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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K
Current Report Pursuant to Section 13 or 15(d) of
The Securities Act of 1934
Date of Report (Date of earliest event reported) September 24, 1996
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(September 17, 1996)
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Superior National Insurance Group, Inc.
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(Exact name of registrant as specified in its charter)
California 0-25984 95-3994873
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(State or other (Commission (I.R.S. Employer
jurisdiction File Number) Identification No.)
of incorporation)
26601 Agoura Road, Calabasas, California 91302
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (818) 880-1600
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(Former name or former address, if changed since last report.)
Exhibit Index Appears on Page 5
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ITEM 5.
The Board of Directors of Superior National Insurance Group,
Inc. (the "Company") have adopted resolutions in connection with the
preservation of the full availability of the Company's net operating loss carry
forwards ("NOLs") under Section 382 of the Internal Revenue Code of 1986, as
amended. As of December 31, 1995, the Company held $82,112,508 of NOLs which
could be applied to reduce future income taxes payable by the Company, which
begin to expire in material amounts in 2006.
Section 382 of the Code 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 the Company's common 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. Certain constructive ownership rules attribute ownership of
stock to the ultimate beneficial owner thereof. Other rules may result in the
treatment of options or warrants as exercised if such treatment would result in
an ownership change. Transactions in the public markets among shareholders
owning less than 5% of the common stock 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 which caused the threshold to be exceeded. As
examples, if a single shareholder owning 10% of the common stock of the Company
acquired an additional 50% of the common stock in a three-year period, a change
of ownership would occur. Similarly, if ten persons, none of whom owned 5% or
more of the common stock at the beginning of the period, each became an owner of
at least 5% of the Company's common stock 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 5.8%). 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 if an ownership change were to occur
in the near future. However, at current values and rates an ownership change
would result in the Company having available only about $1.5 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.
On September 17, 1996, the Company entered into an agreement
with Insurance Partners, L.P., a Delaware Limited Partnership, Insurance
Partners Offshore (Bermuda), L.P., a Bermuda Limited Partnership (together,
"IP"), and certain other persons who will enter into stock subscription
agreements with the Company at a later date (the "Subscribing Shareholders"),
whereby IP and the Subscribing Shareholders will make an equity investment in
the Company by purchasing Common Stock of the Company for $18,000,000, less
certain fees and expenses (the "Stock Purchase Agreement"). The proceeds to the
Company from the Stock Purchase Agreement would be applied to financing of the
Company's $54,000,000 acquisition of Pac Rim Holding Corporation, and the
closing of the Stock Purchase Agreement is conditioned upon all conditions for
the closing of the Pac Rim acquisition having been met. Management believes that
if consummated, the Stock Purchase Agreement would result in the Company having
undergone changes in aggregate percentage ownership, as defined in Section 382,
such that any additional 5% increment in change of aggregate ownership occurring
in the two-year period following the consummation of the Stock Purchase
Agreement would result in an ownership change, which in turn would result in a
dramatic reduction in the availability of the NOLs to the Company under Section
382. Management believes that such a reduction would have a negative impact on
the Company's earnings per share and on the market for the Company's common
stock.
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The Board of Directors therefore approved in principle an
amendment to the Articles of Incorporation of the Company which would, as
contemplated, effectively prevent any new "5% change of ownership" as defined by
Section 382. In particular, the proposed amendment would require that any
shareholder not yet controlling 5% of the Company's outstanding common stock be
divested of any portion such shareholder acquires in excess of 4.90% of the
Company's common stock. In addition, any new acquisitions of shares by current
5% holders of the Company's outstanding common stock would be prevented by
similar divestiture provisions. The amendment would expire after three years.
Management believes it may be necessary for the Company to reincorporate in the
State of Delaware in order to effectively implement the proposed amendment.
In order for the proposed amendment to have the desired effect
of preventing a 50% change of ownership from occurring under Section 382, and in
order to consummate the transaction with IP and the Subscribing Shareholders
under the terms currently contemplated, the Company may not undergo a 5% change
of ownership during the period before its Articles of Incorporation are amended
(or the Company is reincorporated under a charter containing such provisions),
which amendment or reincorporation requires the approval of its shareholders.
The Company has therefore taken steps to inform the public markets of the
consequences of a 5 percentage point change in ownership: the Company could
either (1) lose the ability to fully utilize its NOLs, or (2) be forced to
restructure or abandon its equity financing arrangements. A 5 percentage point
change could occur if any 5% or more shareholder of the Company (other than as
contemplated by the Stock Purchase Agreement) were to acquire additional shares,
or if any person not currently a 5% shareholder acquires a number of shares of
the Company's common stock such that such person would become a holder of 5% or
more of the common stock. This Form 8-K is filed as part of the Company's plan
to inform the public of this situation. In addition, (1) the proposed amendment
was discussed in the Company's press release describing the Pacific Rim
acquisition and the financing commitments, including the IP Agreement obtained
in connection therewith; (2) the Company has contacted Market Makers in its
stock to inform them of this situation; (3) the Company plans to hold a
conference call with analysts who follow the Company's stock, and discuss the
Section 382 issues with them in that conference call; and (4) the Company has
requested that its counsel write to its current 5% shareholders and inform them
of the Section 382 issues. Such letter is attached to this Form 8-K as Exhibit
99.1.
ITEM 7.
(a) Not applicable
(b) Not applicable
(c) Exhibits.
Exhibit 99.1 Letter to Shareholders Known to Hold
5% or More of the Company's
Outstanding Common Stock
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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 hereunto duly authorized.
Date: September 23, 1996
SUPERIOR NATIONAL
INSURANCE GROUP, INC.
/s/ J. Chris Seaman
By:
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J. Chris Seaman
Executive Vice President
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EXHIBIT INDEX
Exhibit
Number Description
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99.1 Letter to Shareholders Known to Hold 5%
or More of the Company's Outstanding Common Stock
Page 5
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September 24, 1996
{FIELD} (Name)
Dear {FIELD}
The Board of Directors and management of Superior National
Insurance Group, Inc. (the "Company") have requested that we write and inform
you of certain steps the Company is taking to preserve its net operating loss
carry forwards ("NOLs") under Section 382 of the Internal Revenue Code of 1986,
as amended. As of December 31, 1995, the Company held $82,112,508 of NOLs which
could be applied to reduce future income taxes payable by the Company, and which
begin to expire in material amounts in 2006. The Company believes that any
additional acquisitions of Company common stock by any of you -- each holders of
5% or more of the Company's common stock -- in the next three to three and
one-half years could cause the Company to be unable to utilize a significant
portion of its NOLs under the "change of ownership" rules in Section 382.
Section 382 of the Code 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 the Company's common 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. Certain constructive ownership rules attribute ownership of
stock to the ultimate beneficial owner thereof. Other rules may result in the
treatment of options or warrants as exercised if such treatment would result in
an ownership change. Transactions in the public markets among shareholders
owning less than 5% of the common stock 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 which caused the threshold to be exceeded. As
examples, if a single shareholder owning 10% of the common stock of the Company
acquired an additional 50% of the common stock in a three-year period, a change
of ownership would occur. Similarly, if ten persons, none of whom
<PAGE> 2
September 24, 1996
Page 2
owned 5% or more of the common stock at the beginning of the period, each became
an owner of at least 5% of the Company's common stock 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 5.8%). 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 if an ownership change were to occur
in the near future. However, at current values and rates an ownership change
would result in the Company having available only about $1.5 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.
On September 17, 1996, the Company entered into an agreement
with Insurance Partners, L.P., a Delaware Limited Partnership, Insurance
Partners Offshore (Bermuda), L.P., a Bermuda Limited Partnership (together,
"IP"), and certain other persons who will enter into stock subscription
agreements with the Company at a later date (the "Subscribing Shareholders"),
whereby IP and the Subscribing Shareholders will make an equity investment in
the Company by purchasing Common Stock of the Company for $18,000,000, less
certain fees and expenses (the "Stock Purchase Agreement"). The proceeds to the
Company from the Stock Purchase Agreement would be applied to financing of the
Company's $54,000,000 acquisition of Pac Rim Holding Corporation, and the
closing of the Stock Purchase Agreement is conditioned upon all conditions for
the closing of the Pac Rim acquisition having been met. Management believes that
if consummated, the Stock Purchase Agreement would result in the Company having
undergone changes in aggregate percentage ownership, as defined in Section 382,
such that any additional 5% increment in change of aggregate ownership occurring
in the two-year period following the consummation of the Stock Purchase
Agreement would result in an ownership change, which in turn would result in a
dramatic reduction in the availability of the NOLs to the Company under Section
382. Management believes that such a reduction would have a negative impact on
the Company's earnings per share and on the market for the Company's common
stock.
<PAGE> 3
September 24, 1996
Page 3
The Board of Directors therefore approved in principle an
amendment to the Articles of Incorporation of the Company which would, as
contemplated, effectively prevent any new "5% change of ownership" as defined by
Section 382. In particular, the proposed amendment would require that any
shareholder not yet controlling 5% of the Company's outstanding common stock be
divested of any portion such shareholder acquires in excess of 4.90% of the
Company's common stock. In addition, any new acquisitions of shares by current
5% holders of the Company's outstanding common stock would be prevented by
similar divestiture provisions. The amendment would expire after three years.
Management believes it may be necessary for the Company to reincorporate in the
State of Delaware in order to effectively implement the proposed amendment.
In order for the proposed amendment to have the desired effect
of preventing a 50% change of ownership from occurring under Section 382, and in
order to consummate the transaction with IP and the Subscribing Shareholders
under the terms currently contemplated, the Company may not undergo a 5% change
of ownership during the period before its Articles of Incorporation are amended
(or the Company is reincorporated under a charter containing such provisions),
which amendment or reincorporation requires the approval of its shareholders.
The Company has therefore taken steps to inform the public markets of the
consequences of a 5 percentage point change in ownership: the Company could
either (1) lose the ability to fully utilize its NOLs, or (2) be forced to
restructure or abandon its equity financing arrangements. A 5 percentage point
change could occur if any 5% or more shareholder of the Company (other than as
contemplated by the Stock Purchase Agreement) were to acquire additional shares,
or if any person not currently a 5% shareholder acquires a number of shares of
the Company's common stock such that such person would become a holder of 5% or
more of the common stock.
A Form 8-K is being filed today with the Securities and
Exchange Commission as part of the Company's plan to inform the public of this
situation. In addition, (1) the proposed amendment was discussed in the
Company's press release describing the Pacific Rim acquisition and the financing
commitments, including the IP Agreement obtained in connection therewith; (2)
the Company has contacted Market Makers in its stock to inform them of this
situation; (3) the Company plans to hold a conference call with analysts who
follow the Company's stock, and discuss the Section 382 issues with them in that
conference call; and (4) the Company has requested that its counsel write this
letter to its current 5% shareholders and inform them of the Section 382 issues.
The Company has therefore asked us to request that you refrain
from any acquisitions of Company common stock until you have been notified that
the proposed
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September 24, 1996
Page 4
amendment has been rejected by the shareholders of the Company, no longer
applies to your shareholdings or has expired according to its terms. If you have
any questions, please feel free to contact the undersigned, or J. Chris Seaman,
the Company's Executive Vice President and Chief Financial Officer. Mr. Seaman's
telephone number is (818) 880-1600, extension 540.
Very truly yours,
/s/ Dana M. Warren
Dana M. Warren
of RIORDAN & McKINZIE
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SCHEDULE A
International Insurance Investors, L.P.,
International Insurance Advisors, Inc.
CentreLine Reinsurance Limited
Centre Reinsurance Limtied
Trustees of the Estate of Bernice P. Bishop
TJS Partners, L.P.
Thomas J. Jamieson
The Ravenswood Investment Company
