the outstanding Loan balance. For purposes hereof, all stock subject
to the pledge shall be valued at the current market price thereof, and Employee
agrees to provide additional stock as collateral upon Employer's request if the
collateral for the Employee Loan is not equal to one hundred percent (100%) of
Employee's outstanding Loan balance. The Employee further agrees that any
shares purchased pursuant to the Option shall also be subject to the Stock
Pledge Agreement. The Employee agrees to execute any amendment to the Stock
Pledge Agreement and any ancillary documents and to take any action requested
by the Corporation to comply with the provisions of this Subsection.
9.4 No Additional Loans: Subject to Section 5.1,
Employee agrees that neither the Corporation nor Employer is under an
obligation to advance any further loans to the Employee other than the existing
Loan outstanding in the amount indicated in Subsection 9.1.
9.5 Modification: Upon the Effective Date, Corporation
and Employee agree to modify the terms of the Loan to provide for interest of
five percent (5%) per annum. The Loan shall be documented in a promissory
note, which shall provide for payment in full of the Loan, with interest at
prime plus one percent (1%), within six (6) months of Employee's termination
during the original term hereof for any reason. In addition, the Employee
agrees that if Employee is terminated for any reason stated in section 2.10(a)
hereof, Corporation and Employer may offset any amounts due Employee either in
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the form of compensation or other payments due him form the Employer or the
Corporation has payments against the note. Notwithstanding the preceding,
there shall be no offset rights if the amount of collateral pledged per the
Stock pledge Agreement equals or exceeds one hundred fifty percent (150%) of
the loan outstanding.
10.0 PROTECTION AGAINST DISCLOSURE OF CONFIDENTIAL INFORMATION
10.1 Access to Confidential Information: The Employee
recognizes and acknowledges that he has had and has access to certain
Confidential Information of the Corporation and Employer and that such
information constitutes valuable, special, and unique property of the
Corporation and Employer.
10.2 Confidentiality Agreement: Concurrent with the
execution of this Agreement, the Employee will enter into that certain
Confidentiality Agreement which sets forth the Agreement of the Corporation,
Employer, and the Employee regarding Confidential Information.
10.3 Condition Precedent: Employee acknowledges that but
for his entering into the Confidentiality Agreement, neither the Corporation
nor the Employer would have entered into this Agreement.
10.4 Breach of Confidentiality Agreement: Employee,
Corporation, and Employer agree that a breach under the Confidentiality
Agreement shall constitute a breach of this Agreement and shall give rise to a
Discharge for Cause.
10.5 Property of Employer: All records, forms, supplies,
or reproduced copies, provided and furnished by the Corporation or the Employer
to the Employee, or obtained by the Employee during the performance of his
services under this Agreement, and/or the Prior Agreements shall remain the
property of the Employer and shall be accounted for and returned by the
Employee upon demand of Employer or the Corporation. Such records, forms, and
supplies shall include, but not be limited to, such things as: documents;
interoffice memos; records, any correspondence, regardless of the author;
notebooks; client lists; or any such other supplies provided by the Employer or
the Corporation. It is expressly understood that the Employee's license to the
possession of said records, forms or supplies, or any copies thereof, are to
fulfill his obligations to the Employer or the Corporation under this Agreement
and/or the Prior Agreements, and he has no other right or proprietary interest
in those documents.
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11.0 RESTRICTIVE COVENANT NOT TO COMPETE
11.1 Covenant: During the period of time any payments are
being made by Employer, its successors, or assigns, including the corporation,
under this agreement, Employee shall not engage in or participate in the
Business of the Employer, directly or indirectly, as a partner, shareholder,
officer, director, employee, consultant, independent contractor, agent or
otherwise, within the Covenant Territory, other than by working for Employer,
the Corporation or either of their successors or assigns.
11.2 Affiliation: The Employee agrees that during the
Covenant Term, he will not, directly or indirectly, individually or together or
through any affiliate or other firm, request, advise, solicit, entice,
persuade, induce, approach or counsel or attempt to request, advise, solicit,
entice, persuade, induce, approach, or counsel any employee, insurance broker,
insurance agent, reinsurer, reinsurance broker, insured, client or customer of
Employer to withdraw, curtail, cancel, terminate, alter or refrain from
extending or renewing any contractual or other relationship of such employee,
insurance broker, insurance agent, reinsurer, reinsurance broker, insured,
client, or customer with the Employer or, where such a relationship with the
Employer is one of an exclusive nature, to commence a similar or substantially
similar relationship with the employee, or any of his affiliates, or any
competitor of the Employer in the Covenant Territory. In addition, the
Employee agrees that, if his employment is terminated during the Covenant Term,
he will not, directly or indirectly, individually or together or through any
affiliate or other firm, employ or attempt to employ any of the Employer's
employees or induce or encourage any of the Employer's Employees to seek or
take employment other than with Employer.
11.3 Failure to Comply: The Employee's failure to comply
with the provisions of this Section 11.0 shall give the Employer the right (in
addition to all other remedies the Employer may have) to terminate any benefits
or compensation to which the Employee may be otherwise entitled, following
termination of his employment hereunder. The Employee's obligations pursuant
to this Section 11.0 shall be excused during such time that the Employee has
performed his obligations under this Agreement and Employer has failed to pay
the Employee the consideration owed to him, pursuant to this Agreement, in
addition to all the rights the Employee may have with respect to such breach by
the Employer.
11.4 Enforceability: If any provisions of this Section
11.0 as applied to any party or circumstances, shall be adjudged by a court to
be invalid or unenforceable, the same shall in no way affect any other
provision of this Agreement, the application of such provision and any other
circumstances, or the validity or enforceability of this Agreement. If any
provision of this Section 11.0, or any part thereof, is held to be
unenforceable, the court making such determination shall have the power to
modify such
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provisions so that the restriction imposed thereby is no greater than what
would otherwise be permissible under the applicable law.
11.5 Separate Covenants: The parties hereto agree that
the duration and area for which the covenants set forth herein is to be
effective are reasonable. In the event that any court determines that the time
period or the area, or both of them, are unreasonable and that such covenant is
to the extent unenforceable, the parties hereto agree that the covenant shall
remain in full force and effect for the greatest time period and to the
greatest area that would not render it unenforceable. The parties intend that
this covenant shall be deemed to be a series of separate covenants, one for
each and every county in the State of California where this covenant is
intended to be effective.
11.6 Equitable Relief: The Employee represents that due
to his education and qualifications and the significant consideration which he
will receive pursuant to this agreement, his ability to earn a livelihood would
not be impaired if Employer is granted in equitable relief to enforce the
obligations set forth in this Agreement.
11.7 Extension of Covenant Term: The term of the covenant
provided for in this Section 11.0 shall be extended by any period for which
Employer, in its sole discretion, elects to extend the term of Employee's
employment, as provided in Section 6.3 hereof.
12.0 RELEASE OF CLAIMS
12.1 Upon the Effective Date, Corporation and Employer,
and each of them, do hereby for themselves, and for their agents, current or
former employees, representatives, attorneys, legal successors and assigns,
officers, directors and shareholders, expressly release and absolutely and
forever discharge Employee, and Employee's respective agents, representatives,
attorneys legal successors and assigns, of and from any and all claims,
demands, damages, debts, liabilities, obligations, costs, expenses, liens,
actions and causes of action of every kind and nature whatever, whether known
or unknown at the Effective Date, suspected or unsuspected, which Corporation
and Employer, and each of them, have at the Effective Date, own or hold, or at
any time prior to the Effective Date ever had, owned or held, or could, shall
or may after the Effective Date have, own or hold against Employee based upon,
related to or by reason of any contract, express, implied in fact or implied by
law, lien, liability, matter, cause, fact, thing, act or omission whatsoever
occurring or existing; provided, however, that such release shall not relieve
(i) Employee's obligation to repay the sum of FOUR HUNDRED FIFTY THOUSAND
DOLLARS ($450,000) to Corporation as provided herein or (ii) any obligation of
Employee arising pursuant to this Agreement or the Confidentiality Agreement.
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12.2 Upon the Effective Date, Employee does hereby for
himself, and for his agents, representatives, attorneys, legal successors and
assigns, expressly release and absolutely and forever discharge Corporation and
Employer and each of Corporation's and Employer's respective agents, current or
former employees, representatives, attorneys, legal successors and assigns,
officers, current and former directors and shareholders, of and from any and
all claims, demands, damages, debts, liabilities, obligations, costs, expenses,
liens, actions and causes of action of every kind and nature whatever, whether
known or unknown at the Effective Date, suspected or unsuspected, which
Employee has, at the Effective Date, owns or holds, or at any time prior to the
Effective Date ever had, owned or held, or could, shall or may after the
Effective Date have, own or hold against Corporation and Employer, and each of
them based upon, related to or by reason of any contract, express, implied in
fact or implied by law, lien, liability, matter, cause, fact, thing, act or
omission whatsoever occurring or existing; provided, however, that such release
shall not relieve the Employer's obligations arising pursuant to this
Agreement.
12.3 The parties expressly agree and acknowledge to one
another that they are familiar with Section 1542 of the Civil Code of the State
of California, and waive any and all right under Section 1542 and any similar
law of any state or territory of the United States. Said section provides as
follows:
SECTION 1542. CERTAIN CLAIMS NOT AFFECTED BY GENERAL RELEASE. A
GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT
KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH DEBTOR.
INITIALS:
_________ _________ _________
Employee Employer Corporation
13.0 WAIVER
The failure of the Employer, Corporation, and Employee at any
time to demand strict performance by the other of any terms, covenants, or
conditions set forth herein, shall not be construed as a continuing waiver or
relinquishment thereof, and either party may, at any time, demand strict and
complete performance by the other of said terms, covenants, and conditions.
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14.0 SIGNIFICANCE OF HEADINGS
Section and Subsection headings contained herein are solely
for the purpose of convenience, and are not in any sense to be given weight in
the construction of this Agreement. Accordingly, in the case of any question
with respect to the construction of this Agreement, it is to be construed as
though section and subsection headings have been omitted.
15.0 EMPLOYER/EMPLOYEE RELATIONSHIP
This Agreement shall specifically include any
employer/employee relationship. The Employer and/or Corporation shall be
responsible for withholding the appropriate taxes and paying the appropriate
taxes and other assessments on the Employee, pursuant to the regulations
promulgated by the related governmental agencies.
16.0 ENTIRE AGREEMENT
16.1 Sole Agreement: This Agreement (including any
attachments and EXHIBITS hereto) contains the parties' sole and entire
agreement regarding the subject matter hereof, and supersedes any and all other
agreements between them.
16.2 No Other Representations: The parties acknowledge
and agree that no party has made any representations (a) concerning the subject
matter hereof, or (b) inducing the other party to execute and deliver this
Agreement, except those representations specifically referenced herein. The
parties have relied on their own judgment in entering into this Agreement.
16.3 No Reliance: The parties further acknowledge that
any statements or representations that may have been made by either of them to
the other are void and of no effect. No party has relied on any such
statements or representations in dealing with the other(s).
17.0 COOPERATIONS AND FURTHER ACTIONS
The parties agree to perform any and all acts and to execute
and deliver any and all documents necessary or convenient to carry out the
terms of this Agreement.
18.0 NO MODIFICATIONS OR WAIVER
18.1 Must Be Written: Waiver or modifications of this
Agreement, or of any covenants, condition, or limitation contained herein, are
valid only if in writing. Such writing must be duly executed by the parties.
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18.2 No Use As Evidence: One or more waivers or
modifications of any covenant, term, or condition in this Agreement by any
party shall not be construed by any other party as a waiver or modification
applicable to any subsequent breach of the same covenant, term, or condition.
Evidence of any such waiver or modification may not be offered or received in
evidence in any proceeding, arbitration, or litigation between the parties
arising out of or affecting this Agreement, or a party's rights or obligations
under it. This limitation does not apply if the waiver or modification is in
writing and duly executed as provided above.
19.0 JOINT PREPARATION
The parties to this Agreement have been represented by
competent counsel. This Agreement is therefore deemed to have been jointly
prepared by the parties, and any uncertainty or ambiguity existing in it shall
not be interpreted against any party under the presumptions of California Civil
Code Section 1654, but rather shall be interpreted according to the rules
generally governing the interpretation of contracts.
20.0 SPOUSAL CONSENT
By executing this Agreement, the Employee represents and
warrants that he has secured the permission and consent of his spouse to enter
into this Agreement and fully perform his respective obligations hereunder.
Employee has obtained the signature of his spouse on the Spousal Consent
attached hereto as EXHIBIT A.
21.0 PROFESSIONAL FEES
If a lawsuit or other proceedings are instituted by any party
to enforce any of the terms or conditions of this Agreement against any other
party hereto, the prevailing party in such litigation or proceedings shall be
entitled, as an additional item of damages, to such reasonable attorneys' and
other professional fees (including but not limited to expert witness fees) and
court costs or costs of such other proceedings as may be fixed by any court of
competent jurisdiction, or other judicial or quasi-judicial body having
jurisdiction thereof, whether or not such litigation or proceedings proceed to
a final judgment or award.
22.0 BINDING UPON SUCCESSORS
This Agreement shall be binding upon and inure to the benefit
of the parties hereto and their respective heirs, legal representatives,
successors and assigns.
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23.0 ARBITRATION OF DISPUTES
In the event of any dispute under or relating to the terms of
this Agreement, or breach thereof, it is agreed that the same shall be
submitted to arbitration to the American Arbitration Association
("Association"), at Los Angeles, California. The arbitration shall be
conducted in accordance with the rules promulgated by that Association, except
that pursuant to Code Civ. Proc. Section 1283.1(b), the provisions of Code
Civ. Proc. Section 1283.05 are incorporated into the arbitration. Any
judgment upon the award rendered by the arbitrator(s) may be entered in any
court, state or federal, having jurisdiction thereof.
24.0 SEVERABILITY
If any part, clause, or condition of this Agreement is held to
be partially or wholly invalid, unenforceable, or inoperative for any reason
whatsoever, such shall not affect any other provision or portion hereof, which
shall continue to be effective as though such invalid, inoperative, or
unenforceable part, clause or condition had not been made.
25.0 GOVERNING LAW AND VENUE
All questions concerning this Agreement, its construction, and
the rights and liabilities of the parties hereto shall be interpreted and
enforced in accordance with the laws of the State of California as applied to
contracts which are executed and performed entirely within the state. For
purposes of this Agreement, sole and proper venue shall be the City of Los
Angeles, State of California.
26.0 INTERPRETATION
26.1 Section Headings: The section and subsection
headings of this Agreement are included for purposes of convenience only, and
shall not affect the construction or interpretation of any of its provisions.
26.2 Capitalized Terms: Except as otherwise expressly
provided herein, all capitalized terms defined in this Agreement shall have the
meaning ascribed to them herein.
26.3 Gender and Number: Whenever required by the context,
the singular shall include the plural, the plural shall include the singular,
and the masculine gender shall include the neuter and feminine genders and vice
versa.
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27.0 FACSIMILE NOTICES
For purposes hereof, delivery of written notice shall be
complete upon receipt of electronic facsimile, provided that any facsimile
notice shall only be deemed received if (a) the transmission thereof is
confirmed, and (b) facsimile notice is followed by written notice, made either
by (i) personal delivery thereof, or (ii) via deposit in regular mail, postage
prepaid, within three (3) business days following the facsimile notice.
Notices shall be addressed to the parties as follows:
Employer: Pac Rim Holding Corporation
Attn: PAUL W. CRAIG
6200 Canoga Avenue
Woodland Hills, CA 91367
Phone: (818) 593-8250
Fax: (818) 595-0088
Employer: The Pacific Rim Assurance Company
Attn: PAUL W. CRAIG
6200 Canoga Avenue
Woodland Hills, CA 91367
Phone: (818) 593-8250
Fax: (818) 595-0088
With required Barger & Wolen
copy to: 19800 MacArthur Blvd.
8th Floor
Irvine, CA 92715
Attn: Dennis W. Harwood, Esq.
Phone: (714) 757-2800
Fax: (714) 752-6313
Employee: Stanley Braun
The Pacific Rim Assurance Company
6200 Canoga Avenue
Woodland Hills, CA 91367
Phone: (818) 226-6200
Fax: (818) 595-0088
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With a required Scott Smith, Esq.
copy to Attorney Pillsbury Madison & Sutro
for Employee: 2700 Sandhill Road
Menlo Park, CA 94025-7020
Phone: (415) 233-4514
Fax: (415) 233-4545
Notice shall be deemed given on the date it is sent via
facsimile. Any party may change the address to which to send notices by
notifying the other party of such changes in writing in accordance with this
Paragraph.
28.0 TIME OF ESSENCE
The parties acknowledge and agree that time is strictly of the
essence with respect to each and every term, condition, obligation, and
provision hereof. Failure to timely perform any of the terms, conditions,
obligations, or provisions hereof by any party shall constitute a material
breach of this Agreement by the party so failing to perform.
29.0 THIRD PARTY BENEFICIARIES
No term or provision of this Agreement is intended to be, or
shall be, for the benefit of any person, firm, organization or corporation not
a party hereto, and no such other person, firm, organization or corporation
shall have any right or cause of action hereunder.
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30.0 COUNTERPARTS
This Agreement may be executed in several counterparts, each
of which so executed shall be deemed to be an original, but such counterparts
shall together constitute and be one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have set their hands the day
and year first above written.
PAC RIM HOLDING CORPORATION,
a Delaware corporation
By:/s/ Paul W. Craig
-------------------------------
Paul W. Craig
Its: Executive Vice President
"CORPORATION"
THE PACIFIC RIM ASSURANCE COMPANY,
a California corporation
By:/s/ Paul W. Souza
-------------------------------
Paul W. Souza
Its: Vice President
& Chief Financial Officer
"EMPLOYER"
/s/ Stanley Braun
-------------------------------------------
STANLEY BRAUN, an individual
"EMPLOYEE"
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EXHIBIT A
CONSENT TO AGREEMENT
I, the undersigned, am the spouse of Stanley Braun. I have read the
Employment Agreement entered into on April 15, 1994, by and among Pac Rim
Holding Corporation, a Delaware corporation and The Pacific Rim Assurance
Company, a California corporation ("Corporation") and my spouse, Stanley Braun,
and clearly understand the provisions thereof. I am aware that by the
provisions of said Agreement my spouse has agreed to certain provisions
regarding his employment with the aforementioned Corporation, including the
expiration of certain stock options according to their terms and the grant of
new stock options and my community interest therein, if any, in accordance with
the terms and provisions of said Agreement. I hereby approve of and consent
and agree to be bound by the provisions of said Agreement, in its entirety.
DATED: April 20, 1994.
/s/ Nancy W. Braun
-----------------------------------
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AMENDMENT TO
EMPLOYMENT AGREEMENT
THIS AMENDMENT TO EMPLOYMENT AGREEMENT, executed this 27th day of
March, 1995, is entered into by and between PAC RIM HOLDING CORPORATION, a
Delaware corporation (the "Corporation"), THE PACIFIC RIM ASSURANCE COMPANY, a
California corporation ("Employer"), and STANLEY BRAUN, an individual
("Employee").
1.0 RECITALS
1.1 Employer, Corporation, and Employee have previously
entered into that certain Employment Agreement executed on April 15, 1994, which
became effective under its terms on August 16, 1995.
1.2 As of the date of this Amendment, the Agreement
constitutes the entire understanding concerning Employee's employment with
Employer.
1.3 Employer, Corporation, and Employee desire to enter into
this Amendment upon the terms and conditions set forth herein, to amend the
Agreement.
NOW THEREFORE, IN CONSIDERATION of the mutual covenants and agreements
contained herein and for other good and valuable consideration, the receipt and
adequacy of which is hereby admitted and acknowledged, the parties hereto agree
as follows:
2.0 DEFINITIONS. The following definitions, to the extent differing
from the definitions contained in the Agreement supersede same and shall be
controlling in interpreting this Amendment:
2.1 Affiliate: "Affiliate" shall have the meaning ascribed to
it by the Securities Act of 1933 as amended and the rules and regulations
promulgated thereunder.
2.1a Agreement: "Agreement" shall mean that certain Employment
Agreement executed on April 15, 1994, which became effective under its terms on
August 16, 1994 and this Amendment by and among Corporation, Employer and
Employee.
2.1b Amendment: "Amendment" shall mean this Amendment to
Employment Agreement.
2.1c Base Salary: Base Salary shall mean FOUR HUNDRED THOUSAND
DOLLARS ($400,000) in annual compensation paid in accordance with the general
payroll practices of Employer as same exists from time to time.
2.2a Change in Control: "Change in Control" shall mean the
closing of an acquisition by no later than June 30, 1996 of more than fifty-one
percent (51%) of the
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outstanding common stock of Corporation through a merger, sale, or
reorganization by an entity, individual, or group acting in concert which
satisfies all of the following:
(i) The affirmative vote by a required majority
of the Board of Directors of Corporation (as
required by the By-Laws of Corporation for
the proposed transaction) approving the
proposed transaction subject to shareholder
approval;
(ii) The affirmative vote of a required majority
(as required by the ByLaws of Corporation
for the proposed transaction) of shares of
the stock of Corporation in favor of the
proposed transaction causing the Change in
Control as well as approving this Amendment;
(iii) Subject to the approval of the SEC,
Corporation shall submit the request for
shareholder approval of certain elements of
the Amendment which became effective upon
shareholder approval as a joint resolution
with the proposed transaction effectuating a
Change in Control; and
(iv) Employee continuing to provide services to
Employer unless said cessation of services
was the result of Termination Without Cause.
Change in Control shall not occur as a result of stock
acquisition by Mr. Richard H. Pickup or his Affiliates through the exercise of
options, warrants, conversion of debentures, or through other capitalization
resulting from capital infusion recommended by a State regulatory agency for
which Employer is subject or Employee on behalf of Employer is subject.
2.6 Covenant Term: "Covenant Term" shall mean a period
beginning on the Effective Date and ending when Employee is no longer receiving
Base Salary under Section 7.1.
2.7 Covenant Territory: "Covenant Territory" shall mean the
States of California, Arizona, and Hawaii provided that Employer conducts the
Business of Employer in such State during the Covenant Term.
2.10 Discharge for Cause: "Discharge for Cause" shall mean a
violation or termination of employment for proven embezzlement, intoxication or
illegal drug use which materially interferes with job performance, absenteeism
in excess of two (2) times normal corporate policy, wrongful disclosure of
Employer's Confidential Information (including but not limited to violation of
the Confidentiality Agreement), gross
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insubordination, conviction of a felony adversely affecting the ability of the
Employee to carry on his normal duties, breach of Sections 4.4 and/or 4.5
hereof, receipt of any rebate, kickback or other remuneration or consideration
from any party that conducts business with Employer, or other material breach of
the Agreement and this Amendment.
2.14a Investment Banker: "Investment Banker" shall mean
Salomon Brothers who have been retained by the Corporation to pursue strategic
alternatives for the Corporation, or its replacement as appointed by the Board
of Directors of Corporation.
2.14b Offer: "Offer" shall occur when Employee and Investment
Banker, before June 30, 1996, jointly recommend to the Board of Directors the
acceptance of a bona fide offer to purchase more than fifty-one percent (51%) of
the outstanding common stock of Corporation in the form of a merger, sale, or
reorganization by an entity, individual or group acting in concert that is
received by the Board of Directors at a value equal to or greater than one (1)
times the net book value of the Corporation as of the preceding calendar quarter
by an acquirer that is ready, willing, and able to consummate the proposed
transaction, while Employee is providing services to Employer (unless a
cessation of services by Employee was the result of Termination Without Cause).
For purposes of this provision, being recommended by the Investment Banker shall
include the requirement that the Investment Banker has delivered a fairness
opinion to the Board of Directors with authority to submit that fairness opinion
to the shareholders as part of the shareholder approval of the transaction
proposed.
2.15a Part-Time: Employee shall be considered to be employed
Part-Time if following a Change in Control, during the two (2) years thereafter
Employer requires Employee to provide services to Employer, of less than seventy
(70) hours of service to Employer each month.
2.17a Successor: "Successor" shall mean the entity acquiring
all or substantially all of the business of Employer if Employer is dissolved,
or merged out of existence, or if substantially all of the assets of Employer
are transferred from Employer to another entity.
4.0 CAPACITIES AND DUTIES
Upon a Change in Control Section 4.2 is replaced in its
entirety as follows:
"4.2 Employee shall render these services as determined by
Employer at 6200 Canoga Avenue, Woodland Hills, California 91367 or within a ten
(10) mile radius of this location or of Employee's residence as of the date of
this Amendment as Employer may designate from time to time."
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Upon a Change in Control Section 4.3 is replaced in its
entirety with the following:
"4.3 Corporation may also cause Employee to be elected to
Employer's and/or Corporation's and/or a successor entity's Board of Directors,
and/or be appointed as Chairman or Vice-Chairman of these boards, but same shall
not entitle Employee to any additional compensation hereunder."
6.0 TERM
Upon a Change in Control, Section 6.1 is replaced in its
entirety with the following:
"6.1 Subject to the rights of parties to prior termination,
the Employee shall perform the capacities and duties under Section 4.0 for a
period of two (2) years commencing on the Change in Control. At the end of this
two (2) year period, Employee's obligation to perform the capacities and duties
under Section 4.0 shall cease, but Employee shall continue to be bound for the
following two (2) years to honor the provisions of Section 11.0 and the
Confidentiality Agreement, as well as to cooperate with Employer and Corporation
in responding to requests for information that may arise in the Business of
Employer."
Upon a Change in Control, Section 6.3 is replaced in its
entirety with the following:
"6.3 For a term of four (4) years after a Change in Control,
Employee agrees to not violate the provisions of Section 11.0 or the
Confidentiality Agreement."
Upon a Change in Control, Section 6.4 is replaced in its
entirety with the following:
"6.4 Employee may terminate this Agreement prior to the
expiration of its term only if Employer and/or Corporation breaches any of its
material covenants or obligations hereunder. In such circumstances, Employee
shall provide Employer and Corporation with written notice, specifying
Employer's and/or Corporation's alleged breach, providing at least thirty (30)
days for Employer and/or Corporation to cure such default before the effective
date of Employee's termination."
Upon a Change in Control, Section 6.5 is replaced in its
entirety with the following:
"6.5 Employer or Corporation may unilaterally terminate this
Agreement upon a Discharge for Cause, which shall take effect immediately upon
either
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Employer's or Corporation's written notification to Employee, outlining
the reasons for cause."
7.0 BASE COMPENSATION AND NORMAL BENEFITS
Upon a Change in Control, Section 7.1 is replaced in its
entirety with the following:
"7.1 Base Salary: For four (4) years after a Change in
Control, Base Salary is an annual amount equal to FOUR HUNDRED THOUSAND DOLLARS
($400,000), which will be paid according to the general payroll practices of
Employer as same exists from time to time."
Upon the date of the Amendment, Section 7.2 is replaced in its
entirety with the following:
"7.2 Performance Bonus:
(a) In addition to other compensation payable
hereunder, Employer agrees to pay Employee a ONE HUNDRED THOUSAND DOLLAR
($100,000) bonus, within five (5) business days of the execution of this
Amendment as a bonus for past services rendered in 1994.
(b) In addition to other compensation payable
hereunder, Employer agrees to pay Employee a TWO HUNDRED THOUSAND DOLLAR
($200,000) bonus, within thirty (30) days of the rejection of an Offer by the
Board of Directors of Corporation or a failure to act on such Offer within
thirty (30) days of its required joint submission by Employee and Investment
Banker. However, in the event of more than one Offer received by the Board of
Directors, this bonus shall not be payable if there is an Offer presented to the
Board which has been pending Board action for less than thirty (30) days or has
been accepted by the Board of Directors within such thirty (30) day period."
Upon a Change in Control, Section 7.6 is replaced in its
entirety with the following:
"7.6 Severance:
(a) For the period of two (2) years from a Change in
Control, Employee shall receive the compensation and benefits provided for in
this Section 7.0. In the event Employee is Terminated Without Cause or reduced
by Employer to Part-Time status, Employee shall continue to receive for the
remainder of the two (2) year term Base Salary, excess medical cost benefit, and
disability insurance coverage under Section 7.4(b) and (c), but no other form of
perquisite under Sections 7.3 and 7.4. For the
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two (2) years following the initial two (2) year term, Employee shall receive
the payment due under Section 7.1."
(b) In the event Employee is Discharged for Cause or
voluntarily resigns without cause, the payment due under Section 7.1 will
continue for a period of two (2) years, then terminate. All other payments shall
terminate on the cessation of services.
Upon a Change in Control, Section 7.7 is added as follows:
"7.7 Termination of Payments: In the event that Employee
violates the provisions of Section 11.0 or the Confidentiality Agreement during
the four (4) year period after a Change in Control, Employer may cease making
payments under the Agreement and this Amendment."
Upon a Change in Control, Section 7.8 is added as follows:
"7.8 Closing Bonus:
(a) Employer agrees to pay or cause Successor to pay
Employee a bonus at the closing of the Change in Control in the amount of FOUR
HUNDRED THOUSAND DOLLARS ($400,000) (less any bonus paid under Section 7.2(b))
so long as Employee is not in violation of the Agreement and this Amendment.
However, the bonus amount will first be subject to the normal payroll
withholding tax required by law, with the excess amount being offset against the
Loan Balance.
(b) Employer agrees to pay or agrees to cause
Successor to assume the obligation to pay, and on said assumption, Employer is
relieved an ongoing liability to pay Employee an additional bonus in the amount
of FIVE HUNDRED THOUSAND DOLLARS ($500,000) as of the tenth (10th) day of
January, of the calendar year following the closing of a Change in Control less
payroll taxes withheld as required by law and less any outstanding Loan Balance
as of the date of this payment."
Upon a Change in Control, Section 7.9 is added as follows:
"7.9 Liability of Successor: In the event of a Change in
Control, in which all or substantially all of the assets of Employer or
Corporation are acquired by a Successor, all obligations under the Amendment and
the Agreement of Employer and Corporation shall be assumed by Successor and
Employer and Corporation shall be relieved of the burden but not the benefits of
this Agreement."
8.0 STOCK OPTIONS
Upon a Change in Control, Section 8.7 is added as follows:
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"8.7 Accelerated Vesting on Change of Control: Notwithstanding
any language to the contrary in the Agreement or in the Option Agreement,
Employee's rights in all Options described in Section 8.0, except for those that
have lapsed as described in Section 8.6(b) shall be fully vested."
Upon a Change in Control, Section 8.8 is added as follows:
"8.8 Corporation Option to Purchase: Corporation, Employer, or
their assign, may at their option purchase any and all options owned by Employee
within thirty (30) days of a Change in Control. Any and all options "not in the
money" shall be valued in total at ONE HUNDRED DOLLARS ($100.00) and may be
purchased by the Corporation, Employer, or their assigns for this amount. All
remaining options "in the money" shall be valued in an amount equal to the
spread between the fair market value of a share of Corporation as of the closing
date of a Change in Control and the exercise price for a share under the option
and may be purchased by the Corporation, Employer, or their assigns for the
amount. In determining the purchase price of any options the value of options in
the money can not be offset by the negative value of options not in the money.
11.0 RESTRICTIVE COVENANT NOT TO COMPETE
Upon a Change in Control, the parenthetical phrase in Section
11.3 shall be deleted.
Upon a Change in Control, Section 11.7 Extension of Covenant
Term is deleted in its entirety.
Section 20.0 is replaced in its entirety with the following:
"20.0 SPOUSAL CONSENT
By executing this Amendment, Employee represents and warrants
that he has secured the permission and consent of his spouse to enter into the
Amendment as well as the Agreement and fully perform his respective obligations
hereunder. Employee has obtained the signature of his spouse on the Spousal
Consent attached hereto as EXHIBIT A."
Section 31.0 is added as follows:
"31.0 SUBSEQUENT AMENDMENTS
Neither Employee, any acquirer of Corporation or Employer, any
Successor, or the Board of Directors of Corporation, shall prior to Change in
Control re-negotiate the Agreement, this Amendment, or Employee's compensation
in any respect without the written consent of Employee and the approval of a
simple majority vote of the Board of Corporation. No member of the Board of
Directors of Corporation will
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individually or collectively attempt to renegotiate Employee's services with
Employer prior to Change in Control, unless the Board of Directors has given its
consent to Employee to negotiate with an acquirer and Employee also gives his
written consent back to Corporation. In the event Employee negotiates a change
to his compensation, this Agreement, or Amendment with any acquirer of
Corporation, or Employer, or any Successor prior to Change in Control without
first meeting the requirements of this Section , Employer and Corporation shall
be relieved of the burden of making any payments required under the Agreement
and the Amendment, but Employee will continue to be bound to honor this
Agreement and Amendment notwithstanding any language to the contrary contained
within."
Section 32.0 is added as follows:
"32.0 LEGAL FEES
Corporation and Employer agree to reimburse Employee for his
actual reasonable out-of-pocket legal fees for the review of this document by
Pillsbury, Madison up to amount not to exceed TWENTY-FIVE THOUSAND DOLLARS
($25,000) including any fee for services rendered to executive management,
subject to the routine review by the Chief Financial Officer of Employer."
Section 33.0 is added as follows:
"33.0 RATIFICATION
To the extent not otherwise modified by the terms and
conditions of this Amendment, all of the terms of the Agreement are hereby
ratified and republished."
Section 34.0 is added as follows:
"34.0 BOARD AND SHAREHOLDER DISCRETION. Nothing in this Amendment or
the Agreement shall be construed as obligating the Board of Directors of
Corporation or Employer, or any shareholder of Corporation or Employer to accept
any Offer or any proposed transaction of any kind, presented to any of these
parties by Salomon Brothers or by Employee. An Offer or proposed transaction may
be rejected in the complete and utter discretion of the Board of Directors of
Corporation and Employer, and/or their shareholders in their absolute
discretion. In this event, Employee shall as a result of the rejection only be
entitled to the bonus provided under Section 7.2(b) of this Amendment if its
terms and conditions are met."
Section 35.0 is added as follows:
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"35.0 PURCHASE OF SUBSTANTIAL GOODWILL
The parties hereto agree that valid consideration shall be
considered deemed paid by Employer, Corporation, Successor, or assigns for the
substantial goodwill of the Corporation and/or Employer, within the meaning of
California Business and Professions Code Section 16600, et seq. to Employee."
Section 36.0 is added as follows:
"36.0 BOARD OF DIRECTORS' APPROVAL
The execution of this Amendment has been authorized by a
meeting of the Board of Directors of the Corporation and Employer as duly called
with Employee absent due to the conflict of interest as ratified by a telephonic
board meeting occurring March __, 1996. However, the terms and conditions of
this Amendment which become effective upon a Change in Control are subject to a
shareholder approval in accordance with the provisions of Section 2.2a. The
undersigned officers of the Corporation and Employer have been duly authorized
to execute this Amendment on behalf of the Corporation and Employer pursuant to
this resolution of the Board of Directors of each."
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IN WITNESS WHEREOF, the parties hereto have set their hands the day and
year first above written.
PAC RIM HOLDING CORPORATION,
a Delaware corporation
By: /s/ PAUL W. CRAIG
--------------------------
Paul W. Craig
Its: Executive Vice President
"CORPORATION"
THE PACIFIC RIM ASSURANCE COMPANY,
a California corporation
By: /s/ PAUL W. CRAIG
____________________________
Paul W. Craig
Its: Executive Vice President
"EMPLOYER"
/s/ STANLEY BRAUN
------------------------------
STANLEY BRAUN, an individual
"EMPLOYEE"
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<PAGE> 339
EXHIBIT A
CONSENT TO AMENDMENT AND AGREEMENT
I, the undersigned, am the spouse of Stanley Braun. I have read the
Employment Agreement dated April 15, 1994 and the Amendment to same dated March
27th, 1995 by and between Pac Rim Holding Corporation, a Delaware corporation,
The Pacific Rim Assurance Company, a California corporation ("Corporation") and
my spouse, Stanley Braun, and clearly understand the provisions thereof. I am
aware that by the provisions of said Amendment and Agreement my spouse has
agreed to certain provisions regarding his employment with the aforementioned
Corporation, including the expiration of certain stock options according to
their terms and the grant of new stock options and my community interest
therein, if any, in accordance with the terms and provisions of said Amendment
and Agreement. I hereby approve of and consent to the provisions of said
Amendment and Agreement, in its entirety.
DATED: March 27, 1995
/s/ NANCY W. BRAUN
---------------------------------
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MEMORANDUM OF UNDERSTANDING
On March 27, 1995, an amendment (the "Amendment") to the employment
agreement (the "Agreement") between Pac Rim Holding Corporation (the
"Corporation"), The Pacific Rim Assurance Company (the "Company") and Stanley
Braun (the "Employee") dated April 15, 1994, and effective August 16, 1994, was
executed. The Amendment entitles the employee to certain fringe benefits
providing the Employee provides at least seventy (70) hours of service per
month to the Corporation. These benefits include those specified in section
7.3 of the Agreement.
In the event that the Employee provides less than seventy (70) hours of
service to the Corporation, the Corporation shall reimburse the Employee for all
reasonable and necessary expenses incurred by the Employee on behalf of the
Corporation on a basis consistent with policies and guidelines approved by the
Board of Directors of the Corporation and in effect from time to time. In
addition, the Corporation shall make available to the Employee a driver from the
Administrative Department of the Company for business-related use of his
personal automobile.
Pac Rim Holding Corporation,
a Delaware corporation
By: /s/ PAUL W. CRAIG
------------------------------------
Paul W. Craig
Its: Executive Vice President
"CORPORATION"
By: /s/ STANLEY BRAUN
------------------------------------
Stanley Braun, an individual
"EMPLOYEE"
Date: April 4, 1995
----------------------------------
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SECOND AMENDMENT TO
EMPLOYMENT AGREEMENT
THIS SECOND AMENDMENT TO EMPLOYMENT AGREEMENT ("Second Amendment"),
executed this 30th day of March, 1996 ("Effective Date"), is entered into by and
between PAC RIM HOLDING CORPORATION, a Delaware corporation (the "Corporation"),
THE PACIFIC RIM ASSURANCE COMPANY, a California corporation ("Employer"), and
STANLEY BRAUN, an individual ("Employee"). Corporation, Employer, and Employee
are collectively referred to as "Parties."
1.0 RECITALS
1.1 Effective August 16, 1994, Employer, Corporation, and
Employee have previously entered into the Employment Agreement which was amended
by the First Amendment on March 27, 1995.
1.2 As of the date of this Second Amendment, the First
Amendment, and the Employment Agreement constitute the entire understanding
concerning Employee's employment with Employer.
1.3 Employer, Corporation, and Employee desire to enter into
this Second Amendment upon the terms and conditions set forth herein, to amend
the Agreement.
NOW THEREFORE, IN CONSIDERATION of the mutual covenants and agreements
contained herein and for such other good and valuable consideration, the receipt
and adequacy of which is hereby admitted and acknowledged, the Parties hereto
agree as follows:
2.0 DEFINITIONS. All capitalized terms not defined herein shall have
the same meanings ascribed to them in the Employment Agreement and First
Amendment. However, the following definitions to the extent differing from the
definitions contained in the First Amendment or the Employment Agreement
supercede same and shall be controlling in interpreting the Agreement.
2.1 Agreement: "Agreement" shall collectively refer to the
Employment Agreement, the First Amendment, and this Second Amendment.
2.2 First Amendment: "First Amendment" shall mean the
Amendment to Employment Agreement dated March 27, 1995 by and among Corporation,
Employer and Employee.
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2.3 Parties: "Parties" shall collectively refer to
Corporation, Employer, and Employee.
2.4 Second Amendment: "Second Amendment" shall mean this
Second Amendment to Employment Agreement dated March 30, 1996.
3.0 AMENDMENTS. The following section of the First Amendment is amended
to read as follows:
3.1 Section 2.2a Change in Control is replaced with the
following language:
"2.2a Change in Control: "Change in Control" shall
mean the closing of an acquisition by no later than
June 30, 1997 of more than fifty-one percent (51%) of
the outstanding common stock of Corporation through a
merger, sale, or reorganization by an entity,
individual, or group acting in concert which
satisfies all of the following:
(i) The affirmative vote by a
required majority of the
Board of Directors of
Corporation (as required by
the By-Laws of Corporation
for the proposed transaction)
approving the proposed
transaction subject to
shareholder approval;
(ii) The affirmative vote of a
required majority (as required
by the By-Laws of
Corporation for the proposed
transaction) of shares of the
stock of Corporation in favor
of the proposed transaction
causing the Change in
Control as well as approving
this Amendment;
(iii) Subject to the approval of the
SEC, Corporation shall
submit the request for
shareholder approval of
certain elements of the
Amendment which became
effective upon shareholder
approval as a joint resolution
with the proposed transaction
effectuating a Change in
Control; and
(iv) Employee continuing to provide
services to Employer unless said
cessation of services was the result
of Termination Without Cause.
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Change in Control shall not occur as a
result of stock acquisition by Mr. Richard H. Pickup
or his Affiliates through the exercise of options,
warrants, conversion of debentures, or through other
capitalization resulting from capital infusion
recommended by a State regulatory agency for which
Employer is subject or Employee on behalf of Employer
is subject."
3.2 Section 2.14b Offer is replaced with the following
language:
"2.14b Offer: "Offer" shall occur when Employee and
Investment Banker, before June 30, 1997, jointly
recommend to the Board of Directors the acceptance of
a bona fide offer to purchase more than fifty-one
percent (51%) of the outstanding common stock of
Corporation in the form of a merger, sale, or
reorganization by an entity, individual or group
acting in concert that is received by the Board of
Directors at a value equal to or greater than one (1)
times the net book value of the Corporation as of the
preceding calendar quarter by an acquirer that is
ready, willing, and able to consummate the proposed
transaction, while Employee is providing services to
Employer (unless a cessation of services by Employee
was the result of Termination Without Cause). For
purposes of this provision, being recommended by the
Investment Banker shall include the requirement that
the Investment Banker has delivered a fairness
opinion to the Board of Directors with authority to
submit that fairness opinion to the shareholders as
part of the shareholder approval of the transaction
proposed."
4.0 RATIFICATION. To the extent not otherwise modified by the terms and
conditions of this Second Amendment, all of the terms of the Employment
Agreement as previously modified by the First Amendment are hereby ratified and
republished.
5.0 BOARD OF DIRECTORS' APPROVAL
The execution of this Second Amendment has been authorized by
a meeting of the Board of Directors of the Corporation and Employer as duly
called with Employee absent due to the conflict of interest as ratified by a
telephonic board meeting occurring March __, 1996. However, the terms and
conditions of this Second Amendment which become effective upon a Change in
Control are subject to a shareholder approval in accordance with the provisions
of Section 2.2a of the First Amendment as revised by this Second Amendment. The
undersigned officers of the Corporation and Employer have been
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duly authorized to execute this Second Amendment on behalf of the Corporation
and Employer pursuant to this resolution of the Board of Directors of each.
The Parties hereto have set their hands the day and year first above
written.
PAC RIM HOLDING CORPORATION,
a Delaware corporation
By: /s/ PAUL W. CRAIG
------------------------------
Paul W. Craig
Its: Executive Vice President
"CORPORATION"
THE PACIFIC RIM ASSURANCE COMPANY,
a California corporation
By: /s/ PAUL W. CRAIG
------------------------------
Paul W. Craig
Its: Executive Vice President
"EMPLOYER"
/s/ STANLEY BRAUN
----------------------------------
STANLEY BRAUN, an individual
"EMPLOYEE"
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EXHIBIT A
CONSENT TO AMENDMENT AND AGREEMENT
I, the undersigned, am the spouse of Stanley Braun. I have read the
Employment Agreement dated April 15, 1994 ("Employment Agreement"), the
Amendment to Employment Agreement dated March 27, 1995 ("First Amendment"), and
this Second Amendment to Employment Agreement dated March ___, 1996 ("Second
Amendment"), by and among Pac Rim Holding Corporation, a Delaware corporation,
The Pacific Rim Assurance Company, a California corporation ("Corporation") and
my spouse, Stanley Braun, and clearly understand the provisions thereof. I am
aware that by the provisions of said Amendment and Agreement my spouse has
agreed to certain provisions regarding his employment with the aforementioned
Corporation, including the expiration of certain stock options according to
their terms and the grant of new stock options and my community interest
therein, if any, in accordance with the terms and provisions of said Second
Amendment, First Amendment and Employment Agreement. I hereby approve of and
consent to the provisions of said Second Amendment, First Amendment and
Employment Agreement, in its entirety.
DATED: March 30, 1996
/s/ NANCY W. BRAUN
------------------
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ANNEX D
TRANSFER RESTRICTIONS CHARTER AMENDMENT
If these provisions are approved by the shareholders at the special
meeting, and reincorporation in Delaware is also approved, then these
provisions would appear as Article Sixth of the Company's Certificate of
Incorporation. If reincorporation in Delaware is not approved at the Special
Meeting, these provisions, if adopted, would be added to the Company's
California Articles of Incorporation by amendment.
(a) Prohibited Transfer; Excess Stock. Except as provided in
Section F, until the Restriction Termination Date, any attempted direct or
indirect Transfer of Stock shall be deemed a "Prohibited Transfer" if (i) such
Transfer would increase the Percentage of Stock Owned by any Person that (or by
any person whose Stock is or by virtue of such Transfer would be attributed to
any Person that), either after giving effect to the attribution rules
(including the option attribution rules) of Section 382 or without regard to
such attribution rules, Owns, by virtue of such Transfer would Own, or has at
any time since the period beginning three years prior to the date of such
Transfer Owned, Stock in excess of the Limit, or (ii) such Transfer would cause
an "ownership change" of the corporation within the meaning of Section 382.
Except at otherwise provided in Section E, the Stock or Option sought to be
Transferred in the Prohibited Transfer shall be deemed "Excess Stock."
(b) Transfer of Excess Stock to Transferee. Except as otherwise
provided in Section E, a Prohibited Transfer shall be void ab initio as to the
Purported Transferee in the Prohibited Transfer and such Purported Transferee
shall not be recognized as the owner of the Excess Stock for any purpose and
shall not be entitled to any rights as a stockholder of the corporation arising
from the ownership of Excess Stock, including, but not limited to, the right to
vote such Excess Stock or to receive dividends or other distributions in
respect thereof or, in the case of Options, to receive Stock in respect of
their exercise. Any Excess Stock shall automatically be transferred to the
Trustee in trust for the benefit of the Charitable Beneficiary, effective as of
the close of business on the business day prior to the date of the Prohibited
Transfer; provided, however, that if the transfer to the trust is deemed
ineffective for any reason, such Excess Stock shall nevertheless be deemed to
have been automatically transferred to the person selected as the Trustee at
such time, and such person shall have rights consistent with those of the
Trustee as described in this section and in Section C below. Any dividend or
other distribution with respect to such Excess Stock paid prior to the
discovery by the corporation that the Excess Stock has been transferred to the
Trustee ("Prohibited Distributions") shall be deemed to be held by the
Purported Transferee as agent for the Trustee, and shall be paid to the Trustee
upon demand, and any dividend or distribution declared but unpaid shall be paid
when due to the Trustee. Any vote cast by a Purported Transferee with respect
to Excess Stock prior to the discovery by
<PAGE> 347
the corporation that the Excess Stock has been transferred to the Trustee will
be rescinded as void and shall be recast in accordance with the desires of the
Trustee acting for the sole benefit of the Charitable Beneficiary. The
Purported Transferee and any other Person holding certificates representing
Excess Stock shall immediately surrender such certificates to the Trustee. The
Trustee shall have all the rights of the owner of the Excess Stock, including
the right to vote, to receive dividends or other distributions, and to receive
proceeds from liquidation, which rights shall be exercised for the sole benefit
of the Charitable Beneficiary.
(c) Disposition of Excess Stock. As soon as practicable following
receipt of notice from the corporation that Excess Stock has been transferred
to the Trustee, the Trustee shall take such actions as it deems necessary to
dispose of the Excess Stock in an arm's-length transaction that would not
constitute a Prohibited Transfer. Upon the disposition of such Excess Stock,
(i) the interest of the Charitable Beneficiary in the Excess Stock shall
terminate, and (ii) the Trustee shall distribute the net proceeds of the sale
as follows: (a) the Purported Transferee shall receive an amount of the net
proceeds of such sale not to exceed the Purported Transferee's cost incurred to
acquire such Excess Stock, or, if such Excess Stock was Transferred for less
than fair market value on the date of the Prohibited Transfer, the fair market
value of the Excess Stock on the date of the Prohibited Transfer, in each case
less all costs incurred by the corporation, the Trustee and the Transfer Agent
in enforcing the Restrictions, and (b) the Charitable Beneficiary shall receive
the balance of the net proceeds from the sale of the Excess Stock, if any,
together with any Prohibited Distributions received from the Purported
Transferee and any other distributions with respect to such Excess Stock while
such Stock was held by the Trustee. In the event the Purported Transferee has
disposed of the Excess Stock and distributed the proceeds and other amounts
otherwise than in accordance with this section, then (w) such Purported
Transferee shall be deemed to have disposed of such Excess Stock as an agent
for the Trustee, (x) such Purported Transferee shall be deemed to hold such
proceeds and any Prohibited Distributions as an agent for the Trustee, (y) such
Purported Transferee shall be required to return to the Trustee the proceeds
from such sale, together with any Prohibited Distributions theretofore received
by the Purported Transferee with respect to such Excess Stock, provided that
upon receipt of written permission from the Trustee, the Purported Transferee
will be entitled to retain an amount of such sale proceeds not to exceed the
amount that such purported Transferee would have received from the Trustee if
the Trustee had obtained and resold the Excess Stock, and (z) the Trustee shall
transfer any remaining proceeds to the Charitable Beneficiary. Neither the
Trustee, the corporation, the Purported Transferee nor any other party shall
claim an income tax deduction with respect to any transfer to the Charitable
Beneficiary and neither the Trustee nor the corporation shall benefit in any
way from the enforcement of the Restrictions, except insofar as these
restrictions protect the corporation's Income Tax Net Operating Loss Carryover.
Neither the Trustee, the corporation nor the Transfer Agent shall have any
liability to any Person for any loss arising from or related to a Prohibited
Transfer.
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(d) Transfer Agent's Rights and Responsibilities. The Transfer Agent
shall not register any Transfer of Stock on the corporation's stock transfer
records if it has knowledge that such Transfer is a Prohibited Transfer. The
Transfer Agent shall have the right, prior and as a condition to registering
any Transfer of Stock on the corporation's stock transfer records, to request
any transferee of the Stock to submit an affidavit, on a form agreed to by the
Transfer Agent and the corporation, stating the number of shares of each class
of Stock Owned by the transferee (and by Persons who would Own the transferee's
Stock) before the proposed Transfer and that would, if effect were given to the
proposed Transfer, be Owned by the transferee (and by Persons who would Own the
prospective Transferee's Stock) after the proposed Transfer. If either (i) the
Transfer Agent does not receive such affidavit, or (ii) such affidavit
evidences that the Transfer was a Prohibited Transfer, the Transfer Agent shall
notify the corporation and shall not enter the Prohibited Transfer into the
corporation's stock transfer records, and the Trustee, the corporation and the
Transfer Agent shall take such steps as provided in the Restrictions in order
to dispose of the Excess Stock purportedly Owned by such Purported Transferee.
If the Transfer Agent, for whatever reason, enters a Prohibited Transfer in the
corporation's stock transfer records, such Transfer shall be nonetheless void
ab initio and shall have no force and effect, in accordance with the
Restrictions, and the corporation's stock transfer records shall be revised to
so provide.
(e) Certain Indirect Prohibited Transfers. In the event a Transfer
would be a Prohibited Transfer as a result of attribution to the Purported
Transferee of the Ownership of Stock by a person (an "Other Person") who is not
controlling, controlled by or under common control with the Purported
Transferee, which Ownership is nevertheless attributed to the Purported
Transferee, the Restrictions shall not apply in a manner that would invalidate
any Transfer to such Other Person, and the Purported Transferee and any Persons
controlling, controlled by or under common control with the Purported
Transferee (collectively, the "Purported Transferee Group") shall automatically
be deemed to have transferred to the Trustee at the time and in a manner
consistent with Section B hereof, sufficient Stock (which Stock shall (i)
consist only of Stock held legally or beneficially, whether directly or
indirectly, by any member of the Purported Transferee Group, but not Stock held
through any Other Person, other than shares held through a Person acting as
agent or fiduciary for any member of the Purported Transferee Group, (ii) be
deemed transferred to the Trustee, in the inverse order in which it was
acquired by members of the Purported Transferee Group, and (iii) be treated as
Excess Stock) to cause the Purported Transferee, following such transfer to the
Trustee, not to be in violation of the Restrictions; provided, however, that to
the extent the foregoing provisions of this Section E would not be effective to
prevent a Prohibited Transfer, the Restrictions shall apply to such other Stock
Owned by the Purported Transferred (including Stock actually owned by Other
Persons), in a manner designed to minimize the amount of Stock subject to the
Restrictions or as otherwise determined by the Board of Directors to be
necessary to prevent a Prohibited Transfer (which Stock shall be treated as
Excess Stock).
D-3
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(f) Exceptions. The term "Prohibited Transfer" shall not include:
(i) the original issuance of Common Stock pursuant to the Stock Purchase
Agreement, (ii) any Transfer described in Section 382(1)(3)(B) of the Code
(relating to transfers upon death or divorce and certain gifts) if all Persons
who would Own the Stock Transferred would be treated for purposes of Section
382 as having Owned such Stock at all times beginning more than three (3) years
prior to the date of the Transfer, and (iii) any Transfer with respect to which
the Person who would otherwise be the Purported Transferee obtains or is
granted the prior written approval of the Board of Directors of the
corporation, which approval shall be granted in its sole and absolute
discretion after considering all facts and circumstances, including but not
limited to future events the occurrence of which are deemed by the Board of
Directors of the corporation to be reasonably possible.
(g) Legend. All certificates or other instruments evidencing
Ownership of Stock shall bear a conspicuous legend describing the restrictions.
The Board of Directors shall take such actions as it deems necessary to
substitute certificates evidencing ownership of Stock and bearing such legend
for certificates not bearing such legend.
(h) Prompt Enforcement; Further Actions. As soon as practicable and
within thirty (30) business days of learning of a purported Prohibited
Transfer, the corporation through its Secretary or any assistant Secretary
shall demand that the Purported Transferee (or any other member of the
Purported Transferee Group) surrender to the Trustee the certificates
representing the Excess Stock or any resale proceeds therefrom, and any
Prohibited Distributions or other dividends or distributions received thereon,
and if such surrender is not made within twenty (20) business days from the
date of such demand, the corporation shall institute legal proceedings to
compel such surrender and for compensatory damages on account of any failure to
take such actions; provided, however, that nothing in this Section H shall
preclude the corporation in its discretion from immediately bringing legal
proceedings without a prior demand, and also provided that failure of the
corporation to act within the time periods set out in this section shall not
constitute a waiver of any right of the corporation to compel any transfer
required hereby. Upon a determination by the Board of Directors that there has
been or is threatened a Prohibited Transfer, the Board of Directors may
authorize such additional action as its deems advisable to give effect to the
Restrictions, including, without limitation, refusing to give effect on the
books of the Company to any such purported Prohibited Transfer or instituting
proceedings to enjoin any such purported Prohibited Transfer. Nothing
contained in the Restrictions shall limit the authority of the Board of
Directors to take such other action to the extent permitted by law as it deems
necessary or advisable to protect the corporation and the interests of the
holders of its securities in preserving the Income Tax Net Operating Loss
Carryover, including, but not limited to, refusing to give effect to any
Prohibited Transfer or other action on the books of the corporation or
instituting proceedings to enjoin any Prohibited Transfer or other action;
provided, however, that any
D-4
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Prohibited Transfer shall nevertheless result in the consequences otherwise
described in the Restrictions.
(i) Board Authority to Interpret. The Board of Directors shall have
the authority to interpret the provisions of the Restrictions for the purpose
of protecting the Income Tax Net Operating Loss Carryover. Any such
interpretation shall be final and binding on any Person who Owns or purports to
acquire Ownership of Stock.
(j) Damages. Any person who knowingly violates the Restrictions, and
any persons controlling, controlled by or under common control with such a
person, shall be jointly and several liable to the corporation for, and shall
indemnify and hold the corporation harmless against, any and all damages
suffered as a result of such violation, including but not limited to damages
resulting from a reduction in or elimination of the corporation's ability to
utilize its Income Tax Net Operating Loss Carryover, and attorneys' and
accountants' fees incurred in connection with such violation.
(k) Severability. If any part of the Restrictions is judicially
determined to be invalid or otherwise unenforceable, such invalidity or
unenforceability shall not affect the remainder of the Restrictions, which
shall be thereafter interpreted as if the invalid or unenforceable part were
not contained herein, and, to the maximum extent possible, in a manner
consistent with preserving the ability of the corporation to utilize to the
greatest extent possible the Income Tax Operating Loss Carryover.
(l) Effect on Stock Exchange Transactions. Nothing in the
Restrictions shall preclude the settlement of a transaction entered into
through the facilities of Nasdaq. The Stock that is the subject of such
transaction shall continue to be subject to the terms and Restrictions after
such settlement.
(m) Definitions:
"Charitable Beneficiary" shall mean one or
more organizations described in Sections 170(b)(1)(A), 170(c)(2) and
501(c)(3) of the Code designated in writing by the corporation.
"Code" shall mean the Internal Revenue Code
of 1986, as amended and as it may be amended from time to time
hereafter.
"Common Stock" shall mean the common stock of
the Corporation, $0.01 par value per share.
"Control" shall mean the possession, direct
or indirect, of the power to direct or cause the direction of the
management, policies or decisions of a Person, whether through the
ownership of voting securities, by contract, family relationship or
otherwise. The terms "controlling," "controlled by" and "under common
control with" shall have
D-5
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correlative meanings. A Person shall be deemed to control or be under
common control with a Purported Transferee if the Excess Stock Owned
by such Person is treated as Owned by the Purported Transferee by
virtue of the family attribution rules of Section 318 of the Code.
"5% Shareholder" shall mean any Person or
Public Group who is a "5-percent shareholder" of the corporation
within the meaning of Section 382, substituting "4.9 percent" for "5
percent" each place it appears therein.
"Income Tax Net Operating Loss Carryover"
shall mean the net operating loss, capital loss, net unrealized
built-in loss, general business credit, alternative minimum tax
credit, foreign tax credit and any other carryovers or losses as
determined for United States federal income tax purposes that are or
could become subject to limitation under Section 382, and to which the
corporation is entitled under the Code and Regulations, at any time
during which the Restrictions are in force.
"IP Delaware" shall mean Insurance Partners,
L.P., a Delaware limited partnership.
"IP Bermuda" shall mean Insurance Partners
Offshore (Bermuda), L.P., a Bermuda limited partnership.
"Limit" shall mean 4.9 Percent of the Stock.
"Option" shall mean any interest that could
give rise to the Ownership of Stock and that is an option, contract,
warrant, convertible instrument, put, call, stock subject to a risk of
forfeiture, pledge of stock or any interest that is similar to any of
such interests or any other interest that would be treated, under
paragraph (d)(9) of Treasury Regulation Section 1.382-4, in the same
manner as an option, whether or not any of such interests is subject
to contingencies.
"Own," and all derivations of the word "Own,"
shall mean any direct or indirect, actual or beneficial interest,
including, except as otherwise provided, a constructive ownership
interest under the attribution rules (including the option attribution
rules) of Section 382. In determining whether a Person Owns an amount
of Stock in excess of the Limit, Options Owned by such Person (or
other Persons whose Ownership of Stock is or would be attributable
under Section 382 to such Person) shall be treated as exercised (and
the Stock that would be acquired by such exercise as outstanding) and
Options Owned by other Persons shall be treated as not
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exercised (and the Stock that would be acquired by such exercise as
outstanding) and Options Owned by other Persons shall be treated as
not exercised (and the Stock that would be acquired if such Options
owned by other Persons were exercised shall be treated as not
outstanding), in each case without regard to whether such treatment
would result in an ownership change within the meaning of Section 382.
In determining whether a Transfer that is an exercise, conversion or
similar transaction with respect to an Option increases the Percentage
Ownership of Stock of any Person or Public Group, such Option shall be
treated as if it were not Owned by such Person immediately prior to
such Transfer.
"Percent," "Percentage" or "%" shall mean
percent or percentage by value.
"Person" shall mean any individual (other
than a Public Group treated as an individual under Section 382) or any
"entity" as that term is defined in Regulations Section 1.382-3(a).
"Public Group" shall have the meaning
assigned to such term in the applicable Regulations under Section 382.
"Purported Transferee" shall mean a Person or
Public Group who acquires Ownership of Excess Stock in a Prohibited
Transfer or, except as otherwise provided in the Restrictions, any
subsequent transferee of such Excess Stock.
"Purported Transferor" shall mean a Person
who Transfers Excess Stock in a Prohibited Transfer.
"Regulations" shall mean Treasury
Regulations, including proposed or temporary regulations, promulgated
under the Code, as the same may be amended from time to time.
References herein to specific provisions of temporary Regulations
shall include the analogous provisions of final Regulations or other
successor Regulations.
"Restriction Effective Date" shall mean the
date of the closing of the purchase of 2,390,438 shares of Common
Stock by IP Delaware, IP Bermuda and the Subscribing Stockholders
pursuant to the Stock Purchase Agreement.
"Restriction Termination Date" shall mean the
earliest to occur of (a) the end of the thirty-sixth (36th) month
following the Restriction Effective Date, (b) the first day of the
first taxable year following the taxable year (or years) in which the
Income Tax Net Operating Loss Carryover has been reduced to zero, or
(c) the date upon which the Board of Directors has determined that
there has been a change in law (including but not limited to the
repeal of Section 382 without a
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<PAGE> 353
successor provision that places restrictions on the Income Tax Net
Operating Loss Carryover based on changes of ownership of the
corporation's Stock similar to Section 382) eliminating the need for
the Restrictions in order to preserve the corporation's ability to
utilize the Income Tax Net Operating Loss Carryover.
"Restrictions" shall mean the restrictions on
the Transfer and Ownership of Stock as set forth in this Article VI.
"Section 382" shall mean Section 382 of the
Code and the Regulations promulgated thereunder, and any successor
statute and regulations.
"Stock" shall mean the Common Stock and any
interest in the corporation that would be treated as stock under
Section 382, without regard to clauses (ii)(B) and (iii)(B) of
paragraph (f)(18) of Temporary Treasury Regulation Section 1.382-2T
(but only if, in determining the Ownership by any Person of Stock, the
uniform treatment of such interest as Stock or as not Stock, as the
case may be, would increase such Person's Percentage Ownership of
Stock), and shall also include any Stock the ownership of which may be
acquired by the exercise of an Option.
"Stock Purchase Agreement" shall mean that
Stock Purchase Agreement among the corporation, IP Delaware, IP
Bermuda, TJS and the Subscribing Stockholders, dated as of September
17, 1996.
"Subscribing Stockholders" shall mean those
individuals who execute the subscription agreements attached to the
Stock Purchase Agreement as exhibits thereto.
"Transfer" shall mean any direct or indirect
acquisition or disposition of stock, whether by sale, exchange,
merger, consolidation, transfer, assignment, conveyance, distribution,
pledge, inheritance, gift, mortgage, the creation of any security
interest in, or lien or encumbrance upon, or any other acquisition or
disposition of any kind and in any manner, whether voluntary or
involuntary, knowing or unknowing, by operation of law or otherwise.
Notwithstanding any understandings or agreements to which an Owner of
Stock is a party, any arrangement, the effect of which is to transfer
any or all of the rights arising from Ownership of Stock, shall be
treated as a Transfer. A Transfer shall also include (i) a transfer
of an interest in an entity and a change in the relationship between
two or more Persons that results in a change in the Ownership of Stock
and (ii) the creation, grant, exercise, conversion, Transfer or other
disposition of
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or with respect to an Option, regardless of whether such Option
previously had been treated as exercised or converted for any other
purpose.
"Transfer Agent" means the Person responsible
for maintaining the books and records in which are recorded the
ownership and transfer of shares of Stock or any Person engaged by the
corporation for the purpose of fulfilling the duties required to be
fulfilled by the Transfer Agent hereunder.
"Trustee" means the trustee of the trust
appointed by the corporation, provided that the Trustee shall be a
Person unaffiliated with the corporation, any 5% Shareholder, and any
Person purchasing or disposing of Stock in a Prohibited Transfer.
* * *
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<PAGE> 355
ANNEX E
AGREEMENT AND PLAN OF MERGER
BETWEEN
SUPERIOR NATIONAL INSURANCE GROUP, INC.
A CALIFORNIA CORPORATION,
AND
SUPERIOR NATIONAL INSURANCE GROUP, INC.,
A DELAWARE CORPORATION
THIS AGREEMENT AND PLAN OF MERGER (this "Merger Agreement") is entered
into as of this __ day of ______________, 1996 by and between Superior National
Insurance Group, Inc., a California corporation ("Merging Corporation"), and
Superior National Insurance Group, Inc., a Delaware corporation ("Surviving
Corporation").
1. Merging Corporation is authorized to issue 25,000,000 shares
of common stock, no par value (the "Merging Corporation Common Stock"). As of
the date hereof, there are _______________ shares of Merging Corporation Common
Stock outstanding.
2. Surviving Corporation is authorized to issue 25,000,000 shares
of common stock, $.01 par value (the "Surviving Corporation Common Stock"). As
of the date hereof, one share of Surviving Corporation Common Stock is
outstanding.
3. Merging Corporation shall be merged with and into Surviving
Corporation (the "Merger") in accordance with the California General
Corporation Law and the General Corporation Law of the State of Delaware and on
the terms and conditions hereinafter set forth. At the Effective Time of the
Merger (as hereinafter defined), the separate existence of Merging Corporation
shall cease, Surviving Corporation shall be the surviving corporation and
Surviving Corporation shall succeed, without other transfer, to all the rights
and property of Merging Corporation and shall be subject to all the debts and
liabilities thereof in the same manner as if Surviving Corporation had itself
incurred them. All rights of creditors and all liens put on the property of
each corporation shall be preserved unimpaired; provided that such liens upon
property of Merging Corporation shall be limited to the property affected
thereby immediately prior to the Effective Time of the Merger.
4. At the Effective Time of the Merger, each share of Merging
Corporation Common Stock outstanding immediately prior to the Effective Time of
the Merger (collectively, the "Shares") shall be converted into one (1) share
of Surviving Corporation Common Stock.
5. The conversion of Shares as provided in this Agreement shall
occur automatically upon the Effective Time of the Merger without action by the
holders thereof.
<PAGE> 356
Each holder of such Shares thereupon shall surrender his certificate or
certificates to Surviving Corporation and shall be entitled to receive in
exchange therefor a certificate or certificates representing the number of
shares into which his Shares theretofore represented by a certificate or
certificates so surrendered shall have been converted as aforesaid.
6. As of the Effective Time of the Merger, Surviving Corporation
will assume and continue Merging Corporation's 1995 Stock Incentive Plan,
(the "1993 Plan") and 1986 Non-Statutory Stock Option and 1986 Non-Statutory
Stock Purchase Plan, and (i) the outstanding and unexercised portions of all
options to buy Common Stock of Merging Corporation shall become options to
purchase the same number of shares of Common Stock of Surviving Corporation,
with no other changes in the terms and conditions of such options, including
exercise prices, and, as of the Effective Time of the Merger, Surviving
Corporation hereby assumes the outstanding and unexercised portions of such
options and the obligations of Merging Corporation with respect thereto and
(ii) the restricted shares of Common Stock of Merging Corporation granted under
the 1995 Plan to which the restrictions have not lapsed shall become the same
number of restricted shares of Common Stock of Surviving Corporation, with no
other changes in the terms and conditions of such grants, and, as of the
Effective Time of the Merger, Surviving Corporation hereby assumes the portions
of such grants to which the restrictions have not lapsed and the obligations of
Merging Corporation with respect thereto.
7. As of the Effective Time of the Merger, Surviving Corporation
will assume all obligations under all outstanding warrants and other rights to
purchase shares of Common Stock of Merging Corporation, and the outstanding but
unexercised portions of all such warrants or other rights to purchase Common
Stock of Merging Corporation shall represent the right to acquire the same
number of shares of Common Stock of Surviving Corporation, with no other
changes in the terms and conditions of such warrants and other rights,
including exercise prices.
8. As of the Effective Time of the Merger, Surviving Corporation
will assume all obligations under all outstanding voting notes of Merging
Corporation, and the outstanding principal amount of such voting notes of
Merging Corporation shall represent the obligation of Surviving Corporation,
with no other changes in the terms and conditions of such voting notes, with
all voting rights of the holders thereof in effect with respect to the
Surviving Corporation.
9. The Certificate of Incorporation and Bylaws of Surviving
Corporation as in effect at the Effective Time of the Merger shall continue to
be the Certificate of Incorporation and Bylaws of Surviving Corporation after
consummation of the Merger.
10. From time to time as and when required by Surviving
Corporation or its successors or assigns, there shall be executed and delivered
on behalf of Merging Corporation such deeds and other instruments, and there
shall be taken or caused to be taken such further and other actions as shall be
appropriate or necessary in order to vest or perfect in or to confirm in record
or otherwise in Surviving Corporation the title to and possession of all the
property, interest, assets, rights, privileges, immunities, powers, franchises
and authority of Merging Corporation, and otherwise to carry out the purposes
of this Merger Agreement, and the officers and directors of Surviving
Corporation are fully authorized in the name and on
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<PAGE> 357
behalf of Merging Corporation or otherwise to take any and all such actions and
to execute and deliver any and all such deeds and other instruments.
11. Prior to the filing of this Merger Agreement with the
Secretary of Sate of the State of California and with the Secretary of State of
the State of Delaware, this Merger Agreement may be amended or terminated by
written agreement of the boards of directors of Merging Corporation and
Surviving Corporation, or by their respective officers authorized by such
boards of directors, notwithstanding approval of this Merger Agreement by the
shareholders of Merging Corporation. In furtherance and not in limitation of
the foregoing, this Merger Agreement may be terminated by resolution of the
Board of Directors of the Merging Corporation if the conditions which have made
this Merger advisible no longer exist.
12. The effective date of the Merger is ___________________, 1996
(the "Effective Time of the Merger").
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<PAGE> 358
13. This Merger Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original.
IN WITNESS WHEREOF, the parties have caused this Agreement and Plan of
Merger to be executed as of the date first above written.
MERGING CORPORATION:
SUPERIOR NATIONAL INSURANCE GROUP, INC.
a California corporation
By:
----------------------------------
William L. Gentz
President
Attest:
- - ----------------------------------
Robert E. Nagle
Secretary
SURVIVING CORPORATION:
SUPERIOR NATIONAL INSURANCE GROUP, INC.,
a Delaware corporation
By:
----------------------------------
William L. Gentz
President
Attest:
- - ----------------------------------
Robert E. Nagle
Secretary
E-4
<PAGE> 359
ANNEX F
CERTIFICATE OF INCORPORATION
OF
SUPERIOR NATIONAL INSURANCE GROUP, INC.
I, the undersigned, for the purposes of incorporating and organizing a
corporation under the General Corporation Law of the State of Delaware, do
execute this Certificate of Incorporation and do hereby certify as follows:
FIRST. The name of the corporation is Superior National Insurance
Group, Inc. (the "Corporation").
SECOND. The address of the Corporation's registered office in the
State of Delaware is One Rodney Square, 10th Floor, Tenth and King Streets, in
the City of Wilmington, County of New Castle, 19801. The name of its
registered agent at such address is RL&F Service Corp.
THIRD. The purpose of the Corporation is to engage in any lawful act
or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware.
FOURTH. The total number of shares of stock which the Corporation
shall have authority to issue is twenty-five million (25,000,000.00). All such
shares are to be common stock, par value of $.01 per share (the "Common
Stock"), and are to be of one class.
FIFTH. (a) Each holder of the Corporation's 14.5% Senior Subordinated
Voting Notes due April 1, 2002 (the "Special Voting Notes") issued pursuant to
the Note Purchase Agreement dated March 31, 1992 (the "Note Purchase
Agreement") shall be entitled to vote only for the election or removal of
directors to (or from) the board of directors of the Corporation (the "Board"),
and shall have that number of votes arrived at by the following calculations:
(i) dividing the principal amount of the Special Voting Note held by a
particular holder by the total principal amount of all outstanding Special
Voting Notes; and (ii) multiplying the result of (i) by the total number of
shares of this Corporation's Common Stock issuable upon exercise of all the
warrants issued pursuant to the Note Purchase Agreement and outstanding on the
record date for any vote of this Corporation's shareholders for the election or
removal of directors. To the extent of this limited right to vote granted to
holders of the Special Voting Notes, the holders of the Common Stock and of the
Special Voting Notes shall vote together and not as separate classes.
(b) The terms of paragraph (a) of article FIFTH may not be amended
without the approval of the holders of the Special Voting Notes then
outstanding, voting as a separate class.
(c) The Board of Directors shall consist of nine (9) members unless
changed by an amendment to the Certificate of Incorporation. Any change in the
authorized number
<PAGE> 360
of directors or the provisions regarding the election of directors shall
require the affirmative vote of the majority of the outstanding Special Voting
Notes, voting as a separate class.
It is proposed that the Certificate of Incorporation read "eleven (11)
members" if such change in number is approved by the shareholders at the
Special Meeting.
SIXTH. (a) Prohibited Transfer; Excess Stock. Except as provided in
Section F, until the Restriction Termination Date, any attempted direct or
indirect Transfer of Stock shall be deemed a "Prohibited Transfer" if (i) such
Transfer would increase the Percentage of Stock Owned by any Person that (or by
any person whose Stock is or by virtue of such Transfer would be attributed to
any Person that), either after giving effect to the attribution rules
(including the option attribution rules) of Section 382 or without regard to
such attribution rules, Owns, by virtue of such Transfer would Own, or has at
any time since the period beginning three years prior to the date of such
Transfer Owned, Stock in excess of the Limit, or (ii) such Transfer would cause
an "ownership change" of the corporation within the meaning of Section 382.
Except at otherwise provided in Section E, the Stock or Option sought to be
Transferred in the Prohibited Transfer shall be deemed "Excess Stock."
(b) Transfer of Excess Stock to Transferee. Except as otherwise
provided in Section E, a Prohibited Transfer shall be void ab initio as to the
Purported Transferee in the Prohibited Transfer and such Purported Transferee
shall not be recognized as the owner of the Excess Stock for any purpose and
shall not be entitled to any rights as a stockholder of the corporation arising
from the ownership of Excess Stock, including, but not limited to, the right to
vote such Excess Stock or to receive dividends or other distributions in
respect thereof or, in the case of Options, to receive Stock in respect of
their exercise. Any Excess Stock shall automatically be transferred to the
Trustee in trust for the benefit of the Charitable Beneficiary, effective as of
the close of business on the business day prior to the date of the Prohibited
Transfer; provided, however, that if the transfer to the trust is deemed
ineffective for any reason, such Excess Stock shall nevertheless be deemed to
have been automatically transferred to the person selected as the Trustee at
such time, and such person shall have rights consistent with those of the
Trustee as described in this section and in Section C below. Any dividend or
other distribution with respect to such Excess Stock paid prior to the
discovery by the corporation that the Excess Stock has been transferred to the
Trustee ("Prohibited Distributions") shall be deemed to be held by the
Purported Transferee as agent for the Trustee, and shall be paid to the Trustee
upon demand, and any dividend or distribution declared but unpaid shall be paid
when due to the Trustee. Any vote cast by a Purported Transferee with respect
to Excess Stock prior to the discovery by the corporation that the Excess Stock
has been transferred to the Trustee will be rescinded as void and shall be
recast in accordance with the desires of the Trustee acting for the sole
benefit of the Charitable Beneficiary. The Purported Transferee and any other
Person holding certificates representing Excess Stock shall immediately
surrender such certificates to the Trustee. The Trustee shall have all the
rights of the owner of the Excess Stock, including the right to vote, to
receive dividends or other distributions, and to receive proceeds from
liquidation, which rights shall be exercised for the sole benefit of the
Charitable Beneficiary.
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<PAGE> 361
(c) Disposition of Excess Stock. As soon as practicable following
receipt of notice from the corporation that Excess Stock has been transferred
to the Trustee, the Trustee shall take such actions as it deems necessary to
dispose of the Excess Stock in an arm's-length transaction that would not
constitute a Prohibited Transfer. Upon the disposition of such Excess Stock,
(i) the interest of the Charitable Beneficiary in the Excess Stock shall
terminate, and (ii) the Trustee shall distribute the net proceeds of the sale
as follows: (a) the Purported Transferee shall receive an amount of the net
proceeds of such sale not to exceed the Purported Transferee's cost incurred to
acquire such Excess Stock, or, if such Excess Stock was Transferred for less
than fair market value on the date of the Prohibited Transfer, the fair market
value of the Excess Stock on the date of the Prohibited Transfer, in each case
less all costs incurred by the corporation, the Trustee and the Transfer Agent
in enforcing the Restrictions, and (b) the Charitable Beneficiary shall receive
the balance of the net proceeds from the sale of the Excess Stock, if any,
together with any Prohibited Distributions received from the Purported
Transferee and any other distributions with respect to such Excess Stock while
such Stock was held by the Trustee. In the event the Purported Transferee has
disposed of the Excess Stock and distributed the proceeds and other amounts
otherwise than in accordance with this section, then (w) such Purported
Transferee shall be deemed to have disposed of such Excess Stock as an agent
for the Trustee, (x) such Purported Transferee shall be deemed to hold such
proceeds and any Prohibited Distributions as an agent for the Trustee, (y) such
Purported Transferee shall be required to return to the Trustee the proceeds
from such sale, together with any Prohibited Distributions theretofore received
by the Purported Transferee with respect to such Excess Stock, provided that
upon receipt of written permission from the Trustee, the Purported Transferee
will be entitled to retain an amount of such sale proceeds not to exceed the
amount that such purported Transferee would have received from the Trustee if
the Trustee had obtained and resold the Excess Stock, and (z) the Trustee shall
transfer any remaining proceeds to the Charitable Beneficiary. Neither the
Trustee, the corporation, the Purported Transferee nor any other party shall
claim an income tax deduction with respect to any transfer to the Charitable
Beneficiary and neither the Trustee nor the corporation shall benefit in any
way from the enforcement of the Restrictions, except insofar as these
restrictions protect the corporation's Income Tax Net Operating Loss Carryover.
Neither the Trustee, the corporation nor the Transfer Agent shall have any
liability to any Person for any loss arising from or related to a Prohibited
Transfer.
(d) Transfer Agent's Rights and Responsibilities. The Transfer Agent
shall not register any Transfer of Stock on the corporation's stock transfer
records if it has knowledge that such Transfer is a Prohibited Transfer. The
Transfer Agent shall have the right, prior and as a condition to registering
any Transfer of Stock on the corporation's stock transfer records, to request
any transferee of the Stock to submit an affidavit, on a form agreed to by the
Transfer Agent and the corporation, stating the number of shares of each class
of Stock Owned by the transferee (and by Persons who would Own the transferee's
Stock) before the proposed Transfer and that would, if effect were given to the
proposed Transfer, be Owned by the transferee (and by Persons who would Own the
prospective Transferee's Stock) after the proposed Transfer. If either (i) the
Transfer Agent does not receive such affidavit, or (ii) such affidavit
evidences that the Transfer was a Prohibited Transfer, the Transfer Agent shall
notify the corporation and shall not enter the Prohibited Transfer into the
corporation's stock
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<PAGE> 362
transfer records, and the Trustee, the corporation and the Transfer Agent shall
take such steps as provided in the Restrictions in order to dispose of the
Excess Stock purportedly Owned by such Purported Transferee. If the Transfer
Agent, for whatever reason, enters a Prohibited Transfer in the corporation's
stock transfer records, such Transfer shall be nonetheless void ab initio and
shall have no force and effect, in accordance with the Restrictions, and the
corporation's stock transfer records shall be revised to so provide.
(e) Certain Indirect Prohibited Transfers. In the event a Transfer
would be a Prohibited Transfer as a result of attribution to the Purported
Transferee of the Ownership of Stock by a person (an "Other Person") who is not
controlling, controlled by or under common control with the Purported
Transferee, which Ownership is nevertheless attributed to the Purported
Transferee, the Restrictions shall not apply in a manner that would invalidate
any Transfer to such Other Person, and the Purported Transferee and any Persons
controlling, controlled by or under common control with the Purported
Transferee (collectively, the "Purported Transferee Group") shall automatically
be deemed to have transferred to the Trustee at the time and in a manner
consistent with Section B hereof, sufficient Stock (which Stock shall (i)
consist only of Stock held legally or beneficially, whether directly or
indirectly, by any member of the Purported Transferee Group, but not Stock held
through any Other Person, other than shares held through a Person acting as
agent or fiduciary for any member of the Purported Transferee Group, (ii) be
deemed transferred to the Trustee, in the inverse order in which it was
acquired by members of the Purported Transferee Group, and (iii) be treated as
Excess Stock) to cause the Purported Transferee, following such transfer to the
Trustee, not to be in violation of the Restrictions; provided, however, that to
the extent the foregoing provisions of this Section E would not be effective to
prevent a Prohibited Transfer, the Restrictions shall apply to such other Stock
Owned by the Purported Transferred (including Stock actually owned by Other
Persons), in a manner designed to minimize the amount of Stock subject to the
Restrictions or as otherwise determined by the Board of Directors to be
necessary to prevent a Prohibited Transfer (which Stock shall be treated as
Excess Stock).
(f) Exceptions. The term "Prohibited Transfer" shall not include:
(i) the original issuance of Common Stock pursuant to the Stock Purchase
Agreement, (ii) any Transfer described in Section 382(1)(3)(B) of the Code
(relating to transfers upon death or divorce and certain gifts) if all Persons
who would Own the Stock Transferred would be treated for purposes of Section
382 as having Owned such Stock at all times beginning more than three (3) years
prior to the date of the Transfer, and (iii) any Transfer with respect to which
the Person who would otherwise be the Purported Transferee obtains or is
granted the prior written approval of the Board of Directors of the
corporation, which approval shall be granted in its sole and absolute
discretion after considering all facts and circumstances, including but not
limited to future events the occurrence of which are deemed by the Board of
Directors of the corporation to be reasonably possible.
(g) Legend. All certificates or other instruments evidencing
Ownership of Stock shall bear a conspicuous legend describing the restrictions.
The Board of Directors shall
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<PAGE> 363
take such actions as it deems necessary to substitute certificates evidencing
ownership of Stock and bearing such legend for certificates not bearing such
legend.
(h) Prompt Enforcement; Further Actions. As soon as practicable and
within thirty (30) business days of learning of a purported Prohibited
Transfer, the corporation through its Secretary or any assistant Secretary
shall demand that the Purported Transferee (or any other member of the
Purported Transferee Group) surrender to the Trustee the certificates
representing the Excess Stock or any resale proceeds therefrom, and any
Prohibited Distributions or other dividends or distributions received thereon,
and if such surrender is not made within twenty (20) business days from the
date of such demand, the corporation shall institute legal proceedings to
compel such surrender and for compensatory damages on account of any failure to
take such actions; provided, however, that nothing in this Section H shall
preclude the corporation in its discretion from immediately bringing legal
proceedings without a prior demand, and also provided that failure of the
corporation to act within the time periods set out in this section shall not
constitute a waiver of any right of the corporation to compel any transfer
required hereby. Upon a determination by the Board of Directors that there has
been or is threatened a Prohibited Transfer, the Board of Directors may
authorize such additional action as its deems advisable to give effect to the
Restrictions, including, without limitation, refusing to give effect on the
books of the Company to any such purported Prohibited Transfer or instituting
proceedings to enjoin any such purported Prohibited Transfer. Nothing
contained in the Restrictions shall limit the authority of the Board of
Directors to take such other action to the extent permitted by law as it deems
necessary or advisable to protect the corporation and the interests of the
holders of its securities in preserving the Income Tax Net Operating Loss
Carryover, including, but not limited to, refusing to give effect to any
Prohibited Transfer or other action on the books of the corporation or
instituting proceedings to enjoin any Prohibited Transfer or other action;
provided, however, that any Prohibited Transfer shall nevertheless result in
the consequences otherwise described in the Restrictions.
(i) Board Authority to Interpret. The Board of Directors shall have
the authority to interpret the provisions of the Restrictions for the purpose
of protecting the Income Tax Net Operating Loss Carryover. Any such
interpretation shall be final and binding on any Person who Owns or purports to
acquire Ownership of Stock.
(j) Damages. Any person who knowingly violates the Restrictions, and
any persons controlling, controlled by or under common control with such a
person, shall be jointly and several liable to the corporation for, and shall
indemnify and hold the corporation harmless against, any and all damages
suffered as a result of such violation, including but not limited to damages
resulting from a reduction in or elimination of the corporation's ability to
utilize its Income Tax Net Operating Loss Carryover, and attorneys' and
accountants' fees incurred in connection with such violation.
(k) Severability. If any part of the Restrictions is judicially
determined to be invalid or otherwise unenforceable, such invalidity or
unenforceability shall not affect the remainder of the Restrictions, which
shall be thereafter interpreted as if the invalid or
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<PAGE> 364
unenforceable part were not contained herein, and, to the maximum extent
possible, in a manner consistent with preserving the ability of the corporation
to utilize to the greatest extent possible the Income Tax Operating Loss
Carryover.
(l) Effect on Stock Exchange Transactions. Nothing in the
Restrictions shall preclude the settlement of a transaction entered into
through the facilities of Nasdaq. The Stock that is the subject of such
transaction shall continue to be subject to the terms and Restrictions after
such settlement.
(m) Definitions:
"Charitable Beneficiary" shall mean one or
more organizations described in Sections 170(b)(1)(A), 170(c)(2) and
501(c)(3) of the Code designated in writing by the corporation.
"Code" shall mean the Internal Revenue Code
of 1986, as amended and as it may be amended from time to time
hereafter.
"Common Stock" shall mean the common stock of
the Corporation, $0.01 par value per share.
"Control" shall mean the possession, direct
or indirect, of the power to direct or cause the direction of the
management, policies or decisions of a Person, whether through the
ownership of voting securities, by contract, family relationship or
otherwise. The terms "controlling," "controlled by" and "under common
control with" shall have correlative meanings. A Person shall be
deemed to control or be under common control with a Purported
Transferee if the Excess Stock Owned by such Person is treated as
Owned by the Purported Transferee by virtue of the family attribution
rules of Section 318 of the Code.
"5% Shareholder" shall mean any Person or
Public Group who is a "5-percent shareholder" of the corporation
within the meaning of Section 382, substituting "4.9 percent" for "5
percent" each place it appears therein.
"Income Tax Net Operating Loss Carryover"
shall mean the net operating loss, capital loss, net unrealized
built-in loss, general business credit, alternative minimum tax
credit, foreign tax credit and any other carryovers or losses as
determined for United States federal income tax purposes that are or
could become subject to limitation under Section 382, and to which the
corporation is entitled under the Code and Regulations, at any time
during which the Restrictions are in force.
"IP Delaware" shall mean Insurance Partners,
L.P., a Delaware limited partnership.
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<PAGE> 365
"IP Bermuda" shall mean Insurance Partners
Offshore (Bermuda), L.P., a Bermuda limited partnership.
"Limit" shall mean 4.9 Percent of the Stock.
"Option" shall mean any interest that could
give rise to the Ownership of Stock and that is an option, contract,
warrant, convertible instrument, put, call, stock subject to a risk of
forfeiture, pledge of stock or any interest that is similar to any of
such interests or any other interest that would be treated, under
paragraph (d)(9) of Treasury Regulation Section 1.382-4, in the same
manner as an option, whether or not any of such interests is subject
to contingencies.
"Own," and all derivations of the word "Own,"
shall mean any direct or indirect, actual or beneficial interest,
including, except as otherwise provided, a constructive ownership
interest under the attribution rules (including the option attribution
rules) of Section 382. In determining whether a Person Owns an amount
of Stock in excess of the Limit, Options Owned by such Person (or
other Persons whose Ownership of Stock is or would be attributable
under Section 382 to such Person) shall be treated as exercised (and
the Stock that would be acquired by such exercise as outstanding) and
Options Owned by other Persons shall be treated as not exercised (and
the Stock that would be acquired by such exercise as outstanding) and
Options Owned by other Persons shall be treated as not exercised (and
the Stock that would be acquired if such Options owned by other
Persons were exercised shall be treated as not outstanding), in each
case without regard to whether such treatment would result in an
ownership change within the meaning of Section 382. In determining
whether a Transfer that is an exercise, conversion or similar
transaction with respect to an Option increases the Percentage
Ownership of Stock of any Person or Public Group, such Option shall be
treated as if it were not Owned by such Person immediately prior to
such Transfer.
"Percent," "Percentage" or "%" shall mean
percent or percentage by value.
"Person" shall mean any individual (other
than a Public Group treated as an individual under Section 382) or any
"entity" as that term is defined in Regulations Section 1.382-3(a).
"Public Group" shall have the meaning
assigned to such term in the applicable Regulations under Section 382.
"Purported Transferee" shall mean a Person or
Public Group who acquires Ownership of Excess Stock in a Prohibited
Transfer or,
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except as otherwise provided in the Restrictions, any subsequent
transferee of such Excess Stock.
"Purported Transferor" shall mean a Person
who Transfers Excess Stock in a Prohibited Transfer.
"Regulations" shall mean Treasury
Regulations, including proposed or temporary regulations, promulgated
under the Code, as the same may be amended from time to time.
References herein to specific provisions of temporary Regulations
shall include the analogous provisions of final Regulations or other
successor Regulations.
"Restriction Effective Date" shall mean the
date of the closing of the purchase of 2,390,438 shares of Common
Stock by IP Delaware, IP Bermuda and the Subscribing Stockholders
pursuant to the Stock Purchase Agreement.
"Restriction Termination Date" shall mean the
earliest to occur of (a) the end of the thirty-sixth (36th) month
following the Restriction Effective Date, (b) the first day of the
first taxable year following the taxable year (or years) in which the
Income Tax Net Operating Loss Carryover has been reduced to zero, or
(c) the date upon which the Board of Directors has determined that
there has been a change in law (including but not limited to the
repeal of Section 382 without a successor provision that places
restrictions on the Income Tax Net Operating Loss Carryover based on
changes of ownership of the corporation's Stock similar to Section
382) eliminating the need for the Restrictions in order to preserve
the corporation's ability to utilize the Income Tax Net Operating Loss
Carryover.
"Restrictions" shall mean the restrictions on
the Transfer and Ownership of Stock as set forth in this Article VI.
"Section 382" shall mean Section 382 of the
Code and the Regulations promulgated thereunder, and any successor
statute and regulations.
"Stock" shall mean the Common Stock and any
interest in the corporation that would be treated as stock under
Section 382, without regard to clauses (ii)(B) and (iii)(B) of
paragraph (f)(18) of Temporary Treasury Regulation Section 1.382-2T
(but only if, in determining the Ownership by any Person of Stock, the
uniform treatment of such interest as Stock or as not Stock, as the
case may be, would increase such Person's Percentage Ownership of
Stock), and shall also include any Stock the ownership of which may be
acquired by the exercise of an Option.
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"Stock Purchase Agreement" shall mean
that Stock Purchase Agreement among the corporation, IP
Delaware, IP Bermuda, TJS and the Subscribing Stockholders,
dated as of September 17, 1996.
"Subscribing Stockholders" shall mean those
individuals who execute the subscription agreements attached to the
Stock Purchase Agreement as exhibits thereto.
"Transfer" shall mean any direct or indirect
acquisition or disposition of stock, whether by sale, exchange,
merger, consolidation, transfer, assignment, conveyance, distribution,
pledge, inheritance, gift, mortgage, the creation of any security
interest in, or lien or encumbrance upon, or any other acquisition or
disposition of any kind and in any manner, whether voluntary or
involuntary, knowing or unknowing, by operation of law or otherwise.
Notwithstanding any understandings or agreements to which an Owner of
Stock is a party, any arrangement, the effect of which is to transfer
any or all of the rights arising from Ownership of Stock, shall be
treated as a Transfer. A Transfer shall also include (i) a transfer
of an interest in an entity and a change in the relationship between
two or more Persons that results in a change in the Ownership of Stock
and (ii) the creation, grant, exercise, conversion, Transfer or other
disposition of or with respect to an Option, regardless of whether
such Option previously had been treated as exercised or converted for
any other purpose.
"Transfer Agent" means the Person responsible
for maintaining the books and records in which are recorded the
ownership and transfer of shares of Stock or any Person engaged by the
corporation for the purpose of fulfilling the duties required to be
fulfilled by the Transfer Agent hereunder.
"Trustee" means the trustee of the trust
appointed by the corporation, provided that the Trustee shall be a
Person unaffiliated with the corporation, any 5% Shareholder, and any
Person purchasing or disposing of Stock in a Prohibited Transfer.
SEVENTH. The holders of the Special Voting Notes and the Common
Stock, voting together as a single class, shall be entitled at all elections of
directors to as many votes as shall equal the number of votes which (except for
this provision as to cumulative voting) he would be entitled to cast for the
election of directors with respect to his shares of stock multiplied by the
number of directors to be elected, and such holder may cast all of such votes
for a single director or may distribute them among the number to be voted for,
or for any two or more of them as he or she may see fit. The holders of the
Common Stock shall be entitled to one vote for each share upon all other
matters.
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EIGHTH. The incorporator of the Corporation is C. Stephen Bigler, P.O
Box 551, Wilmington, DE 19899.
NINTH. Unless and except to the extent that the by-laws of the
Corporation shall so require, the election of directors of the Corporation need
not be by written ballot.
TENTH. In furtherance and not in limitation of the powers conferred
by the laws of the State of Delaware, the Board is expressly authorized to
make, alter and repeal the by-laws of the Corporation, subject to the power of
the stockholders of the Corporation to alter or repeal any by-law whether
adopted by them or otherwise.
ELEVENTH. A director of the Corporation shall not be liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except to the extent such exemption from liability or
limitation thereof is not permitted under the General Corporation Law of the
State of Delaware as the same exists or may hereafter be amended. Any
amendment, modification or repeal of the foregoing sentence shall not adversely
affect any right or protection of a director of the Corporation hereunder in
respect of any act or omission occurring prior to the time of such amendment,
modification or repeal.
TWELFTH. The Corporation reserves the right at any time, and from
time to time, to amend, alter, change or repeal any provision contained in this
Certificate of Incorporation, and other provisions authorized by the laws of
the State of Delaware at the time in force may be added or inserted, in the
manner now or hereafter prescribed by law; and all rights, preferences and
privileges of whatsoever nature conferred upon stockholders, directors or any
other persons whomsoever by and pursuant to this Certificate of Incorporation
in its present form or as hereafter amended are granted subject to the rights
reserved in this article.
The undersigned incorporator hereby acknowledges that the foregoing
certificate of incorporation is his act and deed on _____________, 1996.
_________________________________
C. Stephen Bigler
Incorporator
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ANNEX G
BY-LAWS
OF
SUPERIOR NATIONAL INSURANCE GROUP, INC.
---------------------------------------
ARTICLE I
Stockholders
Section 1.1. Annual Meetings. An annual meeting of stockholders
shall be held for the election of directors at such date, time and place,
either within or without the State of Delaware, as may be designated by
resolution of the Board of Directors from time to time. Any other proper
business may be transacted at the annual meeting.
Section 1.2. Special Meetings. Special meetings of stockholders for
any purpose or purposes may be called at any time by the Board of Directors,
any officer of the Corporation or by ten percent (10%) of the stockholders.
Section 1.3. Notice of Meetings. Whenever stockholders are required
or permitted to take any action at a meeting, a written notice of the meeting
shall be given that shall state the place, date and hour of the meeting and, in
the case of a special meeting, the purpose or purposes for which the meeting is
called. Unless otherwise provided by law, the certificate of incorporation or
these by-laws, the written notice of any meeting shall be given not less than
ten nor more than sixty days before the date of the meeting to each stockholder
entitled to vote at such meeting. If mailed, such notice shall be deemed to be
given when deposited in the United States mail, postage prepaid, directed to
the stockholder at his address as it appears on the records of the corporation.
Section 1.4. Adjournments. Any meeting of stockholders, annual or
special, may adjourn from time to time to reconvene at the same or some other
place, and notice need not be given of any such adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the corporation may transact any business
which might have been transacted at the original meeting. If the adjournment
is for more than thirty days, or if after the adjournment a new record date is
fixed for the adjourned meeting, notice of the adjourned meeting shall be given
to each stockholder of record entitled to vote at the meeting.
Section 1.5. Quorum. Except as otherwise provided by law, the
certificate of incorporation or these by-laws, at each meeting of stockholders
the presence in person or by proxy of the holders of a majority in voting power
of the outstanding shares of stock entitled
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to vote at the meeting shall be necessary and sufficient to constitute a
quorum. In the absence of a quorum, the stockholders so present may, by a
majority in voting power thereof, adjourn the meeting from time to time in the
manner provided in Section 1.4 of these by-laws until a quorum shall attend.
Shares of its own stock belonging to the corporation or to another corporation,
if a majority of the shares entitled to vote in the election of directors of
such other corporation is held, directly or indirectly, by the corporation,
shall neither be entitled to vote nor be counted for quorum purposes; provided,
however, that the foregoing shall not limit the right of the corporation or any
subsidiary of the corporation to vote stock, including but not limited to its
own stock, held by it in a fiduciary capacity.
Section 1.6. Organization. Meetings of stockholders shall be
presided over by the Chairman of the Board, if any, or in his absence by the
Vice Chairman of the Board, if any, or in his absence by the President, or in
his absence by a Vice President, or in the absence of the foregoing persons by
a chairman designated by the Board of Directors, or in the absence of such
designation by a chairman chosen at the meeting. The Secretary shall act as
secretary of the meeting, but in his absence the chairman of the meeting may
appoint any person to act as secretary of the meeting.
Section 1.7. Voting; Proxies. Except as otherwise provided by the
certificate of incorporation, each stockholder entitled to vote at any meeting
of stockholders shall be entitled to one vote for each share of stock held by
him which has voting power upon the matter in question. Each stockholder
entitled to vote at a meeting of stockholders or to express consent or dissent
to corporate action in writing without a meeting may authorize another person
or persons to act for him by proxy, but no such proxy shall be voted or acted
upon after three years from its date, unless the proxy provides for a longer
period. A proxy shall be irrevocable if it states that it is irrevocable and
if, and only as long as, it is coupled with an interest sufficient in law to
support an irrevocable power. A stockholder may revoke any proxy which is not
irrevocable by attending the meeting and voting in person or by filing an
instrument in writing revoking the proxy or by delivering a proxy in accordance
with applicable law bearing a later date to the Secretary of the corporation.
Voting at meetings of stockholders need not be by written ballot. At all
meetings of stockholders for the election of directors a plurality of the votes
cast shall be sufficient to elect. All other elections and questions shall,
unless otherwise provided by law, the certificate of incorporation or these
by-laws, be decided by the affirmative vote of the holders of a majority in
voting power of the shares of stock which are present in person or by proxy and
entitled to vote thereon.
Section 1.8. Notice of Stockholder Business and Nominations.
(A) Annual Meetings of Stockholders. (1) Nominations of
persons for election to the Board of Directors of the Corporation and the
proposal of business to be considered by the stockholders may be made at an
annual meeting of stockholders (a) pursuant to the Corporation's notice of
meeting delivered pursuant to Section 1.3 of these By-laws, (b) by or at the
direction of the Chairman of the Board of Directors or (c) by any stockholder
of the Corporation who is entitled to vote at the meeting, who complied with
the notice
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procedures set forth in clauses (2) and (3) of this paragraph (A) of this
By-law and who was a stockholder of record at the time such notice is delivered
to the Secretary of the Corporation.
(2) For nominations or other business to be
properly brought before an annual meeting by a stockholder pursuant to clause
(c) of paragraph (A)(1) of this By-law, the stockholder must have given timely
notice thereof in writing to the Secretary of the Corporation. To be timely, a
stockholder's notice shall be delivered to the Secretary at the principal
executive offices of the Corporation not less than seventy days nor more than
ninety days prior to the first anniversary of the preceding year's annual
meeting; provided, however, that in the event that the date of the annual
meeting is advanced by more than twenty days, or delayed by more than seventy
days, from such anniversary date, notice by the stockholder to be timely must
be so delivered not earlier than the ninetieth day prior to such annual meeting
and not later than the close of business on the later of the seventieth day
prior to such annual meeting or the tenth day following the day on which public
announcement of the date of such meetings if first made. Such stockholder's
notice shall set forth (a) as to each person whom the stockholder proposes to
nominate for election or re-election as a director all information relating to
such person that is required to be disclosed in solicitations of proxies for
election of directors, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), including such person's written consent to being named in the
proxy statement as a nominee and to serving as a director if elected; (b) as to
any other business desired to be brought before the meeting, the reasons for
conducting such business at the meeting and any material interest in such
business of such stockholder and the beneficial owner, if any, on whose behalf
the proposal is made; and (c) as to the stockholder giving the notice and the
beneficial owner, if any, on whose behalf the nomination or proposal is made
(i) the name and address of such stockholder, as they appear on the
Corporation's books, and of such beneficial owner and (ii) the class and number
of shares of the Corporation which are owned beneficially and or record by such
stockholder and such beneficial owner.
(3) Notwithstanding anything in the second
sentence of paragraph (A)(2) of this By-law to the contrary, in the event that
the number of directors to be elected to the Board of Directors of the
Corporation is increased and there is no public announcement naming all of the
nominees for director or specifying the size of the increased Board of
Directors made by the Corporation at least eighty days prior to the first
anniversary of the preceding year's annual meeting, a stockholder's notice
required by this By-law shall also be considered timely, but only with respect
to nominees for any new positions created by such increase, if it shall be
delivered to the Secretary at the principal executive offices of the
Corporation not later than the close of business on the tenth day following the
day on which such public announcement is first made by the Corporation.
(B) Special Meetings of Stockholders. Only such business
shall be conducted at a special meeting of stockholders as shall have been
brought before the meeting pursuant to the Corporation's notice of meeting
pursuant to Section 1.3 of these By-laws. Nominations of persons for election
to the Board of Directors may be made at a special meeting of stockholders at
which directors are to be elected pursuant to the Corporation's
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notice of meeting (a) by or at the direction of the Board of Directors or (b)
by any stockholder of the Corporation who is entitled to vote at the meeting,
who complies with the notice procedures set forth in this By-law and who is a
stockholder of record at the time such notice is delivered to the Secretary of
the Corporation. Nominations by stockholders of persons for election to the
Board of Directors may be made at such a special meeting of stockholders if the
stockholder's notice as required by paragraph (A)(2) of this By-law shall be
delivered to the Secretary at the principal executive offices of the
Corporation not earlier than the ninetieth day prior to such special meeting
and not later than the close of business on the later of the seventieth day
prior to such special meeting or the tenth day following the day on which
public announcement is first made of the date of the special meeting and of the
nominees proposed by the Board of Directors to be elected at such meeting. In
no event shall the public announcement of an adjournment of a special meeting
commence a new time period for the giving of a stockholder's notice as
described above.
(C) General.
(1) Only persons who are nominated in accordance
with the procedures set forth in this By-law shall be eligible to serve as
director and only such business shall be conducted at a meeting of stockholders
as shall have been brought before the meeting in accordance with the procedures
set forth in this By-law. Except as otherwise provided by law, the Certificate
of Incorporation or these By- laws, the chairman of the meeting shall have the
power and duty to determine whether a nomination or any business proposed to be
brought before the meeting was made in accordance with the procedures set forth
in this By-law and, if any proposed nomination or business is not compliance
with this By-law, to declare that such defective proposal or nomination shall
disregarded.
(2) For purposes of this By-law, "public
announcement" shall mean disclosure in a press release reported by the Dow
Jones News Service, Associated Press or comparable national news service or in
a document publicly filed by the Corporation with the Securities and Exchange
Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of
this By-law, a stockholder shall also comply with all applicable requirements
of the Exchange Act and the rules and regulations thereunder with respect to
the matters set forth in this By-law. Nothing in this By-law shall be deemed
to affect any rights of stockholders to request inclusion of proposals in the
Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act.
Section 1.9. Fixing Date for Determination of Stockholders of Record.
In order that the corporation may determine the stockholders entitled to notice
of or to vote at any meeting of stockholders or any adjournment thereof, or to
express consent to corporate action in writing without a meeting, or entitled
to receive payment of any dividend or other distribution or allotment of any
rights, or entitled to exercise any rights in respect of any change, conversion
or exchange of stock or for the purpose of any other lawful action, the
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Board of Directors may fix a record date, which record date shall not precede
the date upon which the resolution fixing the record date is adopted by the
Board of Directors, and which record date: (1) in the case of determination of
stockholders entitled to vote at any meeting of stockholders or adjournment
thereof, shall, unless otherwise required by law, not be more than sixty nor
less than ten days before the date of such meeting; (2) in the case of
determination of stockholders entitled to express consent to corporate action
in writing without a meeting, shall not be more than ten days from the date
upon which the resolution fixing the record date is adopted by the Board of
Directors; and (3) in the case of any other action, shall not be more than
sixty days prior to such other action. If no record date is fixed: (1) the
record date for determining stockholders entitled to notice of or to vote at a
meeting of stockholders shall be at the close of business on the day next
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the day next preceding the day on which the meeting is
held; (2) the record date for determining stockholders entitled to express
consent to corporate action in writing without a meeting, when no prior action
of the Board of Directors is required by law, shall be the first date on which
a signed written consent setting forth the action taken or proposed to be taken
is delivered to the corporation in accordance with applicable law, or, if prior
action by the Board of Directors is required by law, shall be at the close of
business on the day on which the Board of Directors adopts the resolution
taking such prior action; and (3) the record date for determining stockholders
for any other purpose shall be at the close of business on the day on which the
Board of Directors adopts the resolution relating thereto. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned
meeting.
Section 1.10. List of Stockholders Entitled to Vote. The Secretary
shall prepare and make, at least ten days before every meeting of stockholders,
a complete list of the stockholders entitled to vote at the meeting, arranged
in alphabetical order, and showing the address of each stockholder and the
number of shares registered in the name of each stockholder. Such list shall
be open to the examination of any stockholder, for any purpose germane to the
meeting, during ordinary business hours, for a period of at least ten days
prior to the meeting, either at a place within the city where the meeting is to
be held, which place shall be specified in the notice of the meeting, or if not
so specified, at the place where the meeting is to be held. The list shall
also be produced and kept at the time and place of the meeting during the whole
time thereof and may be inspected by any stockholder who is present. Upon the
willful neglect or refusal of the directors to produce such a list at any
meeting for the election of directors, they shall be ineligible for election to
any office at such meeting. Except as otherwise provided by law, the stock
ledger shall be the only evidence as to who are the stockholders entitled to
examine the stock ledger, the list of stockholders or the books of the
corporation, or to vote in person or by proxy at any meeting of stockholders.
Section 1.11. Consent of Stockholders in Lieu of Meeting.
(a) Any action required to be taken at any annual or
special meeting of stockholders of the Corporation, or any action which may be
taken at any annual or special
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meeting of the stockholders, may be taken without a meeting, without prior
notice and without a vote, if a consent or consents in writing, setting for the
action so taken, shall be signed by the holders of outstanding stock having not
less than the minimum number of votes that would be necessary to authorize or
take such action at a meeting at which all shares entitled to vote thereon were
present and voted and shall be delivered to the Corporation by delivery to its
registered office in Delaware, its principal place of business, or an officer
or agent of the Corporation having custody of the book in which proceedings of
meetings of stockholders are recorded. Delivery made to the Corporation's
registered office shall be made by hand or by certified or registered mail,
return receipt request.
(b) Every written consent shall bear the date of signature
of each stockholder who signs the consent and no written consent shall be
effective to take the corporate action referred to therein unless, within sixty
(60) days of the date the earliest dated consent is delivered to the
Corporation, a written consent or consents signed by a sufficient number of
holders to take action are delivered to the Corporation in the manner
prescribed in paragraph (c) of this Section.
(c) In order that the Corporation may determine the
stockholders entitled to consent to corporate action in writing without a
meeting, the Board of Directors may fix a record date, which record date shall
not precede the date upon which the resolution fixing the record date is
adopted by the Board of Directors, and which date shall not be more than ten
(10) days after the date upon which the resolution fixing the record date is
adopted by the Board of Directors. Any stockholder of record seeking to have
the stockholders authorize or take corporate action by written consent shall,
by written notice to the Secretary, request the Board of Directors to fix a
record date. The Board of Directors shall promptly, but in all events within
ten (10) days after the date on which such a request is received, adopt a
resolution fixing the record date. If no record date has been fixed by the
Board of Directors within ten (10) days of the date on which such a request is
received, the record date for determining stockholders entitled to consent to
corporate action in writing without a meeting, when no prior action by the
Board of Directors is required by applicable law, shall be the first date on
which a signed written consent setting forth the action taken or proposed to be
taken is delivered to the Corporation in accordance with paragraphs (a) and (b)
of this Section. If no record date has been fixed by the Board of Directors
and prior action by the Board of Directors is required by applicable law, the
record date for determining stockholders entitled to consent to corporate
action in writing without a meeting shall be at the close of business on the
date on which the Board of Directors adopts the resolution taking such prior
action.
(d) Within five (5) business days after receipt of the
earliest dated consent delivered to the Corporation in the manner provided in
this Section, the Corporation, shall retain nationally recognized independent
inspectors of elections for the purposes of performing a ministerial review of
the validity of consents and any revocations thereof. The cost of retaining
inspectors of election shall be borne by the Corporation.
(e) At any time that stockholders soliciting consents in
writing to corporate action have a good faith belief that the requisite number
of valid and unrevoked consents to
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authorize or take the action specified has been received by them, the consents
shall be delivered by the soliciting stockholders of the Corporation's
registered office in the State of Delaware or principal place of business or to
the Secretary of the Corporation, together with a certificate stating their
belief that the requisite number of valid and unrevoked consents has been
received as of a specific date, which date shall be identified in the
certificate. In the event that delivery shall be made to the Corporation's
registered office in Delaware, such delivery shall be made by hand or by
certified or registered mail, return receipt requested. Upon receipt of such
consents, the Corporation shall cause the consents to be delivered promptly to
the inspectors of election. The Corporation also shall deliver promptly to the
inspectors of election any revocations of consents in its possession, custody
or control as of the time of receipt of the consents.
(f) As promptly as practicable after the consents and
revocations are received by them, the inspectors of election shall issue a
preliminary report to the Corporation stating: (i) the number of shares
represented by valid and unrevoked consents; (ii) the number of shares
represented by invalid consents; (iii) the number of shares represented by
invalid revocations; and (iv) the number of shares entitled to submit consents
as of the record date. Unless the Corporation and the soliciting stockholders
agree to a shorter or longer period, the Corporation and the soliciting
stockholders shall have five (5) days to review the consents and revocations
and to advise the inspectors and the opposing party in writing as to whether
they intend to challenge the preliminary report. If no timely written notice
of an intention to challenge the preliminary report is received, the inspectors
shall certify the preliminary report (as corrected or modified by virtue or the
detection by the inspectors of clerical errors) as their final report and
deliver it to the Corporation. If the Corporation or the soliciting
stockholders give timely written notice of an intention to challenge the
preliminary report, a challenge session shall be scheduled by the inspectors as
promptly as practicable. A transcript of the challenge session shall be
recorded by a certified court reporter. Following completion of the challenge
session, the inspectors shall issue as promptly as practicable their final
report and deliver it to the Corporation. A copy of the final report shall be
included in the book in which the proceedings of meetings of stockholders are
required.
(g) The Corporation shall give prompt notice to the
stockholders of the results of any consent solicitation or the taking of
corporate action without a meeting by less than unanimous written consent.
(h) This Section shall in no way impair or diminish the
right of any stockholder or director, or any officer whose title to office is
contested, to contest the validity of any consent or revocation thereof, or to
take any other action with respect thereto.
Section 1.12. Inspectors of Election. The corporation may, and shall
if required by law, in advance of any meeting of stockholders, appoint one or
more inspectors of election, who may be employees of the corporation, to act at
the meeting or any adjournment thereof and to make a written report thereof.
The corporation may designate one or more persons as alternate inspectors to
replace any inspector who fails to act. In the event that no inspector so
appointed or designated is able to act at a meeting of stockholders, the person
presiding at the
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meeting shall appoint one or more inspectors to act at the meeting. Each
inspector, before entering upon the discharge of his or her duties, shall take
and sign an oath to execute faithfully the duties of inspector with strict
impartiality and according to the best of his or her ability. The inspector or
inspectors so appointed or designated shall (i) ascertain the number of shares
of capital stock of the corporation outstanding and the voting power of each
such share, (ii) determine the shares of capital stock of the corporation
represented at the meeting and the validity of proxies and ballots, (iii) count
all votes and ballots, (iv) determine and retain for a reasonable period a
record of the disposition of any challenges made to any determination by the
inspectors, and (v) certify their determination of the number of shares of
capital stock of the corporation represented at the meeting and such
inspectors' count of all votes and ballots. Such certification and report shall
specify such other information as may be required by law. In determining the
validity and counting of proxies and ballots cast at any meeting of
stockholders of the corporation, the inspectors may consider such information
as is permitted by applicable law. No person who is a candidate for an office
at an election may serve as an inspector at such election.
Section 1.13. Conduct of Meetings. The date and time of the opening
and the closing of the polls for each matter upon which the stockholders will
vote at a meeting shall be announced at the meeting by the person presiding
over the meeting. The Board of Directors of the corporation may adopt by
resolution such rules and regulations for the conduct of the meeting of
stockholders as it shall deem appropriate. Except to the extent inconsistent
with such rules and regulations as adopted by the Board of Directors, the
chairman of any meeting of stockholders shall have the right and authority to
prescribe such rules, regulations and procedures and to do all such acts as, in
the judgment of such chairman, are appropriate for the proper conduct of the
meeting. Such rules, regulations or procedures, whether adopted by the Board
of Directors or prescribed by the chairman of the meeting, may include, without
limitation, the following: (i) the establishment of an agenda or order of
business for the meeting; (ii) rules and procedures for maintaining order at
the meeting and the safety of those present; (iii) limitations on attendance at
or participation in the meeting to stockholders of record of the corporation,
their duly authorized and constituted proxies or such other persons as the
chairman of the meeting shall determine; (iv) restrictions on entry to the
meeting after the time fixed for the commencement thereof; and (v) limitations
on the time allotted to questions or comments by participants. Unless and to
the extent determined by the Board of Directors or the chairman of the meeting,
meetings of stockholders shall not be required to be held in accordance with
the rules of parliamentary procedure.
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ARTICLE II
Board of Directors
Section 2.1. Number; Qualifications. The Board of Directors shall
consist of nine (9) members unless changed by an amendment to the Certificate
of Incorporation. Any change in the authorized number of directors or the
provisions regarding the election of directors as shall require the affirmative
vote of the majority of the outstanding 14.5% Senior Subordinated Voting Notes
(the "Special Voting Notes"), voting as a separate class. For purposes of this
Section 2.1 and any By-law provisions regarding the number or election of
directors and the ability of the holders of the Special Voting Notes to effect
their rights, the Special Voting Notes shall be considered outstanding shares
entitled to vote. Directors need not be stockholders.
It is proposed that these Bylaws read "eleven (11) members" when
adopted, if such number is approved by the shareholders at the Special Meeting.
Section 2.2. Election; Resignation; Vacancies. The Board of
Directors shall initially consist of the persons named as directors in the
certificate of incorporation, and each director so elected shall hold office
until the first annual meeting of stockholders or until his successor is
elected and qualified. At the first annual meeting of stockholders and at each
annual meeting thereafter, the stockholders and the holders of the Special
Voting Notes (as described in the certificate of incorporation of the
corporation), voting together as one class, shall elect directors each of whom
shall hold office for a term of one year or until his successor is elected and
qualified. Any director may resign at any time upon written notice to the
corporation. Any newly created directorship or any vacancy occurring in the
Board of Directors by reason of death or resignation may be filled by a
majority of the remaining members of the Board of Directors, although such
majority is less than a quorum, or by a plurality of the votes cast at a
meeting of stockholders. Any vacancy occurring in the Board of Directors by
reason of removal of a director by the vote or written consent of the
shareholders may be filled only by a majority of the shares entitled to vote
represented at a duly held meeting at which a quorum is present, or by the
written consent of the holders of the outstanding shares entitled to vote.
Each director elected in accordance with either of the two preceding sentences
shall hold office until the expiration of the term of office of the director
whom he has replaced or until his successor is elected and qualified.
Section 2.3. Regular Meetings. Regular meetings of the Board of
Directors may be held at such places within or without the State of Delaware
and at such times as the Board of Directors may from time to time determine,
and if so determined notices thereof need not be given.
Section 2.4. Special Meetings. Special meetings of the Board of
Directors may be held at any time or place within or without the State of
Delaware whenever called by the President, any Vice President, the Secretary,
or by any member of the Board of Directors.
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Notice of a special meeting of the Board of Directors shall be given by the
person or persons calling the meeting at least twenty-four hours before the
special meeting.
Section 2.5. Telephonic Meetings Permitted. Members of the Board of
Directors, or any committee designated by the Board of Directors, may
participate in a meeting thereof by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation in a meeting pursuant to this
by-law shall constitute presence in person at such meeting.
Section 2.6. Quorum; Vote Required for Action. At all meetings of
the Board of Directors a majority of the whole Board of Directors shall
constitute a quorum for the transaction of business. Except in cases in which
the certificate of incorporation, these by-laws or applicable law otherwise
provides, the vote of a majority of the directors present at a meeting at which
a quorum is present shall be the act of the Board of Directors.
Section 2.7. Organization. Meetings of the Board of Directors shall
be presided over by the Chairman of the Board, if any, or in his absence by the
Vice Chairman of the Board, if any, or in his absence by the President, or in
their absence by a chairman chosen at the meeting. The Secretary shall act as
secretary of the meeting, but in his absence the chairman of the meeting may
appoint any person to act as secretary of the meeting.
Section 2.8. Action by Written Consent of Directors. Unless
otherwise restricted by the certificate of incorporation or these by- laws, any
action required or permitted to be taken at any meeting of the Board of
Directors, or of any committee thereof, may be taken without a meeting if all
members of the Board of Directors or such committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the Board of Directors or such committee.
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ARTICLE III
Committees
Section 3.1. Committees. The Board of Directors may designate one or
more committees, each committee to consist of one or more of the directors of
the corporation. The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of the committee. In the absence or disqualification of
a member of the committee, the member or members thereof present at any meeting
and not disqualified from voting, whether or not he or they constitute a
quorum, may unanimously appoint another member of the Board of Directors to act
at the meeting in place of any such absent or disqualified member. Any such
committee, to the extent permitted by law and to the extent provided in the
resolution of the Board of Directors, shall have and may exercise all the
powers and authority of the Board of Directors in the management of the
business and affairs of the corporation, and may authorize the seal of the
corporation to be affixed to all papers which may require it.
Section 3.2. Committee Rules. Unless the Board of Directors
otherwise provides, each committee designated by the Board of Directors may
make, alter and repeal rules for the conduct of its business. In the absence
of such rules each committee shall conduct its business in the same manner as
the Board of Directors conducts its business pursuant to Article II of these
by-laws.
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ARTICLE IV
Officers
Section 4.1. Executive Officers; Election; Qualifications; Term of
Office; Resignation; Removal; Vacancies. The Board of Directors shall elect a
President and Secretary, and it may, if it so determines, choose a Chairman of
the Board and a Vice Chairman of the Board from among its members. The Board
of Directors may also choose one or more Vice Presidents, one or more Assistant
Secretaries, a Chief Financial Officer or a Treasurer and one or more Assistant
Treasurers. Each such officer shall hold office until the first meeting of the
Board of Directors after the annual meeting of stockholders next succeeding his
election, and until his successor is elected and qualified or until his earlier
resignation or removal. Any officer may resign at any time upon written notice
to the corporation. The Board of Directors may remove any officer with or
without cause at any time, but such removal shall be without prejudice to the
contractual rights of such officer, if any, with the corporation. Any number
of offices may be held by the same person. Any vacancy occurring in any office
of the corporation by death, resignation, removal or otherwise may be filled
for the unexpired portion of the term by the Board of Directors at any regular
or special meeting.
Section 4.2. Powers and Duties of Executive Officers. The officers
of the corporation shall have such powers and duties in the management of the
corporation as may be prescribed in a resolution by the Board of Directors and,
to the extent not so provided, as generally pertain to their respective
offices, subject to the control of the Board of Directors. The Board of
Directors may require any officer, agent or employee to give security for the
faithful performance of his duties.
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ARTICLE V
Stock
Section 5.1. Certificates. Every holder of stock shall be entitled
to have a certificate signed by or in the name of the corporation by the
Chairman or Vice Chairman of the Board of Directors, if any, or the President
or a Vice President, and by the Chief Financial Officer or Treasurer or an
Assistant Treasurer, or the Secretary or an Assistant Secretary, of the
corporation certifying the number of shares owned by him in the corporation.
Any of or all the signatures on the certificate may be a facsimile. In case
any officer, transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to be such
officer, transfer agent, or registrar before such certificate is issued, it may
be issued by the corporation with the same effect as if he were such officer,
transfer agent, or registrar at the date of issue.
Section 5.2. Lost, Stolen or Destroyed Stock Certificates; Issuance
of New Certificates. The corporation may issue a new certificate of stock in
the place of any certificate theretofore issued by it, alleged to have been
lost, stolen or destroyed, and the corporation may require the owner of the
lost, stolen or destroyed certificate, or his legal representative, to give the
corporation a bond sufficient to indemnify it against any claim that may be
made against it on account of the alleged loss, theft or destruction of any
such certificate or the issuance of such new certificate.
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ARTICLE VI
Indemnification
Section 6.1. Right to Indemnification. The corporation shall
indemnify and hold harmless, to the fullest extent permitted by applicable law
as it presently exists or may hereafter be amended, any person (an
"Indemnitee") who was or is made or is threatened to be made a party or is
otherwise involved in any action, suit or proceeding, whether civil, criminal,
administrative or investigative (a "proceeding"), by reason of the fact that
he, or a person for whom he is the legal representative, is or was a director
or officer of the corporation or, while a director or officer of the
corporation, is or was serving at the request of the corporation as a director,
officer, employee or agent of another corporation or of a partnership, joint
venture, trust, enterprise or nonprofit entity, including service with respect
to employee benefit plans, against all liability and loss suffered and expenses
(including attorneys' fees) reasonably incurred by such Indemnitee.
Notwithstanding the preceding sentence, except as otherwise provided in Section
6.3, the corporation shall be required to indemnify an Indemnitee in connection
with a proceeding (or part thereof) commenced by such Indemnitee only if the
commencement of such proceeding (or part thereof) by the Indemnitee was
authorized by the Board of Directors of the corporation.
Section 6.2. Prepayment of Expenses. The corporation shall pay the
expenses (including attorneys' fees) incurred by an Indemnitee in defending any
proceeding in advance of its final disposition, provided, however, that, to the
extent required by law, such payment of expenses in advance of the final
disposition of the proceeding shall be made only upon receipt of an undertaking
by the Indemnitee to repay all amounts advanced if it should be ultimately
determined that the Indemnitee is not entitled to be indemnified under this
Article VI or otherwise.
Section 6.3. Claims. If a claim for indemnification or payment of
expenses under this Article VI is not paid in full within sixty days after a
written claim therefor by the Indemnitee has been received by the corporation,
the Indemnitee may file suit to recover the unpaid amount of such claim and, if
successful in whole or in part, shall be entitled to be paid the expense of
prosecuting such claim. In any such action the corporation shall have the
burden of proving that the Indemnitee is not entitled to the requested
indemnification or payment of expenses under applicable law.
Section 6.4. Nonexclusivity of Rights. The rights conferred on any
Indemnitee by this Article VI shall not be exclusive of any other rights which
such Indemnitee may have or hereafter acquire under any statute, provision of
the certificate of incorporation, these by-laws, agreement, vote of
stockholders or disinterested directors or otherwise.
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Section 6.5. Other Sources. The corporation's obligation, if any, to
indemnify or to advance expenses to any Indemnitee who was or is serving at its
request as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, enterprise or nonprofit entity shall be
reduced by any amount such Indemnitee may collect as indemnification or
advancement of expenses from such other corporation, partnership, joint
venture, trust, enterprise or non-profit enterprise.
Section 6.6. Amendment or Repeal. Any repeal or modification of the
foregoing provisions of this Article VI shall not adversely affect any right or
protection hereunder of any Indemnitee in respect of any act or omission
occurring prior to the time of such repeal or modification.
Section 6.7. Other Indemnification and Prepayment of Expenses. This
Article VI shall not limit the right of the corporation, to the extent and in
the manner permitted by law, to indemnify and to advance expenses to persons
other than Indemnitees when and as authorized by appropriate corporate action.
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ARTICLE VII
Miscellaneous
Section 7.1. Fiscal Year. The fiscal year of the corporation shall
be determined by resolution of the Board of Directors.
Section 7.2. Seal. The corporate seal shall have the name of the
corporation inscribed thereon and shall be in such form as may be approved from
time to time by the Board of Directors.
Section 7.3. Waiver of Notice of Meetings of Stockholders, Directors
and Committees. Any written waiver of notice, signed by the person entitled to
notice, whether before or after the time stated therein, shall be deemed
equivalent to notice. Attendance of a person at a meeting shall constitute a
waiver of notice of such meeting, except when the person attends a meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at nor the purpose of any
regular or special meeting of the stockholders, directors, or members of a
committee of directors need be specified in any written waiver of notice.
Section 7.4. Interested Directors; Quorum. No contract or
transaction between the corporation and one or more of its directors or
officers, or between the corporation and any other corporation, partnership,
association, or other organization in which one or more of its directors or
officers are directors or officers, or have a financial interest, shall be void
or voidable solely for this reason, or solely because the director or officer
is present at or participates in the meeting of the Board of Directors or
committee thereof which authorizes the contract or transaction, or solely
because his or their votes are counted for such purpose, if: (1) the material
facts as to his relationship or interest and as to the contract or transaction
are disclosed or are known to the Board of Directors or the committee, and the
Board of Directors or committee in good faith authorizes the contract or
transaction by the affirmative votes of a majority of the disinterested
directors, even though the disinterested directors be less than a quorum; or
(2) the material facts as to his relationship or interest and as to the
contract or transaction are disclosed or are known to the stockholders entitled
to vote thereon, and the contract or transaction is specifically approved in
good faith by vote of the stockholders; or (3) the contract or transaction is
fair as to the corporation as of the time it is authorized, approved or
ratified, by the Board of Directors, a committee thereof, or the stockholders.
Common or interested directors may be counted in determining the presence of a
quorum at a meeting of the Board of Directors or of a committee which
authorizes the contract or transaction.
Section 7.5. Form of Records. Any records maintained by the
corporation in the regular course of its business, including its stock ledger,
books of account, and minute books, may be kept on, or be in the form of, punch
cards, magnetic tape, photographs,
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microphotographs, or any other information storage device, provided that the
records so kept can be converted into clearly legible form within a reasonable
time.
Section 7.6. Amendment of By-Laws. These by-laws may be altered or
repealed, and new by-laws made, by the Board of Directors, but the stockholders
may make additional by-laws and may alter and repeal any by-laws whether
adopted by them or otherwise.
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ANNEX H
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
For the fiscal year ended December 31, 1995
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
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 91367-2402
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 226-6200
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
<TABLE>
<CAPTION>
Title of each class CUSIP Number
------------------- ------------
<S> <C>
Common Stock, $.01 par value 693-71P-10-0
</TABLE>
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
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Paragraph 229.405 of this Chapter) is not contained
herein, and will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. _____
The aggregate market value of Common Stock held by non-affiliates of
the Registrant on March 25, 1996 was approximately $15,352,000, based on the
closing sale price of such stock on such date.
On March 25, 1996, Registrant had 9,528,200 shares of Common Stock
outstanding.
<PAGE> 387
PART I
ITEM 1. BUSINESS.
GENERAL
Pac Rim Holding Corporation ("Pac Rim Holding") is engaged through its
subsidiary, The Pacific Rim Assurance Company ("Pacific Rim Assurance"), and
its subsidiary, Regional Benefits Insurance Services, Inc. ("RBIS") exclusively
in the writing of workers' compensation insurance. The Company markets its
policies through approximately 180 independent insurance agencies and brokerage
firms. Historically, the Company concentrated primarily on the Southern
California market. In connection with efforts to expand its business into
additional geographic areas and increase future revenues, Pacific Rim Assurance
received Certificates of Authority to write workers' compensation insurance in
Arizona and Texas, and it commenced writing in those states. In March 1996,
the Company received its certificate of authority to write workers'
compensation in Georgia. Pac Rim Holding was founded in 1987 and became a
publicly held company in 1991. Unless the context indicates otherwise, the
"Company" refers to Pac Rim Holding, Pacific Rim Assurance, and RBIS.
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. In Arizona, the
National Council of Compensation Insurance (NCCI) files the premium rates on
behalf of all insurance companies.
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
In California, the jurisdiction in which the Company has in the past, conducted
all its activities, material changes in the laws and regulations affecting the
workers compensation industry have occurred.
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
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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 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. 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.
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 ultimate impact of these reforms on the operations and
profitability of the Company cannot be stated with certainty. 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
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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.
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.
A. M. BEST RATING
Pacific Rim Assurance is rated B+ (Very Good) by A.M. Best Company, Inc.
("Best"), a nationally recognized insurance rating service. Generally, many
employers, or their agents and brokers, will do business only with a company
rated by Best. A Best's rating of B+ is the sixth highest of fifteen ratings
published by Best.
MARKETING
The Company markets its insurance policies through approximately 180
independent insurance agencies and brokerage firms, many of which specialize in
workers' compensation insurance. The independent insurance agencies and
brokerage firms that sell the Company's insurance policies also represent other
insurance companies. The Company pays such independent insurance agents and
brokers a commission consistent with workers' compensation insurance industry
practices.
At December 31, 1995, 36% of the Company's premiums in force had been generated
by its five highest producing agencies and brokerage firms, two of which
accounted for 20% of total premiums in force at that date. The Company
believes that it has favorable operating relationships with these agencies and
brokerage firms. During 1995, market conditions resulted in higher average
commissions being paid to agencies and brokerage firms of the Company,
principally the effect of higher average commission rates on policies written
during 1994 on which the premiums were earned during 1995. (See
"Business-Significant Changes in the California Workers Compensation System.")
No agency or brokerage firm is obligated to place insurance policies with the
Company, and the Company is not obligated to accept business submitted from any
agency or brokerage firm. The loss of any one or more of these agencies or
brokerage firms could materially effect the Company's business.
At December 31, 1995, service industry policyholders represented over 68% of
premiums in force. Typical service industry policyholders include convalescent
homes, restaurant companies, agricultural enterprises, garbage collection, and
parking lot operators. Light manufacturing, including assembly businesses,
accounted for 25%, and other industry policyholders represented 7% of premiums
in force.
During 1995, the Company experienced premium rate erosion. While there can be
no assurance, the Company does not believe that such erosion of premium rates
that occurred in the California marketplace for most of 1995 will occur at the
same levels in 1996. The Company's underwriting philosophy continues to be
predicated on adequate pricing for anticipated claims, services, and expenses.
To offset expected premium loss in California resulting from open rating, the
Company implemented a strategy of expanding into specific new marketplaces in
the southwestern and southeastern United States, by becoming licensed in
Arizona and Texas in 1995, and Georgia in March 1996, and applying for a
license in Florida.
UNDERWRITING
The Company specializes in underwriting larger premium accounts that generate
annual premiums in excess of $30,000. These accounts generally are comprised
of employers, with approximately 50 or more employees, primarily engaged in
service and light manufacturing industries, and which have a favorable loss
experience or are willing to attempt to improve their loss experience through
application of the Company's loss control programs. Pacific Rim Assurance
carefully evaluates the potential profitability of each application for
insurance. This evaluation is based on numerous factors, including the
Company's analysis of the adequacy of the premium rates for various potential
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<PAGE> 390
loss exposure classifications, a team analysis utilizing underwriting, risk
management, and claims personnel to determine whether to accept a specific risk,
and the development of an account service plan for each insured employer to
reduce claim incidents and control loss costs. The Company's employees generally
inspect all businesses prior to issuing coverage. The Company generally does
not insure employers known to be engaged in businesses considered by the WCIRB
as large loss exposure classifications.
Prior to insuring a particular risk, a two-tiered evaluation of the employer is
conducted. The Company reviews the policyholder's loss exposure, loss history,
and financial stability. In addition, representatives of the Company's loss
control department meet with the policyholder and evaluate safety attitude,
employee/employer relations, and the employer's willingness to work in
partnership with the Company to reduce work-related injuries and illnesses.
Based on this evaluation, premiums are established that take into account the
additional cost for increased loss control services that may be required for
that insured. The Company may decline particular risks, regardless of prior
histories, due to potential hazards inherent in certain businesses. Examples
of such classifications include risks associated with aviation or the operation
of aircraft, the manufacture, storage, filling, breaking down, or transport of
fireworks, ammunition, explosive gases, explosives, or various other volatile
materials, mining or quarry operations, and the demolition of structures. The
Company will initiate on-site inspections for inforce accounts if the employer
had a high loss experience since being insured with the Company.
EMPLOYER SERVICES
Employer services encompass the areas of loss control and claims
administration. The Company believes that effective loss control procedures
and claims administration services are the keys to controlling employers'
workers' compensation insurance costs.
Loss Control. The Company's emphasis on loss control is an integral part of its
marketing and underwriting effort. Generally, the Company's loss control
personnel meet with large and medium-sized accounts to discuss hiring
practices, orientation, and training, with the goal of producing a loss control
service plan for the employer soon after the policy is issued. In addition,
the Company's loss control personnel often assist insureds on a continuing
basis in developing and maintaining safety programs and procedures to minimize
on-the-job injuries and industrial health hazards, and may help insureds comply
with state and federal laws relating to safety and health in the workplace.
The Company's loss control consultants provide Industrial Hygiene Services as
well as a complete Psychiatric Stress Prevention Program. Loss control service
programs include the use of video recording for analyzing work practices,
customized orientation programs, hazard recognition, and materials handling.
The Company also regularly provides detailed loss analyses to employers
containing information relevant to each incident, claim frequency and severity,
and information as to paid and anticipated future losses and loss adjustment
expenses. These reports are used as a trend analysis of the loss control
service plan and assist in determining areas in which improvement may be
needed.
Claims Administration. The Company's claims administration service focuses on
developing a close relationship with its policyholders and returning employees
to work as soon as possible. The Company believes that this goal ultimately
benefits all parties, including the employee, the insured, and the Company.
The Company is staffed with claims personnel, some of whom are bilingual in
Spanish and English, who handle the investigation, management, disposition, and
payment of claims. The Company also employs specialists in litigation and
vocational rehabilitation. The Company seeks to contact each injured worker
within 24 hours of the first report of injury and to contact promptly the
medical provider and employer. Direct contact with all the involved parties
can assist the claims examiner in establishing a claims reserve, beginning
benefit payments to the injured worker in a timely manner, and developing a
return-to-work plan. The Company believes personal contact can also help to
establish a rapport with the injured worker. In the event an injured worker is
unable to return to his or her prior employment, the Company provides voluntary
vocational rehabilitation in the form of testing, development of an alternative
return-to-work plan, retraining and placement services, and disability benefits
during the retraining and placement stages. To assist in its achievement of
these goals, the Company has established an alliance with MetraComp, a
subsidiary of United Health Services and MetraHealth, to provide managed
medical care services. Although the length of time that has passed has been
too limited to provide definitive results, as a result of the above actions,
the Company has experienced improvement in average severity of paid claims, and
has experienced a favorable trend in overall claim severity during 1995.
The Company's Claims Special Investigative Team is responsible for the
investigation of suspected fraudulent claims and preparing these cases for
litigation. The need for such a unit originally arose during the early 1990's
as a result of the number of claims stemming from adverse economic conditions
in Southern California, including "stress and
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strain" claims. This team's efforts have resulted in several prosecutions,
numerous withdrawals of alleged fraudulent claims, and successful closure of
other questionable claims. Investigation results are shared with the
Department Fraud Bureau and the applicable county's District Attorney's office
in preparation of cases for criminal prosecution.
The Company's claims policy emphasizes a rapid claims processing function, so
that earlier and more immediate processing of incidents would occur, with more
prompt intervention by Company claims personnel, earlier recognition of claims
closing possibilities, and refined claim reserving techniques.
POLICYHOLDER DIVIDENDS
California law permits workers' compensation insurers to issue participating
policies. Participating policies accounted for 30% of the premiums in force at
December 31, 1995. Although workers' compensation insurance carriers are
prohibited by law from promising policyholders that future policyholder
dividends will be paid or stating the amount or rate of dividends to be paid,
companies compete by informing policyholders of the amounts of dividends that
have been paid historically.
The Company concentrates on insuring workers' compensation accounts where it
competes primarily on the basis of service and reducing the overall cost of
workers' compensation insurance, and where the payment of policyholder
dividends are less of a factor. Effective January 1, 1995, when the end of the
minimum rate law occurred and open price competition officially began, the use
of policyholder dividends in the pricing process became even less of a
competitive factor in California. The competitive pricing of business is more
impacted by the cost of insurance at the inception of the policy, not with the
payment of policyholder dividends after the policy expires.
The Company also issues participating policies in Arizona and Texas. It is not
anticipated that the payment of dividends will be a significant factor to the
Company's marketing strategy.
Any payment of dividends to policyholders determined by the Board of Directors
of an insurance company is subject to the legal requirements in California that
such dividends may not exceed the historical earned surplus related to such
company's workers' compensation policies, may not be unfairly discriminatory,
and may not be declared or paid until after policy expiration. The Board of
Directors of Pacific Rim Assurance considers a number of factors in connection
with the declaration of policyholder dividends, including risk and expense
factors, the loss ratio of an insured, class of business, premium payment
history of the policyholder, adequacy of premium rates, and the overall loss
ratio and financial condition of the Company.
PREMIUM COLLECTION
At the time the Company issues a policy to an insured, the Company bills the
appropriate independent insurance agency or broker for the deposit premium.
The independent agent or broker is responsible for the deposit premium
regardless of whether they collect the deposit premium from the insured. The
deposit premium is a percentage of the estimated annual premium of the policy
at the time of issuance. The percentages range from 10% to 100% of the
estimated annual premium depending on the premium payment schedule, the
insured's credit history, employment classifications, and the industry in which
the insured operates. The deposit premium is applied to premiums due to the
Company. The Company utilizes both Agency Bill and Direct Bill systems. As of
December 31, 1995, 99% of the Company's premiums receivable were Agency
billings.
The insured remits its premiums based on a payment plan or amounts calculated
from periodic reports of the insureds payrolls. In this case, the insured is
required to report periodically to the Company the amount of payroll paid
within each of the insured's employment classifications. When the Company
receives this information, it invoices the independent agency, broker, or
insured for the amount due from the insured for the coverage period. The
independent agency, broker, or insured must submit the amount due to the
Company within 10 to 45 days from the date in which the premium is billed
(depending on the independent agency's, broker's, or insured's credit terms
with the Company). If the insured fails to remit the premium due or submit the
appropriate payroll reporting, the policy is cancelled.
At the end of the policy term or if the policy is cancelled, a final audit of
the insured's records is conducted to determine the correct amount of premium
due to the Company. If the Company is owed any balance after application of
the deposit premium, the Company notifies the insured and submits a premium
invoice to the independent agency, broker, or insured. If the insured fails to
remit the amount due, under Agency Bill, the independent agency or broker is
responsible for paying the amount due to the Company, unless the agent or
broker returns the premium due back
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<PAGE> 392
to the Company for direct collection. In such event, the Company initiates
collection procedures against the insured.
Since inception, the Company's premium billings that have been written off, and
the allowance for doubtful accounts, have had a negligible impact on the
Company's operations. During the period from 1987 through 1995, the total of
uncollected premiums written off and allowance for doubtful accounts has been
.70% of net premiums earned. That collection experience is the result of a
ratio of approximately .68% for the years 1987 through 1994, and a ratio of
approximately .87% for the year ended December 31, 1995.
The Company's allowance for doubtful accounts as of December 31, 1995 and 1994,
was $1,221,000 and $1,071,000, respectively. Such reserves are based on the
Company's analysis of its aging of receivable balances and collection
experience. The Company believes that its allowance for doubtful accounts as of
December 31, 1995, provides a reasonable allowance for uncollectible premiums.
For statutory accounting purposes, if any portion of the premiums due from an
insured is over 90 days past due, the entire amount of the total premiums due
from that insured is considered a non-admitted asset and a reduction to
surplus, without regard to collectibility. At December 31, 1995 and 1994, the
statutory past due premiums were $2,158,000 and $1,619,000, respectively.
CLAIMS, LOSSES, AND LOSS RESERVES
The Company conducts all claims operations, which include reviews of initial
reports of work-related injuries, assignments of appropriate field
investigators, determinations of whether subrogation should be pursued, and
vocational rehabilitation counseling from its principal office in Woodland
Hills, California, and its claim service offices in Fresno, California,
Phoenix, Arizona and San Antonio, Texas. Certain claims are administered by
third-party claim agencies under the supervision of the Company.
As an insurance company, Pacific Rim Assurance is required to maintain reserves
to cover its estimated ultimate liability for losses and loss adjustment
expenses ("LAE") with respect to reported and unreported claims incurred as of
the end of each accounting period, net of estimated reinsurance recoveries.
These reserves are estimates involving actuarial and statistical projections at
a given time of what the Company expects the ultimate settlement and
administration of claims to cost, based on facts and circumstances then known,
late reported claims, estimates of future trends, and other variable factors
such as inflation or changes in regulations. There are inherent uncertainties
in estimating loss reserves as a result of the period of time that often
elapses between the occurrence of a loss, the reporting of that loss, and the
final disposition of the loss.
When a claim is reported to the Company, its claims personnel establish a "case
reserve" for the estimated amount of the ultimate payment. The estimate
reflects the informed judgment of such personnel based on Workers' Compensation
regulations, and other experience and knowledge of such personnel regarding the
nature and value of each claim. These claims are continually investigated and
regularly updated. A reserve is also established for allocated LAE for
individual claims, which represents the estimated expenses of settling the
claim (including legal and other fees).
The claims department completes a thorough investigation of all allegations
made by injured workers. Once all facts are in, a decision to either accept or
deny the claim is made by the Company, in accordance with the appropriate state
regulations. If a dispute arises, it will be settled either directly with the
injured worker, through the worker's attorney, or through a formal hearing in
accordance with the state regulations. In California, monetary settlements
must be approved through the State of California Workers' Compensation Appeals
Board.
In most cases, benefits are paid by the Company for lost wages (temporary
disability) and medical expenses from the initial stages of the claim until the
injured worker is able to return to work. After the worker returns to work,
the Company may continue to pay medical expenses for ongoing treatment and
additional disability benefits (for permanent disability). Until all payments
are made, the Company will continue to reserve for the estimated future
disability payments to the injured worker, medical costs, as well as other
related settlement expenses.
In accordance with industry practice, the Company maintains an incurred but not
reported ("IBNR") reserve. That reserve is established to provide for future
case reserves and loss payments on incurred claims that have not yet been
reported to the Company, and for future increases of known case reserves. In
calculating its IBNR reserves, the Company uses generally accepted actuarial
reserving techniques that take into account loss experience data. The IBNR
reserve is based on the Company's loss experience and frequency patterns for
late reported claims. The IBNR reserve
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also takes into account certain factors such as changes in workers'
compensation regulations, the mix of business, claims processing, current
economic conditions, and inflation that can be expected to affect losses over
time.
The difficulty of making accurate assessments of loss reserves is impacted by
liabilities known as "cumulative trauma" or "cumulative injury," which may
include hearing loss, back injuries, lung problems, or heart attacks.
Cumulative trauma claims are evaluated by the Company in the same manner as
other types of claims. However, the Company evaluates each such claim to
determine whether the trauma was suffered prior to, or after the commencement
of, the Company's coverage.
From 1991 to mid-1992, the California workers' compensation industry
experienced an increase in the number of "stress and strain" claims that did
not involve traumatic physical loss or injury. These claims typically related
to alleged injuries or illnesses arising out of psychological pressures in the
workplace. A claimant may have asserted, for example, that verbal abuse,
harassment, plant closures, or a change in job status precipitated illness.
Concurrently with the increase in "stress and strain" claims, an increase in
the number of fraudulent workers' compensation claims also occurred. The
Company established a special unit to address the effect that these
developments had on its business by scrutinizing and evaluating "stress and
strain" claims that do not involve traumatic physical injuries. This unit
employs numerous specialized techniques in connection with its activities.
In July 1991, legislation was enacted in the State of California with respect
to "stress and strain" claims. Under one measure, which became effective
January 1, 1992, physicians and attorneys, as well as claimants, who engage in
fraudulent workers' compensation practices can face imprisonment and other
criminal penalties such as loss of their professional licenses. Other
legislation enacted in the same month and effective since July 16, 1991
prohibits an employee from asserting a "stress and strain" claim for
psychiatric injury caused by a "regular and routine employment event"
(including a nondiscriminatory good faith personnel action such as discipline,
work evaluation, transfer, demotion, layoff, or termination), unless the
employee has been employed by that employer for six months. Further, the
benefits reform legislation enacted during 1993 (See "Significant Changes in
the California Workers' Compensation System") raised the standard for
determining the compensability of a psychiatric injury claim to be
"predominately" related to employment. It is too early to evaluate the full
impact of this legislation on the Company's future operations. However, since
late 1992, the frequency of stress and strain claims has steadily and
significantly decreased.
Another area giving rise to increased loss costs and difficulty in reserve
assessment is the mandatory vocational rehabilitation benefit afforded under
California law. The Company has established procedures to minimize losses in
this area. The Company's claims department staff encourages vocational
rehabilitation for injured workers who choose to receive that benefit and
encourages voluntary early return-to-work programs, and works with the employer
to develop a modified job assignment promptly following recovery from an
injury.
The Company has implemented a program to utilize in-house legal staff versus
outside legal counsel for those claims requiring legal assistance. The Company
believes that this program has and will continue to reduce the legal costs for
these claims.
The Company evaluates reserves in the aggregate based on monthly indications
using actuarial methods, and quarterly reviews by independent actuaries, and
makes adjustments where deemed appropriate. However, during past years, like
many other casualty insurance companies, the Company experienced adverse loss
development from prior accident years. The increases in reserves for prior
years reduced net income for periods in which the adjustments were made. During
1995, the level of adverse loss development from prior accident years
experienced by the Company during prior years significantly declined, to a
level of less than 1% of the recorded reserves at December 31, 1994. At
December 31, 1995, based on the Company's own analysis and review by its
independent actuaries, the Company believes that its recorded loss and LAE
reserves are adequate.
The Company has filed with the Department an independent actuarial opinion that
states that the Company's loss and LAE reserves make reasonable provision for
loss and LAE obligations of the Company as of December 31, 1995. While no
assurance can be given, the Company believes that, given the inherent
variability in any such estimates, its reserve for losses and LAE is within a
reasonable range of adequacy. If the assumptions on which the estimates are
based prove to be incorrect and reserves are insufficient based on the
Company's actual experience, future results of operations and the financial
condition of the Company would be adversely affected.
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<PAGE> 394
The following table provides a reconciliation of beginning and ending loss and
LAE reserves for the years 1995, 1994, and 1993. All reserve totals are net of
reinsurance deductions. There are no material differences between the
Company's reserves for losses and LAE calculated in accordance with generally
accepted accounting principles ("GAAP") and those reserves calculated based on
statutory accounting practices.
RECONCILIATION OF RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1995 1994 1993
Restated
--------- -------- --------
(amounts in thousands)
<S> <C> <C> <C>
Liability for losses and LAE, net of
reinsurance recoverables on unpaid losses,
at beginning of year $114,709 $111,109 $113,620
Provision for losses and LAE, net
of reinsurance recoverable:
Current accident year 49,962 60,989 65,720
Prior accident years 995 2,799 21,969
-------- -------- --------
Incurred losses during the current year,
net of reinsurance recoverable 50,957 63,788 87,689
Losses and LAE payment for claims, net of
reinsurance recoverable, occurring during:
Current year 13,473 13,641 12,887
Prior years 59,552 46,547 77,313
-------- -------- --------
73,025 60,188 90,200
-------- -------- --------
Liability for losses and LAE, net of
reinsurance recoverable on unpaid
losses, at end of year 92,641 114,709 111,109
Reinsurance recoverable, at end of year 4,068 2,132 25,988
Less: reinsurance recoverable on paid losses (184) (212) (1,132)
-------- -------- --------
Reinsurance recoverable on unpaid losses,
at end of year 3,884 1,920 24,856
-------- -------- --------
Liability for losses and LAE, gross of
reinsurance recoverable on unpaid losses,
at end of year $ 96,525 $116,629 $135,965
======== ======== ========
</TABLE>
During 1991 through 1994, the Company, like the rest of the workers'
compensation industry in California, went through a dramatically changing
experience in losses and LAE incurred. During 1991 and 1992, the Company
experienced a substantial number of claims related to adverse economic
conditions, particularly for the 1990 and 1991 accident years. In addition,
there were "stress and strain" claims that did not involve traumatic physical
loss or injury, many of which were suspected by the Company to be fraudulently
submitted. The Company initially took a general denial stance and
non-settlement posture on such fraudulent claims, to send a clear message to
claimants and vendors of its position.
The Company referred fraudulent claim matters to prosecutors, who have secured
successful indictments and prosecutions of fraudulent claimants or vendors, and
the Company secured withdrawals of such claims by others. In addition, the
enactment of effective legislative and regulatory reforms has been implemented.
That technique was effective, as the Company believes that the frequency of new
suspected fraudulent claims has nearly stopped. Late in 1993, the Company
refined its approach to promote the settlement of certain of these claims,
where minimal
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settlement cost could facilitate early closure and prevent cost escalation.
Throughout 1994 and 1995, the Company continued to experience a favorable trend
in the frequency of new claims. The positive trends and experience related to
new claims since mid-1992 have been consistent with the favorable experience of
other workers' compensation insurance specialty companies in California. In
addition, the level of claims closed was in excess of the level of new claims
reported during 1994 and 1995. As a result, the Company's estimate of loss and
LAE reserves for the 1993, 1994 and 1995 accident years is based on
substantially lower loss ratios than the 1991 and prior accident years.
The following table shows changes in historical loss reserves (net of
reinsurance ceded) for the Company for 1987 and subsequent years. The upper
portion of the table (reserve re-estimated) shows the re-estimated amount of
the previously reported reserves based on experience as of the end of each
succeeding year. The lower portion (paid) presents the amounts paid as of
subsequent years on those claims for which reserves were carried as of each
year end. The estimate changes as more information becomes known about the
actual claims for which the initial reserves were carried. An adjustment to
the carrying value of reserves for a prior year will also be reflected in the
adjustments for all years subsequent to such year. For example, an adjustment
made in 1994 for 1991 loss reserves will be reflected in the re-estimated
ultimate net loss for each of the years 1991 through 1993. The cumulative
deficiency line represents the cumulative change in estimates since the initial
reserve was established. It is equal to the latest liability re-estimated
amount less the initial reserve. For example, the reserves recorded at
December 31, 1994, for 1994 and all prior accident years, have developed a
$992,000 deficiency, or less than 1%, through December 31, 1995.
ANALYSIS OF THE RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
(AS RESTATED)
(NET OF REINSURANCE CEDED)
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------------
1987 1988 1989 1990 1991 1992 1993 1994 1995
---- ------- ------- ------- -------- -------- --------- -------- -------
(amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserve for unpaid losses
and loss adjustment expenses $121 $ 7,900 $27,294 $53,410 $ 86,702 $113,620 $111,109 $114,709 $92,641
Reserve re-estimated as of:
One year later 108 8,072 27,386 56,523 97,719 135,589 113,908 115,701
Two years later 150 8,549 31,142 61,038 130,377 138,315 115,515
Three years later 125 10,086 33,551 78,154 133,151 140,350
Four years later 128 10,229 37,637 81,989 135,911
Five years later 130 10,483 39,188 83,445
Six years later 102 10,591 39,048
Seven years later 102 10,827
Eight years later 103
Cumulative redundancy (deficiency) 18 (2,927) (11,754) (30,035) (49,209) (26,730) (4,406) (992)
Cumulative amount of reserve
paid through:
One year later 33 3,902 12,633 28,725 52,962 77,313 46,547 59,552
Two years later 117 7,040 23,847 53,130 101,761 111,487 88,225
Three years later 120 8,906 31,364 71,376 119,765 136,620
Four years later 127 9,690 35,916 77,324 134,811
Five years later 102 10,312 37,221 83,063
Six years later 102 10,445 38,910
Seven years later 102 10,795
Eight years later 103
Net Reserve - December 31 $111,109 $114,709 $92,641
Reinsurance Recoverable
on unpaid losses 24,856 1,920 3,884
-------- -------- -------
Gross Reserve - December 31 135,965 116,629 96,525
Net Re-estimated Reserve 115,515 115,701
Re-estimated Reinsurance
Recoverables 27,816 5,605
--------
Gross Re-estimated Reserve $143,331 $121,306
======== ========
Gross Cumulative Deficiency $ 7,366 $ 4,677
======== ========
</TABLE>
As discussed above, the deficiency experienced by the Company during 1995, on
claims incurred prior to 1994, is the result of the Company's increase of
reserves for those years in response to current estimates. As previously
mentioned, the 1990 and 1991 accident years were two of the worst accident
years in the history of the California workers' compensation industry. The
adverse development of those accident years is evident in the Analysis of the
Reserve for Losses and Loss Adjustment Expense Development table shown above.
The development recognized for those two accident years is attributable to the
substantial number of claims related to adverse economic conditions in
California. These types of claims, called "stress and strain" claims, do not
involve traumatic physical loss or injury; many of these claims were suspected
by the Company to be fraudulently submitted. In response to a January 1, 1992
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<PAGE> 396
law that made submission of a fraudulent claim a felony, the Company took a
general denial stance and non-settlement posture on such fraudulent claims. The
Company incurred allocated LAE costs in defending against these fraudulent
claims. In addition, the Company had experienced increases in LAE as a result
of the higher reported number of claims and of the increased level of
administrative procedures that has developed and been imposed by the Workers'
Compensation Reform Act that was effective January 1, 1990.
Conditions and trends that have historically affected the Company's claims may
not necessarily be indicative of conditions and trends that will affect future
claims. Accordingly, it would not be appropriate to extrapolate future
redundancies or deficiencies based on the results set forth in the preceding
tables.
INVESTMENTS
The amount and type of investments that may be made by Pacific Rim Assurance are
regulated under the California Insurance Code and related rules and regulations
promulgated by the Department. Subject to such applicable state laws and
regulations, the investments of the Company are managed by an independent
investment advisory firm, which is paid a customary fee for such services.
Investment decisions are reviewed and approved by the Investment Committee of
the Board of Directors of Pacific Rim Assurance.
The Company has a policy of investing, with the intent of holding to maturity,
primarily in high quality U.S. Treasury securities, other governmental agency
securities, and corporate bonds. The Company does not actively trade its
securities. Although the Company has the intent to hold its investments to
maturity, the Company also recognizes that unforeseeable circumstances, such as
changes in market conditions, tax considerations, and operational needs may
require the sale of securities prior to maturity. Therefore, the Company has
designated all of its portfolio as "available for sale", as of December 31,
1995. (See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources".)
In May 1993, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". As of January 1, 1994, the Company
adopted the provisions of that Standard for investments held as of or acquired
after that date. In accordance with Statement 115, prior-period financial
statements have not been restated to reflect the change in accounting principle.
The cumulative effect of adopting Statement 115 as of January 1, 1994 increased
stockholders' equity by $96,000 (net of deferred income taxes of $50,000) to
reflect the net unrealized holding gains on bonds previously carried at
amortized cost; there was no effect on net income as a result of the adoption of
Statement 115. During the year ended December 31, 1994, the Company's
investment portfolio experienced a net unrealized holding loss of $4,877,000
(net of deferred tax benefit of $2,513,000); the net unrealized holding loss was
$4,781,000 at December 31, 1994. During the year ended December 31, 1995, the
Company's investment portfolio experienced a net unrealized holding gain of
$6,403,000 (net of deferred tax expense of $3,299,000); the net unrealized
holding gain was $1,622,000 at December 31, 1995.
The Company has never invested in equity securities or high-yield debt
securities. Investments are maintained in one or more custodial accounts with
commercial banks or other financial institutions authorized to act in such
capacity. Additionally, the Company invests a portion of its portfolio in
short-term investments, which are comprised primarily of U.S. Treasury
obligations, U.S. Treasury money market funds, and high quality commercial
paper. During 1993, the Company sold tax-exempt bonds with an amortized cost of
$89,114,000, which resulted in a pre-tax gain of $3,905,000. There were no such
sales in 1994. Proceeds from the sale of investments in bonds during 1995 were
$61,343,000, which resulted in a pre-tax gain of $453,000.
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<PAGE> 397
The following tables set forth certain information concerning the investment
portfolio of the Company (amounts in thousands):
SUMMARY OF INVESTMENTS
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
1995 1994
-------------------- --------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Fixed income securities:
U.S. Treasury and other
governmental agency bonds $ 68,963 $ 68,823 $119,016 $116,693
Tax exempt bonds -0- -0- 1,000 1,001
Corporate bonds 33,793 35,679 20,462 15,540
U.S. Agencies 10,546 10,964
Asset backed 6,012 6,305
-------- -------- -------- --------
Total fixed income securities 119,314 121,771 140,478 133,234
Short-term investments 7,260 7,260 9,216 9,216
-------- -------- -------- --------
Total investments $126,574 $129,031 $149,694 $142,450
======== ======== ======== ========
</TABLE>
MATURITY DISTRIBUTION OF BONDS
<TABLE>
<CAPTION>
December 31, 1995
----------------------
Amortized Fair
Cost Value
--------- ----------
<S> <C> <C>
Due in 1996 $ 17,580 $ 17,850
Due 1997 - 2001 92,873 94,369
Due 2002 and after 8,861 9,552
-------- --------
$119,314 $121,771
======== ========
</TABLE>
AVERAGE ANNUAL YIELD ON INVESTMENTS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Total investments at end of year
(at amortized value) $126,574 $149,694 $116,494
======== ======== ========
Net investment income $ 8,089 $ 6,514 $ 5,989
======== ======== ========
Average annual yield 6.0% 5.0% 5.1%
=== === ===
</TABLE>
DISTRIBUTION OF BOND INVESTMENTS BY QUALITY RATING
<TABLE>
<CAPTION>
December 31, 1995
-------------------
Fair
Value Percent
-------- -------
S&P/Moody's Ratings
-------------------
<S> <C> <C>
AAA/Aaa $ 86,092 71%
AA/Aa 8,277 7
A/A 27,403 22
-------- ---
$121,771 100%
======== ===
</TABLE>
H-12
<PAGE> 398
REINSURANCE
The Company purchases reinsurance to reduce its net liability on individual
risks, to protect against catastrophic losses, to stabilize its regulatory
financial ratios, and to protect underwriting capacity. Under the Company's
excess of loss reinsurance treaty, the reinsurers assume the liability on that
portion of workers' compensation claims between $350,000 and $80,000,000 per
occurrence.
Effective October 1, 1992, the Company entered into a quota share reinsurance
treaty. Cessions under that treaty were discontinued July 1, 1993. During the
fourth quarter of 1992, the Company ceded 40% of its net premiums earned,
losses, and allocated loss adjustment expenses ("ALAE"). During the first six
months of 1993, the Company ceded 14% of its net premiums earned, losses, and
ALAE. The Company commuted the treaty effective September 30, 1994 and
received $7,739,000 from the reinsurer in October 1994. This commutation had
no impact on earnings.
Effective July 1, 1992, the Company entered into a five-year aggregate excess
of loss reinsurance agreement (the "Agreement"). The Agreement provided up to
$34,000,000 of coverage for aggregate losses and ALAE incurred in excess of
specified loss ratios on net premiums earned from July 1992 through June 1997,
and additional loss and ALAE reserves required for claims incurred prior to
July 1992 above amounts reported as of June 30, 1992. During 1992, the Company
ceded $10,812,000 (as restated) of losses and ALAE under the Agreement. As a
result of having the Agreement in effect during 1992, the net benefit of the
ceded losses and ALAE, less the related premium charge, increased 1992 income
before taxes by $7,625,000 (as restated). This Agreement met the requirements
of risk transfer in 1992 as embodied in reinsurance accounting literature prior
to FASB Statement 113. Reinsurance accounting literature prior to Statement
113 focused on a reinsurer's exposure to varying results, including losses, as
the primary evidence that risk had been transferred under a Agreement. This
Agreement met the Statement 113 criteria of exposing the reinsurer to
significant loss, but had multi-year aggregating retentions that Statement 113
concluded could delay timely reimbursement of claims by the reinsurer; and, the
accounting for the Agreement as reinsurance was not permitted beginning January
1, 1993. Statement 113 required this Agreement to be accounted for as a
deposit contract rather than as reinsurance, as previously reported. Other
than balance sheet reclassifications, Statement 113 specifically prohibited the
restatement of prior-period financial statements. As a result of the
implementation of Statement 113 in 1993, the $10,812,000 (as restated)
reinsurance recoverable, related to this Agreement, was treated as a deposit.
Premiums paid in 1992 and 1993 under the Agreement totaled $11,375,000, and
were expensed as follows: $3,187,000 in 1992; $5,688,000 in 1993; and
$2,500,000 in 1994. The Company commuted the Agreement effective June 30, 1994
and received $11,051,000 from the reinsurer during August 1994. The Company
recognized a $239,000 benefit as a result of the commutation in the quarter
ended June 30, 1994. The total cost of the Agreement on a pre-tax basis, over
the two-year period the Agreement was in force, was $300,000. For matters
affecting the accounting for the aggregate excess of loss reinsurance agreement
see Note 14--Restatement of Financial Statements.
A contingent liability exists to the extent that losses recoverable under a
reinsurance treaty are not paid to the Company by the reinsurer. The Company
selects its reinsurers carefully. The majority of the Company's reinsurers are
domestic companies with a Best rating of A- (Excellent) or higher. The
remainder are foreign reinsurers, unrated by Best, but believed by the Company
to be of high quality. The Company requires that unpaid losses and LAE for
non-admitted reinsurers (unregulated by the Department) be collateralized. As
of December 31, 1995, the Company did not have any claims that were ceded to
non-admitted reinsurers. Since its inception, the Company has not incurred any
losses as a result of uncollectible reinsurance balances. In the event that
the Company was unable to collect balances due from reinsurers, it could have a
material adverse effect on the Company's earnings and financial condition.
The components of net premiums written are summarized as follows (amounts in
thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Direct $75,553 $101,661 $119,840
Assumed 375 112 73
Ceded (3,962) (4,789) (15,572)
------- -------- --------
Net premiums written $71,966 $96,984 $104,341
======= ======= ========
</TABLE>
H-13
<PAGE> 399
The components of net premiums earned are summarized as follows (amounts in
thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Direct $79,920 $100,008 $118,631
Assumed 209 110 133
Ceded (4,113) (7,224) (18,847)
------- -------- --------
Net premiums earned $76,016 $ 92,894 $ 99,917
======= ======== ========
</TABLE>
The components of net losses and loss adjustment expenses are summarized as
follows (amounts in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Direct $54,454 $64,700 $94,609
Assumed 188 149 357
Ceded (3,685) (1,061) (7,277)
------- ------- ------
Net losses and loss
adjustment expenses $50,957 $63,788 $87,689
======= ======= =======
</TABLE>
REGULATION
Pacific Rim Assurance is subject to regulation and supervision by the Insurance
Departments in each state the Company is licensed. These Departments have
broad regulatory, supervisory, and administrative powers over insurance
companies. Regulations relate to such matters as premium rates, the adequacy
of reserves, types and quality of investments, minimum capital and surplus
requirements, deposit of securities for the benefit of policyholders,
restrictions on stockholder dividends, periodic examination of the Company's
business and records, the filing of annual statements and other reports on the
financial condition and other aspects of the Company, assessments against the
Company to cover liabilities to policyholders of insolvent insurance companies,
and requirements regarding other matters. The regulations are concerned
primarily with protecting policyholders and offer only incidental protection,
if any, to holders of Pac Rim Holding common stock.
As a prerequisite to offering workers' compensation insurance in California,
all workers' compensation companies must file and maintain with the State
Treasurer of California, or certain depositories thereof, approved securities
having a deposit value equal to the statutory loss and LAE reserves applicable
to their business in that state. Accordingly, Pacific Rim Assurance presently
maintains an approved depository arrangement with securities having a fair
value at December 31, 1995 of $118,594,000 deposited therein.
In order to write workers' compensation insurance in Arizona, companies must
file and maintain with the insurance Department of Arizona, or certain
appointed depositories thereof, approved securities with a deposit value equal
to a calculated Arizona requirement. The Arizona requirement is a calculation
involving earned premium, losses and LAE incurred, as well as, loss and LAE
payments. In order to meet this requirement as of December 31, 1995, the
Company had securities with a fair value of $1,116,000 on deposit with an
approved depository.
Pacific Rim Assurance, like other insurers, may be subject to assessments from
time to time to cover unpaid policyholder claims of insolvent workers'
compensation insurers doing business. Such assessments are spread among
licensed insurers on a pro-rata basis according to premiums written in the
applicable states. Some of these assessments must be billed to the Company's
policyholders.
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
H-14
<PAGE> 400
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.
In addition to the regulatory supervision of Pacific Rim Assurance, the Company
is also subject to regulation under the California Insurance Holding Company
System Regulatory Act (the "Holding Company Act"). The Holding Company Act
contains certain reporting requirements, including those requiring the Company
to file information relating to its capital structure, ownership, financial
condition, and general business operations of Pacific Rim Assurance.
The National Association of Insurance Commissioners' ("NAIC") Committee on
Financial Regulation and Standards and Accreditation (the "NAIC Committee")
voted to require, as a condition of NAIC accreditation of a state's insurance
regulatory system, adoption of the NAIC's 1986 Model Insurance Holding Company
System Regulatory Act (the "Model Act"). Among other matters, the Model Act
requires states to enact legislation further restricting the payment of
dividends by insurance companies. (See Business - Restrictions on Dividends to
Stockholders)
The California Insurance Code requires the prior approval of the Commissioner
of any proposed change of control of the Company. Under the Code, "control" is
presumed to exist if any person, directly or indirectly, owns, controls, holds
with the power to vote, or holds proxies representing more than 10% of the
voting securities of the Company.
The Clinton Administration previously proposed to reform the nation's health
care system. In light of the uncertain status of national health care reform
and the complex nature of its implementation, including changes in federal and
state laws and other administrative regulatory procedures, the Company cannot
predict the outcome of national health care reform or its impact on the
Company.
RESTRICTIONS ON DIVIDENDS TO STOCKHOLDERS
In an effort to satisfy the dividend payment restrictions of the Model Act,
amendments to the California Insurance Code designed to implement dividend
payment limitations that would yield results substantially equivalent to the
Model Act were passed by the California legislature on October 9, 1993. These
amendments were incorporated into California Senate Bill 482. The amendments
limit dividends payable during the twelve month period, without prior
regulatory approval, to the greater of net income for the preceding year or 10%
of policyholders' surplus as of the preceding December 31. The amendments
further prohibit the payment of dividends without prior Department approval
unless the insurer has available "earned surplus". The term "earned surplus"
is defined as unassigned funds (surplus) as reported on the insurer's annual
statement, excluding earned surplus derived from the appreciation of assets not
yet realized or from an exchange of assets, unless such earned surplus has been
realized or the assets received in exchange are currently realized in cash.
The legislation further requires insurers to report to the Department all
dividends within five days of declaration and prohibits the payment of the
dividend declared until ten days after the Department's receipt of such notice.
Under these provisions, Pacific Rim Assurance paid no dividends in 1995 to Pac
Rim Holding.
As reported to insurance regulatory authorities, statutory-basis capital and
surplus of Pacific Rim Assurance at December 31, 1995 and 1994, was $46,549,000
and $42,284,000, respectively, and the net income (loss) amounted to
$4,879,000, $(2,878,000), and $(2,347,000) for 1995, 1994, and 1993,
respectively. At December 31, 1995, Pacific Rim Assurance had a balance of
$2,131,000 in its earned surplus account. Accordingly, Pacific Rim Assurance
can pay dividends of $2,131,000 to Pac Rim Holding during 1996, without prior
Department approval.
RISK BASED CAPITAL RULES
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
H-15
<PAGE> 401
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.
INSURANCE REGULATORY INFORMATION SYSTEM RATIOS
The NAIC annually calculates 11 key financial ratios to assist state insurance
departments in monitoring the financial condition of insurance companies.
Results are compared against a usual range of results for each ratio
established by the NAIC. For the year ended December 31, 1995, Pacific Rim
Assurance had no ratios outside of the usual range. STATUTORY TRIENNIAL
EXAMINATION
The Department conducts statutory examinations of each domestic insurance
company, generally once every three years. The most recent statutory
examination of Pacific Rim Assurance was conducted as of December 31, 1991.
COMPETITION
The workers' compensation insurance industry is extremely competitive. Many of
the Company's competitors have been in business longer, have a larger volume of
business, offer a more diversified line of insurance coverage, have greater
financial resources, have greater distribution capabilities, and are more
widely known than Pacific Rim Assurance. Of the approximately 300 companies
that wrote workers' compensation insurance in California in 1995, the Company
believes that Pacific Rim Assurance ranks in the top 25 insurers, based on
direct premiums written. As 1995 was the Company's first year to write
premiums in Arizona and Texas, the Company does not have a significant market
share of workers' compensation premiums in these states. Also, many of the
Company's competitors in these states have been in business longer, have a
larger volume of business, offer a more diversified line of insurance coverage,
have greater distribution capabilities, and are more widely known than Pacific
Rim Assurance.
The Company writes approximately 85% of its premiums in the Southern California
marketplace. The operating environment for workers' compensation insurance
companies doing business in Southern California has recently undergone a
dramatic change. During the fourth quarter of 1992, many insurers were leaving
the Southern California marketplace due to the perceived premium rate
inadequacy that existed at that time, and the high number of potentially
fraudulent stress and strain claims being reported. During 1994, a number of
workers' compensation insurers returned to the Southern California marketplace,
drawn by a marked decline in the frequency of new claims reported during 1994.
This influx of insurers resulted in significantly increased levels of
competition in the marketplace during 1995, resulting in a higher level of
commissions paid to agents and brokers, as well as competitive pricing of
premiums. There are many companies in the California workers' compensation
insurance industry that have greater financial resources, longer operating
histories, and more successful records of operations than the Company. As a
result, it has become more difficult for the Company to retain current business
and obtain new business.
SEE BUSINESS - MARKETING
EMPLOYEES
At December 31, 1995, the Company had 220 full-time employees.
ITEM 2. PROPERTIES AND COMPUTER RESOURCES.
The Company entered into a lease agreement effective May 1992 for the leasing
of 93,000 square feet of office space for its principal office. The lease
expires in 2002. The space is in Woodland Hills, California, which is within
Los Angeles County. The Company also entered into a lease agreement effective
November 1992 for the leasing of 3,000 square feet of office space in Fresno,
California. The Company also leases office space in Phoenix, Arizona. The
H-16
<PAGE> 402
office space is 3,692 square feet and the term of the lease is from August 1995
to July 2000.
In August 1995, the Company subleased approximately 3,000 square feet of its
Woodland Hills office space to a third party for one year, subject to an
additional one-year option. Further, in May 1994, the Company subleased an
additional 1,000 square feet of its Woodland Hills office to a third party for
a period of three years. Also, in March 1994, the Company subleased an
additional 12,000 square feet of its Woodland Hills office to a third party for
a period of five years.
In 1992, the Company started a project to design a new computer system. This
system, which was completed in 1993, provides a more sophisticated,
economical, and a better managed flow of information, as well as efficient
insurance processing. This project included investment in electronic data
processing equipment, as well as the development of proprietary software.
In 1995, the Company started a project to design a system to create electronic
files of claim and policyholders' information that would substantially decrease
the need to access paper files. This system is expected to be completed in
1996. When completed, this will allow for more efficient handling of claims
and underwriting activities. This project includes an investment in electronic
data processing equipment, as well as software.
ITEM 3. LEGAL PROCEEDINGS.
The Company is a party to two industrywide legal matters, involving two medical
facilities. This litigation claims that the insurance industry conspired to
delay payments of claims. While the ultimate outcome of this litigation is
uncertain, management believes that such litigation will not have a material
adverse financial effect on the Company's financial position and results of
operations.
In addition, in the ordinary course of business, the Company is named as a
defendant in legal proceedings relating to policies of insurance that have been
issued and other incidental matters. Management does not believe that any such
litigation, taken as a whole, will have a material adverse financial effect on
the Company's financial position and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's stockholders during the
fourth quarter of the fiscal year covered by this report.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company or operating subsidiary are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Stanley Braun 58 President, Chief Executive Officer
Paul W. Craig 41 Executive Vice President, Chief Financial Officer
Sandra L. Richards* 48 Senior Vice President
Ronald J. Tonani* 54 Senior Vice President
- - ----------
</TABLE>
* These persons serve in the indicated capacities as officers of the
Registrant's operating subsidiary; they are not executive officers of Pac Rim
Holding.
Officers of the Company are appointed annually, and serve at the discretion of
the Board of Directors of the Company.
Mr. Braun, the founder of the Company, has been President and Chief Executive
Officer of the Company since its formation. He has been Chairman of the Board
of Pacific Rim Assurance since inception. From 1984 until February 1987, Mr.
Braun occupied senior management positions with Fairmont Insurance Company, a
California workers' compensation insurance company, and served as its President
and Chief Executive Officer from 1986 to 1987, when the company was acquired by
Transamerica Insurance Company.
Mr. Craig was appointed Executive Vice President and Chief Financial Officer of
the Company in August 1994. He previously has served as Executive Vice
President since June 1990, and Chief Financial Officer from March 1990 to
H-17
<PAGE> 403
July 1991. From 1976 to 1990, Mr. Craig was employed by the accounting firm of
Ernst & Young, and was a partner in that firm from 1988 to 1990, specializing
in service to clients in the property and casualty insurance industry. Mr.
Craig is a certified public accountant.
Ms. Richards was appointed Senior Vice President of Pacific Rim Assurance in
July 1991 and has directed the underwriting function of Pacific Rim Assurance
since September 1987. During 1986 and 1987, she was employed as an underwriter
of large accounts at Fairmont Insurance Company, a California workers'
compensation insurance company. From 1980 until 1986, she was an underwriting
supervisor at the Insurance Company of the West, another workers' compensation
insurance company.
Mr. Tonani was appointed Senior Vice President of Pacific Rim Assurance in July
1991 and has directed the client services function of the Company since August
of 1987. During 1986 and 1987, Mr. Tonani was a vice president of claims at
Fairmont Insurance Company, a California workers' compensation insurance
company. From 1977 until 1986, he served as vice president-marketing of the
Insurance Company of the West, another worker's compensation insurance company.
None of the executive officers of the Registrant or executive officers of its
insurance subsidiary has any family relationship with any other executive
officer of the Registrant, any executive officer of its insurance subsidiary,
or any director of the Registrant; although Dina Braun-Puetz, daughter of
Stanley Braun, President and Chief Executive Officer of the Company, does hold
an office of Vice President of Pacific Rim Assurance (an officer position not
considered an executive officer).
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is listed on the National Association of Securities
Dealers Automated Quotation System's ("NASDAQ") National Market System, under
the symbol PRIM. The following table sets forth the high and low closing
prices (as reported by NASDAQ) for the Company's Common Stock during 1993, 1994
and 1995.
<TABLE>
<CAPTION>
High Low
-----------------------------------------------------------
<S> <C> <C>
First Quarter 1993 $5 3/4 $3 1/2
Second Quarter 1993 5 1/4 3 1/2
Third Quarter 1993 4 1/2 3 1/4
Fourth Quarter 1993 4 2 1/2
First Quarter 1994 $2 3/4 $1 7/8
Second Quarter 1994 3 2
Third Quarter 1994 3 2 1/8
Fourth Quarter 1994 3 1/8 2 1/4
First Quarter 1995 $3 3/8 $2 1/4
Second Quarter 1995 2 15/16 2 1/4
Third Quarter 1995 3 3/8 2 5/8
Fourth Quarter 1995 3 1/4 2 1/8
</TABLE>
The Company has never paid a dividend to stockholders and does not anticipate
paying cash dividends on its Common Stock in the foreseeable future. In
addition, Pac Rim Holding is dependent on dividends received from Pacific Rim
Assurance for operating funds. The payment of dividends by Pacific Rim
Assurance is subject to regulation under California law.
As of March 25, 1996 there were approximately 1,200 holders of Pac Rim Holding
Common Stock.
H-18
<PAGE> 404
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The following selected consolidated financial data is derived from the audited
financial statements of the Company and should be read in conjunction with the
audited consolidated financial statements included elsewhere herein. For
matters affecting the accounting for the aggregate excess of loss reinsurance
agreement and the restatement of certain 1992 and 1993 amounts, see
Management's Discussion and Analysis of Financial Condition and Results of
Operations, Note 4-Reinsurance and Note 14-Restatement of Financial Statements.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
In Thousands, Except Per Share Data
Restated Restated
-------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Net premiums earned $76,016 $92,894 $ 99,917 $117,829 $100,952
Net investment income 8,089 6,514 5,989 6,416 4,976
Realized investment gains (losses) 453 3,905 (14)
------- ------- -------- -------- --------
Total revenue 84,558 99,408 109,811 124,231 105,928
Costs and Expenses:
Losses and loss adjustment expenses 50,957 63,788 87,689 100,595 75,311
Amortization of policy
acquisition costs - net 18,647 19,565 11,646 12,864 13,970
Administrative, general, and other 11,662 11,927 13,257 12,647 8,994
Policyholder dividends 132 1,301 1,258 1,722 3,847
Interest expense 2,306 857
------- ------- -------- -------- --------
Total costs and expenses 83,704 97,438 113,850 127,828 102,122
Income (loss) before income taxes and
cumulative effect of a change in
accounting principle 854 1,970 (4,039) (3,597) 3,806
Income tax expense (benefit) 279 812 (2,658) (3,027) 595
------- ------- --------- -------- --------
Income (loss) before cumulative
effect of a change in
accounting principle 575 1,158 (1,381) (570) 3,211
Cumulative effect of a change in
accounting for income taxes 278
------- ------- -------- -------- --------
Net income (loss) $ 575 $ 1,158 $ (1,381) $ (292) $ 3,211
======= ======= ======== ======== ========
Per Share Data:
Income (loss) before cumulative
effect of a change
in accounting principle $ 0.06 $0.12 $ (0.14) $ (0.06) $ $0.35
Cumulative effect of a change in
accounting for income taxes 0.03
-------- ------- -------- --------- --------
Net income (loss) $ 0.06 $0.12 $ (0.14) $ (0.03) $ $0.35
======== ======= ======== ======== ========
Weighted average number of
shares outstanding 9,528 9,528 9,528 9,624 9,059
GAAP Combined Ratio Data:
Loss ratio 67.0% 68.7% 87.8% 85.4% 74.6%
Underwriting expense ratio 39.9 33.9 24.9 21.6 22.8
Policyholder dividend ratio 0.2 1.4 1.2 1.5 3.8
----- ----- ----- ----- ------
Combined ratio 107.1% 104.0% 113.9% 108.5% 101.2%
===== ===== ===== ===== ======
Balance Sheet Data--at end of year:
Cash and total investments $129,804 $143,075 $117,173 $121,441 $104,080
Premiums receivable 11,616 11,855 15,197 20,037 19,244
Earned but unbilled premiums 4,880 5,046 6,974 7,923 8,274
Total assets 169,051 186,570 189,241 198,501 144,711
Reserve for losses and loss
adjustment expenses 96,525 116,629 135,965 135,460 86,702
Unearned premiums 5,715 9,917 8,262 7,233 9,451
Reserve for policyholder dividends 381 990 2,529 3,069 3,506
Total liabilities 124,896 149,393 150,241 158,120 104,058
Total stockholders' equity 44,155 37,177 39,000 40,381 40,653
</TABLE>
H-19
<PAGE> 405
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
The Company's 1995 premium revenue base decreased as a result of state-mandated
premium rate decreases and the beginning of statewide open premium rating in
California, which created an intense level of price competition, and a
continuous overall erosion of premium rate levels throughout 1995. In response
to this price competition, the Company accepted lower premium volume, in return
for continued underwriting discipline and quality of business. As a result of
lower premium volume, the Company carefully managed its expenses. Also, it
expanded geographically, into additional states. Further, as a result of a
1994 capital-raising transaction in August 1994, the Company increased its
average invested assets and investment income in 1995. The Company also
realized capital gains on investments sold during 1995. The Company was
profitable for the 1995 year.
RESULTS OF OPERATIONS
1995 COMPARED TO 1994
Net premiums earned during 1995 were $76,016,000, which represents a decrease
of 18.2%. This decrease is the result of a state-mandated premium rate
decrease of 16% on October 1, 1994, which affected earned premium revenues
generated during 1995 from business originally written during the fourth
quarter of 1994. Further, the beginning of statewide open premium rating for
California workers' compensation insurance, effective January 1, 1995, created
an intense level of price competition and an overall erosion of premium rate
levels.
In connection with efforts to expand its business into additional geographic
areas and increase future revenues, during 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. The company's net
premiums earned in Arizona were $787,000 through December 31, 1995. During
August 1995, the Company received a Certificate of Authority to write workers'
compensation insurance in the State of Texas, and it commenced operations in
October. The Company's net premiums earned in Texas were $20,000 through
December 31, 1995. In March 1996, the Company received a Certificate of
Authority to write workers' compensation insurance in the State of Georgia.
In addition, during September 1995, Pacific Rim Assurance filed an application
to write workers' compensation insurance in the State of Florida. 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 increased 24.2%, to $8,089,000 in 1995, from $6,514,000
in 1994. The average invested assets of $138,100,000 for the year ended
December 31, 1995, increased 6.5% over 1994. The increase in invested assets
was the result of funds received from the sale of debentures and the
commutation of the aggregate excess of loss and quota share reinsurance
treaties during the third and fourth quarters of 1994. The average yield on
average invested assets increased to 6.0% for the year ended December 31, 1995,
from 5.0% for 1994. Prior to the increase in invested assets, the Company
maintained a large position in lower-yielding short-term securities, for
liquidity purposes, which accounts for the lower overall average yield in 1994.
After the Company was able to reposition its investment portfolio into longer
term, higher yielding securities, by October 1994, the Company's investment
yield increased to 5.7% for the fourth quarter of 1994.
The Company sold bonds with total proceeds of $61,343,000 during 1995 to take
advantage of certain advantageous market conditions, reposition into higher
yielding securities, and to meet cash flow demands. These sales resulted in a
net pre-tax realized investment gain of $453,000. There were no sales in 1994.
Losses and loss adjustment expenses ("LAE") incurred decreased $12,831,000 for
the year ended December 31, 1995 as compared to 1994. The loss and LAE ratio
decreased to 67.0% in 1995 from 68.7% in 1994. The improvement in the losses
and LAE was attributable to the continued favorable decline in the frequency of
new claims during the first half of 1995, offset in part by higher frequency of
new claims in the second half of 1995; a reduction in the overall number of
outstanding claims; and a continued stable trend in the severity of claims.
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Total underwriting expenses decreased 3.8% to $30,309,000 for the year ended
December 31, 1995, from $31,492,000 for 1994. This decrease is primarily due
to a decrease in premium volume. Commissions paid to agents and brokers during
1995 decreased by $614,000. However, the average commission ratio to agents
and brokers increased to 21.6% for the year ended December 31, 1995 from 18.3%
for 1994, due to the impact of highly competitive conditions on business
written in the California workers' compensation insurance market during the
third and fourth quarters of 1994 on premiums earned during 1995. New business
written during 1995 was at a lower average commission rate than premiums
written in the third and fourth quarters of 1994.
The general and administrative expense component of underwriting expenses
decreased $265,000 or 2.2% to $11,662,000 in 1995 from $11,927,000 in 1994.
This decrease is due to reduced employee staff costs and related expenses. The
general and administrative expense ratio increased to 15.3% in 1995 from 12.8%
in 1994 reflecting the Company's position to maintain a high quality of service
personnel and agents, despite a decrease in premium volume.
Policyholder dividends decreased to $132,000 for the year ended December 31,
1995, from $1,301,000 for the year ended December 31, 1994. In determining the
appropriate policyholder dividend accrual 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 Company believes that given the decrease in premium
rate levels, California policyholders already have benefited from reduced
workers' compensation premiums. Thus, the importance of dividends to
policyholders has diminished in the competitive market.
Interest expense increased to $2,306,000 in 1995 from $857,000 in 1994. This
increase was the result of having its Series A Convertible Debenture
outstanding for all of 1995 versus only four and one-half months in 1994.
Income before taxes was $854,000 for the year ended December 31, 1995, as
compared to $1,970,000 for the year ended December 31, 1994. This decrease was
due primarily to increased investment income and decreased expenses, offset by
decreased premium volume.
Net income for the year ended December 31, 1995 was $575,000, as compared to
$1,158,000 for 1994.
1994 COMPARED TO 1993
Net premiums earned during 1994 were $92,894,000, which represents a decrease
of 7% from 1993. The Company ceded $2,500,000 under its aggregate excess of
loss treaty during 1994, as compared to $13,188,000 under its aggregate excess
of loss and quota share treaties in 1993. Absent the impact of these treaties,
net premiums earned decreased 16% for the year ended December 31, 1994 as
compared to 1993. This decrease was primarily the result of the Company
downsizing its premium volume due to capital constraints during the first six
months of 1994, and the cumulative effect of reductions in the minimum premium
rate mandated by the California Insurance Commissioner, of 7% on July 16, 1993,
12.7% on January 1, 1994 and an additional 16% on October 1, 1994.
Net investment income increased 9% to $6,514,000 in 1994 from $5,989,000 in
1993. The average invested assets of $129,700,000 for the year ended December
31, 1994 increased 11% over 1993. The increase in invested assets was the
result of funds received from the sale of debentures and the commutation of the
aggregate excess of loss and quota share reinsurance treaties. The average
yield on average invested assets decreased to 5.0% for the year ended December
31, 1994 from 5.1% for 1993. Prior to the increase in invested assets, the
Company maintained a large position in lower-yielding short-term securities,
for liquidity purposes, which accounts for the lower overall average yield.
After the Company was able to reposition its investment portfolio into longer
term, higher yielding securities, by October 1994, the Company's investment
yield increased to 5.7% for the fourth quarter of 1994 from 4.9% in the fourth
quarter of 1993.
The Company sold tax-exempt bonds with a total amortized cost of $89,114,000
during 1993, representing approximately 84% of its investment portfolio and
reinvested the proceeds in U.S. Treasury bonds, to realize the difference
between current market values and the amortized cost of the investments for tax
planning purposes, and to help meet and maintain the depository requirements of
the State of California. These sales resulted in a pre-tax realized investment
gain of $3,905,000. There were no sales during 1994.
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Losses and LAE incurred decreased $23,901,000 for the year ended December 31,
1994 as compared to 1993. The loss and LAE ratio decreased to 68.7% in 1994
from 87.8% in 1993. The improvement in the losses and LAE was attributable to
the continued favorable decline in the frequency of new claims, a reduction in
the number of outstanding claims, and a continued stable trend in the severity
of claims.
Total underwriting expenses increased 26.5% to $31,492,000 for the year ended
December 31, 1994, from $24,903,000 for 1993. The increase in underwriting
expenses is the result of ceded commissions of $2,025,000 received by the
Company under its quota share reinsurance treaty during 1993, with no similar
benefit during 1994; in addition there was an increase of $6,456,000 in the
amount of commissions paid to agents and brokers during 1994. The average
commission ratio to agents and brokers increased to 18.3% for the year ended
December 31, 1994 from 10.5% for 1993, due to the continuation of highly
competitive conditions in the California workers' compensation insurance
market.
The general and administrative expense component of underwriting expenses
decreased $1,330,000 or 10% to $11,927,000 in 1994 from $13,257,000 in 1993.
The general and administrative expense ratio decreased to 12.8% in 1994 from
13.3% in 1993. This decrease is due to reduced employee staff costs and
related expenses.
The policyholder dividend ratio was stable at 1.4% in 1994 and 1.2% in 1993.
In determining appropriate policyholder dividend accrual levels, 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.
Income before income taxes was $1,970,000 for the year ended December 31, 1994
as compared to a $4,039,000 loss for the year ended December 31, 1993. This
improvement was due primarily to the commutation of the aggregate excess of
loss reinsurance treaty, increase in investment income, and decreases in the
frequency of new claims and number of outstanding claims, as well as a stable
trend in the severity of claims.
Net income for the year ended 1994 was $1,158,000, as compared to a net loss of
$1,381,000 for 1993.
In July 1993, the California legislature passed two sets of workers'
compensation law reforms, which could impact significantly the benefits
available under the California workers' compensation system and the premium
rates applicable to such coverage. The legislation is designed to reduce the
claim costs and rates applicable to California workers' compensation coverage.
The first item of legislation repealed the California minimum rating law
effective January 1, 1995. This minimum rating law existed as a means of
preserving the financial integrity of the California workers' compensation
system by generally prohibiting insurers from charging to California insureds
premium rates below the minimum levels established by the Commissioner.
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 minimum premium rate decrease was effective July 16, 1993 for
all policies inforce at that time. In addition, 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 the year. The reduced minimum rates
remained in effect until January 1, 1995, at which time the open price
competition resulting from the repeal of the minimum rating law took effect.
Along with 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 provides 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.
With respect to the potential impact of such reforms on the future results of
operations and liquidity of the Company, the repeal of the minimum rating law
opens the workers' compensation insurance market to direct price competition
among insurers. This gives larger and better capitalized companies a
significant competitive advantage over the Company. On the other hand, some of
the benefit reforms are intended to reduce fraud and over-utilized treatments
and psychiatric injury claims, thus reducing claims costs. While it cannot be
stated with certainty, proponents of the legislation believe that the increased
benefit payments will be more than offset by benefit reduction reforms. Such
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reduction could help offset revenues lost by the rate reductions. However, the
ultimate impact of these reforms on the future operation and liquidity of the
Company cannot be stated with certainty. (See Business - "Significant Changes
in the California Workers' Compensation System")
COMBINED RATIO DATA
Four ratios are traditionally used to measure underwriting performance in the
workers' compensation insurance industry: the loss ratio, the underwriting
expense ratio, and the policyholder dividend ratio, which when added together
constitute the combined ratio. A combined ratio greater than 100% indicates an
underwriting loss, while a combined ratio less than 100% indicates an
underwriting profit.
The following table sets forth the Company's combined ratio and its component
ratios, as measured on the basis of generally accepted accounting principles
("GAAP"):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Loss ratio 67.0% 68.7% 87.8%
Underwriting expense ratio 39.9 33.9 24.9
Policyholder dividend ratio 0.2 1.4 1.2
----- ----- -----
Combined ratio 107.1% 104.0% 113.9%
===== ===== =====
</TABLE>
The following table sets forth the Company's combined ratio and its component
ratios, as measured on the basis of statutory accounting practices.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Loss ratio 67.0% 72.3% 87.9%
Underwriting expense ratio 40.4 33.4 23.2
Policyholder dividend ratio 0.2 2.6 2.3
----- ----- -----
Combined ratio 107.6% 108.3% 113.4%
===== ===== =====
</TABLE>
The differences in the GAAP and statutory loss ratios, underwriting expense
ratios, policyholder dividend ratios, and combined ratios for the periods
presented are due primarily to GAAP permitting, but statutory accounting
practices prohibiting or delaying, certain accruals. The statutory loss ratios
differ from the GAAP loss ratios primarily as a result of the cession of
amounts under the Company's quota share and aggregate excess of loss
reinsurance treaties. (See Business - "Reinsurance.") The statutory
underwriting expense ratios are different than the GAAP underwriting expense
ratios primarily as a result of the recognition of ceding commissions related
to the Company's quota share reinsurance treaty and the amortization of policy
acquisition costs. The statutory policyholder dividend ratios differ from the
GAAP policyholder dividend ratios because policyholder dividends are recognized
for statutory purposes when declared and are accrued for GAAP purposes based on
anticipated future declarations as the related premiums are earned.
RESTATEMENT OF FINANCIAL STATEMENTS
The Company restated its financial statements for the year ended December
31,1992 and subsequent periods, through March 31, 1994, reflecting the
resolution of discussion between the Company and the Staff of the Securities
and Exchange Commission ("Staff") regarding the Company's method of applying
generally accepted accounting principles for an aggregate excess of loss
reinsurance agreement (the "Agreement") entered into by its workers'
compensation insurance subsidiary, The Pacific Rim Assurance Company, in 1992.
The restatement changed the timing of recognition of net benefits and net costs
related to the Agreement during the two years the Agreement was in effect, July
1, 1992 through June 30, 1994. The restatement reduced the originally reported
net income of $2.5 million for the year ended December 31, 1992 by $2.8
million, but it improved the results of operations for the second quarter ended
June 30, 1994 by the same amount. The restatement had no
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net effect on the Company's cumulative operating results during the two-year
period the Agreement was in effect, nor on stockholders' equity as of June 30,
1994. The Company commuted the Agreement as of June 30, 1994, and the
cumulative pre-tax net cost for the two-year period the Agreement was in effect
was $300,000.
The Staff reviewed the Company's Proxy Statement for its August 15, 1994 Annual
Meeting of Stockholders relating to, among other matters, the issuance of $20
million in convertible debentures in a private placement investment of capital
by an investment partnership. In connection with that review, the Staff
advised the Company that, in its view, the Company's 1992 and subsequent
financial statements should be restated. The Staff's view was that the
Company's method of accounting for its Agreement was an inappropriate
application of generally accepted accounting principles, and that the $11.8
million pre-tax net benefit originally recognized by the Company from the
Agreement in 1992 should have been limited to $7.6 million.
The Company believed that the accounting treatment accorded the Agreement in
the Company's financial statements was in conformity with generally accepted
accounting principles and predominant industry practice at the time. However,
following discussions with the Staff, and after considering the impact of a
restatement on the Company, its stockholders, and other constituents, the
Company changed its accounting for the Agreement and restated the 1992, 1993
and March 31, 1994 financial statements.
Prior to restatement, the Company reported a 1992 pre-tax net benefit from the
Agreement of $11.8 million, consisting of $15 million of ceded losses
recoverable, less ceded earned premium of $3.2 million. During 1993, the
Company expensed, on a pre-tax basis, $5.7 million with respect to the
Agreement. During the first six months of 1994, the Company, in accordance
with its original accounting treatment, anticipated expensing, on a pre-tax
basis, an additional $6.4 million, which amount was to include a $1.7 million
non-cash charge to be recognized concurrent with the commutation of the
Agreement as of June 30, 1994.
As a result of the Company's commutation of the Agreement, the Company did not
cede any losses under the Agreement, and received $11.1 million in 1994 of the
$11.4 million in premiums previously paid to the reinsurer. As such, the
pre-tax reinsurance cost over the two-year period that the Agreement was in
effect was $300,000. The restatement did not affect the Company's
stockholders' equity as of June 30, 1994, did not change the Company's
reinsurance cost over the two-year period that the Agreement was in effect, and
did not change the Company's previously reported statutory-basis surplus or
statutory-basis results of operations as of any date or for any period. The
restatement reduced previously reported 1992 net income and stockholders'
equity as of December 31, 1992, December 31, 1993, and March 31, 1994, by $2.8
million, left unchanged the operating results for 1993 and the first quarter of
1994, and improved operating results for the three-month and six-month periods
ended June 30, 1994 by $2.8 million, as compared to the results of operations
that would have been obtained under the Company's original accounting
treatment. As a result, stockholders' equity as of June 30, 1994 was
unaffected by the restatement. As a result of the restatement, as of December
31, 1992, the originally reported pre-tax benefit of $11.8 million was restated
to $7.6 million. The originally reported ceded losses recoverable of $15
million was restated to $10.8 million, and the originally reported 1992 net
income of $2.5 million was restated to a net loss of $300,000.
In this document, all items in the text that have been restated are noted by
("as restated"). All tables and financial statements that have been restated
are noted by "Restated" above the applicable column.
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
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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 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.
In August 1994, the Company completed a capital-raising transaction and issued
$20,000,000 of convertible debentures to PRAC, Ltd. ("PRAC"). As a result of
the capital transaction, the Company increased the policyholders' surplus of
Pacific Rim Assurance by $16,800,000. At December 31, 1995, the
statutory-basis policyholders surplus of Pacific Rim Assurance was $46,549,000.
Pacific Rim Assurance's ratio of net premiums written to policyholders' surplus
for 1995, as determined on the basis of statutory accounting practices, was
1.55 to 1.
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 December 31, 1995, the Company was in good standing with all
Departments of Insurance with respect to its deposit requirements, maintaining
securities with a total fair value of $119,710,000 on deposit with authorized
depositories in various states.
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. No
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
provided by (used in) operating activities for the years ended December 31,
1995, 1994, and 1993 were $(22,819,000), $15,905,000, and $(6,080,000),
respectively. In light of the reduced level of premiums currently being
written, due to state-mandated reductions in premium rates, and the repeal of
the minimum rate law, coupled with claim payments required on premiums
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, together
with certain affiliated entities, is entitled to vote the equivalent of 55.2%
of the Company's voting securities with respect to certain matters, and will be
entitled to vote the equivalent of approximately 61.6% 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
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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, which 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 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 December 1992, the FASB issued Statement 113, "Accounting and Reporting for
Reinsurance of 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. Statement 113 was effective for 1993 financial statements. For
those contracts that meet the statement's criteria for indemnification of
insurance risk, Statement 113 requires that reinsurance recoverables under
reinsurance agreements are to be reported as assets (as opposed to the prior
practice of netting recoverables against liabilities), any amount paid for
retroactive reinsurance contracts (contracts covering insured events that have
already occurred) over the recorded liabilities that are ceded under the
contract, is to be deferred and recognized as income over future periods as the
recoveries are realized, and, the excess of amounts paid for retroactive
reinsurance contracts over the ceded liabilities is to be charged to income.
Statement 113 did not allow restatement of previous financial periods when
adopted.
In May 1993, the FASB issued Statement 115, "Accounting for Certain Investments
in Debt and Equity Securities", which addresses the accounting and reporting
for certain investments in debt securities. Statement 115 was effective for
1994. Statement 115 requires that investments in debt and equity securities be
classified into one of three categories: held-to-maturity, available-for-sale,
or trading. The Company currently classifies its investments in debt
securities as available-for-sale. FASB 115 requires that any unrealized
holding gains and losses be reported as a net amount in a separate component of
Stockholders' Equity. The amount of net unrealized capital gains and losses in
the Company's portfolio, net of applicable taxes, were a loss of $4,781,000 at
December 31, 1994, and a gain of $1,622,000 at December 31, 1995.
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
will elect 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Information with respect to this Item is incorporated by reference to the
financial statements and supplementary data listed in Item 14 of Part IV of
this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
There is incorporated herein by reference the information required by this Item
in the Company's definitive proxy statement for the 1996 annual meeting of
stockholders which it is intended will be filed with the Securities and
Exchange Commission no later than 120 days after the close of the fiscal year
ended December 31, 1995.
ITEM 11. EXECUTIVE COMPENSATION.
There is incorporated herein by reference the information required by this Item
in the Company's definitive proxy statement for the 1996 annual meeting of
stockholders which it is intended will be filed with the Securities and
Exchange Commission no later than 120 days after the close of the fiscal year
ended December 31, 1995.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
(a) Security ownership of certain beneficial owners:
There is incorporated herein by reference the information required by this Item
in the Company's definitive proxy statement for the 1996 annual meeting of
stockholders which it is intended will be filed with the Securities and
Exchange Commission no later than 120 days after the close of the fiscal year
ended December 31, 1995.
(b) Security ownership of management:
There is incorporated herein by reference the information required by this Item
in the Company's definitive proxy statement for the 1996 annual meeting of
stockholders which it is intended will be filed with the Securities and
Exchange Commission no later than 120 days after the close of the fiscal year
ended December 31, 1995.
(c) Changes in control:
The Company knows of no arrangements, including any pledges by any person of
its securities, the operation of which may at a subsequent date result in a
change in control.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
There is incorporated herein by reference the information required by this Item
in the Company's definitive proxy statement for the 1996 annual meeting of
stockholders which it is intended will be filed with the Securities and
Exchange Commission no later than 120 days after the close of the fiscal year
ended December 31, 1995.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) DOCUMENTS FILED WITH REPORT.
1. The following consolidated financial statements of Pac Rim Holding and
subsidiary are filed as part of this report.
Consolidated Balance Sheets - December 31, 1995 and 1994
Consolidated Statements of Operations - Years ended
December 31, 1995, 1994, and 1993
Consolidated Statements of Cash Flows - Years ended
December 31, 1995, 1994, and 1993
Consolidated Statements of Stockholders' Equity - Years ended
December 31, 1995, 1994, and 1993
Notes to Consolidated Financial Statements
2. The following financial statement schedules of Pac Rim Holding and
subsidiary are filed as part of this report.
Schedule II Condensed Financial Information of Registrant
Schedule III Supplementary Insurance Information
Schedule IV Reinsurance
Schedule VI Supplemental Information Concerning Property/Casualty
Insurance Operations
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instruction or are inapplicable and therefore have been omitted.
3. The exhibits listed on the accompanying Exhibit Index are filed as part of
this report.
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed by the Company during the last quarter of the
fiscal year ended December 31, 1995.
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Stockholders and Board of Directors
Pac Rim Holding Corporation:
We have audited the accompanying consolidated balance sheets of Pac Rim Holding
Corporation and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended. These financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Pac Rim Holding
Corporation and subsidiaries as of December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedules following the financial statements
are presented for purposes of complying with the Securities and Exchange
Commission's rules and are not a required part of the basic financial
statements. These schedules have been subjected to the auditing procedures
applied in the audit of the basic financial statements, and in our opinion, are
fairly stated in all material respects in relation to the basic financial
statements taken as a whole.
Los Angeles, California
February 8, 1996
ARTHUR ANDERSEN LLP
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REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
Pac Rim Holding Corporation
We have audited the accompanying consolidated statements of operations, changes
in stockholders' equity and cash flows of Pac Rim Holding Corporation and
subsidiary for the year ended December 31, 1993. Our audit also included the
information for the year ended December 31, 1993, included in the financial
statement schedules listed in the Index at Item 14(a). These financial
statements and schedules are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedules based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of Pac Rim Holding Corporation and subsidiary for the year ended
December 31, 1993, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedules, when
considered in relation to the basic financial statements, as discussed above,
taken as a whole, present fairly in all material respects the information set
forth therein.
As discussed in Note 14, to the consolidated financial statements, the Company
and the staff of the Securities and Exchange Commission (the "Staff") have had
discussions with respect to the application of generally accepted accounting
principles with respect to the Company's accounting method used to account for
its aggregate excess of loss reinsurance agreement (the "Agreement"), as
described in Note 4. As a result of those discussions, the Company had decided
to change its application of generally accepted accounting principles to limit
the benefit recognized under the Agreement, and, accordingly, has restated its
consolidated financial statements and schedules referred to above to reflect
this change.
As discussed in Note 4 to the consolidated financial statements, in 1993, the
Company adopted the provisions of Financial Accounting Standards Board
Statement 113, "Accounting and Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts."
ERNST & YOUNG LLP
Los Angeles, California
February 25, 1994, except as to Note 14,
the date of which is August 3, 1994
H-30
<PAGE> 416
PAC RIM HOLDING CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1995 1994
---- ----
<S> <C> <C>
ASSETS
Investments:
Bonds, available-for-sale at fair value (amortized cost $119,314 and $140,478) $121,771 $133,234
Short-term investments (at cost, which approximates fair value) 7,260 9,216
-------- --------
Total Investments 129,031 142,450
Cash 773 625
Reinsurance recoverable 4,068 2,132
Premiums receivable, less allowance for doubtful
accounts of $1,221 and $1,071 11,616 11,855
Earned but unbilled premiums 4,880 5,046
Investment income receivable 2,207 2,355
Deferred policy acquisition costs 974 2,085
Property and equipment, less accumulated depreciation
and amortization of $3,803 and $2,860 2,434 2,541
Unamortized debenture issue costs 1,468 1,873
Federal income taxes recoverable 1,456 443
Deferred federal income taxes 8,348 12,987
Prepaid reinsurance premiums 227 380
Other assets 1,569 1,798
-------- --------
Total Assets $169,051 $186,570
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Reserve for losses and loss adjustment expenses $ 96,525 $116,629
Convertible debentures payable, less
unamortized discount of $1,393 and $1,695 18,607 18,305
Unearned premiums 5,715 9,917
Reserve for policyholder dividends 381 990
Accrued expenses and accounts payable 3,668 3,552
-------- ---------
Total Liabilities 124,896 149,393
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 1,622 (4,781)
Retained earnings 11,014 10,439
-------- --------
Total Stockholders' Equity 44,155 37,177
-------- --------
Total Liabilities and Stockholders' Equity $169,051 $186,570
======== ========
</TABLE>
See notes to consolidated financial statements.
H-31
<PAGE> 417
PAC RIM HOLDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
REVENUES:
Net premiums earned $76,016 $92,894 $ 99,917
Net investment income 8,089 6,514 5,989
Realized capital gains 453 3,905
------- ------- --------
Total revenue 84,558 99,408 109,811
COSTS AND EXPENSES:
Losses and loss adjustment expenses 50,957 63,788 87,689
Amortization of policy acquisition costs - net 18,647 19,565 11,646
Administrative, general, and other 11,662 11,927 13,257
Policyholder dividends 132 1,301 1,258
Interest expense 2,306 857
------- ------- --------
Total costs and expenses 83,704 97,438 113,850
------- ------- --------
Income (loss) before income taxes 854 1,970 (4,039)
Income tax expense (benefit) 279 812 (2,658)
------- ------- --------
NET INCOME (LOSS) $ 575 $ 1,158 $ (1,381)
======= ======= ========
PER SHARE DATA:
NET INCOME (LOSS) PRIMARY $ .06 $ 0.12 $ (0.14)
======= ====== ========
NET INCOME (LOSS) FULLY DILUTED $ .06 $ 0.12 $ (0.14)
======= ====== ========
</TABLE>
See notes to consolidated financial statements.
H-32
<PAGE> 418
PAC RIM HOLDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS, EXCEPT FOR NUMBER OF SHARES)
<TABLE>
<CAPTION>
UNREALIZED
COMMON STOCK GAIN (LOSS) ON
------------------- AVAILABLE-
NUMBER ADDITIONAL FOR-SALE
OF PAID-IN SECURITIES, RETAINED
SHARES AMOUNT CAPITAL WARRANTS NET EARNINGS TOTAL
--------- ------ --------- -------- ----------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1993 9,528,200 $ 95 $29,624 $ $ $ 10,662 $40,381
(as restated)
Net loss (1,381) (1,381)
--------- ------ ------- -------- --------- -------- -------
Balance at December 31, 1993 9,528,200 95 29,624 9,281 39,000
(as restated)
Unrealized gain on
available-for-sale
securities at January 1,
1994, net 96 96
Additional paid in
capital-warrants 1,800 1,800
Net income 1,158 1,158
Change in unrealized
loss of available-for
-sale securities, net (4,877) (4,877)
--------- ------ ------- -------- --------- -------- -------
Balance at December 31, 1994 9,528,200 95 29,624 1,800 (4,781) 10,439 37,177
Net income 575 575
Change in unrealized gain of
available-for-sale
securities, net 6,403 6,403
--------- ------ ------- -------- --------- -------- -------
Balance at December 31, 1995 9,528,200 $ 95 $29,624 $ 1,800 $ 1,622 $ 11,014 $44,155
========= ====== ======= ======== ========= ======== =======
</TABLE>
See notes to consolidated financial statements.
H-33
<PAGE> 419
PAC RIM HOLDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOW
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income (loss) $ 575 $ 1,158 $ (1,381)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 1,421 930 1,911
Provision for losses on premiums receivable 150 (143) 702
Provision (benefit) for deferred income taxes 1,340 1,188 (851)
Realized capital gains (453) (3,905)
Changes in:
Reserve for losses and loss adjustment expenses (20,104) (19,336) 505
Unearned premiums (4,202) 1,655 1,029
Reserve for policyholder dividends (609) (1,539) (540)
Ceded reinsurance payable (252) (7,592)
Premiums receivable 255 5,413 5,087
Reinsurance recoverable (1,936) 13,044 (3,984)
Aggregate excess of loss reinsurance recoverable 10,812
Prepaid reinsurance premiums 153 2,435 3,395
Deferred policy acquisition costs 1,111 (953) (90)
Income taxes recoverable (1,013) 1,916 (1,807)
Accrued expenses and accounts payable 116 319 (1,281)
Investment income receivable 148 (1,372) 1,882
Other assets 229 630 840
-------- -------- --------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (22,819) 15,905 (6,080)
-------- -------- --------
INVESTING ACTIVITIES
Purchase of investments - bonds (40,524) (67,788) (73,509)
Sales of investments - bonds 61,343 89,114
Maturity and calls of investments - bonds 1,028 7,228 16,852
Additions to property and equipment (836) (918) (916)
-------- -------- --------
NET CASH PROVIDED (USED) BY INVESTMENT ACTIVITIES 21,011 (61,478) 31,541
-------- -------- --------
FINANCING ACTIVITIES
Proceeds from issuance of convertible debentures 20,000
Debenture issuance costs (2,025)
--------
NET CASH PROVIDED BY FINANCING ACTIVITIES 17,975
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,808) (27,598) 25,461
Cash and cash equivalents at beginning of period 9,841 37,439 11,978
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $8,033 $ 9,841 $ 37,439
======== ======== ========
SUPPLEMENTAL DISCLOSURE:
Interest paid $ 1,615 $ -0- $ -0-
======== ========= ========
Income taxes paid $ 37 $ -0- $ -0-
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
H-34
<PAGE> 420
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAC RIM HOLDING CORPORATION AND SUBSIDIARY
DECEMBER 31, 1995
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION: Pac Rim Holding Corporation ("Pac Rim Holding") is a holding
company that was incorporated in 1987 in Delaware. The accompanying
consolidated financial statements include the accounts and operations of the
holding company and its subsidiary, The Pacific Rim Assurance Company and its
subsidiary, Regional Benefits Insurance Services, Inc., (collectively referred
to herein as "the Company"). All significant intercompany transactions and
balances are eliminated in consolidation. The Pacific Rim Assurance Company
("Pacific Rim Assurance") is engaged exclusively in the business of writing
workers' compensation insurance in California, Arizona, and Texas. Regional
Benefits Insurance Services, Inc. ("RBIS") is an insurance agency.
ACCOUNTING PRINCIPLES: The accompanying consolidated financial statements are
presented on the basis of generally accepted accounting principles ("GAAP"),
which differ in some respects from those followed in reports to the Insurance
Departments. The principal differences relate to the recognition of deferred
income taxes, deferred policy acquisition costs, earned but unbilled premiums,
and policyholder dividends.
EARNED PREMIUMS: Earned premiums and the liability for unearned premiums are
calculated by formula such that the premium written is earned pro rata over the
term of the policy. The insurance policies currently written by the Company
are for a period of one year or less. Premiums earned include an estimate for
earned but unbilled premiums and retrospectively rated premiums.
RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES: The reserve for losses and
loss adjustment expenses ("LAE") is based on the accumulation of cost estimates
for each loss reported prior to the close of the accounting period and
provision for the probable cost of losses that have occurred but have not yet
been reported. The Company does not discount such reserves for financial
reporting purposes. The methods for making such estimates and for
establishing the resulting liabilities are continually reviewed and updated and
any adjustments resulting therefrom are included in current operations when
determined. While the ultimate amount of losses incurred and the related
expense is dependent on future developments, management is of the opinion that,
given the inherent variability in any such estimates, the reserve for unpaid
losses and LAE is within a reasonable range of adequacy. The Company had an
independent actuarial study conducted on the Company's reserve for losses and
LAE as of December 31, 1995. The study concluded that such reserve makes a
reasonable provision for all unpaid loss and LAE obligations of the Company
under the terms of its policies and agreements.
POLICY ACQUISITION COSTS: Policy acquisition costs, such as commissions,
premium taxes, and other underwriting costs related to the production and
retention of business, are deferred and amortized as the related premiums are
earned. Anticipated investment income is considered in determining the
recoverability of this asset. Other policy acquisition costs that do not vary
with the production of new business are expensed when incurred and are included
in administrative, general, and other expenses.
POLICYHOLDER DIVIDENDS: A significant portion of all policies written by the
Company are eligible for policyholder dividends. An estimated provision for
policyholder dividends is accrued as the related premiums are earned. Such
dividends do not become a legal liability of Pacific Rim Assurance unless, and
until, declared by the Board of Directors.
INVESTMENTS: In May 1993, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities". As of January 1, 1994,
the Company adopted the provisions of that Standard for investments held as of
or acquired after that date. In accordance with Statement 115, prior-period
financial statements have not been restated to reflect the change in accounting
principle. The cumulative effect as of January 1, 1994 of adopting Statement
115 increased stockholders' equity by $96,000 (net of deferred income taxes of
$50,000) to reflect the net unrealized holding gains on bonds previously carried
at amortized cost; there was no effect on net income as a result of the adoption
of Statement 115. In
H-35
<PAGE> 421
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAC RIM HOLDING CORPORATION AND SUBSIDIARY
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
the year ended December 31, 1994, net unrealized holding gains decreased by
$4,877,000 (net of deferred tax benefit of $2,513,000); the net unrealized
holding loss was $4,781,000 at December 31, 1994. In the year ended December
31, 1995, net unrealized holding gains increased by $6,403,000 (net of deferred
tax expense of $3,299,000); the net unrealized holding gain was $1,622,000 at
December 31, 1995.
The cost of investments sold is determined by specific identification. The
Company's investment guidelines emphasize buying, with the intent of holding to
maturity, high quality U.S. Treasury securities, other governmental agency
securities, and corporate bonds. The Company does not actively trade its
securities. Although the Company has the intent to hold its investments to
maturity, the Company also recognizes that unforeseeable circumstances, such as
changes in market conditions, tax considerations, and operational needs, may
require the sale of securities prior to maturity. As of December 31, 1995, and
1994 the Company has designated all of its portfolio as "available for sale".
PROPERTY AND EQUIPMENT: Property and equipment is stated at cost.
Depreciation of property and equipment is computed using the straight-line
method over an estimated useful life of five years for financial reporting
purposes. Leasehold improvements are amortized on the straight-line method
over the life of the lease.
TAXES: Effective January 1992, the Company adopted SFAS No. 109, "Accounting
for Income Taxes". The Statement requires the recognition of deferred tax
assets and liabilities based on the expected future tax consequences of
existing differences between financial reporting and tax reporting bases of
assets and liabilities and operating loss and tax credit carryforwards for tax
purposes.
The insurance subsidiary pays premium taxes on gross premiums written in
California in lieu of state income taxes.
CASH AND CASH EQUIVALENTS: For purposes of the statements of cash flows,
certificates of deposit and short-term investments with an original maturity of
three months or less, at date of purchase, are considered to be cash
equivalents.
STOCKHOLDERS' EQUITY: The issuance of the convertible debentures included
issuing detachable warrants to purchase common stock (See Note 5). The value
of these warrants was $1,800,000, which was recorded as warrants in the
Consolidated Balance Sheets.
EARNINGS PER SHARE: Net income (loss) per share is computed on the basis of
the weighted average shares of common stock, plus common stock equivalent
shares arising from the effect of the stock options, warrants, and convertible
debentures. As of December 31, 1995, these securities did not impact primary
or fully diluted earnings per share as they were antidilutive. (See Notes 5 and
6).
The number of shares used in the computation of primary and fully diluted
earnings per share for the twelve month periods ended December 31, 1995, 1994,
and 1993 was 9,528,000.
NEW ACCOUNTING STANDARDS: The Company accounts for reinsurance transactions in
accordance with FASB Statement 113, "Accounting and Reporting for Reinsurance of
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. Statement
113 was effective for 1993 financial statements. For those contracts that meet
the statement's criteria for indemnification of insurance risk, Statement 113
requires that reinsurance recoverables under reinsurance agreements are to be
reported as assets (as opposed to the prior practice of netting recoverables
against liabilities), any amount paid for retroactive reinsurance contracts
(contracts covering insured events that have already occurred) over the recorded
liabilities that are ceded under the contract is to be deferred and recognized
as income over future periods as the recoveries are realized, and the excess of
amounts paid for retroactive reinsurance contracts over the ceded liabilities is
to be charged to income. Except for balance sheet reclassifications, Statement
113
H-36
<PAGE> 422
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAC RIM HOLDING CORPORATION AND SUBSIDIARY
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
did not allow restatement of previous financial periods when adopted. (See Note
4.)
In October 1995, FASB issued SFAS 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
will elect 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.
FAIR VALUES OF FINANCIAL INSTRUMENTS: The carrying amounts of financial
instruments, other than investment securities, approximate their fair values.
For investment securities, the fair values for fixed maturity securities are
based on quoted market prices. The carrying amounts and fair values for all
investment securities are disclosed in Note 2.
RECLASSIFICATIONS: Certain amounts in the accompanying financial statements
have been reclassified to conform with the 1995 presentation.
NOTE 2--INVESTMENTS
Major categories of investment income, net of investment expenses, for 1995,
1994 and 1993 are summarized as follows (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Investment Income:
U.S. Treasury and other governmental
agency securities $5,365 $5,508 $1,745
Money Market Funds 309 291 266
Funds Held by Reinsurer 169
Corporate Bonds 2,655 700
Tax-Exempt Bonds 4 102 4,228
Certificates of Deposit 22 9 3
-------- -------- --------
Investment Income 8,355 6,779 6,242
Less: Investment Expenses 266 265 253
------- ------- -------
Net Investment Income $8,089 $6,514 $5,989
====== ====== ======
</TABLE>
Proceeds from the sales of investments in bonds during 1995 were $61,343,000;
gross gains of $657,000 and gross losses of $204,000 were realized on those
sales. There were no sales of investments in bonds during 1994. Proceeds from
the sales of investments in bonds during 1993 were $89,114,000; gross gains of
$3,905,000 were realized on those sales. There were no gross losses from
sales of investments in bonds during 1993.
H-37
<PAGE> 423
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAC RIM HOLDING CORPORATION AND SUBSIDIARY
NOTE 2--INVESTMENTS--CONTINUED
The amortized cost and fair values of investments in debt securities are
summarized as follows (amounts in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
-------- ---------- ---------- --------
<S> <C> <C> <C> <C>
1995
U.S. Treasury and
other governmental
agencies $ 68,963 $ 17 $ (157) $ 68,823
Corporates 33,793 1,886 35,679
U.S. Agencies 10,546 418 10,964
Asset backed 6,012 293 6,305
-------- ------ ------- --------
Total $119,314 $2,614 $ (157) $121,771
======== ====== ======= ========
1994
U. S. Treasuries and
other governmental
agencies $108,114 $(6,198) $101,916
Corporates 20,462 $ 1 (668) 19,795
U.S. Agencies 10,902 (381) 10,521
Municipals 1,000 2 1,002
-------- ------ ------- --------
Total $140,478 $ 3 $(7,247) $133,234
======== ====== ======= ========
</TABLE>
The amortized cost and fair value of debt securities at December 31, 1995 by
contractual maturity are summarized as follows (amounts in thousands):
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
-------- --------
<S> <C> <C>
Due in 1996 $ 17,580 $ 17,850
Due 1997 - 2001 92,873 94,369
Due 2002 and after 8,861 9,552
-------- --------
$119,314 $121,771
======== ========
</TABLE>
The expected maturities will differ from contractual maturities in the
preceding table because borrowers have the right to call or prepay certain
obligations with or without call or prepayment penalties.
At December 31, 1995, securities with a fair value of $119,710,000 were on
deposit to meet the Company's statutory obligation under insurance departments
regulations.
At December 31, 1995, there were individual investments in United States
Treasury securities with an amortized cost of $68,963,000, which exceeded 10%
of stockholders' equity.
H-38
<PAGE> 424
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAC RIM HOLDING CORPORATION AND SUBSIDIARY
NOTE 3--RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
The following table provides a reconciliation of beginning and ending loss and
LAE reserves for the years 1995, 1994, and 1993. All reserve totals are net of
reinsurance deductions. There are no material differences between the
Company's reserves for losses and LAE calculated in accordance with generally
accepted accounting principles and those reserves calculated based on
statutory accounting practices.
RECONCILIATION OF RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1994
1995 Restated 1993
------- -------- --------
(amounts in thousands)
<S> <C> <C> <C>
Liability for losses and LAE, net of
reinsurance recoverables on unpaid losses,
at beginning of year $114,709 $111,109 $113,620
Provision for losses and LAE, net
of reinsurance recoverable:
Current accident year 49,962 60,989 65,720
Prior accident years 995 2,799 21,969
------- -------- --------
Incurred losses during the current year,
net of reinsurance recoverable 50,957 63,788 87,689
Losses and LAE payment for claims, net of
reinsurance recoverable, occurring during:
Current year 13,473 13,641 12,887
Prior years 59,552 46,547 77,313
------- -------- --------
73,025 60,188 90,200
------- -------- --------
Liability for losses and LAE, net of
reinsurance recoverable on unpaid
losses, at end of year 92,641 114,709 111,109
Reinsurance recoverable, at end of year 4,068 2,132 25,988
Less reinsurance recoverable on paid losses (184) (212) (1,132)
------- -------- --------
Reinsurance recoverable on unpaid losses,
at end of year 3,884 1,920 24,856
------- -------- --------
Liability for losses and LAE, gross of
reinsurance recoverable on unpaid losses,
at end of year $96,525 $116,629 $135,965
======= ======== ========
</TABLE>
During 1992 and 1993, the Company, like the rest of the workers' compensation
industry in California, went through a dramatically changing experience in
losses and LAE incurred. During 1991 and 1992, the Company, like other
companies in the industry, experienced a substantial number of claims related
to adverse economic conditions, particularly related
H-39
<PAGE> 425
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAC RIM HOLDING CORPORATION AND SUBSIDIARY
NOTE 3--RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES - CONTINUED
to the 1990 and 1991 accident years. In addition, there were "stress and
strain" claims that did not involve traumatic physical loss or injury, many of
which were suspected by the Company to be fraudulently submitted. The Company
initially took a general denial stance and non-settlement posture on such
fraudulent claims, to send a clear message to claimants and vendors of its
position.
The Company referred fraudulent claim matters to prosecutors, who have secured
successful indictments and prosecutions of fraudulent claimants or vendors, and
the Company secured withdrawals of such claims by others. In addition, the
enactment of effective legislative and regulatory reforms was implemented.
That technique was effective, as the Company believes that the frequency of new
suspected fraudulent claims has nearly stopped. The Company refined its
approach, to promote the settlement of certain of these claims, where minimal
settlement cost may facilitate early closure and prevent cost escalation.
Throughout 1994 and 1995, the Company continued to experience a significantly
improving trend in declining frequency of new claims. The positive trends and
experience related to new claims since mid-1992 have been consistent with the
favorable experience of other workers' compensation insurance specialty
companies in California. As a result, the Company's estimate of loss and LAE
reserves for the 1993, 1994 and 1995 accident years is based on substantially
lower loss ratios than the 1991 and prior accident years.
NOTE 4 -- REINSURANCE
Under the Company's specific excess of loss reinsurance treaty, the reinsurers
assume the liability on that portion of workers' compensation claims between
$350,000 and $80,000,000 per occurrence.
Effective October 1, 1992, the Company entered into a quota share reinsurance
treaty. Cessions under that treaty were discontinued July 1, 1993. During the
first six months of 1993, the Company ceded 14% of its net premiums earned,
losses, and allocated loss adjustment expenses. During the fourth quarter of
1992, the Company ceded 40% of its net premiums earned, losses and allocated
loss adjustment expenses. The Company commuted the treaty effective September
30, 1994 and received $7,739,000 from the reinsurer during October 1994.
Effective July 1, 1992, the Company entered into a five-year aggregate excess of
loss reinsurance agreement (the "Agreement"). The Agreement provided up to
$34,000,000 of coverage for aggregate losses and allocated loss adjustment
expenses ("ALAE") incurred in excess of specified loss ratios on net premiums
earned from July 1992 through June 1997 and additional loss and ALAE reserves
required for claims incurred prior to July 1992 above amounts reported as of
June 30, 1992. During 1992, the Company ceded $10,812,000 (as restated) of
losses and ALAE under the Agreement. As a result of having the Agreement in
effect during 1992, the net benefit of the ceded losses and ALAE, less the
related premium charge, increased 1992 income before taxes by $7,625,000 (as
restated). This Agreement met the requirements of risk transfer in 1992 as
embodied in reinsurance accounting literature prior to FASB Statement 113.
Reinsurance accounting literature prior to Statement 113 focused on a
reinsurer's exposure to varying results, including losses, as the primary
evidence that risk had been transferred under a Agreement. This Agreement met
the Statement 113 criteria of exposing the reinsurer to significant loss, but
had multi-year aggregating retentions that Statement 113 concluded could delay
timely reimbursement of claims by the reinsurer; and, the accounting for the
Agreement as reinsurance was not permitted beginning January 1, 1993. Statement
113 required this Agreement to be accounted for as a deposit contract rather
than as reinsurance, as previously reported. Other than balance sheet
reclassifications, Statement 113 specifically prohibited the restatement of
prior-period financial statements. As a result of the implementation of
Statement 113 in 1993, the $10,812,000 (as restated) reinsurance recoverable,
related to this Agreement, was treated as a deposit. Premiums paid in 1993 and
1992 under the Agreement totaled $11,375,000, and were expensed as follows:
$2,500,000 in 1994; $5,688,000 in 1993; and $3,187,000 in 1992. The Company
commuted the Agreement effective June 30, 1994 and received $11,051,000 from the
reinsurer during August 1994. The Company recognized a $239,000 benefit as a
H-40
<PAGE> 426
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAC RIM HOLDING CORPORATION AND SUBSIDIARY
NOTE 4--REINSURANCE - CONTINUED
result of the commutation in the quarter ended June 30, 1994. The total cost
of the Agreement on a pre-tax basis, over the two-year period the Agreement was
in force, was $300,000. For matters affecting the accounting for the aggregate
excess of loss reinsurance agreement see Note 14- -Restatement of Financial
Statements.
The components of net premiums written are summarized as follows (amounts in
thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Direct $75,553 $101,661 $119,840
Assumed 375 112 73
Ceded (3,962) (4,789) (15,572)
------- -------- --------
Net premiums written $71,966 $ 96,984 $104,341
======= ======== ========
</TABLE>
The components of net premiums earned are summarized as follows (amounts in
thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Direct $79,920 $100,008 $118,631
Assumed 209 110 133
Ceded (4,113) (7,224) (18,847)
------- -------- --------
Net premiums earned $76,016 $ 92,894 $ 99,917
======= ======== ========
</TABLE>
The components of net losses and loss adjustment expenses are summarized as
follows (amounts in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Direct $54,454 $64,700 $94,609
Assumed 188 149 357
Ceded (3,685) (1,061) (7,277)
------- ------- -------
Net losses and loss
adjustment expenses $50,957 $63,788 $87,689
======= ======= =======
</TABLE>
A contingent liability exists to the extent that losses recoverable under a
reinsurance treaty are not paid to the Company by the reinsurer. Reinsurance
recoverable on paid losses as of December 31, 1995 and 1994, are $184,000 and
$212,000, respectively.
H-41
<PAGE> 427
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAC RIM HOLDING CORPORATION AND SUBSIDIARY
NOTE 5--LONG TERM DEBT
The Company has $20,000,000 in principal outstanding 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 owned by PRAC, Ltd.,
a Nevada limited partnership. PRAC, Ltd. is controlled by Mr. Richard Pickup.
Mr. Pickup presently controls approximately 24% of the outstanding shares of
the Company through various investment entities, which together are the
Company's largest stockholder.
The Debentures carry an 8% rate of interest, payable semi-annually 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 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, 1994 loss and
allocated loss adjustment expense reserves related to the 1992 and 1993
accident years, measured as of June 30, 1996. Under the terms of the Debenture
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 Debenture Agreement includes covenants, which provide, among other things,
that the Company maintain at least $32,200,000 in total stockholders' equity.
At December 31, 1995, the Company's stockholders' equity was $44,155,000.
The Debentures are carried on the balance sheet net of unamortized discount of
$1,393,000 at December 31, 1995. 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 bear interest
at a rate of 1% in excess of the prime rate. No borrowings occurred under the
line of credit during 1995.
H-42
<PAGE> 428
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAC RIM HOLDING CORPORATION AND SUBSIDIARY
NOTE 6--STOCK OPTIONS
The Company has stock option plans that provide for options to purchase Pac Rim
Holding common stock at a price not less than fair value as of the date of the
grant. The options under those plans are exercisable over a period of up to
ten years, at which time they expire. A summary of the activity in the stock
option plans is as follows:
<TABLE>
<CAPTION>
Stock Options
------------------------------------
Shares Price Range
------ -----------
<S> <C> <C>
Outstanding at January 1, 1993 1,173,000 $1.00 - $11.41
Granted 124,000 3.38 - 5.25
Exercised
Cancelled (83,000) 2.50 - 8.50
--------
Outstanding at December 31, 1993 1,214,000 1.00 - 11.41
Granted 500,000 2.75 - 5.50
Exercised
Cancelled (736,375) 2.50 - 11.41
---------
Outstanding at December 31, 1994 977,625 1.00 - 8.50
Granted 65,000 2.50 - 3.19
Exercised
Cancelled (85,000) 3.25 - 8.50
--------
Outstanding at December 31, 1995 957,625 1.00 - 8.50
=======
</TABLE>
Under the 1988 stock option plan, 457,375 shares of Common Stock are available
for future grants of options. As of December 31, 1995, options to purchase
471,344 shares of the Company's Common Stock at a price range of $1.00 to $8.50
were vested and were exercisable under the Company's stock option plans.
Subject to certain conditions, such as continued employment, the exercise of
the options is not restricted. The options expire at various dates through
2003. These plans will be terminated at the earlier of the exercise of
outstanding options or in 2003.
Certain current officers and directors of the Company purchased an aggregate of
136,000 shares of Common Stock at a purchase price of $1 per share pursuant to
the Pac Rim Holding 1987 Stock Purchase Plan (the "Stock Purchase Plan"). The
Stock Purchase Plan was terminated in 1988. Shares purchased pursuant to the
Stock Purchase Plan may be repurchased by Pac Rim Holding in the event that the
purchaser's service to the Company terminates prior to specified points of
time.
H-43
<PAGE> 429
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAC RIM HOLDING CORPORATION AND SUBSIDIARY
NOTE 7--COMMITMENT AND CONTINGENCIES
The Company currently leases office facilities in Woodland Hills, and Fresno,
California and Phoenix, Arizona under noncancellable operating leases that are
subject to escalation clauses. Minimum rental commitments on the operating
leases are as follows (amounts in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
1996 $2,664
1997 2,695
1998 2,653
1999 2,376
2000 2,270
All Years Thereafter 2,968
</TABLE>
Rent expense for 1995, 1994 and 1993 was $2,461,000, $2,491,000 and $2,281,000,
respectively.
The Company is a party to two industry-wide legal matters, involving two
medical facilities. This litigation claims that the insurance industry
conspired to delay payments of claims. While the ultimate outcome of this
litigation is uncertain, management believes that such litigation will not have
a material adverse financial effect on the Company's financial position and
results of operations.
In addition, in the ordinary course of business, the Company is named as a
defendant in legal proceedings relating to policies of insurance that have been
issued and other incidental matters. Management does not believe that any such
litigation, taken as a whole, will have a material adverse financial effect on
the Company's financial position and results of operations.
NOTE 8--REGULATORY MATTERS
The National Association of Insurance Commissioners' ("NAIC") Committee on
Financial Regulation and Standards and Accreditation (the "NAIC Committee")
voted to require, as a condition of NAIC accreditation of a state's insurance
regulatory system, adoption of the NAIC's 1986 Model Insurance Holding Company
System Regulatory Act (the "Model Act"). Among other matters, the Model Act
requires states to enact legislation further restricting the payment of
dividends by insurance companies.
In an effort to satisfy the dividend payment restrictions of the Model Act,
amendments to the California Insurance Code designed to implement dividend
payment limitations that would yield results substantially equivalent to the
Model Act were passed by the California legislature on October 9, 1993. These
amendments were incorporated into California Senate Bill 482. The amendments
limit dividends payable during the twelve month period, without prior
regulatory approval, to the greater of net income for the preceding year or 10%
of policyholders' surplus as of the preceding December 31. The amendments
further prohibit the payment of dividends without prior California Insurance
Department ("Department") approval unless the insurer has available "earned
surplus". The term "earned surplus" is defined as unassigned funds (surplus)
as reported on the insurer's annual statement, excluding earned surplus derived
from the appreciation of assets not yet realized or from an exchange of assets,
unless such earned surplus has been realized or the assets received in exchange
are currently realized in cash. The legislation further requires insurers to
report to the Department all dividends within five days of declaration and
prohibits the payment of the dividend declared until ten days after the
Department's receipt of such notice. Under these provisions, Pacific Rim
Assurance paid $548,000 in dividends in 1994 to Pac Rim Holding. Pacific Rim
Assurance paid no dividends to Pac Rim Holding in 1995.
As reported to insurance regulatory authorities, statutory-basis capital and
surplus of Pacific Rim Assurance at December 31, 1995 and 1994 was $46,549,000
and $42,284,000, respectively, and the net income (loss) amounted to
$4,879,000, $(2,878,000), and $(2,347,000) for 1995, 1994, and 1993,
respectively. At December 31, 1995, Pacific Rim Assurance
H-44
<PAGE> 430
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAC RIM HOLDING CORPORATION AND SUBSIDIARY
NOTE 8--REGULATORY MATTERS--CONTINUED
had a balance of $2,131,000 in its earned surplus account. Accordingly,
Pacific Rim Assurance can pay dividends of $2,131,000 to Pac Rim Holding during
1996, without prior Department approval.
NOTE 9--INCOME TAXES
The components of the provision (benefit) for total deferred taxes are
summarized as follows (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Current $(1,061) $ (376) $(1,807)
Deferred 1,340 1,188 (851)
------ ------ ---------
Total $ 279 $ 812 $(2,658)
======== ======= ========
</TABLE>
A reconciliation of income tax computed at the U.S. federal statutory tax rates
to total income tax expense (benefit) is as follows (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate $290 $670 $(1,373)
Increase (decrease) in taxes
resulting from:
Tax-exempt interest (1) (30) (1,222)
Other (10) 172 (63)
----- ----- ----------
Total tax expense (benefit) $279 $812 $(2,658)
==== ==== ========
</TABLE>
At December 31, 1995, the Company has an alternative minimum tax credit of
$334,000 for tax purposes. Alternative minimum tax credits may be carried
forward indefinitely to offset future regular tax liabilities. At December 31,
1995, the Company has a tax net operating loss of $2,676,000 which can be used
to offset taxable income in future years. This carryforward will expire in
2010.
H-45
<PAGE> 431
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAC RIM HOLDING CORPORATION AND SUBSIDIARY
NOTE 9--INCOME TAXES - CONTINUED
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities are summarized as follows
(amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
---- ----
<S> <C> <C>
Deferred tax assets
Discounting of loss reserves $7,189 $9,366
Unearned premiums 373 649
Allowance for doubtful accounts 415 364
Rental expense 518 524
Unrealized loss on securities 2,463
Net operating loss carry forward 910
Alternative minimum tax credit carry forward 334 537
Other - net 93 117
------ ------
Total deferred tax assets 9,832 14,020
Deferred tax liabilities:
Deferred policy acquisition costs 331 709
Earned but unbilled premiums 165 157
Prepaid insurance 86 100
Unrealized gain on securities 835
Other - net 67 67
------ -------
Total deferred tax liabilities $1,484 1,033
------ -------
Net deferred tax assets $8,348 $12,987
====== =======
</TABLE>
Pacific Rim Assurance pays premium taxes to California on gross premiums
written in lieu of state income taxes.
NOTE 10--DISCLOSURE OF CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES
NATURE OF OPERATIONS
During the year ended December 31, 1995, the Company wrote 99% of its business
in the state of California. The workers' compensation industry in the state of
California has seen many changes to regulations in the past few years including
the adoption of open rating. The Company cannot predict what regulatory
changes will be made in the future; therefore, the Company cannot with
certainty predict what material effects any potential changes will have on the
Company. To mitigate such risk, during 1995, the Company expanded into
additional states; and in 1996, the Company will attempt to further expand into
additional states.
The Company markets its insurance policies through approximately 180
independent insurance agencies and brokerage firms, many of which specialize in
workers' compensation insurance. The independent insurance agencies and
brokerage firms that sell the Company's insurance policies also represent other
insurance companies. The Company pays such independent insurance agents and
brokers a commission consistent with workers' compensation industry practices.
H-46
<PAGE> 432
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAC RIM HOLDING CORPORATION AND SUBSIDIARY
NOTE 10-DISCLOSURE OF CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES - CONTINUED
At December 31, 1995, 36% of the Company's premiums in force had been generated
by its five highest producing agencies and brokerage firms, two of which
accounted for 20% of total premiums in force at that date. The Company
believes that it has favorable operating relationships with these agencies and
brokerage firms. Recent market conditions have resulted in higher average
commissions being paid to agencies and brokerage firms of the Company. No
agency or brokerage firm is obligated to place insurance policies with the
Company, and the Company is not obligated to accept business submitted from any
agency or brokerage firm. The loss of any one or more of these agencies or
brokerage firms could materially affect the Company's business.
PERVASIVENESS OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
LOSS AND LOSS ADJUSTMENT EXPENSES/REINSURANCE
Reserves for such difficult-to-estimate liabilities are established by
examining the facts of reported claims and adjusted in the aggregate for
ultimate loss expectations, based upon historical experience patterns and
current economic trends. Due to these factors, among others, the process
cannot provide an exact forecast of future payments. Rather, it produces a
best estimate of liability as of a certain date. Management believes the
reserves for loss and loss adjustment expenses established are adequate, and
the associated estimate of reinsurance recoverable is reasonable. While the
eventual ultimate liability and reinsurance recoverable may differ from the
current estimates, management does not believe that the difference will have a
material effect, either adversely or favorably, on the Company's financial
position and results of operations.
NOTE 11--RELATED PARTY TRANSACTIONS
The Company has a five-year employment contract with its President that expires
on August 16, 1997. Under the provisions of the contract, the President
receives annual compensation of $400,000 and a possible bonus, based on
achievement by the Company of various earnings-based performance criteria. The
agreement also provides for the payment of certain other fringe benefits.
Under the previous employment agreement, which expired on August 16, 1994 the
Company loaned to the President $150,000 annually in 1991, 1992, 1993. As of
December 31, 1993 and 1994, the loan balance was $450,000. Under the previous
employment agreement, the loan bore interest at 10%. Under the current
employment agreement, the loan bears interest at 6.3% on the principal amount,
which is secured by the President's pledge of shares of the Company's common
stock, and payable in full by February 16, 1998. As of December 31, 1995, the
loans are secured by shares of the Company's common stock with a market value
equal to 100% of the principal balance.
The Company has granted the President options to purchase 250,000 shares of the
Company's common stock at an exercise price of $2.75 per share and 250,000
shares at $5.50 per share.
Robert M. Anderson, Chairman of the Board of Pac Rim Holding, owns Anderson and
Anderson Insurance Brokers, Inc. During 1995, the Company paid Anderson and
Anderson Insurance Brokers, Inc. $37,000 in commissions for premiums produced
by the firm. The commission rates were comparable to rates paid to other
brokers.
H-47
<PAGE> 433
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAC RIM HOLDING CORPORATION AND SUBSIDIARY
NOTE 11-RELATED PARTY TRANSACTIONS - CONTINUED
The Company uses the law firm of Barger & Wolen for legal services. Dennis W.
Harwood is a member of the Company's Board of Directors and Richards D. Barger
is a member of Pacific Rim Assurance's Board of Directors, as well as partners
with Barger & Wolen. During 1995, the Company paid Barger & Wolen $262,000 for
legal services. The fees paid for these services are charged to the Company at
the normal rates charged to the firm's other clients.
The Company also uses the legal services of The Busch Firm. Timothy R. Busch,
a member of the Company's Board of Directors, is a partner with The Busch Firm.
During 1995, the Company paid the Busch Firm $61,000 for legal services The
fees paid for these services are charged to the Company at the normal rates
charged to the firm's other clients.
The Company used the services of Guy Carpenter & Company as its intermediary
for the purchase of reinsurance, until October 14, 1995. Don A. Salyer, a
member of the Board of Directors of Pacific Rim Assurance since August 15,
1995, is a Managing Director of Guy Carpenter & Company. During 1995, the
Company remitted reinsurance premiums totaling $172,000 to Guy Carpenter &
Company, for which Guy Carpenter & Company was paid commissions by applicable
reinsurers.
NOTE 12--401(K) PLAN
The Pacific Rim Assurance Company 401(K) Plan (the "Plan") permits employees of
the Company who attain the age of 21 and complete 30 days of employment to
elect to make tax-deferred contributions of a specified percentage of their
compensation during each year through payroll deductions. Under the Plan, the
Company has discretion to make additional contributions. The Company has not
yet made any discretionary employer contributions to the Plan.
H-48
<PAGE> 434
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAC RIM HOLDING CORPORATION AND SUBSIDIARY
NOTE 13--QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth unaudited data regarding operations for each
quarter of 1995 and 1994. In the opinion of management, such unaudited data
includes all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the information presented. The operating results
for any quarter are not necessarily indicative of the operating results for any
future period (in thousands, except per share data).
<TABLE>
<CAPTION>
Quarter Ended
-------------
Mar 31, June 30, Sept 30, Dec 31,
------- -------- -------- -------
<S> <C> <C> <C> <C>
1995
- - ----
Net premiums earned $18,242 $20,914 $18,992 $17,868
Net investment income and
realized investment gains 2,097 2,125 2,151 2,169
------- ------- ------- -------
Total revenue 20,339 23,039 21,143 20,037
Income (loss) before income taxes 1,570 491 (868) (339)
Net income (loss) 1,022 322 (532) (237)
Primary net income (loss) per share $0.10 $0.03 $(0.06) $(0.02)
Fully diluted net income (loss) per share $0.08 $0.03 $(0.06) $(0.02)
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
-------------
Mar 31, June 30, Sept 30, Dec 31,
------- -------- -------- -------
<S> <C> <C> <C> <C>
1994
- - ----
Net premiums earned $22,436 $22,456 $25,957 $22,045
Net investment income and
realized investment gains 1,205 1,348 1,845 2,116
----- ----- ----- -----
Total revenue 23,641 23,804 27,802 24,161
Income (loss) before income taxes (1,624) (153) 582 3,165
Net income (loss) (1,080) (108) 305 2,041
Net income (loss) per share $(0.11) $(0.01) $0.03 $0.18
</TABLE>
The 1994 and 1995 quarterly per share amounts do not aggregate to the annual
net income per share amounts due to the effect of the warrants issued with the
convertible debenture in August 1994.
NOTE 14--RESTATEMENT OF FINANCIAL STATEMENTS
In August 1994, the Company restated its financial statements for the years
ended December 31, 1992, 1993 and the quarter ended March 31, 1994, reflecting
the resolution of discussions between the Company and the Staff of the
Securities and Exchange Commission ("Staff") regarding the Company's method of
applying generally accepted accounting principles for the aggregate excess of
loss reinsurance agreement (the "Agreement") entered into by the
H-49
<PAGE> 435
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAC RIM HOLDING CORPORATION AND SUBSIDIARY
NOTE 14--RESTATEMENT OF FINANCIAL STATEMENTS--CONTINUED
workers' compensation insurance subsidiary, Pacific Rim Assurance in 1992.
The restatement changed the timing of recognition of net benefits and net costs
related to the Agreement during the two years the Agreement was in effect, July
1, 1992 through June 30, 1994. The restatement reduced the originally reported
net income of $2,472,000 for the year ended December 31, 1992 by $2,764,000,
but it improved the results of operations for the six months ended June 30,
1994 by the same amount. The restatement had no net effect on the Company's
cumulative operating results during the two-year period the Agreement was in
effect, nor on stockholders' equity as of June 30, 1994. The Company commuted
the Agreement as of June 30, 1994, and the cumulative pre-tax net cost for the
two year period the Agreement was in effect was approximately $300,000.
The Staff reviewed the Company's Proxy Statement for its August 15, 1994 Annual
Meeting of Stockholders, relating to among other matters, the issuance of
$20,000,000 in convertible debentures in the investment transaction with PRAC
(See Note 5). In connection with that review, the Staff advised the Company
that, in its view, the Company's 1992 and subsequent financial statements
should be restated. The Staff's view was that the Company's method of
accounting for its Agreement was an inappropriate application of generally
accepted accounting principles, and that the $11,812,000 pre-tax net benefit
originally recognized by the Company from the Agreement in 1992 should have
been limited to $7,625,000.
The Company believed that the accounting treatment accorded the Agreement in
the Company's financial statements was in conformity with generally accepted
accounting principles and predominant industry practice at the time. However,
following discussions with the Staff, and after considering the impact of a
restatement of the Company, its stockholders, and other constituents, the
Company changed its accounting for the Agreement and restated the 1992, 1993,
and March 31, 1994 financial statements.
Prior to restatement, the Company reported a 1992 pre-tax net benefit from the
Agreement of $11,812,000, consisting of $15,000,000 of ceded losses
recoverable, less ceded premiums earned of $3,187,000. During 1993, the
Company expensed, on a pre-tax basis, $5,688,000 with respect to the Agreement.
During the first six months of 1994, the Company, in accordance with its
original accounting treatment, anticipated expensing, on a pre-tax basis, an
additional $6,449,000 which amount was to include a $1,749,000 non-cash charge
to be recognized concurrent with the commutation of the Agreement as of June
30, 1994.
As a result of the Company's commutation of the Agreement, the Company did not
cede any losses under the Agreement, but received $11,051,000 in August 1994 of
the $11,375,000 in premiums previously paid to the reinsurer. As such, the
pre-tax reinsurance cost over the two-year period that the Agreement was in
effect was approximately $300,000. The restatement did not affect the
Company's stockholders' equity as of June 30, 1994, did not change the
Company's reinsurance cost over the two-year period that the Agreement was in
effect, and did not change the Company's previously reported statutory-basis
surplus or statutory-basis results of operations as of any date for any period.
The restatement reduced previously reported 1992 net income and stockholders'
equity as of December 31, 1992, December 31, 1993, and March 31, 1994, by
$2,764,000, left unchanged the operating results for 1993 and the first quarter
of 1994, and improved operating results for the six-month ended June 30, 1994
by $2,764,000, as compared to the results of operations that would have been
obtained under the Company's original accounting treatment. As a result,
stockholders' equity as of June 30, 1994 was unaffected by the restatement. As
a result of the restatement, as of December 31, 1992, the originally reported
pre-tax net benefit of $11,812,000 was restated to $7,625,000. The
originally reported reinsurance recoverable of $15,000,000 was restated to
$10,812,000, and the originally reported 1992 net income of $2,472,000 was
restated to a net loss of $292,000.
H-50
<PAGE> 436
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
By:/s/ Stanley Braun
Stanley Braun
President and Chief Executive Officer
Date: March 27, 1996
Pursuant to the requirements of Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on March 27, 1996.
Signature Capacity
- - --------- --------
Principal Executive Officer:
Director, Chief Executive
/s/ Stanley Braun Officer and President
- - ---------------------------------
Stanley Braun
Principal Financial Officer:
Executive Vice President and
/s/ Paul W. Craig Chief Financial Officer
- - --------------------------------
Paul W. Craig
Principal Accounting Officer:
/s/ Gerald L. Whelply Controller
- - ------------------------------
Gerald L. Whelply
Chairman of the Board of
/s/ Robert M. Anderson Directors
- - -----------------------------------
Robert M. Anderson
/s/ Dennis J. Aigner Director
- - -------------------------------------
Dennis J. Aigner
H-51
<PAGE> 437
Signature Capacity
- - --------- --------
/s/ Timothy R. Busch Director
- - ------------------------------------
Timothy R. Busch
/s/ Dennis W. Harwood Director
- - ----------------------------------
Dennis W. Harwood
/s/ Richard H. Pickup Director
- - -----------------------------------
Richard H. Pickup
/s/ Carl A. Strunk Director
- - -------------------------------------
Carl A. Strunk
H-52
<PAGE> 438
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
- - ------- ----------- ----------
<S> <C> <C>
3.1 Restated Certificate of Incorporation of the Company (incorporated by reference from
Exhibit 17 3.1 to Company's Registration Statement on Form S-1 (File #33-36371) filed
August 14, 1990, hereinafter referred to as "Form S-1"). (1)
3.2 Bylaws of the Company (incorporated by reference from Exhibit 3.2 of Form S-1). (1)
3.3 Certificate of Amendment of Restated Certificate of Incorporation of the Company
(incorporated by reference from Exhibit 3.3 of Form S-1). (1)
3.4 Amendment to Bylaws (incorporated by reference from Exhibit 3 (ii) - 1 from Form 10-K/A-1
for the year ended December 31, 1993 filed on May 2, 1994).
4 Specimen Stock Certificate of the Company (incorporated by reference from Exhibit 4 of
Form S-1). (1)
10.1 Workers' Compensation Quota Share Reinsurance Agreement between The Pacific Rim
Assurance Company and Constitution Reinsurance Corporation effective October 1, 1989
(incorporated by reference from Exhibit 10.1 of Form S-1). (1)
10.2 Endorsement No. 1 to Workers' Compensation Quota Share Reinsurance Agreement effective
October 1, 1989 (incorporated by reference from Exhibit 10.2 of Form S-1). (1)
10.3 Endorsement No. 2 to Workers' Compensation Quota Share Reinsurance Agreement effective
January 1, 1990 (incorporated by reference from Exhibit 10.3 of Form S-1). (1)
10.4 Agreement of Reinsurance No. 7310 (First Excess of Loss Agreement) effective October 15,
1987 between General Reinsurance Corporation and Pacific Rim Assurance Company, with
all Endorsements currently for $4,800,000 excess of $200,000 (incorporated by reference
from Exhibit 10.4 of Form S-1). (1)
10.5 Willcox Incorporated Reinsurance Intermediaries Cover No. 08-09-0012 documenting
Worker's Compensation Second Excess of Loss Reinsurance Agreement, effective
October 15, 1989, for $15,000,000 excess of $5,000,000 (incorporated by reference
from Exhibit 10.5 of Form S-1). (1)
10.6 Willcox Incorporated Reinsurance Intermediaries Cover No. 01-89-0334 documenting
Worker's Compensation Third Excess of Loss Reinsurance Agreement, effective
October 15, 1989, for $15,000,000 excess of $20,000,000 (incorporated by reference
from Exhibit 10.6 of Form S-1). (1)
10.7 Willcox Incorporated Reinsurance Intermediaries Cover No. 01-89-0400 documenting
Worker's Compensation Fourth Excess of Loss Reinsurance Agreement, effective
October 15, 1989, for $15,000,000 excess of $35,000,000 (incorporated by reference
from Exhibit 10.7 of Form S-1). (1)
10.8 1988 Stock Option Plan and forms of stock option agreements, as amended (incorporated
by reference from Exhibit 10.8 of Form S-1). (1)
10.9 1987 Stock Option Plan and forms of stock option agreements (incorporated by
reference from Exhibit 10.9 of Form S-1). (1)
</TABLE>
H-53
<PAGE> 439
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
- - ------- ----------- ----------
<S> <C> <C>
10.10 1987 Stock Purchase Plan (incorporated by reference from Exhibit 10.10 of Form S-1). (1)
10.11 The Pacific Rim Assurance Company 401(K) Plan (incorporated by reference from Exhibit
10.11 of Form S-1). (1)
10.12 Employment Agreement dated as of January 1, 1991 between Pac Rim Holding Corporation
and Stanley Braun (incorporated by reference from Exhibit 10 of Form 8-K filed
October 15, 1991). (1)
10.13 $5,000,000 Life Insurance Policy issued by Valley Forge Life Insurance Company, insuring
Stanley Braun, effective November 15, 1989 (incorporated by reference from Exhibit 10.13,
of Form S-1). (1)
10.14 $1,700,000 Adjustable Life Insurance Policy issued by American General Life Insurance
Company of Delaware, insuring Stanley Braun, effective March 23, 1988 (incorporated by
reference from Exhibit 10.14 of Form S-1). (1)
10.15 $2,000,000 Adjustable Life Insurance Policy issued by American General Life Insurance
Company of Delaware, insuring Stanley Braun, effective October 27, 1987 (incorporated
by reference from Exhibit 10.15 of Form S-1). (1)
10.16 Office Building Lease dated January 4, 1989 between the Company, Pacific Rim Assurance
Company and 16030 Associates for office space in Encino, California (incorporated by
reference from Exhibit 10.16 of Form S-1). (1)
10.17 Sublease dated January 5, 1989 between Coastline Financial Corp. and Pacific Rim Assurance
Company for office space in Encino, California (incorporated by reference from Exhibit
10.17 of Form S-1). (1)
10.18 Office Building Lease dated September 30, 1988 between The Pacific Rim Assurance Company
and The Austin Family Trust dated November 6, 1980 for office space in San Bernardino,
California (incorporated by reference from Exhibit 10.18 of Form S-1). (1)
10.19 Corporate Loan dated January 11, 1989 in the amount of $75,000 executed by Stanley Braun
in favor of the Company (incorporated by reference from Exhibit 10.19 of Form S-1). (1)
10.20 Investment Advisory Agreement dated December 7, 1989 between Joel R. Mogy Investment
Counsel Inc. and The Pacific Rim Assurance Company (incorporated by reference from
Exhibit 10.20 of Form S-1). (1)
10.21 Depository Agreement dated September 22, 1987 between City National Bank and The Pacific
Rim Assurance Company (incorporated by reference from Exhibit 10.21 of Form S-1). (1)
10.22 Cover Note and letters documenting Directors and Officers and Company Reimbursement
Indemnity Policies, effective June 19, 1990, for $1,000,000 and $4,000,000 excess of
$1,000,000 (incorporated by reference from Exhibit 10.22 of Form S-1). (1)
10.23 The Pacific Rim Assurance Company Flexible Benefits Plan No. 95-4111441, effective
March 1, 1990 (incorporated by reference from Exhibit 10.23 of Form S-1). (1)
</TABLE>
H-54
<PAGE> 440
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
- - ------- ----------- ----------
<S> <C> <C>
10.24 Office Space Lease dated February 11, 1991 between Rancon Realty Fund V and The Pacific
Rim Assurance Company (incorporated by reference from Exhibit 10.24 of Form S-1). (1)
10.25 Obligatory Reinsurance Agreement effective August 1, 1989 between Hamilton Management,
Ltd. and The Pacific Rim Assurance Company (incorporated by reference from Exhibit
10.25, of Form S-1). (1)
10.26 Cover note effective October 15, 1989 among American Accident Reinsurance Group,
CIGNA Reinsurance Corporation and The Pacific Rim Assurance Company (incorporated
by reference from Exhibit 10.26 of Form S-1). (1)
10.27 Industrial Aid Aviation/Land Travel Hazard Workers' Compensation Excess of Loss
Reinsurance Agreement effective October 15, 1989 between American Accident
Reinsurance Group and The Pacific Rim Assurance Company (incorporated by reference
from Exhibit 10.27 of Form S-1). (1)
10.28 Amendment dated November 1, 1990 to Investment Advisory Agreement between Joel R.
Mogy Investment Counsel Inc. and Pacific Rim Assurance Company (incorporated by
reference from Exhibit 10.28 of Form S-1). (1)
10.29 Willcox Incorporated Reinsurance Intermediaries Cover No. 08-90-0012 documenting
Workers' Compensation Second Excess of Loss Reinsurance Agreement, effective
October 15, 1990, for $15,000,000 excess of $5,000,000 (incorporated by reference
from Exhibit 10.29 of Form S-1). (1)
10.30 Willcox Incorporated Reinsurance Intermediaries Cover No. 08-90-0022 documenting
Workers' Compensation Third Excess of Loss Reinsurance Agreement, effective
October 15, 1990, for $15,000,000 excess of $20,000,000 (incorporated by reference
from Exhibit 10.30 of Form S-1). (1)
10.31 Willcox Incorporated Reinsurance Intermediaries Cover No.08-90-0023 documenting
Workers' Compensation Fourth Excess of Loss Reinsurance Agreement, effective
October 15, 1990, for $15,000,000 excess of $35,000,000 (incorporated by reference
from Exhibit 10.31 of Form S-1). (1)
10.32 Industrial Aid Aviation/Land Travel Hazard Workers' Compensation Excess of Loss
Reinsurance Agreement effective October 15, 1990 between American Accident
Reinsurance Group and The Pacific Rim Assurance Company (incorporated by
reference from Exhibit 10.32 of Form S-1). (1)
10.33 Willcox Incorporated Reinsurance Intermediaries Cover No. 08-90-0024 documenting
Per Person Occupational Accident Excess of Loss Reinsurance Agreement, effective
October 15, 1990, (incorporated by reference from Exhibit 10.33 of Form S-1). (1)
10.34 Letter of confirmation dated February 25, 1991 regarding placement of Workers'
Compensation Catastrophe Excess of Loss Reinsurance, effective October 15, 1990,
for $20,000,000 excess of $50,000,000 (incorporated by reference from Exhibit
10.34 of Form S-1). (1)
</TABLE>
H-55
<PAGE> 441
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
- - ------- ----------- ----------
<S> <C> <C>
10.35 Amendment No. 1 dated as of January 1, 1992 to Employment Agreement between Pac
Rim Holding Corporation and Stanley Braun. (1)
10.36 Willcox Incorporated Reinsurance Intermediaries Cover No. 01-88-0400 documenting
Workers' Compensation Second Excess of Loss Reinsurance, effective
October 15, 1988, for $10,000,000 excess of $10,000,000 (incorporated by reference
from Exhibit 10.36 of Form S-1). (1)
10.37 Willcox Incorporated Reinsurance Intermediaries Cover No. 01-87-0335 Industrial
Aid Aviation/Land Travel Hazard Workers' Compensation Excess of Loss Reinsurance,
effective October 15, 1987, for $3,750,000 excess of $250,000 (incorporated by
reference from Exhibit 10.37 Form S -1). (1)
10.38 Willcox Incorporated Reinsurance Intermediaries Cover No. 01-88-0335 documenting
Industrial Aid Aviation/Land Travel Hazard Workers' Compensation Excess of Loss
Reinsurance, effective October 15, 1988, for $3,750,000 excess of $250,000
(incorporated by reference from Exhibit 10.38 of Form S-1). (1)
10.39 Willcox Incorporated Reinsurance Intermediaries Cover No. 01-87-0334 documenting
Workers' Compensation Excess of Loss Reinsurance, effective October 15, 1987,
for $10,000,000 excess of $5,000,000 (incorporated by reference from Exhibit
10.39 of Form S-1). (1)
10.40 Willcox Incorporated Reinsurance Intermediaries Cover No. 01-88-0334 documenting
Workers' Compensation First Excess of Loss Reinsurance, effective
October 15, 1988, for $5,000,000 excess of $5,000,000 (incorporated by reference
from Exhibit 10.40 of Form S-1). (1)
10.41 Industrial Aid Aviation/Land Travel Hazard Workers' Compensation Excess of Loss
Reinsurance Agreement, effective October 15, 1987, between American Accident
Reinsurance Group and The Pacific Rim Assurance Company (incorporated by reference
from Exhibit 10.41 of Form S-1). (1)
10.42 Workers' Compensation Excess of Loss Reinsurance Agreement, effective October 15,
1987, between Pinehurst Accident Reinsurance Group and The Pacific Rim Assurance
Company (incorporated by reference from Exhibit 10.42 of Form S-1). (1)
10.43 Letters of confirmation of amendment of Quota Share Reinsurance Treaty (incorporated by
reference from Exhibit 10.43 of Form S-1). (1)
10.44 Office building lease dated January 21, 1992 between The Pacific Rim Assurance Company
and Trizec Warner, Inc. for office space in Woodland Hills, California, and related
Guaranty of Pac Rim Holding Corporation. (1)
10.45 Willcox Incorporated Reinsurance Intermediaries Cover No. 08-91-0033 documenting
Workers' Compensation First Excess of Loss Reinsurance, effective October 15, 1991,
for $4,750,000 excess of $250,000. (1)
10.46 Willcox Incorporated Reinsurance Intermediaries Cover No. 08-91-0012 documenting
Workers' Compensation Second Excess of Loss Reinsurance Agreement, effective October
15, 1991, for $15,000,000 excess of $5,000,000. (1)
</TABLE>
H-56
<PAGE> 442
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
- - ------- ----------- ----------
<S> <C> <C>
10.47 Willcox Incorporated Reinsurance Intermediaries Cover No. 08-91-0022 documenting
Workers' Compensation Third Excess of Loss Reinsurance Agreement, effective
October 15, 1991, for $15,000,000 excess of $20,000,000. (1)
10.48 Guy Carpenter & Company, Inc. Cover No. P3791-2 documenting Workers' Compensation
Fourth Excess of Loss Reinsurance Agreement, effective October 15, 1991, for $15,000,000
excess of $35,000,000. (1)
10.49 Guy Carpenter & Company, Inc. Cover No. P3791-1 documenting Workers' Compensation
Fifth Excess of Loss Reinsurance Agreement, effective October 15, 1991, for $30,000,000
excess of $50,000,000. (1)
10.50 Industrial Aid Aviation/Land Travel Hazard Workers' Compensation Excess of Loss
Reinsurance Agreement effective October 15, 1991 between American Accident Reinsurance
Group and The Pacific Rim Assurance Company. (1)
10.51 Willcox Incorporated Reinsurance Intermediaries Cover No. 08-91-0024 documenting Per
Person Occupational Accident Excess of Loss Reinsurance Agreement, effective
October 15, 1991. (1)
10.52 Workers' Compensation Quota Share Reinsurance Agreement effective October 1, 1990
between The Pacific Rim Assurance Company and Constitution Reinsurance Corporation
and Endorsement Number 1 thereto. (1)
10.53 Guy Carpenter & Company, Inc. Cover, effective October 15, 1990, for $20,000,000
excess of $50,000,000. (1)
10.54 Forms of Indemnity Agreements (incorporated by reference from Exhibit 28.1 of Form S-1). (1)
10.55 Second Amendment to Lease dated February 22, 1991 among The Pacific Rim Assurance
Company and 16030 Associates, a Joint Venture. (1)
10.56 Security Agreement (Stock Pledge) dated as of February 25, 1992 between Stanley Braun
and Pac Rim Holding Corporation. (1)
10.57 Aggregate Excess of Loss Reinsurance Agreement, Reference No. 01-92-0641, effective
July 1, 1992, between Underwriters Reinsurance Company and The Pacific Rim Assurance
Company. (1)
10.58 Workers' Compensation Quota Share Reinsurance Agreement effective October 1, 1992,
between The Pacific Rim Assurance Company and Constitution Reinsurance Corporation. (1)
10.59 Addendum No. 2 dated as of September 2, 1992 of Office Building Lease between
The Pacific Rim Assurance Company and Trizec Warner, Inc. (1)
10.60 Office Building Lease dated October 2, 1992, between The Pacific Rim Assurance Company
and Richard V. Gunner & George Andros, for office space in Fresno, California. (1)
10.61 Willcox Incorporated Reinsurance Intermediaries Cover No. 08-92-0033 documenting
Workers' Compensation First Excess of Loss Reinsurance, effective October 15, 1992,
for $4,750,000 excess of $250,000. (1)
</TABLE>
H-57
<PAGE> 443
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
- - ------- ----------- ----------
<S> <C> <C>
10.62 Willcox Incorporated Reinsurance Intermediaries Cover No. 08-92-0012 documenting
Workers' Compensation Second Excess of Loss Reinsurance Agreement, effective
October 15, 1992, for $15,000,000 excess of $5,000,000. (1)
10.63 Guy Carpenter & Company, Inc. Cover No. 3791-00-0001-00-92-03-03-00 documenting
Workers' Compensation Third Excess of Loss Reinsurance Agreement, effective
October 15, 1992, for $15,000,000 excess of $20,000,000. (1)
10.64 Guy Carpenter & Company, Inc. Cover No. 3791-00-0001-00-92-03-04-00 documenting
Worker's Compensation Fourth Excess of Loss Reinsurance Agreement, effective
October 15, 1992, for $15,000,000 excess of $35,000,000. (1)
10.65 Guy Carpenter & Company, Inc. Cover No. 3791-00-0001-00-92-03-05-00 documenting
Workers' Compensation Fifth Excess of Loss Reinsurance Agreement, effective
October 15, 1992, for $30,000,000 excess of $50,000,000. (1)
10.66 Guy Carpenter & Company, Inc. Cover No. 3791-00-0004-00-92-03-00-00 documenting
Industrial Aid Aviation/Land Travel Hazard Workers' Compensation Excess of Loss
Reinsurance Agreement effective October 15, 1992 between American Accident
Reinsurance Group and The Pacific Rim Assurance Company. (1)
10.67 Guy Carpenter & Company, Inc. Cover No. 3791-00-0003-00-92-03-00-00 documenting
Per Person Occupational Accident Excess of Loss Reinsurance Agreement, effective
October 15, 1992. (1)
10.68 Workers' Compensation Quota Share Reinsurance Agreement effective October 1, 1992,
between The Pacific Rim Assurance Company and Constitution Reinsurance Corporation
and Endorsement Number 1 thereto. (1)
10.69 Aggregate Excess of Loss Reinsurance Agreement, Reference No. 01-92-0641, effective
July 1, 1992, between Underwriters Reinsurance Company and The Pacific Rim
Assurance Company and Endorsement Number 1 thereto.(1)
10.70 Investment Advisory Agreement dated April 1, 1993 between Conning and Company and
The Pacific Rim Assurance Company. (1)
10.71 Cover Note and letters documenting Directors and Officers and Company Reimbursement
Indemnity Policies, effective March 4, 1991, for $5,000,000 and $20,000,000 excess of
$5,000,000. (2)
10.72 Willcox Incorporated Reinsurance Intermediaries Cover No. 08-93-0033 documenting
Workers' Compensation First Excess of Loss Reinsurance, effective October 15, 1993,
for $4,650,000 excess of $350,000. (1)
10.73 Willcox Incorporated Reinsurance Intermediaries Cover No. 08-93-0012 documenting
Workers' Compensation Second Excess of Loss Reinsurance Agreement, effective
October 15, 1993, for $15,000,000 excess of $5,000,000. (1)
</TABLE>
H-58
<PAGE> 444
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
- - ------- ----------- ----------
<S> <C> <C>
10.74 Guy Carpenter & Company, Inc. Cover No. 3791-00-0001-00-93-03-03-00 documenting
Workers' Compensation Third Excess of Loss Reinsurance Agreement, effective
October 15, 1993, for $15,000,000 excess of $20,000,000. (1)
10.75 Guy Carpenter & Company, Inc. Cover No. 3791-00-0001-00-93-03-04-00 documenting
Workers' Compensation Fourth Excess of Loss Reinsurance Agreement, effective
October 15, 1993, for $15,000,000 excess of $35,000,000. (1)
10.76 Guy Carpenter & Company, Inc. Cover No. 3791-00-0001-00-93-03-05-00 documenting
Workers' Compensation Fifth Excess of Loss Reinsurance Agreement, effective
October 15, 1993, for $30,000,000 excess of $50,000,000. (1)
10.77 Guy Carpenter & Company, Inc. documenting Industrial Aid Aviation/Land Travel
Hazard Workers' Compensation Excess of Loss Reinsurance Agreement effective
October 15, 1993 between American Accident Reinsurance Group and
The Pacific Rim Assurance Company. (1)
10.78 Guy Carpenter & Company, Inc. Cover No. 3791-00-0003-00-93-03-00-00 documenting
Per Person Occupational Accident Excess of Loss Reinsurance Agreement, effective
October 15, 1993. (1)
10.79 Sublease dated February 3, 1994 between The Pacific Rim Assurance Company and the
Federal Emergency Management Agency, for office space in Woodland Hills, California. (1)
10.80 Sublease dated February 25, 1994 between The Pacific Rim Assurance Company and
The Money Store, for office space in Woodland Hills, California. (1)
10.81 Amendment to Employment Agreement and Consulting Agreement dated as of
January 1, 1993 between Pac Rim Holding Corporation and Stanley Braun. (1)
10.82 Lease Amendment #1, dated April 1, 1993, to the Office Property Lease between Rancon
Realty Fund V, and The Pacific Rim Assurance Company. (1)
10.83 Proxy Statement of Pac Rim Holding Corporation dated July 25, 1994. (1)
10.84 Proxy Supplement of Pac Rim Holding Corporation dated August 4, 1994. (1)
10.85 Commutation of the Aggregate Excess of Loss Reinsurance Agreement between
The Pacific Rim Assurance Company and Underwriters Reinsurance Company. (1)
10.86 Agreement to purchase Series A Convertible Debentures and Series, 1, 2 and 3
Detachable Warrants. (1)
10.87 Commutation of the Workers Compensation Quota Share Reinsurance Agreement
between The Pacific Rim Assurance Company and Constitution Reinsurance
Corporation. (1)
10.88 Willcox Incorporated Reinsurance Intermediaries Cover No. 08-94-0033 documenting
Workers' Compensation First Excess of Loss Reinsurance, effective October 15, 1994,
for $4,650,000 excess of $350,000. (1)
10.89 Willcox Incorporated Reinsurance Intermediaries Cover No. 08-94-0012 documenting
Workers' Compensation Second Excess of Loss Reinsurance Agreement, effective
October 15, 1994, for $15,000,000 excess of $5,000,000. (1)
</TABLE>
H-59
<PAGE> 445
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
- - ------- ----------- ----------
<S> <C> <C>
10.90 Workers' Compensation Third Excess of Loss Reinsurance Agreement,
No. 3791-00-0001-00-94-03-03-00 effective October 15, 1994, for
$15,000,000 excess of $20,000,000. (1)
10.91 Workers' Compensation Fourth Excess of Loss Reinsurance Agreement
No. 3791-00-0001-00-94-03-04-00 documenting, effective October 15, 1994,
for $15,000,000 excess of $35,000,000. (1)
10.92 Workers' Compensation Fifth Excess of Loss Reinsurance Agreement,
No. 3791-00-0001-00-94-03-05-00 documenting, effective October 15, 1994,
for $30,000,000 excess of $50,000,000. (1)
10.93 Per Person Occupational Accident Excess of Loss Reinsurance Contract,
No. 3791-00-0003-00-94-03-00-00, effective October 15, 1994. (1)
10.94 Industrial Aid Aviation/Land Travel Hazard Reinsurance Workers'
Compensation Excess of Loss Contract No. 3791-00-0004-00-94-03-00-00,
effective October 15, 1994. (1)
10.95 Sublease dated May 1, 1994 between The Pacific Rim Assurance Company and Group
Data Services, Incorporated. (1)
10.96 Office lease between L.A.X. Business Center, and Pac Rim Holding Corporation dated
June 1, 1995. (2)
10.97 Certificate of Authority from Department of Insurance, State of Arizona to transact the
business of Casualty With Workers' Compensation Insurance. (2)
10.98 Certificate of Authority from Department of Insurance, State of Texas to transact the
business of casualty with workers' compensation insurance. (3)
10.99 Sublease dated August 15, 1995 between The Pacific Rim Assurance Company and the
General Services Administration. (3)
10.100 Agreement between the Pacific Rim Assurance Company and MetraComp, Inc. dated
August 17, 1995 to provide managed care services. (3)
10.101 Interest and Liabilities Contract for Workers' Compensation Quota Share
Reinsurance Agreement with Reliance National Insurance Company, No. 08-95-0057,
effective April 1, 1995.
10.102 Underwriting Facility Agreement dated April 1, 1995, between Reliance National Risk
Specialists and the Pacific Rim Assurance Company.
10.103 Workers' Compensation Quota Share Retrocessional Agreement with Allstate
Insurance Company, No. 08-95-0058, effective April 1, 1995.
10.104 Willcox Incorporated Reinsurance Intermediaries Cover No. 08-95-0033 documenting
Workers' Compensation First Excess of Loss Reinsurance, effective October 15, 1995,
for $4,650,000 excess of $350,000.
</TABLE>
H-60
<PAGE> 446
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
- - ------- ----------- ----------
<S> <C> <C>
10.105 Willcox Incorporated Reinsurance Intermediaries Cover No. 08-95-0012 documenting
Workers' Compensation Second Excess of Loss Reinsurance Agreement, effective
October 15, 1995, for $15,000,000 excess of $5,000,000.
10.106 Willis Faber North America Reinsurance Intermediaries Cover No. 38450-950
documenting Workers' Compensation Third Excess of Loss Reinsurance
Agreement, effective October 15, 1995, for $15,000,000 excess of $20,000,000.
10.107 Willis Faber North America Reinsurance Intermediaries Cover No. 38451-950
documenting Workers' Compensation Fourth Excess of Loss Reinsurance
Agreement, effective October 15, 1995, for $15,000,000 excess of $35,000,000.
10.108 Willis Faber North America Reinsurance Intermediaries Cover No. 38452-950
documenting Workers' Compensation Fifth Excess of Loss Reinsurance
Agreement, effective October 15, 1995, for $30,000,000 excess of $50,000,000.
10.109 Willis Faber North America Reinsurance Intermediaries Cover No. 38453-950
documenting Per Person Occupational Accident Excess of Loss Reinsurance
Contract, effective October 15, 1995.
10.110 Willis Faber North America Reinsurance Intermediaries Cover No. 38454-950
documenting Industrial Aid Aviation/Land Travel Hazard Reinsurance Workers'
Compensation Excess of Loss Contract, effective October 15, 1995.
10.111 Willis Faber North America Reinsurance Intermediaries Cover No. 38455-950
documenting Additional Land Travel Hazard Excess of Loss Reinsurance
Contract, effective October 15, 1995.
10.112 Sales, License and Service Agreement dated November 14, 1995 between Macess
Corporation and The Pacific Rim Assurance Company for equipment purchases,
software license and professional prepaid support and software maintenance.
10.113 Master Equipment Lease dated November 15, 1995 between General Electric
Capital Computer Leasing Corporation and The Pacific Rim Assurance Company
for the lease of computer equipment and software.
10.114 Certificate of Authority from the State of Georgia Office of Commissioner of
Insurance, to transact the business of Property and Casualty (including Workers'
Compensation).
11 Computation of Per Share Earnings.
22 Subsidiary of the Company (incorporated by reference from Exhibit 22 of Form S-1). (1)
27.1 Agreement to Purchase Series A Convertible Debentures and Series 1, 2, and 3
Detachable Warrants. (1)
27.2 Press Release dated April 18, 1994. (1)
27.3 Amendment #1 to Agreement to Purchase Series A Convertible Debentures and
Series 1, 2, and 3 Detachable Warrants. (1)
</TABLE>
H-61
<PAGE> 447
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
- - ------- ----------- ----------
<S> <C> <C>
29.3 Information from reports furnished to state insurance regulatory authorities for the
year ended December 31, 1995.
</TABLE>
- - ------------------
(1) Incorporated by reference from the Exhibits to the Registrant's Annual
Report on Form 10-K, for the year ended December 31, 1994.
(2) Previously filed with the Registrant's Quarterly Report on Form 10-Q,
for the quarter ended June 30, 1995.
(3) Previously filed with the Registrant's Quarterly Report on Form 10-Q,
for the quarter ended September 30, 1995. Exhibit 10.100 was reported
as Exhibit 12 on the Registrant's Quarterly Report on Form 10-Q, for
the quarter ended September 30, 1995.
H-62
<PAGE> 448
SCHEDULE II
PAC RIM HOLDING CORPORATION (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(Amounts in Thousands)
<TABLE>
<CAPTION>
December 31,
-------------------------
1995 1994
---- ----
<S> <C> <C>
Balance Sheet
Assets
Investments $1,067 $ 2,251
Unrealized gain (loss) 1 (9)
Cash 14 5
Investment in subsidiary 60,181 51,315
Other assets 2,163 2,614
------- -------
$63,426 $56,176
======= =======
Liabilities and Stockholders' Equity
Other liabilities $19,271 $18,999
Stockholders' equity 44,155 37,177
------- -------
$63,426 $56,176
======= =======
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1995 1994 1993
-------- --------- ---------
<S> <C> <C> <C>
Statements of Operations
Investment income $ 94 $ 622 $ 545
Expenses 2,464 1,663 917
------- --------- ---------
Loss before equity in earnings of subsidiary,
income taxes, and cumulative effect of a change
in accounting principle (2,370) (1,041) (372)
Income tax benefit (472) (574) (126)
------- --------- --------
Loss before equity in earnings of subsidiary (1,898) (467) (246)
Equity in earnings (losses) of subsidiary 2,473 1,625 (1,135)
------- --------- --------
Net income (loss) $ 575 $ 1,158 $ (1,381)
======= ========= ========
Statements of Cash Flows
Operating Activities:
Loss before equity in earnings of subsidiary $(1,898) $ (467) $ (246)
Depreciation and amortization 706 257
Changes in other assets and other liabilities 17 (150) 292
Adjustment for prior federal income taxes 220
------- --------- --------
Net cash provided by (used in) operating activities (1,175) (140) 46
Investing Activities:
Investment in subsidiary (15,630)
Change in investments (7) (514)
------- --------- --------
Net cash provided by (used in) investing activities (7) (16,144)
------- --------- --------
Financing Activities:
Proceeds from issuance of convertible debentures and common stock 20,000
Cost of issuance of convertible debentures and common stock (2,025)
------- --------- --------
Net cash provided by financing activities 17,975
------- -------- --------
Increase (decrease) in cash and cash equivalents (1,182) 1,691 46
Cash and cash equivalents, beginning of year 1,738 47 1
------- -------- --------
Cash and cash equivalents, end of year $ 556 $ 1,738 $ 47
======= ======== ========
</TABLE>
See Notes to Consolidated Financial Statements (Beginning on Page 34 of the
Company's 1995 Form 10-K)
H-63
<PAGE> 449
SCHEDULE III
PAC RIM HOLDING CORPORATION SUBSIDIARY
SUPPLEMENTARY INSURANCE INFORMATION
1993, 1994, and 1995
(Amounts in Thousands)
<TABLE>
<CAPTION>
December 31,
- - -------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
Deferred Reserve for
Policy Losses and Loss Policyholder
Acquisition Adjustment Unearned Dividends
Costs Expenses Premiums Payable
----------- --------------- -------- ------------
<S> <C> <C> <C> <C>
1993 $1,132 $135,965 $8,262 $2,529
1994 2,085 116,629 9,917 990
1995 974 96,525 5,715 381
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------------
Column F Column G Column H Column I Column J Column K
--------- -------- -------- -------- -------- --------
Amortization
Net Losses of Deferred
Net Net and Loss Policy Other Net
Premium Investment Adjustment Acquisition Operating Premiums
Revenue Income Expenses Costs Expenses Written
------- ---------- ---------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C>
1993 $99,917 $5,989 $87,689 $11,646 $13,257 $104,341
1994 92,894 6,514 63,788 19,565 11,927 96,984
1995 76,016 8,089 50,957 18,647 11,662 71,966
</TABLE>
H-64
<PAGE> 450
SCHEDULE IV
PAC RIM HOLDING CORPORATION AND SUBSIDIARY
REINSURANCE
(Amounts in Thousands)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
- - -------- -------- -------- -------- -------- --------
Premiums Premiums Percentage
Gross Ceded Assumed Net of Amount
Premiums to Other from Other Premiums Assumed
Earned Companies (1) Companies Earned to Net
-------- ------------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
1993 $118,631 $18,847 $133 $99,917 0.1%
1994 100,008 7,224 110 92,894 0.1%
1995 79,920 4,113 209 76,016 0.3%
</TABLE>
(1) The Company does not net reinsurance-related items against premiums ceded.
H-65
<PAGE> 451
SCHEDULE VI
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY
INSURANCE OPERATIONS
1993, 1994, and 1995
(Amounts in Thousands)
<TABLE>
<CAPTION>
December 31,
- - -------------------------------------------------------------------------
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Reserve Discount,
Deferred for Losses If any,
Policy and Loss Deducted
Acquisition Adjustment from Unearned
Costs Expenses Column C Premiums
----------- ---------- -------- --------
<S> <C> <C> <C>
1993 $1,132 $135,965 $8,262
1994 2,085 116,629 9,917
1995 974 96,525 5,715
</TABLE>
<TABLE>
<CAPTION>
Column F Column G Column H Column I Column J Column K
-------- -------- -------- -------- -------- --------
Net Losses and Loss
Adjustment Expenses
Incurred Related To
-------------------
Net Net (1) (2) Amortization of Net Paid Losses Net
Premiums Investment Current Prior Deferred Policy and Loss Adjustment Premiums
Earned Income Year Years Acquisition Costs Expenses Written
-------- ---------- ------- -------- ----------------- ------------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
1993 $99,917 $5,989 $65,720 $ 21,969 $11,646 $90,200 $104,34
1994 92,894 6,514 60,989 2,799 19,565 60,188 96,984
1995 76,016 8,089 49,962 995 18,647 73,025 71,966
</TABLE>
H-66
<PAGE> 452
ANNEX I
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.
<PAGE> 453
PAC RIM HOLDING CORPORATION
INDEX TO FORM 10-Q
Part I. FINANCIAL INFORMATION
------------------------------
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
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
</TABLE>
I-2
<PAGE> 454
PAC RIM HOLDING CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
(UNAUDITED)
----------- ------------
<S> <C> <C>
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
======== ========
</TABLE>
See notes to unaudited consolidated financial statements.
I-3
<PAGE> 455
PAC RIM HOLDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
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
===== ==== ====== =====
</TABLE>
See notes to unaudited consolidated financial statements.
I-4
<PAGE> 456
PAC RIM HOLDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------
1996 1995
---- ----
<S> <C> <C>
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
======== ========
</TABLE>
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.
I-5
<PAGE> 457
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
I-6
<PAGE> 458
NOTE 3 -- REINSURANCE -- Continued
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.
The components of net premiums written are summarized as follows (amounts in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
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
======= ======= ======= =======
</TABLE>
The components of net premiums earned are summarized as following (amounts in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
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
======= ======= ======= =======
</TABLE>
The components of net losses and loss adjustment expenses are summarized as
follows (amounts in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
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
======= ======= ======= =======
</TABLE>
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.
I-7
<PAGE> 459
NOTE 4--LONG TERM DEBT -- Continued
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 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.
I-8
<PAGE> 460
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 to 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.
I-9
<PAGE> 461
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.
I-10
<PAGE> 462
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.
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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
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<PAGE> 464
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
I-13
<PAGE> 465
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.
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<PAGE> 466
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.
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<PAGE> 467
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.
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<PAGE> 468
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.
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<PAGE> 469
PAC RIM HOLDING CORPORATION
Part II. OTHER INFORMATION
<TABLE>
<CAPTION>
<S> <C>
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
-------------------
</TABLE>
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.
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<PAGE> 470
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)
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<PAGE> 471
SUPERIOR NATIONAL INSURANCE GROUP, INC. SPECIAL MEETING OF SHAREHOLDERS
DECEMBER 11, 1996
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned shareholder of Superior National Insurance Group, Inc., a
California corporation (the "Company"), hereby acknowledges receipt of the
Notice of Special Meeting of Shareholders and Proxy Statement, each dated
November 11, 1996, and hereby appoints Steven D. Germain, Thomas J. Jamieson,
Gordon E. Noble, C. Len Pecchenino, Craig F. Schwarberg, Robert A. Spass,
Bradley E. Cooper, William Gentz, and J. Chris Seaman, and each of them, proxies
and attorneys-in-fact, with full power to each of substitution, on behalf and in
the name of the undersigned, to represent the undersigned at the Special Meeting
of Shareholders of the Company to be held on Wednesday, December 11, 1996 at
10:00 a.m., Pacific Time, at the Company's principal business offices at 26601
Agoura Road, Calabasas, California, and at any postponements or adjournments
thereof, and to vote all shares of common stock at the Special Meeting the
undersigned would be entitled to vote if personally present, on the matters set
forth below:
1. PROPOSAL NO. 1 -- THE STOCK ISSUANCE
Consummation of the Stock Issuance is conditioned upon approval of each of
Proposals No. 2, No. 4, and No. 5.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. PROPOSAL NO. 2 -- TRANSFER RESTRICTIONS CHARTER AMENDMENT
Approval of Proposal No. 2 is a condition to the consummation of the Stock
Issuance.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. PROPOSAL NO. 3 -- REINCORPORATION OF THE COMPANY IN THE STATE OF DELAWARE
Approval of Proposal No. 3 is NOT a condition to the consummation of the
Stock Issuance or the approval of any other Proposal.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. PROPOSAL NO. 4 -- AMENDMENT OF BYLAWS TO INCREASE AUTHORIZED NUMBER OF
DIRECTORS
Approval of Proposal No. 4 is a condition to the consummation of the Stock
Issuance.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
5. PROPOSAL NO. 5 -- ELECTION OF TWO ADDITIONAL DIRECTORS:
The election of all nominees listed below is a condition to the consummation
of the Stock Issuance and conditioned upon approval of Proposal No. 4.
[ ] For all nominees listed below (except as indicated).
[ ] Withhold authority for all nominees listed below.
IF YOU WISH TO WITHHOLD AUTHORITY FOR ANY INDIVIDUAL NOMINEE(S), STRIKE A LINE
THROUGH HIS OR THEIR NAME(S) IN THE LIST BELOW:
Steven B. Gruber Roger W. Gilbert
In their discretion, upon such other matter or matters which may properly come
before the meeting or any postponements or adjournments thereof.
<PAGE> 472
THIS PROXY WILL BE VOTED AS DIRECTED AND AS SAID PROXIES DEEM ADVISABLE ON SUCH
OTHER MATTERS AS MAY COME BEFORE THE MEETING. WITH RESPECT TO THE ELECTION OF
DIRECTORS, IF NO CONTRARY OBJECTION IS INDICATED, THIS PROXY WILL BE VOTED FOR
THE NOMINEES LISTED.
Dated:____________, 1996
________________________
Printed name(s) as shown
on Stock Certificate
________________________
(Signature)
________________________
(Signature)
THIS PROXY SHOULD BE MARKED AND SIGNED BY THE SHAREHOLDER(S) EXACTLY AS HIS,
HER, THEIR OR ITS NAME APPEARS ON THE STOCK CERTIFICATE AND RETURNED PROMPTLY IN
THE ENCLOSED ENVELOPE. PERSONS SIGNING IN A FIDUCIARY CAPACITY SHOULD SO
INDICATE. IF SHARES ARE HELD BY TWO PEOPLE (FOR EXAMPLE, AS JOINT TENANTS OR
COMMUNITY PROPERTY) BOTH PARTIES SHOULD SIGN.
