<PAGE> 1
As filed with the Securities and Exchange Commission on December 30, 1997
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM S-4
REGISTRATION STATEMENT
Under
The Securities Act of 1933
--------------------
SUPERIOR NATIONAL SUPERIOR NATIONAL
INSURANCE GROUP, INC. CAPITAL TRUST I
(Exact name of Registrant as (Exact name of Registrant as
specified in its charter) as specified in its trust agreement)
DELAWARE DELAWARE
(State or other jurisdiction of (State or other jurisdiction of
incorporation or organization) incorporation or organization)
6331 9999
(Primary Standard Industrial (Primary Standard Industrial
Classification Code Number) Classification Code Number)
95-4610936 52-2069953
(I.R.S. Employer Identification No.) (I.R.S. Employer Identification No.)
26601 Agoura Road
Calabasas, California 91302
(818) 880-1600
(Address, including zip code, and telephone number, including
area code, of Registrants' principal executive offices)
Robert E. Nagle, Esq.
Senior Vice President, General Counsel and Secretary
Superior National Insurance Group, Inc.
26601 Agoura Road
Calabasas, California 91302
(818) 880-1600
--------------------
COPIES TO:
Dana M. Warren, Esq.
Riordan & McKinzie
5743 Corsa Avenue, Suite 116
Westlake Village, California 91362
--------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF
THE SECURITIES TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
===========================================================================================================================
Proposed Proposed maximum
Amount to be maximum offering aggregate offering Amount of
Title of each class of securities to be registered registered price per unit(1) price(1) registration fee
- -------------------------------------------------- ------------- ------------------ ------------------ ----------------
<S> <C> <C> <C> <C>
10 3/4% Trust Preferred Securities of Superior
National Capital Trust I .................. $105,000,000 100% $105,000,000 $30,975
- ---------------------------------------------------------------------------------------------------------------------------
10 3/4% Senior Subordinated Notes of Superior
National Insurance Group, Inc.(2) ......... -- -- -- None
- ---------------------------------------------------------------------------------------------------------------------------
Superior National Insurance Group, Inc. ......
Guarantee with respect to 10 3/4% Trust
Preferred Securities(3) ................... -- -- -- None
- ---------------------------------------------------------------------------------------------------------------------------
Total ........................................ $105,000,000(4) 100% $105,000,000(5) $30,975
===========================================================================================================================
</TABLE>
Footnotes on following page.
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
================================================================================
<PAGE> 2
- ----------------------
(1) Estimated solely for the purpose of computing the registration fee pursuant
to Rule 457(f)(2).
(2) No separate consideration will be received for the 10 3/4% Senior
Subordinated Notes due December 1, 2017 of Superior National Insurance
Group, Inc. (the "Senior Subordinated Notes") distributed upon any
liquidation of Superior National Capital Trust I.
(3) No separate consideration will be received for the Superior National
Insurance Group, Inc. Guarantee (the "Guarantee").
(4) This Registration Statement is deemed to cover the rights of holders of the
10 3/4% Trust Preferred Securities of Superior National Capital Trust I
(the "Trust Preferred Securities") under the Amended and Restated
Declaration of Trust, the rights of holders of the Senior Subordinated
Notes under an Indenture, the rights of holders of the Trust Preferred
Securities under the Guarantee and certain backup undertakings as described
herein.
(5) Such amount represents the liquidation amount of the Trust Preferred
Securities to be exchanged hereunder and the aggregate principal amount of
the Senior Subordinated Notes that may be distributed to holders of the
Trust Preferred Securities upon any liquidation of Superior National
Capital Trust I.
<PAGE> 3
SUBJECT TO COMPLETION, DATED DECEMBER 30, 1997
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. Under no circumstances shall this Prospectus constitute an offer to
sell or the solicitation of an offer to buy nor shall there be any sale of these
securities in any jurisdiction in which such offer, solicitation or sale would
be unlawful prior to registration or qualification under the securities laws of
any such jurisdiction.
SUPERIOR NATIONAL CAPITAL TRUST I
OFFER TO EXCHANGE ITS
10 3/4% TRUST PREFERRED SECURITIES
(LIQUIDATION AMOUNT $1,000 PER PREFERRED SECURITY)
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
FOR ANY AND ALL OF ITS OUTSTANDING
10 3/4% TRUST PREFERRED SECURITIES
(LIQUIDATION AMOUNT $1,000 PER PREFERRED SECURITY)
GUARANTEED TO THE EXTENT SET FORTH HEREIN BY
SUPERIOR NATIONAL INSURANCE GROUP, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON ,
1998, UNLESS EXTENDED.
Superior National Capital Trust I, a statutory business trust created
under the laws of the State of Delaware (the "Trust"), hereby offers, upon the
terms and subject to the conditions set forth in this Prospectus (as the same
may be amended or supplemented from time to time, the "Prospectus") and in the
accompanying Letter of Transmittal (which together constitute the "Exchange
Offer"), to exchange up to $105,000,000 aggregate liquidation amount of its 10
3/4% Trust Preferred Securities (the "Exchange Preferred Securities") which have
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), pursuant to a Registration Statement (as defined herein) of which this
Prospectus constitutes a part, for a like liquidation amount of its outstanding
10 3/4% Trust Preferred Securities (the "Preferred Securities"), of which
$105,000,000 aggregate liquidation amount is outstanding. Pursuant to the
Exchange Offer, Superior National Insurance Group, Inc., a Delaware corporation
(the "Company"), is also offering to exchange (i) its guarantee of payments of
cash distributions and payments on liquidation of the Trust or redemption of the
Preferred Securities (the "Company Guarantee") for a like guarantee in respect
of the Exchange Preferred Securities (the "Exchange Guarantee," and together
with the Company Guarantee, the "Guarantee") and (ii) all of its outstanding 10
3/4% Senior Subordinated Notes due December 1, 2017 (the "Old Notes") for a like
aggregate principal amount of its 10 3/4% Senior Subordinated Notes due December
1, 2017 (the "Exchange Notes," and together with the Old Notes, the "Senior
Subordinated Notes"), which Exchange Guarantee and Exchange Notes also have been
registered under the Securities Act. The Preferred Securities, the Company
Guarantee and the Old Notes are collectively referred to herein as the "Old
Securities" and the Exchange Preferred Securities, the Exchange Guarantee and
the Exchange Notes are collectively referred to herein as the "Exchange
Securities."
Preferred Securities may be tendered for exchange on or prior to 5:00
p.m., New York City time, on , 1998 (such time on such date being
hereinafter called the "Expiration Date"), unless the Exchange Offer is extended
by the Company or the Trust (in which case the term "Expiration Date" shall mean
the latest date and time to which the Exchange Offer is extended). Tenders of
Preferred Securities may be withdrawn at any time on or prior to the Expiration
Date. The Exchange Offer is not conditioned upon any minimum liquidation amount
of Preferred Securities being tendered for exchange. However, the Exchange Offer
is subject to certain events and conditions which may be waived by the Company
or the Trust and to the
(continued on following page)
THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL ARE FIRST BEING MAILED TO
HOLDERS OF THE PREFERRED SECURITIES ON , 1998.
SEE "RISK FACTORS" ON PAGE 15 FOR INFORMATION THAT SHOULD BE CONSIDERED
IN CONNECTION WITH THIS OFFERING.
----------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
----------------------
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE> 4
(continuation of cover page)
terms and provisions of the Registration Rights Agreement dated as of December
3, 1997 (the "Registration Rights Agreement") among the Company, the Trust and
the Initial Purchasers (as defined herein). Preferred Securities may be tendered
in whole or in part in a liquidation amount of not less than $100,000 (100
Preferred Securities) or any integral multiple of $1,000 liquidation amount (one
Preferred Security) in excess thereof. The Company will pay all fees, expenses,
debts and obligations (other than the Trust Securities (as defined herein))
related to the Trust and the offering and exchange of the Preferred Securities
and will pay, directly or indirectly, all ongoing costs, expenses and
liabilities of the Trust. See "The Exchange Offer--Fees and Expenses." Holders
of the Preferred Securities whose Preferred Securities are accepted for exchange
will not receive Distributions on such Preferred Securities and will be deemed
to have waived the right to receive any Distributions on such Preferred
Securities accumulated from and after December 3, 1997. See "The Exchange
Offer--Distribution of Exchange Preferred Securities."
The terms of the Exchange Securities are identical in all material
respects to the respective terms of the Old Securities, except that (i) the
Exchange Securities have been registered under the Securities Act and therefore
will not be subject to certain restrictions on transfer applicable to the Old
Securities, (ii) the Exchange Preferred Securities will not contain the $100,000
minimum liquidation amount transfer restriction, (iii) the Exchange Preferred
Securities will not provide for any increase in the Distribution rate thereon,
(iv) the Exchange Notes will not contain the $100,000 minimum principal amount
transfer restriction, and (v) the Exchange Notes will not provide for any
increase in the interest rate thereon. See "Description of Exchange Preferred
Securities" and "Description of Old Securities." The Exchange Securities are
being offered for exchange in order to satisfy certain obligations of the
Company and the Trust under the Registration Rights Agreement. In the event that
the Exchange Offer is consummated, any Preferred Securities that remain
outstanding after consummation of the Exchange Offer and the Exchange Preferred
Securities issued in the Exchange Offer will vote together as a single class for
purposes of determining whether holders of the requisite percentage in
outstanding liquidation amount thereof have taken certain actions or exercised
certain rights under the Declaration (as defined herein).
The Exchange Preferred Securities and the Preferred Securities
(collectively, the "Securities") represent undivided beneficial interests in the
assets of the Trust. The Company is the owner of all of the beneficial interests
represented by common securities of the Trust (the "Common Securities," and
together with the Securities, the "Trust Securities"). Wilmington Trust Company
is the Preferred Trustee of the Trust. The Trust exists for the sole purpose of
issuing the Trust Securities and investing the proceeds thereof in the Senior
Subordinated Notes. The Senior Subordinated Notes will mature on December 1,
2017 (the "Stated Maturity Date"). The Securities will have a preference over
the Common Securities under certain circumstances with respect to cash
distributions and amounts payable on liquidation, redemption, or otherwise. See
"Description of Exchange Preferred Securities."
As more fully described herein, the Company has entered into several
contractual undertakings which, the Company believes, taken together, guarantee
to the holders of the Exchange Preferred Securities a full and unconditional
right to enforce the payment of the distributions with respect to the Exchange
Preferred Securities, the payment of the redemption price upon redemption of the
Exchange Preferred Securities, and the payment of the liquidation amount with
respect to the Exchange Preferred Securities upon liquidation of the Trust. See
"Risk Factors--Rights Under the Exchange Guarantee." Those contractual
arrangements include the Company's obligations under (i) the Exchange Guarantee,
(ii) the Declaration, (iii) the Exchange Notes, and (iv) the Indenture. As used
herein, (i) the "Indenture" means the Senior Subordinated Indenture, dated as of
December 3, 1997, as amended and supplemented from time to time, between the
Company and Wilmington Trust Company, as Indenture Trustee (the "Indenture
Trustee"), (ii) the "Declaration" means the Amended and Restated Declaration of
Trust relating to the Trust, dated as of December 3, 1997, among the Company, as
Sponsor, Wilmington Trust Company, as Preferred Trustee (the "Preferred
Trustee"), Wilmington Trust Company, as Delaware Trustee (the "Delaware
Trustee"), the Company Trustees named therein (collectively, with the Preferred
Trustee and the Delaware Trustee, the "Trustees") and the holders, from time to
time, of undivided beneficial ownership interests in the assets of the Trust.
Holders of the Exchange Preferred Securities will be entitled to receive
preferential cumulative cash distributions arising from the payment of interest
on the Exchange Notes, accruing from December 3, 1997 and payable semi-annually
in arrears on June 1 and December 1 of each year, commencing June 1, 1998, at
the annual rate of 10 3/4% of the liquidation amount of $1,000 per Exchange
Preferred Securities ("Distributions").
Unless an Event of Default (as defined in the Indenture) has occurred
and is continuing, the Company will have the right under the Indenture at any
time during the term of the Exchange Notes to defer the payment of interest at
any time or from time to time for a period not exceeding ten consecutive
semi-annual periods (collectively, an "Extension Period"), provided that no
Extension Period may extend beyond the Stated Maturity Date. As a consequence of
any such deferral, semi-annual Distributions on the Securities by the Trust will
be
ii
<PAGE> 5
(continuation of cover page)
deferred during any such Extension Period. At the end of an Extension Period,
the Company must pay all interest then accrued and unpaid (together with
interest then accrued at the annual rate of 10 3/4%, compounded semi-annually,
to the extent permitted by applicable law). During an Extension Period, interest
will continue to accrue and holders of Exchange Notes (and holders of the Trust
Securities while Trust Securities are outstanding) will be required to accrue
interest income (in the form of OID) for United States federal income tax
purposes prior to the receipt of cash attributable to such income. See "Certain
United States Federal Income Tax Considerations--Interest Income and Original
Issue Discount."
During any such Extension Period, the Company may not (i) declare or pay
any dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of the Company's Capital Stock (as
defined in the Indenture) (which includes common and preferred stock), (ii) make
any payment of principal, interest or premium, if any, on or repay, repurchase
or redeem any debt securities of the Company that rank pari passu in all
respects with or junior in right of payment to the Exchange Notes, or (iii) make
any guarantee payments with respect to any guarantee by the Company of the debt
securities of any Subsidiary (as defined in the Indenture) of the Company if
such guarantee ranks pari passu with or junior in right of payment to the
Exchange Notes; excluding, in each case, (a) dividends or distributions in
shares of or options, warrants or rights to subscribe for or purchase shares of,
Common Stock of the Company, (b) any declaration of a dividend in connection
with the implementation of a stockholders' rights plan, or the issuance of stock
under any such plan in the future, or the redemption or repurchase of any such
rights pursuant thereto, (c) payments under the Guarantee, (d) as a result of a
reclassification of the Company's Capital Stock or the exchange or conversion of
one class or series of the Company's Capital Stock for another class or series
of the Company's Capital Stock, (e) the purchase of fractional interests in
shares of the Company's Capital Stock pursuant to the conversion or exchange
provisions of such Capital Stock or the security being converted or exchanged,
and (f) purchases or issuances of Common Stock under any of the Company's stock
option, stock purchase, stock loan or other benefit plans for its directors,
officers or employees or any of the Company's dividend reinvestment plans, in
each case as now existing or hereafter established or amended.
Prior to the termination of any such Extension Period, the Company may
further extend such Extension Period, provided that such extension does not
cause such Extension Period to exceed ten consecutive semi-annual periods or to
extend beyond the Stated Maturity Date. Upon the termination of any such
Extension Period and the payment of all amounts then due on any Interest Payment
Date (as defined herein), the Company may elect to begin a new Extension Period,
subject to the above requirements. No interest shall be due and payable during
an Extension Period, except at the end thereof. The Company must give the
Preferred Trustee and Indenture Trustee notice of its election of any Extension
Period (or an extension thereof) at least five Business Days (as defined in the
Indenture) prior to the earlier of (i) the date the Distributions on the
Securities would have been payable except for the election to begin or extend
such Extension Period or (ii) the date the Trustees are required to give notice
to any securities exchange or to holders of Trust Securities of the record date
or the date such Distributions are payable, but in any event not less than five
Business Days prior to such record date. The Indenture Trustee shall give notice
of the Company's election to begin or extend a new Extension Period to the
holders of the Securities. There is no limitation on the number of times that
the Company may elect to begin an Extension Period.
Through the Company Guarantee, the agreement of the Company relating to
the Common Securities (the "Common Securities Guarantee"), the Declaration, the
Senior Subordinated Notes and the Indenture, taken together, the Company has
guaranteed or will guarantee, as the case may be, fully, irrevocably and
unconditionally, all of the Trust's obligations under the Trust Securities. See
"Relationship Among the Exchange Preferred Securities, the Declaration, the
Exchange Notes and the Exchange Guarantee--Full and Unconditional Company
Guarantee." The Company Guarantee and the Common Securities Guarantee guarantee,
and the Exchange Guarantee will guarantee, payments of Distributions and
payments on liquidation or redemption of the Trust Securities, but in each case
only to the extent that the Trust holds funds on hand legally available therefor
and has failed to make such payments, as described herein. See "Description of
Exchange Preferred Securities--Description of Exchange Guarantee." If the
Company fails to make a required payment on the Senior Subordinated Notes, the
Trust will not have sufficient funds to make the related payments, including
Distributions, on the Trust Securities. The Guarantee and the Common Securities
Guarantee will not cover any such payment when the Trust does not have
sufficient funds on hand legally available therefor. In such event, a holder of
Securities may institute a legal proceeding directly against the Company to
enforce its rights in respect of such payment. See "Description of Exchange
Preferred Securities--Description of Exchange Notes--Enforcement Rights of
Holders of Exchange Preferred Securities." The obligations of the Company under
the Guarantee, the Common Securities Guarantee and the Senior Subordinated Notes
will be subordinate and junior in right of payment to all Senior Indebtedness
(as defined herein).
iii
<PAGE> 6
(continuation of cover page)
The Trust Securities will be subject to mandatory redemption in a Like
Amount (as defined below), (i) in whole but not in part, on the Stated Maturity
Date upon repayment of the Senior Subordinated Notes at a redemption price equal
to the principal amount of, plus accrued interest on, the Senior Subordinated
Notes (the "Maturity Redemption Price"), (ii) in whole or in part, on or after
December 1, 2005, contemporaneously with the optional prepayment by the Company
of the Senior Subordinated Notes, at the redemption prices set forth herein (the
"Optional Redemption Price"), (iii) upon the occurrence of a Change of Control
Triggering Event (as defined herein), at the option of each holder of Trust
Securities, at a redemption price equal to 101% of the principal amount of any
Senior Subordinated Notes received in exchange for Trust Securities plus any
accrued and unpaid interest thereon (the "Change of Control Redemption Price")
or (iv) in whole upon acceleration of the Senior Subordinated Notes upon the
occurrence of an Event of Default at a redemption price equal to the principal
amount of, plus accrued interest on, the Senior Subordinated Notes (the "Default
Redemption Price").
Further, the Trust Securities are subject to redemption at the option of
the Company in a Like Amount upon the occurrence of a Tax Event (as defined
herein) or an Investment Company Event (as defined herein), in certain
circumstances, at a redemption price equal to the principal amount of, plus
accrued interest on, the Senior Subordinated Notes (the "Event Redemption
Price"). Any of the Maturity Redemption Price, the Change of Control Redemption
Price, the Default Redemption Price, the Event Redemption Price or the Optional
Redemption Price may be referred to herein as the "Redemption Price." See
"Description of Exchange Preferred Securities."
"Like Amount" means (i) with respect to a redemption of the Trust
Securities, Trust Securities having a liquidation amount equal to the principal
amount of Senior Subordinated Notes to be paid in accordance with their terms
and (ii) with respect to a distribution of Senior Subordinated Notes upon the
liquidation of the Trust, Senior Subordinated Notes having a principal amount
equal to the liquidation amount of the Trust Securities of the holder to whom
such Senior Subordinated Notes are distributed.
The Company shall have the right to redeem the Exchange Notes, in whole
or in part, at any time or from time to time after December 1, 2005, upon not
less than thirty or more than sixty days' notice, at the Redemption Prices
(expressed as a percentage of principal amount) set forth below plus accrued and
unpaid interest to the redemption date (subject to the right of holders of
record on the relevant regular record date to receive interest due on an
Interest Payment Date (as defined herein) that is on or prior to the redemption
date) if redeemed during the twelve-month period beginning on December 1 of the
years indicated below:
<TABLE>
<CAPTION>
PERCENTAGE OF
YEAR PRINCIPAL AMOUNT
- ----------- ----------------
<S> <C>
2005......................... 105.375%
2006......................... 103.583%
2007......................... 101.792%
2008 and thereafter.......... 100.000%
</TABLE>
The Company will have the right at any time to dissolve the Trust and,
after satisfaction of liabilities to creditors of the Trust as required by
applicable law, cause a Like Amount of the Senior Subordinated Notes to be
distributed to the holders of the Trust Securities in liquidation of the Trust,
subject to the Company having received an opinion of counsel to the effect that
such distribution will not be a taxable event to holders of Trust Securities.
Unless the Senior Subordinated Notes are distributed to the holders of the Trust
Securities, in the event of a liquidation of the Trust as described herein,
after satisfaction of liabilities to creditors of the Trust as required by
applicable law, the holders of Trust Securities generally will be entitled to
receive a liquidation amount of $1,000 per Trust Security plus accumulated
Distributions thereon to the date of payment. See "Description of Exchange
Preferred Securities."
Based on existing interpretations of the Securities Act by the staff of
the Division of Corporate Finance of the Securities and Exchange Commission (the
"Staff") set forth in several no-action letters to third parties, and subject to
the immediately following sentence, the Company and the Trust believe that the
Exchange Preferred Securities, Exchange Guarantee and Exchange Notes issued
pursuant to the Exchange Offer may be offered for resale, resold and otherwise
transferred by the holders thereof (other than holders who are broker-dealers)
without further compliance with the registration and prospectus delivery
provisions of the Securities Act. However, any purchaser of Preferred Securities
who is an affiliate of the Trust or the Company or who intends to participate in
iv
<PAGE> 7
(continuation of cover page)
the Exchange Offer for the purpose of distributing the Exchange Preferred
Securities, or any broker-dealer who purchased the Preferred Securities from the
Trust to resell pursuant to Rule 144A or any other available exemption under the
Securities Act, (i) will not be able to rely on the interpretation of the Staff
set forth in the above-mentioned no-action letters, (ii) will not be entitled to
tender its Preferred Securities in the Exchange Offer and (iii) must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any sale or transfer of the Preferred Securities unless such
sale or transfer is made pursuant to an exemption from such requirements.
Neither the Company nor the Trust intends to seek its own no-action letter and
there can be no assurance that the Staff would make a similar determination with
respect to the Exchange Preferred Securities, Exchange Guarantee and Exchange
Notes as it has in such no-action letters to third parties.
Each holder of the Preferred Securities (other than certain specified
holders) who wishes to exchange the Preferred Securities for Exchange Preferred
Securities in the Exchange Offer will be required to represent that (i) it is
not an affiliate of the Trust or the Company, (ii) the Exchange Preferred
Securities to be received by it will be acquired in the ordinary course of its
business and (iii) at the time of the Exchange Offer, it has no arrangement with
any person to participate in the distribution (within the meaning of the
Securities Act) and does not intend to engage in the distribution of the
Exchange Preferred Securities. In addition, in connection with any resales of
Exchange Preferred Securities, any broker-dealer (a "Participating
Broker-Dealer") who acquired the Exchange Preferred Securities for its own
account as a result of market-making or other trading activities must deliver a
prospectus meeting the requirements of the Securities Act. The Commission has
taken the position that Participating Broker-Dealers may fulfill their
prospectus delivery requirements with respect to the Exchange Preferred
Securities (other than a resale of an unsold allotment from the original sale of
the Preferred Securities) with the Prospectus contained in the Registration
Statement. Under the Registration Rights Agreement, the Trust is required to
allow Participating Broker-Dealers and other persons, if any, subject to similar
prospectus delivery requirements to use the Prospectus contained in the
Registration Statement in connection with the resale of such Exchange Preferred
Securities for a period ending 90 days after expiration of the Exchange Offer.
In that regard, each Participating Broker-Dealer who surrenders
Preferred Securities pursuant to the Exchange Offer will be deemed to have
agreed, by execution of the Letter of Transmittal, that, upon receipt of notice
from the Company or the Trust of the occurrence of any event or the discovery of
any fact which makes any statement contained or incorporated by reference in
this Prospectus untrue in any material respect or which causes this Prospectus
to omit to state a material fact necessary in order to make the statements
contained or incorporated by reference herein, in light of the circumstances
under which they were made, not misleading or of the occurrence of certain other
events specified in the Registration Rights Agreement, such Participating
Broker-Dealer will suspend the sale of Exchange Preferred Securities (or the
Exchange Guarantee or the Exchange Notes, as applicable) pursuant to this
Prospectus until the Company or the Trust has amended or supplemented this
Prospectus to correct such misstatement or omission and has furnished copies of
the amended or supplemented Prospectus to such Participating Broker-Dealer, or
the Company or the Trust has given notice that the sale of the Exchange
Preferred Securities (or the Exchange Guarantee or the Exchange Notes, as
applicable) may be resumed, as the case may be. If the Company or the Trust
gives such notice to suspend the sale of the Exchange Preferred Securities (or
the Exchange Guarantee or the Exchange Notes, as applicable) it shall extend the
90-day period referred to above during which Participating Broker-Dealers are
entitled to use this Prospectus in connection with the resale of Exchange
Preferred Securities by the number of days during the period from and including
the date of the giving of such notice to and including the date when
Participating Broker-Dealers shall have received copies of the amended or
supplemented Prospectus necessary to permit resales of the Exchange Preferred
Securities or to and including the date on which the Company or the Trust has
given notice that the sale of the Exchange Preferred Securities (or the Exchange
Guarantee or the Exchange Notes, as applicable) may be resumed, as the case may
be.
Prior to the Exchange Offer, there has been only a limited secondary
market and no public market for the Preferred Securities. The Exchange Preferred
Securities will be a new issue of securities for which there currently is no
market. Although the Initial Purchasers have informed the Company and the Trust
that they each currently intend to make a market in the Exchange Preferred
Securities, they are not obligated to do so, and any such market-making may be
discontinued at any time without notice. Accordingly, there can be no assurance
as to the development or liquidity of any market for the Exchange Preferred
Securities. The Company and the Trust currently do not intend to apply for
listing of the Exchange Preferred Securities on any securities exchange or for
quotation through the Nasdaq Stock Market.
v
<PAGE> 8
(continuation of cover page)
Any Preferred Securities not tendered and accepted in the Exchange Offer
will remain outstanding and will be entitled to all the same rights and will be
subject to the same limitations applicable thereto under the Declaration (except
for those rights which terminate upon consummation of the Exchange Offer).
Following consummation of the Exchange Offer, the holders of Preferred
Securities will continue to be subject to all of the existing restrictions upon
transfer thereof and neither the Company nor the Trust will have any further
obligation to such holders (other than under certain limited circumstances) to
provide for registration under the Securities Act of the Preferred Securities
held by them. To the extent that Preferred Securities are tendered and accepted
in the Exchange Offer, a holder's ability to sell untendered Preferred
Securities could be adversely affected. See "Risk Factors--Consequences of a
Failure to Exchange Preferred Securities."
THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION. HOLDERS OF PREFERRED SECURITIES ARE URGED TO READ THIS PROSPECTUS
AND THE RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO
TENDER THEIR PREFERRED SECURITIES PURSUANT TO THE EXCHANGE OFFER.
Neither the Company nor the Trust will receive any cash proceeds from
the issuance of the Exchange Preferred Securities offered hereby. No
dealer-manager is being used in connection with this Exchange Offer. See "Use of
Proceeds" and "Plan of Distribution."
----------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS IN CONNECTION WITH THIS EXCHANGE OFFER AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE TRUST. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE AN IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THE TRUST SINCE
THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR A SOLICITATION
BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION.
----------------------------------------
vi
<PAGE> 9
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements, and other information with
the Securities and Exchange Commission (the "SEC" or the "Commission"). Such
reports, proxy statements and other information may be inspected and copied at
the public reference facilities maintained by the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Regional Offices of the
Commission located at Suite 1400, Citicorp Center, 500 West Madison Street,
Chicago, Illinois 60661 and Room 1300, 7 World Trade Center, New York, New York
10048. Copies of such material may also be obtained by mail from the Public
Reference Branch of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates. Such information may also be accessed electronically
by means of the Commission's home page on the Internet (http://www.sec.gov). The
Company's Common Stock is traded on The Nasdaq National Market ("Nasdaq"). Such
reports, proxy statements, and other information are also available for
inspection at the library of Nasdaq at 1735 K Street, N.W., Washington, D.C.
20006.
No separate financial statements of the Trust have been included herein.
The Company and the Trust do not consider that such financial statements would
be material to holders of the Trust Securities because the Trust is a newly
formed special purpose entity, has no operating history or independent
operations and is not engaged in and does not propose to engage in any activity
other than holding as trust assets the Senior Subordinated Notes, issuing the
Trust Securities and engaging in incidental activities. See "Prospectus
Summary--The Trust," "Description of the Exchange Preferred Securities,"
"Description of the Exchange Guarantee," and "Description of the Exchange
Notes." In addition, the Company does not expect that the Trust will file
reports, proxy statements, and other information under the Exchange Act with the
Commission.
The Company has filed with the Commission a Registration Statement on
Form S-4 (together with all amendments and exhibits thereto, referred to as the
"Registration Statement") under the Securities Act with respect to the
securities offered by this Prospectus. This Prospectus does not contain all of
the information set forth in the Registration Statement and the exhibits and
schedules relating thereto, certain portions of which have been omitted as
permitted by the rules and regulations of the Commission. For further
information with respect to the Company, the Trust and the Exchange Preferred
Securities offered by this Prospectus, reference is made to the Registration
Statement and the exhibits filed or incorporated as a part thereof, which are on
file at the offices of the Commission. Statements contained in this Prospectus
as to the contents of any documents referred to are not necessarily complete,
and, in each such instance, are qualified in all respects by reference to the
applicable documents filed with the Commission.
vii
<PAGE> 10
PROSPECTUS SUMMARY
See "Glossary of Terms" ("Glossary") for the definitions of certain of
the capitalized and defined terms used herein.
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and consolidated financial statements, and
the notes thereto, appearing elsewhere in this Prospectus. Unless the context
indicates otherwise, (i) the "Company" or "Superior National" refers to Superior
National Insurance Group, Inc., a Delaware corporation, and its Subsidiaries,
(ii) the "Subsidiaries" refer to the direct and indirect subsidiaries of the
Company, and (iii) "Superior Pacific" refers to Superior National Insurance
Company ("SNIC") and Superior Pacific Casualty Company ("SPCC"), the principal
operating subsidiaries of the Company. In addition, where the context requires,
descriptions in this Prospectus of the voting rights and liquidation rights of,
and rights to Distributions on, the Exchange Preferred Securities assume that
all of the outstanding Preferred Securities will be exchanged for Exchange
Preferred Securities in the Exchange Offer. To the extent any Preferred
Securities are not so exchanged, pursuant to the Declaration, the Preferred
Securities and Exchange Preferred Securities will rank pari passu in all
respects and will have equal voting rights, liquidation rights and rights to
Distributions.
Unless otherwise indicated, all financial information and operating
statistics applicable to the Company set forth in this Prospectus are based on
generally accepted accounting principles ("GAAP") and not statutory accounting
practices ("SAP"). In conformity with industry practice, data derived from A.M.
Best Company, Inc. ("A.M. Best") and the National Association of Insurance
Commissioners ("NAIC"), generally used herein for industry comparisons, are
based on SAP.
THE COMPANY
Superior National, through its subsidiaries, underwrites and markets
workers' compensation insurance primarily in California. In April, 1997, the
Company completed its acquisition (the "Acquisition") of Pac Rim Holding
Corporation ("Pac Rim") and its subsidiary, The Pacific Rim Assurance Company
(subsequently renamed Superior Pacific Casualty Company). As a result of the
Acquisition, the Company believes that, excluding the California State
Compensation Insurance Fund (the "State Fund"), it is the only exclusive
underwriter of workers' compensation insurance in California and the eighth
largest California workers' compensation insurer overall, based upon 1996 direct
premiums written. Pro forma for the Acquisition, the Company would have had
direct premiums written of $182.2 million and $129.2 million for the year ended
December 31, 1996 and the nine months ended September 30, 1997, respectively.
As a result of the Acquisition, the Company was able to increase its
book of California-related workers' compensation business and generate
significant expense savings through the consolidation of the back office
operations of the two companies. Pro forma for the Acquisition and the sale of
the Preferred Securities, the Company would have had earnings before interest,
taxes, minority interest, depreciation and amortization ("EBITDA") of $26.3
million and $16.1 million for the year ended December 31, 1996 and the nine
months ended September 30, 1997, respectively. Through its operating strategy,
the Company has generated strong underwriting results with an average combined
ratio from continuing operations of 94.2% from 1993 through 1996. For the nine
months ended September 30, 1997, the Company had a combined ratio from
continuing operations of 94.9%.
OPERATING STRATEGY
Superior National specializes in writing workers' compensation insurance
in the State of California, which allows management to respond in a timely
manner to the changing competitive and regulatory environment in the state. The
key elements of its bottom-line driven operating strategy are as follows:
Focus on Specialized Market Segments. The Company's experienced
management team utilizes its sophisticated information system to focus the
Company's business on selected policy sizes and employment classifications that
management believes provide the greatest opportunity for profitability.
- Policy Size. The Company concentrates its marketing efforts on
policies with annual premium under $50,000, principally to avoid
the extreme price competition usually associated with larger
accounts. As of September 30, 1997, the Company's average annual
premium per policy was approximately $10,000.
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<PAGE> 11
- Employment Classifications. While the Company underwrites many
employment classifications, it targets specific classifications
that management believes to be profitable. The Company believes
that by focusing on certain employment classifications, it can
provide claim management and standardized loss control services
at a level appropriate to each policyholder. As of September 30,
1997, 15 employment classifications, made up primarily of office
and clerical, hospitality, agricultural, garment, and health
care workers, represented 43% of the Company's premium in force.
The Company excludes most employment classifications that
represent historically higher risk exposure, including the
manufacturing, handling, and shipping of explosives; oil rig and
derrick work; subway construction; and navigation of marine
vessels.
Underwriting Discipline. Following the elimination of required minimum
rates in California ("open rating"), many California insurers have reduced
premium rates in order to increase market share. The Company has not followed
this practice and has maintained consistently stringent underwriting policies in
order to maintain gross profit margins. As a result, while the Company's direct
premiums written decreased from $158.0 million in 1993 to $96.4 million in 1996,
its combined ratio from continuing operations has improved from 100.2% to 94.6%
over the same period.
Relationship with Producers. The Company markets its insurance products
primarily through approximately 300 small- to medium-sized producers, most of
which have an ongoing relationship with the Company. The Company is one of the
primary underwriters of workers' compensation insurance for most of its
producers. For the policy year ended September 30, 1997, no single producer
controlled more than 4.5% of premium in force.
Data Processing Systems. The Company believes that its data processing
systems give it a significant competitive advantage by (i) enhancing the
effectiveness of its employees' underwriting, policy administration, and claims
activities, (ii) providing detailed, real-time and near real-time information to
management for control and administration purposes, and (iii) providing
marketing benefits through improved customer service.
- Data Warehouse Decision Support System. In 1993 the Company
developed a proprietary "data warehouse decision support system"
called Superior Windows for Analysis of Management Information
("SWAMI(R)"). Management utilizes SWAMI(R) to monitor and control
the Company's operations with information provided in as close to
real-time as possible. Management believes that SWAMI(R) is the
first comprehensive "data warehouse decision support system"
developed in the insurance industry.
- Underwriting. The Company's underwriting system is a fully
integrated rating, quoting, and policy issuance system for use
both internally and remotely by producers. The system contains
edit and blocking features that prohibit underwriters from
issuing policies associated with business that is deemed
inappropriate or undesirable by management, or that may be
inappropriately priced.
- Policy Administration. Policy administration, including premium
collection and audit activities, is fully automated. In addition
to traditional "agency" billing services, the Company's
collections capabilities also include direct billing, electronic
debit and credit of policyholders' bank accounts, and credit card
billings, each of which, management believes, dramatically
improve credit experience, policy persistency, and customer
satisfaction.
- Claims Administration. The core of the claims system is a
proprietary document imaging system, which, combined with
sophisticated workflow protocols, improves the productivity of
the Company's claims staff.
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<PAGE> 12
EXPERIENCED MANAGEMENT; BUSINESS RELATIONSHIPS WITH ZURICH AFFILIATES
The Company is led by an experienced management team, with the Chief
Executive Officer and the Chief Operating Officer having a combined 59 years of
workers' compensation insurance business experience in California. In addition,
the Company benefits from business relationships with affiliates of Zurich
Reinsurance Centre Holdings, Inc. ("Zurich"), which have provided the company
with financing and access to their expertise and products. The experience of
management and the Company's sophisticated data processing systems allow the
Company to react quickly to positive and negative developments in its markets.
For example, in response to possible industry-wide reversals of positive trends
in severity, which the Company believes it was among the first to recognize, the
Company has entered into a non-binding letter of intent during November 1997
with Risk Enterprise Management Limited ("REM"), an affiliate of Zurich, that
contemplates an agreement under which certain of the Company's claims management
functions would be performed by such affiliate. In addition, the Company and
Zurich Reinsurance (North America), Inc. ("ZRNA"), an affiliate of Zurich, have
signed a non-binding letter of intent whereby ZRNA would provide average claims
severity protection through accident year 2000, in connection with the claims
management services described above (together, the "Severity Management
Program"). Further, the Company currently maintains a facility that allows it to
offer certain policyholders insurance policies written by a Zurich affiliate
having an A.M. Best "A" rating. In addition, in December 1997, an affiliate of
Zurich purchased $10.0 million of the Preferred Securities.
CALIFORNIA WORKERS' COMPENSATION INSURANCE MARKET
California is the country's largest workers' compensation insurance
market and is composed of (i) the State Fund, (ii) companies that write workers'
compensation insurance business in California but have significant business
writings in other lines of business or in other states (the "Multi-Line,
Multi-State Writers"), and (iii) Superior National, which is the one private
sector company that writes exclusively workers' compensation insurance business
specifically focusing on California.
The State Fund, which is obligated to write workers' compensation
insurance for any applicant, including those turned down by the private sector
carriers, is the largest underwriter of workers' compensation insurance in
California, accounting for approximately 19% of the direct premiums written in
California in 1996. Because the State Fund must accept all risks, its combined
ratios have historically been much higher than those of the private carriers.
Despite these results, the State Fund has consistently achieved profitability
through the investment income earned on its large invested asset base. As of
December 31, 1996, the State Fund had invested assets of $7.0 billion and
statutory capital and surplus of $1.6 billion. The State Fund currently
maintains an "A" claims paying ability rating from Standard & Poor's Corporation
("S&P") and an "A-" rating from A.M. Best. Notwithstanding its profitability,
the State Fund's relatively poor underwriting results, together with its large
size, have created a skewed perception of the underwriting profitability of
companies writing business in the California workers' compensation marketplace.
Although the State Fund regularly competes with the Company for profitable
underwriting business, the Company views the State Fund's role as the insurer of
last resort to be a significant benefit because it eliminates the need to create
an assigned risk plan in which the Company and other insurers conducting
business in California would be required to participate.
While competitive pressures in the California workers' compensation
market increased with the implementation of open rating in January, 1995,
certain fundamentals of the workers' compensation market in California recently
have improved. For 1996, total direct workers' compensation premiums written in
California leveled out at approximately $5.0 billion as compared to $9.0 billion
in 1993, as the market began to experience rate stabilization. This trend has
continued into 1997, as demonstrated by an improvement in premium pricing of
approximately 2.1% in the nine months ended September 30, 1997, as compared to
the same period in 1996. Additionally, anti-fraud legislation enacted in 1993
continues to have a positive effect on underwriting results by controlling
fraudulent claims and medical and legal expenses. These improvements have
resulted in a reduction in the frequency of claims in the California workers'
compensation market. However, at the same time, there may be an increase in
claims severity for injuries sustained in 1995 and thereafter. Management is
planning to address this potential issue by undertaking the Severity Management
Program.
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<PAGE> 13
The Company believes that it is better positioned than its competitors
to compete successfully in the post-open rating California workers'
compensation insurance market. Because the Company specializes in underwriting
workers' compensation insurance in California, the Company believes that it can
be more responsive to the changing competitive, pricing, and regulatory
environment in California than the Multi-Line, Multi-State Writers for which
California workers' compensation insurance is one of many lines of business
written, representing a smaller portion of their total premium. In addition,
Multi-Line, Multi-State Writers typically price and sell workers' compensation
insurance as part of a package policy which may also include various forms of
other liability and health insurance, while the Company sells strictly workers'
compensation insurance and, therefore, prices and underwrites its policies
specifically on that basis.
QUALITY INVESTMENT PORTFOLIO
As of September 30, 1997, 99.7% of the Company's investment portfolio
was invested in cash and fixed maturities. In addition, 85.8% of the Company's
fixed-income portfolio had ratings of "AA" or equivalent or better and 98.0% had
ratings of "BBB" or equivalent or better.
The Company's corporate offices are located at 26601 Agoura Road,
Calabasas, California 91302, and its telephone number is (818) 880-1600.
THE EXCHANGE OFFER
The Trust........................... Superior National Capital Trust I, a
statutory business trust created under the
laws of the State of Delaware (the
"Trust"). The sole asset of the Trust
consists of the 10 3/4% Senior Subordinated
Notes due December 1, 2017 (the "Senior
Subordinated Notes") of the Company.
The Exchange Offer.................. Up to $105,000,000 aggregate liquidation
amount of Exchange Preferred Securities are
being offered in exchange for a like
aggregate liquidation amount of Preferred
Securities. Preferred Securities may be
tendered for exchange in whole or in part
in a liquidation amount of $100,000 (100
Preferred Securities) or any integral
multiple of $1,000 (one Preferred Security)
in excess thereof. The Company and the
Trust are making the Exchange Offer in
order to satisfy their obligations under
the Registration Rights Agreement relating
to the Preferred Securities. For a
description of the procedures for tendering
Preferred Securities, see "The Exchange
Offer--Procedures for Tendering Preferred
Securities."
Expiration Date..................... 5:00 p.m., New York City time, on
, 1998, unless the
Exchange Offer is extended by the Company
or the Trust (in which case the Expiration
Date will be the latest date and time to
which the Exchange Offer is extended). See
"The Exchange Offer--Terms of the Exchange
Offer."
Conditions to the Exchange Offer.... The Exchange Offer is subject to certain
conditions, which may be waived by the
Company and the Trust in their sole
discretion. The Exchange Offer is not
conditioned upon any minimum liquidation
amount of Preferred Securities being
tendered. See "The Exchange
Offer--Conditions to the Exchange Offer."
Offer............................... The Company and the Trust reserve the right
in their sole and absolute discretion,
subject to applicable law, at any time and
from time to time,
4
<PAGE> 14
(i) to delay the acceptance of the Preferred
Securities for exchange, (ii) to terminate
the Exchange Offer if certain specified
conditions have not been satisfied, and
(iii) to extend the Expiration Date of the
Exchange Offer and retain all Preferred
Securities tendered pursuant to the Exchange
Offer, subject, however, to the right of
holders of Preferred Securities to withdraw
their tendered Preferred Securities. See
"The Exchange Offer--Terms of the Exchange
Offer."
Withdrawal Rights................... Tenders of Preferred Securities may be
withdrawn at any time on or prior to the
Expiration Date by delivering a written
notice of such withdrawal to the Exchange
Agent (as defined herein) in conformity
with certain procedures set forth below
under "The Exchange Offer--Withdrawal
Rights."
Procedures for Tendering
Preferred Securities.............. Tendering holders of Preferred Securities
must complete and sign a Letter of
Transmittal in accordance with the
instructions contained therein and forward
the same by mail, facsimile or hand
delivery, together with any other required
documents, to the Exchange Agent, either
with the Preferred Securities to be
tendered or in compliance with the
specified procedures for guaranteed
delivery of Preferred Securities. Certain
brokers, dealers, commercial banks, trust
companies and other nominees may also
effect tenders by an Agent's Message (as
defined herein) in case of book-entry
delivery to the Exchange Agent prior to the
Expiration Date. Holders of Preferred
Securities registered in the name of a
broker, dealer, commercial bank, trust
company or other nominee are urged to
contact such person promptly if they wish
to tender Preferred Securities pursuant to
the Exchange Offer. See "The Exchange
Offer--Procedures for Tendering Preferred
Securities."
Letters of Transmittal and certificates
representing Preferred Securities should
not be sent to the Company or the Trust.
Such documents should only be sent to the
Exchange Agent.
Resales of Exchange
Preferred Securities.............. The Company and the Trust are making the
Exchange Offer in reliance on the position
of the Staff as set forth in certain
interpretive letters addressed to third
parties in other transactions. However,
neither the Company nor the Trust has
sought its own interpretive letter and
there can be no assurance that the Staff
would make a similar determination with
respect to the Exchange Offer as it has in
such interpretive letters to third parties.
Based on these interpretations by the
Staff, and subject to the two immediately
following sentences, the Company and the
Trust believe that Exchange Preferred
Securities issued pursuant to this Exchange
Offer in exchange for Preferred Securities
may be offered for resale, resold and
otherwise transferred by a holder thereof
(other than a holder who is a
broker-dealer) without further compliance
with the registration and prospectus
delivery requirements of the Securities
Act, provided that such Exchange Preferred
Securities are acquired in the ordinary
course of such holder's business and that
such holder is not participating, and has
no arrangement or understanding with any
person to participate, in a distribution
(within the meaning of the Securities
5
<PAGE> 15
Act) of such Exchange Preferred Securities.
However, any holders of Preferred Securities
who is an "affiliate" of the Company or the
Trust or who intends to participate in the
Exchange Offer for the purpose of
distributing the Exchange Preferred
Securities, or any broker-dealer who
purchased the Preferred Securities from the
Trust to resell pursuant to Rule 144A or any
other available exemption under the
Securities Act, (a) will not be able to rely
on the interpretations of the Staff set
forth in the above-mentioned interpretive
letters, (b) will not be permitted or
entitled to tender such Preferred Securities
in the Exchange Offer and (c) must comply
with the registration and prospectus
delivery requirements of the Securities Act
in connection with any sale or other
transfer of such Preferred Securities unless
such sale is made pursuant to an exemption
from such requirements. In addition, as
described below, if any broker-dealer holds
Preferred Securities acquired for its own
account as a result of market-making or
other trading activities and exchanges such
Preferred Securities for Exchange Preferred
Securities, then such broker-dealer must
deliver a prospectus meeting the
requirements of the Securities Act in
connection with any resales of such Exchange
Preferred Securities.
Each holder of Preferred Securities who
wishes to exchange Preferred Securities for
Exchange Preferred Securities in the
Exchange Offer will be required to
represent that (i) it is not an "affiliate"
of the Company or the Trust, (ii) any
Exchange Preferred Securities to be
received by it are being acquired in the
ordinary course of its business, (iii) it
has no arrangement or understanding with
any person to participate in a distribution
(within the meaning of the Securities Act)
of such Exchange Preferred Securities and
(iv) if such holder is not a broker-dealer,
such holder is not engaged in, and does not
intend to engage in, a distribution (within
the meaning of the Securities Act) of such
Exchange Preferred Securities. Each
broker-dealer that receives Exchange
Preferred Securities for its own account
pursuant to the Exchange Offer must
acknowledge that it acquired the Exchange
Preferred Securities for its own account as
the result of market-making activities or
other trading activities and it will
deliver a prospectus meeting the
requirements of the Securities Act in
connection with any resale of such Exchange
Preferred Securities. The Letter of
Transmittal states that, by so
acknowledging and by delivering a
prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter"
within the meaning of the Securities Act.
Based on the position taken by the Staff in
the interpretive letters referred to above,
the Company and the Trust believe that
Participating Broker-Dealers who acquired
Preferred Securities for their own accounts
as a result of market-making activities or
other trading activities may fulfill their
prospectus delivery requirements with
respect to the Exchange Preferred
Securities received upon exchange of such
Preferred Securities (other than Preferred
Securities which represent an unsold
allotment from the original sale of the
Preferred Securities) with a prospectus
meeting the requirements of the Securities
Act, which may be the prospectus prepared
for an exchange offer so long as it
contains a description of the plan of
distribution with respect to the resale of
such Exchange Preferred Securities.
Accordingly, this Prospectus, as it may be
amended or supplemented from time to time,
may be used by
6
<PAGE> 16
a Participating Broker-Dealer in connection
with resales of Exchange Preferred
Securities received in exchange for
Preferred Securities where such Preferred
Securities were acquired by such
Participating Broker-Dealer for its own
account as a result of market-making or
other trading activities. Subject to certain
provisions set forth in the Registration
Rights Agreement and to the limitations
described herein under "The Exchange
Offer--Resales of Exchange Preferred
Securities," the Company and the Trust have
agreed that this Prospectus, as it may be
amended or supplemented from time to time,
may be used by a Participating Broker-Dealer
and other persons, if any, subject to
similar prospectus delivery requirements, in
connection with resales of such Exchange
Preferred Securities for a period ending 90
days after the Expiration Date (subject to
extension under certain limited
circumstances) or, if earlier, when all such
Exchange Preferred Securities have been
disposed of by such Participating
Broker-Dealer or other person. See "Plan of
Distribution." Any Participating Broker-
Dealer or other person who is an "affiliate"
of the Company or the Trust may not rely on
such interpretive letters and must comply
with the registration and prospectus
delivery requirements of the Securities Act
in connection with any resale transaction.
See "The Exchange Offer--Resales of Exchange
Preferred Securities."
Exchange Agent...................... The exchange agent with respect to the
Exchange Offer is Wilmington Trust Company
(the "Exchange Agent"). The address and
telephone and facsimile numbers of the
Exchange Agent are set forth in the "The
Exchange Offer--Exchange Agent" and in the
Letter of Transmittal.
Use of Proceeds..................... Neither the Company nor the Trust will
receive any cash proceeds from the issuance
of the Exchange Preferred Securities
offered hereby. See "Use of Proceeds."
Certain United States
Federal Income Tax
Considerations;
ERISA Considerations.............. Holders of Preferred Securities should
review the information set forth under
"Certain United States Federal Income Tax
Considerations" and "ERISA Considerations"
prior to tendering Preferred Securities in
the Exchange Offer.
THE EXCHANGE PREFERRED SECURITIES
Securities Offered.................. Up to $105,000,000 aggregate liquidation
amount of the Trust's Exchange Preferred
Securities which have been registered under
the Securities Act (liquidation amount
$1,000 per Exchange Preferred Security).
The Exchange Preferred Securities will be
issued and the Preferred Securities were
issued under the Declaration. The Exchange
Preferred Securities and any Preferred
Securities which may remain outstanding
after consummation of the Exchange Offer
will vote together as a single class for
purposes of determining whether holders of
the requisite percentage in outstanding
liquidation amount thereof have taken
certain actions or exercised certain rights
under the Declaration. See "Description of
Exchange Preferred Securities--Voting
Rights; Modification of the Declaration."
The terms
7
<PAGE> 17
of the Exchange Preferred Securities are
identical in all material respects to the
terms of the Preferred Securities, except
that the Exchange Preferred Securities have
been registered under the Securities Act,
will not be subject to the $100,000 minimum
liquidation amount transfer restriction and
certain other restrictions on transfer
applicable to the Preferred Securities, and
will not provide for any increase in the
Distribution rate thereon. See "The Exchange
Offer--Purpose of the Exchange Offer,"
"Description of Exchange Securities" and
"Description of Old Securities."
Distribution Dates.................. June 1 and December 1 of each year,
commencing June 1, 1998.
Extension Periods................... Distributions on the Exchange Preferred
Securities will be deferred for the
duration of any Extension Period elected by
the Company with respect to the payment of
interest on the Exchange Notes. No
Extension Period will exceed ten
consecutive semi-annual periods or extend
beyond the Stated Maturity Date. See
"Description of Exchange Notes--Option to
Extend Interest Payment Date" and "Certain
United States Federal Income Tax
Considerations--Interest Income and
Original Issue Discount."
Ranking............................. The Exchange Preferred Securities will rank
pari passu, and payments thereon will be
made pro rata, with the Preferred
Securities and the Common Securities except
as described under "Description of Exchange
Preferred Securities--Subordination of
Common Securities." The Exchange Notes will
rank pari passu with the Old Notes and all
other junior subordinated debentures to be
issued by the Company and sold (if at all)
to other trusts to be established by the
Company (if any), in each case similar to
the Trust, and will be unsecured and
subordinate and junior in right of payment
to all Senior Indebtedness to the extent
and in the manner set forth in the
Indenture. At December 31, 1997, the
Company had no outstanding Senior
Indebtedness. See "Description of Exchange
Preferred Securities" and "Description of
Exchange Notes." The Exchange Guarantee
will rank pari passu with the Company
Guarantee and will constitute an unsecured
obligation of the Company and will rank
subordinate and junior in right of payment
to all Senior Indebtedness to the extent
and in the manner set forth in the Exchange
Guarantee. See "Description of Exchange
Preferred Securities" and "Description of
Exchange Guarantee."
Optional Redemption................. The Company is permitted to redeem the
Senior Subordinated Notes at the redemption
prices set forth herein in whole or in
part, from time to time, after December 1,
2005. Upon any such redemption, the
proceeds from such redemption shall
simultaneously be applied by the Trust to
redeem Securities and Common Securities at
the applicable Redemption Price. In the
event that fewer than all the outstanding
Senior Subordinated Notes are to be so
redeemed, then the proceeds from such
redemption shall be allocated to the
redemption pro rata of the Securities and
the Common Securities. See "Description of
the Exchange Preferred Securities--Optional
Redemption."
Mandatory Redemption................ The Exchange Preferred Securities will be
subject to mandatory redemption upon the
repayment of the Senior Subordinated Notes
at
8
<PAGE> 18
their stated maturity, upon acceleration,
earlier redemption or otherwise. See
"Description of the Exchange Preferred
Securities--Mandatory Redemption."
Change of Control Redemption........ Upon the occurrence of a Change of Control
Triggering Event, a holder of Trust
Securities has the right to require the
Trust to exchange all or any part of the
holder's Trust Securities for Senior
Subordinated Notes having an aggregate
principal amount equal to the aggregate
liquidation amount of the Trust Securities
so offered. Upon the occurrence of such an
event, the Company will be required to
immediately redeem any Senior Subordinated
Notes so exchanged at a redemption price
equal to 101% of the principal amount
thereof plus any accrued and unpaid
interest. See "Description of the Exchange
Preferred Securities--Change of Control
Redemption" and "Description of the
Exchange Notes--Change of Control."
Tax Event or Investment
Company Event Redemption
or Distribution................... Upon the occurrence of a Tax Event or any
Investment Company Event, except in certain
limited circumstances, the Company will
cause the Trustees to dissolve and
liquidate the Trust and, after satisfaction
of liabilities to creditors of the Trust,
cause Senior Subordinated Notes to be
distributed to the holders of the
Securities. Upon the occurrence of a Tax
Event, in certain circumstances, the
Company will have the right to redeem the
Senior Subordinated Notes in whole (but not
in part) at 100% of the principal amount
plus accrued and unpaid interest, in lieu
of a distribution of the Senior
Subordinated Notes, in which event all the
Trust Securities will be redeemed by the
Trust at the liquidation amount of $1,000
per each of the Securities plus accrued and
unpaid Distributions. See "Description of
the Exchange Preferred Securities--Tax
Event or Investment Company Event
Redemption or Distribution."
Rating.............................. The Preferred Securities were rated "BB" by
Standard & Poor's Ratings Services and "B1"
by Moody's Investors Service, Inc.
Absence of Market for the Exchange
Preferred Securities.............. The Exchange Preferred Securities will be a
new issue of securities for which there
currently is no market. Although
Donaldson, Lufkin & Jenrette Securities
Corporation and Chase Securities Inc., the
initial purchasers of the Preferred
Securities (the "Initial Purchasers"), have
informed the Company and the Trust that
they each currently intend to make a market
in the Exchange Preferred Securities, they
are not obligated to do so, and any such
market-making may be discontinued at any
time without notice. Accordingly, there can
be no assurance as to the development or
liquidity of any market for the Exchange
Preferred Securities. The Trust and the
Company do not intend to apply for listing
of the Exchange Preferred Securities on any
securities exchange or for quotation
through The Nasdaq Stock Market. See "Plan
of Distribution."
9
<PAGE> 19
RISK FACTORS
Prospective investors should consider carefully the information set
forth under the caption "Risk Factors" and all other information set forth in
this Prospectus in connection with the Exchange Offer and the Exchange Preferred
Securities offered hereby.
10
<PAGE> 20
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table sets forth summary consolidated financial
information with respect to the Company for the periods indicated. The
historical financial information was prepared in accordance with GAAP. The
financial information for the Company as of September 30, 1997 and 1996 is
unaudited; however, in management's opinion, it includes all adjustments,
including normally occurring accruals, that are necessary for a fair
presentation of results for such interim periods. Interim results are not
necessarily indicative of results for the full year. The pro forma consolidated
statement of operations data for the year ended December 31, 1996 and for the
nine months ended September 30, 1997 is unaudited and presents results for the
Company as if the Acquisition and the sale of the Preferred Securities had
occurred as of the beginning of each period presented.
The pro forma information is presented for illustrative purposes only
and is not necessarily indicative of the results of operations or financial
position that would have occurred had the Acquisition and the sale of the
Preferred Securities been consummated on the dates assumed; nor is the pro forma
information intended to be indicative of the Company's future results of
operations.
11
<PAGE> 21
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
AND YEARS ENDED 1996 THROUGH 1994
(In thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
--------------------------------- --------------------------------------------
PRO PRO
FORMA FORMA
1997(1) 1997(2) 1996 1996(1) 1996 1995 1994
-------- -------- ------- -------- ------- ------- --------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Gross premiums written ............... $133,718 $114,211 $74,192 $187,646 $99,282 $97,084 $134,769
Direct premiums written .............. 129,244 109,737 72,663 182,201 96,405 96,122 134,769
Net premiums written ................. 115,364 96,596 66,133 170,287 87,715 89,139 105,946
Net premiums earned .................. 117,916 99,148 66,040 169,989 88,648 89,735 110,418
Total revenues ....................... 128,609 108,392 72,434 186,419 96,417 99,519 119,467
Income before accretion on preferred
securities issued in 1994,
distributions on Preferred
Securities, discontinued operations,
extraordinary items, and cumulative
effect of change in accounting for
income taxes ....................... 8,376 4,902 3,154 10,949 3,630 11,701 3,599
Net income from continuing operations
before extraordinary items ......... 3,426 3,515 1,916 4,349 1,963 10,213 2,916
OTHER DATA (UNAUDITED):
EBITDA(3) ............................ 16,085 13,142 12,680 26,278 14,727 22,652 15,276
Ratio of EBITDA to distributions
on Preferred Securities(4) .......... 1.90x 2.33x
Ratio of Preferred Securities to
EBITDA(5) ........................... N/M(5) 4.00x
GAAP RATIOS:(6)
Claim and claim adjustment
expense ratio ....................... 67.5% 66.9% 55.7% 67.0% 62.8% 60.1% 71.3%
Expense ratio ........................ 27.6 28.0 37.0 28.3 31.8 26.4 24.1
-------- -------- ------- -------- ------- ------- --------
Combined ratio ....................... 95.1% 94.9% 92.7% 95.3% 94.6% 86.5% 95.4%
======== ======== ======= ======== ======= ======= ========
AT SEPTEMBER 30, 1997
-------------------------------
ACTUAL AS ADJUSTED(7)
-------- --------------
CONSOLIDATED BALANCE SHEET DATA:
Total cash and investments ..................... $238,804 $270,132
Total assets ................................... 397,192 428,520
Claim and claim adjustment expenses ............ 222,625 222,625
Total debt ..................................... 42,366 30
Preferred securities issued by affiliate in 1994 25,672 --
Preferred Securities ........................... -- 105,000
Net stockholders' equity ....................... 56,804 56,804
</TABLE>
- ---------------
(1) The pro forma financial data for the periods presented is unaudited.
(2) The information for the nine-month period ended September 30, 1997 includes
the financial data of SPCC for the period beginning April 1, 1997.
(3) EBITDA consists of earnings before interest, taxes, minority interest,
depreciation and amortization. EBITDA is presented here not as a measure of
operating results, but rather as a measure of the Company's cash flow and
debt service ability, and should not be considered as an alternative to net
earnings and cash flows determined in accordance with GAAP. Because the
Company's ability to obtain dividends from its insurance subsidiaries may
be subject to certain restrictions, EBITDA is not necessarily indicative of
the Company's ability to service its indebtedness.
(4) The ratio of EBITDA to distributions on Preferred Securities excludes
interest expense related to the loan from The Chase Manhattan Bank
collateralized by reinsurance receivables in 1996. This debt was repaid in
full on June 30, 1997.
(5) This ratio is not meaningful for interim periods.
(6) These ratios are for continuing operations only. The claim and claim
adjustment expense ratio is calculated by dividing claim and claim
adjustment expenses by net premiums earned. The expense ratio is calculated
by dividing the sum of commissions (net of reinsurance ceding commissions),
policyholder dividends, and general and administrative expenses by net
premiums earned. The combined ratio is the sum of the claim and claim
adjustment expense ratio and the expense ratio.
(7) Gives effect to the issuance of the Preferred Securities.
12
<PAGE> 22
THE TRUST
The Trust is a statutory business trust created under the laws of the
State of Delaware pursuant to (i) a declaration of trust executed by the
Company, as sponsor of the Trust, and certain of the trustees of the Trust and
(ii) the filing of a certificate of trust with the Secretary of State of the
State of Delaware on October 24, 1997. The original declaration of trust of the
Trust was amended and restated in its entirety in the form of the Amended and
Restated Declaration of Trust of the Trust dated as of December 3, 1997 (the
"Declaration"). The Company acquired Common Securities in an aggregate
liquidation amount of $3,248,000, which represents all of the Common Securities
of the Trust and exceeds 3% of the total capital of the Trust. The Common
Securities rank pari passu, and payment will be made thereon pro rata, with the
Exchange Preferred Securities, except that, upon the occurrence and during the
continuance of a Declaration Event of Default (as described herein), the rights
of the Company as holder of the Common Securities to payment in respect of
distributions and payments upon liquidation, redemption and otherwise will be
subordinated to the rights of the holders of the Exchange Preferred Securities.
See "Description of the Exchange Preferred Securities--Subordination of Common
Securities." The assets of the Trust consist of the Senior Subordinated Notes.
The Trust exists for the exclusive purpose of (i) issuing and selling the Trust
Securities representing undivided beneficial ownership interests in the assets
of the Trust, (ii) investing the proceeds of the Trust Securities in the Senior
Subordinated Notes and (iii) engaging in only those other activities necessary
or incidental thereto. Accordingly, the Senior Subordinated Notes are and will
be the sole assets of the Trust, and payments under the Senior Subordinated
Notes will be the sole revenue of the Trust.
The Trust has a term of fifty years but may dissolve earlier as provided
in the Declaration. The Trust business and affairs are conducted by its trustees
(the "Trustees"), each appointed by the Company as sole holder of the Common
Securities. Pursuant to the Declaration, the number of Trustees is five. Three
of the Trustees (the "Company Trustees") are individuals who are officers or
directors of, or who are affiliated with, the Company. The fourth trustee is a
financial institution that is unaffiliated with the Company (the "Preferred
Trustee"). The fifth trustee is an entity that maintains its principal place of
business in the State of Delaware (the "Delaware Trustee"). Wilmington Trust
Company acts as Preferred Trustee and Delaware Trustee and will continue to do
so until, in each case, it is removed or replaced by the holder of the Common
Securities. Wilmington Trust Company also acts as trustee under the Company
Guarantee (the "Guarantee Trustee") and under the Indenture (the "Indenture
Trustee"). See "Description of the Exchange Guarantee" and "Description of the
Exchange Preferred Securities."
The Preferred Trustee holds title to the Senior Subordinated Notes for
the benefit of the holders of the Trust Securities and has the power to exercise
all rights, powers and privileges under the Indenture as the holder of the
Senior Subordinated Notes. In addition, the Preferred Trustee maintains
exclusive control of a segregated non-interest bearing bank account (the
"Property Account") to hold all payments made in respect of the Senior
Subordinated Notes for the benefit of the holders of the Trust Securities. The
Guarantee Trustee holds the Guarantee for the benefit of the holders of the
Exchange Preferred Securities. The Company, as the direct or indirect holder of
all the Common Securities, has the right to appoint, remove or replace any of
the Trustees and to increase or decrease the number of trustees, provided that
the number of trustees shall be at least three, a majority of which shall be
Company Trustees. The holder of the Common Securities of the Trust, or the
holders of a majority in liquidation amount of the Exchange Preferred Securities
if a Declaration Event of Default (as defined herein) has occurred and is
continuing, will be entitled to appoint, remove or replace the Preferred Trustee
and/or the Delaware Trustee for the Trust. In no event will the holders of the
Exchange Preferred Securities have the right to vote to appoint, remove or
replace the Company Trustees; such voting rights are vested exclusively in the
holder of the Common Securities. The duties and obligations of each of the
Trustees are governed by the Declaration. In the Indenture, the Company, as
borrower, has agreed to pay for all fees and expenses related to the Trust,
including fees and expenses of the Trustees and any income taxes, duties and
other governmental charges, and all costs and expenses with respect thereto to
which the Trust may become subject and all fees and expenses related to the
Exchange Offer and will pay, directly or indirectly, all ongoing costs, expenses
and liabilities of the Trust. See "Description of the Exchange Notes."
The rights of the holders of the Exchange Preferred Securities,
including economic rights, and rights to information and voting rights, if any,
are as set forth in the Declaration and the Delaware Business Trust Act, as
amended (the "Trust
13
<PAGE> 23
Act"). See "Description of the Exchange Preferred Securities." The Declaration,
the Indenture and the Guarantee also incorporate by reference the terms of the
Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). Upon
effectiveness of the Registration Statement of which this Prospectus forms a
part, the Declaration, the Indenture and the Exchange Guarantee will be
qualified under the Trust Indenture Act.
The place of business of the Trust is: 1100 North Market Street, Rodney
Square North, Wilmington, Delaware 19890-0001, and its telephone number is (302)
651-1000.
14
<PAGE> 24
RISK FACTORS
Prospective investors should consider carefully the following factors,
in addition to the other information included in this Prospectus, in connection
with the Exchange Offer and the Exchange Preferred Securities offered hereby.
Certain statements in this Prospectus are forward-looking and are identified by
the use of forward-looking words or phrases such as "intended," "will be
positioned," "expects," is or are "expected," "anticipates," and "anticipated."
These forward-looking statements are based on the Company's current
expectations. To the extent any of the information contained in this Prospectus
constitutes a "forward-looking statement" as defined in Section 27A(i)(1) of the
Securities Act, the risk factors set forth below are cautionary statements
identifying important factors that could cause results to differ materially from
those in the forward-looking statement.
RISKS RELATING TO THE EXCHANGE PREFERRED SECURITIES
Subordination of the Guarantee and Senior Subordinated Notes
The Company's obligations under the Guarantee and the Senior
Subordinated Notes are subordinate and junior in right of payment to all future
Senior Indebtedness (as defined herein) of the Company. No payment of principal
(including redemption payments, if any), premium, if any, or interest on the
Senior Subordinated Notes may be made if (i) any Senior Indebtedness having an
outstanding principal amount at the time of determination in excess of $10.0
million, is not paid when due or (ii) any other default on such Senior
Indebtedness occurs and the maturity of such Senior Indebtedness is accelerated
in accordance with its terms, unless, in either case, the default has been cured
or waived and any such acceleration has been rescinded or such Senior
Indebtedness has been paid in full. Although the ability of the Company and its
Subsidiaries to incur Indebtedness (as defined herein) is restricted under the
Senior Subordinated Notes, the Company and its Subsidiaries will have the
ability to incur substantial additional Indebtedness, which may be senior to the
Senior Subordinated Notes. See "Description of the Exchange Notes--Certain
Covenants." Because the Company's assets consist of stock of its Subsidiaries,
and because the Company relies on dividends from its Subsidiaries to meet its
obligations for payment of principal and interest on its outstanding debt
obligations and corporate expenses, the Senior Subordinated Notes are also
effectively subordinate to all existing and future liabilities of the Company's
Subsidiaries. See "--Holding Company Structure; Dividend and Other
Restrictions."
Option to Extend Interest Payment Period; Tax Consequences; Possible Volatility
in Market Price of Exchange Preferred Securities
So long as no Event of Default (as defined in the Indenture) has
occurred and is continuing, the Company has the right under the Indenture to
defer the payment of interest on the Senior Subordinated Notes at any time or
from time to time for a period not exceeding ten consecutive semi-annual periods
with respect to each Extension Period, provided that no Extension Period may
extend beyond the Stated Maturity of the Senior Subordinated Notes. See
"Description of Exchange Notes--Option to Extend Interest Payment Date." As a
consequence of any such deferral, semi-annual Distributions on the Securities by
the Trust will be deferred during any such Extension Period. Distributions to
which holders of the Exchange Preferred Securities are entitled will accumulate
additional Distributions thereon during any Extension Period at the rate of 10
3/4% per annum, compounded semi-annually from the relevant payment date for such
Distributions, computed on the basis of a 360-day year of twelve thirty-day
months and the actual days elapsed in a partial month in such period. The term
"Distribution" as used herein will include any such additional Distributions.
During any such Extension Period, the Company may not (i) declare or pay any
dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of the Company's capital stock, (ii)
make any payment of principal of or interest or premium, if any, on or repay,
repurchase or redeem any debt securities of the Company that rank pari passu in
all respects with or junior in interest to the Senior Subordinated Notes or
(iii) make any guarantee payments with respect to any guarantee of the Company
of the debt securities of any subsidiary of the Company if such guarantee ranks
pari passu with or junior in right of payment to the Senior Subordinated Notes;
excluding, in each case, (a) dividends or distributions in shares of, or
options, warrants or rights to subscribe for or purchase shares of, common stock
of the Company, (b) any declaration of a dividend in connection with the
implementation of a stockholders' rights plan, the issuance of stock under any
such plan in the future, or the redemption or repurchase of any such rights
pursuant thereto, (c) payments under the
15
<PAGE> 25
Guarantee, (d) as a result of a reclassification of the Company's capital stock
or the exchange or conversion of one class or series of the Company's capital
stock for another class or series of the Company's capital stock, (e) the
purchase of fractional interests in shares of the Company's capital stock
pursuant to the conversion or exchange provisions of such capital stock or the
security being converted or exchanged and (f) purchases or issuances of common
stock in connection with any of the Company's stock option, stock purchase,
stock loan or other benefit plans for its directors, officers or employees or
any of the Company's dividend reinvestment plans, in each case as now existing
or hereafter established or amended. Prior to the termination of any such
Extension Period, the Company may further defer the payment of interest,
provided that no Extension Period may exceed ten consecutive semi-annual periods
or extend beyond the Stated Maturity of the Senior Subordinated Notes. Upon the
termination of any Extension Period and the payment of all interest then accrued
and unpaid (together with interest thereon at the annual rate of 10 3/4%,
compounded semiannually, to the extent permitted by applicable law), the Company
may elect to begin a new Extension Period subject to the above conditions. No
interest shall be due and payable during an Extension Period, except at the end
thereof. The Company must give the Preferred Trustee and the Indenture Trustee
notice of its election to begin an Extension Period at least five Business Days
(as defined herein) prior to the earlier of (i) the date the Distributions on
the Exchange Preferred Securities would have been payable but for the election
to begin such Extension Period or (ii) the date the Trustees are required to
give notice to any securities exchange or to holders of Trust Securities of the
record date or the date such Distributions are payable, but in any event, not
less than five Business Days prior to such record date. The Trustees will give
notice of the Company's election to begin a new Extension Period to the holders
of the Exchange Preferred Securities. Subject to the foregoing, there is no
limitation on the number of times that the Company may elect to begin an
Extension Period. See "Description of the Exchange Preferred
Securities--Distributions" and "Description of the Exchange Notes--Option to
Extend Interest Payment Date."
Should an Extension Period occur, a holder of Exchange Preferred
Securities will be required to continue to accrue income (in the form of
original issue discount ("OID")) for United States federal income tax purposes
in respect of its pro rata share of the Senior Subordinated Notes held by the
Trust. As a result, a holder of Exchange Preferred Securities will be required
to include such amount in gross income for United States federal income tax
purposes in advance of the receipt of cash attributable to such income, and will
not receive the cash related to such income from the Trust if the holder
disposes of the Exchange Preferred Securities prior to the record date for the
payment of Distributions with respect to such Extension Period. See "Certain
United States Federal Income Tax Consequences."
The Company has no current intention of exercising its right to defer
payments of interest by extending the interest payment period on the Senior
Subordinated Notes. However, should the Company elect to exercise such right in
the future, the market price of the Exchange Preferred Securities is likely to
be affected. A holder that disposes of Exchange Preferred Securities during an
Extension Period, therefore, might not receive the same return on his, her or
its investment as a holder that continues to hold Exchange Preferred Securities.
In addition, as a result of the existence of the Company's right to defer
interest payments, the market price of the Exchange Preferred Securities (which
represent undivided beneficial ownership interests in the assets of the Trust)
may be more volatile than the market prices of other securities with respect to
which the issuer does not have such right to defer interest payments.
Exchange of Exchange Preferred Securities for Exchange Notes
The holders of all the outstanding Common Securities have the right at
any time to dissolve the Trust and, after satisfaction of liabilities to
creditors of the Trust as provided by applicable law, cause the Exchange Notes
to be distributed to the holders of the Exchange Preferred Securities in
liquidation of the Trust. See "Description of the Exchange Preferred
Securities--Liquidation Distribution Upon Dissolution."
Under current United States federal income tax law interpretations and
assuming, as expected, that the Trust would not be taxable as a corporation, a
distribution of the Exchange Notes upon a liquidation of the Trust would not be
a taxable event to holders of the Exchange Preferred Securities. However, if a
Tax Event were to occur that would cause the Trust to be subject to United
States federal income tax with respect to income received or accrued on the
Exchange Notes, a distribution of the Exchange Notes by the Trust could be a
taxable event to the Trust and the holders of the Exchange Preferred Securities.
See "Certain United States Federal Income Tax Consequences."
16
<PAGE> 26
Trust's Dependence on the Company
The Trust exists for the exclusive purpose of (i) issuing and selling
the Trust Securities representing undivided beneficial ownership interests in
the assets of the Trust, (ii) investing the proceeds of the Trust Securities in
the Senior Subordinated Notes and (iii) engaging in only those other activities
necessary or incidental thereto. Accordingly, the Senior Subordinated Notes are
and will be the sole assets of the Trust, and payments under the Senior
Subordinated Notes will be the sole revenue of the Trust.
The ability of the Trust to make distributions or other payments on the
Exchange Preferred Securities is wholly dependent upon the Company making
interest and other payments on the Senior Subordinated Notes as and when
required. The Company is highly leveraged. See "--Risks Relating to the Business
of the Company--Leverage" and "--Holding Company Structure; Dividend and Other
Restrictions." The Company's level of debt presents the risk that the Company
might not generate sufficient cash to service the Company's indebtedness,
including the Senior Subordinated Notes. If the Company were not to make
payments on the Senior Subordinated Notes, the Trust would be unable to make
payments on the Exchange Preferred Securities as and when required. In such an
event, holders of the Exchange Preferred Securities would not be able to rely on
the Exchange Guarantee since distributions or other payments on the Exchange
Preferred Securities are subject to the Exchange Guarantee only if and to the
extent that the Company has made a payment to the Trust of interest or principal
on the Senior Subordinated Notes.
The Indenture provides that the Company, as borrower, shall pay for all
debts and obligations (other than with respect to the Trust Securities) and all
costs and expenses of the Trust, including any taxes and all costs and expenses
with respect thereto to which the Trust may become subject, except for United
States withholding taxes. No assurance can be given that the Company will have
sufficient resources to enable it to pay any such debts, obligations, costs and
expenses on behalf of the Trust. See "Description of the Exchange Guarantee."
Rights Under the Exchange Guarantee
The Guarantee Trustee will hold the Exchange Guarantee for the benefit
of the holders of the Exchange Preferred Securities. The Exchange Guarantee
guarantees to the holders of the Exchange Preferred Securities the payment of
(i) any accrued and unpaid distributions that are required to be paid on the
Exchange Preferred Securities to the extent the Trust has funds legally
available therefor, (ii) the amount payable upon redemption, including all
accrued and unpaid distributions, of the Exchange Preferred Securities called
for redemption by the Trust, to the extent the Trust has funds legally available
therefor and (iii) upon a voluntary or involuntary dissolution, winding up or
termination of the Trust (other than in connection with the distribution of
Senior Subordinated Notes to the holders of Exchange Preferred Securities or
redemption of all of the Exchange Preferred Securities), the lesser of (a) the
liquidation amount and all accrued and unpaid distributions on the Exchange
Preferred Securities to the date of payment to the extent the Trust has funds
legally available therefor and (b) the amount of cash assets of the Trust
remaining available for distribution to holders of the Exchange Preferred
Securities upon the liquidation of the Trust. The holders of a majority in
liquidation amount of the Exchange Preferred Securities have the right to direct
the time, method and place of conducting any proceeding for any remedy available
to the Guarantee Trustee or to direct the exercise of any trust or power
conferred upon the Guarantee Trustee under the Exchange Guarantee. In addition,
in the event of a payment default on the Exchange Preferred Securities, any
holder of Exchange Preferred Securities may institute a legal proceeding
directly against the Company to enforce such holder's rights in respect thereof
under the Exchange Guarantee without first instituting a legal proceeding
against the Trust, the Guarantee Trustee, or any other person or entity. If the
Company were to default on its obligations under the Senior Subordinated Notes,
the Trust would lack available funds for the payment of Distributions or amounts
payable on redemption of the Exchange Preferred Securities or otherwise, and in
such event, the holders of the Exchange Preferred Securities would not be able
to rely upon the Exchange Guarantee for payment of such amounts. Instead,
holders of the Exchange Preferred Securities could rely on the enforcement (i)
by the Preferred Trustee of its rights as registered holder of the Senior
Subordinated Notes, against the Company pursuant to the terms of the Senior
Subordinated Notes or (ii) by a Special Trustee elected by 25% in liquidation
amount of the Exchange Preferred Securities of the Trust's rights under the
Senior Subordinated Notes or (iii) if the Preferred Trustee or the Special
Trustee does not enforce the Trust's rights against the Company, by such holder
of its right of direct action against the Company on behalf of the Trust to
enforce payments on the Senior Subordinated Notes. See "Description of the
Exchange Guarantee" and "Description of the Exchange Notes--Subordination." The
Declaration provides that each holder of Exchange Preferred Securities, by
acceptance thereof, agrees to the provisions of the Exchange Guarantee
(including the subordination provisions thereof) and the Indenture.
17
<PAGE> 27
Change of Control Redemption
Upon the occurrence of a Change of Control Triggering Event (as defined
herein), a holder of Trust Securities has the right to require the Trust to
exchange all or any part of the holder's Trust Securities for Senior
Subordinated Notes having an aggregate principal amount equal to the liquidation
amount of the Trust Securities so offered. Upon the occurrence of such an event,
the Company will be required to redeem immediately any Senior Subordinated Notes
so exchanged at a redemption price equal to 101% of the principal amount thereof
plus any accrued and unpaid interest. There can be no assurance that, if the
Company were required to redeem any of the Senior Subordinated Notes upon a
Change of Control Triggering Event, the Company would have enough cash available
to fund such a redemption. In addition, such a redemption could result in a
default under other indebtedness that the Company may incur from time to time.
See "Description of the Exchange Preferred Securities--Change of Control
Redemption," "Description of the Exchange Notes--Change of Control," and "Use of
Proceeds."
Tax Event or Investment Company Event Redemption or Distribution
Upon the occurrence of a Tax Event or Investment Company Event, the
Company will, except in certain limited circumstances, cause the Trustees to
dissolve and liquidate the Trust and, after satisfaction of liabilities to
creditors of the Trust, cause Senior Subordinated Notes to be distributed pro
rata to the holders of Trust Securities. In certain circumstances, the Company
will have the right to redeem the Senior Subordinated Notes, in whole (but not
in part), at 100% of principal amount plus accrued and unpaid interest, in lieu
of a distribution of the Senior Subordinated Notes, in which event the Exchange
Preferred Securities will be redeemed in whole at the liquidation amount of
$1,000 per each of the Exchange Preferred Securities plus accrued and unpaid
Distributions. In the case of a Tax Event, the Company may also elect to cause
the Exchange Preferred Securities to remain outstanding. See "Description of the
Exchange Preferred Securities--Tax Event or Investment Company Event Redemption
or Distribution."
Under current United States federal income tax law and assuming, as
expected, that the Trust is not taxable as a corporation, a distribution of the
Senior Subordinated Notes would not be a taxable event to holders of the
Exchange Preferred Securities. However, in the event of a Tax Event which
results in the Trust being treated as an association taxable as a corporation,
the distribution would likely constitute a taxable event to holders of the
Exchange Preferred Securities. See "Certain United States Federal Income Tax
Consequences--Distribution of Exchange Notes or Cash Upon Liquidation of the
Trust."
There can be no assurance as to the market prices for the Exchange
Preferred Securities or the Senior Subordinated Notes that may be distributed in
exchange for Exchange Preferred Securities if a dissolution or liquidation of
the Trust were to occur. Accordingly, the Exchange Preferred Securities that an
investor may purchase, whether pursuant to the offer made hereby or in the
secondary market, or the Senior Subordinated Notes that a holder of Exchange
Preferred Securities may receive on dissolution and liquidation of the Trust,
may trade at a discount to the price that the investor paid to purchase the
Exchange Preferred Securities. Because holders of Exchange Preferred Securities
may receive Senior Subordinated Notes upon the occurrence of a Tax Event or
Investment Company Event, prospective purchasers of Exchange Preferred
Securities are also making an investment decision with regard to the Senior
Subordinated Notes and should carefully review all the information regarding the
Senior Subordinated Notes contained herein. See "Description of the Exchange
Preferred Securities--Tax Event or Investment Company Event Redemption or
Distribution" and "Description of the Exchange Notes--General."
Limited Voting Rights
Except in the limited circumstances described herein, holders of
Exchange Preferred Securities will have no voting rights, including the right to
vote to appoint, remove or replace the Trustees, or increase or decrease their
number, the right to which is vested in the holder(s) of the Common Securities.
See "Description of the Exchange Preferred Securities--Voting Rights."
18
<PAGE> 28
Absence of a Public Market
The Preferred Securities were issued to, and the Company believes such
securities are currently owned by, a relatively small number of beneficial
owners. The Preferred Securities have not been registered under the Securities
Act and are subject to restrictions on transferability if they are not exchanged
for the Exchange Preferred Securities. Although the Exchange Preferred
Securities may be resold or otherwise transferred by the holders (who are not
affiliates of the Company or the Trust) without compliance with the registration
requirements under the Securities Act, they will constitute a new issue of
securities with no established trading market. Preferred Securities may be
transferred by the holders thereof only in blocks having a liquidation amount of
not less than $100,000 (100 Preferred Securities). Exchange Preferred Securities
may be transferred by the holders thereof in blocks having a liquidation amount
of $1,000 (one Exchange Preferred Security) or integral multiples thereof. The
Company and the Trust have been advised by the Initial Purchasers that the
Initial Purchasers presently intend to make a market in the Exchange Preferred
Securities. However, the Initial Purchasers are not obligated to do so and any
market-making activity with respect to the Exchange Preferred Securities may be
discontinued at any time without notice. In addition, such market-making
activity will be subject to the limits imposed by the Securities Act and the
Exchange Act and may be limited during the Exchange Offer. Further, the Company
and the Trust currently do not intend to apply for listing the Exchange
Preferred Securities on any securities exchange or for quotation through the
Nasdaq Stock Market. Accordingly, no assurance can be given that an active
public or other market will develop for the Exchange Preferred Securities or the
Preferred Securities or as to the liquidity of or the trading market for the
Exchange Preferred Securities or the Preferred Securities. If an active public
market does not develop, the market price and liquidity of the Exchange
Preferred Securities may be adversely affected.
If a public trading market develops for the Exchange Preferred
Securities, future trading prices will depend on many factors, including, among
other things, prevailing interest rates, the Company's results and the market
for similar securities. Depending on prevailing interest rates, the market for
similar securities and other factors, including the financial condition of the
Company, the Exchange Preferred Securities may trade at a discount.
Notwithstanding the registration of the Exchange Preferred Securities in
connection with the Exchange Offer, holders who are "affiliates" (as defined
under Rule 405 of the Securities Act) of the Company or the Trust may publicly
offer for sale or resell the Exchange Preferred Securities only in compliance
with the provisions of Rule 144 under the Securities Act.
Each broker-dealer who receives Exchange Preferred Securities for its
own account in exchange for Preferred Securities, where such Preferred
Securities were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Preferred Securities.
See "The Exchange Offer" and "Plan of Distribution."
Proposed Tax Law Changes
Legislation has been previously proposed (but not adopted) that would
have denied an issuer an interest deduction, for United States federal income
tax purposes, on instruments such as the Senior Subordinated Notes. There can be
no assurance that future legislative proposals (if enacted) will not adversely
affect the ability of the Company to deduct interest on the Senior Subordinated
Notes or otherwise affect the tax treatment of the transactions described
herein. Moreover, such legislation could give rise to a Tax Event which would
permit the Company to distribute the Senior Subordinated Notes to holders of the
Securities or cause a redemption of the Securities as described more fully under
"Description of the Exchange Notes" and "Description of the Exchange Preferred
Securities." The Internal Revenue Service also has previously announced that an
important factor in determining whether instruments, such as the Senior
Subordinated Notes, will be treated as debt for federal income tax purposes is
the manner in which such instruments are treated for financial accounting
purposes. While there appears to be no authority in case law that applies this
factor in determining whether an instrument constitutes debt for federal income
tax purposes, there can be no assurance that in the future, courts or the
legislature will not adopt this factor in making such determination. The
adoption of such factor could have an adverse effect on the ability of the
Company to deduct interest on the Senior Subordinated Notes or otherwise affect
the tax treatment of the transactions described herein.
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<PAGE> 29
Consequences of a Failure to Exchange
The Preferred Securities have not been registered under the Securities
Act or any state securities laws and therefore may not be offered, sold or
otherwise transferred except in compliance with the registration requirements of
the Securities Act and any other applicable securities laws, or pursuant to an
exemption therefrom or in a transaction not subject thereto, and in each case in
compliance with certain other conditions and restrictions. Preferred Securities
which remain outstanding after consummation of the Exchange Offer will continue
to bear a legend reflecting such restrictions on transfer. In addition, upon
consummation of the Exchange Offer, holders of Preferred Securities which remain
outstanding will not be entitled to any rights to have such Preferred Securities
registered under the Securities Act or to any similar rights under the
Registration Rights Agreement (subject to certain limited exceptions). The
Company and the Trust do not intend to register under the Securities Act any
Preferred Securities which remain outstanding after consummation of the Exchange
Offer (subject to such limited exceptions, if applicable). To the extent that
Preferred Securities are tendered and accepted in the Exchange Offer, a holder's
ability to sell untendered Preferred Securities could be adversely affected.
The Exchange Preferred Securities and any Preferred Securities which
remain outstanding after consummation of the Exchange Offer will vote together
as a single class for purposes of determining whether holders of the requisite
percentage in outstanding liquidation amount thereof have taken certain actions
or exercised certain rights under the Declaration. See "Description of Exchange
Preferred Securities--Voting Rights; Modification of the Declaration."
Upon consummation of the Exchange Offer, holders of Preferred Securities
will not be entitled to any increase in the Distribution rate thereon or any
further registration rights under the Registration Rights Agreement, except
under limited circumstances. See "Description of Exchange Preferred Securities."
Exchange Offer Procedures
Issuance of the Exchange Preferred Securities in exchange for Preferred
Securities pursuant to the Exchange Offer will be made only after a timely
receipt by the Trust of such Preferred Securities, a properly completed and duly
executed Letter of Transmittal and all other required documents. Therefore,
holders of the Preferred Securities desiring to tender such Preferred Securities
in exchange for Exchange Preferred Securities should allow sufficient time to
ensure timely delivery. Neither the Company nor the Trust is under any duty to
give notification of defects or irregularities with respect to the tenders of
Preferred Securities for exchange.
RISKS RELATING TO THE BUSINESS OF THE COMPANY
Leverage
As of September 30, 1997, after giving pro forma effect to the sale of
the Preferred Securities and the Acquisition, the Company would have had
outstanding indebtedness of approximately $105.0 million. For the fiscal year
ended December 31, 1996, on a pro forma basis, after giving effect to the sale
of the Preferred Securities and the Acquisition as if they had occurred on
January 1, 1996, the Company's ratio of earnings to fixed charges and
distributions on the Securities would have been 1.27 to 1. See "Capitalization"
and "Unaudited Pro Forma Consolidated Financial Statements."
The Indenture pursuant to which the Senior Subordinated Notes were
issued permits the Company to incur additional indebtedness, subject to certain
limitations. Management believes that cash flow from operations and existing
funds available for payments of principal and interest will be adequate to
permit the Company to make its required payments of principal and interest on
its indebtedness, although there can be no assurance that this will be the case.
To the extent that cash flow from operations is insufficient to satisfy the
Company's cash requirements, the Company may seek to raise funds: from
additional borrowings or equity financings; by restructuring; or by acquiring
other businesses that would provide cash flow (in all such cases to the extent
permitted by the Indenture). See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
There can be no assurance that such actions could be effected on satisfactory
terms, in a timely
20
<PAGE> 30
manner or at all, that would enable the Company to make any payments due on the
Senior Subordinated Notes or that any such actions would be permitted under the
Indenture.
The degree to which the Company is leveraged could have adverse
consequences to holders of the Exchange Preferred Securities, including the
following: (i) a substantial portion of the Company's cash flow from operations
must be dedicated to the payment of principal and interest on its indebtedness,
thereby reducing the funds available to the Company for other purposes, (ii) the
Company's ability to obtain additional financing in the future for working
capital, acquisitions or other purposes may be impaired, (iii) certain of the
Company's borrowings may be at variable rates of interest, which would expose
the Company to the risk of higher interest rates, (iv) the Company's flexibility
in planning for or reacting to changes in market conditions may be limited, (v)
the Company may be substantially more leveraged than certain of its competitors,
which may place the company at a competitive disadvantage, and (vi) the Company
may be more vulnerable in the event of a downturn in its business. The Company's
ability to satisfy its obligations will be dependent upon its future
performance, which will be subject to prevailing economic conditions and to
financial, business and other factors, including factors beyond the control of
the Company.
Uncertain Pricing and Profitability
One of the distinguishing features of the insurance industry, including
the workers' compensation insurance industry, is that its products generally are
priced before its costs are known, because premium rates usually are determined
before losses are reported. Premium rate levels are related in part to the
availability of insurance coverage, which varies according to the level of
surplus in the industry. Increases in surplus have generally been followed by
increased price competition among workers' compensation insurers. For these
reasons, together with the commencement of open rating in January, 1995, the
California workers' compensation insurance business in recent years has
experienced very competitive pricing conditions and there can be no assurance as
to the Company's ability to achieve adequate pricing for its policies. Changes
in case law, the passage of new statutes or the adoption of new regulations
relating to the interpretation of insurance contracts can retroactively and
dramatically affect the liabilities associated with known risks after an
insurance contract is in place. Product enhancements also present special issues
in establishing appropriate premium levels in the absence of sufficient
experience with such products' performance.
The number of competitors and the similarity of products offered, as
well as regulatory constraints, limit the ability of workers' compensation
insurers to increase prices in response to declines in profitability or market
demand. In addition, the reported profits and losses of a workers' compensation
insurance company are also determined, in part, by the establishment of, and
adjustments to, reserves reflecting estimates made by management as to the
amount of claim and claim adjustment expenses that will ultimately be incurred
in the settlement of claims. The ultimate liability of the insurer for all claim
and claim adjustment expenses reserved at any given time will likely be greater
or less than these estimates, and material differences in the estimates may have
a material adverse effect on the insurer's financial position, results of
operations or cash flows in future periods.
Variability of Workers' Compensation Insurance Business
The workers' compensation insurance business is affected by many factors
that can cause fluctuations in the results of operations of this business. Many
of these factors are not subject to the control of the Company. For example, an
economic downturn in California could result in less demand for workers'
compensation insurance. These factors, together with competitive pricing and
other considerations, could result in fluctuations in the Company's underwriting
results and net income.
Highly Competitive Businesses
The Company writes exclusively workers' compensation insurance, which is
a highly competitive business. Many of the Company's competitors have
substantially greater financial and other resources than the Company, and there
can be no assurance the Company will be able to compete effectively against such
competitors in the future. The Company's competitors include other companies
which, like the Company, serve the independent agency market, as well as
companies which sell insurance directly to insureds. Direct writers may have
certain competitive
21
<PAGE> 31
advantages over agency writers, including increased name recognition, loyalty of
the customer base to the insurer rather than an independent agency and,
potentially, reduced acquisition costs. In addition, certain competitors of the
Company have decreased their prices from time to time in an attempt to gain
market share. The Company believes that to compete successfully in the workers'
compensation business it will have to market and service a level of premiums
sufficiently large to enable the Company to continue to realize operating
efficiencies in conducting its business. No assurance can be given the Company
will be able to compete successfully if its current level of premiums decreases
significantly.
Importance of Ratings
A.M. Best, an independent insurance rating agency, assigned the Company
a "B+" (Very Good) rating in 1995, which the Company has continued to maintain.
A "B+" rating is assigned to companies which have on balance, in A.M. Best's
opinion, very good financial strength, operating performance and market profile
when compared to the standards established by A.M. Best, and have a good ability
to meet their ongoing obligations to policyholders. "B+" is A.M. Best's sixth
highest rating classification out of 15 ratings. A.M. Best bases its ratings on
factors that concern policyholders and not upon factors concerning investors.
Such ratings are subject to change and are not recommendations to buy, sell or
hold securities. One factor in an insurer's ability to compete effectively is
its A.M. Best rating. The Company's A.M. Best rating is lower than that of many
of its competitors. There can be no assurance that such ratings or future
changes therein will not affect the Company's competitive position.
See "Business--Ratings."
Geographic Concentration
The Company writes workers' compensation insurance almost exclusively in
the State of California; consequently, the Company will be significantly
affected by changes in the regulatory and business climate in California. See
"Business--Regulation."
Uncertainty Associated with Estimating Reserves for Unpaid Claim and Claim
Adjustment Expenses
The reserves for unpaid claim and claim adjustment expenses established
by the Company are estimates of amounts needed to pay reported and unreported
claim and related claim adjustment expenses based on facts and circumstances
then known. These reserves are based on estimates of trends in claims severity,
judicial theories of liability, market conditions and other factors. The
establishment of adequate reserves is an inherently uncertain process, and there
can be no assurance that the ultimate liability will not materially exceed the
Company's reserves for claim and claim adjustment expenses and have a material
adverse effect on the Company's results of operations and financial condition.
Although the Company has recently experienced reduced claims frequency, there
maybe an increase in claims severity for injuries sustained in 1995 and
thereafter. In response, the Company plans to undertake the Severity Management
Program. There can be no assurance that such program will be consummated, or,
upon consummation, that it will have the effect the Company anticipates. See
"Business--Claims Severity Management Program." Due to the inherent uncertainty
of estimating reserve amounts, it has been necessary, and may over time continue
to be necessary, to revise estimates of the Company's reserves for claim and
claim adjustment expenses in response to trends in claim severity, judicial
theories of liability, market conditions and other factors. The historic
development of reserves for claim and claim adjustment expenses may not
necessarily reflect future trends in the development of these amounts.
Accordingly, it may not be appropriate to extrapolate redundancies or
deficiencies based on historical information. See "Business--Claim and Claim
Adjustment Expense Reserves."
Availability of Net Operating Loss Carryforwards
As of September 30, 1997, the Company had available approximately $95.4
million in net operating loss carryforwards ("NOLs") to offset taxable income
recognized by the Company for periods after September 30, 1997. For federal
income tax purposes, these NOLs will expire in material amounts beginning in the
year 2006. Until the expiration of such NOLs, the Company's ability to pay
interest on the Senior Subordinated Notes may be dependent on the continued
availability of the NOLs. On April 11, 1997, the Company reincorporated in
Delaware and in doing so adopted certain restrictions on the transfer of its
Common Stock in its Certificate of Incorporation,
22
<PAGE> 32
intended to prevent a change in ownership under Section 382 of the Internal
Revenue Code, which change would materially limit the availability of the
Company's NOLs. In addition, all holders of the Company's outstanding common
stock purchase warrants entered into a Standstill Agreement in which they agreed
not to exercise such warrants until such time as their exercise would not result
in a change of ownership for purposes of Section 382. The transfer restrictions
adopted in the Company's Certificate of Incorporation and the Standstill
Agreement serve to reduce, but not necessarily eliminate, the risk that Section
382 would be applied to limit the availability of the Company's NOLs. In the
event that transfers occur in violation of the transfer restrictions, there can
be no assurance the Internal Revenue Service will not assert such transfers have
federal income tax significance notwithstanding the transfer restrictions, or
that a court might hold the transfer restrictions to be unenforceable. In
addition, the Board of Directors of the Company has the power to waive the
transfer restrictions and enter into a transaction that may result in an
ownership change for purposes of Section 382 that would limit the use of the
Company's NOLs. The Board of Directors would only permit such transaction after
making a determination that the issuance or transfer of equity securities 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).
Future Growth and Continued Operations Dependent on Access to Capital
The underwriting of workers' compensation insurance is a capital
intensive business. The Company must maintain minimum levels of surplus in SNIC
and SPCC in order to continue to write business and meet the other related
standards established by insurance regulatory authorities and insurance rating
bureaus.
The Company achieved premium growth in 1997 as a result of its
acquisition of SPCC. It intends to continue to pursue acquisition and internal
growth opportunities. Among the factors that may restrict the Company's future
growth is the availability of capital. Such capital will likely have to be
obtained through debt or equity financing or retained earnings. There can be no
assurance that the Company will have access to sufficient capital to support
future growth and also satisfy the capital requirements of rating agencies and
regulators. In addition, the Company may require additional capital to finance
future acquisitions. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Company--Liquidity and Capital
Resources."
Importance of Reinsurance
In order to reduce its underwriting risk, the Company purchases
reinsurance. SNIC and SPCC follow the industry practice of reinsuring a portion
of their respective risks. Reinsurance does not relieve the Company of liability
to its insureds for the risks ceded to reinsurers. As such, the Company is
subject to credit risk with respect to amounts not recoverable from reinsurers.
Although the Company places its workers' compensation reinsurance with
reinsurers that are "A" rated or higher by A.M. Best and which the Company
generally believes to be financially stable, a significant reinsurer's
insolvency or inability to make payments under the terms of a reinsurance treaty
could have a material adverse effect on the Company's financial condition or
results of operations.
The amount and cost of reinsurance available to companies specializing
in workers' compensation insurance are subject, in large part, to prevailing
market conditions beyond the control of such companies. The Company's ability to
provide insurance at competitive premium rates and coverage limits on a
continuing basis depends upon its ability to obtain adequate reinsurance in
amounts and at rates that will not adversely affect its competitive position.
Due to continuing market uncertainties regarding reinsurance capacity,
no assurances can be given as to the Company's ability to maintain its current
reinsurance facilities, which generally are subject to annual renewal. If the
Company is unable to renew such facilities upon their expiration, the Company
may need to reduce the levels of its underwriting commitments. See
"Business--Reinsurance."
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<PAGE> 33
Risks Associated with Investments
The Company's results of operations depend in part on the performance of
its invested assets. As of September 30, 1997, virtually all of the Company's
investment portfolio was invested in fixed-income securities. Certain risks are
inherent in connection with fixed-income securities, including loss upon default
and price volatility in reaction to changes in interest rates and general market
factors. See "Business--Investments."
Comprehensive State Regulation
The Company is subject to comprehensive regulation by government
agencies in California and Arizona. The nature and extent of that regulation
typically involve prior approval of the acquisition of control of an insurance
company or of any company controlling an insurance company, regulation of
certain transactions entered into by an insurance company with any of its
affiliates, limitations on dividends, filing of premium rates and policy forms,
solvency standards, minimum amounts of capital and surplus which must be
maintained, limitations on types and amounts of investments, restrictions on the
size of risks which may be insured by a single company, limitation of the right
to cancel or non-renew policies in some lines, regulation of the right to
withdraw from markets, requirements to participate in residual markets,
licensing of insurers and agents, deposits of securities for the benefit of
policyholders, reporting and satisfying certain regulatory standards with
respect to financial condition, and other matters. In addition, state insurance
department examiners perform periodic financial and market conduct examinations
of insurance companies and dictate the accounting practices to be used by
insurance companies when reporting to regulatory authorities. Such regulation is
generally intended for the protection of policyholders rather than security
holders. No assurance can be given that future legislative or regulatory changes
will not adversely affect the Company. See "Business--Regulation."
Holding Company Structure; Dividend and Other Restrictions
The Company is a holding company whose principal asset is the capital
stock of the Subsidiaries. The Company relies primarily on dividends and other
payments from SNIC and SPCC to meet its obligations to creditors and to pay
corporate expenses, including the principal and interest on the Senior
Subordinated Notes. SNIC and SPCC are domiciled in the State of California,
which limits the payment of dividends and other distributions by insurance
companies. Under California law, the maximum aggregate amount of dividends
permitted to be paid in 1997 without regulatory approval by SNIC and SPCC is
approximately $7.9 million. In addition, state insurance laws and regulations
require that the statutory surplus of an insurance company following any
dividends or distribution by such company be reasonable in relation to its
outstanding liabilities and adequate for its financial needs. See
"Business--Overview" and "--Regulation" and "Management Discussion and Analysis
of Financial Condition and Results of Operations of the Company."
Risks of Acquisitions
The Company may pursue acquisitions of insurance companies or other
companies related to the California workers' compensation insurance market that
can be acquired on acceptable terms and which the Company believes can be
operated profitably. Some of these acquisitions could be material in size and
scope. The Company believes that its future growth may depend, in part, upon the
successful implementation of this strategy. While the Company will continually
be searching for acquisition opportunities, there can be no assurance that the
Company will be successful in identifying suitable acquisitions. If any
potential acquisition opportunities are identified, there can be no assurance
that the Company will consummate such acquisitions. The Company may in the
future face increased competition for acquisition opportunities, which may
inhibit its ability to consummate suitable acquisitions or increase the expense
of completing acquisitions. In addition, to the extent that the Company's
strategy results in the acquisition of businesses, such acquisitions could pose
a number of special risks, including the diversion of management's attention,
the assimilation of the operations and personnel of the acquired companies, the
integration of acquired assets with existing assets, adverse short-term effects
on reported operating results, the amortization of acquired intangible assets,
and the loss of key employees.
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<PAGE> 34
Dependence Upon Producers
Superior Pacific depends on outside producers to provide it with
insurance business. The renewal rights of all of such business written are owned
by the producers, and not by Superior Pacific. While Superior Pacific believes
that its relationships with its producers are generally excellent, there can be
no assurance that producers will not move business currently written by Superior
Pacific to another carrier. If renewal rates were to drop significantly at
Superior Pacific as a result of producers moving business to other carriers, or
if producers were to deliver less business of the type Superior Pacific prefers
to underwrite, then the earnings of Superior Pacific could be adversely
affected.
Approximately $39.9 million (28.2%), $47.0 million (25.0%), and $44.0
million (26.0%) of Superior Pacific's premiums for the nine months ended
September 30, 1997 and the years ended December 31, 1996 and 1995, respectively,
were derived from 10 producers. The loss of any of these producers could have a
material adverse effect on Superior Pacific. See "Business--Marketing."
Premium Volume Concentration
Approximately 70.4% of the Company's premium in force is concentrated in
454 non-group policies and 65 group programs that provide annual premium in
excess of $50,000. While marketing through group programs to reach smaller
policyholders is a means by which the Company can pursue its strategy to
underwrite smaller policies, group programs, like large non-group policies, are
vulnerable to price competition. If the Company is not able to retain a
sufficient number of group programs, the loss of overall premium by the Company
could materially and adversely affect the Company's ability to achieve
profitability. With respect to the Company's non-group policies exceeding
$50,000 in annual premium, most were obtained by the Company upon its
acquisition of Pac Rim. Because of the expected price competition for such
policies and the Company's strategy of maintaining underwriting standards, the
Company anticipates that it will not be able to retain a portion of these large
non-group policies. While the Company expects to replace many of them with new,
smaller accounts through its newly acquired relationships with policyholders and
producers previously associated with Pac Rim, if the Company fails to underwrite
a sufficient number of smaller accounts to offset in part the expected loss of
premium from some of its larger policies, the loss of overall premium by the
Company could materially and adversely affect the Company's ability to achieve
profitability.
Significant Ownership by Affiliates of Zurich and Related Parties
Certain affiliates of Zurich collectively own approximately 21% of the
Company's Common Stock on a fully diluted basis, and less than one percent of
the Company's issued and outstanding Common Stock on a non-fully diluted basis.
In addition, Insurance Partners, L.P. and Insurance Partners Offshore (Bermuda),
L.P. (collectively, "IP") owns approximately 24% of the Company's Common Stock,
on a fully diluted basis, and approximately 36% of the Company's issued and
outstanding Common Stock on a non-fully diluted basis. Certain affiliates of
Zurich are limited partners of IP, holding approximately 23% of IP's limited
partnership interests. Further, International Insurance Investors, L.P., ("III")
owns all of the outstanding Voting Notes (as defined herein) issued by Superior
National. Certain affiliates of Zurich are limited partners of III and hold
approximately 32% of III's limited partnership interests. See "Security
Ownership of Certain Beneficial Owners and Management" and "Certain
Relationships and Related Transactions--Transactions with IP--Limitation on
Related Party Control." Five of the Company's eleven directors have
relationships with such parties. Consequently, such parties have significant
influence over the management of the Company and have a significant portion of
the votes needed to approve any action requiring stockholder approval, including
adopting amendments to the Company's Certificate of Incorporation and approving
certain actions, such as mergers or sales of all or substantially all of the
Company's assets, which could cause a Change of Control or otherwise materially
affect the Company's financial condition. See "Description of the Exchange
Preferred Securities--Change of Control Redemption" and "Description of the
Exchange Notes--Change of Control."
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<PAGE> 35
Dependence on Key Personnel in Connection with Future Success
The future success of the Company depends significantly upon the efforts
of certain key management personnel, including William L. Gentz, a director and
the President and Chief Executive Officer, J. Chris Seaman, a director, an
Executive Vice President and the Chief Financial Officer, and Arnold J. Senter,
an Executive Vice President and the Chief Operating Officer. A loss of any of
these officers or other key employees could materially and adversely affect the
Company's business. See "Management--Executive Officers."
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<PAGE> 36
USE OF PROCEEDS
Neither the Company nor the Trust will receive any cash proceeds from
the issuance of the Exchange Preferred Securities offered hereby. In
consideration for issuing the Exchange Preferred Securities in exchange for the
Preferred Securities as described in this Prospectus, the Trust will receive
Exchange Notes in like liquidation amount. The Preferred Securities surrendered
in exchange for the Exchange Preferred Securities will be retired and canceled.
The proceeds to the Trust from the sale of the Preferred Securities were
invested in the Old Notes. The Company used the net proceeds it received from
the sale of the Old Notes, approximately $101.0 million (after deduction of the
expenses of the sale of the Preferred Securities), (i) to repay outstanding
debt, which consisted primarily of the $40.3 million bank debt incurred in
connection with the acquisition of Pac Rim that matured in April 2003, and bore
an average effective interest rate of 10.2% and (ii) to redeem approximately
$26.6 million in preferred securities that were held by a Zurich affiliate
having an effective interest rate of 11.7%, issued in June 1994 by an affiliate.
See "Certain Relationships and Related Transactions--Transactions with
Affiliates of Zurich, Including Centre Re." The Company used the remainder of
the net proceeds for general corporate purposes, including a capital
contribution to SNIC. Pending utilization of such net proceeds, the Company
invested them in short-term, income-generating, investment-grade securities.
ACCOUNTING TREATMENTS
The Trust will be treated, for financial reporting purposes, as a
Subsidiary of the Company and, accordingly, the accounts of the Trust will be
included in the consolidated financial statements of the Company. The Securities
will be presented as a separate line item in the consolidated balance sheet of
the Company under the caption "Minority Interest--Preferred Securities," and
appropriate disclosures about the Securities, the Exchange Guarantee and the
Exchange Notes will be included in the notes to consolidated financial
statements.
All future reports of the Company filed under the Exchange Act will (a)
present the Trust Securities issued by the Trust on the balance sheet as a
separate line item entitled "Minority Interest--Preferred Securities," (b)
include in a footnote to the financial statements disclosure that the sole
assets of the Trust are the Senior Subordinated Notes (including the outstanding
principal amount, interest rate and maturity date of such Senior Subordinated
Notes) and (c) include in a footnote to the financial statements disclosure that
the Company owns all of the Common Securities of the Trust, the sole assets of
the Trust are the Senior Subordinated Notes, and the back-up obligations, in the
aggregate, constitute a full and unconditional guarantee by the Company of the
obligations of the Trust under the Securities.
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<PAGE> 37
CAPITALIZATION
Set forth below is the capitalization of the Company at September 30,
1997 and the capitalization of the Company at September 30, 1997, as adjusted to
give effect to the sale of the Preferred Securities and the application of the
proceeds therefrom as described in "Use of Proceeds."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------
AS ADJUSTED
FOR THE
ACTUAL OFFERING
--------- -------------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt (1) ................................... $ 42,366 $ 30
Preferred securities issued by affiliate in 1994 ..... 25,672 --
Preferred Securities(2) .............................. -- 105,000
Stockholders' Equity:
Common Stock, $.01 par value; authorized 25,000,000
shares; issued and outstanding 5,837,173 shares . 58 58
Paid-in capital excess of par ..................... 34,070 34,070
Paid-in capital--warrants ......................... 2,206 2,206
Unrealized gain on investments, net of taxes ...... 987 987
Retained earnings ................................. 19,483 19,483
-------- --------
Net stockholders' equity ............................. 56,804 56,804
-------- --------
Total capitalization ................................. $124,842 $161,834
======== ========
</TABLE>
- ----------
(1) Does not reflect the Company's payment in October 1997 of approximately $3.7
million of principal on such long-term debt. Long-term debt includes $44.0
million in debt and $1.0 million in accrued interest payable, less
approximately $2.7 million in unamortized costs related to the transaction.
(2) Gross of compensation paid to the Initial Purchasers, and before deducting
expenses of the sale of the Preferred Securities paid or payable by the
Company, together estimated to be approximately $4.0 million.
28
<PAGE> 38
UNAUDITED PRO FORMA CONSOLIDATED
STATEMENTS OF OPERATIONS
The following Unaudited Pro Forma Consolidated Statements of Operations
of the Company for the year ended December 31, 1996 and for the nine months
ended September 30, 1997 present the results of operations for the Company as if
the Acquisition and the sale of the Preferred Securities had occurred as of the
beginning of each period presented. The pro forma adjustments are based on
available information and certain assumptions the Company currently believes are
reasonable in the circumstances. The Unaudited Pro Forma Consolidated Statements
of Operations have been derived from and should be read in conjunction with the
historical Consolidated Financial Statements and Notes of the Company for the
year ended December 31, 1996 and the unaudited nine months ended September 30,
1997 and the restated, historical Consolidated Financial Statements and Notes of
Pac Rim for the year ended December 31, 1996 and the unaudited three months
ended March 31, 1997, contained elsewhere herein, and should be read in
conjunction with the accompanying Notes to Unaudited Pro Forma Consolidated
Statements of Operations.
On April 11, 1997, the Company acquired Pac Rim for aggregate
consideration of $42.0 million in cash, which resulted in the payment of $20.0
million to Pac Rim's common stockholders, $20.0 million to Pac Rim's convertible
debenture holders, and $2.0 million to Pac Rim's warrant and option holders. In
addition the Company incurred $2.0 million in transaction fees and related
expenses. The Company financed the Acquisition through a $44.0 million term loan
and the sale of $18.0 million of newly issued shares of Common Stock. In
addition to the $42.0 million in cash paid for Pac Rim, $6.6 million of the
proceeds were used to prepay the Company's previously existing long-term debt.
The pro forma information is presented for illustrative purposes only
and is not necessarily indicative of the results of operations that would have
occurred had the Acquisition and the sale of the Preferred Securities been
consummated on the dates assumed; nor is the pro forma information intended to
be indicative of the Company's future results of operations.
29
<PAGE> 39
PRO FORMA FINANCIAL INFORMATION
SUPERIOR NATIONAL INSURANCE GROUP, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997
-------------------------------------------------------------------------------
PRO FORMA PRO FORMA
PURCHASE ADJUSTMENTS
SUPERIOR ADJUST- FOR PRO FORMA
NATIONAL PAC RIM* MENTS(1) OFFERING(1) COMBINED
------------ ---------- --------------- ------------- ------------
INC./
(DECR.)
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
REVENUES:
Net premiums earned(2) ................ $ 99,148 $ 19,507 $ (739)(a) $ $ 117,916
Net investment income (3) ............. 9,198 1,449 10,647
Realized gains (loss) ................. 46 -- 46
----------- -------- ----------- ----------- -----------
Total revenues ....................... 108,392 20,956 (739) 128,609
EXPENSES:
Claim and claim adjustment
expenses, net of reinsurance ......... 66,311 25,841 (581)(a) 79,571
(12,000)(b)
Underwriting and general and
administrative expenses(2) ........... 28,579 10,769 (286)(a) 31,586
(714)(c)
(6,762)(d)
Policyholder dividends ................ -- 1,006 1,006
Goodwill amortization ................. 477 -- (77)(i) 400
Interest expense(2) ................... 5,302 589 (2,742)(e) 3,149
----------- -------- ----------- ----------- -----------
Expenses: ....................... 100,669 38,205 (20,420) (2,742) 115,712
----------- -------- ----------- ----------- -----------
Income (loss) before income taxes,
accretion on preferred securities
issued in 1994, distributions on
Preferred Securities, discontinued
operations, extraordinary items,
and cumulative effect of change in
accounting for income taxes(2) ....... 7,723 (17,249) 19,681 2,742 12,897
Income tax expense (benefit) .......... 2,821 612 156(h) 932(h) 4,521
----------- -------- ----------- ----------- -----------
Income (loss) before accretion on
preferred securities issued in 1994,
distributions on Preferred Securities,
discontinued operations, extraordinary
items, and cumulative effect of change
in accounting for income taxes ...... 4,902 (17,861) 19,525 1,810 8,376
Accretion on preferred
securities issued in 1994,
net of income tax benefit ............ (1,387) -- -- 1,387(f) --
Distributions on Preferred
Securities issued in 1997,
net of tax benefit ................... (5,587)(g) (5,587)
Extraordinary loss on
redemption of Pac Rim's o/s
debentures (net of tax) .............. (635)(j) -- (635)
Extraordinary loss on early
redemption of Imperial Bank
loan (net of tax) .................... (161)(j) -- (161)
Extraordinary loss on early
redemption of Chase Bank loan
(net of tax) ......................... (10,361) (10,361)
Extraordinary loss on early
redemption of Chase Term loan
(net of tax) ......................... (1,810)(k) (1,810)
----------- -------- ----------- ----------- -----------
Net income (loss) from
continuing operations ................ $ (7,642) $(17,861) $ 19,525 $ (4,200) $ (10,178)
=========== ======== =========== =========== ===========
PER COMMON SHARE:
Income (loss) from continuing
operations ........................... $ (1.52) $ (1.87) $ (1.74)
Weighted average shares ...............
outstanding .......................... 5,040,360 9,528,200 5,837,173
OTHER DATA (UNAUDITED):
EBITDA ................................ 16,085
Ratio of earnings to fixed
charges and distributions on
Preferred Securities ................. 1.34x
Ratios of EBITDA to
distributions on Preferred
Securities ........................... 1.90x
Ratios of Preferred
Securities to EBITDA ................. N/M(4)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
------------------------------------------------------------------------
PRO FORMA PRO FORMA
PURCHASE ADJUSTMENTS
SUPERIOR ADJUST- FOR PRO FORMA
NATIONAL PAC RIM MENTS(1) OFFERING(1) COMBINED
--------- --------- -------- ----------- ---------
INC./
(DECR.)
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
REVENUES:
Net premiums earned(2) ................ $ 88,648 $ 82,654 $ (1,313)(a) $ $ 169,989
Net investment income (3) ............. 7,738 7,021 14,759
Realized gains (loss) ................. 31 1,640 1,671
-------- --------- --------- -------- ---------
Total revenues ....................... 96,417 91,315 (1,313) 186,419
EXPENSES:
Claim and claim adjustment
expenses, net of reinsurance ......... 55,638 79,890 (1,603)(a) 113,925
(20,000)(b)
Underwriting and general and
administrative expenses(2) ........... 33,952 31,424 (897)(a) 54,127
(479)(c)
(9,873)(d) (5,938)
Policyholder dividends ................ (5,927) (11)
Goodwill amortization ................. -- -- 534(i) 534
Interest expense(2) ................... 7,527 2,341 (2,962)(e) 6,906
-------- --------- --------- -------- ---------
Total Expenses: ...................... 91,190 113,644 (32,318) (2,962) 169,554
-------- --------- --------- -------- ---------
Income (loss) before income taxes,
accretion on preferred securities
issued in 1994, distributions on
Preferred Securities, discontinued
operations, extraordinary items,
and cumulative effect of change in
accounting for income taxes(2) ....... 5,227 (22,329) 31,005 2,962 16,865
Income tax expense (benefit) .......... 1,597 606 2,706(h) 1,007(h) 5,916
-------- --------- --------- -------- ---------
Income (loss) before accretion on
preferred securities issued in 1994,
distributions on Preferred Securities,
discontinued operations, extraordinary
items, and cumulative effect of change
in accounting for income taxes ...... 3,630 (22,935) 28,299 1,955 10,949
Accretion on preferred
securities issued in 1994,
net of income tax benefit ............ (1,667) -- 1,667(f) --
Distributions on Preferred
Securities issued in 1997,
net of tax benefit ................... (7,450)(g) (7,450)
Extraordinary loss on
redemption of Pac Rim's o/s
debentures (net of tax) .............. (635)(j) (635)
Extraordinary loss on early
redemption of Imperial Bank
loan (net of tax) .................... (161)(j) (161)
Extraordinary loss on early
redemption of Chase Bank loan
(net of tax) .........................
Extraordinary loss on early
redemption of Chase Term loan
(net of tax) ......................... (1,810)(k) (1,810)
-------- --------- --------- -------- ---------
Net income (loss) from
continuing operations ................ $ 1,963 $ (22,935) $ 27,503 $ (5,638) $ 893
======== ========= ========= ======== =========
PER COMMON SHARE:
Income (loss) from continuing
operations .......................... $ 0.40 $ (2.41) $ 0.12
Weighted average shares ...............
outstanding .......................... 5,315,670 9,528,000 7,529,018
OTHER DATA (UNAUDITED):
EBITDA ................................ 26,278
Ratio of earnings to fixed
charges and distributions on
Preferred Securities ................. 1.27x
Ratios of EBITDA to
distributions on Preferred
Securities ........................... 2.33x
Ratios of Preferred
Securities to EBITDA ................. 4.00x
</TABLE>
- ----------
* Represents Pac Rim financial data for the three months ended March 31, 1997.
See accompanying explanatory notes to pro forma financial statements.
<PAGE> 40
NOTES TO PRO FORMA FINANCIAL STATEMENTS
PRO FORMA ADJUSTMENTS
The following descriptions reference the adjustments as labeled on the
unaudited consolidated pro forma statements of operations:
(1) (a) To reflect the premium rate differential between SNIC's excess of
loss reinsurance treaties and Pac Rim's reinsurance treaties.
Additionally, the adjustment includes the pro forma quota share
treaty effects that would result from the additional premium
resulting from the Pac Rim merger.
(b) To reverse a portion of the adverse development recorded in 1996 and
1997 by Pac Rim for accident years 1995 and prior (in effect,
shifting the adverse development in part to the earlier years in
which it occurred). The recording of adverse development amounts in
Pac Rim's 1996 Statement of Operations was required by regulatory
authorities as a condition of the Company's acquisition of Pac Rim.
(c) To reverse expenses related to the Acquisition recorded in Pac Rim's
Statement of Operations for the fiscal year ended December 31, 1996
and the three months ended March 31, 1997.
(d) The following represent the estimated cost reductions expected to be
achieved under the Company's business plan to integrate the
operations of Pac Rim into Superior Pacific:
<TABLE>
<CAPTION>
NINE MONTH
1996 COMBINED 1997 COMBINED
PROJECTED SAVINGS PROJECTED SAVINGS
----------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Payroll reductions for the elimination of
duplicative personnel(i) .................... $6,223 $4,667
Cancellation of data processing outsourcing
agreement(ii) ............................... 1,706 638
Sublease of excess office space at current
market price ................................ 950 712
Elimination of other corporate duplicative
costs including outside audit fees, executive
travel, director and officers insurance,
payroll processing and cancellation of
line of credit(iii) ......................... 994 745
------ ------
$9,873 $6,762
====== ======
</TABLE>
- --------------
(i) Upon acquisition, the Company immediately began the process of
absorbing the operations of Pac Rim into the Company's existing
operations. At the time the acquisition was announced the Company
had approximately 360 employees and Pac Rim had approximately 270
employees.
Within four months following the Acquisition, approximately 200
employees of Pac Rim were released or resigned. The remaining
employees have been retained.
Immediately prior to the Acquisition and subsequent to the
Acquisition, the Company added staff to its existing operations to
support the operations acquired from Pac Rim. As of four months
following the Acquisition, the Company had completed its staff
increases, and was performing substantially all of the
administrative functions in its Calabasas, California headquarters.
The net increase in staff by the Company related to the acquisition
of Pac Rim was approximately 30 employees. The Pac Rim employees
terminated included substantially all of its executive management.
The additional employees added by the Company were primarily line
employees.
31
<PAGE> 41
In preparing the pro-forma salary adjustment, the ongoing salary
expenses relating to the new employees hired were included. These
salary costs are expected to represent the level of salaries needed
to manage the operations acquired from Pac Rim on an ongoing basis.
(ii) In 1992, Pac Rim entered into an agreement with an outside
vendor to assume substantially all of its data processing
responsibilities. During 1996, Pac Rim paid approximately
$1.7 million to the outside vendor for services provided.
The Company, at the time of the Acquisition, terminated
the contract and has assumed all data processing
responsibilities for Pac Rim's operations.
(iii) Represents savings that are the result of the elimination
of certain duplicate services that both the Company and
Pac Rim contracted out or obtained through outsourcing
agreements. These savings have been presented net of
projected cost increases to the Company for additional
costs expected to arise as a result of the Acquisition.
(e) Amount represents the benefit to the Company for the nine months
ended September 30, 1997 and the year ended December 31, 1996 as a
result of the expected repayment of its existing bank debt from the
proceeds of the sale of the Preferred Securities.
(f) Amount represents the benefit, net of tax, for the nine months ended
September 30, 1997 and the year ended December 31, 1997 that would
accrue to the Company as a result of the expected redemption of
preferred securities issued by an affiliate of the Company in 1994.
(g) Amount represents the pro forma distributions to holders of the
Preferred Securities, net of tax, for the nine months ended
September 30, 1997 and the year ended December 31, 1996 that would
have resulted from the issuance of the Preferred Securities
effective January 1, 1997, or January 1, 1996, as applicable.
Distributions to holders of the Preferred Securities were calculated
using an interest rate of 10.75%.
(h) Adjustment reflects the tax effect of the pro forma adjustments,
excluding goodwill at an effective tax rate of 34%.
(i) Amortization of goodwill over a period of 27.5 years.
(j) To record the extraordinary loss on the prepayment of the Company's
outstanding bank debt net of the effects of income taxes.
(k) Adjustment relates to the write-off of the capitalized costs that
would result from repayment of the term loan obtained in April 1997
in connection with the Acquisition.
(2) The Company's management believes that steps taken by it prior to and
subsequent to the acquisition of Pac Rim will have a favorable effect on
the Company's future earnings potential. Prior to Pac Rim's acquisition,
the Company cancelled a reinsurance treaty. The Company recorded a one
time charge to income of $5.3 million related to the cancellation of the
reinsurance treaty. Had the Company not cancelled the reinsurance
contract, underwriting expenses recorded in general and administrative
expenses in 1996 would have been $5.3 million lower and net income would
have been approximately $3.5 million higher.
Further, the reinsurance treaty that was cancelled had a funds withheld
component, under which the Company incurred approximately $6.9 million
in interest expense during 1996. As the treaty has been cancelled and
the funds withheld settled the Company is no longer subject to these
charges.
Pac Rim maintained several collection practices that resulted in the
understatement of amounts recorded as bad debts. During 1996 these
practices resulted in bad debts of $1.8 million or 2% of gross premiums
written. The Company's historical bad debt ratio is 1%; therefore, if
Pac Rim had achieved the bad debt experience of the Company its gross
written premiums would have been approximately $0.9 million higher
32
<PAGE> 42
and its net loss would have been approximately $0.6 million lower. A
similar adjustment is required during the first quarter of 1997.
(3) The Company, after repaying its outstanding bank debt and redeeming the
preferred securities issued in 1994, expects to have, net of expenses of
the sale of the Preferred Securities, approximately $34 million
available for investment. The pro forma statement of earnings for the
nine months ended September 30, 1997 and the year ended December 31,
1996 assumes no investment income on these funds. However, the Company
fully expects to invest such funds.
(4) Ratio not meaningful for interim periods.
33
<PAGE> 43
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data are qualified by
reference to and should be read in conjunction with the consolidated financial
statements and notes thereto included elsewhere in this Prospectus. The selected
consolidated financial data set forth below as of and for the years ended
December 31, 1996, 1995 and 1994 have been derived from the audited financial
statements of the Company included elsewhere in this Prospectus. See "Index to
Financial Statements." The selected consolidated financial data set forth below
as of and for the years ended December 31, 1993 and 1992 have been derived from
audited financial statements of the Company not included in this Prospectus. The
selected consolidated financial data as of and for the nine months ended
September 30, 1997 and 1996 have been derived from unaudited consolidated
financial statements of the Company, but include all adjustments, including
normally occurring accruals, that the Company considers necessary for a fair
presentation of the results of operations for the periods presented. The results
of operations for the nine months ended September 30, 1997 are not necessarily
indicative of the results that may be expected for the Company's fiscal year
ending December 31, 1997.
34
<PAGE> 44
SELECTED CONSOLIDATED FINANCIAL DATA
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1996 THROUGH 1992
(Amounts in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
-------------------------------
1997(1) 1996
------------- -----------
<S> <C> <C>
REVENUES:
Gross premiums written ....... $ 114,211 $ 74,192
Net premiums written ......... 96,596 66,133
Net premiums earned .......... 99,148 66,040
Net investment income
(excluding capital gains and
losses) ..................... 9,198 6,361
Net capital gain (loss) ...... 46 33
Other income (expense), net .. (817) 216
----------- -----------
Total revenues ............ 107,575 72,650
EXPENSES:
Claim and claim adjustment
expenses, net of reinsurance 66,311 36,801
Underwriting and general and
administrative expenses ..... 27,762 26,546
Policyholder dividends ....... -- (2,121)
Goodwill amortization ........ 477 --
Interest expense ............. 5,302 6,922
Income from continuing
operations before preferred
securities and extraordinary
items--pre-tax .............. 7,723 4,502
Income tax benefit (expense) . 3,641 (710)
Accretion on preferred
securities--pre-tax ......... (2,101) (1,876)
(Loss) from operations of
discontinued P&C
operations--pre-tax(2) ...... -- --
Extraordinary (loss)--pre-tax (16,905) --
Cumulative effect of change in
accounting for income taxes . -- --
----------- -----------
Net income (loss) ......... $ (7,642) $ 1,916
PER SHARE:(3)
Income (loss) before items
below--after all taxes ...... $ 2.25 $ 0.76
Preferred securities
(dividends and
accretion)--pre-tax ......... (.42) (.35)
(Loss) from discontinue
operations--pre-tax ......... -- --
Extraordinary (loss)--pre-tax (3.35) --
Cumulative effect of change in
accounting for income taxes . -- --
----------- -----------
Net income (loss)(4) ...... $ (1.52) $ 0.41
OTHER DATA:
EBITDA(5) .................... 13,142 12,680
GAAP RATIOS:(6)
Claim and claim adjustment
expense ratio ............... 66.9% 55.7%
Expense ratio ................ 28.0 37.0
----------- -----------
Continuing operations combined
ratios, net of reinsurance .. 94.9% 92.7%
=========== ===========
Ratio of earnings to combined
fixed charges and accretion
on preferred securities(7) .. 1.66x 1.29x
FINANCIAL POSITION:
Total cash and investments(8)
Carrying value .............. $ 238,804 $ 151,926
Market value ................ 238,804 150,413
Total assets ................. 397,192 228,094
Long-term debt ............... 42,366 7,630
Claim and claim adjustment
expense liability ........... 222,625 113,539
Total liabilities ............ 314,716 160,070
Preferred securities issued by
affiliate ................... 25,672 22,921
Net stockholders' equity ..... 56,804 45,103
Book value per share(3) ......
Outstanding shares(3) ........ 5,837,173 3,433,473
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
REVENUES:
Gross premiums written ....... $ 99,282 $ 97,084 $ 134,769 $ 157,986 $ 109,609
Net premiums written ......... 87,715 89,139 105,946 154,431 59,826
Net premiums earned .......... 88,648 89,735 110,418 153,585 55,892
Net investment income
(excluding capital gains and
losses) ..................... 7,738 10,309 9,014 8,481 5,050
Net capital gain (loss) ...... 31 (525) 35 1,069 5,752
Other income (expense), net .. 186 (536) (340) (743) (243)
----------- ----------- ----------- ----------- -----------
Total revenues ............ 96,603 98,983 119,127 162,392 66,451
EXPENSES:
Claim and claim adjustment
expenses, net of reinsurance 55,638 53,970 78,761 113,817 33,929
Underwriting and general and
administrative expenses ..... 34,138 29,447 21,660 28,779 10,847
Policyholder dividends ....... (5,927) (5,742) 4,983 11,371 4,562
Goodwill amortization ........ -- -- -- -- --
Interest expense ............. 7,527 9,619 8,726 6,221 1,258
Income from continuing
operations before preferred
securities and extraordinary
items--pre-tax .............. 5,227 11,689 4,997 2,204 15,855
Income tax benefit (expense) . (739) 5,849 (4) 2,304 --
Accretion on preferred
securities--pre-tax ......... (2,525) (2,255) (1,035) -- --
(Loss) from operations of
discontinued P&C
operations--pre-tax(2) ...... -- (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) ......... $ 1,963 $ 371 $ 894 $ 1,587 $ 249
PER SHARE:(3)
Income (loss) before items
below--after all taxes ...... $ 0.88 $ 5.12 $ 1.45 $ 1.31 $ 4.62
Preferred securities
(dividends and
accretion)--pre-tax ......... (.48) (.66) (0.30) -- --
(Loss) from discontinue
operations--pre-tax ......... -- (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)(4) ...... $ 0.40 $ 0.11 $ 0.26 $ 0.46 $ 0.07
OTHER DATA:
EBITDA(5) .................... 14,727 22,652 15,276 9,300 16,772
GAAP RATIOS:(6)
Claim and claim adjustment
expense ratio ............... 62.8% 60.1% 71.3% 74.1% 60.7%
Expense ratio ................ 31.8 26.4 24.1 26.1 27.6
----------- ----------- ----------- ----------- -----------
Continuing operations combined
ratios, net of reinsurance .. 94.6% 86.5% 95.4% 100.2% 88.3%
=========== =========== =========== =========== ===========
Ratio of earnings to combined
fixed charges and accretion
on preferred securities(7) .. 1.27x 1.87x 1.36x 1.33x 9.93x
FINANCIAL POSITION:
Total cash and investments(8)
Carrying value .............. $ 149,440 $ 163,951 $ 176,878 $ 150,179 $ 154,953
Market value ................ 149,440 166,103 172,706 156,744 154,294
Total assets ................. 306,569 240,781 286,776 264,098 291,487
Long-term debt ............... 98,961 8,530 9,730 6,743 9,192
Claim and claim adjustment
expense liability ........... 115,529 141,495 171,258 171,038 202,634
Total liabilities ............ 237,807 176,256 227,622 224,044 253,012
Preferred securities issued by
affiliate ................... 23,571 21,045 18,790 -- --
Net stockholders' equity ..... 45,191 43,480 40,364 40,055 38,475
Book value per share(3) ...... $ 13.11 $ 12.68 $ 11.77 $ 11.68 $ 11.22
Outstanding shares(3) ........ 3,446,492 3,430,373 3,429,873 3,429,873 3,429,873
</TABLE>
- ---------------
<PAGE> 45
(1) The information for the nine months ended September 30, 1997 includes
the financial data of SPCC for the period beginning April 1, 1997.
(2) The Company's losses from discontinued operations resulted principally
from contractors' and developers' liability business underwritten from
1986 to 1991.
(3) Adjusted to reflect a four-into-one reverse stock split effective as of
May 24, 1995.
(4) Since the Company's inception it has not declared or paid any dividends
to its stockholders.
(5) EBITDA consists of earnings before interest, taxes, minority interest,
depreciation, and amortization. EBITDA is presented here not as a
measure of operating results, but rather as a measure of the Company's
cash flow and debt service ability, and should not be considered as an
alternative to net earnings and cash flows determined in accordance with
GAAP. Because the Company's ability to obtain dividends from its
insurance subsidiaries may be subject to certain restrictions, EBITDA is
not necessarily indicative of the Company's ability to service its
indebtedness.
(6) These ratios are for continuing operations. The claim and claim
adjustment expense ratio is calculated by dividing claim and claim
adjustment expenses by net premiums earned. The expense ratio is
calculated by dividing the sum of commissions (net of reinsurance ceding
commissions), policyholder dividends, and general and administrative
expenses by net premiums earned. The combined ratio is the sum of the
claim and claim adjustment expense ratio and the expense ratio.
(7) For purposes of calculating the ratio of earnings to combined fixed
charges and preferred stock dividends, earnings represent income before
the provision (benefit) for income taxes, plus fixed charges. Fixed
charges consist of interest expense, amortization of financing costs and
the portion of rental expense on operating leases which the Company
estimates to be representative of the interest factor attributable to
the leases. Preferred stock dividends consist of dividends on
approximately $26.6 million in preferred securities having an effective
interest rate of 11.7% issued in June 1994 by an affiliate.
(8) Investments as of December 31, 1996 are reflected at market value. As of
December 31, 1995 and 1994 a portion of the portfolio was classified as
held to maturity and was therefore reflected at amortized cost and the
remaining portfolio was shown at market value. Investments as of
December 31, 1993 and 1992 are reflected at amortized cost. The changes
in portfolio valuation reflect the adoption of Financial Accounting
Standard Board Statement No. 115, effective for fiscal years following
December 15, 1993.
36
<PAGE> 46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF THE COMPANY
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 and should be read in
conjunction with the consolidated financial statements and the notes thereto
contained elsewhere in this Prospectus.
OVERVIEW
The Company recorded an underwriting profit from continuing operations
of $5.1 million for the nine months ended September 30, 1997, versus $4.8
million for the same period in 1996. When extraordinary items are taken into
account, the Company incurred a net loss of $7.6 million or $1.52 per share for
the nine month- period ended September 30, 1997, versus income of $1.9 million
or $0.41 per share in the corresponding period of the prior year, due primarily
to an extraordinary charge of $10.4 million, net of taxes related to the early
retirement of long-term debt in the second quarter of 1997.
For the year ended December 31, 1996, the Company recorded an
underwriting profit from continuing operations of $4.8 million versus an
underwriting profit of $12.1 million for 1995. The decrease in underwriting
profit for 1996 from 1995 was primarily attributable to a one-time expense of
$5.3 million for the cancellation of a reinsurance contract. In addition, in
1996 the Company recorded $1.7 million in adverse development related to
accident years prior to 1996. See "Business--Reinsurance." When extraordinary
items are taken into account, the Company's net income was $2.0 million or $0.40
per share for the year ended December 31, 1996 as compared to $0.4 million or
$0.11 per share for 1995. The substantial difference between the underwriting
profit of $12.1 million and net income of approximately $0.4 million in 1995 was
primarily the result of an extraordinary after-tax loss of $9.8 million
associated with discontinued operations.
For the year ended December 31, 1995, the Company recorded an
underwriting profit from continuing operations of $12.1 million versus an
underwriting profit of $5.0 million for 1994. The increase in underwriting
profit for 1995 was primarily due to a $4.8 million reduction in reserves for
years prior to 1995 and a $5.7 million reduction in policyholder dividends. When
extraordinary items are taken into account, the Company's net income was $0.4
million or $0.11 per share for the year ended December 31, 1995, versus $0.9
million or $0.26 per share in 1994. The reason for the substantial difference
between the underwriting profit of $12.1 million and net income of $0.4 million
in 1995 is discussed above.
NINE MONTHS ENDED SEPTEMBER 30, 1997 AS COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1996
Gross premiums written increased $40.0 million or 53.9% to $114.2
million in the first nine months of 1997 as compared to the same period in 1996.
Substantially all of this increase can be attributed to the addition of business
written by SPCC. Net premiums written increased $30.5 million or 46.1% to $96.6
million in the first nine months of 1997 as compared to the same period in 1996,
reflecting the increase in gross premiums written. Net premiums earned increased
$33.1 million or 50.1% to $99.1 million in the first nine months of 1997 as
compared to the same period in 1996, reflecting the increase in net premiums
written.
Net claim and claim adjustment expenses increased $29.5 million or 80.2%
to $66.3 million in the first nine months of 1997 as compared to the same period
in 1996, $19.9 million of which resulted from the addition of business written
by SPCC. The net claim and claim adjustment expense ratio increased to 66.9% in
the first nine months of 1997 from 55.7% in the same period of 1996, due to the
return of results in 1997 to historical averages and to unfavorable development
on reserves related to the 1995 accident year. Although the Company has been
experiencing a reduction in the frequency of claims, at the same time there may
be an increase in claims severity for injuries sustained in 1995 and thereafter.
Management currently intends to address this potential trend with the planned
Severity Management Program, which is intended to reduce the Company's average
ultimate claim and claim adjustment expense per claim for 1995 and subsequent
dates of injury. See "Business--Claims Severity Management Program."
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Underwriting and general and administrative expenses, excluding
policyholder dividends, increased $1.2 million or 4.6% to $27.8 million in the
first nine months of 1997 as compared to the same period in 1996. Excluding the
one-time expense of $5.3 million for the cancellation during the second quarter
of 1996 of a reinsurance contract, underwriting expenses increased $6.5 million
or 31.0% to $27.8 million in the first nine months of 1997 from the first nine
months of 1996 as a result of the SPCC acquisition. The Company's expense ratio
decreased to 28.0% for the nine months ended September 30, 1997 from 37.0% for
the same period in 1996, due primarily to the previously mentioned one-time
expense of $5.3 million. Excluding SPCC, the Company's expense ratio increased
to 37.3% for the first nine months of 1997 from 37.0% for the same period during
1996.
No policyholder dividends were paid during the first nine months of 1997
as compared to the payment of $1.3 million of such dividends during the same
period in 1996. 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, dividends are currently no longer a
significant factor in the marketing of workers' compensation insurance in
California. In 1995, as a result of the diminishing value of policyholder
dividends as a marketing tool, the Company's management declared a moratorium in
the payment of policyholder dividends for California policies. In December 1996,
the Company discontinued policyholder dividend payments. Estimated amounts to be
returned to policyholders were accrued when the related premium was earned by
the Company. Dividends were paid to the extent that a surplus was accumulated
from premiums on workers' compensation policies.
Net investment income increased $2.8 million or 44.6% to $9.2 million in
the first nine months of 1997 as compared to the same period in 1996 as a result
of the acquisition of SPCC. Excluding SPCC, net investment income decreased 8.5%
or $0.5 million in the first nine months of 1997 as compared to the same period
in 1996. This 8.5% decrease was due to a decline in the average amount of
invested assets by $19.8 million or 12.6% to $137.7 million in the first nine
months of 1997 as compared to the same period in 1996.
Interest expense decreased $1.6 million or 23.4% to $5.3 million for the
first nine months of 1997 as compared to the same period in 1996, due primarily
to the elimination of funds withheld balance, partially off-set by the Company's
incurrence of a $44.0 million term loan in connection with its acquisition of
Pac Rim.
Discontinued operations claims counts and losses were 216 and $15.6
million, respectively, during the first nine months of 1997, which was
consistent with management's expectations. The Company has significant exposure
to construction defect liabilities on P&C insurance policies underwritten from
1986 to 1993. Management continues to monitor closely its potential exposure to
construction defect claims and has not changed its estimates of ultimate claim
and claim adjustment expense on discontinued operations since 1995. Management
believes its current reserves are adequate to cover its claims activity. There
can be no assurance, however, that further upward development of ultimate loss
costs associated with construction defect claims will not occur. The Company has
allocated $14.0 million of deferred tax assets to pay for these liabilities. See
"Business--Discontinued Operations."
YEAR ENDED DECEMBER 31, 1996 AS COMPARED TO YEAR ENDED DECEMBER 31, 1995
Gross premiums written increased $2.2 million or 2.3% to $99.3 million
in 1996 from 1995, due primarily to the Company's continued strategy of
underwriting smaller risks. Net premiums written decreased $1.4 million or 1.6%
to $87.7 million, reflecting an increased amount of premiums ceded to
reinsurers. Net premiums earned decreased $1.1 million or 1.2% to $88.6 million
in 1996 from 1995, reflecting, in part, an increase in ceded premiums.
Claim and claim adjustment expenses increased $1.7 million or 3.1% to
$55.6 million in 1996 from 1995, due principally to adverse development in claim
and claim adjustment expense reserves related to the 1995 accident year. The
claim and claim adjustment expense ratio as a percentage of net earned premium
increased slightly to 62.8% in 1996 from 60.1% in 1995.
Underwriting and general and administrative expenses, excluding
policyholder dividends, increased $4.7 million or 16% to $34.1 million in 1996
from 1995, due primarily to a $5.3 million adjustment recorded in the second
quarter of 1996 for accrued costs related to the cancellation of a reinsurance
contract. Underwriting and
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general and administrative expenses for 1996, excluding the $5.3 million in
accrued costs, were $28.8 million as compared to $29.4 million in 1995. The
Company's expense ratio, excluding the $5.3 million in accrued costs and
policyholder dividends, was 32.5% for 1996, which is comparable to 32.8% in
1995.
Policyholder dividend expenses for 1996 were comparable to 1995,
constituting a decrease in underwriting expense of $5.9 million in 1996 as
compared to $5.7 million in 1995.
Underwriting profit from continuing operations decreased $7.3 million or
60% to $4.8 million in 1996 from 1995, primarily as a result of a $4.7 million
increase in underwriting expense principally due to the cost of canceling the
reinsurance contract discussed above, and a $2.0 million increase in claim and
claim adjustment expense due mainly to adverse development on reserves related
to prior accident years.
Net investment income decreased $2.0 million or 20% to $7.8 million in
1996 as compared to 1995, due to a decrease in the average investable assets of
$11.3 million and a decline in the average portfolio investment yield as a
result of generally lower market interest rates in 1996 as compared to 1995.
While a financing transaction involving Chase and Centre Re entered into in
November 1996 substantially increased the size of the investment portfolio on
which the Company retained investment income, it occurred too late in 1996 to
have a material effect on 1996 net investment income results. See "--Liquidity
and Capital Resources."
YEAR ENDED DECEMBER 31, 1995 AS COMPARED TO YEAR ENDED DECEMBER 31, 1994
Gross premiums written decreased $37.7 million or 28% to $97.1 million
in 1995 from 1994, due primarily to the competitive effects of the advent of
open rating in California. In 1995, production measured in policy counts was 8%
higher than in 1994, but the premium in force associated with those policies was
down 26%. Net premiums written decreased $16.8 million or 16% to $89.1 million
in 1995 from 1994, reflecting the decrease in gross premiums written, which was
offset, in part, by a decrease in 1995 in ceded premiums of $20.9 million. Net
premiums earned decreased $20.7 million or 19% to $89.7 million in 1995 from
1994, reflecting the decrease in net premiums written.
Claim and claim adjustment expense decreased $24.8 million or 31% to
$54.0 million in 1995 from 1994 due primarily to the 28% decline in gross
premiums written. In addition, 1995 claim and claim adjustment expense included
a $2.2 million decrease in the estimated ultimate claim and claim adjustment
expense 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, which were consistent with those of its outside actuaries. The claim and
claim adjustment expense ratio decreased to 60.1% in 1995 from 71.3% in 1994. Of
this 11.2 percentage point improvement, 8.7 percentage points was attributable
to the decline in frequency and severity of the reporting claims to the Company
that continued through the 1995 accident year. The remaining 2.5 percentage
point improvement reflected the continued decrease in the Company's estimates of
frequency and severity of claims for accident years prior to 1995.
Underwriting and general and administrative expenses, excluding
policyholder dividends, increased $7.8 million or 36% to $29.4 million in 1995
from 1994, due primarily to a $4.5 million decrease in ceding commissions in
1995 from the quota-share contract with ZRNA offset, in part, by a decrease in
direct commission expense of $3.0 million due to lower premium production. The
Company's expense ratio, excluding policyholder dividends, was 32.8% in 1995.
Policyholder dividends decreased $10.7 million in 1995 from 1994, due
primarily 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. This
decrease was attributable to the moratorium declared by the Company in 1995 on
the payment of policyholder dividends for California policies in response to the
diminishing value of policyholder dividends as a marketing tool since the advent
of open rating in January 1995.
Underwriting profit from continuing operations increased $7.0 million or
141% to $12.1 million for the year ended December 31, 1995 from 1994, due
primarily to a $4.8 million decrease in workers' compensation reserves and a
$5.7 million reduction in policyholder dividends. The decrease in workers'
compensation reserves was a result of continued favorable loss reserve
development on accident years prior to 1995. This improvement
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in underwriting profit was offset by an increase in underwriting expense of $7.8
million in 1995, which was primarily the result of decreased premium production
not commensurate with the decrease in commission and overhead expenses.
Underwriting profit for 1995, excluding the items discussed above, decreased
$0.9 million or 18% to $4.1 million from 1994.
Net investment income increased $0.7 million or 8.1% to $9.8 million for
the year ended December 31, 1995. Of the $0.7 million increase, $0.1 million was
attributable to an increase in investment yield to 6.0% for 1995 from 5.6% for
1994. The remaining $0.6 million increase occurred as a result of a $10.2
million or 6.3% increase in average investable assets to $171.7 million at
December 31, 1995 versus December 31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash inflows are generated from cash collected from
policies sold, investment income generated from its existing portfolio, and
sales and maturities of investments. The Company's cash outflows consist
primarily of payments for policyholders' claims, operating expenses, and debt
service. For their insurance operations, SNIC and SPCC must have available cash
and liquid assets to meet their obligations to policyholders and claimants in
accordance with contractual obligations in addition to meeting their ordinary
operating costs. Absent adverse material changes in the workers' compensation
insurance market, management believes that the Company's present cash resources,
as well as cash that is available after applying the proceeds of the sale of the
Preferred Securities are sufficient to meet its needs for the foreseeable
future.
During the first nine months of 1997, the Company used $26.5 million of
cash in its operations versus $21.7 million during the same period in 1996. The
Company's continued negative cash flow is the result of the Company's historical
base of premium in force being significantly higher than its current level. The
Company anticipates it will continue to experience negative cash flow from
operations until the claims related to the historically higher premium base have
been paid out. The $4.8 million increase in cash used in operations during the
first nine months of 1997 is primarily due to the addition of SPCC operations
for the second and third quarters of 1997. The Company believes that it has
adequate short-term investments and readily marketable investment grade
securities to cover both claim payments and expenses. As of September 30, 1997,
the Company had total cash, cash equivalents, and investments of $238.8 million
and had 99.7% of its investment portfolio invested in cash, cash equivalents,
and fixed maturities. In addition, 85.8% of the Company's fixed-income portfolio
had ratings of "AA" or equivalent or better and 98.0% had ratings of "BBB" or
equivalent or better.
The Company generated $48.6 million in cash from financing activities
during the nine months ended September 30, 1997 as compared to $2.7 million
during the corresponding period in 1996. The Company substantially increased its
financing activities in the first nine months of 1997 compared to the same
period in 1996 because of its need to fund its acquisition in April 1997 of Pac
Rim and to repay outstanding bank debt. The Company generated the necessary cash
with the proceeds from a $44.0 million term loan and the issuance and sale by
the Company of approximately $18.0 million in Common Stock. Of the approximately
$62.0 million raised in such financing transactions, approximately $42.0 million
was used to fund the acquisition of Pac Rim, approximately $6.6 million was used
to prepay the Company's then outstanding bank debt, $10.0 million was
contributed as capital to SPCC, and the remainder was used for general corporate
purposes, including the payment of related transaction costs. Further, the
Company's liabilities on its discontinued operations have declined to $21.4
million as of September 30, 1997 from $25.9 million as of December 31, 1996.
During the first nine months of 1997, the Company's working cash flow
increased approximately $44.0 million as a result of the DOI's release of excess
assets pledged by SNIC to secure future workers' compensation claims. In
addition, the DOI released in the fourth quarter of 1997 an additional $20.0
million of excess assets that had been pledged by SPCC to secure future workers'
compensation claims.
In November 1996, the Company entered into a financing transaction
involving Centre Re and The Chase Manhattan Bank ("Chase") pursuant to which
Chase extended a $93.1 million term loan (net of transaction costs). The Company
used the proceeds from the financing to purchase from SNIC reinsurance
receivables due from Centre Re. On June 30, 1997, the Company and Chase reached
an agreement under which the Company agreed to transfer such reinsurance
receivables to Chase in exchange for the cancellation of the Company's debt to
Chase. As a result
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of these actions, the Company's investable assets increased $93.1 million, which
should increase investment income in future periods.
Superior Pacific has a reverse repurchase facility with a national
securities brokerage firm that allows it to engage in up to $20.0 million in
reverse repurchase transactions secured either by U.S. Treasury instruments,
U.S. Agency debt, or corporate debt. This arrangement provides Superior Pacific
with additional short-term liquidity. Reverse repurchase transactions may be
rolled over from one period to the next, at which time the transaction is
repriced. This type of financing allows Superior Pacific a great deal of
flexibility to manage short-term investments, avoiding the unnecessary
realization of losses to satisfy short-term cash needs. Further, this method of
financing is less expensive than bank debt. As of September 30, 1997, Superior
Pacific had no obligation outstanding under this facility.
Superior National, as a holding company, depends on dividends and
intercompany tax allocation payments from Superior Pacific for its net cash flow
requirements, which consist primarily of periodic payments on its outstanding
debt obligations. Absent other sources of cash flow, Superior National cannot
expend funds materially in excess of the amount of dividends or tax allocation
payments that could be paid to it by Superior Pacific. Further, 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 up to the greater
of (i) net income for the preceding year and (ii) 10% of statutory surplus as
regards policyholders as of the preceding December 31) without prior notice to,
or approval by, the DOI. No dividends were paid during the nine months ended
September 30, 1997.
The Company 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
Company's minimum commitment with respect to these leases in 1997 is
approximately $4.1 million. These leases expire from 1997 to 2003.
The Company does not foresee any expenditures during the next twelve
months other than those arising in the normal course of business and out of the
Pac Rim acquisition.
The Company made a $10.0 million capital contribution to SPCC upon
consummation of the acquisition of Pac Rim, and management believes SPCC is
adequately capitalized for the foreseeable future.
The effect of inflation on the revenues and net income of Superior
National during the nine months ended September 30, 1997 and the years ended
December 31, 1996, 1995 and 1994 was not significant.
TAXES
As of September 30, 1997, the Company had available approximately $95.4
million in NOLs to offset taxable income recognized by the Company in periods
after September 30, 1997. For federal income tax purposes, these NOLs will
expire in material amounts beginning in the year 2006. Any 5% shift in the
current ownership of the Company may result in a "change of ownership" under
Section 382 of the Code, and severely limit the Company's ability to utilize
NOLs. In an effort to protect these NOLs, the Company's charter documents
prohibit 5% owners of the Company's Common Stock (including holders of options
and warrants) from acquiring additional stock and prohibit any additional person
or entity from becoming a 5% holder of Common Stock. The prohibition against
changes in ownership by the 5% holders of Common Stock expires in April 2000.
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share" ("SFAS 128"), which is required to be
adopted on December 31, 1997. At that time, the Company will be required to
change the method currently used to compute per share results and to restate all
prior periods. The impact of SFAS 128 is not expected to have a material effect
on the Company's earnings per share.
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In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). SFAS 130 is effective for periods ending after December 15,
1997, including interim periods. SFAS No. 130 requires companies to report
comprehensive income and its components in a financial statement and display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in-capital. Comprehensive income includes all
changes in equity during a period except those resulting from investments by
stockholders and distributions to stockholders. The Company has not determined
the impact of SFAS No. 130.
Also, in June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards, No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS No. 131"). This
statement specifies revised guidelines for determination of an entity's
operating segments and the type and level of financial information to be
disclosed. SFAS No. 131 is effective for periods ending after December 15, 1997,
including interim periods. The Company has not determined the impact of SFAS No.
131.
PRIMARY DIFFERENCES BETWEEN GAAP AND SAP
The financial statements contained herein have been prepared in
conformity with Generally Accepted Accounting Principles ("GAAP") as opposed to
statutory accounting practices ("SAP") prescribed or permitted for insurance
companies by regulatory authorities. SAP differs from GAAP principally in the
following respects: (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.
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BUSINESS
OVERVIEW
Superior National is a holding company that, through its wholly-owned
subsidiaries SNIC and SPCC, underwrites and markets workers' compensation
insurance principally in the State of California and, until September 30, 1993,
was engaged in the underwriting and marketing of commercial property and
casualty insurance. The Company was incorporated in California in March 1985
under the name Coastal Holdings, Ltd. SNIC and SPCC conduct business under the
"Superior Pacific" trade name. Unless the context indicates otherwise, "Superior
Pacific," as used herein, refers to SNIC and SPCC and their combined operations
from April 1997 to the present, and refers only to SNIC and its operations for
all prior periods.
In April 1997, Superior National acquired Pac Rim, the parent company of
The Pacific Rim Assurance Company (subsequently renamed Superior Pacific
Casualty Company). SPCC's Southern California operations complement SNIC's
historical focus on Central and Northern California. As a result of the
Acquisition, the Company believes that, excluding the State Fund, it is the only
exclusive underwriter of workers' compensation insurance in California and the
eighth largest California workers' compensation insurer overall, based upon 1996
direct premiums written. Pro forma for the Acquisition, the Company would have
had direct premiums written of $182.2 million and $129.2 million for the year
ended December 31, 1996 and for the nine months ended September 30, 1997,
respectively.
In connection with the Acquisition, the Company agreed with the DOI that
SPCC would operate in a "run-off" situation and that all new or renewal business
would be written only by SNIC. As a result, the Company has been integrating
SPCC's pre-Acquisition operations into SNIC's operations and has substantially
completed the process. The Acquisition has enabled the Company to increase its
book of California-related workers' compensation business and generate
significant expense savings through the consolidation of the back office
operations of the two companies. Pro forma for the Acquisition and the sale of
the Preferred Securities, the Company would have had EBITDA of $26.3 million and
$16.1 million for the year ended December 31, 1996 and the nine months ended
September 30, 1997, respectively. Through its operating strategy, the Company
has generated strong underwriting results with an average combined ratio from
continuing operations of 94.2% from 1993 through 1996. For the nine months ended
September 30, 1997, the Company had a combined ratio from continuing operations
of 94.9%.
In addition to California and Arizona, Superior Pacific is also licensed
to write business in Arkansas, Colorado, District of Columbia, Georgia, Indiana,
Iowa, Kentucky, Maryland, Mississippi, Missouri, Montana, Nevada, New Mexico,
Oregon, South Dakota, Texas, Utah, and Wyoming, but virtually all of Superior
Pacific's current premium is generated in California (95%) and Arizona (5%).
Following the Acquisition, SPCC's operations in states other than California and
Arizona were discontinued and are currently in run-off.
OPERATING STRATEGY
Superior National specializes in writing workers' compensation insurance
in the State of California, which allows management to respond in a timely
manner to the changing competitive and regulatory environment in the state. The
key elements of its bottom-line driven operating strategy are as follows:
Focus on Specialized Market Segments. The Company's experienced
management team utilizes its sophisticated information system to focus the
Company's business on selected policy sizes and employment classifications that
management believes provide the greatest opportunity for profitability.
POLICY SIZE. The Company concentrates its marketing efforts on
policies with annual premium under $50,000, principally to avoid
the extreme price competition usually associated with larger
accounts. As of September 30, 1997, the Company's average annual
premium per policy was approximately $10,000.
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EMPLOYMENT CLASSIFICATIONS. While the Company underwrites many
employment classifications, it targets specific classifications
that management believes to be profitable. The Company believes
that by focusing on certain employment classifications, it can
provide claim management and standardized loss control services
at a level appropriate to each policyholder. As of September 30,
1997, 15 employment classifications, made up primarily of office
and clerical, hospitality, agricultural, garment, and health care
workers, represented 43% of the Company's premium in force. The
Company excludes most employment classifications that represent
historically higher risk exposure, including the manufacturing,
handling, and shipping of explosives; oil rig and derrick work;
subway construction; and navigation of marine vessels.
Underwriting Discipline. Following the advent of open rating in
California, many California insurers have reduced premium rates in order to
increase market share. The Company has not followed this practice and has
maintained consistently stringent underwriting policies in order to maintain
gross profit margins. As a result, while the Company's direct premiums written
decreased from $158.0 million in 1993 to $96.4 million in 1996, its combined
ratio from continuing operations has improved from 100.2% to 94.6% over the same
period.
Relationship with Producers. The Company markets its insurance products
primarily through approximately 300 small- to medium-sized producers, most of
which have an ongoing relationship with the Company. The Company is one of the
primary underwriters of workers' compensation insurance for most of its
producers. For the policy year ended September 30, 1997, no single producer
controlled more than 4.5% of premium in force.
Data Processing Systems. The Company believes that its data processing
systems give it a significant competitive advantage by (i) enhancing the
effectiveness of its employees' underwriting, policy administration, and claims
activities, (ii) providing detailed, real-time and near real-time information to
management for control and administration purposes, and (iii) providing
marketing benefits through improved customer service.
EXPERIENCED MANAGEMENT; BUSINESS RELATIONSHIPS WITH ZURICH AFFILIATES
The Company is led by an experienced management team, with the Chief
Executive Officer and the Chief Operating Officer having a combined 59 years of
workers' compensation insurance business experience in California. In addition,
the Company benefits from its business relationships with affiliates of Zurich,
which have provided the Company with financing and access to their expertise and
products. The experience of management and the Company's sophisticated data
processing systems allow the Company to react quickly to positive and negative
developments in its markets. For example, in response to possible industry-wide
reversals of positive trends in severity, which the Company believes it was
among the first to recognize, the Company has entered into a non-binding letter
of intent during November 1997 with REM, an affiliate of Zurich, that
contemplates an agreement under which certain of the Company's claims management
functions would be performed by such affiliate. In addition, the Company and
ZRNA have signed a non-binding letter of intent whereby ZRNA would provide
average claims severity protection through accident year 2000 in connection with
the claims management services described above. Further, the Company currently
maintains a facility that allows it to offer certain policyholders insurance
policies written by a Zurich affiliate having an A.M. Best "A" rating.
COMPANY STRUCTURE
Superior National has two direct, wholly-owned subsidiaries: Superior
Pacific Insurance Group, Inc. ("SPIG") and Superior National Capital Holding
Corporation ("SNCHC"). SPIG has four active, direct, wholly-owned subsidiaries:
SNIC, SPCC, InfoNet Management Systems, Inc. ("InfoNet"), and Superior (Bermuda)
Ltd. ("SBL"). InfoNet provides data processing purchasing services to Superior
National and its subsidiaries. SBL was formed in September 1995 to facilitate
the management of the run-off of Superior Pacific's P&C business.
The sole function of SNCHC, Superior National's other direct,
wholly-owned subsidiary, is to act as a general partner of Superior National
Capital, L.P., a Bermuda limited partnership that issued $20.0 million face
amount of preferred securities to Centre Reinsurance Services (Bermuda) III
Limited effective June 30, 1994. The proceeds of that transaction were loaned to
Superior National and partially contributed by Superior National to the capital
of SNIC. Centre Reinsurance Services (Bermuda) III Limited is an affiliate of
Centre Re. See "Certain
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Relationships and Related Transactions--Transactions with Affiliates of Zurich,
Including Centre Re." One use of the proceeds the Company received from the sale
of the Senior Subordinated Notes was to redeem all of the approximately $26.6
million face amount of preferred securities issued by Superior National Capital,
L.P. As a result of such redemption, the Company intends to dissolve Superior
National Capital, L.P.
SNIC's only subsidiary is wholly-owned Western Select Service Corp.,
which currently provides vocational rehabilitation, legal, paralegal, and other
services to SNIC and SPCC. SPCC has no active subsidiaries.
CALIFORNIA WORKERS' COMPENSATION MARKET
Workers' Compensation. Workers' compensation is a no-fault statutory
system under which an employer is required to provide its employees with medical
care and other specified benefits for work-related injuries and diseases. There
are four types of benefits payable under workers' compensation policies:
disability, vocational rehabilitation, medical and death benefits. The amount of
benefits payable for various types of claims are established by statute and vary
with the nature, severity of the injury or disease, wages, occupation and age of
the employee. While no dollar limitations are set for medical benefits and
dollar limitations apply only under certain circumstances to vocational
rehabilitation benefits, reinsurance typically covers liability in excess of a
specified dollar amount.
California Marketplace. California is the country's largest workers'
compensation insurance market, with total direct premiums written of $5.0
billion in 1996. The California market is composed of (i) the State Fund, (ii)
MultiLine, Multi-State Writers that write workers' compensation insurance in
California but have significant business writings in other lines of business
and/or in other states, and (iii) Superior National, which is the one private
sector company that writes exclusively workers' compensation insurance
specifically focused in California.
State Fund. The State Fund, which is obligated to write workers'
compensation insurance for any applicant, including those turned down by the
private sector carriers, is the largest underwriter of workers' compensation
insurance in California, accounting for approximately 19% of the direct premiums
written in California in 1996. Because the State Fund must accept all risks, its
combined ratios have historically been much higher than those of the private
carriers. Despite these results, the State Fund has consistently achieved
profitability through the investment income earned on its large invested asset
base. As of December 31, 1996, the State Fund had invested assets of $7.0
billion and statutory capital and surplus of $1.6 billion. The State Fund
currently maintains an "A" claims paying ability rating from S&P and an "A-"
rating from A.M. Best. Although the State Fund regularly competes with the
Company for profitable underwriting business, the Company views the State Fund's
role as the insurer of last resort to be a significant benefit because it
eliminates the need to create an assigned risk plan in which the Company and
other insurers conducting business in California would be required to
participate.
Pricing. Prior to January 1, 1995, the DOI set minimum premium rates for
workers' compensation insurance in order to provide a stable environment for the
pricing of such insurance. On January 1, 1995, the State of California formally
converted to a system of "open rating" for workers' compensation insurance
written within the state. Insurance companies now file and use their own
actuarially defensible rates. Following the introduction of open rating, total
direct written premiums in the California market decreased from $9.0 billion in
1993 to $5.0 billion in 1996 as many carriers engaged in price competition.
Under open rating, the DOI sets "pure premium" (effectively, the
estimated claim and allocated claim adjustment expense) rates for each
employment classification. Carriers then apply their own multipliers to the pure
premium rate, to adjust for that carrier's anticipated unallocated claim
adjustment and underwriting expenses. These rates are then subject to further
adjustment on a policyholder by policyholder basis to account for historical
loss experience, the presence of stricter safety programs, differing dividend
and commission plans, and other factors.
45
<PAGE> 55
Recent Results. The State Fund's relatively poor underwriting results,
together with its large size, have created a skewed perception of the
underwriting profitability of companies writing business in the California
workers' compensation marketplace. Although market-wide combined ratios have
increased, responsible underwriters, such as Superior National, have been able
to achieve an underwriting profit. The results of the State Fund and of the
total industry under statutory accounting practices are detailed below:
<TABLE>
<CAPTION>
1996 1995 1994 1993
----------------- ------------- -------------- ------------------
State State State State
Fund Industry Fund Industry Fund Industry Fund Industry
------ -------- ----- -------- ----- -------- ----- --------
(In Millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Premiums .................. $ 992 $ 5,779 $1,073 $5,855 $1,456 $7,655 $1,705 $8,965
Loss Ratio ................ 111.8% 94.4% 87.0% 75.7% 71.0% 67.8% 96.1% 80.4%
Expense Ratio ............. 21.1 20.6 17.0 20.0 12.6 17.8 11.1 15.4
Policyholder Dividend Ratio 11.8 6.5 26.3 15.1 23.3 14.2 9.8 7.4
------ -------- ------ ------ ------ ------ ------ ------
Combined Ratio ............ 144.7% 121.5% 130.3% 110.8% 106.9% 99.8% 117.0 103.2%
====== ======== ====== ====== ====== ====== ====== ======
Underwriting Gain (Loss) .. $ (443) $(1,244) $ (325) $ (632) $(102) $ 15 $ (290) $ (286)
Investment Income ......... 473 NA 490 1,740 502 1,623 531 2,178
------ -------- ------ ------ ------ ------ ------ ------
Pre-Tax Income ............ $ 30 NA $ 165 $1,108 $ 400 $1,638 $ 241 1,892
======== ======== ====== ====== ====== ====== ====== ======
</TABLE>
Recent Developments. While competitive pressures in the California's
workers' compensation market increased with the implementation of open rating in
January 1995, certain fundamentals of the workers' compensation market have
recently improved. In 1996, the total direct workers' compensation premiums
written in California leveled out at approximately $5.0 billion as compared to
$9.0 billion in 1993, as the market began to experience rate stabilization. This
trend has continued into 1997, as demonstrated by an improvement in premium
pricing of 2.1% in the nine months ended September 30, 1997 over the same period
in 1996. Additionally, anti-fraud legislation passed by the State of California
in 1993 continues to have a positive effect on the market's losses by
controlling fraudulent claims and medical and legal expense levels. These
improvements have resulted in a reduction in the frequency of claims in the
California workers' compensation market. However, at the same time, there may be
an increase in claims severity for injuries sustained in 1995 and thereafter.
Management is planning to address this potential issue by undertaking the
Severity Management Program. See "--Claims Severity Management Program" and
"--Claim and Claim Adjustment Expense Reserves" and "Risk Factors--Uncertainty
Associated with Estimating Reserves for Unpaid Claim and Claim Adjustment
Expenses."
Superior National Within the California Workers' Compensation Market.
The Company believes that it is better positioned than its competitors to
compete successfully in the post-open rating California workers' compensation
insurance market. Because the Company specializes in underwriting workers'
compensation insurance in California, the Company believes that it can be more
responsive to the changing competitive and regulatory environment in California
than the Multi-Line, Multi-State Writers for which California workers'
compensation insurance is one of many lines of business written, representing a
smaller portion of their total premium. In addition, Multi-Line, Multi- State
Writers typically price and sell workers' compensation insurance as part of a
package policy which may also include various forms of other liability and
health insurance. The Company sells strictly workers' compensation insurance
and, therefore, prices and underwrites its policies specifically on that basis.
MARKETING
Superior Pacific primarily markets its insurance products through
approximately 300 small- to medium-sized producers located throughout California
and Arizona, most of which have an ongoing relationship with the Company's
executives. Because these producers also represent one or more competing
insurance companies, Superior Pacific views the producers as its marketing
target and delivers service that the Company believes surpasses normal industry
levels. Superior Pacific'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. The
Company is one of the primary underwriters of workers' compensation insurance
for most of its producers. During the first nine months of 1997, no single
producer controlled more than 4.5% of premium in force.
46
<PAGE> 56
While the Company's principal marketing strategy is to meet the business
needs of Superior Pacific's producers by providing the insurance coverage and
services needed by their customers, the Company concentrates its marketing
efforts on policies with annual premium under $50,000, principally to avoid the
extreme price competition usually associated with larger insureds. As of
September 30, 1997, the Company's average annual premium per policy was
approximately $10,000.
Approximately 70.4% of the Company's premium in force is concentrated in
454 non-group policies and 65 group programs that each provide annual premium in
excess of $50,000. The average annual premium volume generated by each of
Superior Pacific's group programs is approximately $575,000 and in the aggregate
these programs represent 29% of the Company's premium in force. Because policies
issued through group programs reflect some of the attributes of smaller
non-group policies, marketing workers' compensation insurance through such
programs to reach smaller policyholders is a means by which the Company can
implement its strategy to underwrite smaller policies. For example, individual
policies within a group typically possess rate adequacy associated with small
non-group accounts. Moreover, renewal rates within a group are generally
superior to non-group business. However, group programs, because of their
overall premium, also reflect some of the attributes of large non-group
policies, mainly, their greater vulnerability to price competition than the
individual accounts within the group.
The average size of Superior Pacific's non-group policies that exceed
$50,000 in annual premium is approximately $124,000 and in the aggregate
represent 36% of premium in force. Most of these policies were obtained by the
Company upon its acquisition of Pac Rim. The Company's strategy is to maintain
adequate pricing on accounts regardless of their size, and in pursuing this
strategy, the Company anticipates that it will not be able to retain a portion
of these large non-group policies. However, the Company expects to replace many
of them with new, smaller accounts through its newly acquired relationships with
policyholders and producers previously associated with Pac Rim.
Superior Pacific closely monitors its producers through its on-line
management information systems, with special attention given to the volume and
profitability of business written through Superior Pacific. Relationships with
producers who consistently write unprofitable business, or do not meet the
minimum guideline of annual premium per year, may be terminated. Superior
Pacific believes that by continually monitoring and improving the quality of the
business acquired through its producers, long-term profitability will be
enhanced. See "--Information Services."
The 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. Superior Pacific conducts its marketing by
territory to enable its marketing representatives to better address the specific
types of accounts located in each region. Producer commissions are generally
determined by negotiation and are dependent on the size and profit potential of
the producer's accounts.
Superior Pacific's average direct commission rate was 11.0% for the
first nine months of 1997, 11.1% in 1996, 12.0% in 1995, and 11.7% in 1994. The
Company believes the stabilization in average direct commission rate for the
first nine months of 1997 was due primarily to a combination of firming prices
and a greater use by larger policyholders of fee-based arrangements (as opposed
to traditional commission arrangements) with their insurance agents. Superior
Pacific's producers are not permitted to bind Superior Pacific with respect to
any account. All new and renewal policyholder applications must be submitted to
Superior Pacific for approval. Superior Pacific is not committed to accept a
fixed portion of any producer's business.
UNDERWRITING
Because the types of accounts that Superior Pacific insures vary among
different geographic regions, Superior Pacific conducts its underwriting
activities through branch offices that are focused on the local economies. While
Superior Pacific underwrites over 400 of the approximately 500 employment
classifications established by the DOI, it targets specific classifications that
management believes to be profitable. The Company believes that by focusing on
certain employment classifications, it can provide claim management and
standardized loss control services at a level appropriate to each policyholder.
As of September 30, 1997, 15 employment classifications, made up primarily of
office and clerical, hospitality, agricultural, garment, and health care
workers, represented 43% of Superior Pacific's premium in force. The Company
excludes most employment classifications that represent historically higher
47
<PAGE> 57
risk exposure, including 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 Superior Pacific's
principal underwriting officer include those that represent potential exclusions
from Superior Pacific'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.
Prior to insuring an account, Superior Pacific'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. Superior Pacific 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.
The Company's underwriting system is a fully integrated rating, quoting,
and policy issuance system for use both internally and remotely from producers'
offices. The system contains edit and blocking features that prohibit
underwriters from issuing policies associated with business that is deemed
inappropriate or undesirable by management, or that may be inappropriately
priced. See "--Information Services."
SPCC historically underwrote much larger accounts versus SNIC, and in a
much more limited range of risk classification codes. Since SPCC's acquisition,
Superior Pacific has been re-underwriting SPCC's book of business at policy
renewal dates in conformity with SNIC's historic underwriting standards and
pricing guidelines. SPCC's average policy size has declined significantly,
standing at approximately $14,000 for the policy year ended September 30, 1997,
versus approximately $20,300 for the policy year ended September 30, 1996.
Management believes that the re-underwriting of SPCC's business will produce a
new book of business mirroring SNIC's historical book of business, both as to
size and range of risk classifications, by the end of 1998.
Virtually all of SPCC's business is located in urban and suburban
Southern California. Until 1993, claim experience in Southern California was
more volatile and less favorable versus the remainder of the state. Further,
since 1995 the relatively large accounts that SPCC underwrote were subject to
extreme price competition versus smaller accounts. While SPCC's recent claim
experience appears to be significantly more favorable than the period prior to
1993, and management believes SPCC's reserves are adequate, the nature of SPCC's
historical book of business may cause historical claim reserves to be subject to
more uncertainty versus claim reserves established on prospective business.
LOSS CONTROL
In addition to its responsibility for risk evaluation as part of the
underwriting process, Superior Pacific's loss control department may assist
Superior Pacific'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, Superior
Pacific's loss control consultants will help develop a loss control program and
establish accident reporting and claim follow-up activities for the
policyholder. Superior Pacific'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.
CLAIMS SEVERITY MANAGEMENT PROGRAM
In November 1997, the Company entered into a non-binding letter of
intent with REM, an affiliate of Zurich, that contemplates an agreement under
which certain of the Company's claims management functions would be performed by
REM. In connection with the Company's plan to enter into the claims management
program, the Company and ZRNA, another Zurich affiliate, have signed a
non-binding letter of intent whereby ZRNA would provide average claims severity
protection through accident year 2000 (together, with the claims management
program, the "Severity Management Program"). The total cost of the Severity
Management Program to the Company is expected to be approximately $35.0 million
through December 31, 1998, with amounts thereafter to be determined. While the
Company expects that definitive documents will be completed in the near future,
the letters of intent are not binding on the parties; as a result, there can be
no assurance that the Severity Management Program, if consummated, will take the
form outlined in the letters of intent.
48
<PAGE> 58
The letter of intent with REM contemplates that REM would provide
certain claims management services, while Superior Pacific would provide claims
facilities and data processing systems. REM would be bound by operational
restrictions and performance standards designed to assure quality claims
administration. The Company believes that combining REM's claims management
techniques with Superior Pacific's claims processing systems should produce
material improvements in Superior Pacific's claims severity, more than
offsetting the cost of such services. The Company believes that the Severity
Management Program will reduce the Company's ultimate severity with favorable
cost-benefit trade-offs.
Under the proposed agreement with ZRNA, ZRNA would credit Superior
Pacific direct claims costs by up to $3,500 per claim (up to an aggregate of $30
million) to the extent that Superior Pacific's open claims severity through 1997
exceeds $38,700, and for claims incurred after 1997, ZRNA will credit Superior
Pacific direct claims costs by as yet undetermined per claim amounts to the
extent that Superior Pacific's ultimate claims severity subsequent to 1997
exceeds expected severity targets. Superior Pacific would pay ZRNA $10 million
in 1997, an estimated $10 million in 1998, and as yet unspecified amounts in
1999 and 2000.
Superior Pacific and REM will continue to work closely with
policyholders to return injured workers to the job as quickly as is medically
appropriate. Superior Pacific and REM intend to continue to maintain four
full-service Claims Servicing Offices ("CSO") in California located in Woodland
Hills, Fresno, South San Francisco, and Sacramento, as well as one in Phoenix,
Arizona. Each CSO is managed by a 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. Superior Pacific has responded to fraud by
training and dedicating a claims staff to handle potentially fraudulent claims.
The Woodland Hills CSO has a Special Investigation Unit staffed with two senior
examiners. The other CSOs each have one senior examiner dedicated to Special
Investigations.
Superior Pacific'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, reducing the possibility of
error by means of system prompts and edit checks, and the automation of many
manual functions. An additional benefit resulting from the claims system is
increased productivity resulting from the claims examiner's ability to handle a
higher case load without negatively impacting claims processing results. See
"--Information Services."
Superior Pacific'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.
CLAIM 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. Superior Pacific is required to maintain reserves for
payment of estimated claim and claim adjustment expense for both reported claims
and claims which have been incurred but have not yet been reported ("IBNR").
Superior Pacific'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 Superior Pacific's reserving
practices, which take into account the type of risk, the circumstances
surrounding the claim or policy provisions relating to type of loss, and
historical paid claims and claim adjustment expense data for similar claims.
Case-by-case reserves are not established for claim adjustment expense, and the
entire reserve for claim adjustment expense is established primarily based upon
the Company's historical paid data. Superior Pacific's claims department
regularly
49
<PAGE> 59
monitors reserve adequacy for claims which have occurred and been reported to it
and adjusts such reserves as necessary.
Claim 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. See "Risk Factors--Uncertainty Associated with Estimating Reserves for
Unpaid Claim and Claim Adjustment Expense." The senior officers of the Company
review and adjust IBNR reserves monthly.
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 to calculate taxable income as required by the
Internal Revenue Code of 1986, as amended (the "Code").
The following table provides a reconciliation of the beginning and
ending claim and claim adjustment expense reserves for the nine months ended
September 30, 1997 and each of the years in the three-year period ended December
31, 1996, computed in accordance with GAAP.
RECONCILIATION OF LIABILITY FOR CLAIM AND CLAIM ADJUSTMENT EXPENSE
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
--------------- -----------------------------------------
1997 1996 1995 1994
--------- -------- --------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Beginning reserve, gross of reinsurance ...... $ 115,529 $ 141,495 $ 171,258 $ 171,038
Less: Reinsurance recoverable on unpaid losses 24,986 27,076 31,897 28,971
--------- --------- --------- ---------
Beginning reserve, net of reinsurance ........ 90,543 114,419 139,361 142,067
Pac Rim reserves at acquisition .............. 104,588 -- -- --
Provision for net claim and claim adjustment
expenses
For claims occurring in current year ...... 61,472 57,614 58,842 72,457
For claims occurring in prior years ....... 4,839 (1,976) (4,872) 6,304
--------- --------- --------- ---------
Total claim and claim adjustment expenses . 66,311 55,638 53,970 78,761
--------- --------- --------- ---------
Payments for net claim and claim adjustment
expense:
Attributable to insured events incurred
in current year ......................... (12,362) (19,816) (19,732) (23,061)
Attributable to insured events incurred
in prior years .......................... (80,490) (59,698) (58,180) (58,406)
--------- --------- --------- ---------
Total claim and claim adjustment
expense payments ........................ (92,852) (79,514) (78,912) (81,467)
--------- --------- --------- ---------
Ending reserves, net of reinsurance .......... 168,590 90,543 114,419 139,361
Reinsurance recoverable on unpaid losses ..... 54,035 24,986 27,076 31,897
--------- --------- --------- ---------
Ending reserves, gross of reinsurance ........ $ 222,625 $ 115,529 $ 141,495 $ 171,258
========= ========= ========= =========
</TABLE>
50
<PAGE> 60
The following table discloses the development of direct workers'
compensation claim and claim adjustment expense reserves of Superior Pacific
from December 31, 1987 through December 31, 1996.
<TABLE>
<CAPTION>
ANALYSIS OF DIRECT CLAIM AND CLAIM ADJUSTMENT EXPENSE DEVELOPMENT
CALENDAR YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1987 1988 1989 1990 1991
----- ---- ----- ----- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Reserve for Direct Unpaid Claim and Claim
Adjustment Expenses, Gross of Reinsurance
Recoverables Reserve .................... $ 21,969 $ 42,268 $ 60,615 $ 88,270 $ 116,811
Re-estimated as of:
One Year Later .......................... 24,241 43,581 68,718 112,160 144,676
Two Years Later ......................... 26,120 46,788 79,059 111,151 143,912
Three Years Later ....................... 29,140 50,955 74,619 117,506 138,607
Four Years Later ........................ 29,423 47,696 78,112 113,029 137,939
Five Years Later ........................ 29,541 49,297 75,475 112,840 135,074
Six Years Later ......................... 29,082 47,554 75,913 109,655
Seven Years Later ....................... 27,759 49,470 74,149
Eight Years Later ....................... 27,846 48,653
Nine Years Later ........................ 27,573
Cumulative (Deficiency)
Redundancy ............................. (5,604) (6,385) (13,534) (21,385) 18,263
Cumulative Amount of Reserve Paid Through
One Year Later .......................... $ 9,447 $17,698 $24,478 $ 36,975 $ 53,914
Two Years Later ......................... 14,482 19,879 35,195 45,561 56,299
Three Years Later ....................... 15,777 25,830 38,067 52,811 63,354
Four Years Later ........................ 18,666 26,165 38,261 56,369 64,703
Five Years Later ........................ 19,384 26,026 40,794 57,768 68,152
Six Years Later ......................... 19,660 27,181 42,032 59,622
Seven Years Later ....................... 20,707 27,202 43,146
Eight Years Later ....................... 20,803 27,947
Nine Years Later ........................ 21,123
</TABLE>
<TABLE>
<CAPTION>
ANALYSIS OF DIRECT CLAIM AND CLAIM ADJUSTMENT EXPENSE DEVELOPMENT
CALENDAR YEARS ENDED DECEMBER 31,
-----------------------------------------------
1992 1993 1994 1995 1996
------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
Reserve for Direct Unpaid Claim and Claim
Adjustment Expenses, Gross of Reinsurance
Recoverables Reserve .................... $136,102 $171,038 $171,258 $141,495 $115,529
Re-estimated as of:
One Year Later .......................... 162,634 171,960 162,635 137,242
Two Years Later ......................... 148,906 161,262 154,249
Three Years Later ....................... 152,420 148,654
Four Years Later ........................ 144,898
Five Years Later ........................
Six Years Later .........................
Seven Years Later .......................
Eight Years Later .......................
Nine Years Later ........................
Cumulative (Deficiency)
Redundancy ............................. (8,796) 22,384 17,009 4,235
Cumulative Amount of Reserve Paid Through
One Year Later .......................... $ 57,348 $60,726 $ 67,757 $ 63,587
Two Years Later ......................... 61,648 66,077 61,952
Three Years Later ....................... 63,523 64,464
Four Years Later ........................ 66,547
Five Years Later ........................
Six Years Later .........................
Seven Years Later .......................
Eight Years Later .......................
Nine Years Later ........................
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------
1993 1994 1995 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Gross Reserve--December 31 ................................................ 171,038 171,258 141,495 115,529
Reinsurance Recoverables .................................................. 28,971 31,897 27,076 24,986
-------- -------- -------- -------
142,067 139,361 114,419 90,543
Reclassification of Amounts Recoverable from Reinsurers ................... (41,889) (34,344) (11,670) --
-------- -------- -------- -------
Net Reserve--December 31............................................ 100,178 105,017 102,749 90,543
======== ======== ======== =======
Gross Re-estimated Reserve ................................................ 148,654 154,249 137,242
Re-estimated Reinsurance Recoverables ..................................... 23,589 25,511 24,799
-------- -------- --------
125,065 128,738 112,443
Reclassification of Amounts Recoverable from Reinsurers ................... (41,889) (34,344) (11,670)
-------- -------- --------
Net Re-estimated Reserve .................................................. 83,176 94,394 100,773
======== ======== ========
Net Cumulative Redundancy ................................................. 17,002 10,623 1,976
======== ======== ========
</TABLE>
The first line of the preceding table depicts the estimated liability for
unpaid claim and claim adjustment expense recorded on the balance sheets of
Superior Pacific at the indicated balance sheet dates. This liability represents
the estimated amount of claim and claim adjustment expense for claims arising
during all years prior to the indicated balance sheet date that are unpaid as of
that balance sheet date, gross of reinsurance recoverables, including losses
that have been incurred but not yet reported. The table also shows the
re-estimated liability as of the end of each succeeding year through the latest
balance sheet date, and the cumulative payments made for such claims, at annual
intervals after the initial indicated balance sheet date. The claim and claim
adjustment expense liability estimates change as more information becomes known
about the frequency and severity of claims for each year. A direct reserve
redundancy or deficiency is displayed for each balance sheet date in the center
of the table when the initial liability estimate is greater (or less) than the
re-estimated liability at the latest balance sheet date. A net-of-reinsurance
redundancy is displayed for each of the years ended December 31, 1993, 1994, and
1995 at the bottom of the table.
The direct reserve deficiencies associated with the years ended December 31,
1987 and 1988 were due to the lack of claim and claim adjustment expense
history, which prevented management from accurately estimating ultimate claim
costs. The direct reserve deficiencies associated with the years ended December
31, 1989, 1990, 1991, and 1992 were due to unexpected increases in claims costs
resulting from increased litigation in the California workers' compensation
51
<PAGE> 61
system, an economic recession in California, and workers' compensation laws that
at the time effectively encouraged workers to file unwarranted psychiatric
stress and fraudulent claims. The direct redundancies associated with the years
ended December 31, 1993, 1994, and 1995 occurred as a result of significant
reforms in the California workers' compensation laws that became effective
January 1, 1993 and an improvement in the California economy that were not
anticipated when reserves were established.
Superior Pacific's experience with direct reserve deficiencies occurring for
the years ended December 31, 1989, 1990, 1991, and 1992 and direct redundancies
occurring for the years ended December 31, 1993, 1994, and 1995 is consistent
with the results experienced by the California workers' compensation industry
during the same time periods. The underlying improvements in claims frequency
and severity during the years ended December 31, 1993, 1994, and 1995 that
caused Superior Pacific to develop direct redundant reserves is also consistent
with industry experience. The net-of-reinsurance redundancies displayed at the
bottom of the table reflect Superior Pacific's per risk excess of loss, quota
share, and aggregate excess of loss reinsurance, the effects of which were to
reduce Superior Pacific's direct redundancies due to the cession of a portion of
Superior Pacific's favorable development.
Currently, management prepares on a monthly basis a comprehensive analysis
of workers' compensation experience and the process of estimating claim and
claim adjustment expense liabilities is continually modified to consider
additional information regarding trends in pricing, frequency, and severity.
Further, conditions and trends that have historically affected Superior
Pacific's claims may not necessarily be indicative of conditions and trends that
will affect future claims, and it is not appropriate to extrapolate future
reserve redundancies or deficiencies based on the data set forth above.
By frequently reviewing such reserves, management is generally able to
detect trends in claim and claim adjustment expenses and take appropriate
actions in a timely manner to avoid having to increase substantially such
reserves at a later date. For example, the Company, because of its experienced
management and its sophisticated data processing systems, was one of the first
to recognize and quantify the possible increase in claims severity, appearing in
claims with 1995 and subsequent dates of injury. Recognition of this possible
reversal of the trend has enabled management to take steps to deal pro-actively
with this trend, an example of which is its intention to undertake the Severity
Management Program. See "--Claims Severity Management Program."
DISCONTINUED OPERATIONS
Superior Pacific'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 during the years 1986 through 1990. There is often a significant
lag between the date of loss of construction-related claims and the date such
claims are reported to Superior Pacific. Superior Pacific believes the existing
provision is sufficient to cover future claims, but there is significant
uncertainty associated with the reporting and severity of construction claims.
Management estimates that discontinued operations will essentially have
"run-off" by the year 2000.
In 1993, the Company recorded a pre-tax charge to income of $4.5 million for
estimated operating losses during the phase-out period. During the second
quarter of 1995, the Company increased by approximately $15.0 million its
reserves for discontinued operations for accident years 1993 and prior and has
not increased them since.
52
<PAGE> 62
The following table provides a reconciliation of the beginning and ending
loss and loss adjustment expense reserves for discontinued operations for the
nine months ended September 30, 1997 and each of the years in the three-year
period ended December 31, 1996, computed in accordance with GAAP.
RECONCILIATION OF LIABILITY FOR DISCONTINUED OPERATIONS
CLAIM AND CLAIM ADJUSTMENT EXPENSE
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
-------------- -------------------------------------------
1997 1996 1995 1994
-------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Beginning reserve, gross of reinsurance ...... $ 25,466 $ 40,526 $ 36,410 $ 54,898
Less: Reinsurance recoverable on unpaid losses 6,976 9,159 8,777 8,379
-------- -------- -------- --------
Beginning reserve, net of reinsurance ........ 18,490 31,367 27,633 46,519
Provision for net claim and claim adjustment
expenses
For claims occurring in current year .... -- -- -- 4,482
For claims occurring in prior years ..... (24) -- 15,006 (2,294)
-------- -------- -------- --------
Total claim and claim adjustment expenses (24) -- 15,006 2,188
-------- -------- -------- --------
Payments for net claim and claim adjustment
expense
For claims occurring in current year .... -- -- -- (3,019)
For claims occurring in prior years ..... (2,883) (12,877) (11,272) (18,055)
-------- -------- -------- --------
Total claim and claim adjustment expense (2,883) (12,877) (11,272) (21,074)
-------- -------- -------- --------
Ending reserves, net of reinsurance .......... 15,583 18,490 31,367 27,633
Reinsurance recoverable on unpaid losses ..... 5,642 6,976 9,159 8,777
-------- -------- -------- --------
Ending reserves, gross of reinsurance ........ $ 21,225 $ 25,466 $ 40,526 $ 36,410
======== ======== ======== ========
</TABLE>
53
<PAGE> 63
The following table discloses the development of direct discontinued
operations claims and claim adjustment expense reserves from December 31, 1987
through December 31, 1996.
ANALYSIS OF DISCONTINUED OPERATIONS DIRECT CLAIM
AND CLAIM ADJUSTMENT EXPENSE DEVELOPMENT
<TABLE>
<CAPTION>
CALENDAR YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1987 1988 1989 1990 1991 1992
-------- ------- --------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Reserve for Direct Unpaid Claim and Claim
Adjustment Expenses, Gross of Reinsurance
Recoverables Reserve .............................. $ 12,678 $25,935 $ 41,088 $ 56,735 $ 65,629 $ 66,532
Re-estimated as of:
One Year Later ................................... 19,879 32,395 56,093 73,295 83,770 73,298
Two Years Later .................................. 25,865 43,160 60,679 89,336 91,453 73,067
Three Years Later ................................ 30,455 43,585 72,860 98,206 90,717 96,531
Four Years Later ................................. 30,134 52,261 82,218 102,538 117,215 92,569
Five Years Later ................................. 34,215 61,539 84,304 126,431 113,084
Six Years Later .................................. 38,051 63,072 103,325 23,722
Seven Years Later ................................ 38,844 77,080 104,428
Eight Years Later ................................ 44,129 78,938
Nine Years Later ................................. 44,866
Cumulative (Deficiency)............................. (32,188) (53,003) (63,340) (66,987) (47,455) (26,037)
Cumulative Amount of Reserve Paid Through
One Year Later ................................... 7,529 13,754 19,839 26,587 29,274 26,473
Two Years Later .................................. 13,146 15,301 26,399 31,124 29,165 23,483
Three Years Later ................................ 15,900 19,844 32,188 39,486 28,136 18,380
Four Years Later ................................. 18,915 23,007 37,758 42,399 23,255 17,777
Five Years Later ................................. 22,329 28,609 38,798 40,990 22,047
Six Years Later .................................. 26,129 31,715 37,585 45,029
Seven Years Later ................................ 27,645 31,247 42,260
Eight Years Later ................................ 27,791 37,394
Nine Years Later ................................. 27,780
</TABLE>
<TABLE>
<CAPTION>
CALENDAR YEAR ENDED DECEMBER 31,
-------------------------------------------
1993 1994 1995 1996
------- ------- ------- --------
<S> <C> <C> <C> <C>
Reserve for Direct Unpaid Claim and Claim
Adjustment Expenses, Gross of Reinsurance
Recoverables Reserve .......................... $54,898 $36,410 $40,526 $ 25,466
Re-estimated as of:
One Year Later ............................... 56,041 54,855 41,293
Two Years Later .............................. 75,703 55,622
Three Years Later ............................ 76,079
Four Years Later .............................
Five Years Later .............................
Six Years Later ..............................
Seven Years Later ............................
Eight Years Later ............................
Nine Years Later .............................
Cumulative (Deficiency)......................... (21,181) (19,212)
Cumulative Amount of Reserve Paid Through
One Year Later ............................... 23,043 14,329 15,827
Two Years Later .............................. 16,203 16,765
Three Years Later ............................ 19,649
Four Years Later .............................
Five Years Later .............................
Six Years Later ..............................
Seven Years Later ............................
Eight Years Later ............................
Nine Years Later .............................
Gross Reserve--December 31 ..................... 54,898 36,410 40,526 25,466
Reinsurance Recoverables ....................... 8,379 8,777 9,159 6,976
-------- ------- ------- -------
Net Reserve--December 31 ....................... 46,519 27,633 31,367 18,490
======== ======= ======= =======
Gross Re-estimated Reserve ..................... 76,079 55,622 41,293
Re-estimated Reinsurance Recoverables........... 11,816 12,216 9,926
-------- ------- -------
Net Re-estimated Reserve ....................... 64,263 43,406 31,367
======== ======= =======
Net Cumulative (Deficiency) .................... $(17,744) $(15,733) $ --
======== ======== =======
</TABLE>
The first line of the preceding 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
Claims and Claim Adjustment Expense Development," above.
From 1987 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 which 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.
The predominant number of the Company's pre-1991 discontinued operations
claims are attributable to construction defect claims associated with commercial
package policies sold to general contractors, developers, and artisan
contractors underwritten from 1986 to 1993. 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, 1996,
approximately $23.0 million of the total $25.5 million (approximately 90%) of
direct reserves for discontinued operations, and approximately 893 of the
Company's 992 (approximately 90%) IBNR claim counts, were attributable to
expected future reports of construction
54
<PAGE> 64
defect claims. Approximately $4.9 million of the total $17.6 million of paid
claims and claim adjustment expense for discontinued operations was attributable
to a single claim paid in the first quarter of 1996.
The Company began to monitor separately 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 vary 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 approximately a $15.0 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 IBNR construction defect
claims.
The frequency of newly reported construction defect claims increased
significantly in July 1995. 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 of judgment associated with defective
construction. Since July 1995 the Company has received notices of claims 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. Beginning in July 1996 and continuing through year-end, management
began to see the trend in newly reported claims decline.
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 $15.0 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.
Superior Pacific follows the industry practice of reinsuring a portion of its
risks. The availability and cost of reinsurance are subject to prevailing market
conditions and may affect Superior Pacific's profitability. Superior Pacific's
reinsurance program is based on the security of the reinsurers, coverage, and
price. Superior Pacific monitors its reinsurers' financial condition carefully
and recoverable losses are pursued aggressively. Occasionally, Superior Pacific
is involved in disputes with reinsurers, which, if not settled, may be resolved
in arbitration. At September 30, 1997, there were no disputes related to the
workers' compensation operations.
Superior Pacific maintains excess of loss reinsurance contracts with
various reinsurers and a quota-share contract with ZRNA, an affiliate of Zurich.
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 $150.0 million
per occurrence.
Effective January 1, 1994, SNIC entered into a quota-share reinsurance
contract (the "Quota-Share Contract") with ZRNA. Under the Quota-Share Contract,
ZRNA may provide Superior Pacific with an Assumption of Liability Endorsement
("ALE") facility, or, effective January 1, 1997, Superior Pacific may write
directly on policy forms of ZC Insurance Company ("ZCIC"), an affiliate of
Zurich (the "ZCIC Front"). The ceding rate under the contract was 20% for 1994,
and ZRNA and Superior Pacific mutually agreed to reduce the quota-share
participation to 5% for 1995
55
<PAGE> 65
and 1996. Further, Superior Pacific receives ceding commissions ranging between
22.5% and 24.5% for premiums ceded to ZRNA. The purpose of the ceding commission
is to cover Superior Pacific's cost of acquiring new business and may be changed
as a result of changes in market conditions on a quarterly basis.
Effective January 1, 1997, the terms of the Quota Share Contract were
amended. Under the amended terms of the Quota Share Contract, ZRNA increased its
participation from 5% of premiums written in 1996 to 6.5% in 1997. In exchange
for the increased participation, ZRNA will no longer receive a separate fee for
policies written on ALEs, but will receive 2% of premiums written on ZCIC Front
policies only.
Superior Pacific entered into a reinsurance transaction with Centre Re
effective June 30, 1997, under which Centre Re assumed $11 million of reserves
associated with claims open for future medical payments from Superior Pacific in
consideration of $1 million in cash and the assignment of the rights of Superior
Pacific's contribution and subrogation recoveries during the term of the
contract. The contract is accounted for as a deposit, and no gain or loss will
be recognized until net cash payments from (or to) Centre Re are either greater
(or less) than Superior Pacific's $1 million premium.
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 Superior Pacific is
unable to meet its claim payment obligations, ZRNA assumes all responsibility
for the payment of losses related to the policy. All of the excess of loss
reinsurance is with non-affiliated reinsurers.
Superior Pacific generally enters into its contracts on an annual basis.
Superior Pacific has maintained reinsurance contracts with many reinsurers for a
number of years, as did SPCC. In general, Superior Pacific's reinsurance
contracts cover specified underwritten risks. Superior Pacific also from time to
time purchases reinsurance covering specific liabilities or policies
underwritten. As of September 30, 1997, ZRNA and General Reinsurance Corporation
accounted for 22.6% and 14.3%, respectively, of total amounts recoverable by
Superior Pacific from all reinsurers on paid and unpaid claims and claim
adjustment expenses, and were the only reinsurers that accounted for more than
10% of such amounts.
INVESTMENTS
The amount and types of investments that may be made by Superior Pacific
are regulated under the California Insurance Code and rules and regulations
promulgated by the DOI. The investments of Superior Pacific are primarily
managed internally, although Superior Pacific hires an outside investment
management company as needed on a fee for service basis. As of September 30,
1997, 99.7% of Superior Pacific's investment portfolio was invested in cash and
fixed maturities. In addition, 85.8% of the Company's fixed-income portfolio had
ratings of "AA" or equivalent or better and 98.0% had ratings of "BBB" or
equivalent or better.
56
<PAGE> 66
The table below contains information concerning the composition of the
investment portfolio at September 30, 1997.
<TABLE>
<CAPTION>
CARRYING ESTIMATED
TYPE OF INVESTMENT VALUE (1) MARKET VALUE
- -------------------------------------------- ----------- ----------
<S> <C> <C>
Fixed maturities:
United States Treasury securities and
obligations of United States
government corporations and agencies.. $ 49,823 $ 49,823
Corporate securities..................... 43,383 43,383
Collateralized mortgage obligations...... 48,189 48,189
Special revenue and special assessment... 63,337 63,337
----------- ----------
Total Fixed Maturities................... 204,732 204,732
Equity Securities:
Preferred stocks......................... -- --
Common stocks............................ 849 849
Short-term investments...................... 31,036 31,036
----------- ----------
Total Investments........................ $ 236,617 $ 236,617
=========== ==========
</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.
The table below reflects investments and interest earned for the periods
presented.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
NINE MONTHS ENDED -----------------------------------
SEPTEMBER 30, 1997 1996 1995 1994
----------------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net investment income (excluding realized
gains and losses) .......................... 9,198 7,738 10,309 9,014
Average investment portfolio ................. 194,185 158,580 171,699 161,512
Pre-tax return on average investment portfolio 6.3% 4.9% 6.0% 5.6%
Net realized gains (losses) .................. 46 31 (525) 35
</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 September 30, 1997
was 2.91 years compared to 4.69 years at December 31, 1996. The modified
duration related to claim and claim adjustment expense at September 30, 1997 was
2.45 years compared to 2.38 years at December 31, 1996.
57
<PAGE> 67
The table below sets forth the maturity profile of the Company's bond
portfolio at market value as of the dates presented.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31,
------------------------ ----------------------------------------------------
1996 1995
------------------------- ---------------------- ------------------------
MARKET PERCENT TOTAL MARKET PERCENT TOTAL MARKET PERCENT TOTAL
TIME TO MATURITY VALUE MARKET VALUE VALUE MARKET VALUE VALUE MARKET VALUE
- -------------------------------- --------- ------------- ------ ------------- ------ -------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
1 year or less ................. -- -- % $ 7,309 15.8% $ 30,646 19.3%
More than 1 year through 5 years $ 42,614 20.8 16,601 35.8 61,093 38.4
More than 5 years through 10
years ....................... 48,575 23.7 10,263 22.2 21,512 13.5
More than 10 years ............. 113,543 55.5 12,157 26.2 45,875 28.8
-------- ----- ------ ------ -------- ----
Total .......................... $204,732 100.0% $46,330 100.0% $159,126 100.0%
======== ===== ======= ====== ======== =====
</TABLE>
The Company holds $6.0 million in debt at par value that are subject to
being called by the issuers or their successor company. As a result of the call
features of the bonds, the Company is subject to reinvestment risk. The Company
has $4.0 million in debt that is subject to being called by the issuer in
November 1997, at par, and an additional $2.0 million in December 1998, at a
price of 104.75.
At September 30, 1997, 98.0% 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. The
table below sets forth a profile of the Company's bond portfolio by rating at
market value as of the dates presented.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31,
----------------------- --------------------------------------------
1996 1995
--------------------- ---------------------
MARKET PERCENT TOTAL MARKET PERCENT TOTAL MARKET PERCENT TOTAL
RATING (1) VALUE MARKET VALUE VALUE MARKET VALUE VALUE MARKET VALUE
-------- ------------- ------ ------------- ------ -------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
Aaa or AAA ..................... $162,497 79.4% $35,338 76.3% $150,377 94.5%
Aa or AA ....................... 13,118 6.4 1,417 3.1 1,976 1.2
A .............................. 22,982 11.2 3,617 7.8 3,627 2.3
Baa or BBB ..................... 2,130 1.0 2,954 6.4 1,086 0.7
Ba or BB (2) ................... 4,005 2.0 -- -- 2,060 1.3
Other below investment grade(2) -- -- 3,004 6.4 -- --
Not rated ...................... -- -- -- -- -- --
-------- ----- ------- ----- -------- -----
Total .......................... $204,732 100.0% $46,330 100.0% $159,126 100.0%
======== ===== ======= ===== ======== =====
</TABLE>
- ----------
(1) S&P 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 "B" 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."
(2) During 1996, the Company purchased at or near par $3.0 million of bank
debt that carries an 8 1/4% coupon and matures in 2003, and is callable
on November 6, 1997, at par. The debt carries a "BB-" rating from S&P
and no other rating agency has rated the bond. As of October 7, 1997,
the debt traded at approximately 102, a premium.
INFORMATION SERVICES
Superior Pacific emphasizes the development of personal computer based
information and processing systems for use in all areas of its business and to
that end strives to maintain a creative, flexible, and dynamic data processing
capability that (i) enhances the effectiveness of its employees' underwriting,
policy administration, and claims activities, (ii) provides detailed, real-time
and near real-time information to management for control and administration
purposes, and (iii) provides marketing benefits through improved customer
service. The Company believes that these systems give it a significant
competitive advantage over competitors that lack such systems. Superior Pacific
expensed or capitalized $5.3 million or 4.8% of direct premiums written during
the first nine months of 1997 as compared to 4.2%, 3.3%, and 1.8% in 1996, 1995,
and 1994, respectively.
58
<PAGE> 68
Data Warehouse Decision Support System. In 1993 the Company developed
SWAMI(R), its proprietary "data warehouse decision support" system. Beginning
with the installation of SWAMI(R), Superior Pacific 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. Accordingly, SWAMI(R) was
developed to provide quality, detailed, real-time and near real-time information
to management as needed to reduce the risk represented by lack of information.
The SWAMI(R) system has been constantly enhanced since its implementation.
Management believes that SWAMI(R) is the first comprehensive "data warehouse
decision support" system developed in the insurance industry.
Underwriting. The Company's underwriting system is a fully-integrated
rating, quoting, and policy issuance system for use both internally and remotely
from producers' offices. The system contains edit and blocking features that
prohibit underwriters from issuing policies associated with business that is
deemed inappropriate or undesirable by management, or that may be
inappropriately priced. 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.
Policy Administration. Policy administration, including premium
collection and audit activities, is fully automated. In addition to traditional
"agency" billing services, the Company's collections capabilities also include
direct bill, automatic withdrawals from policyholders' bank accounts, and credit
card billings, which, management believes, dramatically improve credit
experience and policy persistency.
Claims Administration. The core of the claims system is a proprietary
document imaging system that, combined with sophisticated workflow protocols,
improves the productivity of the Company's claims staff.
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.
The Company does not believe that it will incur any material
expenditures or liabilities as a result of the "year 2000" problem in computer
software.
COMPETITION
California is the country's largest workers' compensation insurance
market. Competitive pressures in the California workers' compensation market
increased with the implementation of open rating in January, 1995. As a result,
total direct premiums written for the California market decreased from $9.0
billion in 1993 to $5.0 billion in 1996. More recently, the nature of the
workers' compensation market in California has improved, as demonstrated by an
actual improvement in premium pricing of 2.1% in the nine months ended September
30, 1997, as compared to the same period in 1996.
The workers' compensation insurance industry in California is extremely
competitive. Many of Superior Pacific'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 Superior Pacific. Of the approximately 300
companies that report to the WCIRB that they write workers' compensation
insurance, the Company believes that Liberty Mutual Insurance Companies,
California Compensation Insurance Company, and American International Group are
the largest private sector underwriters of workers' compensation insurance in
California. Superior Pacific believes the dominant competitor in the California
workers' compensation industry is the State Fund. As a result of the
Acquisition, the Company believes that, excluding the State Fund, it is the only
other exclusive underwriter of workers' compensation insurance in California and
the eighth largest California workers' compensation insurer overall, based upon
1996 direct premiums written.
59
<PAGE> 69
The workers' compensation market is commodity-oriented, highly
fragmented, and reflective of intense price competition. Nevertheless, because
each risk is 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, due to 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. Superior Pacific's existing and
prospective customer bases are vulnerable to competition, especially from larger
insurers that at any time are capable of penetrating Superior Pacific's markets
with products priced at levels substantially below Superior Pacific's.
RATINGS
Superior Pacific is currently rated "BBB" by S&P, a rating it has held
since 1995. Insurance companies rated "BBB" are considered by S&P to offer
adequate financial security, but capacity to meet policyholder obligations is
susceptible to adverse economic and underwriting conditions. A.M. Best has
currently assigned a "B+" (Very Good) rating to Superior Pacific, a rating it
has held since 1995. A.M. Best's ratings are based upon an evaluation of a
company's: (i) financial strength (leverage/capitalization, capital
structure/holding company, quality, and appropriateness of reinsurance program,
adequacy of loss/policy reserves, quality, and diversification of assets, and
liquidity); (ii) operating performance (profitability, revenue composition, and
management experience and objectives); and (iii) market profile (market risk,
competitive market position, spread of risk, and event risk). A "B+" rating is
assigned to companies that have on balance, in A.M. Best's opinion, very good
financial strength, operating performance, and market profile when compared to
the standards established by A.M. Best, and have a good ability to meet their
ongoing obligations to policyholders. "B+" is A.M. Best's sixth highest rating
classification out of 15 ratings. A.M. Best's and S&P's ratings represent an
independent opinion of a company's financial strength and ability to meet its
obligations to policyholders and are not based upon factors concerning
investors. Such ratings are subject to change and are not recommendations to
buy, sell, or hold securities. One factor in an insurer's ability to compete
effectively is its A.M. Best rating. The Company's A.M. Best rating is lower
than that of many of its competitors. There can be no assurance that such
ratings or future changes therein will not affect the Company's competitive
position.
In addition, the Company currently maintains a facility that allows it
to offer certain policyholders insurance policies written by a Zurich affiliate
having an A.M. Best "A" rating.
REGULATION
Superior National and its insurance subsidiaries are subject to
extensive governmental regulation and supervision. Regulations relate to such
matters as the filing of premium rates and policy forms, adequacy of reserves,
types and quality of investments, minimum capital and surplus requirements,
deposit of securities for the protection of policyholders, statutory financial
reporting, and restrictions on shareholder dividends. Superior National and its
insurance subsidiaries are also subject to periodic examination by the DOI. In
addition, assessments are made against Superior Pacific to cover liabilities to
policyholders of insolvent insurance companies. For insurance other than
California workers' compensation insurance, Superior Pacific is still subject to
assessments in non-material, decreasing amounts. The regulation and supervision
of insurance companies by state agencies is designed principally for the benefit
of policyholders, not shareholders. Superior National believes that it and its
subsidiaries are in material compliance with state regulatory requirements that
are relevant to their respective businesses.
The DOI Triennial Examination of SNIC, which covered the three years
ended December 31, 1994, was completed in 1996 and indicated no material issues
or actions needed to be taken by SNIC in either its operations or financial
statements. SPCC's Triennial Examination, which was completed in 1996, resulted
in an additional $18.5 million of claim and claim adjustment expense reserves,
being recorded as of December 31, 1996. Additionally, $12.0 million in claim and
claim adjustment expense was recorded in first quarter of 1997. See Note 9 to
the Consolidated Financial Statements of Pac Rim.
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<PAGE> 70
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 with 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 without DOI approval 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. The maximum
dividends permitted under the California Insurance Code are not necessarily
indicative of an insurer's actual ability to pay dividends or other
distributions to a parent company, which also may be constrained by business and
regulatory considerations, such as the impact of dividends on surplus, which
could affect an insurer's competitive position, the amount of premiums that can
be written, and the ability to pay future dividends. Further, the California
Insurance Code requires that the statutory surplus of an insurance company
following any dividend or distribution by such company be reasonable in relation
to its outstanding liabilities and adequate for its financial needs.
In 1989, 1991, 1993 and 1995, various workers' compensation reform laws
passed into law by the California Legislature materially impacted the Company's
rates, claims experience, financial condition and results of operations.
Under the last important measure, adopted in 1993, 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 and rules can
only be disapproved by the DOI after a hearing and only on the basis of
solvency, market share, or improper filing. Superior Pacific cannot predict the
ultimate effect of open rating on its workers' compensation business, but during
the first two and one-half years of open rating, the intense price competition
that ensued led to lower average premiums per policy. Rates stabilized in 1996,
and appeared to increase during the first nine months of 1997. The specified
benefit increases are scheduled to occur gradually over a three-year period. The
potential cost savings from the other reforms adopted 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. Superior Pacific 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.
The California legislature passed, and the DOI has issued its guidelines
with respect to the implementation of, Assembly Bill 1913 ("AB 1913"). AB 1913
causes, among other things, the experience modification factor of a current
workers' compensation policy and the immediately preceding two policies
(regardless of carrier) to be 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 paid $505,000
in AB 1913 refunds in the year ending December 31, 1996.
Proposed federal legislation has been introduced from time to time in
recent years that would provide the federal government with substantial power to
regulate property and casualty 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.
In order to enhance the regulation of insurer solvency, the NAIC has
adopted a formula and model law to implement risk-based capital ("RBC")
requirements for property and casualty insurance companies designed to assess
minimum capital requirements and to raise the level of protection that statutory
surplus provides for policyholder obligations. The NAIC model law has been
incorporated into the California Insurance Code. The RBC formula for property
and casualty insurance companies measures four major areas of risk facing
property and casualty insurers: (i) underwriting, which encompasses the risk of
adverse loss developments and inadequate pricing, (ii) declines in asset
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<PAGE> 71
values arising from credit risk, (iii) declines in asset values arising from
investment risks, and (iv) off-balance sheet risk arising from adverse
experience from non-controlled assets, guarantees for affiliates, contingent
liabilities and reserve and premium growth. Pursuant to the model law, insurers
having less statutory surplus than that required by the RBC calculation will be
subject to varying degrees of regulatory action, depending on the level of
capital inadequacy.
The RBC model law provides for four levels of regulatory action. The
extent of regulatory intervention and action increases as the level of surplus
to RBC falls. The first level, the Company Action Level (as defined by the
NAIC), requires an insurer to submit a plan of corrective actions to the
regulator if surplus falls below 200% of the RBC amount. The Regulatory Action
Level (as defined by the NAIC) requires an insurer to submit a plan containing
corrective actions and requires the relevant insurance commissioner to perform
an examination or other analysis and issue a corrective order if surplus falls
below 150% of the RBC amount. The Authorized Control Level (as defined by the
NAIC) gives the relevant insurance commissioner the option either to take the
aforementioned actions or to rehabilitate or liquidate the insurer if surplus
falls below 100% of the RBC amount. The fourth action level is the Mandatory
Control Level (as defined by the NAIC) which requires the relevant insurance
commissioner to rehabilitate or liquidate the insurer if surplus falls below 70%
of the RBC amount. Based on the foregoing formulae, as of September 30, 1997,
the RBC ratios of SNIC and SPCC were in excess of the Company Action Level, the
first trigger level that would require regulatory action.
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 may lead to increased regulatory oversight. Based on its 1996 statutory
financial statement, SNIC was within the usual range of all twelve IRIS tests,
and SPCC fell outside the usual range of six of the twelve IRIS tests. SPCC was
outside of the usual range of the tests measuring net premiums written to
surplus, two-year overall operating ratio, change in surplus, and three reserve
adequacy tests. All of the unusual values were the result of third and fourth
quarter claim and claim adjustment expense reserve increases. Because of the
pooling arrangement that currently exists between SPCC and SNIC, both companies
will now have identical IRIS test results.
The NAIC currently has a project under way to codify SAP, as existing
SAP does not address all accounting issues and may differ from state to state.
Upon completion, the codification is expected to replace prescribed or permitted
practices as the new comprehensive statutory basis of accounting for insurance
companies. The final format of the codification is uncertain at this time, yet
implementation could be required as early as December 31, 1999. Due to the
project's uncertainty, the Company has not yet quantified the impact any such
changes would have on the statutory capital and surplus or statutory results of
operations of the Company's insurance subsidiaries. The impact of adopting this
new comprehensive statutory basis of accounting may, however, materially impact
statutory capital and surplus.
It is not possible to predict the future impact of changing state and
federal regulation on the Company's operations and there can be no assurance
that laws and regulations enacted in the future will not be more restrictive
than existing laws.
EMPLOYEES
As of September 30, 1997, the Company had approximately 419 employees,
none of whom was covered by a collective bargaining agreement.
BUSINESS PROPERTIES
The Company's principal executive offices are located in Calabasas,
California and are subject to a lease that expires in 2000. The Company also
leases space for branch offices in Woodland Hills, South San Francisco,
Sacramento, and Fresno (all in California). Such leases expire in 2002, 1997,
2001, and 2000, respectively. The Company is relocating its South San Francisco
office to Pleasanton, California under a lease that expires in 2003.
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<PAGE> 72
LEGAL PROCEEDINGS
Superior National and its subsidiaries are parties to various legal
proceedings, all of which are considered routine and incidental to the business
of the Company and are not material to the financial condition and operation of
the business. Neither Superior National nor any of its subsidiaries is a party
to any litigation expected to have a material adverse effect upon the Company's
business or financial position.
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<PAGE> 73
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Directors
Information is set forth below concerning the directors of the Company
and the year in which each was first elected as a director of the Company.
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE POSITION WITH THE COMPANY SINCE
- ------------------------- ---- ---------------------------- ---------
<S> <C> <C> <C>
C. Len Pecchenino(1) 70 Director, Chairman of the Board 1988
Steven D. Germain(2) 44 Director 1995
Thomas J. Jamieson(1)(3) 54 Director 1985
Gordon E. Noble(2) 69 Director 1990
Craig F. Schwarberg(1)(3) 41 Director 1992
Robert A. Spass 41 Director 1992
Bradley E. Cooper(2)(3) 31 Director 1992
William Gentz 57 President, Chief Executive 1994
Officer and Director
J. Chris Seaman(3) 43 Executive Vice President, Chief 1993
Financial Officer and Director
Steven B. Gruber 40 Director 1997
Roger W. Gilbert 65 Director 1997
</TABLE>
- ----------
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Member of Investment Committee
No arrangement or understanding exists between any director and any
other person pursuant to which any director holds such position. None of the
directors has any family relationship to any other director or executive officer
of the Company.
C. Len Pecchenino became a director of the Company in May 1988 and was
elected as 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 held various executive
officer positions, including President and Chief Operating Officer, with IC
Industries, Inc. and Pneumo Corporation until his retirement in 1986.
Steven D. Germain was elected to the Company's Board of Directors in
April 1995. 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
Re and as a director, Senior Vice President and Secretary of CentreLine. Mr.
Germain is also a director, President, and Chief Executive Officer of Home
Holdings, Inc. and a director of certain of its subsidiaries.
Thomas J. Jamieson has been a director of the Company since December
1985. Since 1971, he has served as President of Jaco Oil Company, and 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 and previously served as Executive Vice
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<PAGE> 74
President and as a director and member of the Executive Committee of Sedgwick
James, an international insurance brokerage and risk management firm.
Craig F. Schwarberg was appointed to the Board of Directors in March
1992. From 1991 to the present, Mr. Schwarberg has worked for International
Insurance Advisors, Inc. ("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. Prior to 1991, he held
various positions at Lehman Brothers Inc., most recently as Senior Vice
President.
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. Prior to 1990, Mr. Spass held
various positions at Salomon Brothers Inc, most recently as a Director. Since
January 1996, he has served as a director of Highlands Insurance Group, Inc.
From 1990 to 1996, he served as a director of National Reinsurance Holdings
Corp., the holding company for National Reinsurance Corp. Since 1994, he has
served as a director of Unionamerica Holdings plc and from 1994 to 1996 he
served as a director of NACOLAH Holding Corporation.
Bradley E. Cooper became a director of the Company in May 1992. From May
1990 to February 1994, Mr. Cooper served as Vice President of IIA. Currently,
Mr. Cooper is a Partner of Insurance Partners Advisors, L.P., joining at its
formation in 1994. Prior to 1990, Mr. Cooper was an analyst with Salomon
Brothers Inc. Since January 1996, he has served as a director of Highlands
Insurance Group, Inc.
William 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 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 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.
Steven B. Gruber became a director of the Company in April 1997. He was
a founder of, and since February 1994, has served as a Managing Partner of,
Insurance Partners Advisors, L.P. From May 1990 to present, Mr. Gruber has
served as the Managing Director of Oak Hill Partners, Inc. and from October 1992
to present, has served as a Vice President of Keystone, Inc. From 1981 to April
1990 he was associated with Lehman Brothers Inc., most recently as Managing
Director and Co-Head of high-yield securities. He is also a director of
Unionamerica Holdings plc, Reliant Building Products, Inc. and MVE Inc.
Roger W. Gilbert became a director of the Company in April 1997. 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. Prior to 1988, Mr. Gilbert served as Senior
Vice President and director of Great American Insurance Companies, and as
President of Great America West Inc.
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<PAGE> 75
Executive Officers
Set forth in the table below are the names, ages and current offices
held by all executive officers of the Company and Superior Pacific. Unless
specifically noted, the positions named are held at both the Company and at
Superior Pacific.
<TABLE>
<CAPTION>
EXECUTIVE
OFFICER
NAME AGE POSITION WITH THE COMPANY SINCE
- -------------------- ---- ------------------------------------------------- ---------
<S> <C> <C> <C>
William L. Gentz 57 President and Chief Executive Officer 1994
J. Chris Seaman 43 Executive Vice President and Chief Financial Officer 1991
Arnold J. Senter 55 Executive Vice President and Chief Operating Officer 1997
Thomas I. Boggs, Jr 51 Senior Vice President--Underwriting 1995
Karl O. Johnson 66 Senior Vice President, Superior Pacific 1989
Douglas R. Roche 57 Senior Vice President 1990
Robert E. Nagle 49 Senior Vice President, General Counsel and Secretary 1996
James L. Cinney 57 Senior Vice President, Superior Pacific 1994
Edward C. Shoop 53 Senior Vice President and Chief Actuary 1997
Matthew Natalizio 42 Vice President, Finance and Treasurer 1994
Sue A. Binder 49 Vice President, Superior Pacific 1992
Harold J. Fedora 47 Vice President, Superior Pacific 1993
Curtis H. Carson 37 Vice President, Superior Pacific 1997
Jack W. Solomon 63 Resident Vice President, Superior Pacific 1991
Robert J. Niebur 62 Resident Vice President, Superior Pacific 1995
</TABLE>
Executive officers of the Company are elected by and serve at the
discretion of the Board. 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 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 positions of President and Chief Executive
Officer since mid-1994, and has served as a director of the Company since June
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.
Arnold J. Senter has held the positions of Executive Vice President and
Chief Operating Officer since February 1997. Prior to joining the Company, Mr.
Senter most recently served as Senior Vice President, Southwest and Southeast
Operations, at Zenith National Insurance Company, and had previously held
various operational positions in nearly every functional area for Zenith since
1981. Mr. Senter has 30 years experience with both regional and national
carriers.
Thomas I. Boggs, Jr. was appointed Senior Vice President of Workers'
Compensation Underwriting effective March 1995. From October 1993 to March 1995,
he served as Assistant Vice President of Fremont
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<PAGE> 76
Compensation Insurance Company and from October 1991 to October 1993, served as
Business Development Executive for the Southern California CIC Commercial
Insurance Center for Fireman's Fund Insurance Company. Prior to October 1991,
Mr. Boggs held various underwriting and marketing positions at Cypress Insurance
Company, Industrial Indemnity Insurance Company, and Safeco.
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 and served in such position until January 1997 at
which point he was appointed Senior Vice President--Claims. He served in such
position until September 1997 when he was reappointed Senior Vice
President--Management Information Systems. Before 1994, 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.
Edward C. Shoop was appointed Senior Vice President and Chief Actuary in
October 1997. From April 1995 to October 1997 he served as Senior Vice President
and Actuary with Zenith Insurance Company, and from March 1994 to April 1995
served as Vice President and Actuary with Great States Insurance Company. Prior
to that, Mr. Shoop was Vice President and Actuary with the Workers' Compensation
Insurance Rating Bureau of Massachusetts from November 1991 to March 1994. Mr.
Shoop has 30 years of actuarial experience working for Aetna Life & Casualty
Company, Fireman's Fund Insurance Company, and Royal Insurance Company of
Canada.
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 A. Binder has held the position of Home Office Claims Manager of
SNIC since 1991 and was appointed 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 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.
Curtis H. Carson has held the position of Vice President--Human
Resources since January 1997. From 1984 until he joined the Company, Mr. Carson
was employed by Farmers Insurance, most recently as Manager-- Human Resources.
Jack W. Solomon has held the position of Vice President of SNIC and
Phoenix Manager 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.
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<PAGE> 77
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 firm, from 1994 to 1995, and operated his own insurance consulting
business from 1993 to 1994. Prior to forming his own company, Mr. Niebur was an
operating executive with Great States Insurance Company and held various staff
and executive positions with Zenith Insurance Company.
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<PAGE> 78
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, 1996, 1995, and 1994, of those persons who were, at December
31, 1996, (i) the chief executive officer and (ii) the other four most highly
compensated executive officers of the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
----------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUT
------------------------------------ -------- ----
ALL
OTHER RESTRICED SECURITIES OTHER
ANNUAL STOCK UNDERLYING COMPEN-
NAME AND PRINCIPAL COMPEN- AWARDS OPTIONS/ LTIP SATION
POSITION YEAR SALARY(1) BONUS(2) SATION($) ($)(3) SARS(#) PAYOUT(#) ($)(4)
---- -------- -------- ---- -------- -------- ---- --------
<S> <C> <C> <C> <C> <C> <C>
William L. Gentz(5) 1996 $298,300 $278,500 -- $ 46,874(6) 17,875 -- 2,250
President and Chief 1995 294,508 203,500 -- 53,690 19,175 -- 2,250
Executive Officer 1994 168,755 100,000 -- -- 31,250 -- --
J. Chris Seaman 1996 235,298 128,500 -- 36,223(7) 13,813 -- 2,250
Executive Vice 1995 215,600 128,500 -- 40,170 39,325 -- 2,250
President and Chief 1994 173,690 75,000 -- -- -- -- 2,250
Financial Officer
Joseph P. Wolonsky(8) 1996 168,974 18,500 -- 21,306(9) 8,125 -- 2,250
Senior Vice President 1995 163,700 53,500 -- 24,700 20,050 -- 2,250
and Corporate Counse1 1994 145,200 30,000 -- -- -- -- 2,250
Karl O. Johnson 1996 143,974 14,000 -- 21,306(10) 8,125 -- 2,007
Senior Vice 1995 135,200 27,000 -- 16,900 17,300 -- 2,250
President 1994 131,108 27,000 -- -- -- -- 2,250
Thomas I. Boggs, Jr 1996 155,800 32,000 -- 21,306(12) 8,125 -- 2,163
Senior Vice 1995 115,917 7,000 -- 13,000 12,150 -- 1,098
President(11) 1994 -- -- -- -- -- -- --
</TABLE>
- ----------
(1) The amounts set forth for fiscal year 1996 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 to
which they apply, although payment typically is made in March of the
subsequent year.
(3) Represents the fair market value of the underlying shares on the date of
grant.
(4) Other than as specifically noted, represents the employer's contribution
under the Company's 401(k) Plan.
(5) 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 as President and Chief Executive Officer 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.
(6) Represents a grant of 9,625 shares of restricted stock that vests in nine
equal annual increments following the date of grant. As of December 31,
1996, Mr. Gentz held an aggregate of 19,950 shares of restricted stock
valued at $254,363, based upon the $12.75 per share fair market value of
the Common Stock on such date.
(7) Represents a grant of 7,438 shares of restricted stock that vests in nine
equal annual increments following the date of grant. As of December 31,
1996, Mr. Seaman held an aggregate of 15,163 shares of restricted stock
valued at $193,328, based upon the $12.75 per share fair market value of
the Common Stock on such date.
(8) Mr. Wolonsky resigned from the Company effective June 30, 1997.
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<PAGE> 79
(9) Represents a grant of 4,375 shares of restricted stock that vests in nine
equal annual increments following the date of grant. As of December 31,
1996, Mr. Wolonsky held an aggregate of 9,125 shares of restricted stock
valued at $116,344, based upon the $12.75 per share fair market value of
the Common Stock on such date.
(10) Represents a grant of 4,375 shares of restricted stock that vests in nine
equal annual increments following the date of grant. As of December 31,
1996, Mr. Johnson held an aggregate of 7,625 shares of restricted stock
valued at $97,219, based upon the $12.75 per share fair market value of
the Common Stock on such date.
(11) Mr. Boggs began his employment with the Company in March 1995.
(12) Represents a grant of 4,375 shares of restricted stock that vests in nine
equal annual increments following the date of grant. As of December 31,
1996, Mr. Boggs held an aggregate of 6,875 shares of restricted stock
valued at $87,656, based upon the $12.75 per share fair market value of
the Common Stock on such date.
EMPLOYMENT AGREEMENTS
The Company has in effect employment agreements with the following
officers:
William L. Gentz, President and Chief Executive Officer. Mr. Gentz's
agreement expires on June 1, 1999, 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 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.
Arnold J. Senter, Executive Vice President and Chief Operating Officer.
Mr. Senter's agreement expires on February 17, 1999, 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
February 17, 1997 at $200,000 annually, plus benefits and incidentals generally
provided to officers of the Company, and is thereafter as determined by the
Board. If Mr. Senter's 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. Senter would be deemed terminated without cause and his employment
agreement would be deemed to have a three-year remaining term.
J. Chris Seaman, Executive Vice President and Chief Financial Officer.
Mr. Seaman's agreement expires on June 1, 1998, 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 annual salary under
the agreement is $200,000, plus benefits and incidentals generally provided to
officers of the Company, and is thereafter as determined by the Board. If Mr.
Seaman's 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. Seaman
would be deemed terminated without cause and his employment agreement would be
deemed to have a three-year remaining term.
Edward C. Shoop, Senior Vice President-Chief Actuary. Mr. Shoop's
agreement expires on October 6, 1999 and provides that, if his employment with
the Company is terminated as a result of a change in control, he will be
entitled to his salary and benefits for two years from the date of his
termination.
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.
70
<PAGE> 80
DIRECTOR COMPENSATION
Each 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.
In addition, in May 1997, the Board of Directors of the Company approved
the payment to C. Len Pecchenino, the Chairman of the Board, of an annual salary
of $50,000 so long as he remains Chairman of the Board and serves on the Audit
Committee of the Board of Directors. This salary is to be paid in addition to
the compensation he normally receives for attendance at regularly scheduled
Board of Directors meetings. Mr. Pecchenino was paid $50,000 in September 1997
and from thereafter will receive this salary in four equal quarterly
installments.
CHANGE-IN-CONTROL ARRANGEMENTS
In addition to the rights described above with respect to Messrs. Gentz,
Senter, Seaman, and Shoop, 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 1986 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
Officers, key employees, including directors who are key employees, and
consultants 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, key employees, and consultants 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 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.
71
<PAGE> 81
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning options granted
during fiscal 1996 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/SARS EXERCISE ASSUMED ANNUAL RATES OF STOCK
UNDERLYING GRANTED TO OR BASE PRICE APPLICATION FOR OPTION TERM
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION ---------------------------------
NAME GRANTED (#) FISCAL YEAR ($/Sh)(1) DATE 0%(2) 5%($)(3) 10%($)(3)
- ---------------------- ---------- ----------- -------- -------- ----- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
William L. Gentz 17,87(4) 12.0 4.87 3/01/06 0 54,746 138,738
J. Chris Seaman 13,81(4) 9.3 4.87 3/01/06 0 42,306 107,210
Joseph P. Wolonsky (5) 8,125(4) 5.5 4.87 3/01/06 0 24,884 63,062
Karl O. Johnson 8,125(4) 5.5 4.87 3/01/06 0 24,884 63,062
Thomas I. Boggs, Jr 8,125(4) 5.5 4.87 3/01/06 0 24,884 63,062
</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 from the date of grant, granted pursuant to
the 1995 Plan.
(5) Mr. Wolonsky resigned from the Company effective June 30, 1997.
OPTION EXERCISES AND YEAR END VALUE
The following table sets forth information concerning the aggregate
number of options exercised during fiscal 1996 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, 1996.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/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 -- -- 16,335/51,965 $ 123,329/$398,235
J. Chris Seaman -- -- 37,065/31,073 290,880/ 246,119
Joseph P. Wolonsky (2) -- -- 19,260/18,915 152,913/ 149,990
Karl O. Johnson -- -- 14,060/21,365 113,473/ 168,667
Thomas I. Boggs, Jr. -- -- 2,430/17,845 18,347/ 137,411
</TABLE>
- ---------------
(1) Uses a fair market value at December 31, 1996 of $12.75 per share, with
the aggregate exercise price deducted from the total value of the stock
underlying the options.
(2) Mr. Wolonsky resigned from the Company effective June 30, 1997.
72
<PAGE> 82
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee during the fiscal year ended December 31, 1996
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 1996 for investment banking and financial consulting
services. Mr. Germain is an officer and a director of Centre Re, which was
involved in several transactions with the Company during 1996 involving payments
in excess of $60,000. See "Certain Relationships and Related Transactions."
During fiscal 1996, no officers participated in deliberations of the
Company's Compensation Committee concerning executive officer compensation,
except William Gentz, the Company's President and Chief Executive Officer.
73
<PAGE> 83
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 December 1, 1997 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. On March 31, 1992, the
Company issued its 14.5% Senior Subordinated Voting Notes due April 1, 2002 (the
"Voting Notes") in connection with a transaction wherein the Company issued its
14.5% Senior Subordinated promissory notes in an aggregate principal amount of
$11.0 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. See "Certain Relationships and
Related Transactions--Transactions with Zurich, Including Centre Re." 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 December 1, 1997, the
number of votes held by the holder 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
Certificate of Incorporation and Bylaws.
<TABLE>
<CAPTION>
CERTAIN BENEFICIAL OWNERS
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) 23.38% -- --
Insurance Partners, L.P. ..................
201 Main Street
Suite 2600
Ft. Worth, Texas 76102
"IIA" ..................................... 1,243,333(5) 17.51% -- --
International Insurance Advisors, Inc. ....
One Chase Manhattan Plaza
44th Floor
New York, New York 10005
"IP BERMUDA" .............................. 754,978(6) 12.86% -- --
Insurance Partners Offshore (Bermuda), L.P.
Cedar House
41 Cedar Avenue
P.O. Box HM 1179
Hamilton HM HX, Bermuda
"TJS" ..................................... 529,652(7) 9.04% -- --
TJS Partners, L.P.
52 Vanderbilt Avenue, 5th Floor
New York, New York 10017
</TABLE>
74
<PAGE> 84
<TABLE>
<CAPTION>
COMMON STOCK(1) VOTING NOTES
-------------------------- ------------------
SHARES-
NAME AND ADDRESS SHARES PERCENT(2) EQUIVALENT PERCENT
- ------------------------------------------ ------------- --------- ---------- --------
<S> <C> <C> <C> <C>
"CENTRELINE" .............................. 579,356(8) 9.00% -- --
CentreLine Reinsurance Limited,
a Bermuda corporation
Cumberland House
One Victoria Street
Hamilton HM HX, Bermuda
"CENTRE RE" ............................... 470,390(9) 7.43% -- --
Centre Reinsurance Limited
One Victoria Street
Seventh Floor
Hamilton HM HX, Bermuda
"BISHOP ESTATE" ........................... 388,752(10) 6.22% -- --
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 April
1, 2002 to purchase 579,356 shares of Common Stock described more fully
in footnote 8, 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 $11.0 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, initially exercisable
into 1,474,306 shares of Common Stock, were originally issued to IIA, as
agent for each of the limited partners and the general partner of III.
The Warrants have since been distributed to the partners of III;
however, IIA's revocable agency relationship with such partners was
reestablished after the distribution. Since the distribution, several
such partners sold their Warrants to certain third parties that do not
have such an agency relationship with IIA. See footnote 5 below. 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
September 30, 1997, which number is 5,859,269 shares, plus any shares
issuable pursuant to warrants held by the entity in question which may
be exercised within 60 days after December 1, 1997.
(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. In
addition, Mr. Spass has voting power over all of the voting capital
stock of International Insurance Investors (Bermuda) Limited, the
general partner of III. International Insurance Investors (Bermuda)
Limited owns Warrants to purchase 47,129 shares of Common Stock that are
held by IIA, as its agent. See footnote 5 below. See also "Certain
Relationships and Related Transactions--Transactions with IP and
Limitations on Related Party Control" regarding restrictions on III's
ability to acquire additional equity securities of the Company or
exercise such Warrants.
(4) Represents shares of Common Stock held by IP Delaware. Robert A. Spass
and Steven B. Gruber, directors of the Company, 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 held by IP
Delaware. See "Certain Relationships and Related Transactions --
75
<PAGE> 85
Transactions with IP and Limitations on Related Party Control" regarding
restrictions on IP Delaware's ability to acquire additional equity
securities of the Company.
(5) Represents Warrants to purchase shares of Common Stock that are held by
IIA, as agent for each of the limited partners and for the general
partner of III, as discussed in footnotes 1 and 3 above. 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. The partners who, upon revocation of IIA's authority,
would be entitled to exercise Warrants covering more than 5% of the
Common Stock are Centre Re and Bishop Estate, in the share amounts and
percentages stated. See "Certain Relationships and Related
Transactions--Transactions with IP and Limitations on Related Party
Control" regarding restrictions on IIA's ability to acquire additional
equity securities of the Company or exercise warrants to purchase Common
Stock.
(6) Represents shares of Common Stock held by IP Bermuda. Robert A. Spass
and Steven B. Gruber, directors of the Company, 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 held by IP
Bermuda. See "Certain Relationships and Related
Transactions--Transactions with IP and Limitations on Related Party
Control" regarding restrictions on IP Bermuda's ability to acquire
additional equity securities of the Company.
(7) 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 are
the beneficial owners of all such shares. The information contained in
this footnote is based, in part, on an Amendment No. 2 to Schedule
13D/A, filed with the SEC in May 1997. Does not include 173,223 shares
issuable upon the exercise of Warrants acquired since May 1997 that are
subject to an agreement among all holders of Company warrants, which
prohibits the exercise or transfer of such warrants until April 2000
unless prior approval from the Company's Board of Directors is obtained.
Because of such restrictions, TJS, TJS Management, L.P., TJS
Corporation, and Thomas J. Salvatore disclaim beneficial ownership (as
defined in Rule 13d-3 under the Exchange Act) of such Warrants.
(8) 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 Re. See footnote 9 below for information regarding
Centre Re's beneficial ownership of securities of the Company. The
CentreLine Warrant was issued in connection with a $20.0 million
investment in the Company (and its affiliate, Superior National Capital,
L.P.) by CentreLine and a second Centre Re affiliate, Centre Reinsurance
Services (Bermuda) III Limited. 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 Re and CentreLine. In addition to
Mr. Germain, each of Steven M. Gluckstern, Michael D. Palm, and David A.
Brown, is an officer and/or director of both Centre Re and CentreLine.
Messrs. Germain, Gluckstern, Palm and Brown disclaim any beneficial
interest in the CentreLine Warrant and the Common Stock issuable upon
its exercise, and in the Warrants held by IIA, as agent for Centre Re
(as described in footnote 9 below), and the shares of Common Stock
issuable upon the exercise of such Warrants. However, as officers and/or
directors of both Centre Re and CentreLine, such persons share voting
and/or investment power over such securities (subject to the agency
appointment described in footnotes 1 and 5 above). See "Certain
Relationships and Related Transactions--Transactions with IP and
Limitations on Related Party Control" regarding restrictions on
CentreLine's ability to acquire additional equity securities of the
Company or exercise the CentreLine Warrant.
76
<PAGE> 86
(9) Represents Warrants to purchase shares of Common Stock received upon the
distribution by III to its partners of the Warrants, as described in
footnote 1 above. See footnote 5 above for information concerning Centre
Re's agency relationship with IIA with respect to such Warrants and see
footnote 8 above for information concerning Centre Re's relationships
with Steven D. Germain and CentreLine. The numbers of shares reported
for Centre Re and III (excluding the Voting Notes) are based on an
Amendment No. 1 to Schedule 13G, filed with the SEC in February 1997.
See "Certain Relationships and Related Transactions--Transactions with
IP and Limitations on Related Party Control" regarding restrictions on
Centre Re's ability to acquire additional equity securities of the
Company or exercise the Warrants.
(10) Represents Warrants to purchase shares of Common Stock 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. Mr. Peters is a director of IIA. The number of
shares reported for the Bishop Estate is based on a Schedule 13G filed
with SEC in February 1996.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock as of December 1, 1997 by (i) each
director and certain executive officers of the Company, individually, and (ii)
all directors and executive officers as a group:
<TABLE>
<CAPTION>
OWNERSHIP OF MANAGEMENT
PERCENT OF COMMON
NAME SHARES OWNED STOCK(1)
- ------------------------------- ---------------- -------------------
<S> <C> <C>
William L. Gentz 97,929(2) 1.66%
J. Chris Seaman 166,181(3) 2.78%
Arnold J. Senter 2,000 *
Karl O. Johnson 51,878(4) *
Douglas R. Roche 28,100(5) *
Thomas J. Jamieson 245,300(6) 4.19%
Gordon E. Noble 10,000 *
C. Len Pecchenino 14,250 *
Robert A. Spass 63,720(7) 1.09%
Craig F. Schwarberg 3,321(8) *
Bradley E. Cooper 5,107(9) *
Steven D. Germain 1,056,226(10) 15.29%
Steven B. Gruber --(11) --
Roger W. Gilbert -- --
Directors and Executive Officers as 1,843,168(12) 25.35%
a Group (24 persons)
</TABLE>
- ----------
* Less than 1%
(1) Percent ownership is based on the number of shares outstanding as of
December 1, 1997, which number is 5,859,269 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 1, 1997.
(2) Includes 29,995 shares issuable upon exercise of stock options that are
exercisable within sixty days of December 1, 1997, in addition to 29,950
restricted stock grants awarded under the 1995 Plan, of which the
restrictions have lapsed as to 3,361 shares.
77
<PAGE> 87
(3) Includes 58,795 shares issuable upon exercise of Warrants and 40,591
shares issuable upon exercise of stock options, each of which is
exercisable within sixty days of December 1, 1997, in addition to
24,163 restricted stock grants awarded under the 1995 Plan, of which the
restrictions have lapsed as to 2,557 shares.
(4) Includes 4,262 shares issuable upon exercise of Warrants and 21,095
shares issuable upon exercise of stock options, both of which are
exercisable within sixty days of December 1, 1997, in addition to
8,725 restricted stock grants awarded under the 1995 Plan, of which the
restrictions have lapsed as to 1,218 shares.
(5) Includes 9,417 shares issuable upon exercise of stock options that are
exercisable within sixty days of December 1, 1997, in addition to
6,387 restricted stock grants awarded under the 1995 Plan, of which the
restrictions have lapsed as to 804 shares.
(6) Includes 98,050 shares owned of record by Jaco Oil Company, an entity
controlled by Mr. Jamieson.
(7) Includes 8,000 shares of Common Stock owned directly by Mr. Spass. In
addition, Mr. Spass is the beneficial owner of Warrants, held by IIA, as
agent, representing the right to purchase 55,720 shares of Common Stock
as described in footnotes 3 and 5 of the preceding "Certain Beneficial
Owners" table. Mr. Spass is an officer of IIA and is the beneficial
owner of less than one percent of the equity securities of IIA. IIA
holds, as agent for the partners of III, Warrants to purchase 1,243,333
shares of Common Stock. In addition, see footnote 3 to the preceding
"Certain Beneficial Owners" table concerning Mr. Spass' voting power
with respect to the Voting Notes. Separately, 1,369,856 shares of Common
Stock are held by IP Delaware and 754,978 shares of Common Stock are
held by IP Bermuda. 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 are held by IP Delaware and IP Bermuda. See footnotes 4 and 6
to the preceding "Certain Beneficial Owners" table for information
concerning such partnerships. Pursuant to the terms of the stock
purchase agreement under which IP Delaware and IP Bermuda purchased
their shares of Common Stock, 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. See "Certain Relationships and Related Transactions--Transactions
with IP and Limitations on Related Party Control."
(8) Represents Warrants to purchase 3,321 shares of Common Stock held by
IIA, as agent, as described in footnote 5 of the preceding "Certain
Beneficial Owners" table. In addition, Mr. Schwarberg is the beneficial
owner of less than one percent of IIA's equity securities.
(9) Includes 4,000 shares of Common Stock. Also includes Warrants to
purchase 1,107 shares of Common Stock held by IIA, as agent, as
described in footnote 5 of the preceding "Certain Beneficial Owners"
table. In addition, Mr. Cooper is the beneficial owner of less than one
percent of IIA's equity securities.
(10) Includes (i) 5,600 shares of Common Stock owned directly, (ii) 880
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 and the Warrants held by IIA as agent for
Centre Re. See the preceding "Certain Beneficial Owners" table and
footnotes 8 and 9 thereto. Mr. Germain is an officer and director of
both Centre Re 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 Centre Re). Mr. Germain disclaims
any beneficial interest in the CentreLine Warrant, the Warrants held by
IIA as agent for Centre Re, and the Common Stock issuable upon their
exercise.
(11) Mr. Gruber, a director of the Company, is a Vice President of each of
GenPar Inc. and GenPar (Bermuda) Ltd., the ultimate general partners of
IP Delaware and IP Bermuda, respectively. IP Delaware owns 1,369,856
shares of Common Stock and IP Bermuda owns 754,978 shares of Common
Stock. Mr. Gruber disclaims beneficial ownership (as defined in Rule
13d-3 under the Exchange Act) of all shares of Common Stock held by IP
Delaware and IP Bermuda. See footnotes 4 and 6 to the preceding "Certain
Beneficial Owners" table for information concerning such partnerships.
78
<PAGE> 88
(12) Includes (i) 1,172,951 shares issuable upon exercise of warrants and
(ii) 138,642 shares issuable upon exercise of stock options, each of
which are exercisable within sixty days of December 1, 1997. Also
includes 99,873 shares subject to the Company's right of repurchase, of
which the restrictions have lapsed as to 11,068 shares. Refer to
footnotes 7 through 10 for information regarding beneficial interests in
the Warrants and the CentreLine Warrant held by certain directors.
79
<PAGE> 89
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 paid $250,000 by the Company during each of fiscal 1996, 1995, and 1994 for
investment banking and financial consulting services. Such payments were made
pursuant to a consulting agreement entered into in 1992 that continues through
1998.
TRANSACTIONS WITH AFFILIATES OF ZURICH, INCLUDING CENTRE RE
Centre Re and CentreLine are affiliates of each other. Mr. Germain, a
director of the Company, is an officer and director of Centre Re and CentreLine.
During each of 1994 (prior to Mr. Germain's election to the Board) and 1995 the
Company paid $15.0 million to Centre Re for reinsurance services. Effective
January 1, 1996, the Company cancelled certain reinsurance services provided by
Centre Re. The Company accrued a $5.3 million charge related to the cancellation
of such reinsurance services.
As of June 30, 1994, the Company completed a $20.0 million financing
transaction (the "1994 Transaction") with CentreLine and another affiliate of
Centre Re involving the sale to an affiliate of Centre Re of preferred shares
(the "SNCLP Preferred Shares") of Superior National Capital, L.P., a Bermuda
limited partnership ("SNCLP"), an entity controlled by the Company, together
with the issuance of the CentreLine Warrant. See "Security Ownership of Certain
Beneficial Owners and Management--Security Ownership of Certain Beneficial
Owners." The proceeds of the 1994 Transaction were loaned by SNCLP to Superior
National and partially contributed to the capital of SNIC. The SNCLP Preferred
Securities pay a 9.7% annual rate of return, in semi-annual installments and
must be redeemed on or before June 30, 2001. The 1994 Transaction was structured
to allow the Company to meet its capital needs and to obtain certain beneficial
tax and accounting treatments. The 1994 Transaction was approved by the
Company's Board of Directors and its shareholders, and an opinion as to the
financial fairness of the 1994 Transaction terms was provided by an investment
banking firm to the Board of Directors. SNCLP issued an additional 83,337;
91,616; and 49,167 shares of SNCLP Preferred Stock in 1995, 1996, and 1997,
respectively, as dividends on the outstanding SNCLP Preferred Stock to an
affiliate of Centre Re in connection with the 1994 Transaction. One use of the
proceeds the Company received from the sale of the Senior Subordinated Notes to
the Trust in connection with the sale of the Preferred Securities was to redeem
all of the approximately $26.6 million face amount of the then outstanding SNCLP
Preferred Securities.
Further, Messrs. Seaman and Johnson, each of whom is an officer of the
Company (Mr. Seaman is also a director), Joseph Wolonsky (an officer who
resigned from the Company in June 1997), Richard Hotchkiss (an officer who
retired from the Company in June 1996), and Edwin Wilson (an officer who
resigned from the Company in May 1995) each held a portion of the Company's
14.5% Senior Subordinated Notes due April 1, 2002 (the "14.5% Notes"), in the
aggregate principal amount of approximately $0.5 million. III held the remainder
of the outstanding 14.5% Notes, in the principal amount of approximately $7.4
million (approximately $3.1 million in aggregate principal amount of the 14.5%
Notes had been prepaid in 1993). The 14.5% Notes were refinanced in June 1994
with a bank term loan that provided substantial interest expense savings to the
Company. The 14.5% Notes were subject to a substantial prepayment penalty, and
upon their prepayment, the above-named officers and III received aggregate
prepayment penalty fees of approximately $0.1 million and $1.4 million,
respectively. Messrs. Spass, Schwarberg, and Cooper, directors of the Company,
are each the beneficial owner of less than one percent of the limited
partnership interests in III. In addition, Mr. Spass has voting power over all
of the voting capital stock of III's general partner. The Company's Board of
Directors (without Messrs. Seaman, Spass, Schwarberg, and Cooper, who disclosed
their conflict of interest, withdrew from the discussion and abstained from the
vote) unanimously approved the refinancing transaction, but only after a
reduction in the prepayment penalty was negotiated. Such negotiations were
conducted by Mr. Pecchenino on behalf of the Company.
In addition to its interest in the refinancing of the 14.5% Notes,
Centre Re, because of its limited partnership position in III, was further
interested because, under the terms of the CentreLine Warrant, the exercise
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price thereof would have been reduced from $5.20 to $4.00 had the 14.5% Notes
not been refinanced prior to December 31, 1994. If that reduction had occurred,
the aggregate exercise price that CentreLine would have had to pay to exercise
the CentreLine Warrant in full would have decreased by $695,228.
Effective January 1, 1993, SNIC entered into an aggregate excess of loss
reinsurance contract with Centre Re under which SNIC was required to cede not
less than $15.0 million and not more than $20.0 million of claim and claim
adjustment expense to Centre Re with respect to any covered accident year. The
Company cancelled this contract effective January 1, 1996 and as a result,
reported a $5.3 million charge.
Effective January 1, 1994, SNIC entered into a quota-share reinsurance
contract (the "Quota-Share Contract") with ZRNA, an affiliate of Zurich, which
also applies to business written by SPCC since April 1, 1997. Under the
Quota-Share Contract, ZRNA may provide Superior Pacific with an Assumption of
Liability Endorsement ("ALE") facility, or, effective January 1, 1997, Superior
Pacific may write directly on policy forms of ZC Insurance Company ("ZCIC"), an
affiliate of ZRNA (the "ZCIC Front"). The ceding rate under the contract was 20%
for 1994, and ZRNA and Superior Pacific mutually agreed to reduce the
quota-share participation to 5% for 1995 and 1996. Further, Superior Pacific
receives ceding commissions ranging between 22.5% and 24.5% for premiums ceded
to ZRNA. The purpose of the ceding commission is to cover Superior Pacific's
cost of acquiring new business and may be changed as a result of changes in
market conditions on a quarterly basis.
Effective January 1, 1997, the terms of the Quota Share Contract were
amended. Under the amended terms of the Quota Share Contract, ZRNA increased its
participation from 5% of premiums written in 1996 to 6.5% in 1997. In exchange
for the increased participation, ZRNA will no longer receive a separate fee for
policies written on ALEs, but will receive 2% of premiums written on ZCIC Front
policies only.
Superior Pacific entered into a reinsurance transaction with Centre Re
effective June 30, 1997 under which Centre Re assumed $11 million of reserves
associated with claims open for future medical payments only from Superior
Pacific in consideration of $1 million in cash and the assignment of the rights
of Superior Pacific's contribution and subrogation recoveries during the term of
the contract. The contract is accounted for as a deposit, and no gain or loss
will be recognized until net cash payments from (or to) Centre Re are either
greater (or less) than Superior Pacific's $1 million premium.
In November 1997, the Company entered into a non-binding letter of
intent with REM, an affiliate of Zurich, under which certain of the Company's
claims management functions would be performed by such affiliate. In addition,
the Company and ZRNA, another affiliate of Zurich, have signed a non-binding
letter of intent whereby ZRNA would provide average claims severity protection
through accident year 2000, in connection with the claims management services
described above (together the "Severity Management Program"). The total cost of
the Severity Management Program to the Company is expected to be approximately
$35.0 million through December 31, 1998, with amounts thereafter to be
determined. See "Business--Claims Severity Management Program."
In December 1997, an affiliate of Zurich purchased $10 million of the
Preferred Securities.
TRANSACTIONS WITH IP AND LIMITATIONS ON RELATED PARTY CONTROL
Messrs. Spass and Gruber, directors of the Company, are executive
officers of the ultimate general partner of each of IP Delaware and IP Bermuda
(collectively, "IP"). In April 1997, IP purchased an aggregate of 2,124,834
shares of Common Stock at $7.53 per share, for an aggregate purchase price of
$16.0 million, pursuant to the Stock Purchase Agreement dated as of September
17, 1996, as amended and restated effective as of February 17, 1997 (the "Stock
Purchase Agreement"), among the Company, IP, TJS, and certain members of the
Company's management. The Company used the proceeds to fund, in part, its
acquisition of Pac Rim. The price of the Common Stock was determined based on
its per share price as quoted on The Nasdaq National Market during a certain
period preceding the September 17, 1996 announcement of the Pac Rim acquisition,
and represented in April 1997, a significant discount to the then current market
price of the Common Stock. Mr. Gruber's election as a director of the Company
was effective upon the consummation of the acquisition of Pac Rim. The Company's
Board of Directors (without Messrs. Gentz, Seaman, Spass, Germain, and Cooper,
who disclosed their conflict of
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interest, withdrew from the discussion and abstained from the vote) unanimously
approved the Stock Purchase Agreement. The negotiations were conducted by Mr.
Pecchenino on behalf of the Company.
The Stock Purchase Agreement contains, in addition to customary terms
and provisions, 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
Company's Common Stock on a fully diluted basis. For purposes of the Stock
Purchase Agreement, "Associates" means each of CentreLine, Centre Re, 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. 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 participating in any group with respect to the
foregoing, without a two-third majority vote of either the non-Associate and
non-employee directors or the Company's stockholders (excluding those shares
held by IP and its Associates and by executive officers having to report
transactions in Common Stock under securities laws). Other covenants provide
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) and that
IP and its Associates will not transfer any of its shares except in certain
types of specified transactions.
In connection with the Stock Purchase Agreement, IP also entered into an
agreement with all holders of the Company's outstanding warrants pursuant to
which such holders are prohibited from exercising their warrants until April
2000 unless prior approval of the Company's Board of Directors is obtained. This
restriction was implemented in order to reduce the risk that the Company would
undergo an ownership change for purposes of Section 382 of the Code and thus be
limited in its ability to use its NOLs. See "Risk Factors--Availability of Net
Operating Loss Carryforwards."
In addition, each of Messrs. Spass and Gruber are executive officers of
Insurance Partners Advisors, L.P. ("IPA"). On April 11, 1997, IPA received a
transaction fee from the Company of $625,000 representing a percentage of all of
the funds raised in connection with the acquisition of Pac Rim.
MANAGEMENT PURCHASE OF EQUITY
In April 1997, certain members of the Company's management (30 persons)
and TJS, a 10% or greater stockholder of the Company, purchased an aggregate of
265,604 shares of Company Common Stock at $7.53 per share for an aggregate
purchase price of $2.0 million under the Stock Purchase Agreement. As is its
policy, IP requested that management participate with IP in its purchase of
Common Stock under the same Stock Purchase Agreement. Of the 2,390,438 shares of
Common Stock issued in the financing transaction, 2,124,834 shares were acquired
by IP, as discussed above, 132,802 shares were acquired by TJS, 25,234 were
acquired by William Gentz (a director and the President and Chief Executive
Officer of the Company), 25,232 were acquired by J. Chris Seaman (a director, an
Executive Vice President and the Chief Financial Officer of the Company), 9,296
were acquired by Joseph P. Wolonsky (who was then a Senior Vice President of the
Company, but who subsequently resigned from the Company as of June 30, 1997),
9,296 were acquired by Karl O. Johnson (a Senior Vice President of Superior
Pacific), 9,296 were acquired by Douglas R. Roche (a Senior Vice President of
the Company) and 54,448 were acquired by other members of management.
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THE EXCHANGE OFFER
For the purposes of this section, as well as the sections entitled,
"Description of the Exchange Preferred Securities," "Description of the Exchange
Guarantee," "Description of the Exchange Notes," and "Relationship Among the
Exchange Preferred Securities, the Declaration, the Exchange Notes and the
Exchange Guarantee," the "Company" refers to Superior National Insurance Group,
Inc. exclusive of its Subsidiaries or affiliates. In addition, where the context
requires, descriptions of the voting rights and liquidation rights of, and
rights to Distributions on, the Exchange Preferred Securities assume that all of
the outstanding Preferred Securities will be exchanged for Exchange Preferred
Securities in the Exchange Offer. To the extent any Preferred Securities are not
so exchanged, pursuant to the Declaration, the Preferred Securities and Exchange
Preferred Securities will rank pari passu in all respects and will have equal
voting rights, liquidation rights and rights to Distributions.
PURPOSE OF THE EXCHANGE OFFER
In connection with the sale of the Preferred Securities, the Company and
the Trust entered into the Registration Rights Agreement with the Initial
Purchasers, pursuant to which the Company and the Trust agreed to file and to
use their reasonable efforts to cause to become effective with the Commission a
registration statement with respect to the exchange of the Preferred Securities
for capital securities with terms identical in all material respects to the
terms of the Preferred Securities. A copy of the Registration Rights Agreement
has been filed as an Exhibit to the Registration Statement of which this
Prospectus forms a part.
The Exchange Offer is being made to satisfy the contractual obligations
of the Company and the Trust under the Registration Rights Agreement. The form
and terms of the Exchange Preferred Securities are the same as the form and
terms of the Preferred Securities except that the Exchange Preferred Securities
have been registered under the Securities Act and will not be subject to the
$100,000 minimum liquidation amount transfer restriction and certain other
restrictions on transfer applicable to the Preferred Securities and will not
provide for any increase in the Distribution rate thereon. In that regard, the
Preferred Securities provide, among other things, that, if a registration
statement relating to the Exchange Offer has not been filed by December 31, 1997
and declared effective by June 1, 1998, the Distribution rate borne by the
Preferred Securities commencing on January 1, 1998 will increase by 0.25% per
annum until the Exchange Offer is consummated. Upon consummation of the Exchange
Offer, holders of Preferred Securities will not be entitled to any increase in
the Distribution rate thereon or any further registration rights under the
Registration Rights Agreement, except under limited circumstances. See "Risk
Factors--Consequences of a Failure to Exchange Preferred Securities."
The Exchange Offer is not being made to, nor will the Trust accept
tenders for exchange from, holders of Preferred Securities in any jurisdiction
in which the Exchange Offer or the acceptance thereof would not be in compliance
with the securities or blue sky laws of such jurisdiction.
Unless the context requires otherwise, the term "holder" with respect to
the Exchange Offer means any person in whose name the Preferred Securities are
registered on the books of the Trust or any other person who has obtained a
properly completed stock power from the registered holder, or any person whose
Preferred Securities are held of record by The Depository Trust Company ("DTC")
who desires to deliver such Preferred Securities by book-entry transfer at DTC.
Pursuant to the Exchange Offer, the Company will exchange as soon as
practicable after the date hereof, the Company Guarantee for the Exchange
Guarantee and the Old Notes, in an amount corresponding to the Preferred
Securities accepted for exchange, for a like aggregate principal amount of the
Exchange Notes. The Exchange Guarantee, the Exchange Notes and the Exchange
Preferred Securities have been registered under the Securities Act.
TERMS OF THE EXCHANGE OFFER
The Trust hereby offers, upon the terms and subject to the conditions
set forth in this Prospectus and in the accompanying Letter of Transmittal, to
exchange up to $105,000,000 aggregate liquidation amount of Exchange Preferred
Securities for a like aggregate liquidation amount of Preferred Securities
properly tendered on or prior to the Expiration Date and not properly withdrawn
in accordance with the procedures described below. The Trust will issue promptly
after the Expiration Date, an aggregate liquidation amount of up to $105,000,000
of Exchange
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Preferred Securities in exchange for a like principal amount of outstanding
Preferred Securities tendered and accepted in connection with the Exchange
Offer. Holders may tender their Preferred Securities in whole or in part in a
liquidation amount of not less than $100,000 (100 Preferred Securities) or any
integral multiple of $1,000 liquidation amount (one Preferred Security) in
excess thereof.
The Exchange Offer is not conditioned upon any minimum liquidation
amount of Preferred Securities being tendered. As of the date of this
Prospectus, an aggregate of $105,000,000 liquidation amount of the Preferred
Securities is outstanding.
Holders of Preferred Securities do not have any appraisal or dissenters'
rights in connection with the Exchange Offer. Preferred Securities which are not
tendered for or are tendered but not accepted in connection with the Exchange
Offer will remain outstanding and be entitled to the benefits of the
Declaration, but will not be entitled to any further registration rights under
the Registration Rights Agreement, except under limited circumstances. See "Risk
Factors--Consequences of a Failure to Exchange Preferred Securities."
If any tendered Preferred Securities are not accepted for exchange
because of an invalid tender or if certain other events set forth herein shall
occur, then certificates for any such unaccepted Preferred Securities will be
returned, without expense, to the tendering holders thereof promptly after the
Expiration Date.
Holders who tender Preferred Securities in connection with the Exchange
Offer will not be required to pay brokerage commissions or fees or, subject to
the instructions in the Letter of Transmittal, transfer taxes with respect to
the exchange of Preferred Securities in connection with the Exchange Offer. See
"--Fees and Expenses."
NEITHER THE COMPANY, THE BOARD OF DIRECTORS OF THE COMPANY NOR ANY
TRUSTEE OF THE TRUST MAKES ANY RECOMMENDATION TO HOLDERS OF PREFERRED SECURITIES
AS TO WHETHER TO TENDER OR REFRAIN FROM TENDERING ALL OR ANY PORTION OF THEIR
PREFERRED SECURITIES PURSUANT TO THE EXCHANGE OFFER. IN ADDITION, NO ONE HAS
BEEN AUTHORIZED TO MAKE ANY SUCH RECOMMENDATION. HOLDERS OF PREFERRED SECURITIES
MUST MAKE THEIR OWN DECISION WHETHER TO TENDER PURSUANT TO THE EXCHANGE OFFER
AND, IF SO, THE AGGREGATE AMOUNT OF PREFERRED SECURITIES TO TENDER BASED ON SUCH
HOLDERS' OWN FINANCIAL POSITION AND REQUIREMENTS.
The term "Expiration Date" means 5:00 p.m., New York City time, on
, 1998 unless the Exchange Offer is extended by the Company or
the Trust (in which case the term "Expiration Date" shall mean the latest date
and time to which the Exchange Offer is extended).
The Company and the Trust expressly reserve the right in their
reasonable discretion, subject to applicable law, at any time and from time to
time, (i) to delay the acceptance of the Preferred Securities for exchange, (ii)
to terminate the Exchange Offer (whether or not any Preferred Securities have
theretofore been accepted for exchange) if the Company or the Trust determines,
in its reasonable discretion, that any of the events or conditions referred to
under "--Conditions to the Exchange Offer" have occurred or exist or have not
been satisfied and (iii) to extend the Expiration Date and retain all Preferred
Securities tendered thereunder, subject, however, to the right of holders of
Preferred Securities to withdraw their tendered Preferred Securities as
described under "--Withdrawal Rights." If the Exchange Offer is amended in a
manner determined by the Company and the Trust to constitute a material change,
or if the Company and the Trust waive a material condition of the Exchange
Offer, the Company and the Trust will promptly disclose such amendment or waiver
by means of a prospectus supplement that will be distributed to the holders of
the Preferred Securities. If any facts or events arise which constitute a
fundamental change in the information set forth herein or if any material
changes or material additions are made to the Plan of Distribution described
herein, the Company and the Trust will file a post-effective amendment to the
Registration Statement setting forth the applicable information and will
distribute an amended prospectus to the holders of the Preferred Securities. If
at the time that such prospectus supplement or amended prospectus is first given
to holders of Preferred Securities, the Exchange Offer is scheduled to expire at
any time earlier than the expiration of a period ending on the tenth business
day from, and including, the date that such prospectus supplement or amended
prospectus is first so given, then the Exchange Offer will be extended until the
expiration of such period of ten business days.
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Any such delay in acceptance, extension, termination or amendment will
be followed promptly by oral or written notice thereof to the Exchange Agent and
by making a public announcement thereof, and such announcement in the case of an
extension will be made no later than 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date. Without limiting
the manner in which the Company and the Trust may choose to make any public
announcement and subject to applicable law, the Company and the Trust shall have
no obligation to publish, advertise or otherwise communicate any such public
announcement and, subject to applicable law, the Company and the Trust shall
have no obligation to publish, advertise or otherwise communicate any such
public announcement other than by issuing a release to an appropriate news
agency.
ACCEPTANCE FOR EXCHANGE AND ISSUANCE OF EXCHANGE PREFERRED SECURITIES
Upon the terms and subject to the conditions of the Exchange Offer, the
Trust will exchange and issue to the Exchange Agent, Exchange Preferred
Securities for Preferred Securities validly tendered and not withdrawn promptly
after the Expiration Date.
In all cases, delivery of Exchange Preferred Securities in exchange for
Preferred Securities tendered and accepted for exchange pursuant to the Exchange
Offer will be made only after timely receipt by the Exchange Agent of (i)
Preferred Securities or a book-entry confirmation of a book-entry transfer of
Preferred Securities into the Exchange Agent's account at DTC, (ii) the Letter
of Transmittal (or facsimile thereof), properly completed and duly executed,
with any required signature guarantees, or, in the case of a participant in the
book-entry transfer facility system, an Agent's Message and (iii) any other
documents required by the Letter of Transmittal.
The term "book-entry confirmation" means a timely confirmation of a
book-entry transfer of Preferred Securities into the Exchange Agent's account at
DTC.
Subject to the terms and conditions of the Exchange Offer, the Trust
will be deemed to have accepted for exchange, and thereby exchanged, Preferred
Securities validly tendered and not withdrawn as, if and when the Trust gives
oral or written notice to the Exchange Agent of the Trust's acceptance of such
Preferred Securities for exchange pursuant to the Exchange Offer. The Exchange
Agent will act as agent for the Trust for the purpose of receiving tenders of
Preferred Securities, Letters of Transmittal and related documents, and as agent
for tendering holders for the purpose of receiving Preferred Securities, Letters
of Transmittal and related documents and transmitting Exchange Preferred
Securities to validly tendering holders. Such exchange will be made promptly
after the Expiration Date. If, for any reason whatsoever, acceptance for
exchange or the exchange of any Preferred Securities tendered pursuant to the
Exchange Offer is delayed (whether before or after the Trust's acceptance for
exchange of Preferred Securities) or the Trust extends the Exchange Offer or is
unable to accept for exchange or exchange Preferred Securities tendered pursuant
to the Exchange Offer, then, without prejudice to the Trust's rights set forth
herein, the Exchange Agent may, nevertheless, on behalf of the Trust and subject
to Rule 14e-1(c) under the Exchange Act, retain tendered Preferred Securities
and such Preferred Securities may not be withdrawn except to the extent
tendering holders are entitled to withdrawal rights as described under
"--Withdrawal Rights."
Pursuant to the Letter of Transmittal, a holder of Preferred Securities
will warrant and agree in the Letter of Transmittal that (i) it has full power
and authority to tender, exchange, sell, assign and transfer Preferred
Securities, (ii) the Trust will acquire good, marketable and unencumbered title
to the tendered Preferred Securities, free and clear of all liens, restrictions,
charges and encumbrances, and (iii) the Preferred Securities tendered for
exchange are not subject to any adverse claims or proxies. The holder also will
warrant and agree that it will, upon request, execute and deliver any additional
documents deemed by the Trust or the Exchange Agent to be necessary or desirable
to complete the exchange, sale, assignment and transfer of the Preferred
Securities tendered pursuant to the Exchange Offer.
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PROCEDURES FOR TENDERING PREFERRED SECURITIES
Valid Tender
Except as set forth below, in order for Preferred Securities to be
validly tendered pursuant to the Exchange Offer, a properly completed and duly
executed Letter of Transmittal (or facsimile thereof), with any required
signature guarantees and any other required documents, or an Agent's Message in
case of book-entry delivery as described below, must be received by the Exchange
Agent at its address set forth under "--Exchange Agent," and either (i) tendered
Preferred Securities must be received by the Exchange Agent, or (ii) such
Preferred Securities must be tendered pursuant to the procedures for book-entry
transfer set forth below and a book-entry confirmation must be received by the
Exchange Agent, in each case on or prior to the Expiration Date, or (iii) the
guaranteed delivery procedures set forth below must be complied with.
If less than all of the Preferred Securities are tendered, a tendering
holder should fill in the amount of Preferred Securities being tendered in the
appropriate box on the Letter of Transmittal. The entire amount of Preferred
Securities delivered to the Exchange Agent will be deemed to have been tendered
unless otherwise indicated.
THE METHOD OF DELIVERY OF CERTIFICATES, THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND SOLE RISK OF THE TENDERING
HOLDER, AND DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE
EXCHANGE AGENT. IF DELIVERY IS BY MAIL, REGISTERED MAIL, RETURN RECEIPT
REQUESTED, PROPERLY INSURED, OR AN OVERNIGHT DELIVERY SERVICE, IS RECOMMENDED.
IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY.
Book-Entry Transfer
The Exchange Agent will establish an account with respect to the
Preferred Securities at DTC for purposes of the Exchange Offer within two
Business Days after the date of this Prospectus. Any financial institution that
is a participant in DTC's book-entry transfer facility system may make a
book-entry delivery of the Preferred Securities by causing DTC to transfer such
Preferred Securities into the Exchange Agent's account at DTC in accordance with
DTC's procedures for transfers. Except in the case of a participant in the
book-entry transfer facility system who transfers the Preferred Securities by an
Agent's Message, delivery of Preferred Securities effected through book-entry
transfer into the Exchange Agent's account at DTC requires that the Letter of
Transmittal (or facsimile thereof), properly completed and duly executed, with
any required signature guarantees and any other required documents, must in any
case be delivered to and received by the Exchange Agent at its address set forth
under "--Exchange Agent" on or prior to the Expiration Date, or the guaranteed
delivery procedure set forth below must be complied with. A holder who is a
participant in the book-entry transfer facility system and transfers such
holder's Preferred Securities by an Agent's Message need not transmit the Letter
of Transmittal to the Exchange Agent to consummate the exchange.
The term "Agent's Message" means a message transmitted through
electronic means by a book-entry transfer facility to and received by the
Exchange Agent and forming a part of a book-entry confirmation, which states
that DTC has received an express acknowledgement from the participant tendering
the Preferred Securities that such participant has received and agrees to be
bound by the Letter of Transmittal and/or the Notice of Guaranteed Delivery (as
discussed below), where applicable.
DELIVERY OF DOCUMENTS TO DTC IN ACCORDANCE WITH DTC'S PROCEDURES DOES
NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
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Signature Guarantees
Certificates for the Preferred Securities need not be endorsed and
signature guarantees on the Letter of Transmittal are unnecessary unless (a) a
certificate for the Preferred Securities is registered in a name other than that
of the person surrendering the certificate or (b) such holder completes the box
entitled "Special Issuance Instructions" or "Special Delivery Instructions" in
the Letter of Transmittal. In the case of (a) or (b) above, such certificates
for Preferred Securities must be duly endorsed or accompanied by a properly
executed stock power, with the endorsement or signature on the stock power and
on the Letter of Transmittal guaranteed by a firm or other entity identified in
Rule 17Ad-15 under the Exchange Act as an "eligible guarantor institution,"
including (as such terms are defined therein): (i) a bank, (ii) a broker,
dealer, municipal securities broker or dealer or government securities broker or
dealer, (iii) a credit union, (iv) a national securities exchange, registered
securities association or clearing agency, or (v) a savings association that is
a participant in a Securities Transfer Association (an "Eligible Institution"),
unless surrendered on behalf of such Eligible Institution. See Instruction 1 to
the Letter of Transmittal.
Guaranteed Delivery
If a holder desires to tender Preferred Securities pursuant to the
Exchange Offer and the certificates for such Preferred Securities are not
immediately available, time will not permit all required documents to reach the
Exchange Agent on or prior to the Expiration Date, or the procedure for
book-entry transfer cannot be completed on a timely basis, such Preferred
Securities may nevertheless be tendered, provided that all of the following
guaranteed delivery procedures are complied with:
(a) such tenders are made by or through an Eligible
Institution;
(b) a properly completed and duly executed Notice of
Guaranteed Delivery, substantially in the form
accompanying the Letter of Transmittal, or, in the
case of a participant in the book-entry transfer
facility system, an Agent's Message is received by
the Exchange Agent, as provided below, on or prior
to the Expiration Date; and
(c) the certificates (or a book-entry confirmation)
representing all tendered Preferred Securities, in
proper form for transfer, together with a properly
completed and duly executed Letter of Transmittal
(or facsimile thereof), with any required signature
guarantees and any other documents required by the
Letter of Transmittal, or, in the case of a
participant in the book-entry transfer facility
system, an Agent's Message, are received by the
Exchange Agent within three New York Stock Exchange
trading days after the date of the execution of
such Notice of Guaranteed Delivery.
The Notice of Guaranteed Delivery may be delivered by hand,
transmitted by facsimile or mailed to the Exchange Agent and must include a
guarantee by an Eligible Institution in the form set forth in such notice.
Notwithstanding any other provision hereof, the delivery of
Exchange Preferred Securities in exchange for Preferred Securities tendered and
accepted for exchange pursuant to the Exchange Offer will in all cases be made
only after timely receipt by the Exchange Agent of Preferred Securities, or of a
book-entry confirmation with respect to such Preferred Securities, and a
properly completed and duly executed Letter of Transmittal (or facsimile
thereof), together with any required signature guarantees and any other
documents required by the Letter of Transmittal, or, in the case of a
participant in the book-entry transfer facility system, an Agent's Message.
Accordingly, the delivery of Exchange Preferred Securities might not be made to
all tendering holders at the same time and will depend upon when Preferred
Securities, book-entry confirmation with respect to Preferred Securities and
other required documents are received by the Exchange Agent.
The Trust's acceptance for exchange of Preferred Securities tendered
pursuant to any of the procedures described above will constitute a binding
agreement between the tendering holder and the Trust upon the terms and subject
to the conditions of the Exchange Offer.
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Determination of Validity
All questions as to the form of documents, validity, eligibility
(including time of receipt) and acceptance for exchange of any tendered
Preferred Securities will be determined by the Company and the Trust, in their
sole discretion, whose determination shall be final and binding on all parties.
The Company and the Trust reserve the absolute right, in their sole and absolute
discretion, to reject any and all tenders determined by them not to be in proper
form or the acceptance of which, or exchange for, may, in the opinion of counsel
to the Company and the Trust, be unlawful. The Company and the Trust also
reserve the absolute right, subject to applicable law, to waive any of the
conditions of the Exchange Offer as set forth under "--Conditions to the
Exchange Offer" or any condition or irregularity in any tender of Preferred
Securities of any particular holder whether or not similar conditions or
irregularities are waived in the case of other holders.
The interpretation by the Company and the Trust of the terms and
conditions of the Exchange Offer (including the Letter of Transmittal and the
Instructions thereto) will be final and binding. No tender of Preferred
Securities will be deemed to have been validly made until all irregularities
with respect to such tender have been cured or waived. Neither the Company, the
Trust, any affiliates or assigns of the Company or the Trust, the Exchange Agent
nor any other person shall be under any duty to give any notification of any
irregularities in tenders or incur any liability for failure to give any such
notification.
If any Letter of Transmittal, endorsement, stock power, power of
attorney, or any other document required by the Letter of Transmittal is signed
by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
such person should so indicate when signing, and unless waived by the Company
and the Trust, proper evidence satisfactory to the Company and the Trust, in
their sole discretion, of such person's authority to so act must be submitted.
A beneficial owner of Preferred Securities that are held by or
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee or custodian is urged to contact such entity promptly if such
beneficial holder wishes to participate in the Exchange Offer.
Resales of Exchange Preferred Securities
The Trust is making the Exchange Offer for the Exchange Preferred
Securities in reliance on the position of the Staff set forth in certain
interpretive letters addressed to third parties in other transactions. However,
neither the Company nor the Trust sought its own interpretive letter and there
can be no assurance that the Staff would make a similar determination with
respect to the Exchange Offer as it has in such interpretive letters to third
parties. Based on these interpretations by the Staff and subject to the two
immediately following sentences, the Company and the Trust believe that Exchange
Preferred Securities issued pursuant to the Exchange Offer in exchange for
Preferred Securities may be offered for resale, resold and otherwise transferred
by a holder thereof (other than a holder who is a broker-dealer) without further
compliance with the registration and prospectus delivery requirements of the
Securities Act, provided that such Exchange Preferred Securities are acquired in
the ordinary course of such holder's business and that such holder is not
participating, and has no arrangement or understanding with any person to
participate, in a distribution (within the meaning of the Securities Act) of
such Exchange Preferred Securities. However, any holder of Preferred Securities
who is an "affiliate" of the Company or the Trust or who intends to participate
in the Exchange Offer for the purpose of distributing Exchange Preferred
Securities, or any broker-dealer who purchased Preferred Securities from the
Trust to resell pursuant to Rule 144A or any other available exemption under the
Securities Act, (a) will not be able to rely on the interpretations of the Staff
set forth in the above-mentioned interpretive letters, (b) will not be permitted
or entitled to tender such Preferred Securities in the Exchange Offer and (c)
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any sale or other transfer of such Preferred
Securities unless such sale is made pursuant to an exemption from such
requirements. In addition, as described below, if any broker-dealer holds
Preferred Securities acquired for its own account as a result of market-making
or other trading activities and exchanges such Preferred Securities for Exchange
Preferred Securities, then such broker-dealer must deliver a prospectus meeting
the requirements of the Securities Act in connection with any resales of such
Exchange Preferred Securities.
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Each holder of Preferred Securities who wishes to exchange Preferred
Securities for Exchange Preferred Securities in the Exchange Offer will be
required to represent that (i) it is not an "affiliate" of the Company or the
Trust, (ii) any Exchange Preferred Securities to be received by it are being
acquired in the ordinary course of its business, (iii) it has no arrangement or
understanding with any person to participate in a distribution (within the
meaning of the Securities Act) of such Exchange Preferred Securities and (iv) if
such holder is not a broker-dealer, such holder is not engaged in, and does not
intend to engage in, a distribution (within the meaning of the Securities Act)
of such Exchange Preferred Securities. In addition, the Company and the Trust
may require such holder as a condition to such holder's eligibility to
participate in the Exchange Offer, to furnish to the Company and the Trust (or
an agent thereof) in writing information as to the number of "beneficial owners"
(within the meaning of Rule 13d-3 under the Exchange Act) on behalf of whom such
holder holds the Preferred Securities to be exchanged in the Exchange Offer.
Each broker-dealer that receives Exchange Preferred Securities for its own
account pursuant to the Exchange Offer must acknowledge that it acquired the
Exchange Preferred Securities for its own account as the result of market-making
activities or other trading activities and must agree that it will deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resale of such Exchange Preferred Securities. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. Based on the position taken by the Staff in the interpretive
letters referred to above, the Company and the Trust believe that Participating
Broker-Dealers who acquired Preferred Securities for their own accounts as a
result of market-making activities or other trading activities may fulfill their
prospectus delivery requirements with respect to the Exchange Preferred
Securities received upon exchange of such Preferred Securities (other than
Preferred Securities which represent an unsold allotment from the original sale
of the Preferred Securities) with a prospectus meeting the requirements of the
Securities Act, which may be the prospectus prepared for an exchange offer so
long as it contains a description of the plan of distribution with respect to
the resale of such Exchange Preferred Securities. Accordingly, this Prospectus,
as it may be amended or supplemented from time to time, may be used by a
Participating Broker-Dealer during the period referred to below in connection
with resales of Exchange Preferred Securities received in exchange for Preferred
Securities where such Preferred Securities were acquired by such Participating
Broker-Dealer for its own account as a result of market-making or other trading
activities. Subject to certain provisions set forth in the Registration Rights
Agreement, the Company and the Trust have agreed that this Prospectus, as it may
be amended or supplemented from time to time, may be used by a Participating
Broker-Dealer in connection with resales of such Exchange Preferred Securities
for a period ending 90 days after the Expiration Date (subject to extension
under certain limited circumstances described below) or, if earlier, when all
such Exchange Preferred Securities have been disposed of by such Participating
Broker-Dealer. See "Plan of Distribution." However, a Participating Broker-
Dealer who intends to use this Prospectus in connection with the resale of
Exchange Preferred Securities received in exchange for Preferred Securities
pursuant to the Exchange Offer must notify the Company or the Trust, or cause
the Company or the Trust to be notified, on or prior to the Expiration Date,
that it is a Participating Broker-Dealer. Such notice may be given in the space
provided for that purpose in the Letter of Transmittal or may be delivered to
the Exchange Agent at the address set forth herein under "--Exchange Agent." Any
Participating Broker-Dealer who is an "affiliate" of the Company or the Trust
may not rely on such interpretive letters and must comply with the registration
and prospectus delivery requirements of the Securities Act in connection with
any resale transaction.
In that regard, each Participating Broker-Dealer who surrenders
Preferred Securities pursuant to the Exchange Offer will be deemed to have
agreed, by execution of the Letter of Transmittal, that, upon receipt of notice
from the Company or the Trust of the occurrence of any event or the discovery of
any fact which makes any statement contained or incorporated by reference in
this Prospectus untrue in any material respect or which causes this Prospectus
to omit to state a material fact necessary in order to make the statements
contained or incorporated by reference herein, in light of the circumstances
under which they were made, not misleading or of the occurrence of certain other
events specified in the Registration Rights Agreement, such Participating
Broker-Dealer will suspend the sale of Preferred Exchange Securities (or the
Exchange Guarantee or the Exchange Notes, as applicable) pursuant to this
Prospectus until the Company or the Trust has amended or supplemented this
Prospectus to correct such misstatement or omission and has furnished copies of
the amended or supplemented Prospectus to such Participating Broker-Dealer, or
the Company or the Trust has given notice that the sale of the Exchange
Preferred Securities (or the Exchange Guarantee or the Exchange Notes, as
applicable) may be resumed, as the case may be. If the Company or the Trust give
such notice to suspend the sale of the Exchange Preferred Securities (or the
Exchange Guarantee or the Senior Subordinated Notes, as applicable), it shall
extend the 90-day period referred to
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above during which Participating Broker-Dealers are entitled to use this
Prospectus in connection with the resale of Exchange Preferred Securities by the
number of days during the period from and including the date of the giving of
such notice to and including the date when Participating Broker-Dealers shall
have received copies of the amended or supplemented Prospectus necessary to
permit resales of the Exchange Preferred Securities or to and including the date
on which the Company or the Trust has given notice that the sale of Exchange
Preferred Securities (or the Exchange Guarantee or the Exchange Notes, as
applicable) may be resumed, as the case may be.
Withdrawal Rights
Except as otherwise provided herein, tenders of Preferred Securities may
be withdrawn at any time on or prior to the Expiration Date.
In order for a withdrawal to be effective, a written or facsimile
transmission of such notice of withdrawal must be timely received by the
Exchange Agent at its address set forth under "-- Exchange Agent" on or prior to
the Expiration Date. Any such notice of withdrawal must specify the name of the
person who tendered the Preferred Securities to be withdrawn, the aggregate
liquidation amount of Preferred Securities to be withdrawn, and (if certificates
for such Preferred Securities have been tendered) the name of the registered
holder of the Preferred Securities as set forth on the Preferred Securities, if
different from that of the person who tendered such Preferred Securities. If
Preferred Securities have been delivered or otherwise identified to the Exchange
Agent, then prior to the physical release of such Preferred Securities, the
tendering holder must submit the serial number shown on the particular Preferred
Securities to be withdrawn and the signature on the notice of withdrawal must be
guaranteed by an Eligible Institution, except in the case of Preferred
Securities tendered for the account of an Eligible Institution. If Preferred
Securities have been tendered pursuant to the procedures for book-entry transfer
set forth in "--Procedures for Tendering Preferred Securities," the notice of
withdrawal must specify the name and number of the account at DTC to be credited
with the withdrawal of Preferred Securities, in which case a notice of
withdrawal will be effective if delivered to the Exchange Agent by written or
facsimile transmission. Withdrawals of tenders of Preferred Securities may not
be rescinded. Preferred Securities properly withdrawn will not be deemed validly
tendered for purposes of the Exchange Offer, but may be retendered at any
subsequent time on or prior to the Expiration Date by following any of the
procedures described above under "--Procedures for Tendering Preferred
Securities."
All questions as to the validity, form and eligibility (including time
of receipt) of such withdrawal notices will be determined by the Trust and the
Company, in their sole discretion, whose determination shall be final and
binding on all parties. Neither the Company, the Trust, any affiliates or
assigns of the Company or the Trust, the Exchange Agent nor any other person
shall be under any duty to give any notification of any irregularities in any
notice of withdrawal or incur any liability for failure to give any such
notification. Any Preferred Securities which have been tendered but which are
withdrawn will be returned to the holder thereof promptly after withdrawal.
DISTRIBUTIONS ON EXCHANGE PREFERRED SECURITIES
Holders of Preferred Securities whose Preferred Securities are accepted
for exchange will not receive Distributions on such Preferred Securities and
will be deemed to have waived the right to receive any Distributions on such
Preferred Securities accumulated from and after December 3, 1997. Accordingly,
holders of Exchange Preferred Securities as of the record date for the payment
of Distributions on June 1, 1998 will be entitled to receive Distributions
accumulated from and after December 3, 1997.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, or any
extension of the Exchange Offer, the Company and the Trust will not be required
to accept for exchange, or to exchange, any Preferred Securities for any
Exchange Preferred Securities, and, as described below, may terminate the
Exchange Offer (whether or not any Preferred Securities have theretofore been
accepted for exchange) if any of the following conditions have occurred or exist
or have not been satisfied.
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(a) there shall occur a change in the current
interpretation by the Staff which permits the Exchange Preferred
Securities issued pursuant to the Exchange Offer in exchange for
Preferred Securities to be offered for resale, resold and
otherwise transferred by holders thereof (other than
broker-dealers and any such holder which is an "affiliate" of the
Company or the Trust within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act provided
that such Exchange Preferred Securities are acquired in the
ordinary course of such holder's business and such holders have
no arrangement or understanding with any person to participate in
the distribution of such Exchange Preferred Securities; or
(b) any law, statute, rule or regulation shall have been
adopted or enacted which, in the judgment of the Company or the
Trust, would reasonably be expected to impair its ability to
proceed with the Exchange Offer; or
(c) a stop order shall have been issued by the Commission
or any state securities authority suspending the effectiveness of
the Registration Statement or proceedings shall have been
initiated or, to the knowledge of the Company or the Trust,
threatened for that purpose or any governmental approval has not
been obtained, which approval the Company or the Trust shall, in
its reasonable discretion, deem necessary for the consummation of
the Exchange Offer as contemplated hereby.
If the Company or the Trust determines in its reasonable discretion that
any of the foregoing events or conditions has occurred or exist or has not been
satisfied, it may, subject to applicable law, terminate the Exchange Offer
(whether or not any Preferred Securities have theretofore been accepted for
exchange) or may waive any such condition or otherwise amend the terms of the
Exchange Offer in any respect. If such waiver or amendment constitutes a
material change to the Exchange Offer, the Company or the Trust will promptly
disclose such waiver or amendment by means of a prospectus supplement that will
be distributed to the registered holders of the Preferred Securities. If such
waiver or amendment constitutes a fundamental change to the Exchange Offer, the
Company and the Trust will file a post-effective amendment to the Registration
Statement setting forth the applicable information and will distribute an
amended prospectus to the holders of the Preferred Securities. At the time that
such prospectus supplement or amended prospectus is first given to holders of
Preferred Securities, if the Exchange Offer is scheduled to expire at any time
earlier than the expiration of a period ending on the tenth business day from,
and including, the date that such prospectus supplement or amended prospectus is
first so given, then the Exchange Offer will be extended until the expiration of
such period of ten business days.
EXCHANGE AGENT
Wilmington Trust Company has been appointed as Exchange Agent for the
Exchange Offer. Delivery of the Letters of Transmittal and any other required
documents, questions, requests for assistance, and requests for additional
copies of this Prospectus or of the Letter of Transmittal should be directed to
the Exchange Agent, by registered or certified mail or by hand or overnight
delivery, as follows:
Wilmington Trust Company
Rodney Square North
1100 North Market Street
Wilmington, Delaware 19890-0001
Attention: Corporate Trust Operations
CONFIRM BY TELEPHONE:
(302) 651-8869
FACSIMILE TRANSMISSIONS:
(ELIGIBLE INSTITUTIONS ONLY)
(302) 651-1079
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Delivery to other than the above address or facsimile number will not
constitute a valid delivery.
FEES AND EXPENSES
The Company has agreed to pay the Exchange Agent reasonable and
customary fees for its services and will reimburse it for its reasonable
out-of-pocket expenses in connection therewith. The Company will also pay
brokerage houses and other custodians, nominees and fiduciaries the reasonable
out-of-pocket expenses incurred by them in forwarding copies of this Prospectus
and related documents to the beneficial owners of Preferred Securities, and in
handling or tendering for their customers.
Holders who tender their Preferred Securities for exchange will not be
obligated to pay any transfer taxes in connection therewith. If, however,
Exchange Preferred Securities are to be delivered to, or are to be issued in the
name of, any person other than the registered holder of the Preferred Securities
tendered, or if a transfer tax is imposed for any reason other than the exchange
of Preferred Securities in connection with the Exchange Offer, then the amount
of any such transfer taxes (whether imposed on the registered holder or any
other persons) will be payable by the tendering holder. If satisfactory evidence
of payment of such taxes or exemption therefrom is not submitted with the Letter
of Transmittal, the amount of such transfer taxes will be billed directly to
such tendering holder.
Neither the Company nor the Trust will make any payment to brokers,
dealers or other nominees soliciting acceptance of the Exchange Offer.
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DESCRIPTION OF THE EXCHANGE PREFERRED SECURITIES
The following summary of certain material terms of the Exchange
Preferred Securities does not purport to be complete and is subject to, and
qualified in its entirety by reference to, all of the provisions of the
Declaration. Capitalized terms not otherwise defined herein have the meanings
assigned to them in the Declaration.
GENERAL
Pursuant to the terms of the Declaration, the Trust has issued the
Preferred Securities and the Common Securities and will issue the Exchange
Preferred Securities. The Exchange Preferred Securities will represent preferred
beneficial interests in the Trust and the holders of the Exchange Preferred
Securities and the Preferred Securities will be entitled to a preference over
the Common Securities in certain circumstances with respect to Distributions and
amounts payable on redemption of the Trust Securities or liquidation of the
Trust. See "--Subordination of Common Securities." Upon effectiveness of the
Registration Statement of which this Prospectus forms a part, the Declaration
will be qualified under the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act").
The Exchange Preferred Securities are limited to $105,000,000 aggregate
liquidation amount at any one time outstanding. The Exchange Preferred
Securities will rank pari passu, and payments will be made thereon pro rata,
with the Preferred Securities and the Common Securities except as described
under "--Subordination of Common Securities." Legal title to the Exchange Notes
will be held by the Preferred Trustee in trust for the benefit of the holders of
the Exchange Preferred Securities and the Common Securities. The Exchange
Guarantee will be a guarantee on a subordinated basis but will not guarantee
payment of Distributions or amounts payable on redemption of the Exchange
Preferred Securities or on liquidation of the Trust when the Trust does not have
cash on hand legally available for such payments. See "--Description of Exchange
Guarantee."
DISTRIBUTIONS
Distributions on the Exchange Preferred Securities will be fixed at a
rate per annum of 10 3/4% of the stated liquidation amount of $1,000 per
Exchange Preferred Security. The amount of Distributions payable for any period
will be computed on the basis of a 360-day year of twelve thirty-day months.
Distributions on the Exchange Preferred Securities will be cumulative,
will accrue from December 3, 1997 and will be payable semi-annually in arrears
on each June 1 and December 1, commencing June 1, 1998, when, as and if the
Trust has funds available for payment.
Distributions on the Exchange Preferred Securities must be paid
semi-annually on the dates payable to the extent that the Trust has funds
legally available for the payment of such Distributions. The Trust's funds
available for distribution to the holders of the Exchange Preferred Securities
will be limited to payments received from the Company on the Senior Subordinated
Notes in which the Trust has invested the proceeds from the issuance and sale
of the Trust Securities. See "Description of the Exchange Notes." The payment of
Distributions, to the extent the Trust has funds legally available therefor, is
guaranteed by the Company on a limited basis, as set forth under "Description of
the Exchange Guarantee."
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Distributions on the Exchange Preferred Securities will be payable to
the holders thereof as they appear on the books and records of the Trust on the
relevant record dates, which will be one day prior to the relevant payment dates
(fifteen days if the Exchange Preferred Securities do not remain in
book-entry-only form). Subject to any applicable laws and regulations and the
provisions of the Declaration, each such payment will be made as described under
"--Form, Denomination, Book-Entry Procedures and Transfer" below. In the event
that any date on which Distributions are payable on the Exchange Preferred
Securities is not a Business Day (as defined below), payment of the Distribution
payable on such date will be made on the next succeeding day which is a Business
Day (without any distribution or other payment in respect of any such delay)
except that, if such Business Day is in the next succeeding calendar year, such
payment shall be made on the immediately preceding Business Day, in each case
with the same force and effect as if made on such date. A "Business Day" shall
mean any day other than a day on which banking institutions in the City of New
York or Wilmington, Delaware are authorized or required by law to close.
So long as no Event of Default under the Indenture shall have occurred
and be continuing, the Company has the right under the Indenture to defer
payment of interest on the Exchange Notes at any time or from time to time for a
period not exceeding ten consecutive semi-annual periods (collectively, an
"Extension Period"), provided that no Extension Period may extend beyond the
Stated Maturity Date. As a consequence of any such deferral of interest payments
by the Company, semi-annual Distributions on the Exchange Preferred Securities
will also be deferred by the Trust during any such Extension Period.
Distributions to which holders of the Exchange Preferred Securities are entitled
will accumulate additional Distributions thereon at the rate per annum of 10
3/4% thereof, compounded semi-annually from the relevant payment date for such
Distributions. The term "Distributions" as used herein shall include any such
additional Distributions.
During any Extension Period, the Company may extend such Extension
Period, provided that such extension does not cause such Extension Period to
exceed ten consecutive semi-annual periods or to extend beyond the Stated
Maturity Date. Upon the termination of any such Extension Period and the payment
of all amounts then due, and subject to the foregoing limitations, the Company
may elect to begin a new Extension Period. The Company must give the Preferred
Trustee and the Indenture Trustee notice of its election of any Extension Period
or any extension thereof at least five Business Days prior to the earlier of (i)
the date the Distributions on the Exchange Preferred Securities would have been
payable except for the election to begin or extend such Extension Period and
(ii) the date the Trustees are required to give notice to any securities
exchange or to holders of the Exchange Preferred Securities of the record date
or the date such Distributions are payable, but in any event not less than five
Business Days prior to such record date. There is no limitation on the number of
times that the Company may elect to begin an Extension Period. See "Description
of the Exchange Notes--Option to Extend Interest Payment Date" and "Certain
United States Federal Income Tax Consequences--Interest Income and Original
Issue Discount."
During any such Extension Period, the Company may not (i) declare or pay
any dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of the Company's Capital Stock, (ii)
make any payment of principal of or interest or premium, if any, on or repay,
repurchase or redeem any debt securities of the Company that rank pari passu in
all respects with, or junior in interest to, the Exchange Notes subject to
certain exceptions described herein or (iii) make any guarantee payments with
respect to any guarantee by the Company of the debt securities of any subsidiary
of the Company if such guarantee ranks pari passu with, or junior in right of
payment to, the Exchange Notes; excluding, in each case, (a) dividends or
distributions in shares of, or options, warrants or rights to subscribe for or
purchase shares of, common stock of the Company, (b) any declaration of a
dividend in connection with the implementation of a stockholders' rights plan,
the issuance of stock under any such plan in the future or the redemption or
repurchase of any such rights pursuant thereto, (c) payments under the
Guarantee, (d) as a result of a reclassification of the Company's Capital Stock
or the exchange or conversion of one class or series of the Company's Capital
Stock for another class or series of the Company's Capital Stock, (e) the
purchase of fractional interests in shares of the Company's Capital Stock
pursuant to the conversion or exchange provisions of such Company Capital Stock
or the security being converted or exchanged and (f) purchases or issuances of
common stock in connection with any of the Company's stock option, stock
purchase, stock loan or other benefit plans for its directors, officers or
employees or any of the Company's dividend reinvestment plans, in each case as
now existing or hereafter established or amended. See "Description of Exchange
Notes--Option to Extend Interest Payment Date."
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The Company has no current intention of exercising its right to defer
payments of interest by extending the interest payment period on the Exchange
Notes.
OPTIONAL REDEMPTION
The Company is permitted to redeem the Exchange Notes in whole or in
part, from time to time, after December 1, 2005, upon not less than thirty nor
more than sixty days' notice. See "Description of the Exchange Notes--Optional
Redemption." Upon any redemption in whole or in part of the Exchange Notes at
the option of the Company, the proceeds from such redemption shall
simultaneously be applied by the Trust to redeem Exchange Preferred Securities
and Common Securities at the prices set forth herein, plus accrued and unpaid
Distributions thereon to the date fixed for redemption ("Redemption Price")
together with the related amount of the premium, if any, paid by the Company
upon the concurrent redemption of such Exchange Notes. See "Description of
Exchange Notes--Optional Redemption."
In the event that fewer than all the outstanding Exchange Notes are to
be so redeemed, then the proceeds from such redemption shall be allocated to the
redemption pro rata of the Exchange Preferred Securities and the Common
Securities.
In the event of any redemption in part, the Trust shall not be required
to (i) issue, register the transfer of, or exchange any of the Exchange
Preferred Securities during a period beginning at the opening of business
fifteen days before any selection for redemption of Exchange Preferred
Securities and ending at the close of business on the earliest date in which the
relevant notice of redemption is deemed to have been given to all holders of
Exchange Preferred Securities to be so redeemed and (ii) register the transfer
of or exchange any Exchange Preferred Securities so selected for redemption, in
whole or in part, except for the unredeemed portion of any Exchange Preferred
Securities being redeemed in part.
TAX EVENT OR INVESTMENT COMPANY EVENT REDEMPTION OR DISTRIBUTION
If a Tax Event (as defined herein) shall occur and be continuing, the
Company shall cause the Trustees to dissolve and liquidate the Trust and, after
satisfaction of the liabilities of the Trust, cause Senior Subordinated Notes to
be distributed to the holders of the Trust Securities in liquidation of the
Trust within ninety days following the occurrence of such Tax Event; provided,
however, that such liquidation and distribution shall be conditioned on (i) the
Trustees' receipt of an opinion of independent tax counsel experienced in such
matters (a "No Recognition Opinion"), which opinion may rely on published
revenue rulings of the Internal Revenue Service, to the effect that the holders
of the Exchange Preferred Securities will not recognize any income, gain or loss
for United States federal income tax purposes as a result of such liquidation
and distribution of Senior Subordinated Notes and (ii) the Company being unable
to avoid such Tax Event within such ninety-day period by taking some ministerial
action or pursuing some other reasonable measure that will have no adverse
effect on the Trust, the Company or the holders of the Exchange Preferred
Securities and will involve no material cost. Furthermore, if (i) the Company
has received an opinion (a "Redemption Tax Opinion") of independent tax counsel
experienced in such matters that, as a result of a Tax Event, there is more than
an insubstantial risk that the Company would be precluded from deducting the
interest on the Senior Subordinated Notes for United States federal income tax
purposes, even after the Senior Subordinated Notes were distributed to the
holders of the Exchange Preferred Securities upon liquidation of the Trust as
described above or (ii) the Trustees shall have been informed by such tax
counsel that it cannot deliver a No Recognition Opinion, the Company shall have
the right, upon not less than thirty nor more than sixty days' notice and within
ninety days following the occurrence of the Tax Event, to redeem the Senior
Subordinated Notes, in whole (but not in part) for cash, at 100% of the
principal amount thereof plus accrued and unpaid interest and, following such
redemption, all the Exchange Preferred Securities and Common Securities will be
redeemed by the Trust at the liquidation amount of $1,000 per Trust Security
plus accrued and unpaid Distributions; provided, however, that, if at the time
there is available to the Company or the Trust the opportunity to eliminate,
within such ninety-day period, the Tax Event by taking some ministerial action
or pursuing some other reasonable measure that will have no adverse effect on
the Trust, the Company or the holders of the Exchange Preferred Securities and
will involve no material cost, the Trust or the Company will pursue such measure
in lieu of redemption. See "--Mandatory Redemption."
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If the Company does not elect any of the options described above, the
Exchange Preferred Securities will remain outstanding until repayment of the
Senior Subordinated Notes, whether at maturity or redemption, and in the event a
Tax Event has occurred and is continuing pursuant to the Indenture, the Company
will be obligated to pay any additional taxes, duties, assessments and other
governmental charges (other than United States withholding taxes) to which the
Trust has become subject as a result of the Tax Event.
"Tax Event" means that the Company shall have obtained an opinion of an
independent tax counsel experienced in such matters to the effect that, as a
result of (i) any amendment to or change (including any announced proposed
change) in the laws (or any regulations thereunder) of the United States or any
political subdivision or taxing authority thereof or therein or (ii) any
amendment to or change in an interpretation or application of such laws or
regulations by any legislative body, court, governmental agency or regulatory
authority (including the enactment of any legislation and the publication of any
judicial decision or regulatory determination on or after December 3, 1997),
which amendment or change is effective or which proposed change, interpretation,
or pronouncement is announced on or after November 26, 1997, there is more than
an insubstantial risk that (i) the Trust is or, within ninety days of the
delivery of an opinion of counsel, will be subject to United States federal
income tax with respect to interest received or accrued on the Senior
Subordinated Notes, (ii) interest payable to the Trust on the Senior
Subordinated Notes is not or, within ninety days of the delivery of an opinion
of counsel, will not be deductible for United States federal income tax purposes
by the Company or (iii) the Trust is or, within ninety days of the delivery of
an opinion of counsel, will be subject to more than a de minimis amount of other
taxes, duties, assessments, or other governmental charges of whatever nature
imposed by the United States or any other taxing authority.
If an Investment Company Event (as defined herein), shall occur and be
continuing, the Company shall cause the Trustees to liquidate the Trust and,
after satisfaction of the liabilities of the Trust, cause the Senior
Subordinated Notes to be distributed to the holders of the Trust Securities in
liquidation of the Trust within ninety days following the occurrence of such
Investment Company Event.
The distribution by the Trust of the Senior Subordinated Notes will
effectively result in the cancellation of the Exchange Preferred Securities.
"Investment Company Event" means receipt by the Company of an opinion of
independent counsel experienced in tax and securities matters to the effect
that, as a result of the occurrence of a change in law or regulation or a change
in interpretation or application of law or regulation by any legislative body,
court, governmental agency or regulatory authority (a "Change in 1940 Act Law"),
the Trust is or will be considered an "investment company" which is required to
be registered under the Investment Company Act of 1940, as amended (the "1940
Act"), which Change in 1940 Act Law becomes effective on or after December 3,
1997.
After the date fixed for any distribution of Senior Subordinated Notes
(i) the Exchange Preferred Securities will no longer be deemed to be
outstanding, (ii) The Depository Trust Company ("DTC") or its nominee, as the
record holder of the Global Exchange Preferred Securities, will receive a
registered global certificate or certificates representing the Senior
Subordinated Notes to be delivered upon such distribution and (iii) any
certificates representing Exchange Preferred Securities not held by DTC or its
nominee will be deemed to represent Senior Subordinated Notes having a principal
amount equal to the aggregate of the stated liquidation amount of such Exchange
Preferred Securities, with accrued and unpaid interest equal to the amount of
accrued and unpaid distributions on such Exchange Preferred Securities, until
such certificates are presented to the Company or its agent for transfer or
reissuance.
MANDATORY REDEMPTION
The Senior Subordinated Notes will mature on December 1, 2017 and may be
redeemed, in whole or in part, at any time after December 1, 2005, or at any
time in certain circumstances upon the occurrence of a Tax Event or an
Investment Company Event. Upon the repayment of the Senior Subordinated Notes,
whether at maturity, upon redemption, by declaration or otherwise, after
satisfaction of the liabilities of the Trust, the proceeds from such repayment
or redemption shall simultaneously be applied to redeem Trust Securities having
an aggregate liquidation amount equal to the Senior Subordinated Notes so repaid
or redeemed at the Redemption Price together with the related amount of premium,
if any, paid by the Company upon the concurrent redemption of such Senior
Subordinated Notes, provided that holders of the
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Trust Securities shall be given not less than thirty nor more than sixty days'
notice of such redemption. See "--Tax Event or Investment Company Event
Redemption or Distribution," "Description of the Exchange Notes--General," and
"Optional Redemption." If less than all of the Senior Subordinated Notes are to
be repaid or redeemed, then the proceeds from such repayment or redemption shall
be allocated to the redemption pro rata of the Exchange Preferred Securities and
the Common Securities. The amount of premium, if any, paid by the Company upon
the redemption of all or any part of the Senior Subordinated Notes to be repaid
or redeemed shall be allocated to the redemption pro rata of the Exchange
Preferred Securities and the Common Securities.
CHANGE OF CONTROL REDEMPTION
Upon the occurrence of a Change of Control Triggering Event (as defined
herein), a holder of Trust Securities has the right to require the Trust to
exchange all or any part of the holder's Trust Securities for Senior
Subordinated Notes having an aggregate principal amount equal to the aggregate
liquidation amount of the Trust Securities so offered. Upon the occurrence of
such an event, the Company will be required to immediately redeem any Senior
Subordinated Notes so exchanged at a redemption price equal to 101% of the
principal amount thereof plus any accrued and unpaid interest. See "Description
of the Exchange Notes--Change of Control."
REDEMPTION PROCEDURES
The Exchange Preferred Securities will not be redeemed unless all
accrued and unpaid Distributions have been paid on all Exchange Preferred
Securities for all semi-annual distribution periods terminating on or prior to
the date of redemption.
If the Trust gives a notice of redemption in respect of Exchange
Preferred Securities (which notice will be irrevocable), then, by 12:00 noon,
New York City time, on the redemption date, the Trust will irrevocably deposit
with DTC funds sufficient to pay the amount payable on redemption and will give
DTC irrevocable instructions and authority to pay such amount in respect of
Exchange Preferred Securities represented by the Global Exchange Preferred
Securities and will irrevocably deposit with the paying agent for the Exchange
Preferred Securities funds sufficient to pay such amount in respect of any
Exchange Preferred Securities and will give such paying agent irrevocable
instructions and authority to pay such amount to the holders of Exchange
Preferred Securities upon surrender of their certificates. Notwithstanding the
foregoing, Distributions payable on or prior to the redemption date for any
Exchange Preferred Securities called for redemption shall be payable to the
holders of such Exchange Preferred Securities on the relevant record dates for
the related Distribution dates. If notice of redemption shall have been given
and funds are deposited as required, then upon the date of such deposit, all
rights of holders of such Exchange Preferred Securities so called for redemption
will cease; except for the right of the holders of such Exchange Preferred
Securities to receive the redemption price and any Distributions payable on or
prior to the date of redemption, but without interest on such redemption price.
In the event that any date fixed for redemption of Exchange Preferred Securities
is not a Business Day, then payment of the amount payable on such date will be
made on the next succeeding day which is a Business Day (without any interest or
other payment in respect of any such delay), except that, if such Business Day
falls in the next calendar year, such payment will be made on the immediately
preceding Business Day. In the event that payment of the redemption price in
respect of Exchange Preferred Securities is improperly withheld or refused and
not paid by the Trust or the sponsor pursuant to the Exchange Guarantee,
Distributions on such Exchange Preferred Securities will continue to accrue at
the then applicable rate, from the original redemption date to the date of
payment, in which case the actual payment date will be considered the date fixed
for redemption for the purpose of calculating the amount payable upon redemption
(other than for the purpose of calculating any premium).
Subject to the foregoing and applicable law (including, without
limitation, United States federal securities laws), the Company or its
Subsidiaries may at any time and from time to time purchase outstanding Exchange
Preferred Securities by tender, in the open market or by private agreement. If
less than all of the Exchange Preferred Securities and Common Securities are to
be redeemed, then the aggregate liquidation amount of such Exchange Preferred
Securities and Common Securities to be redeemed shall be allocated pro rata to
the Exchange Preferred Securities and the Common Securities based upon the
relative liquidation amounts of such classes. The Preferred Trustee shall
promptly notify the trust registrar in writing of the portion of the Exchange
Preferred Securities to be redeemed. For all purposes of the Declaration, unless
the context otherwise requires, all provisions
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relating to the redemption of Exchange Preferred Securities shall relate, in the
case of any Exchange Preferred Securities redeemed or to be redeemed only in
part, to the portion of the aggregate liquidation amount of Exchange Preferred
Securities which has been or is to be redeemed.
Notice of any redemption will be mailed at least thirty days but not
more than sixty days before the date of the redemption to each holder of Trust
Securities to be redeemed at its registered address. Unless the Company defaults
in payment of the redemption price on the Senior Subordinated Notes, on and
after the date of the redemption interest ceases to accrue on such Senior
Subordinated Notes or portions thereof (and Distributions cease to accrue on the
Exchange Preferred Securities or portions thereof) called for redemption.
SUBORDINATION OF COMMON SECURITIES
Payment of Distributions on, and the amount payable upon redemption or
liquidation of, the Trust Securities, as applicable, shall be made pro rata
based on the liquidation amount of such Trust Securities, provided, however,
that, if on any distribution date or redemption date a Declaration Event of
Default (as defined below) under the Declaration shall have occurred and be
continuing, no payment of any distribution on, or amount payable upon redemption
of, any Common Security, and no other payment on account of the redemption,
liquidation or other acquisition of Common Securities, shall be made unless
payment in full in cash of accumulated and unpaid Distributions on all
outstanding Exchange Preferred Securities for all Distribution periods
terminating on or prior thereto, or in the case of payment of the amount payable
upon redemption of the Exchange Preferred Securities, the full amount thereof in
respect of all outstanding Exchange Preferred Securities, shall have been made
or provided for, and all funds available to the Preferred Trustee shall first be
applied to the payment in full in cash of all Distributions on, or the amount
payable upon redemption of, Exchange Preferred Securities then due and payable.
In the case of any Declaration Event of Default, the holder of Common
Securities will be deemed to have waived the right to act with respect to any
such Declaration Event of Default until all such Declaration Events of Default
with respect to the Exchange Preferred Securities have been cured, waived, or
otherwise eliminated. Until any such Declaration Events of Default with respect
to the Exchange Preferred Securities have been so cured, waived or otherwise
eliminated, the Trustees shall act solely on behalf of the holders of the
Exchange Preferred Securities and not the holder of the Common Securities, and
only the holders of the Exchange Preferred Securities will have the right to
direct the Trustees to act on their behalf.
LIQUIDATION DISTRIBUTION UPON DISSOLUTION
In the event of any voluntary or involuntary liquidation, dissolution,
winding up, or termination of the Trust, the holders of Trust Securities at the
time will be entitled to receive out of the assets of the Trust available for
distribution to holders of Trust Securities after satisfaction of liabilities to
creditors of the Trust an amount equal to the aggregate of the stated
liquidation amount of $1,000 per each of the Exchange Preferred Securities and
accrued and unpaid distributions thereon to the date of payment (the
"Liquidation Distribution"), unless, in connection with such liquidation,
dissolution, winding up, or termination, Senior Subordinated Notes in an
aggregate principal amount equal to the Liquidation Distribution have been
distributed on a pro rata basis to the holders of the Exchange Preferred
Securities. If such Liquidation Distribution can be paid only in part because
the Trust has insufficient assets available to pay in full the aggregate
Liquidation Distribution, then the amounts payable directly by the Trust on the
Exchange Preferred Securities shall be paid on a pro rata basis. The holder(s)
of the Trust's Common Securities will be entitled to receive distributions upon
any such liquidation pro rata with the holders of the Exchange Preferred
Securities, except that if a Declaration Event of Default has occurred and is
continuing, the Exchange Preferred Securities shall have a priority over the
Common Securities.
Pursuant to the Declaration, the Trust shall be dissolved and its
affairs shall be wound up upon the earliest to occur of the following: (i)
October 24, 2047, the expiration of the term of the Trust, (ii) the bankruptcy,
liquidation, or dissolution of the Company, (iii) the revocation of the
Company's charter and the expiration of 90 days after the date of revocation
without a reinstatement thereof, (iv) the entry of a decree of judicial
dissolution of the Company or the Trust by a court of competent jurisdiction,
(v) all of the Trust Securities have been called for redemption and the
Redemption Price has been paid to the holders in accordance with the terms of
the Trust
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Securities, (vi) the distribution of all of the Trust Property (as defined in
the Declaration), (vii) the written direction to the Preferred Trustee from the
Company at any time (which direction is optional and wholly within the
discretion of the Company) to dissolve the Trust and distribute the Senior
Subordinated Notes to the holders thereof in exchange for the Exchange Preferred
Securities, (viii) the redemption of all of the Exchange Preferred Securities in
connection with the redemption of all of the Senior Subordinated Notes, (ix)
subject to certain conditions, the occurrence of a Tax Event, and (x) the
occurrence of an Investment Company Event.
MERGER, CONSOLIDATION OR AMALGAMATION OF THE TRUST
The Trust may not consolidate, amalgamate, merge with or into, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to any corporation or other person, except as
described below, or as described in "Liquidation Distribution Upon Dissolution."
The Trust may, without the consent of the holders of the Exchange Preferred
Securities, consolidate, amalgamate, merge with or into, or be replaced by, or
convey, transfer or lease its properties and assets substantially as an entirety
to, a trust organized as such under the laws of any state of the United States
of America; provided that (i) if the Trust is not the survivor, such successor
entity either (x) expressly assumes all of the obligations of the Trust under
the Trust Securities or (y) substitutes for the Trust Securities other
securities having substantially the same terms as the Trust Securities (the
"Successor Securities") as long as the Successor Securities rank the same as the
Trust Securities with respect to distributions and payments upon liquidation,
redemption and otherwise, (ii) the Company expressly appoints a trustee of the
successor entity that possesses the same powers and duties as the Preferred
Trustee as the holder of the Senior Subordinated Notes, (iii) the Exchange
Preferred Securities or any Successor Securities are listed, or any Successor
Securities will be listed upon notification of issuance, on any national
securities exchange or other organization on which the Exchange Preferred
Securities are then listed, if any, (iv) such merger, consolidation,
amalgamation, replacement, conveyance, transfer or lease does not cause the
Exchange Preferred Securities (including any Successor Securities) to be
downgraded by any nationally recognized statistical rating organization, (v)
such merger, consolidation, amalgamation, replacement, conveyance, transfer, or
lease does not adversely affect the rights, preferences, and privileges of the
holders of the Trust Securities (including any Successor Securities) in any
material respect, (vi) such successor entity has a purpose substantially
identical to that of the Trust, (vii) the Company has provided a guarantee to
the holders of the Successor Securities with respect to such successor entity
having substantially the same terms as the Exchange Guarantee and (viii) prior
to such merger, consolidation, amalgamation, replacement, conveyance, transfer,
or lease, the Company has received an opinion of nationally recognized
independent counsel to the Trust experienced in such matters to the effect that
(x) such successor entity will be treated as a grantor trust for United States
federal income tax purposes or otherwise as an entity that is not subject to
United States federal income tax at the entity level and the assets and income
of which are treated for United States federal income tax purposes as held and
derived directly by holders of interests in the entity, (y) following such
merger, consolidation, amalgamation, replacement, conveyance, transfer, or
lease, neither the Company nor such successor entity will be required to
register as an investment company under the 1940 Act and (z) such merger,
consolidation, amalgamation, replacement, conveyance, transfer, or lease will
not adversely affect the rights, preferences, privileges, and limited liability
of the Exchange Preferred Securities in any material respect. Notwithstanding
the foregoing, the Trust shall not, except with the consent of the holders of
100% in liquidation amount of the Trust Securities, consolidate, amalgamate,
merge with or into, be replaced by, convey, transfer, or lease its properties
and assets substantially as an entirety to, any other entity or permit any other
entity to consolidate, amalgamate, merge with or into or replace it, if such
consolidation, amalgamation, merger, replacement, conveyance, transfer, or lease
would cause the Trust or the successor entity to be classified as other than a
grantor trust for United States federal income tax purposes or another entity
which is not subject to United States federal income tax at the entity level and
the assets and income of which are treated for United States federal income tax
purposes as held and derived directly by holders of interests in the entity.
DECLARATION EVENTS OF DEFAULT
An event of default under the Indenture (an "Event of Default") or a
default by the Company under the Exchange Guarantee constitutes an event of
default under the Declaration with respect to the Trust Securities (a
"Declaration Event of Default"); provided that pursuant to the Declaration, the
holder(s) of the Common Securities will be deemed to have waived any Declaration
Event of Default with respect to the Common Securities until all Declaration
Events of Default with respect to the Exchange Preferred Securities have been
cured, waived, or
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otherwise eliminated. Until such Declaration Events of Default with respect to
the Exchange Preferred Securities have been so cured, waived, or otherwise
eliminated, the Exchange Preferred Trustee will be deemed to be acting solely on
behalf of the holders of the Exchange Preferred Securities and only the holders
of the Exchange Preferred Securities will have the right to direct the Preferred
Trustee with respect to certain matters under the Declaration and, therefore,
the Indenture.
If a Declaration Event of Default has occurred and is continuing and
such event is attributable to the failure of the Company to pay interest on or
principal of the Senior Subordinated Notes on the date such interest or
principal is otherwise payable (or in the case of redemption, the redemption
date), unless such payment is otherwise excused for the reasons herein stated,
then holders of not less than 25% in liquidation amount of outstanding Exchange
Preferred Securities have the right to appoint a trustee (the "Special Trustee")
to act on behalf of all holders of Exchange Preferred Securities. The Special
Trustee appointed in accordance with the preceding sentence will represent the
holders of all outstanding Exchange Preferred Securities unless the holders of
at least a majority in liquidation amount of the outstanding Exchange Preferred
Securities appoint an alternative Special Trustee in which case the Special
Trustee appointed in accordance with the preceding sentence will be required to
resign as Special Trustee. At no time can there be more than one Special Trustee
acting on behalf of the holders of Exchange Preferred Securities. To the fullest
extent permitted by law, the Special Trustee will have the right to directly
institute a proceeding against the Company (a "Trustee Action") for enforcement
of payment to the holders of Exchange Preferred Securities of the principal of
or interest on the Senior Subordinated Notes having a principal amount equal to
the aggregate liquidation amount of the Exchange Preferred Securities of such
holders. In connection with such action, the rights of the Company as holder of
Common Securities will be subrogated to the rights of the holders of Exchange
Preferred Securities under the Declaration to the extent of any payment made by
the Company to such holders in such Trustee action. If the Preferred Trustee or
the Special Trustee do not enforce such payment obligations, a holder of
Exchange Preferred Securities will have, to the fullest extent permitted by law,
the right to bring an action on behalf of the Trust to enforce the Trust's
rights under the Senior Subordinated Notes and the Indenture. The holders of
Exchange Preferred Securities will not be able to exercise directly any other
remedy available to the holders of the Senior Subordinated Notes.
Upon the occurrence of a Declaration Event of Default, the Preferred
Trustee as the sole holder of the Senior Subordinated Notes will have the right
under the Indenture to declare the principal of and interest on the Senior
Subordinated Notes to be immediately due and payable. The Company and the Trust
are each required to file annually with the Preferred Trustee an officer's
certificate as to its compliance with all conditions and covenants under the
Declaration.
EXPENSES AND TAXES
The Trust was created solely to facilitate an investment in the Senior
Subordinated Notes; consequently, the Company, as borrower, has agreed in the
Indenture, to pay all debts and obligations (other than with respect to the
Exchange Preferred Securities and Common Securities, for which the Company's
obligations are limited to the extent provided in the Exchange Guarantee) and
all costs and expenses of the Trust (including, but not limited to, all costs
and expenses relating to the organization of the Trust, and fees and expenses of
the Trustees and all costs and expenses relating to the operation of the Trust)
and to pay any and all taxes, duties, assessments, or governmental charges of
whatever nature (other than withholding taxes) imposed on the Trust by the
United States, or any other taxing authority, so that the net amounts received
and retained by the Trust and the Preferred Trustee after paying such expenses
will be equal to the amounts the Trust and the Preferred Trustee would have
received had no such costs or expenses been incurred by or imposed on the Trust.
The foregoing obligations of the Company are for the benefit of, and
shall be enforceable by, any person or entity to which any such debts,
obligations, costs, expenses and taxes are owed (each a "Creditor") whether or
not such Creditor has received notice thereof. Any such Creditor may enforce
such obligations of the Company directly against the Company, and the Company
has irrevocably waived any right or remedy to require that any such Creditor
take any action against the Trust or any other person before proceeding against
the Company. The Company shall execute such additional agreements as may be
necessary or desirable to effect the foregoing.
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VOTING RIGHTS
Except as described herein and under "Description of the Exchange
Guarantee--Amendments and Assignment" and as provided in the Delaware Business
Trust Act and the Trust Indenture Act and as otherwise required by law and the
Declaration, the holders of the Exchange Preferred Securities will have no
voting rights.
Subject to the requirement of the Preferred Trustee obtaining a tax
opinion in certain circumstances set forth in the last sentence of this
paragraph, the holders of a majority in aggregate liquidation amount of the
Exchange Preferred Securities have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Preferred
Trustee or Special Trustee, if approved, or direct the exercise of any trust or
power conferred upon the Preferred Trustee under the Declaration including the
right to direct the Preferred Trustee, as holder of the Senior Subordinated
Notes, to (i) exercise the remedies available under the Indenture with respect
to the Senior Subordinated Notes, (ii) waive any past Event of Default that may
be waived under the Indenture, (iii) exercise any right to rescind or annul a
declaration that the principal of all the Senior Subordinated Notes shall be due
and payable or (iv) consent to any amendment, modification, or termination of
the Indenture or the Senior Subordinated Notes where such consent shall be
required; provided, however, that where a consent or action under the Indenture
would require the consent or act of the holders of more than a majority of the
aggregate principal amount of Senior Subordinated Notes affected thereby, only
the holders of the percentage of the aggregate stated liquidation amount of the
Exchange Preferred Securities which is at least equal to the percentage required
under the Indenture may direct the Preferred Trustee to give such consent or
take such action. The Trustees shall not revoke any action previously authorized
or approved by a vote of Exchange Preferred Security holders except by
subsequent vote of the holders of Exchange Preferred Securities. If the
Preferred Trustee or the Special Trustee fails to enforce its rights under the
Senior Subordinated Notes to receive interest or principal on the Senior
Subordinated Notes on the date such interest or principal is otherwise payable
(or in the case of redemption, the redemption date), a holder of record of
Exchange Preferred Securities may, to the fullest extent permitted by law,
institute a legal proceeding on behalf of the Trust against the Company to
enforce the Trust's rights under the Senior Subordinated Notes without first
instituting any legal proceeding against the Preferred Trustee or any other
person or entity. The holders of the Exchange Preferred Securities would not be
able to exercise directly any other remedies available to the holder of the
Senior Subordinated Notes unless the Preferred Trustee or the Indenture Trustee,
acting for the benefit of the Preferred Trustee, fails to do so. In such event,
the holders of at least 25% in aggregate liquidation amount of outstanding
Exchange Preferred Securities would have a right to institute such proceedings.
The Preferred Trustee shall notify all holders of the Exchange Preferred
Securities of any notice of default received from the Indenture Trustee with
respect to the Senior Subordinated Notes. Such notice shall state that such
Event of Default also constitutes a Declaration Event of Default. Except with
respect to directing the time, method and place of conducting a proceeding for a
remedy, the Preferred Trustee shall not take any of the actions described in
clause (i), (ii), or (iii) above unless the Preferred Trustee has obtained an
opinion of tax counsel to the effect that, as a result of such action, the Trust
will not fail to be classified as a grantor trust for United States federal
income tax purposes or another entity which is not subject to United States
federal income tax at the entity level and the assets and income of which are
treated for United States federal income tax purposes as held and derived
directly by holders of interests in the entity.
In the event the consent of the Preferred Trustee, as the holder of the
Senior Subordinated Notes, is required under the Indenture with respect to any
amendment, modification, or termination of the Indenture, the Preferred Trustee
shall request the direction of the holders of the Exchange Preferred Securities
with respect to such amendment, modification, or termination and shall vote with
respect to such amendment, modification, or termination as directed by a
majority in liquidation amount of the Exchange Preferred Securities; provided,
however, that where a consent under the Indenture would require the consent of
the holders of more than a majority of the aggregate principal amount of the
Senior Subordinated Notes, the Preferred Trustee may only give such consent at
the direction of the holders of at least the same proportion in aggregate stated
liquidation amount of the Exchange Preferred Securities. The Preferred Trustee
shall not take any such action in accordance with the directions of the holders
of the Exchange Preferred Securities unless the Preferred Trustee has obtained
an opinion of tax counsel to the effect that for the purposes of United States
federal income tax the Trust will not be classified as other than a grantor
trust or another entity which is not subject to United States federal income tax
at the entity level and the assets and income of which are treated for United
States federal income tax purposes as held and derived directly by holders of
interests in the entity.
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A waiver of an Event of Default under the Indenture will constitute a
waiver of the corresponding Declaration Event of Default.
Any required approval or direction of holders of Exchange Preferred
Securities may be given at a separate meeting of holders of Exchange Preferred
Securities convened for such purpose, at a meeting of all of the holders of
Trust Securities or pursuant to written consent. The Trustees will cause a
notice of any meeting at which holders of Exchange Preferred Securities are
entitled to vote, or of any matter upon which action by written consent of such
holders is to be taken, to be mailed to each holder of record of Exchange
Preferred Securities. Each such notice will include a statement setting forth
the following information: (i) the date, place and purpose of such meeting or
the date by which such action is to be taken, (ii) a description of any
resolution proposed for adoption at such meeting on which such holders are
entitled to vote or of such matter upon which written consent is sought and
(iii) instructions for the delivery of proxies or consents. No vote or consent
of the holders of Exchange Preferred Securities will be required for the Trust
to redeem and cancel Exchange Preferred Securities or distribute Senior
Subordinated Notes in accordance with the Declaration.
Notwithstanding that holders of Exchange Preferred Securities are
entitled to vote or consent under any of the circumstances described above, any
of the Exchange Preferred Securities that are owned at such time by the Company
or any entity directly or indirectly controlling or controlled by, or under
direct or indirect common control with, the Company, shall not be entitled to
vote or consent and shall, for purposes of such vote or consent, be treated as
if such Exchange Preferred Securities were not outstanding.
The procedures by which holders of Exchange Preferred Securities may
exercise their voting rights are described below.
Holders of the Exchange Preferred Securities will have no rights to
appoint or remove, or increase or decrease the number of, the Trustees, who may
be appointed, removed or replaced, increased or decreased solely by the Company
as the indirect or direct holder of all of the Common Securities.
MODIFICATION OF THE DECLARATION
The Declaration may be modified and amended by the Trustees and the
Company, provided, that if any proposed amendment provides for, or the Trustees
or the Company otherwise propose to effect, (i) any action that would adversely
affect the powers, preferences or special rights of the Trust Securities,
whether by way of amendment to the Declaration or otherwise or (ii) the
dissolution, winding-up, or termination of the Trust other than pursuant to the
terms of the Declaration, then the holders of the Trust Securities voting
together as a single class will be entitled to vote on such amendment or
proposal and such amendment or proposal shall not be effective except with the
approval of at least a majority in liquidation amount of the Trust Securities
affected thereby; provided that if any amendment or proposal referred to in
clause (i) above would adversely affect only the Exchange Preferred Securities
or the Common Securities, then only the affected class will be entitled to vote
on such amendment or proposal and such amendment or proposal shall not be
effective except with the approval of at least a majority in liquidation amount
of such class of Trust Securities.
Notwithstanding the foregoing, no amendment or modification may be made
to the Declaration if such amendment or modification would (i) cause the Trust
to be classified for purposes of United States federal income taxation as other
than a grantor trust or another entity which is not subject to United States
federal income tax at the entity level and the assets and income of which are
treated for United States federal income tax purposes as held and derived
directly by holders of interests in the entity, (ii) reduce or otherwise
adversely affect the powers of the Trustees or (iii) cause the Trust to be
deemed an "investment company" which is required to be registered under the 1940
Act.
FORM, DENOMINATION, BOOK-ENTRY PROCEDURES AND TRANSFER
The Exchange Preferred Securities initially will be represented by one
or more Exchange Preferred Securities certificates in registered, global form
(collectively, the "Global Exchange Preferred Securities"). The Global Exchange
Preferred Securities will be deposited upon issuance with the Preferred Trustee
as custodian for
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DTC, in New York, New York, and registered in the name of DTC or its nominee, in
each case for credit to an account of a direct or indirect participant in DTC as
described below.
Except as set forth below, the Global Exchange Preferred Securities may
be transferred, in whole and not in part, only to another nominee of DTC or to a
successor of DTC or its nominee. Beneficial interests in the Global Exchange
Preferred Securities may not be exchanged for Exchange Preferred Securities in
certificated form except in the limited circumstances described below. See
"--Exchange of Book-Entry Exchange Preferred Securities for Certificated
Exchange Preferred Securities."
Depositary Procedures
DTC has advised the Trust and the Company that DTC is a limited-purpose
trust company created to hold securities for its participating organizations
(collectively, the "Participants") and to facilitate the clearance and
settlement of transactions in those securities between Participants through
electronic book-entry changes in accounts of its Participants. The Participants
include securities brokers and dealers (including the Initial Purchasers),
banks, trust companies, clearing corporations and certain other organizations.
Access to DTC's system is also available to other entities such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly (collectively,
the "Indirect Participants"). Persons who are not Participants may beneficially
own securities held by or on behalf of DTC only through the Participants or the
Indirect Participants. The ownership interest and transfer of ownership interest
of each actual purchaser of each security held by or on behalf of DTC are
recorded on the records of the Participants and Indirect Participants.
DTC has also advised the Trust and the Company that, pursuant to
procedures established by it, (i) upon deposit of the Global Exchange Preferred
Securities, DTC will credit the accounts of Participants designated by the
Initial Purchasers with portions of the liquidation amount of the Global
Exchange Preferred Securities and (ii) ownership of such interests in the Global
Exchange Preferred Securities will be shown on, and the transfer of ownership
thereof will be effected only through, records maintained by DTC (with respect
to the Participants) or by the Participants and the Indirect Participants (with
respect to other owners of beneficial interests in the Global Exchange Preferred
Securities).
Except as described below, owners of interests in the Global Exchange
Preferred Securities will not have Exchange Preferred Securities registered in
their name, will not receive physical delivery of Exchange Preferred Securities
in certificated form and will not be considered the registered owners or holders
thereof under the Declaration for any purpose.
Payments in respect of the Global Exchange Preferred Security registered
in the name of DTC or its nominee will be payable by the Preferred Trustee to
DTC in its capacity as the registered holder under the Declaration. Under the
terms of the Declaration, the Preferred Trustee will treat the persons in whose
names the Exchange Preferred Securities, including the Global Exchange Preferred
Securities, are registered as the owners thereof for the purpose of receiving
such payments and for any and all other purposes whatsoever. Consequently,
neither the Preferred Trustee nor any agent thereof has or will have any
responsibility or liability for (i) any aspect of DTC's records or any
Participant's or Indirect Participant's records relating to or payments made on
account of beneficial ownership interests in the Global Exchange Preferred
Securities, or for maintaining, supervising or reviewing any of DTC's records or
any Participant's or Indirect Participant's records relating to the beneficial
ownership interests in the Global Exchange Preferred Securities or (ii) any
other matter relating to the actions and practices of DTC or any of its
Participants or Indirect Participants. DTC has advised the Trust and the Company
that its current practice, upon receipt of any payment in respect of securities
such as the Exchange Preferred Securities, is to credit the accounts of the
relevant Participants with the payment on the payment date, in amounts
proportionate to their respective holdings in liquidation amount of beneficial
interests in the relevant security as shown on the records of DTC unless DTC has
reason to believe it will not receive payment on such payment date. Payments by
the Participants and the Indirect Participants to the beneficial owners of
Exchange Preferred Securities will be governed by standing instructions and
customary practices and will be the responsibility of the Participants or the
Indirect Participants and will not be the responsibility of DTC, the Preferred
Trustee, the Trust or the Company. None of the Trust, the Company or the
Preferred Trustee will be liable for any delay by DTC or any of its Participants
in identifying the beneficial owners of the Exchange Preferred Securities, and
the Trust or the
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Company and the Preferred Trustee may conclusively rely on and will be protected
in relying on instructions from DTC or its nominee for all purposes.
Interests in the Global Exchange Preferred Securities will trade in
DTC's Same-Day Funds Settlement System and secondary market trading activity in
such interests will therefore settle in immediately available funds, subject in
all cases to the rules and procedures of DTC and its Participants.
Transfers between Participants in DTC will be effected in accordance
with DTC's procedures and will be settled in same-day funds.
DTC has advised the Trust and the Company that it will take any action
permitted to be taken by a holder of Exchange Preferred Securities only at the
direction of one or more Participants to whose account with DTC interests in the
Global Exchange Preferred Securities are credited and only in respect of such
portion of the liquidation amount of the Exchange Preferred Securities as to
which such Participant or Participants has or have given such direction.
However, if there is a Declaration Event of Default, DTC reserves the right to
exchange the Global Exchange Preferred Securities for Exchange Preferred
Securities in certificated form and to distribute such Exchange Preferred
Securities to its Participants.
The information in this section concerning DTC, and their book-entry
systems has been obtained from sources that the Trust and the Company believe to
be reliable, but neither the Trust nor the Company takes responsibility for the
accuracy thereof.
Exchange of Book-Entry Exchange Preferred Securities for Certificated Exchange
Preferred Securities
A Global Exchange Preferred Security is exchangeable for Exchange
Preferred Securities in registered certificated form if (i) DTC (x) notifies the
Trust that it is unwilling or unable to continue as Depositary for the Global
Exchange Preferred Security and the Trust thereupon fails to appoint a successor
Depositary within ninety days or (y) has ceased to be a clearing agency
registered under the Exchange Act, (ii) the Company in its sole discretion
elects to cause the issuance of the Exchange Preferred Securities in
certificated form or (iii) there shall have occurred and be continuing a
Declaration Event of Default or any event which after notice or lapse of time or
both would be a Declaration Event of Default. In addition, beneficial interests
in a Global Exchange Preferred Security may be exchanged for certificated
Exchange Preferred Securities upon request but only upon at least twenty days'
prior written notice given to the Preferred Trustee by or on behalf of DTC in
accordance with customary procedures. In all cases, certificated Exchange
Preferred Securities delivered in exchange for any Global Exchange Preferred
Security or beneficial interests therein will be registered in the names, and
issued in any approved denominations, requested by or on behalf of the
Depositary (in accordance with its customary procedures).
PAYMENT AND PAYING AGENCY
Payments in respect of the Exchange Preferred Securities shall be made
to DTC, which shall credit the relevant accounts at DTC on the applicable
distribution dates or, in the case of certificated Exchange Preferred
Securities, such payments shall be made by check mailed to the address of the
holder entitled thereto as such address shall appear on the Register. The Paying
Agent shall initially be Wilmington Trust Company. The Paying Agent shall be
permitted to resign as Paying Agent upon thirty days' written notice to the
Trustees. In the event that Wilmington Trust Company shall no longer be the
Paying Agent, the Trustees shall appoint a successor to act as Paying Agent
(which shall be a bank or trust company).
REGISTRAR AND TRANSFER AGENT
Wilmington Trust Company will act as registrar and transfer agent for
the Exchange Preferred Securities. Registration of transfers of Exchange
Preferred Securities will be effected without charge by or on behalf of the
Trust, but upon payment (with the giving of such indemnity as the Trust or the
Company may require) in respect of any tax or other government charges which may
be imposed in relation to it. The Trust will not be required to register or
cause to be registered the transfer of Exchange Preferred Securities after such
Exchange Preferred Securities have been called for redemption.
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GOVERNING LAW
The Declaration and the Exchange Preferred Securities will be governed
by and construed in accordance with the laws of the State of Delaware.
MISCELLANEOUS
The Company Trustees are authorized and directed to conduct the affairs
of and to operate the Trust in such a way that the Trust will not be deemed to
be an "investment company" required to be registered under the 1940 Act or
characterized as other than a grantor trust for United States federal income tax
purposes or otherwise as an entity that is not subject to United States federal
income tax at the entity level and the assets and income of which are treated
for United States federal income tax purposes as held and derived directly by
holders of interests in the entity, and so that the Senior Subordinated Notes
will be treated as indebtedness of the Company for United States federal income
tax purposes. In this connection, the Company Trustees and the Company are
authorized to take any action, not inconsistent with applicable law, the
certificate of trust or the Declaration that the Trustees determine in their
discretion to be necessary or desirable for such purposes as long as such action
does not adversely affect in any material respect the interests of the holders
of the Exchange Preferred Securities.
Holders of the Exchange Preferred Securities have no preemptive or
similar rights.
INFORMATION CONCERNING THE PREFERRED TRUSTEE
The Preferred Trustee, prior to default, undertakes to perform only such
duties as are specifically set forth in the Declaration and, after default,
shall exercise the same degree of care as a prudent individual would exercise in
the conduct of his or her own affairs. Subject to such provision, the Preferred
Trustee is under no obligation to exercise any of the powers vested in it by the
Declaration at the request of any holder of Exchange Preferred Securities,
unless offered reasonable indemnity by such holder against the costs, expenses,
and liabilities which might be incurred thereby. The Preferred Trustee is not
required to expend or risk its own funds or otherwise incur personal financial
liability in the performance of its duties if the Preferred Trustee reasonably
believes that repayment or adequate indemnity is not reasonably assured to it.
INFORMATION CONCERNING THE DELAWARE TRUSTEE
The Delaware Trustee is Wilmington Trust Company. The Delaware Trustee
shall be one of the trustees of the Trust for the sole and limited purpose of
fulfilling the requirements of the Delaware Business Trust Act for a trustee
that is either a natural person who is a resident of Delaware or a legal entity
with its principal place of business in that state.
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DESCRIPTION OF THE EXCHANGE GUARANTEE
The Exchange Guarantee will be executed and delivered by the Company
concurrently with the issuance by the Trust of the Exchange Preferred Securities
for the benefit of the holders of the Exchange Preferred Securities. As soon as
practicable after the date hereof, the Company Guarantee will be exchanged by
the Company for the Exchange Guarantee for the benefit of the holders of the
Exchange Preferred Securities. Upon effectiveness of the Registration Statement
of which this Prospectus forms a part, the Exchange Guarantee will be qualified
under the Trust Indenture Act. This summary of certain provisions of the
Exchange Guarantee does not purport to be complete and is subject to, and
qualified in its entirety by reference to, all of the provisions of the Exchange
Guarantee. Wilmington Trust Company will act as trustee (the "Guarantee
Trustee") under the Exchange Guarantee. The Guarantee Trustee will hold the
Exchange Guarantee for the benefit of the holders of the Exchange Preferred
Securities.
GENERAL
Pursuant to the Exchange Guarantee, the Company will irrevocably and
unconditionally agree to pay in full on a senior subordinated basis, to the
extent set forth herein, the Guarantee Payments (as defined below) to the
holders of the Exchange Preferred Securities, as and when due, regardless of any
defense, right of set-off or counterclaim that the Trust may have or assert,
other than the defense of payment. The following payments or distributions with
respect to the Exchange Preferred Securities (the "Guarantee Payments") will be
subject to the Exchange Guarantee (without duplication): (i) any accrued and
unpaid Distributions that are required to be paid on the Exchange Preferred
Securities, to the extent the Trust has funds legally available therefor, (ii)
the Redemption Price with respect to the Exchange Preferred Securities called
for redemption, to the extent the Trust has funds legally available therefor and
(iii) upon a voluntary or involuntary dissolution, winding up, or liquidation of
the Trust (other than in connection with a Distribution of the Exchange Notes to
holders of Exchange Preferred Securities or redemption of all the Exchange
Preferred Securities), the lesser of (a) the aggregate of the liquidation amount
and all accrued and unpaid Distributions on the Exchange Preferred Securities to
the date of payment, to the extent the Trust has funds legally available
therefor and (b) the amount of cash assets of the Trust remaining legally
available for distribution to holders of the Exchange Preferred Securities upon
the liquidation of the Trust. If the Company does not make interest payments on
the Exchange Notes held by the Trust, the Trust will not be able to pay
Distributions on the Exchange Preferred Securities and will not have funds
legally available therefor.
The Exchange Guarantee will be an irrevocable and unconditional
guarantee on a senior subordinated basis of the Trust's obligations under the
Exchange Preferred Securities, but will apply only to the extent that the Trust
has funds sufficient to make such payments and is not a guarantee of collection.
The Exchange Guarantee will rank subordinate and junior in right of payment to
all Senior Indebtedness of the Company. See "--Status of the Exchange
Guarantee."
Substantially all of the assets of the Company consist of stock of the
Subsidiaries. Accordingly, the Company relies primarily on dividends from such
Subsidiaries to meet its obligations for payment of principal and interest on
its outstanding debt obligations and corporate expenses. The inability of the
Company's direct and indirect Subsidiaries to pay dividends to the Company in an
amount sufficient to meet debt service obligations and pay operating expenses
would have a material adverse effect on the Company and the Trust. The payment
of dividends by the Company's Subsidiaries without prior regulatory approval is
subject to restrictions set forth in the insurance laws and regulations of
California, the state of domicile of the Company's primary Insurance
Subsidiaries. See "Business--Regulation." The Company currently does not expect
such regulatory requirements to impair its ability to meet interest payment
obligations and to pay operating expenses in the future. However, the Company
can give no assurance that dividends will be declared or paid by its
Subsidiaries. In addition, payment of dividends to the Company by the Insurance
Subsidiaries is subject to ongoing review by insurance regulators and is subject
to various statutory limitations and in certain circumstances requires approval
by insurance regulatory authorities. The right of the Company to participate in
any distribution of assets of any Subsidiary upon such Subsidiary's liquidation
or reorganization, or otherwise, is subject to the prior claims of creditors of
the Subsidiary, except to the extent the Company may itself be recognized as a
creditor of that Subsidiary. Accordingly, the Exchange Notes will be effectively
subordinated to all existing and future liabilities of the Company's
Subsidiaries (including the intermediate holding company), and holders of
Exchange Notes should look only to the assets of the Company for
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payments on the Exchange Notes. Accordingly, the Company's obligations under the
Guarantee, as well as its obligation to pay interest and principal on the
Exchange Notes, will be effectively subordinated to all existing and future
liabilities of the Company's Subsidiaries. See "Risk Factors--Holding Company
Structure; Dividend and Other Restrictions." As of September 30, 1997, the
liabilities of the Company's Subsidiaries were approximately $282.5 million.
The Company has, through the Exchange Guarantee, the Declaration, the
Exchange Notes and the Indenture, taken together, fully, irrevocably and
unconditionally guaranteed all of the Trust's obligations under the Exchange
Preferred Securities. No single document standing alone or operating in
conjunction with fewer than all of the other documents constitutes such
guarantee. It is only the combined operation of these documents that has the
effect of providing a full, irrevocable and unconditional guarantee of the
Trust's obligations under the Exchange Preferred Securities. See "Relationship
Among the Exchange Preferred Securities, the Exchange Notes and the Exchange
Guarantee."
The Company has also agreed separately to guarantee irrevocably and
unconditionally the obligations of the Trust with respect to the Common
Securities to the same extent as the Exchange Guarantee, except that upon the
occurrence and during the continuation of a Declaration Event of Default,
holders of Exchange Preferred Securities shall have priority over holders of
Common Securities with respect to distributions and payments on liquidation,
redemption or otherwise.
STATUS OF THE EXCHANGE GUARANTEE
The Exchange Guarantee will constitute an unsecured senior subordinated
obligation of the Company and will rank subordinate and junior in right of
payment to all Senior Indebtedness of the Company as defined under "Description
of the Exchange Notes--Certain Definitions." The Exchange Guarantee will
constitute a guarantee of payment and not of collection (i.e., the guaranteed
party may institute a legal proceeding directly against the Company to enforce
its rights under the Exchange Guarantee without first instituting a legal
proceeding against any other person or entity). The Exchange Guarantee will be
held for the benefit of the holders of the Exchange Preferred Securities. The
Exchange Guarantee will not be discharged except by payment of the Guarantee
Payments in full to the extent not paid by the Trust out of funds legally
available therefor or upon distribution of the Exchange Notes to the holders of
the Exchange Preferred Securities. The Exchange Guarantee does not place a
limitation on the amount of additional Senior Indebtedness that may be incurred
by the Company. However, the ability of the Company and its Subsidiaries to
incur indebtedness is restricted under the Exchange Notes. The Company may from
time to time incur additional indebtedness constituting Senior Indebtedness. See
"Description of the Exchange Notes--Certain Covenants."
The Company may not make a Guarantee Payment to holders of Exchange
Preferred Securities if (i) any Senior Indebtedness of the Company having an
outstanding principal amount at the time of determination in excess of $10.0
million (the "Specified Senior Indebtedness") is not paid when due or (ii) any
other default on Specified Senior Indebtedness of the Company occurs and the
maturity of such Specified Senior Indebtedness is accelerated in accordance with
its terms, unless, in either case, the default has been cured or waived and any
such acceleration has been rescinded or such Specified Senior Indebtedness has
been paid in full. The failure to make a payment under the Exchange Guarantee
shall not be considered an Event of Default. However, the Company may make a
Guarantee Payment without regard to the foregoing if the Company and the
Guarantee Trustee receive written notice approving such payment from a
representative of the Specified Senior Indebtedness with respect to which either
of the events set forth in clause (i) or (ii) of the immediately preceding
sentence has occurred and is continuing. During the continuance of any default
(other than a default described in clause (i) or (ii) of the second preceding
sentence) with respect to any Specified Senior Indebtedness of the Company
pursuant to which the maturity thereof may be accelerated immediately without
further notice (except such notice as may be required to effect such
acceleration) or the expiration of any applicable grace periods, the Company may
not make a Guarantee Payment to holders of Exchange Preferred Securities for a
period (a "Payment Blockage Period") commencing upon the receipt by the
Guarantee Trustee (with a copy to the Company) of written notice (a "Blockage
Notice") of such default from the representative of the holders of such
Specified Senior Indebtedness specifying an election to effect a Payment
Blockage Period and ending 179 days thereafter (or earlier if such Payment
Blockage Period is terminated (i) by written notice to the Guarantee Trustee and
the Company from the representative of the holders of such
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Specified Senior Indebtedness, (ii) because the default giving rise to such
Blockage Notice is no longer continuing or (iii) because such Specified Senior
Indebtedness has been repaid in full). Notwithstanding the provisions described
in the immediately preceding sentence, unless the holders of such Specified
Senior Indebtedness or the representative of such holders have accelerated the
maturity of such Specified Senior Indebtedness, the Company may resume Guarantee
Payments after the end of such Payment Blockage Period. The Exchange Guarantee
shall not be subject to more than one Payment Blockage Period in any consecutive
360-day period, irrespective of the number of defaults with respect to Specified
Senior Indebtedness during such period.
Upon any payment or distribution of the assets of the Company upon a
total or partial liquidation or dissolution or reorganization of or similar
proceeding relating to the Company or its property, the holders of Senior
Indebtedness of the Company will be entitled to receive payment in full of such
Senior Indebtedness before the holders of Exchange Preferred Securities are
entitled to receive any Guarantee Payment, and until the Senior Indebtedness of
the Company is paid in full, any payment or Distribution to which holders of
Exchange Preferred Securities would be entitled but for the subordination
provisions of the Exchange Guarantee will be made to holders of such Senior
Indebtedness as their interests may appear. If a Distribution is made to holders
of Exchange Preferred Securities, that, due to the subordination provisions,
should not have been made to them, such holders are required to hold it in trust
for the holders of Senior Indebtedness of the Company and pay it over to them as
their interests may appear.
If a Guarantee Payment is to be made by the Company to holders of
Exchange Preferred Securities, the Company or the Guarantee Trustee shall
promptly notify the holders of Senior Indebtedness of the Company or the
representative of such holders of such Guarantee Payment. If any Senior
Indebtedness of the Company is outstanding, the Company may not pay such
Guarantee Payment until five Business Days after the representatives of all the
issues of Senior Indebtedness of the Company receive notice of such Guarantee
Payment and, thereafter. may pay such Guarantee Payment only if the Exchange
Guarantee otherwise permits payment at that time.
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes that do not materially adversely
affect the rights of holders of the Exchange Preferred Securities (in which case
no vote will be required), the Exchange Guarantee may not be amended without the
prior approval of the holders of not less than a majority in aggregate
liquidation amount of the outstanding Exchange Preferred Securities. The manner
of obtaining any such approval will be as set forth under "Description of the
Exchange Preferred Securities--Voting Rights." All guarantees and agreements
contained in the Exchange Guarantee shall bind successors, assigns, receivers,
trustees and representatives of the Company and shall inure to the benefit of
the holders of the Exchange Preferred Securities then outstanding. The Exchange
Guarantee shall not be amended without the prior receipt by the Company of an
opinion of independent tax counsel to the effect that such amendment of the
Exchange Guarantee will not result in the recognition of income, gain or loss by
holders of the Exchange Preferred Securities.
EVENTS OF DEFAULT
An event of default under the Exchange Guarantee will occur upon the
failure of the Company to perform any of its payment or other obligations
thereunder. The holders of not less than a majority in aggregate liquidation
amount of the Exchange Preferred Securities have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Guarantee Trustee in respect of the Exchange Guarantee or to direct the exercise
of any trust or power conferred upon the Guarantee Trustee under the Exchange
Guarantee.
Upon the occurrence of a payment default under the Exchange Guarantee,
any holder of the Exchange Preferred Securities may institute a legal proceeding
directly against the Company to enforce its rights under the Exchange Guarantee
without first instituting a legal proceeding against the Trust, the Guarantee
Trustee or any other persons or entity.
The Company, as guarantor, is required to file annually with the
Guarantee Trustee a certificate as to whether or not the Company is in
compliance with all the conditions and covenants applicable to it under the
Exchange Guarantee.
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TERMINATION OF THE EXCHANGE GUARANTEE
The Exchange Guarantee will terminate and be of no further force and
effect upon full payment of the Redemption Price of the Exchange Preferred
Securities, upon full payment of the amounts payable in accordance with the
Declaration upon liquidation of the Trust or upon distribution of Exchange Notes
to the holders in exchange for all of the Exchange Preferred Securities. The
Exchange Guarantee will continue to be effective or will be reinstated, as the
case may be, if at any time any holder of the Exchange Preferred Securities must
restore payment of any sums paid under such Exchange Preferred Securities or
such Exchange Guarantee.
GOVERNING LAW
The Exchange Guarantee will be governed by and construed in accordance
with the laws of the State of New York.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The Guarantee Trustee, other than during the occurrence and continuance
of a default by the Company in performance of the Exchange Guarantee, undertakes
to perform only such duties as are specifically set forth in the Exchange
Guarantee and, after default with respect to the Exchange Guarantee, must
exercise the same degree of care and skill as a prudent person would exercise or
use in the conduct of his or her own affairs. Subject to this provision, the
Guarantee Trustee is under no obligation to exercise any of the powers vested in
it by the Exchange Guarantee at the request of any holder of the Exchange
Preferred Securities unless it is offered reasonable indemnity against the
costs, expenses and liabilities that might be incurred thereby.
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DESCRIPTION OF THE EXCHANGE NOTES
Set forth below is a description of certain material terms of the
Exchange Notes. The Old Notes were issued and the Exchange Notes will be issued
as separate series under the Indenture. Upon effectiveness of the Registration
Statement of which this Prospectus forms a part, the Indenture will be qualified
under the Trust Indenture Act. The following summary does not purport to be
complete and is subject to, and qualified in its entirely by reference to, all
of the provisions of the Indenture. Capitalized terms not otherwise defined
herein have the meaning assigned to them in the Indenture.
Under certain circumstances involving the dissolution of the Trust
following the occurrence of a Tax Event, Change of Control Triggering Event or
Investment Company Event, Exchange Notes may be distributed to the holders of
the Exchange Preferred Securities in liquidation of the Trust. See "Description
of the Exchange Preferred Securities--Tax Event or Investment Company Event
Redemption or Distribution" and "Description of the Exchange Preferred
Securities--Change of Control Redemption."
GENERAL
The Exchange Notes will be issued under the Indenture and will be
limited in aggregate principal amount to the sum of the aggregate stated
liquidation amount of the Trust Securities.
The Exchange Notes are not entitled to the benefit of any sinking fund.
The entire principal amount of the Exchange Notes will become due and payable,
together with any accrued and unpaid interest thereon, on December 1, 2017.
The Exchange Notes will initially be issued in fully registered
certificated form and held by the Preferred Trustee. If distributed to holders
of Exchange Preferred Securities in a dissolution of the Trust or following a
Change of Control Triggering Event, the Exchange Notes will then be issued as a
global security to the extent of any Global Exchange Preferred Securities at the
time representing any Exchange Preferred Securities and otherwise in fully
registered, certificated form. In the event that Exchange Notes are issued in
certificated form, such Exchange Notes will be in denominations of $1,000 and
integral multiples thereof and may be transferred or exchanged at the offices
described below.
Payments on Exchange Notes issued as a global security will be made in
immediately available funds to DTC, as the depository for the Exchange Notes. In
the event Exchange Notes are issued in certificated form, principal and interest
will be payable, the transfer of the Exchange Notes will be registrable, and
Exchange Notes will be exchangeable for, Exchange Notes of other denominations
of a like aggregate principal amount at the corporate trust office of the
Indenture Trustee in the City of New York; provided that, unless the Exchange
Notes are held by the Trust or any successor permissible as described under
"Description of the Exchange Preferred Securities--Merger, Consolidation or
Amalgamation of the Trust," payment of interest may be made at the option of the
Company by check mailed to the address of the persons entitled thereto.
INTEREST
The Exchange Notes will bear interest at the rate of 10 3/4% per annum
from the original date of issuance, payable semi-annually in arrears on June 1
and December 1 (each, an "Interest Payment Date"), commencing June 1, 1998, to
the person in whose name such Exchange Note is registered at the close of
business on the fifteenth day immediately preceding such Interest Payment Date.
Interest on the Exchange Notes will accrue from the most recent date on which
interest has been paid or, if no interest has been paid, from the Issue Date.
Interest in arrears for more than one semi-annual period (and interest thereon)
will accrue interest (compounded semi-annually) at the same rate, to the extent
permitted by applicable law.
The amount of interest payable for any period will be computed on the
basis of a 360-day year of twelve, thirty-day months. In the event that any date
on which interest is payable on the Exchange Notes is not a Business Day, then
payment of the interest payable on such date will be made on the next succeeding
day which is a Business
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Day (without any interest or other payment in respect of any such delay), except
that, if such Business Day is in the next succeeding calendar year, such payment
shall be made on the immediately preceding Business Day, in each case with the
same force and effect as if made on such date.
OPTION TO EXTEND INTEREST PAYMENT DATE
Unless an Event of Default has occurred and is continuing, the Company
will have the right under the Indenture at any time during the term of the
Exchange Notes to defer the payment of interest at any time or from time to time
for a period not exceeding ten consecutive semi-annual periods with respect to
each Extension Period, provided that no Extension Period may extend beyond the
Stated Maturity Date. As a consequence of any such deferral, semi-annual
Distributions on the Exchange Preferred Securities by the Trust will be deferred
during any such Extension Period. At the end of an Extension Period, the Company
must pay all interest then accrued and unpaid (together with interest then
accrued at the annual rate of 10 3/4%, compounded semi-annually, to the extent
permitted by applicable law). During an Extension Period, interest will continue
to accrue and holders of Exchange Notes (and holders of the Trust Securities
while Trust Securities are outstanding) will be required to accrue interest
income (in the form of OID) for United States federal income tax purposes prior
to the receipt of cash attributable to such income. See "Certain United States
Federal Income Tax Consequences--Interest Income and Original Issue Discount."
During any such Extension Period, the Company may not (i) declare or pay
any dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of the Company's Capital Stock (which
includes common and preferred stock), (ii) make any payment of principal,
interest, or premium, if any, on or repay, repurchase or redeem any debt
securities of the Company that rank pari passu with or junior in right of
payment to the Exchange Notes or (iii) make any guarantee payments with respect
to any guarantee by the Company of the debt securities of any Subsidiary of the
Company if such guarantee ranks pari passu with or junior in right of payment to
the Exchange Notes; excluding, in each case, (a) dividends or distributions in
shares of or options, warrants or rights to subscribe for or purchase shares of,
Common Stock of the Company, (b) any declaration of a dividend in connection
with the implementation of a stockholders' rights plan, or the issuance of stock
under any such plan in the future, or the redemption or repurchase of any such
rights pursuant thereto, (c) payments under the Guarantee, (d) as a result of a
reclassification of the Company's Capital Stock or the exchange or conversion of
one class or series of the Company's Capital Stock for another class or series
of Company's Capital Stock, (e) the purchase of fractional interests in shares
of the Company's Capital Stock pursuant to the conversion or exchange provisions
of such Capital Stock or the security being converted or exchanged and (f)
purchases or issuances of Common Stock under any of the Company's stock option,
stock purchase, restricted stock grant, stock loan or other benefit plans for
its directors, officers, or employees or any of the Company's dividend
reinvestment plans, in each case as now existing or hereafter established or
amended.
Prior to the termination of any such Extension Period, the Company may
further extend such Extension Period, provided that such extension does not
cause such Extension Period to exceed ten consecutive semi-annual periods or to
extend beyond the Stated Maturity Date. Upon the termination of any such
Extension Period and the payment of all amounts then due on any Interest Payment
Date, the Company may elect to begin a new Extension Period, subject to the
above requirements. No interest shall be due and payable during an Extension
Period, except at the end thereof. The Company must give the Preferred Trustee
and Indenture Trustee notice of its election of any Extension Period (or an
extension thereof) at least five Business Days prior to the earlier of (i) the
date the Distributions on the Exchange Preferred Securities would have been
payable except for the election to begin or extend such Extension Period or (ii)
the date the Trustees are required to give notice to any securities exchange or
to holders of Trust Securities of the record date or the date such Distributions
are payable, but in any event not less than five Business Days prior to such
record date. The Indenture Trustee shall give notice of the Company's election
to begin or extend a new Extension Period to the holders of the Exchange
Preferred Securities. There is no limitation on the number of times that the
Company may elect to begin an Extension Period.
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OPTIONAL REDEMPTION
The Company shall have the right to redeem the Exchange Notes, in whole
or in part, at any time or from time to time after December 1, 2005, upon not
less than thirty or more than sixty days' notice, at the Redemption Prices (as
defined in the Indenture) (expressed as a percentage of principal amount) set
forth below plus accrued and unpaid interest to the Redemption Date (as defined
in the Indenture) (subject to the right of holders of record on the relevant
Regular Record Date (as defined in the Indenture) to receive interest due on an
Interest Payment Date that is on or prior to the Redemption Date) if redeemed
during the twelve-month period beginning on December 1 of the years indicated
below:
<TABLE>
<CAPTION>
PERCENTAGE OF
YEAR PRINCIPAL AMOUNT
- ---- ----------------
<S> <C>
2005................................... 105.375%
2006................................... 103.583%
2007................................... 101.792%
2008 and thereafter.................... 100.000%
</TABLE>
In the event of any redemption in part, the Company shall not be
required to (i) issue, register the transfer of or exchange any Exchange Note
during a period beginning at the opening of business fifteen days before any
selection for redemption of Exchange Notes and ending at the close of business
on the earliest date on which the relevant notice of redemption is deemed to
have been given to all holders of Exchange Notes to be so redeemed or (ii)
register the transfer of or exchange any Exchange Notes so selected for
redemption, in whole or in part, except the unredeemed portion of any Exchange
Note being redeemed in part.
SUBORDINATION
The indebtedness evidenced by the Exchange Notes will be senior
subordinated obligations of the Company. The payment of the principal of
(including any payments on redemption or repurchase), premium (if any) and
interest on the Exchange Notes is subordinate in right of payment, as set forth
in the Indenture, to all Senior Indebtedness of the Company, whether outstanding
on the date the Exchange Notes are originally issued or thereafter incurred.
Although the Indenture contains limitations on the amount of additional
Indebtedness that the Company may incur, under certain circumstances the amount
of such Indebtedness could be substantial and, in any case, such Indebtedness
may be Senior Indebtedness. See "--Certain Covenants."
The Exchange Notes will be issued in denominations of $1,000 and
integral multiples thereof. The Exchange Notes will mature on December 1, 2017
(the "Stated Maturity Date"). The Exchange Notes will be unsecured and
subordinate and rank junior in right of payment to the extent and in the manner
set forth in the Indenture to all Senior Indebtedness. Almost all of the
Company's assets consist of stock in the Subsidiaries. Consequently, the Company
relies primarily on dividends, interest and fees from such Subsidiaries to meet
its obligations. The Company is a legal entity separate and distinct from its
Subsidiaries. The principal sources of the Company's income are dividends,
interest and fees from its Subsidiaries. The Company's ability to meet debt
service obligations and pay operating expenses depends on receipt of sufficient
funds from its direct and indirect Subsidiaries. The inability of the Company's
direct and indirect Subsidiaries to pay dividends, interest and fees to the
Company in an amount sufficient to meet debt service obligations and pay
operating expenses would have a material adverse effect on the Company and the
Trust. The payment of dividends by the Company's Subsidiaries without prior
regulatory approval is subject to restrictions set forth in the insurance laws
and regulations of California, the state of domicile of the Company's primary
Insurance Subsidiaries. The Company currently does not expect such regulatory
requirements to impair its ability to meet interest payment obligations and to
pay operating expenses in the future. However, the Company can give no assurance
that dividends will be declared or paid by its Subsidiaries. As of September 30,
1997, Superior Pacific would have been permitted to pay an aggregate of $7.9
million in dividends without prior regulatory approval. In addition, payment of
dividends to the Company by the Insurance Subsidiaries is subject to ongoing
review by insurance regulators and is subject to various statutory limitations
and in certain circumstances requires approval by insurance regulatory
authorities. The right
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of the Company to participate in any distribution of assets of any Subsidiary
upon such Subsidiary's liquidation or reorganization or otherwise is subject to
the prior claims of creditors of the Subsidiary, except to the extent the
Company may itself be recognized as a creditor of that Subsidiary. Accordingly,
the Exchange Notes will be effectively subordinated to all existing and future
liabilities of the Company's Subsidiaries, including the intermediate holding
company, and holders of Exchange Notes should look only to the assets of the
Company for payments on the Exchange Notes. In addition, because the Company's
principal Subsidiaries are insurance companies subject to regulatory control by
various state insurance departments, the ability of such Insurance Subsidiaries
to pay dividends to the Company without prior regulatory approval is limited by
applicable laws and regulations. The Declaration and the Guarantee do not place
a limitation on the amount of additional Senior Indebtedness that may be
incurred by the Company. However, the ability of the Company and its
Subsidiaries to incur indebtedness is restricted under the Exchange Notes. The
Company may from time to time incur additional Indebtedness constituting Senior
Indebtedness. See "--Certain Covenants."
The Company may not pay principal of, or premium (if any), or interest
on, the Exchange Notes and may not repurchase, redeem or otherwise retire any
Exchange Notes (collectively, "pay the Notes") if (i) any Senior Indebtedness of
the Company having an outstanding principal amount at the time of determination
in excess of $10.0 million (the "Specified Senior Indebtedness") is not paid
when due or (ii) any other default on Specified Senior Indebtedness of the
Company occurs and the maturity of such Specified Senior Indebtedness is
accelerated in accordance with its terms, unless, in either case, the default
has been cured or waived and any such acceleration has been rescinded or such
Specified Senior Indebtedness has been paid in full. However, the Company may
pay the Notes without regard to the foregoing if the Company and the Indenture
Trustee receive written notice approving such payment from a representative of
the Specified Senior Indebtedness with respect to which either of the events set
forth in clause (i) or (ii) of the immediately preceding sentence has occurred
and is continuing. During the continuance of any default (other than a default
described in clause (i) or (ii) of the second preceding sentence) with respect
to any Specified Senior Indebtedness of the Company pursuant to which the
maturity thereof may be accelerated immediately without further notice (except
such notice as may be required to effect such acceleration) or the expiration of
any applicable grace periods, the Company may not pay the Notes for a period (a
"Payment Blockage Period") commencing upon the receipt by the Indenture Trustee
(with a copy to the Company) of written notice (a "Blockage Notice") of such
default from the representative of the holders of such Specified Senior
Indebtedness specifying an election to effect a Payment Blockage Period and
ending 179 days thereafter (or earlier if such Payment Blockage Period is
terminated (i) by written notice to the Indenture Trustee and the Company from
the representative of the holders of such Specified Senior Indebtedness, (ii)
because the default giving rise to such Blockage Notice is no longer continuing
or (iii) because such Specified Senior Indebtedness has been repaid in full).
Notwithstanding the provisions described in the immediately preceding sentence,
unless the holders of such Specified Senior Indebtedness or the representative
of such holders have accelerated the maturity of such Specified Senior
Indebtedness, the Company may resume payments on the Exchange Notes after the
end of such Payment Blockage Period. The Exchange Notes shall not be subject to
more than one Payment Blockage Period in any consecutive 360-day period,
irrespective of the number of defaults with respect to Specified Senior
Indebtedness during such period.
Upon any payment or distribution of the assets of the Company upon a
total or partial liquidation or dissolution, or reorganization of, or similar
proceeding relating to, the Company or its property, the holders of Senior
Indebtedness of the Company will be entitled to receive payment in full of such
Senior Indebtedness before the holders of Exchange Notes are entitled to receive
any payment, and until the Senior Indebtedness of the Company is paid in full,
any payment or distribution to which holders of Exchange Notes would be entitled
but for the subordination provisions of the Indenture will be made to holders of
such Senior Indebtedness as their interests may appear. If a distribution is
made to holders of Exchange Notes, that, due to the subordination provisions,
should not have been made to them, such holders are required to hold it in trust
for the holders of Senior Indebtedness of the Company and pay it over to them as
their interests may appear.
If payment of the Exchange Notes is accelerated because of an Event of
Default, the Company or the Indenture Trustee shall promptly notify the holders
of Senior Indebtedness of the Company or the representative of such holders of
the acceleration. If any Senior Indebtedness is outstanding, the Company may not
pay the Notes until five Business Days after the representatives of all the
issues of Senior Indebtedness receive notice of such acceleration and,
thereafter, may pay the Notes only if the Indenture otherwise permits payment at
that time.
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By reason of the subordination provisions contained in the Indenture, in
the event of insolvency, creditors of the Company who are holders of Senior
Indebtedness of the Company may recover more, ratably, than the holders of
Exchange Notes, and creditors of the Company who are not holders of Senior
Indebtedness may recover less, ratably, than holders of Senior Indebtedness and
may recover more, ratably, than the holders of Exchange Notes.
CERTAIN COVENANTS
Limitation on Restricted Payments
(a) The Company shall not, and shall not permit any Subsidiary to,
directly or indirectly, make any Restricted Payment if at the time the Company
or such Subsidiary makes such Restricted Payment: (1) a Default shall have
occurred and be continuing (or would result therefrom), (2) the Company is not
able to Incur an additional $1.00 of Indebtedness pursuant to paragraph (a) of
the covenant described under "--Limitation on Incurrence of Indebtedness," or
(3) the aggregate amount of such Restricted Payment and all other Restricted
Payments since the Issue Date would exceed the sum of (A) 50% of the
Consolidated Net Income accrued during the period (treated as one accounting
period) from the Issue Date to the end of the Company's most recently ended
fiscal quarter for which internal financial statements are available at the time
of such Restricted Payment (or, in case such Consolidated Net Income shall be a
deficit, minus 100% of such deficit), (B) the aggregate Net Cash Proceeds
received by the Company from the issuance or sale of its Capital Stock (other
than Disqualified Stock) subsequent to the Issue Date (other than an issuance or
sale to a Subsidiary and other than an issuance or sale to an employee stock
ownership plan or to a trust established by the Company or any of its
Subsidiaries for the benefit of their employees), and (C) the amount by which
Indebtedness of the Company is reduced on the Company's balance sheet upon the
conversion or exchange (other than by a Subsidiary), subsequent to the Issue
Date, of any Indebtedness of the Company convertible or exchangeable for Capital
Stock (other than Disqualified Stock) of the Company (less the amount of any
cash, or the fair value of any other property, distributed by the Company upon
such conversion or exchange).
(b) The provisions of the foregoing paragraph (a) shall not prohibit:
(i) any purchase or redemption of stock or Subordinated Obligations of the
Company made by exchange for, or out of the proceeds of the substantially
concurrent sale of, Capital Stock of the Company (other than Disqualified Stock
and other than Capital Stock issued or sold to a Subsidiary or an employee stock
ownership plan or to a trust established by the Company or any of its
Subsidiaries for the benefit of their employees); provided, however, that (A)
such purchase or redemption shall be excluded in the calculation of the amount
of Restricted Payments and (B) the Net Cash Proceeds from such sale shall be
excluded from the calculation of amounts under clause (3)(B) of paragraph (a)
above, (ii) any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Subordinated Obligations made by exchange
for, or out of the proceeds of the substantially concurrent sale of,
Indebtedness of the Company which is permitted to be Incurred pursuant to the
covenant described under "--Limitation on Incurrence of Indebtedness;" provided,
however, that such purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value shall be excluded in the calculation of the
amount of Restricted Payments; or (iii) dividends paid within sixty days after
the date of declaration thereof if at such date of declaration such dividend
would have complied with this covenant; provided, however, that at the time of
payment of such dividend, no other Default shall have occurred and be continuing
(or result therefrom); provided further, however, that such dividend shall be
included in the calculation of the amount of Restricted Payments.
Limitation on Incurrence of Indebtedness
(a) The Company shall not, and shall not permit any Subsidiary to,
Incur, directly or indirectly, any Indebtedness unless, on the date of such
Incurrence (and after giving effect thereto), the Consolidated Coverage Ratio
exceeds 2.0 to 1.
(b) The foregoing limitations contained in paragraph (a) do not apply to
the Incurrence of any of the following Indebtedness: (1) Indebtedness owed to
and held by a Wholly Owned Subsidiary; provided, however, that any subsequent
issuance or transfer of any Capital Stock that results in any such Wholly Owned
Subsidiary ceasing to be a Wholly Owned Subsidiary or any subsequent transfer of
such Indebtedness (other than to another Wholly
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Owned Subsidiary) shall be deemed, in each case, to constitute the Incurrence of
such Indebtedness by the Company, (2) the Exchange Notes, (3) Indebtedness
incurred, in each case, to provide all or a portion of the purchase price or
cost of construction of an asset or, in the case of a sale/leaseback
transaction, to finance the value of such asset owned by the Company or a
Subsidiary, in an aggregate principal amount which, together with all other such
Indebtedness outstanding on the date of such Incurrence (other than Indebtedness
permitted by paragraph (a) or clause (1) or (6) of this paragraph (b)), does not
exceed $10.0 million, (4) Refinancing Indebtedness in respect of Indebtedness
Incurred pursuant to paragraph (a) or pursuant to clause (2) or (3) of this
paragraph (b), (5) Indebtedness under a reverse repurchase program or other
derivative instrument if such Indebtedness is secured only by an Investment by
the Company or its Subsidiaries (or the proceeds of the sale of such an
Investment), provided such Indebtedness has a term of 90 days or less, (6)
customer deposits and advance payments received from customers for goods or
services purchased in the ordinary course of business, and (7) Indebtedness in
an aggregate principal amount which, together with all other Indebtedness of the
Company and its Subsidiaries outstanding on the date of such Incurrence (other
than Indebtedness permitted by paragraph (a) or clauses (1) through (6) of this
paragraph (b)), does not exceed $5.0 million.
(c) Notwithstanding the foregoing, the Company shall not, and shall not
permit any Subsidiary to, Incur, directly or indirectly, any Indebtedness (i)
that is subordinate or junior in ranking in right of payment to its Senior
Indebtedness unless such Indebtedness is Senior Subordinated Indebtedness or is
expressly subordinated in right of payment to Senior Subordinated Indebtedness
or (ii) pursuant to paragraph (b) above if the proceeds thereof are used,
directly or indirectly, to Refinance any Subordinated Obligations unless such
Indebtedness shall be subordinated to the Exchange Notes to at least the same
extent as such Subordinated Obligations.
(d) For purposes of determining compliance with the foregoing covenant,
(i) in the event that an item of Indebtedness meets the criteria of more than
one of the types of Indebtedness described above, the Company, in its sole
discretion, will classify such item of Indebtedness and only be required to
include the amount and type of such Indebtedness in one of the above clauses and
(ii) an item of Indebtedness may be divided and classified in more than one of
the types of Indebtedness described above.
Limitation on Restrictions on Distributions from Subsidiaries
The Company shall not, and shall not permit any Subsidiary to,
voluntarily create or otherwise cause or permit to exist or become effective any
consensual encumbrance or restriction on the ability of any Subsidiary (other
than SPCC or SBL) (a) to pay dividends or make any other distributions on its
Capital Stock to the Company or any other Subsidiary or pay any Indebtedness
owed to the Company or any other Subsidiary, (b) to pay any management fees or
billing fees to the Company or any other Subsidiary, (c) to make any loans or
advances to the Company or any other Subsidiary or (d) transfer of any of its
property or assets to the Company or any other Subsidiary, except: (i) any
encumbrance or restriction pursuant to an agreement in effect at or entered into
on the Issue Date, (ii) any encumbrance or restriction with respect to a
Subsidiary pursuant to an agreement relating to any Indebtedness Incurred by
such Subsidiary on or prior to the date on which such Subsidiary was acquired by
the Company (other than Indebtedness Incurred as consideration in, or to provide
all or any portion of the funds or credit support utilized to consummate the
transaction or series of related transactions pursuant to which such Subsidiary
became a Subsidiary or was acquired by the Company) and outstanding on such
date, (iii) any encumbrance or restriction pursuant to an agreement effecting a
Refinancing of Indebtedness Incurred pursuant to an agreement referred to in
clause (i) or (ii) above or this clause (iii) or contained in any amendment to
an agreement referred to in clause (i) or (ii) above or this clause (iii);
provided, however, that the encumbrances and restrictions with respect to such
Subsidiary contained in any such refinancing agreement or amendment are no less
favorable to the holders of Exchange Notes than encumbrances and restrictions
with respect to such Subsidiary contained in such agreements, (iv) any such
encumbrance or restriction consisting of customary non-assignment provisions in
leases governing leasehold interests or in licensing agreements to the extent
such provisions restrict the transfer of the lease or the property leased
thereunder or the licensing agreement or the rights licensed thereunder, (v) in
the case of clause (d) above, restrictions contained in security agreements or
mortgages securing Indebtedness of a Subsidiary to the extent such restrictions
restrict the transfer of the property subject to such security agreements or
mortgages and (vi) any restriction with respect to a Subsidiary imposed pursuant
to an agreement entered into for the sale or disposition of all or substantially
all the Capital Stock or assets of such Subsidiary pending the closing of such
sale or disposition.
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Limitation on Sales of Assets and Subsidiary Stock
(a) The Company shall not, and shall not permit any Subsidiary to,
directly or indirectly, consummate any Asset Disposition unless (i) the Company
or such Subsidiary receives consideration at the time of such Asset Disposition
at least equal to the fair market value (including as to the value of all
non-cash consideration), as determined in good faith by the Board of Directors
of the Company or such Subsidiary as the case may be, of the shares and assets
subject to such Asset Disposition and at least 75% of the consideration thereof
received by the Company or such Subsidiary is in the form of cash, cash
equivalents or Marketable Securities and (ii) an amount equal to 100% of the Net
Available Cash from such Asset Disposition is applied by the Company (or such
Subsidiary, as the case may be) (A) first, to the extent the Company elects (or
is required by the terms of any Senior Indebtedness), to prepay, repay, redeem,
or purchase Senior Indebtedness or Indebtedness (other than any Disqualified
Stock) of a Wholly Owned Subsidiary (in each case other than Indebtedness owed
to the Company or an Affiliate of the Company) within eighteen months from the
later of the date of such Asset Disposition or the receipt of such Net Available
Cash, (B) second, to the extent of the balance of such Net Available Cash after
application in accordance with clause (A), to the extent the Company elects, to
acquire Additional Assets within eighteen months from the later of the date of
such Asset Disposition or the receipt of such Net Available Cash and (C) third,
to the extent of the balance of such Net Available Cash after application in
accordance with clauses (A) and (B), to make an offer to the holders of the
Exchange Notes to purchase Exchange Notes pursuant to and subject to the
conditions contained in the Indenture; provided, however, that in connection
with any prepayment, repayment, or purchase of Indebtedness pursuant to clause
(A) or (C) above, the Company or such Subsidiary shall retire such Indebtedness
and shall cause the related loan commitment (if any) to be permanently reduced
in an amount equal to the principal amount so prepaid, repaid, or purchased.
Notwithstanding the foregoing provisions of this paragraph, the Company and the
Subsidiaries shall not be required to apply any Net Available Cash in accordance
with this paragraph except to the extent that the aggregate Net Available Cash
from all Asset Dispositions which are not applied in accordance with this
paragraph exceeds $5.0 million. Pending application of Net Available Cash
pursuant to this covenant, such Net Available Cash shall be invested in
Permitted Investments.
For the purposes of this covenant, the following are deemed to be
cash or cash equivalents: (x) the assumption of Indebtedness of the Company or
any Subsidiary and the release of the Company or such Subsidiary from all
liability on such Indebtedness in connection with such Asset Disposition and (y)
securities received by the Company or any Subsidiary from the transferee that
are promptly converted by the Company or such Subsidiary into cash.
(b) In the event of an Asset Disposition that requires the purchase of
the Exchange Notes pursuant to clause (a) (ii) (C) above, the Company will be
required to purchase Exchange Notes tendered pursuant to an offer by the Company
for the Exchange Notes at a purchase price of 101% of their principal amount
(without premium) plus accrued but unpaid interest, in accordance with the
procedures (including prorating in the event of oversubscription) set forth in
the Indenture. The Company shall not be required to make such an offer to
purchase Exchange Notes pursuant to this covenant if the Net Available Cash
available therefor is less than $5.0 million (which lesser amount shall be
carried forward for purposes of determining whether such an offer is required
with respect to any subsequent Asset Disposition).
(c) The Company shall comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Exchange Notes pursuant to
this covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company shall comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations under this clause by virtue thereof.
Limitation on Affiliate Transactions
(a) The Company shall not, and shall not permit any Subsidiary to, enter
into any transaction (including the purchase, sale, lease, or exchange of any
property, employee compensation arrangements or the rendering of any service)
with any Affiliate of the Company (an "Affiliate Transaction") (other than
reinsurance with an Affiliate in the ordinary course of business) if such
Affiliate Transaction involves an amount in excess of
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$0.5 million unless the terms thereof (i) are set forth in writing and (ii) have
been approved by a majority of the disinterested members of the Board of
Directors of the Company or such Subsidiary.
(b) The provisions of paragraph (a) above shall not prohibit (i) any
Restricted Payment permitted to be paid pursuant to the covenant described under
"--Limitation on Restricted Payments," (ii) transactions or payments pursuant to
any employee arrangements or employee or director benefit plans entered into by
the Company or any of its Subsidiaries in the ordinary course of business of the
Company or such Subsidiary, and (iii) any Affiliate Transaction between the
Company and a Wholly Owned Subsidiary or between Wholly Owned Subsidiaries.
Senior Subordinated Indebtedness; Liens
The Company shall not, and shall not permit any Subsidiary to, Incur (i)
any Indebtedness if such Indebtedness is subordinate or junior in ranking in any
respect to any Senior Indebtedness, unless such Indebtedness is Senior
Subordinated Indebtedness or is expressly subordinated in right of payment to
Senior Subordinated Indebtedness or (ii) any Secured Indebtedness that is not
Senior Indebtedness unless (A) contemporaneously therewith effective provision
is made to secure the Exchange Notes equally and ratably with such Secured
Indebtedness for so long as such Secured Indebtedness is secured by a Lien or
(B) such Secured Indebtedness is permitted by clause (3) or (4) of paragraph (b)
of the covenant described under "--Limitation on Incurrence of Indebtedness."
Limitation on Mergers, Acquisitions and Sales of Assets
The Indenture provides that the Company may not consolidate or merge
with or into (whether or not the Company is the Surviving Person), or sell,
assign, transfer, lease, convey, or otherwise dispose of all or substantially
all of its properties and assets in one or more related transactions, to another
Person unless (i) the Surviving Person is a corporation organized and existing
under the laws of the United States of America, any state thereof or the
District of Columbia, (ii) the Surviving Person (if other than the Company)
assumes all the obligations of the Company under the Exchange Notes and the
Indenture pursuant to a supplemental indenture in a form reasonably satisfactory
to the Indenture Trustee, (iii) at the time of and immediately after such
transaction, no Default or Event of Default shall have occurred and be
continuing, (iv) the Surviving Person will have Consolidated Net Worth
(immediately after the transaction) equal to or greater than the Consolidated
Net Worth of the Company immediately preceding the transaction, (v) at the time
of such transaction and after giving pro forma effect thereto, the Surviving
Person would be permitted to incur at least $1.00 of additional Indebtedness
pursuant to paragraph (a) of the covenant described under "Limitation on
Incurrence of Indebtedness," and (vi) the Company delivers to the Indenture
Trustee an officers' certificate, and an opinion of counsel, each stating that
such consolidation, merger, or transfer and such supplemental indenture, if any,
complies with the Indenture.
OWNERSHIP OF THE TRUST
The Company shall continue (i) to directly or indirectly maintain 100%
ownership of the Common Securities of the Trust; provided, however, that any
permitted successor of the Company under the Indenture may succeed to the
Company's ownership of such Common Securities and (ii) to use its reasonable
efforts to cause the Trust (x) to remain a statutory business trust, except in
connection with the distribution of Exchange Notes to the holders of Trust
Securities in liquidation of the Trust, the redemption of all of the Trust
Securities, or certain mergers, consolidations, or amalgamations, each as
permitted by the Declaration and (y) to otherwise continue to be classified for
United States federal income tax purposes as a grantor trust or another entity
which is not subject to United States federal income tax at the entity level and
the assets and income of which are treated for United States federal income tax
purposes as held and derived directly by holders of interests in the entity.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control Triggering Event (as defined
herein), a holder of Trust Securities has the right to require the Trust to
exchange all or any part of the holder's Trust Securities for Senior
Subordinated Notes having an aggregate principal amount equal to the aggregate
liquidation amount of the Trust Securities so
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offered. Upon the occurrence of such an event, the Company will be required to
immediately redeem any Exchange Notes so exchanged at a redemption price equal
to 101% of the principal amount thereof plus any accrued and unpaid interest.
The Company shall comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Exchange Notes pursuant to
this covenant. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of this covenant, the Company shall
comply with the applicable securities laws and regulations and shall not be
deemed to have breached its obligations under this covenant by virtue thereof.
Future indebtedness of the Company may contain prohibitions on the
occurrence of certain events that would constitute a Change of Control or
require such indebtedness to be repurchased upon a Change of Control. Moreover,
the exercise by the holders of the Exchange Preferred Securities to exchange the
Exchange Preferred Securities for Exchange Notes and their right to require the
Company to redeem the Exchange Notes could cause a default under such
indebtedness, even if the Change of Control itself does not, due to the
financial effect of such repurchase on the Company. Finally, the Company's
ability to pay cash to the holders of Exchange Notes following the occurrence of
a Change of Control may be limited by the Company's then existing financial
resources. While in the context of a Change of Control a Person attempting to
effect the Change of Control would be cognizant of the redemption right of the
holders of Exchange Preferred Securities and either may obtain the agreement of
such holders not to exercise their redemption right or may have, or arrange for
the provision of, cash sufficient to fund such a redemption, there can be no
assurance that sufficient funds will be available when necessary to make any
required repurchases. The provisions under the Indenture relative to the
Company's obligation to make an offer to repurchase the Exchange Notes as a
result of a Change of Control may be waived or modified with the written consent
of the holders of a majority in principal amount of the Exchange Notes.
EVENTS OF DEFAULT
The Indenture provides that any one or more of the following described
events, which has occurred and is continuing, constitutes an "Event of Default"
with respect to the Exchange Notes: (i) failure for thirty days to pay interest
on the Exchange Notes when due, (ii) failure to pay principal of or premium, if
any, on the Exchange Notes when due, whether at maturity, upon redemption, by
judicial declaration or otherwise, (iii) failure to observe or perform, in any
material respect, any other covenant contained in the Indenture for ninety days
after notice as provided in the Indenture, (iv) default under any mortgage,
indenture or instrument under which there may be issued or by which there may be
secured or evidenced any Indebtedness for money borrowed by the Company or any
Subsidiary (or the payment of which is guaranteed by the Company or any
Subsidiary), whether such Indebtedness or Guarantee now exists or is incurred
after the Issue Date, if (A) such default results in the acceleration of such
Indebtedness prior to its express maturity or shall constitute a default in the
payment of such Indebtedness and (B) the principal amount of any such
Indebtedness that has been accelerated or not paid at maturity, when added to
the aggregate principal amount of all other such Indebtedness, at such time,
that has been accelerated or not paid at maturity, exceeds $10.0 million, (v)
the dissolution, winding up, or termination of the Trust, except in connection
with the distribution of Exchange Notes to the holders of Securities in
liquidation of the Trust and in connection with certain mergers, consolidations,
or amalgamations permitted by the Declaration, or (vi) certain events in
bankruptcy, insolvency, or reorganization of the Company.
The Indenture Trustee or the holders of not less than 25% in aggregate
outstanding principal amount of the Exchange Notes may declare the principal of
and interest on the Exchange Notes due and payable immediately on the occurrence
of an Event of Default; provided, however, that, after such acceleration, but
before a judgment or decree based on acceleration, the holders of a majority in
aggregate principal amount of outstanding Exchange Notes may, under certain
circumstances, rescind and annul such acceleration if all Events of Default,
other than the nonpayment of accelerated principal, have been cured or waived as
provided in the Indenture. For information as to waiver of defaults, see
"--Modification of the Indenture."
The Preferred Trustee is the initial holder of the Exchange Notes.
However, while the Securities are outstanding, the Preferred Trustee has agreed
under the Declaration not to waive an Event of Default with respect
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to the Exchange Notes without the consent of holders of a majority in aggregate
liquidation amount of the Securities then outstanding.
A default under any other indebtedness of the Company or any of its
Subsidiaries or joint ventures or the Trust would not constitute an Event of
Default under the Exchange Notes.
Subject to the provisions of the Indenture relating to the duties of the
Indenture Trustee in case an Event of Default shall occur and be continuing, the
Indenture Trustee will be under no obligation to exercise any of its rights or
powers under the Indenture at the request or direction of any holders of
Exchange Notes unless such holders shall have offered to the Indenture Trustee
reasonable indemnity. Subject to such provisions for the indemnification of the
Indenture Trustee, the holders of a majority in aggregate principal amount of
the Exchange Notes then outstanding will have the right to direct the time,
method, and place of conducting any proceeding for any remedy available to the
Indenture Trustee, or exercising any trust or power conferred on the Indenture
Trustee.
No Holder of any Exchange Note will have any right to institute any
proceeding with respect to the Indenture or for any remedy thereunder, unless
such Holder shall have previously given to the Indenture Trustee written notice
of a continuing Event of Default and, if the Preferred Trustee is not the Holder
of Exchange Notes, unless the holders of at least 25% in aggregate principal
amount of the Exchange Notes then outstanding shall also have made written
request, and offered reasonable indemnity, to the Indenture Trustee to institute
such proceeding as Indenture Trustee, and the Indenture Trustee shall not have
received from the holders of a majority in aggregate principal amount of the
outstanding Exchange Notes a direction inconsistent with such request and shall
have failed to institute such proceeding within sixty days. However, such
limitations do not apply to a suit instituted by a Holder of an Exchange Note
for enforcement of payment of the principal of and premium, if any, or interest
on such Exchange Notes on or after the respective due dates expressed in such
Exchange Note.
The holders of a majority in aggregate outstanding principal amount of
the Exchange Notes affected thereby may, on behalf of the holders of all the
Exchange Notes, waive any past default, except a default in the payment of
principal, premium, if any, or interest. The Company is required to file
annually with the Indenture Trustee and the Trustees a certificate as to whether
or not the Company is in compliance with all the conditions and covenants under
the Indenture.
MODIFICATION OF THE INDENTURE
The Indenture contains provisions permitting the Company and the
Indenture Trustee, with consent of the holders of not less than a majority in
principal amount of the Exchange Notes, to modify the Indenture or any
supplemental indenture, provided that no such modification may, without the
consent of the Holder of each outstanding Exchange Note (or a majority in
liquidation amount of the Securities so long as they remain outstanding)
affected thereby, (i) extend the Stated Maturity of any Exchange Note, or reduce
the principal amount thereof, or reduce the rate or extend the time of payment
of interest thereon, except as otherwise stated herein, or reduce any premium
payable upon the redemption thereof, (ii) change the place or currency of
payment of principal of, or any premium or interest on, any Exchange Note, (iii)
impair the right to institute suit for the enforcement of any payment on or with
respect to any Exchange Note, (iv) modify the subordination provisions in a
manner adverse to the holders of the Exchange Notes or (v) reduce the percentage
in principal amount of Exchange Notes the holders of which are required to
consent to any modification or amendment of the Indenture.
In addition, the Company and the Indenture Trustee may execute, without
the consent of any holder of Exchange Notes, any supplemental indenture to cure
any ambiguities, comply with the Trust Indenture Act and for certain other
customary purposes; provided that any such action does not materially adversely
affect the interests of the holders of the Exchange Notes (or the Securities so
long as they remain outstanding).
GOVERNING LAW
The Indenture and the Exchange Notes will be governed by, and construed
in accordance with, the laws of the State of New York.
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INFORMATION CONCERNING THE INDENTURE TRUSTEE
The Indenture Trustee, prior to default, undertakes to perform only such
duties as are specifically set forth in the Indenture and, after default, shall
exercise the same degree of care as a prudent individual would exercise in the
conduct of his or her own affairs. Subject to such provision, the Indenture
Trustee is under no obligation to exercise any of the powers vested in it by the
Indenture at the request of any holder of Exchange Notes, unless offered
reasonable indemnity by such holder against the costs, expenses and liabilities
which might be incurred thereby. The Indenture Trustee is not required to expend
or risk its own funds or otherwise incur personal financial liability in the
performance of its duties if the Indenture Trustee reasonably believes that
repayment or adequate indemnity is not reasonably assured to it.
CERTAIN DEFINITIONS
As used in the Indenture:
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) in a Related Business, (ii) the Capital Stock of
a Person that becomes a Subsidiary as a result of the acquisition of such
Capital Stock by the Company or another Subsidiary or (iii) Capital Stock
constituting a minority interest in any Person that at such time is a
Subsidiary; provided that any such Subsidiary described in clauses (ii) or (iii)
above is primarily engaged in a Related Business.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person; provided, however, that an Affiliate of the
Company shall not be deemed to include the Trust. For the purposes of this
definition, "control" when used with respect to any Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing. For purposes of the provisions described under "--Certain
Covenants--Limitation on Restricted Payments," "--Certain Covenants--Limitation
on Affiliate Transactions," and "--Certain Covenants--Limitations on Sales of
Assets and Subsidiary Stock" only, "Affiliate" shall also mean any beneficial
owner of Capital Stock representing 5% or more of the total voting power of the
Voting Stock (on a fully diluted basis) of the Company or of rights or warrants
to purchase such Capital Stock (whether or not currently exercisable) and any
Person who would be an Affiliate of any such beneficial owner pursuant to the
first sentence hereof.
"Asset Disposition" means any sale, lease, transfer, or other
disposition (or series of related sales, leases, transfers or dispositions) by
the Company or any Subsidiary, including any disposition by means of a merger,
consolidation or similar transaction (each referred to for the purposes of this
definition as a "disposition"), of (i) any shares of Capital Stock of any
Subsidiary (other than directors' qualifying shares or shares required by
applicable law to be held by a Person other than the Company or a Subsidiary),
(ii) all or substantially all the assets of any division or line of business of
the Company or any Subsidiary or (iii) any other assets of the Company or any
Subsidiary outside of the ordinary course of business of the Company or such
Subsidiary (other than, in the case of (i), (ii) and (iii) above, (y) a
disposition by a Subsidiary to the Company or by the Company or a Subsidiary to
a Wholly Owned Subsidiary and (z) for purposes of the covenant described under
"--Certain Covenants--Limitation on Sales of Assets and Subsidiary Stock" only,
a disposition that constitutes a Restricted Payment permitted by the covenant
described under "--Certain Covenants--Limitation on Restricted Payments").
"Associates" means each of CentreLine, Centre Re, 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.
"Average Life" means, as of the date of determination, with respect to
any Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the
sum of the products of numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
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"Board of Directors" means, with respect to the Company or a Subsidiary,
as the case may be, the Board of Directors (or other body performing functions
similar to any of those performed by a Board of Directors).
"Business Day" means any day other than (i) a Saturday or Sunday, (ii) a
day on which banking institutions in the City of New York are authorized or
required by law or executive order to remain closed or (iii) a day on which the
corporate trust office of the Indenture Trustee, or, with respect to the
Exchange Preferred Securities, the principal office of the Preferred Trustee
under the Declaration, is closed for business.
"Capital Lease Obligations" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting purposes
in accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
"Capital Stock" of any Person means any and all shares, interests,
rights to purchase, warrants, options, participation or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into such equity.
"Change of Control" means any transaction or series of transactions in
which any Person or group (within the meaning of Rule 13d-5 under the Exchange
Act and Section 13(d) and 14(d) of the Exchange Act) other than the Company and
its Subsidiaries or IP or its Associates acquires all or substantially all of
the Company's assets or becomes the direct or indirect "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), by way of merger, consolidation,
other business combination or otherwise, of greater than 50% of the total voting
power (on a fully diluted basis as if all convertible securities had been
converted and all options and warrants had been exercised) entitled to vote in
the election of directors of the Company or the Surviving Person (if other than
the Company).
"Change of Control Triggering Event" means a Change of Control.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of EBITDA for the Company's most recently
ended four full fiscal quarters for which internal financial statements are
available immediately preceding the date of such determination to (ii)
Consolidated Interest Expense for such four fiscal quarters; provided, however,
that (1) if the Company or any Subsidiary has Incurred any Indebtedness since
the beginning of such period that remains outstanding or if the transaction
giving rise to the need to calculate the Consolidated Coverage Ratio is an
Incurrence of Indebtedness, or both, EBITDA and Consolidated Interest Expense
for such period shall be calculated after giving effect on a pro forma basis to
such Indebtedness as if such Indebtedness had been Incurred on the first day of
such period and the discharge of any other Indebtedness repaid, repurchased,
defeased, or otherwise discharged with the proceeds of such new Indebtedness as
if such discharge had occurred on the first day of such period, (2) if since the
beginning of such period the Company or any Subsidiary shall have made any Asset
Disposition, the EBITDA for such period shall be reduced by an amount equal to
the EBITDA (if positive) directly attributable to the assets which are the
subject of such Asset Disposition for such period, or increased by an amount
equal to the EBITDA (if negative), directly attributable thereto for such period
and Consolidated Interest Expense for such period shall be reduced by an amount
equal to the Consolidated Interest Expense directly attributable to any
Indebtedness of the Company or any Subsidiary repaid, repurchased, defeased, or
otherwise discharged with respect to the Company and its continuing Subsidiaries
in connection with such Asset Disposition for such period (or, if the Capital
Stock of any Subsidiary is sold, the Consolidated Interest Expense for such
period directly attributable to the Indebtedness of such Subsidiary to the
extent the Company and its continuing Subsidiaries are no longer liable for such
Indebtedness after such sale), (3) if since the beginning of such period the
Company or any Subsidiary (by merger or otherwise) shall have made an Investment
in any Subsidiary (or any Person which becomes a Subsidiary) or an acquisition
of assets, including any acquisition of assets occurring in connection with a
transaction requiring a calculation to be made hereunder, which constitutes all
or substantially all of an operating unit of a business, EBITDA and Consolidated
Interest Expense for such period shall be calculated after giving pro forma
effect thereto (including the Incurrence of any Indebtedness) as if such
Investment or acquisition occurred on the first day of such period and (4) if
since the beginning of such period any Person (that subsequently became a
Subsidiary or was merged with or into the Company or any Subsidiary since
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the beginning of such period) shall have made any Asset Disposition, any
Investment or acquisition of assets that would have required an adjustment
pursuant to clause (2) or (3) above if made by the Company or a Subsidiary
during such period, EBITDA and Consolidated Interest Expense for such period
shall be calculated after giving pro forma effect thereto as if such Asset
Disposition, Investment or acquisition occurred on the first day of such period.
For purposes of this definition, whenever pro forma effect is to be given to an
acquisition of assets, the amount of income or earnings relating thereto and the
amount of Consolidated Interest Expense associated with any Indebtedness
Incurred in connection therewith, the pro forma calculations shall be determined
in good faith by a responsible financial or accounting officer of the Company.
If any Indebtedness bears a floating rate of interest and is being given pro
forma effect, the interest of such Indebtedness shall be calculated as if the
rate in effect on the date of determination had been the applicable rate for the
entire period (taking into account any Interest Rate Agreement applicable to
such Indebtedness if such Interest Rate Agreement has a remaining term in excess
of twelve months).
"Consolidated Interest Expense" means, for any period, the total
interest expense of the Company and its consolidated Subsidiaries, plus, to the
extent not included in such total interest expense, and to the extent incurred
by the Company or its Subsidiaries, (i) interest expense attributable to capital
leases, (ii) amortization of debt discount and debt issuance cost, (iii)
capitalized interest, (iv) non-cash interest expenses, (v) commissions,
discounts and other fees and charges owed with respect to letters of credit and
bankers' acceptance financing, (vi) net costs associated with Hedging
Obligations (including amortization of fees), (vii) Preferred Stock dividends in
respect of all Preferred Stock held by Persons other than the Company or a
Wholly Owned Subsidiary, (viii) interest incurred in connection with Investments
in discontinued operations, (ix) interest accruing on any Indebtedness of any
other Person to the extent such Indebtedness is Guaranteed by the Company or any
Subsidiary and (x) the cash contributions to any employee stock ownership plan
or similar trust to the extent such contributions are used by such plan or trust
to pay interest or fees to any Person (other than the Company) in connection
with Indebtedness Incurred by such plan or trust.
"Consolidated Net Income" means, for any period, the net income of the
Company and its consolidated Subsidiaries; provided, however, that there shall
not be included in such Consolidated Net Income: (i) any net income of any
Person if such Person is not a Subsidiary, except that (A) subject to the
exclusion contained in clause (iv) below, the Company's equity in the net income
of any such Person for such period shall be included in such Consolidated Net
Income up to the aggregate amount of cash actually distributed by such Person
during such period to the Company or a Subsidiary as a dividend or other
distribution (subject, in the case of a dividend or other distribution paid to a
Subsidiary to the limitations contained in clause (iii) below) and (B) the
Company's equity in a net loss of any such Person for such period shall be
included in determining such Consolidated Net Income, (ii) any net income (or
loss) of any Person acquired by the Company or a Subsidiary in a pooling of
interests transaction for any period prior to the date of such acquisition,
(iii) any net income of any Subsidiary that is not a Wholly Owned Subsidiary if
such Subsidiary is subject to contractual, governmental, or regulatory
restrictions, directly or indirectly, on the payment of dividends or the making
of distributions by such Subsidiary, directly or indirectly, to the Company,
except that (A) subject to the exclusion contained in clause (iv) below, the
Company's equity in the net income of any such Subsidiary for such period shall
be included in such Consolidated Net Income up to the aggregate amount of cash
actually distributed by such Subsidiary during such period to the Company or
another Subsidiary as a dividend or other distribution (subject, in the case of
a dividend or other distribution paid to another Subsidiary that is not a Wholly
Owned Subsidiary, to the limitation contained in this clause) and (B) the
Company's equity in a net loss of any such Subsidiary for such period shall be
included in determining such Consolidated Net Income, (iv) any gain (but not
loss) realized upon the sale or other disposition of any assets of the Company
or its consolidated Subsidiaries (including pursuant to any sale and leaseback
arrangement) that is not sold or otherwise disposed of in the ordinary course of
business and any gain (but not loss) realized upon the sale or other disposition
of any Capital Stock of any Person, (v) extraordinary gains or losses, and (vi)
the cumulative effect of a change in accounting principles.
"Consolidated Net Worth" means the total of the amounts shown on the
balance sheet of the Company and its consolidated Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the Company's most
recently ended fiscal quarter for which internal financial statements are
available prior to the taking of any action for the purpose of which the
determination is being made, as (i) the par or stated value of all outstanding
Capital Stock of the Company plus (ii) paid-in capital or capital surplus
relating to such Capital Stock
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plus (iii) any retained earnings or earned surplus less (A) any accumulated
deficit and (B) any amounts attributable to Disqualified Stock.
"Currency Agreement" means any foreign currency exchange contract,
currency swap agreement or other similar agreement or arrangement designed and
entered into to protect the Company or any Subsidiary against fluctuations in
currency exchange rates.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default (as defined herein).
"Disqualified Stock" means, with respect to any Person, any Capital
Stock that by its terms (or by the terms of any security into which it is
Convertible or for which it is exchangeable) or upon the happening of any event
(i) matures or is mandatorily redeemable pursuant to a sinking fund obligation
or otherwise, (ii) is convertible or exchangeable for Indebtedness or
Disqualified Stock or (iii) is redeemable at the option of the holder thereof,
in whole or in part, in each case on or prior to the first anniversary of the
Stated Maturity of the Exchange Notes; provided, however, that any Capital Stock
that would not constitute Disqualified Stock but for provisions thereof giving
holders thereof the right to require such Person to repurchase or redeem such
Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the first anniversary of the Stated Maturity of the Exchange
Notes shall not constitute Disqualified Stock if the "asset sale" or "change of
control" provisions applicable to such Capital Stock are not more favorable to
the holders of such Capital Stock than the provisions described under "--Certain
Covenants--Limitation on Sales of Assets and Subsidiary Stock" and "--Change of
Control."
"EBITDA" for any period means the sum of Consolidated Net Income, plus
Consolidated Interest Expense plus the following to the extent deducted in
calculating such Consolidated Net Income: (a) all income tax expense of the
Company and its Subsidiaries, (b) depreciation expense and (c) amortization
expense, in each case for such period. Notwithstanding the foregoing, the
provision for taxes based on the income or profits of, and the depreciation and
amortization of, a Subsidiary that is not a Wholly Owned Subsidiary shall be
added to Consolidated Net Income to compute EBITDA only to the extent (and in
the same proportion) that the net income of such Subsidiary was included in
calculating Consolidated Net Income and only if a corresponding amount would be
permitted at the date of determination to be dividended to the Company by such
Subsidiary without prior approval (that has not been obtained), pursuant to the
terms of its charter and all agreements, instruments, judgments, decrees,
orders, statutes, rules, and governmental regulations applicable to such
Subsidiary or its stockholders.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"GAAP" means generally accepted accounting principles in the United
States of America as in effect as of the Issue Date, including those set forth
(i) in the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants, (ii) statements and
pronouncements of the Financial Accounting Standards Board, (iii) in such other
statements by such other entity as approved by a significant segment of the
accounting profession, and (iv) the rules and regulations of the SEC governing
the inclusion of financial statements (including pro forma financial statements)
in periodic reports required to be filed pursuant to Section 13 of the Exchange
Act, including opinions and pronouncements in staff accounting bulletins and
similar written statements from the accounting staff of the SEC.
"Guarantee" means any obligation, contingent, or otherwise, of any
Person directly or indirectly guaranteeing any Indebtedness or other obligation
of any Person and any obligation, direct or indirect, contingent or otherwise,
of such Person (i) to purchase or pay (or advance or supply funds for the
purchase or payment of) such Indebtedness or other obligation of such Person
(whether arising by virtue of partnership arrangements, or by agreements to keep
well, to purchase assets, goods, securities or services, to take-or-pay or to
maintain financial statement conditions or otherwise) or (ii) entered into for
the purpose of assuring in any other manner the obligee of such Indebtedness or
other obligation of the payment thereof or to protect such obligee against loss
in respect thereof (in whole or in part); provided, however, that the term
"Guarantee" shall not include endorsements for collection or deposit in the
ordinary course of business. The term "Guarantee" used as a verb has a
corresponding meaning. The term "Guarantor" means any Person Guaranteeing any
obligation.
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"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by such
Subsidiary at the time it becomes a Subsidiary. The term "Incurrence" when used
as a noun shall have a correlative meaning. The accretion of principal of a
non-interest bearing or other discount security shall be deemed the Incurrence
of Indebtedness.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of (A) indebtedness of such Person for money borrowed and (B)
indebtedness evidenced by notes, debentures, bonds or other similar instruments
for the payment of which such Person is responsible or liable, (ii) all Capital
Lease Obligations of such Person, (iii) all obligations of such Person issued or
assumed as the deferred purchase price of property or services, all conditional
sale obligations of such Person and all obligations of such Person under any
title retention agreement (other than (x) customary reservations or retentions
of title under agreements with suppliers entered into in the ordinary course of
business, (y) trade debt incurred in the ordinary course of business and due
within six months of the incurrence thereof and (z) obligations incurred under a
pension, retirement, or deferred compensation program or arrangement regulated
under the Employee Retirement Income Security Act of 1974, as amended, or the
laws of a foreign government), (iv) all obligations of such Person for the
reimbursement of any obligor on any letter of credit, bank guaranty, banker's
acceptance or similar credit transaction (other than obligations with respect to
letters of credit and bank guaranties (A) issued to guaranty or support the
payment of performance bonds, workers' compensation claims relating to the
Company's employees, insurance claims and contested appeals and compliance with
operational and regulatory obligations incurred in the ordinary course of
business and (B) securing obligations (other than obligations described in (i)
through (iii) above) entered into in the ordinary course of business of such
Person to the extent such letters of credit are not drawn upon or, if and to the
extent drawn upon, such drawing is reimbursed no later than the tenth Business
Day following receipt by such Person of a demand for reimbursement following
payment on the letter of credit), (v) the amount of all obligations of such
Person with respect to the redemption, repayment, or other repurchase of any
Disqualified Stock or, with respect to any subsidiary of such Person, any
Preferred Stock (but excluding, in each case, any accrued dividends), (vi) all
obligations of the type referred to in clauses (i) through (v) of other Persons
and all dividends of other Persons for the payment of which, in either case,
such Person is responsible or liable, directly or indirectly, as obligor,
guarantor or otherwise, including by means of any Guarantee, (vii) all
obligations of the type referred to in clauses (i) through (vi) of other Persons
secured by any Lien on any property or asset of such Person (whether or not such
obligation is assumed by such Person), the amount of such obligation being
deemed to be the lesser of the value of such property or assets or the amount of
the obligation so secured and (viii) to the extent not otherwise included in
this definition, Hedging Obligations of such Person. The amount of Indebtedness
of any Person at any date shall be the outstanding balance at such date of all
unconditional obligations as described above and the maximum liability, upon the
occurrence of the contingency giving rise to the obligation, of any contingent
obligations at such date.
"Insurance Subsidiary" means any Subsidiary, whether now owned or
hereafter acquired, that is authorized or admitted to carry on or transact the
business of selling, issuing or underwriting insurance or reinsurance, in any
state.
"Interest Rate Agreement" means any interest rate swap agreement,
interest rate cap agreement or other financial agreement or arrangement designed
and entered into to protect the Company or any Subsidiary against fluctuations
in interest rates.
"Invested Assets" means the amount on a consolidated basis of a Person's
Investments as reflected on such Person's most recent quarterly balance sheet
prepared in accordance with GAAP.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of such Person) or other
extensions of credit (including by way of Guarantee or similar arrangement) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account
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or use of others), or any purchase or acquisition of Capital Stock, Indebtedness
or other similar instruments issued by such Person.
"Investment-Grade Securities" means: (i) U.S. Government Obligations;
(ii) any certificate of deposit, maturing not more than 270 days after the date
of acquisition, issued by, or time deposit of, a commercial banking institution
that has combined capital and surplus of not less than $100.0 million or its
equivalent in foreign currency, whose debt is rated at the time as of which any
investment therein is made, "A" (or higher) according to S&P or Moody's, or if
neither S&P nor Moody's shall then exist or if the debt of such bank has not
been rated by S&P or Moody's, the equivalent of such rating by any other
internationally recognized securities rating agency; (iii) commercial paper,
maturing not more than 270 days after the date of acquisition, issued by a
corporation (other than an Affiliate or Subsidiary of the Issuer) with a rating,
at the time as of which any investment therein is made, of "A-1" (or higher)
according to S&P or "P-1," (or higher) according to Moody's, or if neither S&P
nor Moody's shall then exist, the equivalent of such rating by any other
internationally recognized securities rating agency; (iv) any banking
acceptances, any private loans or any money market deposit accounts, in each
case, issued or offered by any commercial bank having capital and surplus in
excess of $100.0 million or its equivalent in foreign currency, whose debt or
credit paying ability is rated at the time as of which any investment therein is
made, "A" (or higher) according to S&P or Moody's, or if neither S&P nor Moody's
shall then exist or if the debt or credit paying ability of such bank has not
been rated by S&P or Moody's, the equivalent of such rating by any other
internationally recognized securities rating agency; (v) any other debt
securities or debt instruments with a rating of "BBB-1" or higher by S&P,
"Baa-3," or higher by Moody's, Class "2" or higher by the NAIC or the equivalent
of such rating by S&P, Moody's or the NAIC, or if none of S&P, Moody's and the
NAIC shall then exist or if such security has not been rated by S&P, Moody's or
the NAIC, the equivalent of such rating by any other internationally recognized
securities rating agency; and (vi) any fund investing exclusively in investments
of the types described in clauses (i) through (v) above.
"Issue Date" means the date on which the Old Notes were originally
issued, December 3, 1997.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien
or charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Marketable Securities" means securities listed on a national securities
exchange which have a minimum weekly trading volume of at least 100,000 shares.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Available Cash" from an Asset Disposition means cash payments
received therefrom (including any cash payments received by way of deferred
payment of principal pursuant to a note or installment receivable or otherwise
but only as and when received, but excluding any other consideration received in
the form of assumption by the acquiring Person of Indebtedness or other
obligations relating to such properties or assets or received in any other
non-cash form) in each case net of (i) all legal, title, and recording tax
expenses, commissions and other fees and expenses incurred, and all federal,
state, provincial, foreign and local taxes required to be accrued as a liability
under GAAP, as a consequence of such Asset Disposition, (ii) all payments made
on any Indebtedness which is secured by any assets subject to such Asset
Disposition, in accordance with the terms of any Lien upon or other security
agreement of any kind with respect to such assets, or which must by its terms,
or in order to obtain a necessary consent to such Asset Disposition, or by
applicable law be repaid out of the proceeds from such Asset Disposition, (iii)
all distributions and other payments required to be made to minority interest
holders in Subsidiaries or joint ventures as a result of such Asset Disposition,
and (iv) the deduction of appropriate amounts provided by the seller as a
reserve, in accordance with GAAP, against any liabilities associated with the
property or other assets disposed in such Asset Disposition and retained by the
Company or any Subsidiary after such Asset Disposition.
"Net Cash Proceeds," with respect to any issuance or sale of Capital
Stock, means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
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"Non-Investment-Grade Investments" means any Investments (including,
without limitation, debt securities, equity securities, real estate investments
and real estate loans) other than Investment Grade Securities.
"Permitted Investment" means an Investment by the Company or any
Subsidiary in (i) a Person that will, upon the making of such Investment, be or
become a Subsidiary; provided, however, that the primary business of such
Subsidiary is a Related Business, (ii) a Person if as a result of such
Investment such other Person is merged or consolidated with or into, or
transfers or conveys all or substantially all its assets to, the Company or a
Subsidiary; provided, however, that such Person's primary business is a Related
Business, (iii) Temporary Cash Investments, (iv) any demand deposit account with
an Approved Lender, (v) receivables owing to the Company or any Subsidiary if
created or acquired in the ordinary course of business and payable or
dischargeable in accordance with customary trade terms; provided, however, that
such trade terms may include such concessionary trade terms as the Company or
any such Subsidiary deems reasonable under the circumstances, (vi) payroll,
travel, and similar advances to cover matters that are expected at the time of
such advances ultimately to be treated as expenses for accounting purposes and
that are made in the ordinary course of business, (vii) loans or advances to
employees made in the ordinary course of business consistent with past practices
of the Company or such Subsidiary, (viii) stock, obligations or securities
received in settlement of debts created in the ordinary course of business and
owing to the Company or any Subsidiary, or in satisfaction of judgments, (ix)
any Person to the extent such Investment represents the non-cash portion of the
consideration received for an Asset Disposition as permitted pursuant to the
covenant described under "--Certain Covenants--Limitation on Sales of Assets and
Subsidiary Stock," (x) any Affiliate (the primary business of which is a Related
Business) that is not a Subsidiary (other than the Company); provided, all such
Investments outstanding at any one time under this clause (x) shall not exceed
$3.0 million, (xi) Investments by the Insurance Subsidiaries in Investment-Grade
Securities, (xii) Investments by the Insurance Subsidiaries in Non-
Investment-Grade Securities; provided that on the date such Investment is made,
the fair market value of such Investment when taken with all other such
Investments shall not exceed in the aggregate 15% of the total Invested Assets
of the Insurance Subsidiaries taken as a whole (except that investments
permitted to be classified as part of the workers' compensation deposit under
California Insurance Code Section 11715 and the regulations promulgated
thereunder shall not be classified as Non-Investment Grade for purposes of
determining the percentage of Non- Investment-Grade Securities held); provided
further that such Investment in other Investment-Grade Securities and
Non-Investment-Grade Securities in any single issuer, together with all other
investments in the same issuer, as determined at the date such Investment is
made and after giving effect thereto, shall not exceed in the aggregate those
percentages of the total Invested Assets of the Insurance Subsidiaries permitted
by state law or regulations (as they may be amended from time to time)
determined as of the end of the preceding calendar quarter, and (xiii)
Investments in an aggregate amount not to exceed $20.0 million at any one time
outstanding.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization,
government, or any agency, instrumentality, or political subdivision thereof, or
any other entity.
"Preferred Stock," as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes (however designated) which is
preferred as to the payment of dividends, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation.
"Principal" of an Exchange Note means the principal of the Exchange Note
plus the premium, if any, payable on the Exchange Note which is due or overdue
or is to become due at the relevant time.
"Refinance" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, redeem, defease or retire, or to issue other
Indebtedness in exchange or replacement for, such indebtedness.
"Refinanced" and "Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of the Company or any Subsidiary existing on the Issue Date or
incurred in compliance with the Indenture including Indebtedness that Refinances
Refinancing Indebtedness; provided, however, that (i) such Refinancing
Indebtedness has a Stated Maturity no earlier than the Stated Maturity of the
Indebtedness being Refinanced, (ii) such Refinancing Indebtedness has an Average
Life at the time such Refinancing Indebtedness is Incurred that is equal to or
greater
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than the Average Life of the Indebtedness being Refinanced and (iii) such
Refinancing Indebtedness has an aggregate principal amount (or if Incurred with
original issue discount, an aggregate issue price) that is equal to or less than
the aggregate principal amount (or if Incurred with original issue discount, the
aggregate accrued value) then outstanding or committed (plus fees and expenses,
including any premium and defeasance costs) under the Indebtedness being
Refinanced; provided further, however, that Refinancing Indebtedness shall not
include (x) Indebtedness of a Subsidiary that Refinances Indebtedness of the
Company or (y) Indebtedness of the Company or a Subsidiary that Refinances
Indebtedness of another Subsidiary.
"Related Business" means the business of providing workers' compensation
insurance and any business related, ancillary, or complementary to such business
of the Company or its Subsidiaries.
"Restricted Payment" with respect to any Person means (i) the
declaration or payment of any dividends or any other distributions of any sort
in respect of its Capital Stock (including any payment in connection with any
merger or consolidation involving such Person) or similar payment to the direct
or indirect holders of its Capital Stock (other than dividends or distributions
payable solely in its Capital Stock (other than Disqualified Stock)) and
dividends or distributions payable solely to the Company or a Subsidiary, and
other than pro rata dividends or other distributions made by a Subsidiary that
is not a Wholly Owned Subsidiary to minority stockholders (or owners of an
equivalent interest in the case of a Subsidiary that is an entity other than a
corporation), (ii) the purchase, redemption or other acquisition or retirement
for value of any Capital Stock of the Company held by any Person or of any
Capital Stock of a Subsidiary held by any Affiliate of the Company (other than a
Subsidiary), including the exercise of any option to exchange any Capital Stock
(other than into Capital Stock of the Company that is not Disqualified Stock),
(iii) the purchase, repurchase, redemption, defeasance, or other acquisition or
retirement for value, prior to scheduled maturity, scheduled repayment, or
scheduled sinking fund payment of any Subordinated Obligations (other than the
purchase, repurchase, or other acquisition of Subordinated Obligations purchased
in anticipation of satisfying a sinking fund obligation, principal installment
or final maturity, in each case due within one year of the date of acquisition),
or (iv) the making of any Investment in any Person (other than a Permitted
Investment).
"SEC" means the Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of the Company secured by
a Lien.
"Senior Indebtedness" means, with respect to the Company, (i)
Indebtedness of such Person, whether outstanding on the Issue Date or thereafter
incurred and (ii) accrued and unpaid interest (including interest accruing on or
after the filing of any petition in bankruptcy or for reorganization relating to
such Person, whether or not the claim for such interest is allowed as a claim
after such filing) in respect of (A) Indebtedness of such Person for money
borrowed and (B) Indebtedness evidenced by notes, debentures, bonds, or other
similar instruments for the payment of which such Person is responsible or
liable unless, in the instrument creating or evidencing the same or pursuant to
which the same is outstanding, it is provided that such obligations are
subordinate in right of payment to the Exchange Notes; provided, however, that
Senior Indebtedness shall not include (1) any obligation of such Person to any
Subsidiary of such Person, (2) any liability for federal, state, local, or other
taxes owed or owing by such Person, (3) any accounts payable or other liability
to trade creditors arising in the ordinary course of business (including
guarantees thereof or instruments evidencing such liabilities), (4) any
Indebtedness of such Person (and any accrued and unpaid interest in respect
thereof) which is subordinate or junior in any respect to any other Indebtedness
or other obligation of such Person, or (5) that portion of any Indebtedness
which at the time of incurrence is incurred in violation of the Indenture.
"Senior Subordinated Indebtedness" means the Exchange Notes and any
other Indebtedness of the Company that specifically provides that such
Indebtedness is to rank pari passu with the Exchange Notes in right of payment
and is not subordinated by its terms in right of payment to any Indebtedness or
other obligation of the Company that is not Senior Indebtedness.
"S&P" means Standard & Poor's Corporation and its successors.
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"Stated Maturity" means, with respect to any security, the date
specified in such security as the fixed date on which the final payment of
principal of such security is due and payable, including pursuant to any
mandatory redemption provision (but excluding any provision providing for the
repurchase of such security at the option of the holder thereof upon the
happening of any contingency unless such contingency has occurred).
"Subordinated Obligation" means any Indebtedness of the Company (whether
outstanding on the Issue Date or thereafter Incurred) that is subordinate or
junior in right of payment to the Exchange Notes pursuant to a written agreement
to that effect.
"Subsidiary" means any corporation, association, partnership, business
trust, or other business entity of which more than 50% of the total voting power
of shares of Capital Stock or other interests (including partnership interests)
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers, or trustees thereof is at the time owned or
controlled, directly or indirectly, by the Company or by one or more
Subsidiaries, or by the Company and one or more Subsidiaries.
"Surviving Person" means, with respect to any Person involved in any
merger, consolidation, or other business combination or the sale, assignment,
transfer, lease, conveyance, or other disposition of all or substantially all of
such Person's assets, the Person formed by or surviving such transaction or the
Person to which such disposition is made.
"Temporary Cash Investments" means any of the following: (a) U.S.
Government Obligations, (b) time deposits and certificates of deposit,
Eurodollar time deposits and Eurodollar certificates of deposit of any United
States commercial bank of recognized standing (y) having capital and surplus in
excess of $500.0 million and (z) whose short-term commercial paper rating from
S&P is at least A-1 or the equivalent thereof or from Moody's is at least P-1 or
the equivalent thereof (any such bank being an "Approved Lender"), in each case
with maturities of not more than 270 days from the date of acquisition, (c)
commercial paper and variable or fixed rate notes issued by an Approved Lender
(or by the parent company thereof) and maturing within six months of the date of
acquisition, (d) repurchase agreements entered into by a Person with a bank or
trust company or recognized securities dealer having capital and surplus in
excess of $500.0 million for (i) U.S. Government Obligations, (ii) time deposits
or certificates of deposit described under subsection (b) above, or (iii)
commercial paper or other notes described under subsection (c) above, in which,
in each such case, such bank, trust company or dealer shall have a perfected
first priority security interest (subject to no other Liens) and having, on the
date of purchase thereof, a fair market value of at least 100% of the amount of
the repurchase obligations, (e) obligations of any State of the United States or
any political subdivision thereof, the interest with respect to which is exempt
from federal income taxation under Section 103 of the United States Internal
Revenue Code, having a long term rating of at least AA- or Aa-3 by S&P or
Moody's, respectively, and maturing within three years from the date of
acquisition thereof, (f) Investments in municipal auction preferred stock (i)
rated AAA (or the equivalent thereof) or better by S&P or Aaa (or the equivalent
thereof) or better by Moody's and (ii) with dividends that reset at least once
every 365 days and (g) Investments, classified in accordance with GAAP as
current assets, in money market investment programs registered under the
Investment Company Act of 1940, as amended, in each case which are administered
by reputable financial institutions having capital of at least $100,000,000 and
the portfolios of which are limited to Investments of the character described in
clauses (a), (b), (c), (e) and (f) above.
"U.S. Government Obligations" means securities that are (i) direct
obligations of the United States of America the timely payment of which its full
faith and credit is pledged or (ii) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States of
America the timely payment of which is unconditionally guaranteed as a full
faith and credit obligation by the United States of America, and shall also
include a depositary receipt issued by a bank (as defined in Section 3(a)(2) of
the Securities Act of 1933), as custodian with respect to any such U.S.
Government Obligation or a specific payment of principal of or interest on any
such U.S. Government Obligation held by such custodian for the account of the
holder of such depositary receipt; provided that (except as required by law)
such custodian is not authorized to make any deduction from the amount payable
to the holder of such depositary receipt from any amount received by the
custodian in respect of the U.S. Government Obligation or the specific payment
of principal of or interest on the U.S. Government Obligation evidenced by such
depositary receipt.
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"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers, or trustees thereof.
"Wholly Owned Subsidiary" means a Subsidiary all the Capital Stock
(other than directors' qualifying shares and shares held by other Persons, to
the extent such shares are required by applicable law to be held by a Person
other than the Company or a Subsidiary) of which is owned by the Company or by
one or more Wholly Owned Subsidiaries, or by the Company and one or more Wholly
Owned Subsidiaries.
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RELATIONSHIP AMONG THE EXCHANGE PREFERRED SECURITIES, THE
EXCHANGE NOTES AND THE EXCHANGE GUARANTEE
Where the context requires, descriptions of the voting rights and
liquidation rights of, and rights to Distributions on, the Exchange Preferred
Securities assume that all of the outstanding Preferred Securities will be
exchanged for Exchange Preferred Securities in the Exchange Offer. To the extent
any Preferred Securities are not so exchanged, pursuant to the Declaration, the
Preferred Securities and Exchange Preferred Securities will rank pari passu in
all respects and will have equal voting rights, liquidation rights and rights to
Distributions.
FULL AND UNCONDITIONAL GUARANTEE
Payments of Distributions and other amounts due on the Exchange
Preferred Securities (to the extent the Trust has funds legally available for
the payment of such Distributions) are irrevocably guaranteed by the Company as
and to the extent set forth under "Description of the Exchange Guarantee." Taken
together, the Company's obligations under the Exchange Notes, the Indenture, the
Declaration and the Exchange Guarantee provide, in effect, a full, irrevocable
and unconditional guarantee of payments of Distributions and other amounts due
on the Exchange Preferred Securities. No single document standing alone or
operating in conjunction with fewer than all of the other documents constitutes
such guarantee. It is only the combined operation of these documents that has
the effect of providing a full, irrevocable and unconditional guarantee of the
Trust's obligations under the Exchange Preferred Securities. If and to the
extent that the Company does not make payments on the Exchange Notes, the Trust
will not pay Distributions or other amounts due on its Exchange Preferred
Securities. The Exchange Guarantee does not cover payment of Distributions when
the Trust does not have sufficient funds legally available to pay such
Distributions. In such event, the remedy of a holder of an Exchange Preferred
Security is to institute a legal proceeding directly against the Company on
behalf of the Trust for enforcement of the Company's obligations on the Exchange
Notes. The obligations of the Company under the Exchange Guarantee are
subordinate and junior in right of payment to all Senior Indebtedness of the
Company.
SUFFICIENCY OF PAYMENTS
As long as payments of interest and other payments are made when due on
the Exchange Notes, such payments will be sufficient to cover Distributions and
other payments due on the Exchange Preferred Securities, primarily because (i)
the aggregate principal amount of the Senior Subordinated Notes will be equal to
the sum of the aggregate stated liquidation amount of the Exchange Preferred
Securities and Common Securities, (ii) the interest rate and interest and other
payment dates on the Exchange Notes will match the distribution rate and
distribution and other payment dates for the Exchange Preferred Securities,
(iii) the Indenture provides that the Company shall pay, and the Trust shall not
be obligated to pay, directly or indirectly, any and all costs, expenses and
liabilities of the Trust except the Trust's obligations to holders of its
Exchange Preferred Securities under such Exchange Preferred Securities and (iv)
the Declaration further provides that the Trust will not engage in any activity
that is not consistent with the limited purposes of the Trust.
Notwithstanding anything to the contrary in the Indenture, the Company
has the right to set-off any payment it is otherwise required to make thereunder
with and to the extent the Company has theretofore made, or is concurrently on
the date of such payment making, a payment under the Exchange Guarantee.
ENFORCEMENT RIGHTS OF HOLDERS OF EXCHANGE PREFERRED SECURITIES
If a Declaration Event of Default has occurred and is continuing and is
attributable to the failure of the Company to make payments on the Exchange
Notes, then holders of not less than 25% in liquidation amount of outstanding
Exchange Preferred Securities have the right to appoint a trustee (the "Special
Trustee") to act on behalf of all holders of Exchange Preferred Securities. The
Special Trustee appointed in accordance with the preceding sentence will
represent the holders of all outstanding Exchange Preferred Securities unless
the holders of at least a majority in liquidation amount of the outstanding
Exchange Preferred Securities appoint an alternative Special Trustee in which
case the Special Trustee appointed in accordance with the preceding sentence
will be required to
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resign as Special Trustee. At no time can there be more than one Special Trustee
acting on behalf of the holders of Exchange Preferred Securities. The Special
Trustee will have the right to directly institute a proceeding (a "Trustee
Action") for enforcement of payment to the holders of Exchange Preferred
Securities of the principal of or interest on the Exchange Notes having a
principal amount equal to the aggregate liquidation amount of the Exchange
Preferred Securities outstanding on or after the respective due date specified
in the Exchange Notes. The holders of the Exchange Preferred Securities would
not be able to exercise directly any other remedies available to the holders of
the Exchange Notes unless the Preferred Trustee or the Special Trustee, acting
for the benefit of the Preferred Trustee, fails to do so. In such event, the
holders of at least 25% in aggregate liquidation amount of outstanding Exchange
Preferred Securities would have, to the fullest extent permitted by law, a right
to institute such proceedings. In addition, if the Company fails to make
interest or other payments on the Exchange Notes when due, the Indenture
provides that a holder of Exchange Preferred Securities may institute, to the
fullest extent permitted by law, legal proceedings directly against the Company
to enforce the Preferred Trustee's rights under the Exchange Notes without first
instituting a legal proceeding against the Preferred Trustee, the Trust or any
other person or entity. See "Description of the Exchange Preferred
Securities--Voting Rights."
If the Company fails to make a payment under the Exchange Guarantee, a
holder of an Exchange Preferred Security may institute a legal proceeding
directly against the Company to enforce its rights under the Exchange Guarantee
without first instituting a legal proceeding against the Guarantee Trustee, the
Trust or any other person or entity. If the Company fails to make payments in
respect of the Trust's costs and expenses as required by the Indenture, a
creditor of the Trust may institute a legal proceeding directly against the
Company to enforce such payments.
In the event of payment defaults under, or acceleration of, Senior
Indebtedness of the Company, the subordination provisions of the Indenture
provide that no payments may be made in respect of the Exchange Notes until such
Senior Indebtedness has been paid in full or any payment default thereunder has
been cured or waived. Failure to make required payments on the Exchange Notes
would constitute an Event of Default.
LIMITED PURPOSE OF THE TRUST
The Exchange Preferred Securities evidence undivided beneficial
ownership interests in the Trust, and the Trust exists for the sole purpose of
issuing the Trust Securities and investing the proceeds thereof in the Senior
Subordinated Notes. A principal difference between the rights of a holder of an
Exchange Preferred Security and a holder of an Exchange Note is that a holder of
an Exchange Note is entitled to receive from the Company the principal amount of
and interest accrued on Exchange Notes held, while a holder of Exchange
Preferred Securities is entitled to receive distributions from the Trust (or
from the Company under the Exchange Guarantee) if and to the extent the Trust
has funds available for the payment of such distributions.
RIGHTS UPON DISSOLUTION
Upon any voluntary or involuntary dissolution, winding-up, or
liquidation of any Trust involving the liquidation of the Exchange Notes, after
satisfaction of liabilities to creditors of the Trust, the holders of the
Exchange Preferred Securities will be entitled to receive, out of assets held by
such Trust, the Liquidation Distribution in cash. See "Description of the
Exchange Preferred Securities--Liquidation Distribution Upon Dissolution." Upon
any voluntary or involuntary liquidation or bankruptcy of the Company, the
Preferred Trustee, as holder of the Exchange Notes, would be a subordinated
creditor of the Company, subordinated in right of payment to all Senior
Indebtedness, but entitled to receive payment in full of principal and interest,
before any stockholders of the Company receive payments or distributions.
Because the Company is the guarantor under the Exchange Guarantee and has agreed
to pay for all costs, expenses and liabilities of the Trust (other than the
Trust's obligations to the holders of its Exchange Preferred Securities), the
positions of a holder of the Exchange Preferred Securities and a holder of the
Exchange Notes relative to other creditors and to stockholders of the Company in
the event of liquidation or bankruptcy of the Company are expected to be
substantially the same.
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DESCRIPTION OF OLD SECURITIES
The terms of the Old Securities are identical in all material respects
to the Exchange Securities, except that (i) the Old Securities have not been
registered under the Securities Act and are entitled to certain rights under the
Registration Rights Agreement (which rights will terminate upon consummation of
the Exchange Offer, except under limited circumstances), (ii) the Exchange
Preferred Securities will not contain the $100,000 minimum liquidation amount
transfer restriction and certain other restrictions on transfer applicable to
the Preferred Securities, (iii) the Exchange Preferred Securities will not
provide for any increase in the Distribution rate thereon, (iv) the Exchange
Notes will not contain the $100,000 minimum principal amount transfer
restriction and (v) the Exchange Notes will not provide for any increase in the
interest rate thereon. The Preferred Securities provide that, in the event that
a registration statement relating to the Exchange Offer has not been filed by
December 31, 1997 and declared effective by June 1, 1998, or, in certain limited
circumstances, in the event a shelf registration statement (the "Shelf
Registration Statement") with respect to the resale of the Preferred Securities
is not declared effective by June 1, 1998, then interest will accrue (in
addition to the stated interest rate on the Old Notes) at the rate of 0.25% per
annum on the principal amount of the Old Notes and Distributions will accrue (in
addition to the stated Distribution rate on the Preferred Securities) at the
rate of 0.25% per annum on the liquidation amount of the Preferred Securities,
for the period from the occurrence of such event until such time as such
required Exchange Offer is consummated or any required Shelf Registration
Statement is effective. The Exchange Securities are not, and upon consummation
of the Exchange Offer the Preferred Securities will not be, entitled to any such
additional interest or Distributions. Accordingly, holders of Preferred
Securities should review the information set forth under "Risk
Factors--Consequences of a Failure to Exchange Preferred Securities" and
"Description of Exchange Preferred Securities."
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Riordan & McKinzie, a Professional Corporation,
special United States federal income tax counsel to the Company and the Trust
("Tax Counsel"), the following summary accurately describes the material United
States federal income tax consequences of the purchase, ownership and
disposition of the Exchange Preferred Securities. Unless otherwise stated, this
summary deals only with Exchange Preferred Securities held as capital assets by
United States Persons (defined below) who purchased the Preferred Securities
upon original issuance at their original issue price. As used herein, a "United
States Person" means (i) a person that is a citizen or resident of the United
States, (ii) a corporation, partnership or other entity created or organized in
or under the laws of the United States or any political subdivision thereof,
(iii) an estate the income of which is subject to United States federal income
taxation regardless of its source or (iv) any trust if a court within the United
States is able to exercise primary supervision over the administration of such
trust and one or more United States fiduciaries have the authority to control
all the substantial decisions of such trust. The tax treatment of a holder may
vary depending on such holder's particular situation. This summary does not
address all the tax consequences that may be relevant to a particular holder or
to holders who may be subject to special tax treatment, such as banks, real
estate investment trusts, regulated investment companies, insurance companies,
dealers in securities or currencies, or tax-exempt investors. In addition, this
summary does not include any description of any alternative minimum tax
consequences or the tax laws of any state, local, or foreign government that may
be applicable to a holder of Exchange Preferred Securities. This summary is
based on the Internal Revenue Code of 1986, as amended (the "Code"), the
Treasury Regulations promulgated thereunder and administrative and judicial
interpretations thereof, as of the date hereof, all of which are subject to
change, possibly on a retroactive basis. The authorities on which this summary
is based are subject to various interpretations and the opinions of Tax Counsel
are not binding on the Internal Revenue Service ("IRS") or the courts, either of
which could take a contrary position. Moreover, no rulings have been or will be
sought by the Company from the IRS with respect to the transactions described
herein. Accordingly, there can be no assurance that the IRS will not challenge
the opinions expressed herein or that a court would not sustain such a
challenge. Nevertheless, Tax Counsel has advised that it is of the view that, if
challenged, the opinions expressed herein would be sustained by a court with
jurisdiction in a properly presented case.
HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE EXCHANGE
PREFERRED SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL,
FOREIGN, AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN UNITED STATES
FEDERAL OR OTHER TAX LAWS. FOR A DISCUSSION OF THE POSSIBLE REDEMPTION OF THE
EXCHANGE PREFERRED SECURITIES UPON THE OCCURRENCE OF CERTAIN TAX EVENTS SEE
"DESCRIPTION OF THE EXCHANGE PREFERRED SECURITIES--TAX EVENT OR INVESTMENT
COMPANY EVENT REDEMPTION OR DISTRIBUTION."
EXCHANGE OF SECURITIES
The exchange of Preferred Securities for Exchange Preferred Securities
will not be a taxable event to a holder for United States federal income tax
purposes. Under applicable Treasury Regulations, the exchange of Preferred
Securities for Exchange Preferred Securities pursuant to the Exchange Offer will
not be treated as an "exchange" for United States federal income tax purposes.
Accordingly, the Exchange Preferred Securities will have the same issue price as
the Preferred Securities, and a holder will have the same adjusted tax basis and
holding period in the Exchange Preferred Securities as the holder had in the
Preferred Securities immediately before the exchange.
CLASSIFICATION OF THE TRUST
In connection with the issuance of the Exchange Preferred Securities,
Tax Counsel is of the opinion that under current law and assuming full
compliance with the terms of the Declaration, the Trust will be classified as a
grantor trust for United States federal income tax purposes and not as an
association taxable as a corporation. Accordingly, for United States federal
income tax purposes, each beneficial owner of Exchange Preferred Securities
generally will be considered the owner of an undivided interest in the Exchange
Notes and, thus, will be required
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to include in its gross income its pro rata share of the interest income or
original issue discount ("OID") that is paid or accrued on the Exchange Notes.
See "--Interest Income and Original Issue Discount."
CLASSIFICATION OF THE SENIOR SUBORDINATED NOTES
The Company, the Trust and the holders of the Exchange Preferred
Securities (by acceptance of a beneficial ownership interest in an Exchange
Preferred Security) will agree to treat the Exchange Notes as indebtedness for
all United States tax purposes. In connection with the issuance of the Exchange
Notes, Tax Counsel is of the opinion that, under current law, and based on
certain representations, facts and assumptions set forth in such opinion, the
Exchange Notes will be classified as indebtedness for United States federal
income tax purposes.
INTEREST INCOME AND ORIGINAL ISSUE DISCOUNT
Because the Company has the right to defer the payment of stated
interest on the Exchange Notes, the stated interest on the Exchange Notes will
be considered to be original issue discount ("OID") (within the meaning of
Section 1273(a) of the Code). Consequently, holders must include such stated
interest in gross income on a daily economic accrual basis (using the
constant-yield-to-maturity method of accrual described in Section 1272 of the
Code), regardless of their regular method of tax accounting and in advance of
receipt of the cash attributable to such income. The application of these OID
accrual rules may accelerate the timing of a holder's recognition of such income
in certain situations. Actual payments of stated interest on the Exchange Notes,
however, will not be separately reported as taxable income. During an Extension
Period, holders will be required to continue to include their pro rata share of
the stated interest in their gross income for United States federal income tax
purposes, in advance of the receipt of the cash payments attributable to such
deferred interest. Any amount of OID included in a holder's gross income with
respect to an Exchange Preferred Security will increase such holder's adjusted
tax basis in such Exchange Preferred Security, and the amount of Distributions
received by a holder in respect of such OID will reduce such holder's adjusted
tax basis in such Exchange Preferred Security.
Corporate holders of Exchange Preferred Securities will not be entitled
to a dividends-received deduction with respect to any income recognized by such
holders with respect to the Exchange Preferred Securities.
DISTRIBUTION OF EXCHANGE NOTES OR CASH UPON LIQUIDATION OF THE TRUST
As described under the caption "Description of the Exchange Preferred
Securities--Liquidation Distribution Upon Dissolution," Exchange Notes may be
distributed to holders in exchange for the Exchange Preferred Securities in a
liquidation of the Trust. Under current law, such a distribution would be
non-taxable, and will result in the holder receiving directly its pro rata share
of the Exchange Notes previously held indirectly through the Trust, with a
holding period and aggregate tax basis equal to the holding period and aggregate
tax basis such holder had in its Exchange Preferred Securities before such
distribution. If, however, the liquidation of the Trust were to occur because
the Trust is subject to United States federal income tax with respect to income
accrued or received on the Exchange Notes, the distribution of the Exchange
Notes to holders would be a taxable event to the Trust and to each holder and a
holder would recognize gain or loss as if the holder had exchanged its Exchange
Preferred Securities for the Exchange Notes it received upon liquidation of the
Trust.
A holder would accrue interest in respect of the Exchange Notes received
from the Trust in the manner described above under "--Interest Income and
Original Issue Discount."
Under certain circumstances described herein (see "Description of the
Exchange Preferred Securities--Redemption"), the Exchange Notes may be redeemed
for cash, with the proceeds of such redemption distributed to holders in
redemption of their Exchange Preferred Securities. Under current law, such a
redemption would constitute a taxable disposition of the redeemed Exchange
Preferred Securities for United States federal income tax purposes, and a holder
would recognize gain or loss as if it sold such redeemed Exchange Preferred
Securities for cash. See "--Sales of Exchange Preferred Securities."
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SALES OF EXCHANGE PREFERRED SECURITIES
A holder that sells Exchange Preferred Securities will recognize gain or
loss equal to the difference between the amount realized by the holder on the
sale or redemption of the Exchange Preferred Securities (except to the extent
that such amount realized is characterized as a payment in respect of accrued
but unpaid interest on such holder's allocable share of the Exchange Notes that
such holder has not included in gross income previously) and the holder's
adjusted tax basis in the Exchange Preferred Securities sold or redeemed. Such
gain or loss generally will be a capital gain or loss and generally will be a
long-term capital gain or loss if the Exchange Preferred Securities have been
held for more than one year. Subject to certain limited exceptions, capital
losses cannot be applied to offset ordinary income for United States federal
income tax purposes.
A holder will be required to add any accrued and unpaid OID to its
adjusted tax basis for its Exchange Preferred Securities. To the extent the
selling price of such holder's Exchange Preferred Securities is less than the
adjusted tax basis (which will include any accrued and unpaid OID) a holder will
recognize a capital loss.
POSSIBLE TAX CHANGES
Legislation has been previously proposed (but not adopted) that would
have denied an issuer an interest deduction, for United States federal income
tax purposes, on instruments such as the Exchange Notes. There can be no
assurance that future legislative proposals will not adversely affect the
ability of the Company to deduct interest on the Exchange Notes or otherwise
affect the tax treatment of the transactions described herein. Moreover, such
legislation could give rise to a Tax Event which would permit the Company to
distribute the Exchange Notes to holders of the Exchange Preferred Securities or
cause a redemption of the Exchange Preferred Securities as described more fully
under "Description of the Exchange Notes" and "Description of the Exchange
Preferred Securities." The Internal Revenue Service also has previously
announced that an important factor in determining whether instruments, such as
the Exchange Notes, will be treated as debt for federal income tax purposes is
the manner in which such instruments are treated for financial accounting
purposes. While there appears to be no authority in case law that applies this
factor in determining whether an instrument constitutes debt for federal income
tax purposes, there can be no assurance that in the future, courts or the
legislature will not adopt this factor in making such determination. The
adoption of such factor could have an adverse effect on the ability of the
Company to deduct interest on the Exchange Notes or otherwise affect the tax
treatment of the transactions described herein.
NON-UNITED STATES HOLDERS
As used herein, the term "Non-United States Holder" means any person
that is not a United States Person (as defined above). As discussed above, the
Exchange Preferred Securities will be treated as evidence of an indirect
beneficial ownership interest in the Exchange Notes. See "--Classification of
the Trust." Thus, under present United States federal income tax law, and
subject to the discussion below concerning backup withholding:
(a) no withholding of United States federal income tax will be
required with respect to the payment by the Company or any paying agent of
principal or interest (which for purposes of this discussion includes any OID)
with respect to the Exchange Preferred Securities (or on the Exchange Notes) to
a Non-United States Holder; provided (i) that the beneficial owner of the
Exchange Preferred Securities (or Exchange Notes) ("Beneficial Owner") does not
actually or constructively own 10% or more of the total combined voting power of
all classes of stock of the Company entitled to vote within the meaning of
section 871(h)(3) of the Code and the regulations thereunder, (ii) the
Beneficial Owner is not a controlled foreign corporation that is related to the
Company through stock ownership, (iii) the Beneficial Owner is not a bank whose
receipt of interest with respect to the Exchange Preferred Securities (or on the
Exchange Notes) is described in section 881(c)(3)(A) of the Code, and (iv) the
Beneficial Owner satisfies the statement requirement (described generally below)
set forth in section 871(h) and section 881(c) of the Code and the regulations
thereunder, and
(b) no withholding of United States federal income tax will be
required with respect to any gain realized by a Non-United States Holder upon
the sale or other disposition of the Exchange Preferred Securities (or the
Exchange Notes).
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To satisfy the requirement referred to in (a)(iv) above, the Beneficial
Owner, or a financial institution holding the Exchange Preferred Securities (or
the Exchange Notes) on behalf of such owner, must provide, in accordance with
specified procedures, to the Trust or any paying agent (a "Paying Agent"), a
statement to the effect that the Beneficial Owner is not a United States Holder.
Pursuant to current temporary Treasury regulations, these requirements will be
met if (1) the Beneficial Owner provides his name and address, and certifies,
under penalties of perjury, that it is not a United States person (which
certification may be made on an IRS Form W-8 (or successor form)) or (2) a
financial institution holding the Exchange Preferred Securities (or the Exchange
Notes) on behalf of the Beneficial Owner certifies, under penalties of perjury,
that such statement has been received by it and furnishes a paying agent with a
copy thereof.
If a Non-United States Holder cannot satisfy the requirements of the
"portfolio interest" exception described in (a) above, payments of premium, if
any, and interest (including any OID) made to such Non-United States Holder will
be subject to a 30% withholding tax unless the Beneficial Owner provides the
Company or the relevant Paying Agent, as the case may be, with a properly
executed (1) IRS Form 1001 (or successor form) claiming an exemption from, or a
reduction of, such withholding United States income tax under the benefit of a
tax treaty or (2) IRS Form 4224 (or successor form) stating that interest paid
with respect to the Exchange Preferred Securities (or on the Exchange Notes) is
not subject to withholding tax because it is effectively connected with the
Beneficial Owner's conduct of a trade or business in the United States.
As discussed above, the Company will treat the Exchange Notes as
indebtedness for United States federal income tax purposes. If, however, the
Exchange Notes were to be recharacterized as equity, for United States federal
income tax purposes, the income on the Exchange Notes would be recharacterized
as dividends which would generally be subject to 30% withholding tax when paid
to a Non-United States Holder.
If a Non-United States Holder is engaged in a trade or business in the
United States and interest with respect to the Exchange Preferred Securities (or
on the Exchange Notes) is effectively connected with the conduct of such trade
or business, the Non-United States Person, although exempt from the withholding
tax discussed above, will be subject to United States federal income tax on such
interest on a net income basis in the same manner as if it were a United States
Holder. In addition, if such Non-United States Holder is a foreign corporation,
it may be subject to a branch profits tax equal to 30% of its effectively
connected earnings and profits for the taxable year, subject to adjustments. For
this purpose, such interest would be included in such foreign corporation's
earnings and profits.
Any gain realized upon the sale or other taxable disposition of the
Exchange Preferred Securities (or the Exchange Notes) by a Non-United States
Holder generally will not be subject to United States federal income tax unless
(i) such gain is effectively connected with a trade or business carried on in
the United States by such NonUnited States Holder, (ii) in the case of a
Non-United States Holder who is an individual, such individual is present in the
United States for 183 days or more in the taxable year of such sale or
disposition, and certain other conditions are met and (iii) in the case of any
gain representing accrued interest with respect to the Exchange Preferred
Securities (or on the Exchange Notes) the requirements described above are not
satisfied.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Income on the Exchange Preferred Securities (or the Exchange Notes) held
of record by United States Persons (other than corporations and other exempt
holders) will be reported annually to such holders and to the IRS. The Preferred
Trustee currently intends to deliver such reports to holders of record prior to
January 31 following each calendar year. It is anticipated that persons who hold
Exchange Preferred Securities (or the Exchange Notes) as nominees for beneficial
holders will report the required tax information to beneficial holders on Form
1099.
"Backup withholding" at a rate of 31% will apply to payments of interest
to non-exempt United States Persons unless the holder furnishes its taxpayer
identification number in the manner prescribed in applicable Treasury
regulations, certifies that such number is correct, certifies as to no loss of
exemption from backup withholding and meets certain other conditions.
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No information reporting or backup withholding will be required with
respect to payments made by the Trust or any Paying Agent to Non-United States
Holders if a statement described in (a)(iv) under "Non-United States Holders"
has been received and the payor does not have actual knowledge that the
beneficial owner is a United States Person.
In addition, backup withholding and information reporting will not apply
if payments of the principal, interest, OID or premium with respect to the
Exchange Preferred Securities (or on the Exchange Notes) are paid or collected
by a foreign office of a custodian, nominee or other foreign agent on behalf of
the Beneficial Owner, or if a foreign office of a broker (as defined in
applicable Treasury regulations) pays the proceeds of the sale of the Exchange
Preferred Securities (or the Exchange Notes) to the owner thereof. If, however,
such nominee, custodian, agent, or broker is, for United States federal income
tax purposes, a United States person, a controlled foreign corporation or a
foreign person that derives 50% or more of its gross income for certain periods
from the conduct of a trade or business in the United States, such payments will
not be subject to backup withholding but will be subject to information
reporting, unless (1) such custodian, nominee, agent, or broker has documentary
evidence in its records that the Beneficial Owner is not a United States person
and certain other conditions we met or (2) the Beneficial Owner otherwise
establishes an exemption.
Payment of the proceeds from disposition of Exchange Preferred
Securities (or Exchange Notes) to or through a United States office of a broker
is subject to information reporting and backup withholding unless the holder or
beneficial owner establishes an exemption from information reporting and backup
withholding.
Any amounts withheld from a holder of the Exchange Preferred Securities
under the backup withholding rules generally will be allowed as a refund or a
credit against such holder's United States federal income tax liability,
provided the required information is furnished to the IRS.
THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS
INCLUDED FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A
HOLDER'S PARTICULAR SITUATION. HOLDERS SHOULD CONSULT THEIR TAX ADVISORS WITH
RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF THE EXCHANGE PREFERRED SECURITIES, INCLUDING THE TAX CONSEQUENCES
UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF
CHANGES IN UNITED STATES FEDERAL OR OTHER TAX LAWS.
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ERISA CONSIDERATIONS
Generally, employee benefit plans ("Benefit Plans") that are subject to
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or
Section 4975 of the Code (which includes individual retirement accounts) or
entities deemed to be holding the assets of such plans under the Plan Assets
Regulation (as defined herein), may purchase the Exchange Preferred Securities,
subject to the investing fiduciary's determination that the investment in the
Exchange Preferred Securities satisfies ERISA's fiduciary standards as well as
rules under ERISA and the Code that, among other things, prohibit Benefit Plan
fiduciaries from causing a Benefit Plan to engage in a "prohibited transaction."
The Department of Labor ("DOL") has issued a regulation (29 C.F.R.
Section 2510.3-101) (the "Plan Assets Regulation") concerning the definition of
what constitutes the assets of a Benefit Plan. The Plan Assets Regulation
provides that, as a general rule, the underlying assets and properties of
corporations, partnerships, trusts, and certain other entities in which a
Benefit Plan makes an equity investment (as opposed to the purchase of a debt
instrument) will be deemed for purposes of ERISA to be assets of the investing
Benefit Plan unless certain exceptions apply. Although there is little authority
on the subject, the Company believes that the Exchange Preferred Securities will
be classified as debt securities rather than equity interests, and therefore
that the assets of the Trust will not be deemed to be assets of investing
Benefit Plans under the Plan Assets Regulation (and the resulting application of
ERISA's fiduciary regime).
If the Exchange Preferred Securities are not classified as debt, then an
exception would be required to avoid the application of the Plan Assets
Regulation. Pursuant to an exception contained in the Plan Assets Regulation,
the assets of a Trust would not be deemed to be "plan assets" of investing
Benefit Plans if, immediately after the most recent acquisition of any equity
interest in the Trust, less than 25% of the value of each class of equity
interest (in the instant case, the value of the Exchange Preferred Securities)
in the Trust were held by Benefit Plans, other employee benefit plans not
subject to ERISA or Section 4975 of the Code (such as governmental, church and
foreign plans), and entities holding assets deemed to be plan assets of any
Benefit Plan ("Plan Asset Entity") (collectively, "Benefit Plan Investors"). No
assurance can be given that the value of the Exchange Preferred Securities held
by Benefit Plan Investors will be less than 25% of the total value of such
Exchange Preferred Securities at the completion of the Exchange Offer or
thereafter, and no monitoring or other measures will be taken with respect to
the satisfaction of the conditions to this exception. All of the Common
Securities are held directly by the Company.
Prohibited transactions under Section 406 of ERISA and Section 4975 of
the Code may occur by reason of the purchase of Exchange Preferred Securities by
Benefit Plans with respect to which the Trust, the Company, the Initial
Purchasers, and certain other persons providing services with respect to the
Exchange Preferred Securities, and certain of their respective affiliates may be
considered to be parties in interest (under ERISA) and/or Disqualified Persons
(under the Code). Accordingly, each fiduciary of a Benefit Plan considering the
acquisition of the Exchange Preferred Securities should consult its own counsel
as to whether the acquisition of such Exchange Preferred Securities would be a
prohibited transaction and would otherwise comply with the applicable provisions
of ERISA and of the Code. In order to preclude the occurrence of a prohibited
transaction, the acquisition by a Benefit Plan will be permitted only in a
transaction qualifying under a DOL Prohibited Transaction Class Exemption or
another applicable statutory or individual prohibited transaction exemption.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Preferred Securities for its
own account in connection with the Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Preferred
Securities. This Prospectus, as it may be amended or supplemented from time to
time, may be used by Participating Broker-Dealers during the period referred to
below in connection with resales of Exchange Preferred Securities received in
exchange for Preferred Securities if such Preferred Securities were acquired by
such Participating Broker-Dealers for their own accounts as a result of
market-making activities or other trading activities. The Company and the Trust
have agreed that this Prospectus, as it may be amended or supplemented from time
to time, may be used by a Participating Broker-Dealer in connection with resales
of such Exchange Preferred Securities for a period ending 90 days after the
Expiration Date (subject to extension under certain limited circumstances
described herein) or, if earlier, when all such Exchange Preferred Securities
have been disposed of by such Participating Broker-Dealer. However, a
Participating Broker-Dealer who intends to use this Prospectus in connection
with the resale of Exchange Preferred Securities received in exchange for
Preferred Securities pursuant to the Exchange Offer must notify the Company or
the Trust, or cause the Company or the Trust to be notified, on or prior to the
Expiration Date, that it is a Participating Broker-Dealer. Such notice may be
given in the space provided for that purpose in the Letter of Transmittal or may
be sent to the Exchange Agent at the address or the facsimile number set forth
herein under "The Exchange Offer--Exchange Agent." See "The Exchange
Offer--Resales of Exchange Preferred Securities."
Neither the Company nor the Trust will receive any cash proceeds from
the issuance of the Exchange Preferred Securities offered hereby. Exchange
Preferred Securities received by broker-dealers for their own accounts in
connection with the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the Exchange Preferred Securities or a combination of
such methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or at negotiated prices. Any
such resale may be made directly to purchasers or to or through brokers or
dealers who may receive compensation in the form of commissions or concessions
from any such broker-dealer and/or the purchasers of any such Exchange Preferred
Securities.
Any broker-dealer that resells Exchange Preferred Securities that were
received by it for its own account in connection with the Exchange Offer and any
broker or dealer that participates in a distribution of such Exchange Preferred
Securities may be deemed to be an "underwriter" within the meaning of the
Securities Act, and any profit on any such resale of Exchange Preferred
Securities and any commissions or concessions received by any such persons may
be deemed to be underwriting compensation under the Securities Act. The Letter
of Transmittal states that by acknowledging that it will deliver and be
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act.
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EXPERTS
The consolidated financial statements of the Company as of December 31,
1996 and 1995 and for each of the years in the three-year period ended December
31, 1996, have been included herein and elsewhere in this Prospectus and the
Registration Statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein and upon
the authority of such firm as experts in accounting and auditing.
LEGAL MATTERS
The validity of the Exchange Notes and the Exchange Guarantee will be
passed upon for the Company by Riordan & McKinzie, a Professional Corporation,
Los Angeles, California. Certain matters of Delaware law relating to the Trust
and the validity of the Exchange Preferred Securities will be passed upon for
the Trust by Richards, Layton & Finger, P.A., Wilmington, Delaware, special
Delaware counsel to the Trust and the Company.
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GLOSSARY OF TERMS
DEFINED TERMS AND SELECTED INSURANCE TERMS
<TABLE>
<S> <C>
Admitted Assets.................... Assets recognized and accepted by state insurance regulatory
authorities for their purposes in determining the financial condition
of an insurance company.
Centre Re.......................... Centre Reinsurance Limited.
Claim 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).
Claim and Claim Adjustment Expense
Ratio........................... The ratio of claim and claim adjustment expenses to net premiums
earned.
Code............................... Internal Revenue Code of 1986, as amended.
Combined Ratio..................... The sum of the claim and claim adjustment expense ratio and the
expense ratio for continuing operations. A combined ratio under
100% generally indicates an underwriting profit, and a combined
ratio over 100% generally indicates an underwriting loss.
Company (or Superior National)..... Superior National Insurance Group, Inc., a Delaware corporation,
including, if the context requires, its subsidiaries, on a consolidated
basis.
Direct Premiums Written............ Direct premiums written include all premiums arising from policies
issued by the Company acting as primary insurance carrier,
adjusted for any return or additional premiums arising from
endorsements, cancellations, audits and retrospective rating plans.
DOI................................ California Department of Insurance.
EBITDA............................. Earnings before interest, taxes, minority interest, depreciation, and
amortization.
Exchange Act....................... Securities Exchange Act of 1934, as amended.
Expense Ratio...................... The ratio of commissions (net of reinsurance ceding commissions),
policyholder dividends, and general and administrative expenses to
net premiums earned.
GAAP............................... Generally accepted accounting principles in the United States of
America as in effect as of the Issue Date, including those set forth
in: (i) the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public
Accountants, (ii) statements and pronouncements of the Financial
Accounting Standards Board, (iii) in such other statements by such
other entity as approved by a significant segment of the accounting
profession, and (iv) the rules and regulations of the SEC governing
the inclusion of financial statements in periodic reports required to
be filed pursuant to Section 13 of the Exchange Act, including
opinions and pronouncements in staff accounting bulletins and
similar written statements from the accounting staff of the SEC.
</TABLE>
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<TABLE>
<S> <C>
Gross Premiums Written............. Gross premiums written include all premiums arising from policies
issued by the Company acting as primary insurance carrier and
policies issued through fronting facilities, adjusted for any
additional or return premiums arising from endorsements,
cancellations, audits and retrospective rating plans.
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.
IP Bermuda......................... Insurance Partners Offshore (Bermuda), L.P., a Bermuda limited
partnership.
IP Delaware........................ Insurance Partners, L.P., a Delaware limited partnership.
IRS................................ Internal Revenue Service.
NAIC............................... National Association of Insurance Commissioners.
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.
P&C................................ Property and casualty.
Pac Rim............................ Pac Rim Holding Corporation, and where the context requires, its
subsidiaries including The Pacific Rim Assurance Company.
Policy Acquisition Costs........... Agents' or brokers' commissions, premium taxes, and marketing,
underwriting, and other expenses associated with the production of
business.
Premium in Force................... Premium in force is the sum of the estimated annual gross written
premiums for policies on which the Company is currently providing
workers' compensation coverage.
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.
REM................................ Risk Enterprise Management Limited, a Delaware corporation, an
affiliate of Zurich.
Securities Act..................... Securities Act of 1933, as amended.
SNIC............................... Superior National Insurance Company, the wholly-owned insurance
subsidiary of Superior National.
SPCC............................... Superior Pacific Casualty Company, a wholly-owned insurance
subsidiary of Superior National.
</TABLE>
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<TABLE>
<S> <C>
Statutory Accounting Practices An accounting method prescribed or permitted by state
("SAP") insurance regulators. The more significant
differences from GAAP 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.
Superior Pacific................... SNIC and SPCC, the principal operating subsidiaries of the
Company. In addition, "Superior Pacific" is the trade name under
which SNIC and SPCC conduct business.
Triennial Examination.............. A regularly scheduled triennial review of the operations and
financial condition of a regulated California insurance company by
the DOI as required under various provisions of the California
Insurance Code.
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 Claim and Claim Adjustment An estimate of claims that have occurred, both reported and
Expenses........................ unreported (including claim adjustment expenses), and have been
charged against earnings but remain unpaid.
WCIRB.............................. Workers' Compensation Insurance Rating Bureau.
ZRNA............................... Zurich Reinsurance (North America), Inc., a Connecticut
corporation, an affiliate of Zurich.
Zurich............................. Zurich Reinsurance Centre Holdings, Inc., a Delaware corporation.
</TABLE>
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
SUPERIOR NATIONAL INSURANCE GROUP, INC.
<TABLE>
<CAPTION>
PAGE
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<S> <C>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS........................................... F-ii
INDEPENDENT AUDITORS' REPORT......................................................... F-iii
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 31, 1996 and 1995....................... F-1
Consolidated Statements of Income for the years ended December 31, 1996, 1995 and
1994............................................................................ F-2
Consolidated Statements of Changes in Shareholders' Equity for the years ended
December 31, 1996, 1995 and 1994................................................ F-3
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995
and 1994........................................................................ F-4
Notes to Consolidated Financial Statements......................................... F-5
FINANCIAL STATEMENTS SCHEDULES:
Schedule I: Condensed Financial Information of the Registrant, Superior National
Insurance Group, Inc................................................. F-24
Schedule II: Valuation and Qualifying Accounts and Reserves....................... F-29
Schedule V: Supplemental Insurance Information, Reinsurance and Supplemental
Property and Casualty Insurance Information........................... F-30
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets as of September 30, 1997 (unaudited) and
December 31, 1996............................................................... F-33
Condensed Consolidated Statements of Operations for the three and nine months ended
September 30, 1997 (unaudited) and September 30, 1996 (unaudited)............... F-34
Condensed Consolidated Statement of Changes in Stockholders' Equity for the nine
months ended September 30, 1997 (unaudited)..................................... F-35
Condensed Consolidated Statements of Cash Flows for the nine months ended September
30, 1997 (unaudited) and September 30, 1996 (unaudited)......................... F-36
Notes to Condensed Consolidated Financial Statements (unaudited)................... F-37
PAC RIM HOLDING CORPORATION
INDEPENDENT AUDITORS' REPORT......................................................... F-40
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1996 (restated) and 1995............ F-41
Consolidated Statements of Operations for the years ended December 31, 1996
(restated), 1995 and 1994....................................................... F-42
Consolidated Statements of Stockholders' Equity for the years ended December 31,
1996 (restated), 1995 and 1994.................................................. F-43
Consolidated Statements of Cash Flows for the years ended December 31, 1996
(restated), 1995 and 1994....................................................... F-44
Notes to Consolidated Financial Statements......................................... F-45
UNAUDITED CONSOLIDATED CONDENSED PRO FORMA FINANCIAL INFORMATION
Financial Data..................................................................... F-59
Balance Sheet as of March 31, 1997................................................. F-60
Statements of Operations for the three months ended March 31, 1997................. F-62
Statements of Operations for the year ended December 31, 1996...................... F-63
Notes to Financial Data............................................................ F-64
</TABLE>
F-i
<PAGE> 154
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Independent Auditors' Report......................................................... F-iii
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1996 and 1995....................... F-1
Consolidated Statements of Income for the years ended December 31, 1996, 1995 and
1994............................................................................ F-2
Consolidated Statements of Changes in Shareholders' Equity for the years ended
December 31, 1996, 1995 and 1994................................................ F-3
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995
and 1994........................................................................ F-4
Notes to Consolidated Financial Statements......................................... F-5
Financial Statements Schedules:
Schedule I: Condensed Financial Information of the Registrant, Superior National
Insurance Group, Inc.................................................. F-24
Schedule II: Valuation and Qualifying Accounts and Reserves....................... F-29
Schedule V: Supplemental Insurance Information, Reinsurance and Supplemental
Property and Casualty Insurance Information........................... F-30
</TABLE>
F-ii
<PAGE> 155
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, 1996 and
1995, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1996, 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.
KPMG Peat Marwick LLP
Los Angeles, California
February 18, 1997
F-iii
<PAGE> 156
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Investments:
Bonds and Notes
Available-for-sale, at market (cost: 1996, $46,549; 1995, $41,800)... $ 46,330 $ 42,053
Equity securities, at market
Common stock (cost: 1996, $1,199; 1995, $686)........................ 1,173 689
Funds withheld from reinsurers, at amortized cost (market: 1995,
$117,073)............................................................ -- 114,921
Cash and Invested cash (Restricted cash: 1996, $297; 1995, $2,686)..... 100,487 4,588
Restricted investment.................................................. 1,450 1,700
-------- --------
Total Investments............................................ 149,440 163,951
Reinsurance recoverable:
Paid and unpaid claims and claim adjustment expense.................. 25,274 38,772
Policyholder dividends............................................... -- 841
Premiums receivable (less allowance for doubtful accounts of $300 in
1996 and $500 in 1995)............................................... 9,390 11,574
Earned but unbilled premiums receivable................................ 5,251 3,150
Accrued investment income.............................................. 1,035 1,827
Deferred policy acquisition costs...................................... 3,042 2,780
Deferred income taxes.................................................. 9,520 10,085
Funds held by reinsurer................................................ 1,948 972
Receivable from reinsurer.............................................. 93,266 --
Prepaid reinsurance premiums........................................... 1,039 752
Prepaid and other...................................................... 7,364 6,077
-------- --------
Total Assets................................................. $306,569 $240,781
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Claims and claim adjustment expense.................................... $115,529 $141,495
Unearned premiums...................................................... 9,702 10,347
Reinsurance payable.................................................... 874 370
Long-term debt......................................................... 98,961 8,530
Policyholder dividends................................................. -- 8,094
Accounts payable and other liabilities................................. 12,741 7,420
-------- --------
Total Liabilities............................................ 237,807 176,256
Preferred securities issued by affiliate; authorized
1,100,000 shares; issued and outstanding 1,013,753 shares
in 1996 and 922,137 shares in 1995......................... 23,571 21,045
SHAREHOLDERS' EQUITY
Common stock, no par value; authorized 25,000,000 shares; issued and
outstanding 3,446,492 shares in 1996 and 3,430,373 shares in 1995.... 16,022 15,943
Unrealized (loss) gain on equity securities, net of taxes.............. (17) 2
Unrealized (loss) gain on available-for-sale investments, net of
taxes................................................................ (145) 167
Paid in capital -- warrants............................................ 2,206 2,206
Retained earnings...................................................... 27,125 25,162
-------- --------
Net Shareholders' Equity..................................... 45,191 43,480
-------- --------
Total Liabilities and Shareholders' Equity................... $306,569 $240,781
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-1
<PAGE> 157
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- --------
<S> <C> <C> <C>
REVENUES:
Premiums written, net of reinsurance ceded................. $87,715 $89,139 $105,946
Net change in unearned premiums............................ 933 596 4,472
------- ------- --------
Net premiums earned........................................ 88,648 89,735 110,418
Net investment income...................................... 7,769 9,784 9,049
------- ------- --------
Total Revenues................................... 96,417 99,519 119,467
------- ------- --------
EXPENSES:
Claims and claim adjustment, net of reinsurance recoveries
of $6,064, $2,418 and $8,402 in 1996, 1995 and 1994,
respectively............................................. 55,638 53,970 78,761
Commissions, net of reinsurance ceding commissions of
$2,030, $1,350 and $5,854 in 1996, 1995 and 1994,
respectively............................................. 10,426 11,881 10,404
Policyholder dividends..................................... (5,927) (5,742) 4,983
Interest................................................... 7,527 9,619 8,726
General and administrative
Underwriting............................................. 23,712 17,566 11,256
Other.................................................... (186) 536 340
------- ------- --------
Total Expenses................................... 91,190 87,830 114,470
Income before income taxes, preferred securities
dividends and accretion, discontinued
operations, and extraordinary item............. 5,227 11,689 4,997
Income tax expense (benefit)............................... 1,597 (12) 1,398
------- ------- --------
Income before preferred securities dividends and accretion,
discontinued operations, and extraordinary item.......... 3,630 11,701 3,599
Preferred securities dividends and accretion, net of income
tax benefit of $858, $767 and $352, in 1996, 1995 and
1994, respectively (1,667) (1,488) (683)
Loss from operations of discontinued property and casualty
operations, net of income tax benefit of $5,070 in
1995..................................................... -- (9,842) --
Extraordinary loss on retirement of long-term debt, net of
income tax benefit of $1,042 in 1994..................... -- -- (2,022)
------- ------- --------
Net income................................................. $ 1,963 $ 371 $ 894
======= ======= ========
EARNINGS PER SHARE:
Income before preferred securities dividends and accretion,
discontinued operations, and extraordinary item.......... $ 0.71 $ 3.41 $ 1.05
Preferred securities dividends and accretion, net of income
taxes.................................................... (0.31) (0.43) (0.20)
Loss from operations of discontinued property and casualty
operations, net of income tax benefit.................... -- (2.87) --
Extraordinary loss on retirement of long-term debt, net of
income tax benefit....................................... -- -- (0.59)
------- ------- --------
Net income................................................. $ 0.40 $ 0.11 $ 0.26
======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 158
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<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 SHAREHOLDERS'
ISSUED VALUE SECURITIES INVESTMENTS WARRANTS EARNINGS EQUITY
--------- ------- ----------- ------------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
Stock issued under stock option plan.... 500 2 -- -- -- -- 2
--------- ------- ---- ------- ------ ------- -------
Balance at December 31, 1995............ 3,430,373 15,943 2 167 2,206 25,162 43,480
--------- ------- ---- ------- ------ ------- -------
Net Income.............................. -- -- -- -- -- 1,963 1,963
Unrealized gain on equity
securities.......................... -- -- (19) -- -- -- (19)
Change in unrealized loss on
available-for-sale investments, net of
taxes................................. -- -- -- (312) -- -- (312)
Stock issued under stock option plan.... 3,100 12 -- -- -- -- 12
Common stock issued under stock
incentive............................. 13,019 67 -- -- -- -- 67
--------- ------- ---- ------- ------ ------- -------
Balance at December 31, 1996............ 3,446,492 $16,022 $ (17) $ (145) $2,206 $27,125 $45,191
========= ======= ==== ======= ====== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 159
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
-------- --------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................................... $ 1,963 $ 371 $ 894
-------- --------- --------
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Amortization of bonds and preferred stock.................................... (1,581) (3,575) (2,770)
Amortization of long-term debt............................................... -- -- 1,151
(Gain)/loss on sale of investments........................................... (31) 525 (35)
(Gain)/loss on sale of Centre Re investments................................. (2,036) (4,891) --
Preferred securities dividends and accretion................................. 2,526 2,255 1,035
Decrease in reinsurance balances receivable.................................. 14,339 28,516 2,874
Decrease in premiums receivable.............................................. 2,184 6,901 208
(Increase) decrease in earned but unbilled premiums receivable............... (2,101) 3,336 2,580
Decrease (increase) in accrued investment income............................. 792 (491) 138
(Increase) decrease in deferred policy acquisition costs..................... (262) 125 446
Decrease in income taxes receivable.......................................... -- 1,721 --
Decrease (increase) in deferred taxes........................................ 735 (5,853) --
(Increase) in funds held by reinsurer........................................ (976) (972) --
(Increase) decrease in prepaid reinsurance premiums.......................... (287) (88) (537)
(Increase) in other assets................................................... (1,287) (1,413) (362)
(Decrease) increase in claims and claim adjustment expense reserves.......... (25,966) (29,763) 220
Decrease in unearned premium reserves........................................ (645) (508) (3,935)
(Decrease) increase in reinsurance payable................................... 504 (2,835) 2,161
(Decrease) increase in policyholder dividends payable........................ (8,094) (10,970) 1,163
Decrease in discontinued operations.......................................... -- (4,223) --
Increase (decrease) in accounts payable and other liabilities................ 5,321 (1,994) 984
-------- --------- --------
Total adjustments........................................................ (16,865) (24,197) 5,321
-------- --------- --------
Net cash provided by (used in) operating activities...................... (14,902) (23,826) 6,215
-------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Retirement of long-term debt................................................. (2,660) (1,200) (8,165)
Proceeds from long-term debt................................................. -- -- 10,000
Proceeds from Chase Financing................................................ 93,091 -- --
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 taken....................................... 79 2 --
-------- --------- --------
Net cash provided by (used in) financing activities...................... 90,510 (1,198) 21,580
-------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of bonds and notes:
Investments held-to-maturity............................................... -- -- (4,179)
Investments available-for-sale............................................. (43,257) (4,611) (15,025)
Investments funds withheld from reinsurers................................. (88,568) (204,577) (16,982)
Purchases of common stock.................................................... (513) (680) --
(Increase) in receivable from reinsurer...................................... (93,266) -- --
Investments and cash allocated to discontinued operations.................... -- (1,581) (19,034)
Sales of bonds and notes: Investments available for sale..................... 25,343 17,643 4,047
Maturities of bonds and notes:
Investments held-to-maturity............................................... -- 2,250 --
Investments available-for-sale............................................. 12,771 3,035 9,179
Sales and maturities of funds withheld from reinsurers....................... 206,548 191,238 14,949
Sales of common stock........................................................ -- -- 27
Net decrease (increase) in invested cash..................................... 983 26,062 (3,645)
-------- --------- --------
Net cash provided by (used in) investing activities...................... 20,041 28,779 (30,663)
-------- --------- --------
Net increase (decrease) in cash.......................................... 95,649 3,755 (2,868)
Cash and invested cash at beginning of period................................ 6,288 2,533 5,401
-------- --------- --------
Cash and invested cash at end of period...................................... $101,937 $ 6,288 $ 2,533
======== ========= ========
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes................................. $ 4 $ 4 $ 4
======== ========= ========
Cash paid during the year for interest..................................... $ 641 $ 808 $ 1,222
======== ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 160
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT 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 (SNIC) 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. Earned premiums reported in
1996, 1995, and 1994, 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 1996 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 was 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 and Invested 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. 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
F-5
<PAGE> 161
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
shareholders' equity of approximately $289 net of deferred income taxes in 1994.
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. For determining realized
gains or losses on securities sold, cost is based on average cost.
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
SNIC records premiums receivable for both billed and unbilled amounts.
Unbilled premiums receivable, which are substantially all earned, primarily
represent SNIC's estimate of the difference between amounts billed on
installment policies and the amount to be ultimately 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. SNIC 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 SNIC'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 claim adjustment
expenses, and certain other costs expected to be incurred as the premium is
earned.
Policy acquisition costs incurred and amortized into income are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Balance as of beginning of year............ $ 2,780 $ 2,905 $ 3,351
Cost deferred during the year.............. 17,132 18,163 16,300
Amortization charged to expense............ (16,870) (18,288) (16,746)
-------- -------- --------
Balance at end of year..................... $ 3,042 $ 2,780 $ 2,905
======== ======== ========
</TABLE>
F-6
<PAGE> 162
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
Claims and Claim Adjustment Expense
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
the ultimate liability will not differ from such estimates.
There is a high level of uncertainty inherent in the evaluation of the
required claims and claim adjustment expense reserves. 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
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.
Policyholder Dividends
Prior to open rating, policyholder dividends served both as an economic
incentive to employers for safe operations and as a means of price
differentiation; however, since the inception of open rating in January, 1995
the consumers' preference has been for the lowest net price at a policy's
inception. This is evidenced by the decline in participating policies written by
SNIC as a percent of total policies, such percentage has declined from 65% of
workers' compensation premiums in force at December 31, 1994 to 24% at December
31, 1995, and less than 1% at December 31, 1996. In 1995, as a result of the
diminishing value of Policyholder Dividends SNIC's management declared a
moratorium in the payment of policyholder dividends. In December 1996, the
Company discontinued policyholder dividend payments. Estimated amounts to be
returned to policyholders were accrued when the related premium was earned by
SNIC. Dividends were paid to the extent that a surplus was 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,
In accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS 109). Under the asset and liability method
deferred taxes are measured using enacted tax rates in effect for the year in
which those temporary differences are expected to be settled. 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, 1996, 1995 and 1994
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
F-7
<PAGE> 163
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
antidilutive. The calculations assume the reverse stock split, effective May 25,
1995, had been outstanding at the beginning of all periods presented. The
weighted number of shares outstanding used in the earnings per share
calculations are 5,315,670 shares for 1996, 3,430,373 shares for 1995 and
3,429,873 shares for 1994.
Property, Equipment and Leasehold Improvements
Property, equipment, and leasehold improvements are stated at cost, net of
accumulated depreciation and amortization (approximately $5,061 and $4,176 at
December 31, 1996 and 1995, 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 sheets.
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.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard 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 the fiscal
year beginning in 1996. The Company has adopted the disclosure method of
accounting for SFAS 123.
(2) INVESTMENTS
The amortized cost and market values of bonds and notes classified as
available-for-sale at December 31, 1996 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..................................... 22,596 62 (174) 22,484
Collateralized mortgage obligations............... 12,989 -- (134) 12,855
Corporate instruments............................. 9,864 23 (20) 9,867
State and political subdivisions.................. 1,100 24 -- 1,124
------ --- ---- ------
Total-available-for-sale.......................... 46,549 109 (328) 46,330
====== === ==== ======
</TABLE>
F-8
<PAGE> 164
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
The market value of equity securities as of December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
EQUITY SECURITIES:
Corporate Instruments............................. $ 1,199 $ 73 $(99) $1,173
------ --- ---- ------
Total Equity Securities........................... $ 1,199 $ 73 $(99) $1,173
====== === ==== ======
</TABLE>
The amortized cost and estimated market values of investments classified as
available for sale at December 31, 1996, 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. Mortgage backed securities are included based upon the expected
payout pattern and duration of the fixed income security. Changes in interest
rates, investor expectations and political agendas could cause the ultimate
payout pattern to differ.
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
--------------------
AMORTIZED MARKET
COST VALUE
--------- ------
<S> <C> <C>
Due in one year or less.................................................. 7,458 7,309
Due after one year through five years.................................... 16,641 16,601
Due after five years through ten years................................... 10,266 10,263
Due after ten years...................................................... 12,184 12,157
------ ------
Total.......................................................... 46,549 46,330
====== ======
</TABLE>
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>
The amortized cost and market values of bonds, 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>
F-9
<PAGE> 165
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
The market value of equity securities as of December 31, 1995 are as
follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---- ---------- ---------- ------
<S> <C> <C> <C> <C>
EQUITY SECURITIES:
Corporate Instruments................. $686 $3 $-- $689
---- --- --- ----
Total Equity Securities............... $686 $3 $-- $689
==== === === ====
</TABLE>
A summary of net investment income for the years ended December 31, are as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Interest on bonds and notes...................... $6,628 $9,310 $8,738
Interest on invested cash........................ 1,609 1,297 597
Realized gains (losses).......................... 31 (525) 35
Other............................................ -- -- 3
------ ------ ------
Total investment income.......................... 8,268 10,082 9,373
Investment expense............................... 499 298 324
------ ------ ------
Net investment income............................ $7,769 $9,784 $9,049
====== ====== ======
</TABLE>
Realized gains (losses) on investments for the years ended December 31, are
as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ----- ----
<S> <C> <C> <C>
Bonds and notes...................................... $31 $(525) $ 55
Equity securities.................................... -- -- (20)
--- ---- ----
Total................................................ $31 $(525) $ 35
=== ==== ====
</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>
1996 1995 1994
----- ------ -------
<S> <C> <C> <C>
Bonds and notes.................................. $(472) $4,154 $14,637
Equity securities................................ (29) 2 --
----- ------ ------
Total.................................. $(501) $4,156 $14,637
===== ====== ======
</TABLE>
Proceeds from sales of investments held as available for sale for the year
ended December 31, 1996, 1995 and 1994 were $25,343, $17,643 and $4,047,
respectively. Gross gains of $44 and gross losses of $13 were realized on those
sales in 1996. 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.
Bonds and other securities with a market value of $127,112 at December 31,
1996 and $143,462 at December 31, 1995, were on deposit with various insurance
regulatory authorities. Additionally, see Note (7) regarding investments held
related to reinsurance contracts.
(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, 1996 and 1995.
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.
F-10
<PAGE> 166
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
The carrying amounts shown in the table below are included in the
Consolidated Balance Sheets under the indicated options.
<TABLE>
<CAPTION>
1996 1995
------------------ ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Financial liabilities:
Chase financing agreement................................. 91,681 91,374 -- --
Imperial Bank Debt........................................ 7,250 7,541 8,530 $ 8,769
Preferred securities issued by affiliate.................. $ 23,571 $19,998 $ 21,045 $22,035
======= ====== ======= ======
</TABLE>
Fair value 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.
(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,
----------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Beginning reserve, gross of reinsurance.................... $141,495 $171,258 $171,038
Less: Reinsurance recoverable on unpaid losses............. 27,076 31,897 28,971
-------- -------- --------
Beginning reserve, net of reinsurance...................... 114,419 139,361 142,067
Provision for net claims and claim adjustment expenses
For claims occurring in current year..................... 57,614 58,842 72,457
For claims occurring in prior years...................... (1,976) (4,872) 6,304
-------- -------- --------
Total claims and claim adjustment expenses............... 55,638 53,970 78,761
-------- -------- --------
Payments for net claims and claim adjustment expense:
Attributable to insured events incurred in current
year.................................................. (19,816) (19,732) (23,061)
Attributable to insured events incurred in prior years... (59,698) (59,180) (58,406)
-------- -------- --------
Total claims and claim adjustment expense payments....... (79,514) (78,912) (81,467)
-------- -------- --------
Ending reserves, net of reinsurance........................ 90,543 114,419 139,361
Reinsurance recoverable on unpaid losses................... 24,986 27,076 31,897
-------- -------- --------
Ending reserves, gross of reinsurance...................... $115,529 $141,495 $171,258
======== ======== ========
</TABLE>
During 1996, the Company continued to experience decreased frequency and
severity with respect to claims incurred during 1996; however adverse
development on the 1995 accident year began to emerge. The Company's 1996
accident year net claim and claim adjustment expense ratio for accident year
1996 at the end of calendar year 1996 was 65.0%, versus 65.6% for accident years
1995 and 1994, at their respective calendar year ends.
In 1996, the Company experienced approximately $2.0 million in favorable
development on net claims and claim adjustment expense reserves estimated at
December 31, 1995. This $2.0 million favorable development is the result of $8.4
million in favorable development on direct reserves for accident years 1994 and
prior. The favorable development was offset in part by $4.1 million adverse
development on direct reserves for accident year 1995, and $2.3 million adverse
development on ceded reserves for accident years 1995 and prior. The Company's
1995 accident year net claims and claim adjustment expense ratio for accident
year
F-11
<PAGE> 167
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
1995 at the end of calendar year 1995 was 65.6%, verses 74.6% at the end of the
1996 calendar year. Similar adverse development has been experienced throughout
the California workers' compensation industry.
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.
(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, 1996 and 1995, 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 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,
-------------------
1996 1995
------- -------
<S> <C> <C>
Assets:
Reinsurance recoverables............................... $ 8,604 $40,495
Investments and other assets........................... 17,261 43
------- -------
Total Assets................................... $25,865 $40,538
======= =======
Liabilities:
Claims and claim adjustment expense reserves........... $25,466 $40,526
Other liabilities...................................... 399 12
------- -------
Total liabilities.............................. $25,865 $40,538
======= =======
</TABLE>
F-12
<PAGE> 168
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(6) INCOME TAXES
Total income tax expense (benefit) for the years ended December 31, 1996,
1995, and 1994, was allocated as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------- -------
<S> <C> <C> <C>
Continuing operations..................... $1,597 $ (12) $ 1,398
Dividend accrued on preferred
securities.............................. (858) (767) (352)
Discontinued operations................... -- (5,070) --
Extraordinary item........................ -- -- (1,042)
------ ------- -------
Total........................... $ 739 $(5,849) $ 4
====== ======= =======
</TABLE>
Income tax expense (benefit) from continuing operations for the years ended
December 31, 1996, 1995, and 1994 is composed of the following amounts:
<TABLE>
<CAPTION>
1996 1995 1994
------ ---- ------
<S> <C> <C> <C>
Current...................................... $ 4 $ 4 $ 4
Deferred..................................... 1,593 (16) 1,394
------ --- ------
Total.............................. $1,597 $(12) $1,398
====== === ======
</TABLE>
Taxes computed at the statutory rate of 34% varied from the amounts
reported in the consolidated statements of income at December 31, as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------- ------
<S> <C> <C> <C>
Income taxes at statutory rates............ $1,777 $ 3,974 $1,699
Effect of tax-exempt interest.............. (22) (15) (15)
Effect of meals and entertainment.......... 38 38 37
Research and Development credit............ (200) -- --
Change in valuation allowance for tax
assets................................... -- (4,013) (237)
Internal Revenue Service settlement........ -- -- 15
Change in AMT credit carryforward.......... -- -- (101)
Other...................................... 4 4 --
------ ---- ------
Total............................ $1,597 $ (12) $1,398
====== ==== ======
</TABLE>
F-13
<PAGE> 169
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
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>
1996 1995
-------- --------
<S> <C> <C>
Deferred tax assets:
Original issue discount................................ $ 5,764 $ 22,908
Net operating loss carryforward........................ 29,062 27,961
Alternate minimum tax carryforward..................... 701 701
Unearned premium liability............................. 660 686
Policyholder dividends................................. -- 2,326
Unrealized loss on available for sale securities....... 84 --
Research and development credit........................ 200 --
Other.................................................. 281 391
-------- --------
Total gross deferred tax assets........................ 36,752 54,973
Less: Valuation allowance.............................. -- --
-------- --------
Total........................................ 36,752 54,973
-------- --------
Deferred tax liabilities:
Loss reserves.......................................... (9,139) (22,197)
Discontinued operations................................ (1,245) (5,850)
Reinsurance experience refund.......................... (15,300) (15,300)
Deferred acquisition costs............................. (1,034) (945)
Direct collection allowance............................ (510) (510)
Unrealized gain on available-for-sale.................. -- (86)
Reinsurance payable.................................... (4) --
-------- --------
Total gross deferred tax liabilities................... (27,232) (44,888)
-------- --------
Net deferred tax asset....................... $ 9,520 $ 10,085
======== ========
</TABLE>
Management believes it is more likely than not the existing net deductible
temporary differences will reverse during periods in which the Company generates
net taxable income. However, there can be no assurance the Company will generate
any earnings or any specific level of continuing earnings in future years.
Certain tax planning strategies could be implemented to supplement income from
operations to fully realize recorded tax benefits.
At December 31, 1996, the Company had a tax net operating loss carry
forward of $86.1 million that begins to expire in the year 2006.
(7) REINSURANCE
SNIC 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 SNIC's claims arising from large risks
or from hazards of an unusual nature. SNIC 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.
F-14
<PAGE> 170
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
As of December 31, 1996, SNIC was involved in a dispute with reinsurers,
which, if not settled, may be resolved in arbitration. SNIC's dispute exists
with its property and casualty reinsurers as to the existence of coverage
related to a claim in the amount of $850. Management expects to recover the
entire disputed amount. At December 31, 1996, there were no disputes related to
the workers' compensation operations.
Effective June 30, 1991, SNIC entered into an aggregate excess of loss
reinsurance contract (1991 Contract) with Centre Reinsurance Limited (Centre
Re). 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 amounted to $87.5 million in excess of SNIC's retention. Additionally,
SNIC ceded approximately $69.1 million of earned premiums to Centre Re through
December 31, 1992. Claims and claim adjustment expenses occurring prior to
December 31, 1992 were ceded to Centre Re in the amount of $165.6 million under
the 1991 Contract. Prospective cessions of premium and claims were terminated by
mutual consent of SNIC and Centre Re effective December 31, 1992; however, all
other terms of the 1991 Contract remain in effect until the treaty terminates
January 1, 1998.
As a result of the transaction entered into between the Company, Centre Re
and Chase Manhattan Bank (see footnote 8), the reinsurance receivables related
to the 1991 Contract no longer qualify as reinsurance receivables under the
conditions established in SFAS No. 113. Therefore, the receivables have been
reclassified as receivables from reinsurer on the balance sheet.
Effective January 1, 1993, SNIC entered into an aggregate excess of loss
reinsurance contract (1993 Contract) with Centre Re. 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 SNIC or Centre Re 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 Re with respect to
any covered accident year. Claims and allocated claim adjustment expenses
occurring during the accident year are ceded to Centre Re 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 Company accrued $5.3 million related to the cancellation of the
1993 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 Re.
Under related reinsurance agreements with Centre Re, the Company held 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 Re 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 was Centre Re's. Additionally, investment income on the
funds withheld account inured to the benefit of Centre Re.
Effective January 1, 1994, the Company entered into a 20% quota-share
reinsurance agreement with Zurich Reinsurance Centre (ZRC), an affiliate of
Centre Re. 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 December 31, 1994, ZRC elected to reduce its quota share
participation to 5%; however, all other terms of the treaty remained in effect.
F-15
<PAGE> 171
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
SNIC's 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 December 31, 1996, ZRC, General Reinsurance Corporation and
Unum Life Insurance Co. account for 36.8%, 24.8% and 15.6%, 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>
1996 1995 1994
-------- ------- --------
<S> <C> <C> <C>
Net Premiums written:
Premiums written.......................... $ 99,282 $97,084 $134,769
Premiums ceded............................ (11,567) (7,945) (28,823)
-------- ------- --------
Net premiums written.............. $ 87,715 $89,139 $105,946
======== ======= ========
Net change in unearned premiums:
Direct.................................... $ (645) $ (381) $ (3,935)
Ceded..................................... (288) (215) (537)
-------- ------- --------
Net change in unearned premiums... $ (933) $ (596) $ (4,472)
======== ======= ========
Net claims and claim adjustment expenses:
Claims and claim adjustment expenses...... $ 61,702 $56,388 $ 87,163
Reinsurance recoveries.................... (6,064) (2,418) (8,402)
-------- ------- --------
Net claims and claim adjustment
expenses........................ $ 55,638 $53,970 $ 78,761
======== ======= ========
</TABLE>
Funds withheld interest charges relating to the Centre Re treaties were
recorded in the amount of $6,062, $8,815 and $7,545 for the years ended December
31, 1996, 1995, and 1994, 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. The
entire funds withheld investments were returned to Centre Re in November 1996.
(8) LONG TERM DEBT
The following is a summary of the long-term debt balances at December 31:
<TABLE>
<CAPTION>
1996 1995
------- ------
<S> <C> <C>
Chase Financing Agreement -- 6.87% due through 2004....... $91,681 $ --
Imperial Bank Debt -- 8.25% due through 2001.............. 7,250 8,500
Voting Notes due 2002..................................... 30 30
------- ------
Balance at end of period.................................. $98,961 $8,530
======= ======
</TABLE>
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
F-16
<PAGE> 172
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
plus one half percent to a fixed rate of 8% per annum. Additionally, under the
amended terms of the 1994 Loan, the Company could 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 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 SNIC to maintain
certain financial ratios and Superior National Insurance Group, Inc. the holding
company, to maintain Imperial Bank certificates of deposit in an amount equal to
20% of SNIG's outstanding balance under the 1994 Loan. At December 31, 1996, the
Imperial Bank time certificates of deposit were $1.5 million all of which was
restricted. The Company is in compliance with all loan covenants as of December
31, 1996.
During 1996, the Company entered into a financing transaction involving
Centre Re and Chase. Chase extended a $93.1 million term loan (net of
transaction costs). The Company used the proceeds from the financing to purchase
from SNIC reinsurance receivables due from Centre Re.
The principal balance of the loan is collateralized by receivables due from
reinsurer and amortizes based upon the payout pattern of the underlying claims
of the reinsurance receivables. The loan amortizes approximately $6.0 million in
1997, $33.7 million in 1998, $25.6 million in 1999, $15.2 million in 2000 and
$(0.8) in 2001, with the remaining $12.0 million due through 2004. The effective
interest rate of the loan will be approximately 6.87%.
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, 1996. 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 Re, and Company officers for
prepayment penalty related to the early extinguishment of debt are $1,397 and
$153, respectively. Interest expense incurred in 1996, 1995, and 1994, was
$1,465, $804, and $1,181, respectively.
The warrants related to the Series A and B notes remain outstanding and
provide their holders the right to purchase 1,566,465 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, SNIC 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, 1996.
The aggregate maturities of the financing agreement; long-term debt and
voting notes are as follows:
<TABLE>
<CAPTION>
FINANCING LONG-TERM VOTING
FISCAL YEAR AGREEMENT DEBT NOTES
----------------------------------------------- --------- --------- ------
<S> <C> <C> <C>
1997........................................... 6,021 1,400 --
1998........................................... 33,709 1,450 --
1999........................................... 25,555 1,600 --
2000........................................... 15,229 1,600 --
2001........................................... (799) 1,200 --
Thereafter..................................... 11,966 -- 30
------ ----- ---
91,681 7,250 30
====== ===== ===
</TABLE>
F-17
<PAGE> 173
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(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.
The following is a summary of the preferred securities balance as of
December 31:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Beginning balance........................................ $21,045 $18,790
Add: Dividends and accretion............................. 2,526 2,255
------ ------
Balance at end of period................................. $23,571 $21,045
====== ======
</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
SNIC 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.
SNIC 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.
SNIC's statutory policyholders' surplus as reported to regulatory
authorities was $51,998 and $51,895 at December 31, 1996, and 1995,
respectively. SNIC's statutory net income, as reported to regulatory
authorities, was $791, $1,050 and $3,917 for the years ended December 31, 1996,
1995, and 1994 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
F-18
<PAGE> 174
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
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 SNIC 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 SNIC.
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 were required to report their RBC ratios to the NAIC. SNIC has
calculated and met its RBC requirement.
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, 1996, SNIC
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, SNIC 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 SNIC's
statutory capital and surplus. Cash dividends of $850 were paid in 1994.
(11) EMPLOYEE BENEFIT PLANS
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options. As discussed below
in management's opinion, the alternative fair value accounting provided for
under FAS No. 123, "Accounting for Stock Based Compensation" requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of the grant, no compensation expense is recognized.
The Company has two fixed option plans the 1986 Stock Option Plan (the
"1986 Plan") and the 1995 Stock Incentive Plan (the "1995 Plan"). The terms of
the 1986 Plan permit the Company, at the Board of Directors discretion, to grant
options to its management to purchase 225,000 shares of common stock. Options
granted under the 1986 Plan are not intended to qualify as incentive stock
options within the meaning of Section 422 of the Internal Revenue Code (the
"Code"). The 1995 Plan permits 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 may be given the opportunity to receive
restricted stock of the Company. Under the 1995 Plan the number of shares of
common stock that may be granted, either through the exercise of options or the
issuance of restricted stock, is 625,000 shares. Under both plans, the exercise
price of each option equals the market price of the Company's stock on the date
of grant and options have a maximum term of ten years. The Board of Directors
may grant options at any point during a year and the options generally vest over
five years.
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method
F-19
<PAGE> 175
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
of that Statement. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions. The risk free interest rate used in the
calculation is the 10 year Treasury Note rate on the date the options were
granted. The risk free interest rate used for options granted during 1996 ranged
from 6.0% to 6.79% and options granted during 1995, the risk free interest rate
ranged from 6% to 7.11%. The volatility factors for the expected market price of
the common stock of 70% and 77% were used for options granted in 1996 and 1995
respectively. A weighted average expected life of ten years was used as the
Company has little history of options being exercised prior to their expiration.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that do not have vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions including the expected stock
price volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the value of an estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized into expense over the options' vesting period. The
Company's pro forma information follows (in thousands except for earnings per
share information):
<TABLE>
<CAPTION>
1996 1995
------ -----
<S> <C> <C>
Pro forma net income...................................... $1,842 $ 338
Pro forma earnings per share
Primary................................................. $ 0.41 0.10
Fully Diluted........................................... $ 0.38 0.10
</TABLE>
A summary of the Company's stock option activity, and related information
for the years ended December 31, follows:
<TABLE>
<CAPTION>
1996
--------------------------- 1995
NUMBER ----------------------------
OF WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
SHARES EXERCISE PRICE OF SHARES EXERCISE PRICE
-------- ---------------- --------- ----------------
<S> <C> <C> <C> <C>
Stock options outstanding
beginning of year........ 252,500 $ 4.19 138,750 $ 4.47
Stock options granted...... 146,516 5.46 135,000 5.20
Stock options exercised.... (3,100) 4.00 (500) 4.00
Stock options canceled..... (6,400) 4.61 (20,750) 4.00
-------- --------
Stock options outstanding,
end of year.............. 389,516 $ 5.13 252,500 $ 4.90
======== ===== ======== =====
Exercisable at end of
year..................... 102,200 -- 56,690 --
Weighted-average fair value
of options granted during
the year................. $ 4.41 $ 4.40
</TABLE>
Exercise prices for options outstanding as of December 31, 1996 ranged from
$4 to $7.70. The weighted-average remaining contractual life of those options is
9 years.
F-20
<PAGE> 176
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
The following is a summary of the transactions under the 1986 stock option
plan for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------- ----------------------- -----------------------
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............ 127,500 $4.00-$5.20 138,750 $4.00-$5.20 146,250 $ 4.00
Stock options granted.......... -- -- 10,000 5.20 57,500 5.00-5.20
Stock options exercised........ (3,100) 4.00 (500) 4.00 -- --
Stock options canceled......... (4,400) 4.00-5.20 (20,750) 4.00 (65,000) 4.00
------- ------- -------
Stock options outstanding, end
of year...................... 120,000 $4.00-$5.20 127,500 $4.00-$5.20 138,750 $4.00-$5.20
======= =========== ======= =========== ======= ===========
</TABLE>
At December 31, 1996, 58,200 vested options were exercisable and no
additional options or purchase rights will be granted under the 1986 Plan.
<TABLE>
<CAPTION>
1996 1995
------------------------ -------------------
NUMBER OPTION NUMBER OPTION
OF SHARES PRICE OF SHARES PRICE
--------- ---------- --------- -----
<S> <C> <C> <C> <C>
Stock Options:
Options outstanding at beginning of the year..... 125,000 $ 5.20 -- --
Options granted.................................. 146,516 $5.20-7.70 125,000 $5.20
Options canceled................................. (2,000) 5.20 -- --
------- -------
Options outstanding at end of year............... 269,516 $5.20-7.70 125,000 $5.20
======= =========== ======= ===========
</TABLE>
<TABLE>
<CAPTION>
1996 1995
------------------------ -------------------
NUMBER OPTION NUMBER OPTION
OF SHARES PRICE OF SHARES PRICE
--------- ---------- --------- -----
<S> <C> <C> <C> <C>
Restricted Stock:
Shares outstanding at beginning of year.......... 36,350 $ 5.20 -- --
Shares granted................................... 45,934 4.87-6.25 36,350 $5.20
Shares issued.................................... (13,019) 4.87-5.20 -- --
------- -------
Shares outstanding at end of year................ 69,265 $4.87-6.25 36,350 $5.20
======= =========== ======= ===========
</TABLE>
At December 31, 1996, 44,000 vested options were exercisable and 243 of the
restricted shares granted in 1996 were vested, but were not issued. Shares
available for future grants under the 1995 Plan at December 31, 1996 were
286,219.
Effective January 1, 1990, the Company implemented a 401(k) Plan (the
"Plan") which is available for substantially all employees and under which the
Company matches a percentage of the participant's compensation. The employer
contributions are discretionary and vest over a five year period. The employer
contributions for plan years 1996, 1995, and 1994 were $170, $150, and $82,
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 $48, $322 and $284 of accrued expenses were
recorded at December 31, 1996, 1995, and 1994, respectively.
F-21
<PAGE> 177
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(12) COMMITMENTS
The Company and its subsidiaries occupy offices under various operating
leases. The future minimum lease payments at December 31, 1996, are as follows:
<TABLE>
<S> <C>
1997...................................... $1,931
1998...................................... 1,589
1999...................................... 1,604
2000...................................... 391
2001...................................... 43
</TABLE>
Rental expenses totaled approximately $1,918, $1,772 and $1,780 for the
years ended December 31, 1996, 1995, and 1994, respectively.
In a transaction associated with the sale of Senior Subordinated Notes to
III, the Company and SNIC 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 SNIC to pay the
consulting fee.
(13) LITIGATION
The Company is subject to various litigation which arises in the ordinary
course of business. Management is of the opinion that such litigation will not
have a 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>
1996 1995
------- ------
<S> <C> <C>
Furniture and fixtures, net............................... $ 1,260 $1,151
Data processing equipment, net............................ 3,560 2,767
Prepaid and advances...................................... 1,091 1,540
Other..................................................... 1,453 619
------- -------
$ 7,364 $6,077
======= =======
</TABLE>
(15) ACCOUNTS PAYABLE AND OTHER LIABILITIES
A summary of accounts payable and other liabilities at December 31, are as
follows:
<TABLE>
<CAPTION>
1996 1995
------- ------
<S> <C> <C>
Escheatment payable....................................... $ 333 $1,423
Rent and lease liability.................................. 527 662
Accounts payable.......................................... 8,683 5,275
Other liabilities......................................... 3,198 60
------- -------
$12,741 $7,420
======= =======
</TABLE>
F-22
<PAGE> 178
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(16) SUBSEQUENT EVENT
On September 17, 1996 the Company entered into a definitive agreement to
acquire Pac Rim Holding Corporation (PRIM) for approximately $54 million in
cash. The ultimate price per share to be paid was based on a formula that was
based upon the size of PRIM's loss reserves at the time of the scheduled
transaction closing in December 1996. The transaction was expected to yield $3
to $3.10 a share to PRIM shareholders. As a result of the DOI's triennial audit
of PRIM, it was required to strengthen its claim and claim adjustment expense
reserve by $12 million. The magnitude of the reserve strengthening necessitated
renegotiation of the terms of the original definitive agreement. On February 18,
1997 a revised purchase agreement was announced by the Company and PRIM. Under
the terms of the agreement the Company will acquire PRIM for the aggregate
consideration of approximately $42 million in cash. PRIM shareholders will
receive approximately $20 million ($2.11 per share); $20 million will be paid to
PRIM's convertible debenture holders; and approximately $2 million will be paid
to PRIM's warrant and option holders.
The Company will finance the acquisition with a combination of common stock
and bank debt. Under an agreement reached September 17, 1996, a group of
investors including Insurance Partners, L.P., TJS Partners, L.P., and the
Company's management have agreed to purchase $18 million of newly issued common
stock (2,390,438 shares) at $7.53 per share, based upon the September 1996
market price of the Company's common stock. The Company expects the remaining
$24 million of the purchase price will be funded by a $44 million bank loan to
be provided by a syndicate of banks led by Chase Manhattan Bank. Approximately
$6.6 million of the loan proceeds will be used to redeem the Company's
outstanding long-term debt. Approximately $10 million of the loan proceeds will
be contributed to the capital of PRIM's wholly owned subsidiary, Pacific Rim
Assurance Company. The above described transaction is subject to both
shareholder and regulatory approval.
F-23
<PAGE> 179
SCHEDULE I.1
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SUPERIOR NATIONAL INSURANCE GROUP, INC.
BALANCE SHEET
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- -------
<S> <C> <C>
ASSETS INVESTMENTS:
Bonds and Notes at market (amortized cost: $1,497 in 1995)............ $ -- $ 1,500
Cash and invested cash (certificates of deposit and other short-term
instruments)....................................................... 1,787 2,889
-------- -------
Total Investments............................................. 1,787 4,389
Accrued investment income............................................. 1 9
Receivable from reinsurer............................................. 110,527 --
Investment in subsidiaries............................................ 72,788 67,695
Intercompany receivable............................................... 91 91
Deferred income taxes................................................. 4,957 1,526
Other................................................................. 1,087 94
-------- -------
Total Assets.................................................. $191,238 $73,804
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES:
Long-term debt........................................................ $ 98,961 $ 8,530
Intercompany Liability................................................ 23,465 --
Accounts payable and other liabilities................................ 50 749
-------- -------
Total liabilities............................................. 122,476 9,279
-------- -------
Preferred securities issued by affiliate; authorized 1,100,000
shares; issued and outstanding 1,013,753 shares in 1996 and
922,137 shares in 1995....................................... 23,571 21,045
Shareholders' Equity:
Common stock, no par value; authorized 25,000,000 shares: issued and
outstanding 3,446,492 shares in 1996 and 3,430,373 shares in
1995............................................................... 16,022 15,943
Unrealized gain (loss) on investments, net of income taxes............ (162) 169
Paid in capital -- warrants........................................... 2,206 2,206
Retained earnings..................................................... 27,125 25,162
-------- -------
Total shareholders' equity.................................... 45,191 43,480
-------- -------
Total liabilities and shareholders' equity.................... $191,238 $73,804
======== =======
</TABLE>
See notes to condensed financial information
F-24
<PAGE> 180
SCHEDULE I.2
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,
-------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
REVENUES:
Net investment income....................................... $ 89 $ 330 $ 90
------- ------- -------
Total revenues...................................... 89 330 90
EXPENSES:
Interest expense............................................ 1,465 804 1,108
General and administrative expenses......................... (446) 304 116
------- ------- -------
Total expenses...................................... 1,019 1,108 1,224
------- ------- -------
Loss from operations before federal income tax expense,
equity in net income of subsidiaries, extraordinary item
and preferred securities dividends and accretion......... (930) (778) (1,134)
Income tax expense.......................................... 858 767 1,394
------- ------- -------
Loss from operations before equity in net income of
subsidiaries, extraordinary item, and preferred
securities dividend and accretion........................ (1,788) (1,545) (2,528)
Equity in net income of subsidiaries........................ 5,418 3,404 6,127
Extraordinary loss on retirement of long-term debt, net of
income tax benefit of $1,042 in 1994..................... -- -- (2,022)
Preferred securities dividends and accretion, net of income
tax benefit of $858, $767 and $352 in 1996, 1995 and 1994
respectively............................................. (1,667) (1,488) (683)
------- ------- -------
Net income.................................................. $ 1,963 $ 371 $ 894
======= ======= =======
</TABLE>
See notes to condensed financial information
F-25
<PAGE> 181
SCHEDULE I.3
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,
----------------------------------
1996 1995 1994
--------- ------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................... $ 1,963 $ 371 $ 894
--------- ------- --------
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Amortization of bonds and preferred stock.............. -- (1) 55
Amortization of long-term debt......................... -- -- 1,151
Income from subsidiaries............................... (5,418) (3,404) (6,127)
Loss on sale of investments............................ 5 -- 68
Preferred securities dividends and accretion........... 2,525 2,255 1,035
Decrease in accrued investment income.................. 8 1 11
Increase in current income taxes....................... -- 1,721 --
(Decrease) increase in other assets.................... (994) (11) 157
(Decrease) increase in accounts payable and other
liabilities......................................... 19,334 78 (271)
--------- ------- --------
Total adjustments................................... 15,460 639 (3,921)
--------- ------- --------
Net cash provided by (used in) operating
activities........................................ 17,423 1,010 (3,027)
--------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Retirement of long-term debt............................. -- -- (8,164)
Repayment of bank loans -- Imperial Bank................. (1,250) (1,200) --
Repayment of bank loans -- Chase......................... (1,410) -- --
Proceeds from long-term debt............................. -- -- 10,000
Proceeds from Chase financing............................ 93,091 -- --
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......................... 78 2 --
--------- ------- --------
Net cash provided by (used in) financing
activities........................................ 90,509 (1,198) 21,581
--------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of bonds and notes:
Investments......................................... -- (1,496) --
Dividends received from subsidiaries..................... -- -- 850
(Increase) in receivable from reinsurer.................. (110,527) -- --
Sales of bonds and notes:
Investments available for sale......................... 1,493 -- 923
Capital contribution to subsidiaries..................... -- (1,500) (15,000)
Sales of common & preferred stock........................ -- -- 24
Net (increase) decrease in invested cash................. -- -- 668
--------- ------- --------
Net cash provided by (used in) investing
activities........................................ (109,034) (2,996) (12,535)
--------- ------- --------
Net increase (decrease) in cash..................... (1,102) (3,184) 6,019
Cash and Invested cash at beginning of period............ 2,889 6,073 54
--------- ------- --------
Cash and Invested cash at end of period.................. $ 1,787 $ 2,889 $ 6,073
========= ======= ========
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes.......... $ 1 $ 1 $ 1
========= ======= ========
Cash paid during the year for interest.............. $ 641 $ 808 $ 1,222
========= ======= ========
</TABLE>
See notes to condensed financial information
F-26
<PAGE> 182
SCHEDULE I.4
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SUPERIOR NATIONAL INSURANCE GROUP, INC.
NOTES TO CONDENSED FINANCIAL INFORMATION
1. BASIS OF PRESENTATION
In accordance with the requirements of Regulation S-X of the Securities and
Exchange Commission, the financial statements of the registrant are condensed
and omit many disclosures presented in the consolidated financial statements and
the notes thereto.
2. LONG TERM DEBT
The following is a summary of the long-term debt balances at December 31:
<TABLE>
<CAPTION>
1996 1995
------- ------
<S> <C> <C>
Chase Financing Agreement -- 6.87% due through 2004....... $91,681 $ --
Imperial Bank Debt -- 8.25% due through 2001.............. 7,250 8,500
Voting Notes due 2002..................................... 30 30
------- ------
Balance at end of period.................................. $98,961 $8,530
======= ======
</TABLE>
Maturities of long-term debt for the next five years are as follows:
<TABLE>
<CAPTION>
FINANCING LONG-TERM VOTING
FISCAL YEAR AGREEMENT DEBT NOTES
----------------------------------------------- --------- --------- ------
<S> <C> <C> <C>
1997........................................... $ 6,021 $ 1,400 $ --
1998........................................... 33,709 1,450 --
1999........................................... 25,555 1,600 --
2000........................................... 15,229 1,600 --
2001........................................... (799) 1,200 --
Thereafter..................................... 11,966 -- 30
------- ------ ---
$91,681 $ 7,250 $ 30
======= ====== ===
</TABLE>
3. DIVIDENDS FROM SUBSIDIARIES
During 1996 and 1995, there were no dividends paid to Superior National
Insurance Group by its consolidated subsidiaries. During 1994, a cash dividend
of $850,000 was paid to Superior National Insurance Group by its consolidated
subsidiaries.
4. CONTINGENCIES
The Company is subject to various litigation which arises in the ordinary
course of business. Based upon discussions with counsel, management is of the
opinion that such litigation will not have a material adverse effect on the
consolidated financial position of the Company or its consolidated results of
operations.
F-27
<PAGE> 183
5. RECONCILIATION -- RECEIVABLE FROM REINSURER
The following is a reconciliation between the Condensed Financial
Information of Registrant Balance Sheet and the Consolidated Balance Sheet for
Receivable from reinsurer.
<TABLE>
<CAPTION>
RECEIVABLE
FROM REINSURER
--------------
<S> <C>
Balance per Consolidated Balance Sheet......................... $ 93,266
Add: Elimination for Discontinued Operations................... 17,261
--------
Balance per Condensed Balance Sheet............................ $110,527
========
</TABLE>
F-28
<PAGE> 184
SCHEDULE II
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN C
COLUMN B ---------------------------
-------- COLUMN E
BALANCE ADDITIONS --------
AT --------------------------- BALANCE
BEGINNING CHARGED TO CHARGED TO COLUMN D AT END
OF COSTS OTHER -------- OF
COLUMN A PERIOD AND EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ----------------------------- -------- ------------ ---------- -------- --------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Allowance for possible losses
on premiums receivable..... $500 $1,369 -- $(1,569) $300
==== ====== ====== ======= ====
Allowance for possible losses
on reinsurance
recoverable................ -- -- -- -- --
==== ====== ====== ======= ====
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................ -- -- -- -- --
==== ====== ====== ======= ====
</TABLE>
F-29
<PAGE> 185
SCHEDULE V. 1
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTAL INSURANCE INFORMATION
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN C
COLUMN B -------------- COLUMN E
----------- FUTURE POLICY ------------ COLUMN G
DEFERRED BENEFITS, COLUMN D OTHER POLICY COLUMN F ----------
POLICY LOSSES, CLAIMS -------- CLAIMS AND -------- NET
ACQUISITION AND LOSS UNEARNED BENEFITS PREMIUM INVESTMENT
COLUMN A COSTS EXPENSES PREMIUM PAYABLE REVENUE INCOME
- -------------------------- ----------- -------------- -------- ------------ -------- ----------
COLUMN H
----------
BENEFITS,
CLAIMS,
LOSSES AND
SETTLEMENT
EXPENSES
----------
<S> <C> <C> <C> <C> <C> <C> <C>
1996
Workers' Compensation..... $ 3,042 $115,529 $ 9,702 $ -- $88,648 $7,769 $ 55,638
====== ======== ======= ==== ======== ====== =======
1995
Workers' Compensation..... $ 2,780 $141,495 $10,347 $ -- $89,735 $9,784 $ 53,970
====== ======== ======= ==== ======== ====== =======
1994
Workers' Compensation..... $ 2,905 $171,258 $10,728 $ -- $110,418 $9,049 $ 78,761
====== ======== ======= ==== ======== ====== =======
<CAPTION>
COLUMN I
------------
AMORTIZATION COLUMN J
OF DEFERRED -------- COLUMN K
POLICY OTHER --------
ACQUISITION OPERATING PREMIUMS
COLUMN A COSTS EXPENSES WRITTEN
- -------------------------- ------------ -------- --------
<S> <C> <C> <C>
1996
Workers' Compensation..... $ 16,870 $24,609 $87,715
======= ======= =======
1995
Workers' Compensation..... $ 18,288 $21,314 $89,139
======= ======= =======
1994
Workers' Compensation..... $ 16,746 $13,980 $105,946
======= ======= =======
</TABLE>
F-30
<PAGE> 186
SCHEDULE V. 2
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
REINSURANCE
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN D COLUMN F
COLUMN C ------------ --------------
COLUMN A COLUMN B -------------- ASSUMED FROM COLUMN E 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, 1996
Premiums:
Workers' compensation
insurance.................... $ 97,270 $ 11,280 $2,658 $ 88,648 3.0%
-------- ------- ------ -------- ----
Total Premiums................. $ 97,270 $ 11,280 $2,658 $ 88,648 3.0%
======== ======= ====== ======== ====
YEAR ENDED DECEMBER 31, 1995
Premiums:
Workers' compensation
insurance.................... $ 96,630 $ 7,730 $ 835 $ 89,735 0.9%
-------- ------- ------ -------- ----
Total premiums................. $ 96,630 $ 7,730 $ 835 $ 89,735 0.9%
======== ======= ====== ======== ====
YEAR ENDED DECEMBER 31, 1994
Premiums:
Workers' compensation
insurance.................... $138,704 $ 28,286 $ -- $110,418 $ --
-------- ------- ------ -------- ----
Total premiums................. $138,704 $ 28,286 $ -- $110,418 $ --
======== ======= ====== ======== ====
</TABLE>
F-31
<PAGE> 187
SCHEDULE V. 3
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTAL PROPERTY AND CASUALTY INSURANCE INFORMATION
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN H
-----------------
COLUMN C CLAIMS AND CLAIM
---------- ADJUSTMENT
COLUMN B RESERVES EXPENSES
----------- FOR UNPAID COLUMN G INCURRED RELATED
DEFERRED CLAIMS AND COLUMN E COLUMN F ---------- TO:
POLICY CLAIMS -------- -------- NET -----------------
ACQUISITION ADJUSTMENT UNEARNED EARNED INVESTMENT CURRENT PRIOR
COLUMN A COSTS REQUIRED PREMIUM PREMIUM INCOME YEAR YEAR
- -------------------------- ----------- ---------- -------- -------- ---------- ------- -------
COLUMN D
----------
DISCOUNT
IF ANY,
DEDUCTED
IN
RESERVES
FOR UNPAID
CLAIMS AND
CLAIM
ADJUSTMENT
EXPENSES
----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996
Workers' Compensation..... $ 3,042 $115,529 $ -- $ 9,702 $ 88,648 $7,769 $57,614 $(1,976)
====== ======== === ======= ======== ====== ======= =======
1995
Workers' Compensation..... $ 2,780 $141,495 $ -- $10,347 $ 89,735 $9,784 $58,842 $(4,872)
====== ======== === ======= ======== ====== ======= =======
1994
Workers' Compensation..... $ 2,905 $171,258 $ -- $10,728 $110,418 $9,049 $72,457 $ 6,304
====== ======== === ======= ======== ====== ======= =======
<CAPTION>
COLUMN I COLUMN J
------------ ----------
AMORTIZATION PAID
OF DEFERRED CLAIMS AND COLUMN K
POLICY CLAIM --------
ACQUISITION ADJUSTMENT PREMIUMS
COLUMN A COSTS EXPENSES WRITTEN
- -------------------------- ------------ ---------- --------
<S> <C> <C> <C>
1996
Workers' Compensation..... $ 16,870 $ 79,514 $ 87,715
======= ======= ========
1995
Workers' Compensation..... $ 18,288 $ 78,912 $ 89,139
======= ======= ========
1994
Workers' Compensation..... $ 16,746 $ 81,467 $105,946
======= ======= ========
</TABLE>
F-32
<PAGE> 188
SUPERIOR NATIONAL INSURANCE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED) (*)
<S> <C> <C>
Investments:
Bonds and notes:
Available-for-sale, at market (cost: 1997, $203,354; 1996, $46,549)...................... $ 204,732 $ 46,330
Equity securities, at market (cost: 1997, $686; 1996, $1,199)............................ 849 1,173
Cash and short-term instruments (Restricted cash: 1997, $476; 1996, $297)................ 33,223 100,487
Restricted investment.................................................................... -- 1,450
-------- --------
Total Investments................................................................... 238,804 149,440
Reinsurance receivable................................................................... 54,887 25,274
Premiums receivable (less allowance for doubtful accounts: 1997, $3,604;
1996, $300)............................................................................ 23,232 9,390
Earned but unbilled premiums receivable.................................................. 9,123 5,251
Deferred policy acquisition costs........................................................ 5,834 3,042
Deferred income taxes.................................................................... 13,097 9,520
Funds held by reinsurer.................................................................. 3,815 1,948
Receivable from reinsurer................................................................ -- 93,266
Goodwill................................................................................. 25,766 --
Prepaid and other........................................................................ 22,634 9,438
-------- --------
Total Assets........................................................................ $ 397,192 $306,569
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Claims and claim adjustment expenses..................................................... 222,625 115,529
Unearned premiums........................................................................ 14,988 9,702
Reinsurance Payable...................................................................... 9,833 874
Long-term debt........................................................................... 42,366 98,961
Accounts payable and other liabilities................................................... 24,904 12,741
-------- --------
Total Liabilities................................................................... 314,716 237,807
Preferred securities issued by affiliate; authorized 1,100,000 shares; issued and
outstanding 1,062,920 shares in 1997, and 1,013,753 shares in 1996...................... 25,672 23,571
Stockholders' Equity:
Common stock, $0.01 par value; authorized 25,000,000 shares; issued and outstanding 5,837,173
shares in 1997 and 3,446,492 shares in 1996................................................ 58 --
Paid-in capital excess of par.............................................................. 34,070 16,022
Paid in capital -- warrants.................................................................. 2,206 2,206
Unrealized gain on equity securities, net of taxes........................................... 108 (17)
Unrealized gain (loss) on available-for-sale investments, net of income taxes................ 879 (145)
Retained earnings............................................................................ 19,483 27,125
-------- --------
Total Stockholders' Equity.......................................................... 56,804 45,191
-------- --------
Total Liabilities and Stockholders' Equity.......................................... $ 397,192 $306,569
======== ========
</TABLE>
- ---------------
* Derived from audited financial statements
See Notes to Condensed Consolidated Financial Statements.
F-33
<PAGE> 189
SUPERIOR NATIONAL INSURANCE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- ------------------
1997 1996 1997 1996
------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenues:
Premiums written, net of reinsurance ceded............................. $32,890 $23,337 $ 96,596 $66,133
Net change in unearned premiums........................................ 1,870 (330) 2,552 (93)
------- ------- -------- -------
Net premiums earned.................................................... 34,760 23,007 99,148 66,040
Net investment income.................................................. 3,723 2,129 9,244 6,394
------- ------- -------- -------
Total Revenues................................................. 38,483 25,136 108,392 72,434
Expenses:
Claims and claim adjustment expenses, net of reinsurance recoveries.... 21,316 14,201 66,311 36,801
Commissions, net of reinsurance commissions............................ 2,773 2,607 9,661 7,865
Policyholder dividends................................................. -- (715) -- (2,121)
Interest expense....................................................... 1,158 2,126 5,302 6,922
General and administrative expenses
Underwriting........................................................ 7,140 5,304 18,101 18,681
Other............................................................... 296 173 817 (216)
Goodwill............................................................ 340 -- 477 --
------- ------- -------- -------
Total Expenses................................................. 33,023 23,696 100,669 67,932
------- ------- -------- -------
Income before income taxes and preferred securities dividends and
accretion, and extraordinary items..................................... 5,460 1,440 7,723 4,502
Income tax expense....................................................... 2,052 300 2,821 1,348
------- ------- -------- -------
Income before preferred securities dividends and accretion, and
extraordinary items.................................................... 3,408 1,140 4,902 3,154
Preferred securities dividends and accretion, net of income taxes...... (480) (428) (1,387) (1,238)
Extraordinary loss on redemption of Pac Rim's debentures, net of income
tax benefit of $327................................................. (635) -- (635) --
Extraordinary loss on early retirement of Imperial Bank loan, net of
income tax benefit of $83........................................... (161) -- (161) --
Extraordinary loss on retirement of long-term debt, net of income tax
benefit of $5,338................................................... -- -- (10,361) --
------- ------- -------- -------
Net (loss) Income.............................................. $ 2,132 $ 712 $ (7,642) $ 1,916
======= ======= ======== =======
Earnings per common and dilutive common equivalent shares:
Income before preferred securities dividends accretion, and extraordinary
items.................................................................. $ 0.44 $ 0.23 $ 0.97 $ 0.64
Preferred securities dividends and accretion........................... (0.06) (0.08) (0.28) (0.23)
Extraordinary loss on redemption of Pac Rim's debentures, net of income
tax benefit......................................................... (0.08) -- (0.12) --
Extraordinary loss on early retirement of Imperial Bank loan, net of
income tax benefit.................................................. (0.02) -- (0.03) --
Extraordinary loss on retirement of long-term debt, net of income tax
benefit............................................................. -- -- (2.06) --
------- ------- -------- -------
Net (loss) Income.............................................. $ 0.28 $ 0.15 $ (1.52) $ 0.41
======= ======= ======== =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-34
<PAGE> 190
SUPERIOR NATIONAL INSURANCE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK
------------------------------ UNREALIZED NET UNREALIZED
PAID-IN GAIN GAIN (LOSS)
CAPITAL (LOSS) ON AVAILABLE- PAID IN TOTAL
SHARES $.01 PAR EXCESS ON EQUITY FOR-SALE CAPITAL- RETAINED SHAREHOLDERS'
ISSUED VALUE OF PAR SECURITIES INVESTMENTS WARRANTS EARNINGS EQUITY
--------- -------- ------- ---------- -------------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996....................... 3,446,492 -- $16,022 $(17) $ (145) $2,206 $ 27,125 $45,191
Net loss..................... -- -- -- -- -- -- (7,642) (7,642)
Change in unrealized gain on
equity Securities.......... -- -- -- 125 -- -- -- 125
Change in unrealized gain
(loss) on investments, net
of taxes................... -- -- -- -- 1,024 -- -- 1,024
Common stock issued.......... 2,390,681 58 18,048 -- -- -- -- 18,106
--------- --- ------- ---- ------ ------ ------- -------
Balance at September 30,
1997....................... 5,837,173 $ 58 $34,070 $108 $ 879 $2,206 $ 19,483 $56,804
========= === ======= ==== ====== ====== ======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-35
<PAGE> 191
SUPERIOR NATIONAL INSURANCE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1997 1996
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income......................................................................... $ (7,642) $ 1,916
--------- --------
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating
activities:
Amortization of bonds and preferred stock............................................... (1,004) (705)
Loss (gain) on sale of investments...................................................... 95 (33)
Gain on sale of Centre Re Investments................................................... -- (2,261)
Amortization of Goodwill................................................................ 477 --
Extraordinary Loss -- retirement of long-term debt...................................... 11,157 --
Interest expense on long-term debt...................................................... 4,225 --
Preferred securities dividends and accretion............................................ 1,387 1,876
Increase in reinsurance receivable...................................................... (25,593) (1,292)
(Increase) decrease in premiums receivables............................................. (716) 1,009
Decrease (increase) in earned but unbilled premiums receivable.......................... 270 (1,656)
(Increase) decrease in accrued investment income........................................ (637) 339
Increase in deferred policy acquisition costs........................................... (2,792) (340)
Decrease in deferred income taxes....................................................... 2,821 706
Increase in funds held by reinsurer..................................................... (1,867) (413)
(Increase) decrease in prepaid reinsurance premiums..................................... (5,278) 498
Increase in other assets................................................................ (1,411) (855)
Decrease in claims and claim adjustment expense reserves................................ (979) (25,268)
Decrease in unearned premium reserves................................................... (1,573) (404)
Increase in reinsurance payable......................................................... 8,959 122
Decrease in policyholder dividends payable.............................................. -- (3,577)
(Decrease) increase in accounts payable and other liabilities........................... (6,354) 8,659
--------- --------
Total adjustments................................................................... (18,813) (23,595)
--------- --------
Net cash used in operating activities............................................... (26,455) (21,679)
--------- --------
Cash flows from financing activities:
Paid-in-capital -- restricted stock....................................................... 106 13
Proceeds from issuance of common stock.................................................... 18,000 --
Long-term debt -- Chase Manhattan Bank.................................................... 41,257 --
Retirement of long-term debt -- Imperial Bank............................................. (7,250) (900)
Prepayment penalty on early retirement of long-term debt.................................. (244) --
Funding of discontinued operations........................................................ (3,225) --
Proceeds from repurchase transaction...................................................... -- 3,596
--------- --------
Net cash provided by financing activities........................................... 48,644 2,709
--------- --------
Cash flows from investing activities:
Purchases of bonds and notes:
Investments available-for-sale.......................................................... (149,275) (29,119)
Investment funds withheld from reinsurers............................................... -- (71,061)
Purchase of equity security............................................................... (145) --
Acquisition of Pac Rim.................................................................... (44,016) --
Sales of bonds and notes; Investments available-for-sale.................................. 37,906 22,414
Maturities of bonds and notes: Investments available-for-sale............................. 8,771 12,286
Sales and maturities of bonds and notes held to maturity:
Funds withheld from reinsurers.......................................................... -- 110,098
Sale of equity security................................................................... 517 --
Net decrease in invested cash............................................................. 55,339 7,931
Net increase in invested cash for funds withheld from reinsurers.......................... -- (451)
--------- --------
Net cash (used in) provided by investing activities..................................... (90,903) 52,098
--------- --------
Net (decrease) increase in cash......................................................... (68,714) 33,128
--------- --------
Cash and invested cash at beginning of period............................................... 101,937 2,952
--------- --------
Cash and invested cash at end of period..................................................... $ 33,223 $ 36,080
========= ========
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes.................................................. $ 4 $ 4
========= ========
Cash paid during the year for interest...................................................... $ 1,124 $ 488
========= ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
F-36
<PAGE> 192
SUPERIOR NATIONAL INSURANCE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997
(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 subsidiaries, Superior National Insurance Company
("SNIC") and Superior Pacific Casualty Company ("SPCC"), is engaged in writing
workers' compensation insurance principally in the States of California and
Arizona, 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 1997 presentation. Operating results
for the nine months ended September 30, 1997, are not necessarily indicative of
the results to be expected for the year ended December 31, 1997. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and footnotes thereto contained in the
Company's annual report on Form 10-K for the year ended December 31, 1996.
A.2 Acquisition of Pac Rim Holding Corporation
On April 11, 1997, the Company completed its acquisition of Pac Rim Holding
Corporation ("PRHC") and its wholly-owned subsidiary, The Pacific Rim Assurance
Company, for total consideration of approximately $42 million in cash. The
consideration paid by SNIG resulted in payment of approximately $20 million
($2.105 per share) to PRHC's common stockholders; $20 million to PRHC's
debenture holders; and the remainder to PRHC's warrant and option holders. The
Pacific Rim Assurance Company was renamed Superior Pacific Casualty Company upon
its acquisition by the Company. SNIG financed the acquisition with the issuance
and sale in a private transaction, of approximately $18.0 million in common
stock, (2,390,438 shares) to a group of investors including Insurance Partners,
L.P., TJS Partners, L.P., and SNIG management and the incurrence of a $44
million term loan by a bank syndicate led by The Chase Manhattan Bank ("Chase").
Approximately $6.6 million of the loan proceeds was used to prepay SNIG's
previously outstanding long-term debt, and approximately $10 million was
contributed by SNIG to the capital of SPCC.
The Company accounted for the acquisition of PRHC as a purchase, and
accordingly, assets and liabilities of PRHC were adjusted to their fair value at
the time of the purchase. As of September 30, 1997, the Company had recorded
$25.8 million in goodwill, the excess of purchase price over amounts assigned to
identifiable assets acquired less liabilities assumed.
In connection with the Company's SEC reporting obligations the Company has
prepared pro forma financial information. The following is a comparison, between
the actual and pro forma information presented. The following pro forma amounts
are those amounts as if the acquisition of PRHC by SNIG had occurred as of the
beginning of each period presented.
<TABLE>
<CAPTION>
PRO FORMA
----------------------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
1997(1) 1997(2) 1997(3) 1996(4)
------------- ------------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Total Revenues........................... $ 108,392 $ 128,609 $ 129,348 $ 187,732
Net income (loss) from continuing
operations............................. $ 4,902 $ 8,376 $ (13,182) $ (20,417)
Net loss................................. $ (7,642) $ (9,666) $ (25,726) $ (22,880)
Earnings (loss) per common share from
continuing operations.................. $ 0.97 $ 1.43 $ (2.26) $ (2.65)
Loss per common share.................... $ (1.52) $ (1.66) $ (4.41) $ (2.97)
Weighted average shares outstanding...... 5,040,360 5,837,173 5,837,173 7,706,108
</TABLE>
F-37
<PAGE> 193
SUPERIOR NATIONAL INSURANCE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
- ---------------
(1) Represents the results of operations of the Company for the nine months
ended September 30, 1997. The acquired Company's results are incorporated in
the Company's results for periods after April 1, 1997. Balances reflect all
purchase accounting adjustments known to date.
(2) Represents the pro forma combined balances of SNIG and PRHC at September 30,
1997 adjusted for purchase accounting; the restatement of PRHC's December
31, 1996 audited financial statements; and the expected savings from
management's implementation of its integration plan for PRHC.
(3) Represents the pro forma combined balances of SNIG and PRHC as if the
transaction had occurred on January 1, 1997. The balances have been adjusted
for the results of PRHC's first quarter results; purchase accounting and the
restatement of PRHC's December 31, 1996 audited financial statements as
filed in Form 8-K/A dated September 5, 1997.
(4) Represents the pro forma combined balances of SNIG and PRHC as if the
transaction had occurred on January 1, 1996. The balances have been adjusted
for purchase accounting adjustments and the restatement of PRHC's December
31, 1996 audited financial statements as filed in Form 8-K/A dated September
5, 1997.
A.3 Earnings Per Share ("EPS")
Earnings per common and dilutive common equivalent shares for the three and
nine months ended September 30, 1997, and 1996, are based on the average number
of common shares outstanding during each period and the number of common shares
that would be outstanding if all outstanding stock options and warrants were
exercised. While the assumed conversion of common stock equivalents, such as
stock options and warrants, generally has a dilutive effect on EPS, if the
assumed conversion of all common stock equivalents is antidilutive to the EPS
calculation, then such common stock equivalents are excluded from EPS amounts.
The number of shares used in the EPS calculations are 7,692,289 and 5,040,360
shares for the three and nine months ended September 30, 1997, respectively, and
5,316,873 shares for the three and nine months ended September 30, 1996.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard presentation No. 128, and "Earnings per Share"
("SFAS 128"), which establishes the computation, presentation, and disclosure
requirements for earnings per share. SFAS 128 is effective for fiscal periods
ending after December 15, 1997. The effects of SFAS 128 on the Company's
earnings per share calculation is not expected to be materially different from
that historically presented.
A.4 Claim and Claim Adjustment Expense Reserves
The liability for unpaid claim 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 recoverables. Adjustments to the liability resulting
from subsequent developments or revisions to the estimate are reflected in
results of operations in the period in which such adjustments 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.
F-38
<PAGE> 194
SUPERIOR NATIONAL INSURANCE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
NOTE B. FINANCING AGREEMENT
On June 30, 1997, the Company prepaid approximately $88.6 million of
long-term debt outstanding to Chase. The prepayment was accomplished by
transferring reinsurance receivables due from Centre Reinsurance Limited
("Centre Re") to Chase in exchange for the cancellation of the debt. As a result
of the cancellation of the reinsurance treaty with Centre Re, SNIG recognized an
extraordinary net-of-tax loss of approximately $10.4 million on debt prepayment
in the second quarter of 1997.
NOTE C. DEBT AGREEMENT
Upon the close of the PRHC acquisition on April 11, 1997, the Company
obtained a term loan in the amount of $44 million. The loan is collateralized by
the stock of the Company's intermediate holding company Superior Pacific
Insurance Group, Inc. ("SPIG") and certain of SPIG's subsidiaries. The Company
used the proceeds of the term loan for the acquisition and related expenses, a
capital contribution to SPCC, and to prepay existing indebtedness. The loan is
due six years from April 11, 1997. Principal payments are due semi-annually in
eleven consecutive installments of $3.65 million commencing October 11, 1997,
with a final installment of $3.85 million. The interest rate on the debt is a
LIBOR-based variable rate that will not exceed Chase's prime commercial lending
rate unless default interest becomes due.
NOTE D. DISCONTINUED OPERATIONS
Outstanding discontinued operations claims and claim adjustment expenses
were $15.6 million at September 30, 1997, which was consistent with management's
expectations. Offsetting these liabilities are $14.0 million of deferred tax
assets and $1.6 million of investments available for the payment for these
liabilities.
F-39
<PAGE> 195
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Superior National Insurance Group, Inc.:
We have audited the accompanying consolidated balance sheets of Pac Rim Holding
Corporation and subsidiaries as of December 31, 1996 (as restated -- see Note 2)
and 1995, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1996 (restated as to 1996 -- see Note 2). These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 Pac Rim Holding
Corporation and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Los Angeles, California
August 28, 1997
F-40
<PAGE> 196
PAC RIM HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995
1996 --------
----------
(RESTATED)
<S> <C> <C>
Investments:
Bonds, available-for-sale at fair value (amortized cost $55,245 and
$119,314)....................................................... $ 54,759 $121,771
Short-term investments (at cost, which approximates fair value).... 56,794 7,260
-------- --------
Total investments.......................................... 111,553 129,031
Cash................................................................. 1,731 773
Reinsurance recoverable on outstanding losses........................ 3,124 3,884
Reinsurance receivable on paid losses................................ 785 184
Premiums receivable, less allowance for doubtful accounts of $2,516
(Restated) and $1,221.............................................. 14,278 11,616
Earned but unbilled premiums......................................... 4,142 4,880
Investment income receivable......................................... 609 2,207
Deferred policy acquisition costs.................................... 1,065 974
Property and equipment, less accumulated depreciation and
amortization of $4,978 and $3,803.................................. 4,411 2,434
Unamortized debenture issue costs.................................... 1,063 1,468
Federal income taxes recoverable..................................... -- 1,456
Deferred federal income taxes, net................................... 8,745 8,348
Prepaid reinsurance premiums......................................... 198 227
Other assets......................................................... 3,731 1,569
-------- --------
Total Assets............................................... $155,435 $169,051
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Reserve for losses and loss adjustment expenses...................... $100,588 $ 96,525
Convertible debentures payable, less unamortized discount of $1,059
and $1,393......................................................... 18,941 18,607
Unearned premiums.................................................... 6,917 5,715
Reserve for policyholder dividends................................... 364 381
Obligation under capital lease....................................... 1,203 --
Accrued expenses and accounts payable................................ 8,148 3,668
-------- --------
Total Liabilities.......................................... 136,161 124,896
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......... (324) 1,622
Retained earnings (deficit).......................................... (11,921) 11,014
-------- --------
Net Stockholders' Equity............................................. 19,274 44,155
-------- --------
Total Liabilities and Stockholders' Equity................. $155,435 $169,051
======== ========
</TABLE>
See notes to consolidated financial statements.
F-41
<PAGE> 197
PAC RIM HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994
1996 ------- -------
----------
(RESTATED)
<S> <C> <C> <C>
REVENUES:
Net premiums earned...................................... $ 82,654 $76,016 $92,894
Net investment income.................................... 7,013 8,089 6,514
Realized capital gains................................... 1,640 453 --
A&H commission income.................................... 8 -- --
------- ------- -------
Total revenue.................................... 91,315 84,558 99,408
COSTS AND EXPENSES:
Losses and loss adjustment expenses...................... 79,890 50,957 63,788
Amortization of policy acquisition costs -- net.......... 14,672 18,647 19,565
Administrative, general, and other....................... 16,752 11,662 11,927
Policyholder dividends................................... (11) 132 1,301
Interest expense......................................... 2,341 2,306 857
------- ------- -------
Total costs and expenses......................... 113,644 83,704 97,438
------- ------- -------
Income (loss) before income taxes.......................... (22,329) 854 1,970
Income tax expense......................................... 606 279 812
------- ------- -------
NET INCOME (LOSS).......................................... $(22,935) $ 575 $ 1,158
======= ======= =======
PER SHARE DATA:
NET INCOME (LOSS) PRIMARY AND FULLY DILUTED.............. $ (2.41) $ .06 $ 0.12
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-42
<PAGE> 198
PAC RIM HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS, EXCEPT FOR NUMBER OF SHARES)
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
COMMON STOCK ON
------------------ AVAILABLE-
NUMBER ADDITIONAL FOR-SALE RETAINED
OF PAID-IN SECURITIES, EARNINGS
SHARES AMOUNT CAPITAL WARRANTS NET (DEFICIT) TOTAL
--------- ------ ---------- -------- ----------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994......... 9,528,200 $ 95 $ 29,624 -- -- $ 9,281 $39,000
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
--------- --- ------- ------ ------- -------- -------
Net loss (Restated)................ -- -- -- -- -- (22,935) (22,935)
Change in unrealized loss of
available-for-sale securities,
net.............................. -- -- -- -- (1,946) -- (1,946)
--------- --- ------- ------ ------- -------- -------
Balance at December 31, 1996,
(Restated)....................... 9,528,200 $ 95 $ 29,624 $1,800 $ (324) $(11,921) $19,274
========= === ======= ====== ======= ======== =======
</TABLE>
See notes to consolidated financial statements.
F-43
<PAGE> 199
PAC RIM HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1994
1996 -------- -------
-----------
(RESTATED)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income (loss)................................................. $(22,935) $ 575 $ 1,158
Adjustments to reconcile net income (loss) to net cash provided
(used) by operating activities:
Depreciation and amortization.................................. 2,001 1,421 930
Provision for losses on premiums receivable.................... 1,295 150 (143)
Provision for deferred income taxes............................ 606 1,340 1,188
Realized capital gains......................................... (1,640) (453) --
Changes in:
Reserve for losses and loss adjustment expenses.............. 4,063 (20,104) (19,336)
Unearned premiums............................................ 1,202 (4,202) 1,655
Reserve for policyholder dividends........................... (17) (609) (1,539)
Ceded reinsurance payable.................................... -- -- (252)
Premiums receivable.......................................... (3,219) 255 5,413
Reinsurance recoverable...................................... 159 (1,936) 13,044
Aggregate excess of loss reinsurance recoverable............. -- -- 10,812
Prepaid reinsurance premiums................................. 29 153 2,435
Deferred policy acquisition costs............................ (91) 1,111 (953)
Income taxes recoverable..................................... 1,456 (1,013) 1,916
Accrued expenses and accounts payable........................ 4,466 116 319
Investment income receivable................................. 1,598 148 (1,372)
Other assets................................................. (2,162) 229 630
-------- -------- --------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES.......... (13,189) (22,819) 15,905
-------- -------- --------
INVESTING ACTIVITIES
Purchase of investments -- bonds.................................. (47,622) (40,524) (67,788)
Sales of investments -- bonds..................................... 104,172 61,343 --
Maturity and calls of investments -- bonds........................ 9,080 1,028 7,228
Additions to property and equipment............................... (1,949) (836) (918)
-------- -------- --------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES............... 63,681 21,011 (61,478)
-------- -------- --------
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.................... 50,492 (1,808) (27,598)
Cash and cash equivalents at beginning of period.................... 8,033 9,841 37,439
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD..................... $58,525 $ 8,033 $ 9,841
======== ======== ========
SUPPLEMENTAL DISCLOSURE:
Interest paid..................................................... $1,600 $ 1,615 $ -0-
======== ======== ========
Income taxes paid................................................. $-0- $ 37 $ -0-
======== ======== ========
</TABLE>
The Company entered into a capital lease during 1996, to acquire certain
operating system hardware and software; the lease obligation at December 31,
1996 was $1,203,000.
See notes to consolidated financial statements.
F-44
<PAGE> 200
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAC RIM HOLDING CORPORATION AND SUBSIDIARIES
DECEMBER 31, 1996
(RESTATED)
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 ("Pacific Rim Assurance")
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. Pacific Rim Assurance is engaged
exclusively in the business of writing workers' compensation insurance in
California, Arizona, Georgia, Alabama and Texas. Regional Benefits Insurance,
Inc. ("RBIS") is an insurance agency.
Sale of Pac Rim Holding: The previously announced acquisition of Pac Rim
Holding by Superior National Insurance Group, Inc. ("SNTL") was completed on
April 11, 1997. Pac Rim Holding was acquired for aggregate consideration of $42
million in cash. The $42 million payment by SNTL resulted in the payment of
approximately $20 million ($2.105 per share) to Pac Rim Holding's common
stockholders, $20 million to Pac Rim Holding's convertible debenture holders,
and $2 million to Pac Rim Holding's warrant and option holders.
Accounting Principles: The accompanying consolidated financial statements
are presented on the basis of generally accepted accounting principles ("GAAP"),
which differ in some respects from prescribed and permitted statutory accounting
practices followed in reports to the Insurance Departments. Prescribed statutory
accounting practices include a variety of publications of the National
Association of Insurance Commissioners, as well as state laws, regulations, and
general administrative rules. Permitted statutory accounting practices encompass
all accounting practices not so prescribed. The principal differences relate to
the non-admission of certain assets, examples are, deferred income taxes,
deferred policy acquisition costs, earned but unbilled premiums, premiums
receivable, and software.
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.
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 periods 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.
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: Certain 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
F-45
<PAGE> 201
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAC RIM HOLDING CORPORATION AND SUBSIDIARIES (CONTINUED)
dividends do not become a legal liability of Pacific Rim Assurance unless, and
until, declared by the board of directors.
Investments: The Company has designated all of its portfolio as
"available-for-sale" and accordingly, bonds are carried at market with the
unrealized gain (loss) reflected in equity, net of the applicable income taxes.
The cost of investments sold is determined by specific identification.
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: The Company recognizes 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 carry forwards 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 6). 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 to the extent they are dilutive. (See Notes 6 and 7). The number of
shares used in the computation of primary and fully diluted earnings per share
for the years ended December 31, 1996, 1995 and 1994 was 9,528,200.
New Accounting Standards: In October 1995, FASB issued Statement 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 (APB) No. 25; and thus, the
Company adopted only the disclosure provision of FASB Statement No. 123.
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 3.
Reclassifications: Certain prior year amounts in the accompanying financial
statements have been reclassified to conform with the 1996 presentation.
F-46
<PAGE> 202
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAC RIM HOLDING CORPORATION AND SUBSIDIARIES (CONTINUED)
NOTE 2 -- RESTATEMENT OF 1996 FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
NET
STOCKHOLDERS'
NET LOSS EQUITY
-------- -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
As originally stated at December 31, 1996............ $(15,900) $26,309
Change in EBUB....................................... (3,385) (3,385)
Change in allowance for doubtful accounts............ (1,460) (1,460)
Write-off of deferred merger expenses................ (479) (479)
Additional accrued expenses and accounts payable..... (1,278) (1,278)
Write-off of gain contingencies...................... (433) (433)
-------- -------
As restated at December 31, 1996..................... $(22,935) $19,274
======== =======
</TABLE>
Earned But Unbilled Premiums: Earned but unbilled premiums ("EBUB")
represent management's estimate of future additional or return premiums
generated by interim and final audits of payroll and rate classification data
associated with the Company's expired and inforce workers' compensation
policies. EBUB is generally based upon estimated and actual payrolls and rates
provided by policyholders, and historical billing patterns adjusted for changes
in regulations, pricing, and billing practices and procedures. The Company's
former management recorded $7.9 million in EBUB at December 31, 1996.
Current management attempted to reconcile its estimates with that of prior
management's recorded EBUB, and found prior management's methodology to be
fundamentally flawed. In light of the flawed methodology used by prior
management, current management reduced EBUB by $3.385 million.
Premiums receivable: At December 31, 1996, the Company had recorded
premiums receivable of $15.7 million, net of an allowance of doubtful accounts
of $1.1 million. Further, included in the $15.7 million premiums receivable, net
of the allowance for doubtful accounts were $1.6 million in premiums receivable
that had been turned over to an attorney for collection.
Based upon information contained in the December 31, 1996, 10-(K) and other
sources available to prior management, it was apparent to current management
that an additional allowance was required.
Deferred merger expenses: GAAP provides that certain costs related to an
acquisition of another company may be deferred by the acquiring Company. Costs
related to the acquisition of the company being acquired may not be deferred.
Pac Rim Holdings at December 31, 1996, had improperly deferred $0.479 million in
legal and investment banking costs related to its acquisition by SNTL.
Accrued expenses and accounts payable: At December 31, 1996, former
management estimated it had unpaid liabilities of $7.3 million. The current
management identified an additional $1.278 million in accrued liabilities and
accounts payable relating to legal, commissions, and miscellaneous general and
administrative expenses that were substantially known at year-end.
Gain contingencies: GAAP does not provide for the recognition of a gain
prior to its realization. At December 31, 1996, the Company recorded $433,000 in
such contingent gains. These gains related to anticipated legal actions that had
not gone to trial or had not been settled at December 31, 1996. Therefore, in
accordance with GAAP these contingent gains were eliminated from the
Consolidated Statements of Operations.
F-47
<PAGE> 203
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAC RIM HOLDING CORPORATION AND SUBSIDIARIES (CONTINUED)
NOTE 3 -- INVESTMENTS
Major categories of investment income, net of investment expenses, for
1996, 1995 and 1994 are summarized as follows (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Investment Income:
U.S. Treasury and Other Governmental Agency
Securities.................................. $4,065 $5,365 $5,508
Money Market Funds............................. 418 309 291
Funds Held by Reinsurer........................ -- -- 169
Corporate Bonds................................ 2,762 2,655 700
Tax-Exempt Bonds............................... -- 4 102
Certificates of Deposit........................ 31 22 9
------ ------ ------
Investment Income.............................. 7,276 8,355 6,779
Less: Investment Expenses...................... 263 266 265
------ ------ ------
Net Investment Income............................ $7,013 $8,089 $6,514
====== ====== ======
</TABLE>
Proceeds from the sales of investments in bonds during 1996 were
$104,172,000; gross gains of $1,888,000 and gross losses of $248,000 were
realized on those sales. 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.
F-48
<PAGE> 204
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAC RIM HOLDING CORPORATION AND SUBSIDIARIES (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>
1996
U.S. Treasury and other governmental $ 28,808 $ 5 $ (184) $ 28,629
agencies..............................
Corporates.............................. 13,765 2 (204) 13,563
U.S. agencies........................... 12,341 8 (118) 12,231
Asset backed............................ 331 5 -- 336
------- ------ ------ -------
Total......................... $ 55,245 $ 20 $ (506) $ 54,759
======= ====== ====== =======
1995
U.S. Treasury and other governmental $ 68,963 $ 17 $ (157) $ 68,823
agencies..............................
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
======= ====== ====== =======
</TABLE>
The amortized cost and fair value of debt securities at December 31, 1996,
by contractual maturity are summarized as follows (amounts in thousands):
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
--------- -------
<S> <C> <C>
Due in 1997....................................... $10,701 $10,696
Due 1998 - 2001................................... 44,544 44,063
------- -------
$55,245 $54,759
======= =======
</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, 1996,
debt securities and short-term investments with a fair value of $105,301,000
were on deposit to meet the Company's statutory obligation under insurance
department regulations.
NOTE 4 -- RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
The Company recognized adverse development during 1996, for the accident
years 1995 and prior. Despite experiencing favorable trends in the overall
frequency and severity of claims for the 1995 and 1996 accident years, the
Company and its internal and independent actuaries observed development patterns
in the 1990-1994 accident years that were volatile when compared to previous
historical patterns. In particular, 1990-1992, were very difficult accident
years to predict, due to the impact of fraud and stress claims from adverse
economic conditions. The 1993-1994 accident years were very favorable transition
years, following legislative reforms to the workers' compensation benefits
system. Nevertheless, it was unclear how each of those years ultimately would
develop, and how subsequent accident year patterns would thus be affected, given
paid loss and case reserve activity during 1996.
F-49
<PAGE> 205
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAC RIM HOLDING CORPORATION AND SUBSIDIARIES (CONTINUED)
The following table provides a reconciliation of beginning and ending loss
and LAE reserves for the years 1996, 1995, and 1994. 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 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,
------------------------------------
1996 1995 1994
---------- -------- --------
(RESTATED)
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Liability for losses and LAE, net of
reinsurance recoverables on unpaid
losses, at beginning of year........... $ 92,641 $114,709 $111,109
Provisions for losses and LAE, net of
reinsurance recoverable:
Current accident year.................. 62,244 49,962 60,989
Prior accident years................... 17,646 995 2,799
-------- -------- --------
Incurred losses during the current year,
net of reinsurance recoverable......... 79,890 50,957 63,788
Losses and LAE payment for claims, net of
reinsurance recoverable, occurring
during:
Current year........................... 16,398 13,473 13,641
Prior years............................ 58,669 59,552 46,547
-------- -------- --------
75,067 73,025 60,188
-------- -------- --------
Liability for losses and LAE, net of
reinsurance recoverable on unpaid
losses, at end of year................. 97,464 92,641 114,709
Reinsurance recoverable, at end of
year................................... 3,909 4,068 2,132
Less reinsurance recoverable on paid
losses................................. (785) (184) (212)
-------- -------- --------
Reinsurance recoverable on unpaid losses,
at end of year......................... 3,124 3,884 1,920
-------- -------- --------
Liability for losses and LAE, gross of
reinsurance recoverable on unpaid
losses, at end of year................. $100,588 $ 96,525 $116,629
======== ======== ========
</TABLE>
During 1991 through 1994, the Company, and the workers' compensation
industry in California in general, 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.
Throughout 1994, 1995 and 1996, the Company continued to experience a
favorable trend in the frequency of new claims. The positive trends and
experience related to new claims since the second half of 1992 have been
consistent with 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, 1995 and
1996 accident years is based on substantially lower loss ratios than the 1991
and prior accident years. Nevertheless, despite improved frequency and lower
overall loss and LAE ratios in those years, the volatile changes in legislative,
economic, managed medical care, and litigation expense factors, affecting
historical paid loss and case reserve development patterns, have made it more
difficult to estimate the ultimate
F-50
<PAGE> 206
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAC RIM HOLDING CORPORATION AND SUBSIDIARIES (CONTINUED)
dollar cost of those reported claims. Thus, the inherent variability has
increased, and recognition of adverse development of prior years' estimates has
occurred.
NOTE 5 -- 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.
The components of net premiums written are summarized as follows (amounts
in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
---------- ------- --------
(RESTATED)
<S> <C> <C> <C>
Direct.................................... $ 85,796 $75,553 $101,661
Assumed................................... 2,568 375 112
Ceded..................................... (4,479) (3,962) (4,789)
------- ------ --------
Net premiums written...................... $ 83,885 $71,966 $ 96,984
------- ------ --------
</TABLE>
The components of net premiums earned are summarized as follows (amounts in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
---------- ------- --------
(RESTATED)
<S> <C> <C> <C>
Direct.................................... $ 84,916 $79,920 $100,008
Assumed................................... 2,247 209 110
Ceded..................................... (4,509) (4,113) (7,224)
------- ------ --------
Net premiums earned....................... $ 82,654 $76,016 $ 92,894
------- ------ --------
</TABLE>
The components of net losses and loss adjustment expenses are summarized as
follows (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
------- -------- -------
<S> <C> <C> <C>
Direct....................................... $79,840 $ 54,454 $64,700
Assumed...................................... 1,559 188 149
Ceded........................................ (1,509) (3,685) (1,061)
------- ------- -------
Net losses and loss adjustment expenses...... $79,890 $ 50,957 $63,788
------- ------- -------
</TABLE>
A contingent liability exists to the extent that losses recoverable under a
reinsurance treaty are not paid to the Company by the reinsurer.
NOTE 6 -- LONG TERM DEBT
The Company had $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, of which 90% were owned
by PRAC, Ltd., a Nevada limited partnership. PRAC, Ltd. is controlled by Mr.
Richard Pickup, a former director. Mr. Pickup controlled approximately 26% of
the outstanding shares of the Company through various investment entities, which
together were the Company's largest stockholder. The remaining 10% were held by
the Company's primary reinsurer.
F-51
<PAGE> 207
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAC RIM HOLDING CORPORATION AND SUBSIDIARIES (CONTINUED)
The Debentures carried an 8% rate of interest, payable semi-annually and
were due on August 16, 1999. The Debentures were convertible at the holder's
option, into shares of common stock at a conversion price of $2.75 per share.
The Debentures were 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 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 expired on August 16, 1999, and the
exercise price of the Warrants was subject to downward adjustment in the event
of adverse development in the Company's December 31, 1993 loss and allocated
adjustment expense reserves related to the 1992 and 1993 accident years,
measured as of June 30, 1997. 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 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, the Company maintain at least $32,200,000 in total stockholders' equity.
At December 31, 1996, the Company was not in compliance with certain of the
covenants. In April 1997, the debentures were repaid and the warrants purchased
in connection with the acquisition of the Company by SNTL.
The Debentures are carried on the balance sheet net of unamortized discount
of $1,059,000 at December 31, 1996. The effective average interest rate of this
debt after consideration of debt issuance costs and discount was 13.3%.
During 1996, the Company completed design and implementation of an
enhancement to it's electronic data processing system. That system created
electronic files of claim and policyholder information, which substantially
decreases the need to access paper files and allows for more efficient handling
of claims and other underwriting activities. The project included an investment
in electronic data processing equipment, as well as software. The investment was
financed through a capital lease obligation covering a period of 36 months. The
lease contains a bargain purchase option at the end of the lease term. The total
cost of the equipment and software, $1,203,000, has been included in property
and equipment, and the present value of the capital lease obligation has been
recorded as a liability. Minimum lease payments are as follows (amounts in
thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
---------------------------------------------------- ------
<S> <C>
1997................................................ $504
1998................................................ 504
1999................................................ 307
</TABLE>
NOTE 7 -- 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 values as of the date of
the grant. The options under those plans are
F-52
<PAGE> 208
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAC RIM HOLDING CORPORATION AND SUBSIDIARIES (CONTINUED)
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> <C> <C>
Outstanding at January 1, 1994................... 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
Granted........................................ -- -- --
Exercised...................................... -- -- --
Cancelled...................................... (52,750) 2.50 - 8.50
---------
Outstanding at December 31, 1996................. 904,875 1.00 - 8.50
=========
</TABLE>
Under the 1988 stock option plan, 510,125 shares of common stock are
available for future grants of options. As of December 31, 1996, options to
purchase 676,000 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 plan.
Subject to certain conditions, such as continued employment, the exercise of the
options is not restricted. The options expire at various dates through 2003. The
Company accounts for these plans under APB Opinion No. 25, under which no
compensation cost has been recognized. Had compensation cost for these plans
been determined consistent with SFAS No. 123, the Company's net income (loss)
and earnings (loss) per share would not have been materially different from that
reported.
Certain current officers and directors of the Company purchased as
aggregate of 136,000 shares of common stock at a purchase price of $1.00 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.
NOTE 8 - COMMITMENT AND CONTINGENCIES
The Company currently leases office facilities in Woodland Hills, and
Fresno, California as well as 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>
1997................................................ 2,430
1998................................................ 2,381
1999................................................ 2,297
2000................................................ 2,269
2001................................................ 2,226
All Years Thereafter................................ 742
</TABLE>
Rent expense for 1996, 1995 and 1994, was $2,468,000, $2,461,000 and
$2,491,000, respectively.
F-53
<PAGE> 209
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAC RIM HOLDING CORPORATION AND SUBSIDIARIES (CONTINUED)
The Company is a party to two industrywide lawsuits, involving two medical
facilities. This litigation claims 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 9 -- REGULATORY MATTERS
Under regulatory restrictions the ability of Pacific Rim Assurance to pay
dividends to its stockholders is limited. Generally, dividends payable during a
twelve month period, without prior regulatory approval, is limited to the
greater of net income for the preceding year or 10% of policyholders' surplus as
of the preceding December 31. The payment of dividends without prior California
Insurance Department ("DOI") approval can only be paid out of "earned surplus".
Under these provisions, Pacific Rim Assurance paid $1,100,000 in dividends in
1996 to Pac Rim Holding.
As reported to insurance regulatory authorities, statutory-basis capital
and surplus of Pacific Rim Assurance at December 31, 1996 and 1995, was
$27,216,000 and $46,549,000, respectively, and the net income (loss) amounted to
$(13,069,000), $4,879,000, and $(2,878,000) for 1996, 1995, and 1994,
respectively. At December 31, 1996, Pacific Rim Assurance had a deficit balance
of $(17,202,000) in its earned surplus account. Accordingly, Pacific Rim
Assurance cannot pay dividends to its parent during 1997, without prior DOI
approval.
Subsequent to Pacific Rim Assurance filing its 1995 annual statement with
regulatory authorities, the DOI issued its triennial report for the three years
ended December 31, 1995. As a result of the DOI's triennial report the Company
was required to reduce its statutory surplus by $27 million, leaving Pacific Rim
Assurance with a statutory surplus of $19 million at December 31, 1995. Pacific
Rim Assurance did not reflect or only partially reflected the DOI required
adjustments in their 1996 annual statement. The following table summarizes the
amounts required to be recorded and the amounts reflected in the Pacific Rim
Assurance 1996 annual statement. As the table reflects, Pacific Rim Assurance's
statutory surplus would have been reduced by an additional $4.626 million.
<TABLE>
<CAPTION>
REDUCTION IN
SURPLUS RECORDED
REDUCTION IN SURPLUS IN THE ANNUAL UNRECORDED REDUCTIONS
PER EXAMINATION STATEMENT IN SURPLUS
-------------------- ------------------ ---------------------
<S> <C> <C> <C>
Premiums and agents' balances due in
the course of collections........... $ 2,918 $ 2,918 --
Federal income tax recoverable........ 1,318 1,318 --
Electronic data processing
equipment........................... 1,626 -- $ 1,626
Loss and Loss Adjustment Expense...... 21,500 18,500 3,000
------- ------- ------
Total................................. $ 27,362 $ 22,736 $ 4,626
======= ======= ======
</TABLE>
The Risk Based Capital Model (RBC) for property and casualty companies was
adopted by the National Association of Insurance Commissioners in December 1993,
requiring companies to calculate and report their RBC ratios annually. RBC is a
company's statutory surplus adjusted through a formula for trends in premiums
written and claims activities, credit risk, asset risk, and underwriting risk.
The Company's total adjusted capital is compared to its authorized control
level. Pacific Rim Assurance previously reported that it had met its RBC
requirements for 1996.
F-54
<PAGE> 210
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAC RIM HOLDING CORPORATION AND SUBSIDIARIES (CONTINUED)
As a result of the adjustments discussed in Note 2 that have been recorded
as part of this restatement and adjustments indicated to be recorded as a result
of the DOI's triennial examination not reflected in its 1996 annual statement
filed with the DOI and other regulatory bodies, the RBC level of Pacific Rim
Assurance would have placed it in an action level. Depending upon the action
level that Pacific Rim Assurance would be categorized as, the DOI could have
required it to develop a rehabilitation plan, restrict or eliminate its ability
to write additional premiums, require additional surplus to be raised or take
other actions considered necessary. As a result of SNTL's acquisition of Pacific
Rim Assurance with the DOI's approval and SNTL's contribution of $10 million to
its surplus, Pacific Rim Assurance's adjusted statutory capital exceeds the
minimal RBC level.
NOTE 10 -- INCOME TAXES
The components of the provision for total income tax expense are summarized
as follows (amount in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
---------- ------- ------
(RESTATED)
<S> <C> <C> <C>
Current..................................... $ 0 $(1,061) $ (376)
Deferred.................................... 606 1,340 1,188
------ ------ ------
Total............................. $606 $ 279 $ 812
------ ------ ------
</TABLE>
A reconciliation of income tax computed at the U.S. federal statutory tax
rates to total income tax expense is as follows (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
------- ---- ----
(RESTATED)
<S> <C> <C> <C>
Federal statutory rate............................. $(7,592) $290 $670
Increase (decrease) in taxes resulting from:
Valuation allowance.............................. 8,129 -- --
Tax-exempt interest.............................. -- (1) (30)
Other............................................ 69 (10) 172
------ ---- ----
Total tax expense........................ $ 606 $279 $812
====== ==== ====
</TABLE>
At December 31, 1996, 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,
1996, the Company has a tax net operating loss of $23,403,000 (restated) which
can be used to offset taxable income in future years, of which $2,676,000
expires in 2010 and $20,727,000 (restated) expires in 2011.
F-55
<PAGE> 211
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAC RIM HOLDING CORPORATION AND SUBSIDIARIES (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,
------------------
1996 1995
------- ------
(RESTATED)
<S> <C> <C>
Deferred tax assets
Discounting of loss reserves.......................... $ 7,273 $7,189
Unearned premiums..................................... 470 373
Allowance for doubtful accounts....................... 855 415
Rental expense........................................ 512 518
Unrealized loss of securities......................... 167 --
Net operating loss carry forward...................... 7,957 910
Alternative minimum tax credit carry forward.......... 334 334
Policyholder dividends................................ 121 --
Other -- net.......................................... 21 93
------- ------
Total deferred tax assets............................... 17,710 9,832
Less: Valuation allowance............................... 8,129 --
Deferred tax liabilities:
Deferred policy acquisition........................... 362 331
Earned but unbilled premiums.......................... 282 165
Prepaid insurance..................................... 56 86
Unrealized gain on securities......................... -- 835
Other -- net.......................................... 136 67
------- ------
Total deferred tax liabilities.......................... $ 836 $1,484
------- ------
Net deferred tax assets................................. $ 8,745 $8,348
======= ======
</TABLE>
There were no taxes paid in 1995 and 1996.
Because of the significant operating loss during 1996, management believed
that it was prudent to record a valuation allowance of $8.1 million. Management
believes that it is more likely than not the net deductible temporary
differences not supported by the valuation allowance will reverse during periods
in which the Company generates net taxable income. However, there can be no
assurance the Company will generate any earnings or any specific level of
continuing earnings in future years. Certain tax planning strategies could be
implemented to supplement income from operations to fully realize recorded
benefits.
NOTE 11 -- DISCLOSURE OF CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES
Nature of Operations
During the year ended December 31, 1996, the Company wrote 88% 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.
F-56
<PAGE> 212
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAC RIM HOLDING CORPORATION AND SUBSIDIARIES (CONTINUED)
At December 31, 1996, 35% of the Company's premiums in force had been
generated by its five highest producing agencies and brokerage firms, two of
which accounted for 17% of total premiums in force at that date.
Use 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 reporting amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Loss and Loss Adjustment Expenses
Loss and loss adjustment expenses are based on case-basis estimates of
reported claims and on estimates, based on experience and industry data, for
unreported loss and loss adjustment expenses. The provision for unpaid loss and
loss 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 the
ultimate liability will not differ from such estimates.
There is a high level of uncertainty inherent in the evaluation of the
required loss and loss adjustment expense reserves. Management has selected
ultimate loss and loss 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
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.
NOTE 12 -- RELATED PARTY TRANSACTIONS
The Company had a five-year employment contract with its former president
that expired on August 16, 1997. Under the provisions of the contract, the
President received annual compensation of $400,000 and a possible bonus, based
on achievement by the Company of various earnings-based performance criteria.
The agreement also provided for the payment of certain other fringe benefits.
The Company loaned to the former President $150,000 annually in 1991, 1992,
1993. As of December 31, 1996 and 1995, the loan balance was $450,000. The loan
bore interest at 6.3% on the principal amount, which was 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, 1996, the loan was secured by shares of
the Company's common stock with a market value equal to 100% of the principal
balance. The loan was eliminated on April 11, 1997, in conjunction with the
purchase of Pac Rim Holding.
The Company granted the former 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.
The Company used the law firm of Barger & Wolen for legal services. Dennis
W. Harwood was a member of the Company's Board of Directors, and Richard D.
Barger was a member of Pacific Rim Assurance's Board of Directors, as well as
being a partner with Barger & Wolen. During 1996, the Company paid Barger &
Wolen $711,000 for legal services. The fees paid for these services were charged
to the Company at the normal rates charged to the firm's other clients.
F-57
<PAGE> 213
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PAC RIM HOLDING CORPORATION AND SUBSIDIARIES (CONTINUED)
The Company also used the legal services of The Busch Firm. Timothy R.
Busch, former Chairman of the Company's Board of Directors, is a partner in The
Busch Firm. During 1996, the Company paid the Busch Firm $20,000 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.
NOTE 13 -- 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 compensations 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.
F-58
<PAGE> 214
UNAUDITED CONSOLIDATED CONDENSED PRO FORMA FINANCIAL INFORMATION
FINANCIAL DATA
The accompanying unaudited consolidated condensed pro forma balance sheet
presents the consolidated financial position of Superior National Insurance
Group, Inc. ("SNTL") and Pac Rim Holding Corporation ("Pac Rim Holding") at
March 31, 1997, assuming that the acquisition had occurred as of March 31, 1997.
Such pro forma information is based upon the historical balance sheet data of
the companies, at that date, giving effect to the acquisition using the purchase
method of accounting described in the accompanying notes to unaudited
consolidated condensed pro forma financial data.
The accompanying unaudited consolidated condensed pro forma statement of
operations give effect to the acquisition by consolidating the results of
operations of SNTL and Pac Rim Holding for the three months ended March 31, 1997
and for the year ended December 31, 1996, using the purchase method of
accounting and by giving effect to the acquisition described in the accompanying
notes to unaudited consolidated condensed pro forma financial data.
Certain reclassifications have been made to the historical financial data
of SNTL for certain periods to conform to its current presentation. Certain
reclassifications have been made to the historical financial data of Pac Rim
Holding to conform to SNTL's current presentation.
The accompanying unaudited consolidated condensed pro forma financial data
should be read in conjunction with the separate historical financial statements
and notes thereto of SNTL and Pac Rim Holding. The following unaudited
consolidated condensed pro forma financial data is presented for information
purposes only and is not necessarily indicative of the results of future
operations of the consolidated entity or the actual results that would have been
achieved had the acquisition been consummated on the dates presented.
F-59
<PAGE> 215
ACQUISITION OF PAC RIM HOLDING CORPORATION BY
SUPERIOR NATIONAL INSURANCE GROUP, INC.
PURCHASE ACCOUNTING METHOD
UNAUDITED CONSOLIDATED CONDENSED PRO FORMA BALANCE SHEET
AS OF MARCH 31, 1997
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
PURCHASE
PAC RIM ACCOUNTING PRO FORMA
SNTL HOLDING ADJUSTMENTS COMBINED
-------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Investments
Bonds and notes:
Available-for-sale, at market.......................... $ 54,755 $ 54,358 $ (158)(a) $108,955
Equity securities, at market............................. 1,177 -- (499)(b) 678
Cash and short-term market............................... 83,600 54,182 11,665(b) 149,447
Restricted investment.................................... 1,380 -- -- 1,380
-------- -------- -------- --------
Total Investments................................... 140,912 108,540 11,008 260,460
Reinsurance recoverable:
Paid claims and claim adjustment expense............... 131 534 -- 665
Unpaid claims and claim adjustment expense............. 25,843 3,486 -- 29,329
Premiums receivable (less allowance for doubtful
account)............................................... 9,318 13,126 -- 22,444
Earned but unbilled premiums receivable.................. 4,450 4,142 -- 8,592
Accrued investment income................................ 1,141 661 (21)(c) 1,781
Deferred policy acquisition costs........................ 4,248 -- -- 4,248
Property and equipment, less accumulated depreciation and
amortization........................................... 4,757 3,907 (2,525)(d) 6,139
Deferred income taxes.................................... 9,202 8,860 6,073(e) 24,135
Funds held by reinsurer.................................. 2,320 -- -- 2,320
Goodwill................................................. -- -- 27,419(f) 27,419
Receivable from reinsurer................................ 91,639 -- -- 91,639
Prepaid reinsurance premiums............................. 758 (292) -- 466
Prepaid and other........................................ 3,265 5,116 (1,938)(g) 6,443
-------- -------- -------- --------
Total Assets........................................ $297,984 $148,080 $ 40,016 $486,080
======== ======== ======== ========
</TABLE>
See explanatory notes to pro forma financial statements.
F-60
<PAGE> 216
ACQUISITION OF PAC RIM HOLDING CORPORATION BY
SUPERIOR NATIONAL INSURANCE GROUP, INC.
PURCHASE ACCOUNTING METHOD
UNAUDITED CONSOLIDATED CONDENSED PRO FORMA BALANCE SHEET (CONTINUED)
AS OF MARCH 31, 1997
(IN THOUSANDS)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PURCHASE
PAC RIM ACCOUNTING PRO FORMA
SNTL HOLDING ADJUSTMENTS COMBINED
-------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Liabilities
Claims and claim adjustment expenses..................... $106,758 $107,743 331(h) $214,832
Unearned premiums........................................ 10,446 6,859 -- 17,305
Policyholder dividends payable........................... -- 1,370 -- 1,370
Convertible debentures payable, less unamortized
discount............................................... -- 19,030 (19,030)(b) --
Long-term debt........................................... 96,947 -- 37,100(b) 134,047
Accounts payable and other liabilities................... 13,851 11,889 5,495(i) 31,235
-------- -------- -------- --------
Total Liabilities................................... 228,002 146,891 23,896 398,789
Preferred securities issued by affiliate; authorized
1,100,000 shares: issued and outstanding 1,013,753
shares in 1997 and 1996................................ 24,258 -- -- 24,258
Shareholders' Equity
Common stock, no par value; authorized 25,000,000 shares:
issued and 3,446,492 shares in 1997 and 1996........... 16,022 29,719 (11,719)(b) 34,022
Unrealized gain on equity securities, net of taxes....... (110) -- -- (110)
Unrealized gain (loss) on available-for-sale investments,
net of income taxes.................................... (275) (548) 653(b) (170)
Paid in capital -- warrants.............................. 2,206 1,800 (1,800)(j) 2,206
Retained earnings........................................ 27,881 (29,782) 28,986(j) 27,085
-------- -------- -------- --------
Total Shareholders' Equity............................... 45,724 1,189 16,120 63,033
-------- -------- -------- --------
Total Liabilities and Shareholders' Equity............. $297,984 $148,080 $ 40,016 $486,080
======== ======== ======== ========
</TABLE>
See explanatory notes to pro forma financial statements.
F-61
<PAGE> 217
PRO FORMA FINANCIAL INFORMATION
ACQUISITION OF PAC RIM HOLDING CORPORATION
BY SUPERIOR NATIONAL INSURANCE GROUP, INC.
PURCHASE ACCOUNTING METHOD
UNAUDITED CONSOLIDATED CONDENSED PRO FORMA STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997
-----------------------------------------------------
PRO PRO
PAC RIM FORMA FORMA
SNTL HOLDING ADJUSTMENTS COMBINED
---------- -------- ---------- ----------
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
Revenues:
Net premiums earned................................. $ 18,978 $ 19,507 -- $ 38,485
Net investment income and capital................... 2,086 1,449 -- 3,535
--------- ------- ------- ---------
Total Revenues............................ 21,064 20,956 -- 42,020
Expenses:
Claims and claim adjustment expenses, net of
reinsurance....................................... 10,271 25,841 -- 36,112
Underwriting and general and administrative
expenses.......................................... 7,185 10,769 -- 17,954
Policyholder dividends.............................. -- 1,006 -- 1,006
Goodwill amortization............................... -- -- 249(a) 249
Interest expense.................................... 1,727 589 (589)(b) 2,277
(140)(c)
690(d)
--------- ------- ------- ---------
Total Expenses...................................... 19,183 38,205 210 57,598
--------- ------- ------- ---------
Income (loss) before income taxes, preferred
securities dividends and accretion, and
extraordinary items............................... 1,881 (17,249) (210) (15,578)
Income tax expense (benefit)........................ 671 612 13(e) 1,296
--------- ------- ------- ---------
Income (loss) before preferred securities dividends
and accretion, and extraordinary items............ 1,210 (17,861) (223) (16,874)
Preferred securities dividends and accretion, net of
income tax benefit................................ (454) -- -- (454)
Extraordinary loss on redemption of Pac Rim's
outstanding debentures, net of tax................ -- -- (635) (635)
Extraordinary loss on early redemption of Imperial
Bank Loan, net of tax............................. -- -- (161) (161)
--------- ------- ------- ---------
Net income (loss)................................... $ 756 $(17,861) $ (1,019) $ (18,124)
========= ======= ======= =========
Per common share:
Income (loss)....................................... $ 0.15 $ (1.87) $ (2.31)
Weighted average shares outstanding................. 5,465,459 9,528,200 7,855,897
</TABLE>
See explanatory notes to pro forma financial statements.
F-62
<PAGE> 218
PRO FORMA FINANCIAL INFORMATION
ACQUISITION OF PAC RIM HOLDING CORPORATION
BY SUPERIOR NATIONAL INSURANCE GROUP, INC.
PURCHASE ACCOUNTING METHOD
UNAUDITED CONSOLIDATED CONDENSED PRO FORMA STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
--------------------------------------------------
PRO PRO
PAC RIM FORMA FORMA
SNTL HOLDING ADJUSTMENTS COMBINED
---------- ---------- ----------- ----------
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
Revenues:
Net premiums earned..................................... $ 88,648 $ 82,654 -- $ 171,302
Net investment income and capital gains................. 7,769 8,661 -- 16,430
------- -------- ------- --------
Total Revenues........................................ 96,417 91,315 -- 187,732
Expenses:
Claims and claim adjustment expenses, net of
reinsurance........................................... 55,638 79,890 -- 135,528
Underwriting and general and administrative expenses.... 33,952 31,424 -- 65,376
Policyholder dividends.................................. (5,927) (11) -- (5,938)
Goodwill amortization................................... -- -- 997(a) 997
Interest expense........................................ 7,527 2,341 (2,341)(b) 10,043
(621)(c)
3,137(d)
------- -------- ------- --------
Total Expenses.......................................... 91,190 113,644 1,172 206,006
------- -------- ------- --------
Income (loss) before income taxes, preferred securities
dividends and accretion, and extraordinary items...... 5,227 (22,329) (1,172) (18,274)
Income tax expense (benefit)............................ 1,597 606 (60)(e) 2,143
------- -------- ------- --------
Income (loss) before preferred securities dividends and
accretion, and extraordinary items.................... 3,630 (22,935) (1,112) (20,417)
Preferred securities dividends and accretion, net of
income tax benefit.................................... (1,667) -- -- (1,667)
------- -------- ------- --------
Extraordinary loss on redemption of Pac Rim's
outstanding debentures, net of tax.................... -- -- (635) (635)
Extraordinary loss on early redemption of Imperial Bank
loan, net of tax...................................... -- -- (161) (161)
------- -------- ------- --------
Net income (loss)....................................... $ 1,963 $ (22,935) $(1,908) $ (22,880)
======= ======== ======= ========
Per common share:
Income (loss)........................................... $ 0.40 $ (2.41) $ (2.97)
Weighted average shares outstanding..................... 5,315,670 9,528,200 7,706,108
</TABLE>
See explanatory notes to pro forma financial statements.
F-63
<PAGE> 219
NOTES TO FINANCIAL DATA
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed pro forma balance sheet
presents the consolidated financial position of SNTL and Pac Rim Holding as of
March 31, 1997, assuming that the Merger had occurred as of March 31, 1997. The
accompanying unaudited consolidated condensed pro forma statements of operations
give effect to the Merger by consolidating the results of operations of the
respective companies for the three months ended March 31, 1997 and for the year
ended December 31, 1996 assuming that the Merger had occurred as of the
beginning of each period.
On April 11, 1997, SNTL acquired Pac Rim Holding's for aggregate
consideration of $44 million in cash, that resulted in the payment of $20
million to Pac Rim Holding's common stockholders, $20 million to Pac Rim
Holding's convertible debenture holders, $2 million to Pac Rim Holding's warrant
and option holders, and $2 million in fees and related expenses.
SNTL financed the acquisition of Pac Rim Holding's with a $44 million term
loan from a consortium of banks and the sale of $18 million of newly issued
shares. In addition to the $42 million in cash SNTL paid for Pac Rim Holding's,
$6.6 million of the proceeds were used to redeem SNTL's previously existing long
term debt, $10 million was contributed to Pacific Rim Assurance.
SNTL agreed to pay Pac Rim Holding's former Chief Executive Officer (CEO)
$2.6 million in severance, covenant not to compete and other related
compensation. Compensation due Pac Rim Holding's former CEO at closing were
in-part offset against amounts the former CEO owed Pac Rim Holding. Further,
SNTL agreed to pay all other employees and officers of the Company $3.4 million
in severance benefits.
NOTE 2 -- PRO FORMA ADJUSTMENTS
EXPLANATORY NOTES
(1) Description of Pro Forma Adjustments
The following descriptions reference the adjustments as labeled on the
unaudited consolidated condensed pro forma balance sheet as of March 31, 1997:
(a) Adjustment to bonds and notes to reflect the fair market value as of
April 11, 1997.
(b) Represent funds received and amounts paid related to the purchase of
Pac Rim Holding.
(c) Adjustment to investment income receivable to write-off interest
receivable relating to the former CEO's loan of $450,000.
(d) Adjustment to fixed assets to reflect their fair market valuation as
of March 31, 1997.
(e) Adjustment to Pac Rim Holding's deferred tax assets to recognize its
recoverability in light of the acquisition and to reflect the related
tax effect of the extraordinary items.
(f) The excess of the purchase price paid for Pac Rim Holding over the
amounts assigned to identifiable assets acquired less liabilities
assumed is recorded as goodwill.
(g) Adjustment to other assets to reflect repayment of loan receivable due
from the former CEO of Pac Rim Holding, and to reflect accrued costs
relating to the Pac Rim acquisition.
(h) Adjustment to claims and claim adjustment expenses related to
out-of-state operations.
(i) Adjustment to accounts payable and other liabilities to accrue for
costs relating to the Pac Rim Holding acquisition, severance costs and
other miscellaneous expenses; which was offset in part by the
elimination of certain facility liabilities.
(j) Adjustment to common stock and additional paid-in-capital to reflect
the elimination of Pac Rim Holding stockholder equity interest.
F-64
<PAGE> 220
NOTES TO FINANCIAL DATA
EXPLANATORY NOTES
(1) Description of Pro Forma Adjustments
The following descriptions reference the adjustments as labeled on the
unaudited consolidated condensed pro forma statements of operations:
(a) Adjustment represents amortization of goodwill on a straight line
basis over an estimated 27.5-year period.
(b) Adjustment represents the elimination of interest expense on Pac Rim
Holding's convertible debentures payable.
(c) Adjustment represents the elimination of interest expense on SNTL's
term loan with Imperial Bank as if the repayment of such term loan had
been effective as of the beginning of the period.
(d) Adjustment represents the interest expense on SNTL's new term loan
with Chase as if the term loan had been effective as of the beginning
of the period. Interest expense is calculated based upon one month
Libor at each month-end plus 200 basis point.
(e) Adjustment represents the tax effect of pro forma adjustments,
excluding goodwill, at an effective tax rate of 34%.
F-65
<PAGE> 221
================================================================================
NO DEALER, SALESPERSON, OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE TRUST. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE AN IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THE TRUST SINCE
THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY
ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED
OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO
SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
----------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Available Information........................................... vii
Prospectus Summary.............................................. 1
Risk Factors.................................................... 15
Use of Proceeds................................................. 27
Accounting Treatments........................................... 27
Capitalization.................................................. 28
Unaudited Pro Forma Consolidated
Statements of Operations..................................... 29
Selected Consolidated Financial Data ........................... 34
Management's Discussion and Analysis of
Financial Condition and Results of
Operations of the Company.................................... 37
Business........................................................ 43
Management...................................................... 64
Executive Compensation.......................................... 69
Security Ownership of Certain Beneficial
Owners and Management........................................ 74
Certain Relationships and Related Transactions.................. 80
The Exchange Offer.............................................. 83
Description of the Exchange
Preferred Securities......................................... 93
Description of the Exchange Guarantee........................... 106
Description of the Exchange Notes............................... 110
Relationship Among the Exchange Preferred
Securities, the Exchange Notes and the
Exchange Guarantee........................................... 130
Description of Old Securities................................... 132
Certain United States Federal Income
Tax Consequences............................................. 133
ERISA Considerations............................................ 138
Plan of Distribution............................................ 139
Experts......................................................... 140
Legal Matters................................................... 140
Glossary of Terms............................................... 141
Index to Financial Statements................................... F-i
</TABLE>
----------------------
UNTIL , 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE EXCHANGE
PREFERRED SECURITIES, WHETHER OR NOT PARTICIPATING IN THE EXCHANGE OFFER, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
================================================================================
================================================================================
SUPERIOR NATIONAL
CAPITAL TRUST I
10 3/4% TRUST PREFERRED SECURITIES
WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT
OF 1933
GUARANTEED TO THE EXTENT
SET FORTH HEREIN BY
SUPERIOR NATIONAL
INSURANCE GROUP, INC.
---------------------------
PROSPECTUS
---------------------------
, 1998
================================================================================
<PAGE> 222
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS, OFFICERS AND TRUSTEES
Pursuant to Section 145 of the General Corporation Law of the State of
Delaware (the "Delaware Corporation Law"), Article VI of the By-laws of the
Company, a copy of which is incorporated by reference as Exhibit 3.2 to this
Registration Statement (the "By-laws"), provides that the Company shall
indemnify and hold harmless to the fullest extent authorized by applicable law,
including the Delaware Corporation Law, any person made a party or threatened to
be made a party to or involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative (provided that any such party shall
only be so indemnified in connection with any such action, suit or proceeding
commenced by such party if such commencement was authorized by the Board of
Directors of the Company) 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 Company or,
while a director or officer of the Company, is or was serving at the request of
the Company 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 expense,
liability and loss (including attorneys' fees) reasonably incurred or suffered
by such person in connection therewith. If a claim under the foregoing provision
of the By-laws is not paid in full by the Company within sixty days after its
receipt of a written claim, the claimant may bring suit against the Company to
recover the unpaid amount of the claim, and if successful, in whole or in part,
the claimant is entitled to the expenses of prosecuting such claim. In any such
action, the Company shall have the burden of proving that the claimant is not
entitled to the requested indemnification under applicable law.
Pursuant to Section 102(b)(7) of the Delaware Corporation Law, Article
Eleventh of the Certificate of Incorporation of the Company (the "Certificate of
Incorporation") provides that no director of the Company shall be liable to the
Company or its stockholders for monetary damages for a breach of his duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware Corporation Law or (iv) for any
transaction from which the director derived an improper personal benefit.
The foregoing discussion of the By-laws, Certificate of Incorporation
and the Delaware Corporation Law is not intended to be exhaustive and is
qualified in its entirety by the By-laws, Certificate of Incorporation and the
relevant provisions of applicable law, including the Delaware Corporation Law.
Reference is made to the Purchase Agreement (attached as Exhibit 1 to
this Registration Statement) which provides for indemnification by the Initial
Purchasers of the directors and officers of the Company, the Trustees and
certain controlling persons of the Company and Trust against certain
liabilities, including those arising under the Securities Act, with respect to
the Preliminary Offering Memorandum and Offering Memorandum relating to the sale
of the Preferred Securities.
Reference is made to the Registration Rights Agreement (attached as
Exhibit 4.2 to this Registration Statement) which provides for indemnification
by the holders of the Preferred Securities participating in the Exchange Offer
of the directors and officers of the Company and the Trustees signing the
Registration Statement and certain controlling persons of the Company or the
Trust against certain liabilities, including those arising under the Securities
Act.
The directors and officers of the Company and its subsidiaries are
insured under certain insurance policies against claims made during the period
of the policies against liabilities arising out of claims for certain acts in
their capacities as directors and officers of the Company and its subsidiaries.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted with respect to directors, officers or persons controlling
the Company or the Trust pursuant to the foregoing provisions, the Company and
the Trust have been informed that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
The Company agrees pursuant to the Declaration:
(a) to the fullest extent permitted by applicable law, to indemnify and
hold harmless (i) each Trustee, (ii) any Affiliate (as defined in the
Declaration) of any Trustee, (iii) any officer, director, shareholder, employee,
II-1
<PAGE> 223
representative or agent of any Trustee, and (iv) any employee or agent of the
Trust or its Affiliates (referred to herein as an "Indemnified Person") from and
against any loss, damage, liability, tax, penalty, expense or claim of any kind
or nature whatsoever incurred by such Indemnified Person by reason of the
creation, operation, dissolution, winding-up or termination of the Trust or any
act or omission performed or omitted by such Indemnified Person in good faith on
behalf of the Trust and in a manner such Indemnified Person reasonably believed
to be within the scope of authority conferred on such Indemnified Person by the
Declaration, except that no Indemnified Person shall be entitled to be
indemnified in respect of any loss, damage or claim incurred by such Indemnified
Person by reason of its negligence (or, in the case of the Delaware Trustee and
its related Indemnified Persons, gross negligence) or willful misconduct with
respect to such acts or omissions; and
(b) to the fullest extent permitted by applicable law, to advance
expenses (including legal fees) incurred by an Indemnified Person in defending
any claim, demand, action, suit or proceeding prior to the final disposition of
such claim, demand, action, suit or proceeding upon receipt by the Company of
(i) a written affirmation by or on behalf of the Indemnified Person of its or
his good faith belief that it or he has met the standard of conduct set forth in
the immediately preceding paragraph and (ii) an undertaking by or on behalf of
the Indemnified Person to repay such amount if it shall be determined that the
Indemnified Person is not entitled to be indemnified as authorized in the
preceding subsection.
II-2
<PAGE> 224
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
1 Purchase Agreement dated November 26, 1997 among the Company, the Trust
and Donaldson, Lufkin & Jenrette Securities Corporation and Chase
Securities Inc. (the "Initial Purchasers") providing for the sale by the
Trust to the Initial Purchasers of the Preferred Securities
2 Amended and Restated Agreement and Plan of Merger dated as of February
17, 1997 among the Company, SNTL Acquisition Corp., and Pac Rim Holding
Corporation*****
3.1 Certificate of Incorporation of the Company, as currently in effect++
3.2 By-laws of the Company, as currently in effect++
4.1 Amended and Restated Declaration of Trust of the Trust dated as of
December 3, 1997, including the Trust's Certificate of Trust and the
forms of Preferred Securities and Exchange Preferred Securities
4.2 Registration Rights Agreement dated as of December 3, 1997 among the
Company, the Trust and the Initial Purchasers
4.3 Senior Subordinated Indenture, including forms of the Old Notes and
Exchange Notes, dated as of December 3, 1997 between the Company and
Wilmington Trust Company, as trustee, providing for the sale by the
Company to the Trust of the Senior Subordinated Notes
4.4 Guarantee Agreement dated as of December 3, 1997 between the Company and
Wilmington Trust Company, as trustee, with respect to the Preferred
Securities
4.5 Guarantee Agreement with Respect to Common Securities dated as of
December 3, 1997 by the Company
4.6 Form of Exchange Guarantee Agreement between the Company and Wilmington
Trust Company, as trustee, with respect to the Exchange Preferred
Securities
5.1 Opinion of Riordan & McKinzie
5.2 Opinion of Richards, Layton & Finger, P.A.
8 Tax Opinion of Riordan & McKinzie
10.1 Employment Agreement, dated June 1, 1997, by and between Mr. William
L. Gentz, President and Chief Executive Officer of the Company, and the
Company+++++
10.2 Employment Agreement, dated February 17, 1997, by and between Mr. Arnold
J. Senter, Executive Vice President and Chief Operating Officer of the
Company, and the Company+
10.3 Employment Agreement, dated June 1, 1997, by and between J. Chris
Seaman, Executive Vice President and Chief Financial Officer of the
Company, and the Company+++++
10.4 1986 Non-Statutory Stock Option and 1986 Non-Statutory Stock Purchase
Plan***
10.5 1995 Stock Incentive Plan***
10.6 Aggregate Excess of Loss Cover entered into on the 30th day of August
1991, between Centre Reinsurance Limited (Centre Re) and the Company, as
amended*
10.7 Multi-year Prospective Accident Year Stop Loss Reinsurance Contract
effective the 1st of January 1993, between Centre Reinsurance
International Company and the Company (the "1993 Centre Re Contract")*
10.8 Letter dated March 28, 1996 from the Company canceling the 1993 Centre
Re Contract effective January 1, 1996***
10.9 Workers' Compensation and Employers' Liability Quota Share Insurance
Contract No. 30006A effective January 1, 1994, between the Company and
Zurich Reinsurance Centre, as amended (the "ZRC Contract")*
10.10 Addendum No. 4 to the ZRC Contract effective as of January 1, 1996***
</TABLE>
II-3
<PAGE> 225
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
10.11 Addendum No. 1 to the Retrocession Agreement (an ancillary agreement to
the ZRC Contract) effective as of January 1, 1996***
10.12 Lease, dated 27th day of October 1988, by and between Corporate Center
at Malibu Canyon, a California Limited Partnership and the Company,
relating to the lease of the Company's home office and Calabasas Branch
Facilities*
10.13 Lease, dated 27th of July 1993, by and between TOMOE Investment and
Development, Inc. and the Company, relating to the lease of its South
San Francisco Facility*
10.14 Lease, dated 14th of November 1991, by and between Dean Witter Reynolds
and the Company relating to the lease of its Fresno Facilities*
10.15 Lease, dated 23rd of February 1993, by and between Shaw Avenue
Associates, a California Limited Partnership and the Company relating to
the lease of its Fresno Facilities*
10.16 Lease, dated 14th of February 1994, by and between Contra Costa County
Employees Retirement Association and the Company relating to its
Sacramento Facility*
10.17 Agreement in Principle dated 29th of March 1994 by and between the
Company and Centre Reinsurance Limited or one of its affiliates*
10.18 Limited Partnership Agreement of Superior National Capital, L.P.
with certificate of Limited Partnership and Certificate of Exempted
Partnership, all as filed on the 28th of June 1994, with the
Registrar of Companies of Bermuda*
10.19 Termination and Release Agreement dated as of December 3, 1997 among
the Company, Superior Pacific Insurance Group, Inc., the subsidiaries
of the Company signatories thereto, The Chase Manhattan Bank and
certain financial institutions with respect to the Credit Agreement
dated as of April 11, 1997
10.20 Purchase warrant, dated as of the 30th of June 1994, entitling
Centreline Reinsurance Limited to purchase 579,356 shares of the
Company's common stock*
10.21 Form of Common Stock Purchase Warrant, held by those members of the
Company's management and other parties set forth on the schedule
attached thereto, to purchase an aggregate of 1,566,465 shares of the
Company common stock
10.22 Stock Purchase Agreement dated as of September 17, 1996, as amended and
restated effective as of February 17, 1997, 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*****
10.23 Registration Rights Agreement dated as of April 11, 1997 among the
Company, Insurance Partners, L.P. and Insurance Partners Offshore
(Bermuda), L.P.+++
10.24 Letter Agreement dated November 25, 1996 among the Company and the
shareholders and holders of warrants party thereto, relating to such
warrants and certain registration rights+++
10.25 Agreement with Prime Advisors regarding investment Management Services
provided to the Company dated April 12, 1997+++
10.26 Addendum No. 2 to the Retrocession Agreement between Superior National
Insurance Company and Zurich Reinsurance Centre, Inc. effective
January 1, 1997
10.27 State of California Department of Insurance Amended Certificate of
Authority+++++
10.28 The Pacific Rim Assurance Company 401(k) Plan (incorporated by reference
from Exhibit 10.11 of Pac Rim Holding Corporation's Registration Statement on
Form S-1)(1)
10.29 Office Building Lease dated January 4, 1989 between the Company, Pacific
Rim Assurance Company and 16030 Associates for office space in Encino,
California(1)
10.30 Sublease dated January 5, 1989 between Coastline Financial Corp. and
Pacific Rim Assurance Company for office space in Encino, California(1)
10.31 Office Building Lease dated September 30, 1998 between The Pacific Rim
Assurance Company and The Austin Family Trust dated November 6, 1980 for
office space in San Bernardino, California(1)
10.32 Office Space Lease dated February 11, 1991 between Rancon Realty Fund V
and The Pacific Rim Assurance Company(1)
</TABLE>
II-4
<PAGE> 226
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
10.33 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)
10.34 Addendum No. 2 dated as of September 2, 1992 of Office Building Lease
between The Pacific Rim Assurance Company and Trizec Warner, Inc(1)
10.35 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)
10.36 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)
10.37 Sublease dated February 25, 1994 between The Pacific Rim Assurance
Company and The Money Store, for office space in Woodland Hills,
California(1)
10.38 Lease Amendment #1, dated April 1, 1993, to the Office Property Lease
between Rancon Realty Fund V, and The Pacific Rim Assurance Company(1)
10.39 Sublease dated May 1, 1994 between The Pacific Rim Assurance Company and
Group Data Services, Incorporated(1)
10.40 Office lease between L.A.X. Business Center, and Pac Rim Holding
Corporation dated June 1, 1995(1)
10.41 Certificate of Authority from Department of Insurance, State of Arizona
to transact the business of Casualty With Workers' Compensation
Insurance(1)
10.42 Certificate of Authority from Department of Insurance, State of Texas to
transact the business of casualty with workers' compensation
insurance(1)
10.43 Sublease dated August 15, 1995 between The Pacific Rim Assurance Company
and the General Services Administration(1)
10.44 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(1)
10.45 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(1)
10.46 Certificate of Authority from the State of Georgia Office of
Commissioner of Insurance, to transact the business of Property and
Casualty (including Workers' Compensation)(1)
10.47 Producer agreement between Regional Benefits Insurance Services, a
subsidiary of Superior Pacific Casualty Company, and Hull & Co., Inc.,
dated May 15, 1996(2)
10.48 Producer agreement between Regional Benefits Insurance Services, and
Gulf Atlantic Management Group, Inc., dated May 15, 1996(2)
10.49 Office lease between Gulf Atlantic Investment Group, Inc. and Regional
Benefits Insurance Services, Inc., dated May 20, 1996(2)
10.50 Employment Agreement between Pac Rim Holding Corporation and Stanley
Braun, dated April 15, 1994, as amended March 27, 1995, and March 30,
1996(3)
10.51 Third Amendment to Employment Agreement between Pac Rim Holding
Corporation and Stanley Braun, dated as of April 10, 1997++++
11 Statement Regarding Computation of Per Share Earnings+ and +++++
12 Computation of Ratio of Earnings to Fixed Charges and Preferred
Dividends and EBITDA calculations
21 Subsidiaries of the Company
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Riordan & McKinzie (contained in Exhibit 5.1)
23.3 Consent of Richards, Layton & Finger, P.A. (contained in Exhibit 5.2)
24.1 Power of Attorney with respect to the Company (contained on pages II-8
and II-9 hereto)
</TABLE>
II-5
<PAGE> 227
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
24.2 Power of Attorney with respect to the Trust (contained on page II-10
hereto)
25.1 Form T-1 Statement of Eligibility under the Trust Indenture Act of
Wilmington Trust Company under the Indenture
25.2 Form T-1 Statement of Eligibility under the Trust Indenture Act of
Wilmington Trust Company under the Declaration
25.3 Form T-1 Statement of Eligibility under the Trust Indenture Act of
Wilmington Trust Company under the Exchange Guarantee Agreement
27.1 Financial Data Schedule +
27.2 Financial Data Schedule ++++
27.3 Financial Data Schedule for Financial Statements of Pac Rim Holding
Corporation for the fiscal year ended December 31, 1996 (restated)
99.1 Form of Letter of Transmittal
99.2 Form of Notice of Guaranteed Delivery.
99.3 Form of Exchange Agent Agreement
</TABLE>
- -----------------------
* Previously filed as an exhibit to the Company's Registration Statement
on Form 10, as filed with the Securities and Exchange Commission ("SEC")
on May 1, 1995 (File No. 0-25984).
** Previously filed as an exhibit to Amendment No. 2 to the Company's
Registration Statement on Form 10/A, as filed with the SEC on November
1, 1995 (File No. 0-25984).
*** Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1995, as filed with the SEC
on March 29, 1996.
***** Previously filed as an exhibit to the Company's statement on Schedule
13D, as filed with the SEC on February 27, 1997.
+ Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1996, as filed with the SEC
on March 10, 1997.
++ Previously filed as an exhibit to the Company's Current Report on Form
8-K, as filed with the SEC on April 24, 1997.
+++ Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1997, as filed with the SEC on May
15, 1997.
++++ Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997, as filed with the SEC on
August 14, 1997.
+++++ Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1997, as filed with the SEC on
November 13, 1997.
(1) Incorporated by reference from the Exhibits to the Annual Report on Form
10-K of Pac Rim Holding Corporation for the year ended December 31,
1995.
(2) Previously filed with the Quarterly Report on Form 10-Q of Pac Rim
Holding Corporation, for the quarter ended June 30, 1996.
(3) Previously filed as Exhibit K to Annex C of the Company's Proxy
Statement on Schedule 14A dated March 10, 1997.
(b) FINANCIAL STATEMENT SCHEDULES
The following financial statement schedules are included in this
Registration Statement beginning on F-24:
Schedule I: Condensed Financial Information of Superior National
Insurance Group, Inc.
Schedule II: Valuation and Qualifying Accounts and Reserves
Schedule V: Supplemental Insurance Information, Reinsurance and
Supplemental Property and Casualty Insurance
Information
II-6
<PAGE> 228
ITEM 22. UNDERTAKINGS
1. The undersigned Registrants hereby undertake to supply by means
of a post-effective amendment all information concerning a
transaction, and the company being acquired involved therein,
that was not the subject of and included in this Registration
Statement when it became effective.
2. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers
and controlling persons of each undersigned Registrant pursuant
to the foregoing provisions, or otherwise, each Registrant has
been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by each undersigned Registrant of
expenses incurred or paid by a director, officer or controlling
person of each Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being
registered, each Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final
adjudication of such issue.
3. The Undersigned Registrants hereby undertake that:
(a) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of prospectus
filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared
effective.
(b) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-7
<PAGE> 229
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, Superior National Insurance Group, Inc. has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Calabasas, State of California, on December 30,
1997.
SUPERIOR NATIONAL INSURANCE GROUP, INC.
By: /s/ J. CHRIS SEAMAN
-------------------------------
J. Chris Seaman
Executive Vice President and Chief
Financial Officer
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of Superior National
Insurance Group, Inc., hereby severally constitute and appoint each of J. Chris
Seaman, William L. Gentz, and Arnold J. Senter, our true and lawful
attorney-in-fact, with full power to him to sign for us and in our names in the
capacities indicated below, the Registration Statement on Form S-4 filed
herewith and any and all pre-effective and post-effective amendments to said
Registration Statement, and generally to do all such things in our names and on
our behalf in our capacities as officers and directors to enable Superior
National Insurance Group, Inc., to comply with the provisions of the Securities
Act of 1933, as amended, and the requirements of the Securities and Exchange
Commission, hereby ratifying and confirming our signatures as they may be signed
by each said attorney-in-fact, or any of them, to said Registration Statement
and any and all amendments thereto.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ WILLIAM L. GENTZ President, Chief Executive Officer December 30, 1997
- ----------------------------
William L. Gentz and Director (Principal Executive
Officer)
/s/ J. CHRIS SEAMAN Executive Vice President, Chief December 30, 1997
- ---------------------------- Financial Officer and Director
J. Chris Seaman (Principal Financial and Accounting
Officer)
/s/ C. LEN PECCHENINO Director, Chairman of the Board December 30, 1997
- ----------------------------
C. Len Pecchenino
/s/ THOMAS J. JAMIESON Director December 30, 1997
- ----------------------------
Thomas J. Jamieson
/s/ GORDON E. NOBLE Director December 30, 1997
- ----------------------------
Gordon E. Noble
/s/ ROBERT A. SPASS Director December 30, 1997
- ----------------------------
Robert A. Spass
/s/ CRAIG F. SCHWARBERG Director December 30, 1997
- ----------------------------
Craig F. Schwarberg
</TABLE>
II-8
<PAGE> 230
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ BRADLEY E. COOPER Director December 30, 1997
- ----------------------------
Bradley E. Cooper
Director December __, 1997
- ----------------------------
Steven D. Germain
/s/ STEVEN B. GRUBER Director December 30, 1997
- ----------------------------
Steven B. Gruber
/s/ ROGER W. GILBERT Director December 30, 1997
- ----------------------------
Roger W. Gilbert
</TABLE>
II-9
<PAGE> 231
We, the undersigned Company Trustees of Superior National Capital Trust
I, hereby severally constitute and appoint each of J. Chris Seaman, William L.
Gentz, and Arnold J. Senter, our true and lawful attorney-in-fact, with full
power to him to sign for us and in our names in the capacities indicated below,
the Registration Statement on Form S-4 filed herewith and any and all
pre-effective and post-effective amendments to said Registration Statement, and
generally to do all such things in our names and on our behalf in our capacities
as Company Trustees to enable Superior National Capital Trust I to comply with
the provisions of the Securities Act of 1933, as amended, and the requirements
of the Securities and Exchange Commission, hereby ratifying and confirming our
signatures as they may be signed by each said attorney-in-fact, or any of them,
to said Registration Statement and any and all amendments thereto.
Pursuant to the requirements of the Securities Act of 1933, as amended,
Superior National Capital Trust I has duly caused this Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Calabasas, State of California, on December 30, 1997.
SUPERIOR NATIONAL CAPITAL TRUST I
By: /s/ WILLIAM L. GENTZ
-----------------------------------
William L. Gentz
Company Trustee
By: /s/ ARNOLD J. SENTER
-----------------------------------
Arnold J. Senter
Company Trustee
By: /s/ J. CHRIS SEAMAN
-----------------------------------
J. Chris Seaman
Company Trustee
II-10
<PAGE> 232
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
1 Purchase Agreement dated November 26, 1997 among the Company, the Trust
and Donaldson, Lufkin & Jenrette Securities Corporation and Chase
Securities Inc. (the "Initial Purchasers") providing for the sale by the
Trust to the Initial Purchasers of the Preferred Securities
2 Amended and Restated Agreement and Plan of Merger dated as of February
17, 1997 among the Company, SNTL Acquisition Corp., and Pac Rim Holding
Corporation*****
3.1 Certificate of Incorporation of the Company, as currently in effect++
3.2 By-laws of the Company, as currently in effect++
4.1 Amended and Restated Declaration of Trust of the Trust dated as of
December 3, 1997, including the Trust's Certificate of Trust and the
forms of Preferred Securities and Exchange Preferred Securities
4.2 Registration Rights Agreement dated as of December 3, 1997 among the
Company, the Trust and the Initial Purchasers
4.3 Senior Subordinated Indenture, including forms of the Old Notes and
Exchange Notes, dated as of December 3, 1997 between the Company and
Wilmington Trust Company, as trustee, providing for the sale by the
Company to the Trust of the Senior Subordinated Notes
4.4 Guarantee Agreement dated as of December 3, 1997 between the Company and
Wilmington Trust Company, as trustee, with respect to the Preferred
Securities
4.5 Guarantee Agreement with Respect to Common Securities dated as of
December 3, 1997 by the Company
4.6 Form of Exchange Guarantee Agreement between the Company and Wilmington
Trust Company, as trustee, with respect to the Exchange Preferred
Securities
5.1 Opinion of Riordan & McKinzie
5.2 Opinion of Richards, Layton & Finger, P.A.
8 Tax Opinion of Riordan & McKinzie
10.1 Employment Agreement, dated June 1, 1997, by and between Mr. William
L. Gentz, President and Chief Executive Officer of the Company, and the
Company+++++
10.2 Employment Agreement, dated February 17, 1997, by and between Mr. Arnold
J. Senter, Executive Vice President and Chief Operating Officer of the
Company, and the Company+
10.3 Employment Agreement, dated June 1, 1997, by and between J. Chris
Seaman, Executive Vice President and Chief Financial Officer of the
Company, and the Company+++++
10.4 1986 Non-Statutory Stock Option and 1986 Non-Statutory Stock Purchase
Plan***
10.5 1995 Stock Incentive Plan***
10.6 Aggregate Excess of Loss Cover entered into on the 30th day of August
1991, between Centre Reinsurance Limited (Centre Re) and the Company, as
amended*
10.7 Multi-year Prospective Accident Year Stop Loss Reinsurance Contract
effective the 1st of January 1993, between Centre Reinsurance
International Company and the Company (the "1993 Centre Re Contract")*
10.8 Letter dated March 28, 1996 from the Company canceling the 1993 Centre
Re Contract effective January 1, 1996***
10.9 Workers' Compensation and Employers' Liability Quota Share Insurance
Contract No. 30006A effective January 1, 1994, between the Company and
Zurich Reinsurance Centre, as amended (the "ZRC Contract")*
10.10 Addendum No. 4 to the ZRC Contract effective as of January 1, 1996***
</TABLE>
<PAGE> 233
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
10.11 Addendum No. 1 to the Retrocession Agreement (an ancillary agreement to
the ZRC Contract) effective as of January 1, 1996***
10.12 Lease, dated 27th day of October 1988, by and between Corporate Center
at Malibu Canyon, a California Limited Partnership and the Company,
relating to the lease of the Company's home office and Calabasas Branch
Facilities*
10.13 Lease, dated 27th of July 1993, by and between TOMOE Investment and
Development, Inc. and the Company, relating to the lease of its South
San Francisco Facility*
10.14 Lease, dated 14th of November 1991, by and between Dean Witter Reynolds
and the Company relating to the lease of its Fresno Facilities*
10.15 Lease, dated 23rd of February 1993, by and between Shaw Avenue
Associates, a California Limited Partnership and the Company relating to
the lease of its Fresno Facilities*
10.16 Lease, dated 14th of February 1994, by and between Contra Costa County
Employees Retirement Association and the Company relating to its
Sacramento Facility*
10.17 Agreement in Principle dated 29th of March 1994 by and between the
Company and Centre Reinsurance Limited or one of its affiliates*
10.18 Limited Partnership Agreement of Superior National Capital, L.P.
with certificate of Limited Partnership and Certificate of Exempted
Partnership, all as filed on the 28th of June 1994, with the
Registrar of Companies of Bermuda*
10.19 Termination and Release Agreement dated as of December 3, 1997 among
the Company, Superior Pacific Insurance Group, Inc., the subsidiaries
of the Company signatories thereto, The Chase Manhattan Bank and
certain financial institutions with respect to the Credit Agreement
dated as of April 11, 1997
10.20 Purchase warrant, dated as of the 30th of June 1994, entitling
Centreline Reinsurance Limited to purchase 579,356 shares of the
Company's common stock*
10.21 Form of Common Stock Purchase Warrant, held by those members of the
Company's management and other parties set forth on the schedule
attached thereto, to purchase an aggregate of 1,566,465 shares of the
Company common stock
10.22 Stock Purchase Agreement dated as of September 17, 1996, as amended and
restated effective as of February 17, 1997, 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*****
10.23 Registration Rights Agreement dated as of April 11, 1997 among the
Company, Insurance Partners, L.P. and Insurance Partners Offshore
(Bermuda), L.P.+++
10.24 Letter Agreement dated November 25, 1996 among the Company and the
shareholders and holders of warrants party thereto, relating to such
warrants and certain registration rights+++
10.25 Agreement with Prime Advisors regarding investment Management Services
provided to the Company dated April 12, 1997+++
10.26 Addendum No. 2 to the Retrocession Agreement between Superior National
Insurance Company and Zurich Reinsurance Centre, Inc. effective
January 1, 1997
10.27 State of California Department of Insurance Amended Certificate of
Authority+++++
10.28 The Pacific Rim Assurance Company 401(k) Plan (incorporated by reference
from Exhibit 10.11 of Pac Rim Holding Corporation's Registration Statement on
Form S-1)(1)
10.29 Office Building Lease dated January 4, 1989 between the Company, Pacific
Rim Assurance Company and 16030 Associates for office space in Encino,
California(1)
10.30 Sublease dated January 5, 1989 between Coastline Financial Corp. and
Pacific Rim Assurance Company for office space in Encino, California(1)
10.31 Office Building Lease dated September 30, 1998 between The Pacific Rim
Assurance Company and The Austin Family Trust dated November 6, 1980 for
office space in San Bernardino, California(1)
10.32 Office Space Lease dated February 11, 1991 between Rancon Realty Fund V
and The Pacific Rim Assurance Company(1)
</TABLE>
<PAGE> 234
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
10.33 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)
10.34 Addendum No. 2 dated as of September 2, 1992 of Office Building Lease
between The Pacific Rim Assurance Company and Trizec Warner, Inc(1)
10.35 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)
10.36 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)
10.37 Sublease dated February 25, 1994 between The Pacific Rim Assurance
Company and The Money Store, for office space in Woodland Hills,
California(1)
10.38 Lease Amendment #1, dated April 1, 1993, to the Office Property Lease
between Rancon Realty Fund V, and The Pacific Rim Assurance Company(1)
10.39 Sublease dated May 1, 1994 between The Pacific Rim Assurance Company and
Group Data Services, Incorporated(1)
10.40 Office lease between L.A.X. Business Center, and Pac Rim Holding
Corporation dated June 1, 1995(1)
10.41 Certificate of Authority from Department of Insurance, State of Arizona
to transact the business of Casualty With Workers' Compensation
Insurance(1)
10.42 Certificate of Authority from Department of Insurance, State of Texas to
transact the business of casualty with workers' compensation
insurance(1)
10.43 Sublease dated August 15, 1995 between The Pacific Rim Assurance Company
and the General Services Administration(1)
10.44 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(1)
10.45 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(1)
10.46 Certificate of Authority from the State of Georgia Office of
Commissioner of Insurance, to transact the business of Property and
Casualty (including Workers' Compensation)(1)
10.47 Producer agreement between Regional Benefits Insurance Services, a
subsidiary of Superior Pacific Casualty Company, and Hull & Co., Inc.,
dated May 15, 1996(2)
10.48 Producer agreement between Regional Benefits Insurance Services, and
Gulf Atlantic Management Group, Inc., dated May 15, 1996(2)
10.49 Office lease between Gulf Atlantic Investment Group, Inc. and Regional
Benefits Insurance Services, Inc., dated May 20, 1996(2)
10.50 Employment Agreement between Pac Rim Holding Corporation and Stanley
Braun, dated April 15, 1994, as amended March 27, 1995, and March 30,
1996(3)
10.51 Third Amendment to Employment Agreement between Pac Rim Holding
Corporation and Stanley Braun, dated as of April 10, 1997++++
11 Statement Regarding Computation of Per Share Earnings+ and +++++
12 Computation of Ratio of Earnings to Fixed Charges and Preferred
Dividends and EBITDA calculations
21 Subsidiaries of the Company
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Riordan & McKinzie (contained in Exhibit 5.1)
23.3 Consent of Richards, Layton & Finger, P.A. (contained in Exhibit 5.2)
24.1 Power of Attorney with respect to the Company (contained on pages II-8
and II-9 hereto)
</TABLE>
<PAGE> 235
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
24.2 Power of Attorney with respect to the Trust (contained on page II-10
hereto)
25.1 Form T-1 Statement of Eligibility under the Trust Indenture Act of
Wilmington Trust Company under the Indenture
25.2 Form T-1 Statement of Eligibility under the Trust Indenture Act of
Wilmington Trust Company under the Declaration
25.3 Form T-1 Statement of Eligibility under the Trust Indenture Act of
Wilmington Trust Company under the Exchange Guarantee Agreement
27.1 Financial Data Schedule +
27.2 Financial Data Schedule ++++
27.3 Financial Data Schedule for Financial Statements of Pac Rim Holding
Corporation for the fiscal year ended December 31, 1996 (restated)
99.1 Form of Letter of Transmittal
99.2 Form of Notice of Guaranteed Delivery.
99.3 Form of Exchange Agent Agreement
</TABLE>
- -----------------------
* Previously filed as an exhibit to the Company's Registration Statement
on Form 10, as filed with the Securities and Exchange Commission ("SEC")
on May 1, 1995 (File No. 0-25984).
** Previously filed as an exhibit to Amendment No. 2 to the Company's
Registration Statement on Form 10/A, as filed with the SEC on November
1, 1995 (File No. 0-25984).
*** Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1995, as filed with the SEC
on March 29, 1996.
***** Previously filed as an exhibit to the Company's statement on Schedule
13D, as filed with the SEC on February 27, 1997.
+ Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1996, as filed with the SEC
on March 10, 1997.
++ Previously filed as an exhibit to the Company's Current Report on Form
8-K, as filed with the SEC on April 24, 1997.
+++ Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1997, as filed with the SEC on May
15, 1997.
++++ Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997, as filed with the SEC on
August 14, 1997.
+++++ Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1997, as filed with the SEC on
November 13, 1997.
(1) Incorporated by reference from the Exhibits to the Annual Report on Form
10-K of Pac Rim Holding Corporation for the year ended December 31,
1995.
(2) Previously filed with the Quarterly Report on Form 10-Q of Pac Rim
Holding Corporation, for the quarter ended June 30, 1996.
(3) Previously filed as Exhibit K to Annex C of the Company's Proxy
Statement on Schedule 14A dated March 10, 1997.
<PAGE> 1
EXHIBIT 1
SUPERIOR NATIONAL CAPITAL TRUST I
U.S.$105,000,000
10 3/4% TRUST PREFERRED SECURITIES
(Liquidation Amount $1,000 per
Trust Preferred Security)
Guaranteed to the Extent Set Forth in the Preferred Securities
Company Guarantee by Superior National Insurance
Group, Inc.
PURCHASE AGREEMENT
November 26, 1997
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
CHASE SECURITIES INC.
c/o Donaldson, Lufkin & Jenrette
Securities Corporation
277 Park Avenue
New York, New York 10172
Ladies & Gentlemen:
Superior National Insurance Group, Inc., a corporation incorporated
under the laws of the State of Delaware (the "Company") and Superior National
Capital Trust I, a statutory business trust created under the laws of the State
of Delaware (the "Trust"), agree with you as follows:
1. The Offering and Related Transactions. The Trust proposes to issue
and sell to Donaldson, Lufkin & Jenrette Securities Corporation and Chase
Securities Inc. (each, an "Initial Purchaser" and together, the "Initial
Purchasers"), in the respective amounts set forth on Schedule I hereto, an
aggregate of $105 million principal amount of its 10 3/4% Trust Preferred
Securities (Liquidation Amount $1,000 per Trust Preferred Security) (the
"Preferred Securities") guaranteed by the Company to the extent set forth in the
guarantee agreement (the "Preferred Securities Company Guarantee"), dated
December 3, 1997, by and between the Company and Wilmington Trust Company, as
trustee (the "Preferred Securities Guarantee Trustee"). The Preferred Securities
are to be issued by the Trust pursuant to the provisions of an amended and
restated declaration of trust (the "Declaration"), dated as of December 3, 1997,
by and among Wilmington Trust Company, as trustee (the "Preferred Trustee"),
William L. Gentz, Arnold J. Senter and J. Chris Seaman as the trustees (the
"Company Trustees"), Wilmington Trust Company, as trustee
<PAGE> 2
2
(the "Delaware Trustee"), the Company, as sponsor, and by the holders, from time
to time, of undivided beneficial interests in the Trust. The proceeds of the
sale of the Preferred Securities and of the common securities of the Trust (the
"Common Securities," guaranteed by the Company to the extent set forth in the
guarantee (the "Common Securities Company Guarantee"), dated December 3, 1997,
by the Company and, together with the Preferred Securities, the "Trust
Securities") sold to the Company are to be invested in senior subordinated notes
of the Company (the "Senior Subordinated Notes"), to be issued pursuant to an
indenture, to be dated as of December 3, 1997 (the "Indenture"), between the
Company and Wilmington Trust Company, as trustee (the "Indenture Trustee").
Under certain circumstances, as specified in greater detail in the Declaration,
the Preferred Securities may be exchangeable for Senior Subordinated Notes. The
Preferred Securities, the Preferred Securities Company Guarantee and the Senior
Subordinated Notes are collectively referred to herein as the "Securities."
Capitalized terms used but not defined herein shall have the meanings
given to such terms in the Indenture.
The Preferred Securities will be offered and sold to you pursuant to an
exemption from the registration requirements under the Securities Act of 1933,
as amended (the "Securities Act"). The Company has prepared a preliminary
offering memorandum, dated November 12, 1997 (the "Preliminary Offering
Memorandum"), and a final offering memorandum, dated November 26, 1997 (the
"Offering Memorandum"), relating to the Trust and the Company and its
subsidiaries and the Securities.
Upon original issuance thereof, and until such time as the same is no
longer required under the applicable requirements of the Securities Act, the
Preferred Securities (and all securities issued in exchange therefor or in
substitution thereof) shall bear the following legend:
"THE PREFERRED SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR
ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAW.
NEITHER THIS PREFERRED SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN
MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR
OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH
TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION.
THE HOLDER OF THIS PREFERRED SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO
OFFER, SELL OR OTHERWISE TRANSFER THIS PREFERRED SECURITY, PRIOR TO THE
DATE (THE "RESALE RESTRICTION TERMINATION DATE") WHICH IS TWO YEARS
AFTER THE LATER OF THE ORIGINAL ISSUANCE DATE HEREOF AND THE LAST DATE
ON WHICH THE COMPANY OR ANY "AFFILIATE" OF THE COMPANY WAS THE OWNER OF
THIS PREFERRED SECURITY (OR ANY PREDECESSOR OF THIS PREFERRED SECURITY)
ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION
<PAGE> 3
3
STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT,
(C) SO LONG AS THIS PREFERRED SECURITY IS ELIGIBLE FOR RESALE PURSUANT
TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON IT
REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN
RULE 144A) THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A
QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER
IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES
TO NONUNITED STATES PERSONS THAT OCCUR OUTSIDE THE UNITED STATES WITHIN
THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN
INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH
(A)(1), (2), (3) OR (7) OF RULE 501 UNDER THE SECURITIES ACT THAT IS
ACQUIRING THIS PREFERRED SECURITY FOR ITS OWN ACCOUNT, OR FOR THE
ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, FOR INVESTMENT
PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION
WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT OR (F)
PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION
REQUIREMENTS UNDER THE SECURITIES ACT, SUBJECT TO THE RIGHT OF THE TRUST
AND THE COMPANY PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (i) PURSUANT
TO CLAUSE (D), (E) OR (F) TO REQUIRE THE DELIVERY OF AN OPINION OF
COUNSEL, CERTIFICATIONS AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF
THEM AND (ii) PURSUANT TO CLAUSE (E) TO REQUIRE THAT THE TRANSFEROR
DELIVER TO THE TRUST A LETTER FROM THE TRANSFEREE SUBSTANTIALLY IN THE
FORM OF ANNEX A TO THE OFFERING MEMORANDUM DATED NOVEMBER 26, 1997. SUCH
HOLDER FURTHER AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS
PREFERRED SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT
OF THIS LEGEND."
Additional Legend for Regulation S Preferred Securities:
"THIS PREFERRED SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES
ACT AND MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR
FOR THE ACCOUNT OR BENEFIT OF, UNITED STATES PERSONS UNLESS REGISTERED
UNDER THE SECURITIES ACT OR AN EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT IS AVAILABLE."
Additional Legend until rights under the Registration Rights Agreement are
exercised:
"BY ACCEPTANCE HEREOF, EACH HOLDER AGREES TO BE BOUND BY THE
PROVISIONS OF THE REGISTRATION RIGHTS AGREEMENT DATED AS OF
<PAGE> 4
4
DECEMBER 3, 1997 BETWEEN THE COMPANY AND THE INITIAL
PURCHASERS."
You have advised the Trust that you will make offers (the "Exempt
Resales") of the Preferred Securities purchased hereunder on the terms set forth
in the Offering Memorandum, as amended or supplemented, solely to persons whom
you reasonably believe to be "qualified institutional buyers," as defined in,
and in accordance with, Rule 144A under the Securities Act ("QIBs"), to persons
who are not U.S. persons (as defined in Regulation S under the Securities Act)
("Non-U.S. Persons") in transactions conforming to the requirements of such
Regulation S (and in compliance with the applicable laws of the relevant foreign
jurisdiction, including, without limitation, any required governmental filings
and offering memorandum delivery requirements) and to a limited number of
institutional "accredited investors" referred to in Rule 501(a)(1), (2), (3) or
(7) of Regulation D under the Securities Act (each, an "Accredited Investor").
Such QIBs, Non-U.S. Persons and Accredited Investors are sometimes referred to
herein as the "Eligible Purchasers." You will offer the Preferred Securities to
such Eligible Purchasers initially at a price equal to 100 percent of the
principal amount thereof. Such price may be changed by you at any time without
notice.
Holders (including subsequent transferees) of the Preferred Securities
will have the registration rights set forth in the registration rights agreement
relating thereto (the "Registration Rights Agreement"), to be dated the Closing
Date (as defined herein), in substantially the form of Exhibit A hereto.
Pursuant to the Registration Rights Agreement, the Trust and the Company will
agree to file with the Securities and Exchange Commission (the "Commission"),
under the circumstances set forth therein, (i) a registration statement under
the Securities Act (the "Exchange Offer Registration Statement") registering an
issue of the preferred securities of the Trust and the related senior
subordinated notes and guarantee of the Company (respectively, the "Exchange
Preferred Securities," the "Exchange Notes" and the "Exchange Preferred
Securities Company Guarantee" and collectively the "Exchange Securities") which
are to be offered (the "Exchange Offer") in exchange for, and which are
identical in all material respects to, the Securities (except that the Exchange
Securities will not contain terms with respect to transfer restrictions) and,
(ii) if applicable, a shelf registration statement pursuant to Rule 415 under
the Securities Act (the "Shelf Registration Statement") relating to the resale
by certain holders of the Securities and to use their best efforts to cause such
Registration Statements to be effective. This Purchase Agreement (this
"Agreement"), the Securities, the Exchange Securities, the Declaration, the
Indenture and the Registration Rights Agreement are hereinafter sometimes
referred to collectively as the "Operative Documents."
2. Agreements to Sell and Purchase. On the basis of the representations
and warranties contained in this Agreement, and subject to its terms and
conditions, the Trust agrees to issue and sell to you, and each of the Initial
Purchasers, severally but not jointly, agrees to purchase from the Trust,
Preferred Securities in the respective principal amount set forth opposite its
name on Schedule I hereto. The purchase price for the Preferred Securities shall
be 100 percent of their principal amount.
<PAGE> 5
5
As compensation to the Initial Purchasers for their commitments
hereunder, and in view of the fact that the proceeds from the sale of the Trust
Securities will be used by the Trust to purchase the Senior Subordinated Notes,
the Company on the Closing Date will pay by wire transfer of immediately
available funds to Donaldson, Lufkin & Jenrette Securities Corporation for the
accounts of the several Initial Purchasers, the amount of $29.50 per Security.
3. Delivery and Payment. Delivery to the Initial Purchasers of, and
payment for, the Preferred Securities shall be made at 10:00 a.m., New York City
time, on December 3, 1997 (the "Closing Date") at the offices of Simpson Thacher
& Bartlett, 425 Lexington Avenue, New York, New York 10017, or such other time
or place as you and the Company shall agree and designate.
Payment for the Preferred Securities shall be made by the Initial
Purchasers to the Trust or its order by wire transfer in U.S. dollars in
immediately available funds to an account at a U.S. bank designated in writing
by the Company prior to the Closing Date. Such payment shall be made against
delivery at the place or places and in the principal amounts of Preferred
Securities specified in writing by the Initial Purchasers prior to the Closing
Date to (a) the Preferred Trustee, on behalf of The Depository Trust Company
("DTC"), of a global certificate registered in the name of Cede & Co., as
nominee of DTC, in respect of the Preferred Securities sold pursuant to Rule
144A, (b) the Preferred Trustee, on behalf of DTC, on behalf of The Euroclear
System ("Euroclear") and Cedel Bank, societe anonyme ("Cedel Bank"), of a global
certificate registered in the name of Cede & Co., as nominee of DTC, in respect
of the Preferred Securities sold pursuant to Regulation S, and (c) the Preferred
Trustee, on behalf of DTC, of a global certificate registered in the name of
Cede & Co., as nominee of DTC, in respect of the Preferred Securities sold to
Accredited Investors. The global certificates representing the Preferred
Securities as aforesaid shall be made available to you for inspection not later
than 9:30 a.m., New York City time, on the business day immediately preceding
the Closing Date.
4. Agreements of the Trust and the Company. Each of the Trust and the
Company (collectively, the "Issuers") jointly and severally agrees with each of
you as follows:
(a) To advise you promptly and, if requested by you, confirm such
advice in writing, (i) of the issuance by any state securities
commission of any stop order suspending the qualification or exemption
from qualification of any of the Securities for offering or sale in any
jurisdiction, or the initiation of any proceeding for such purpose by
any state securities commission or other regulatory authority, and (ii)
(A) of the happening of any event that makes any statement of a material
fact made in the Offering Memorandum untrue or that requires the making
of any additions to or changes in the Offering Memorandum in order to
make the statements therein, in light of the circumstances under which
they are made, not misleading and (B) of the issuance of any quarterly,
annual or other financial statements by the Company (copies of which
shall be delivered to you within three business days after the date of
issuance). Each of the Issuers shall use its best efforts to prevent the
issuance of any stop order or order suspending the qualification or
exemption of any of the Securities under any state securities or Blue
Sky laws, and if at any time any state securities commission or other
regulatory authority shall issue an order
<PAGE> 6
6
suspending the qualification or exemption of any of the Securities under
any state securities or Blue Sky laws, the Issuers shall use its best
efforts to obtain the withdrawal or lifting of such order at the
earliest possible time.
(b) To furnish you, without charge, as many copies of the
Preliminary Offering Memorandum and the Offering Memorandum, and any
amendments or supplements thereto, as you may reasonably request. Each
Issuer consents to the use of the Preliminary Offering Memorandum and
the Offering Memorandum, and any amendments and supplements thereto, by
you in connection with Exempt Resales.
(c) Not to amend or supplement the Preliminary Offering
Memorandum or the Offering Memorandum prior to the Closing Date unless
you shall previously have been advised thereof and shall not have
reasonably objected thereto in writing within three business days after
being furnished a copy thereof. The Issuers shall promptly prepare, upon
your reasonable request, any amendment or supplement to the Preliminary
Offering Memorandum or the Offering Memorandum that may be reasonably
necessary or advisable in connection with Exempt Resales.
(d) If, after the date hereof and prior to consummation of any
Exempt Resales, any event shall occur as a result of which, in the
opinion of your counsel, it becomes necessary to amend or supplement the
Offering Memorandum in order to make the statements therein, in light of
the circumstances when the Offering Memorandum is delivered to an
Eligible Purchaser which is a prospective purchaser, not misleading, or
if it is necessary to amend or supplement the Offering Memorandum to
comply with applicable law, promptly to prepare an appropriate amendment
or supplement to the Offering Memorandum so that statements therein as
so amended or supplemented will not, in light of the circumstances when
the Offering Memorandum is so delivered, be misleading, or so that the
Offering Memorandum will comply with applicable law.
(e) To cooperate with you and your counsel in connection with the
qualification of the Securities under the securities or Blue Sky laws of
such jurisdictions as you may request and to continue such qualification
in effect so long as required for the Exempt Resales and to continue
such qualification in effect so long as required by law for
distributions of the Securities.
(f) Whether or not the transactions contemplated by this
Agreement are consummated or this Agreement becomes effective or is
terminated, to pay all costs, expenses, fees and taxes incident to and
in connection with: (i) the preparation, printing, processing and
distribution of the Preliminary Offering Memorandum and the Offering
Memorandum (including, without limitation, financial statements and
exhibits) and all amendments and supplements thereto, (ii) the
preparation (including, without limitation, word processing and
duplication costs), printing, processing and delivery of this Agreement
and the other Operative Documents and all other agreements, memoranda,
correspondence and other documents prepared and delivered in connection
herewith and
<PAGE> 7
7
with the Exempt Resales, (iii) the issuance and delivery by the Issuers
of the Securities and the Exchange Securities, (iv) furnishing such
copies of the Preliminary Offering Memorandum and the Offering
Memorandum, and all amendments and supplements thereto, as may be
reasonably requested for use in connection with Exempt Resales, (v) the
preparation of certificates for the Securities and the Exchange
Securities (including, without limitation, printing and engraving
thereof), (vi) the fees, disbursements and expenses of the Issuers'
counsel and accountants, (vii) all expenses and listing fees in
connection with the application for quotation of the Preferred
Securities in the National Association of Securities Dealers, Inc.
("NASD") Private Offerings, Resales and Trading through Automated
Linkages ("PORTAL") market, (vii) all fees and expenses (including fees
and expenses of counsel) of the Issuers in connection with approval of
the Securities and the Exchange Securities by DTC, Euroclear and Cedel
Bank for "book-entry" transfer, (ix) any fees and expenses charged by
rating agencies for rating the Securities and the Exchange Securities,
(x) all "road show" and other marketing expenses related to the
preparation of slides, videotapes and printed marketing materials and
travel, hotel, food and entertainment expenses of the Issuers and (xi)
the performance by the Issuers of their other obligations under this
Agreement and the other Operative Documents. In addition, the Issuers
agree to pay all out-of-pocket expenses incurred by the Initial
Purchasers (including the reasonable fees and expenses of their counsel)
incurred in connection with qualifying the Securities under the Blue Sky
state securities laws and preparing, printing and distributing
preliminary and final Blue Sky memoranda.
(g) To use the proceeds from the sale of the Trust Securities in
the manner described in the Offering Memorandum under the caption "Use
of Proceeds."
(h) Not to voluntarily claim, and to resist any attempts to
claim, the benefit of any usury laws against the holders of any
Securities or Exchange Securities.
(i) To do and perform all things required to be done and
performed under this Agreement by it prior to or after the Closing Date
and to satisfy all conditions precedent on its part to the delivery of
the Securities.
(j) Not to sell, offer for sale or solicit offers to buy or
otherwise negotiate in respect of any security (as defined in the
Securities Act) that would be integrated with the sale of the Preferred
Securities in a manner that would require the registration under the
Securities Act of the sale to you or Eligible Purchasers of the
Preferred Securities.
(k) For so long as any of the Securities or Exchange Securities
remain outstanding and during any period in which the Company or Trust
is not subject to Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), to make available to any QIB,
beneficial owner or other holder of Preferred Securities in connection
with any sale thereof and any prospective purchaser of such Preferred
Securities from such QIB, beneficial owner or other holder, the
information required by Rule 144A(d)(4) under the Securities Act.
<PAGE> 8
8
(l) To cause the Exchange Offer to be made in the appropriate
form to permit registration of the Exchange Securities to be offered in
exchange for the Securities and to comply in all material respects with
all applicable United States federal and state securities laws in
connection with the Exchange Offer.
(m) To use its best efforts to effect the inclusion of the
Preferred Securities in PORTAL.
(n) In the case of the Company during a period of five years
following the date of this Agreement, to deliver to each of the Initial
Purchasers promptly upon their becoming available, copies of all
current, regular and periodic reports filed by the Company with the
Commission or with any governmental authority succeeding to any of the
functions of such regulators, or any securities exchange or security
holders and such other publicly available information concerning the
Company and its subsidiaries as any Initial Purchaser shall reasonably
request.
(o) Not to, and to use its reasonable best efforts to cause its
affiliates not to, offer, sell, contract to sell or grant any option to
purchase or otherwise transfer or dispose of any securities (other than
(i) the Securities and (ii) the Exchange Securities issuable in the
Exchange Offer) substantially similar to the Preferred Securities or any
security convertible into or exchangeable for, or otherwise represent a
right to acquire, any such security, for a period of 180 days after the
Closing Date, without the prior written consent of Donaldson, Lufkin &
Jenrette Securities Corporation.
(p) To comply in all material respects with all agreements set
forth in the representation letter of the Trust or the Company to DTC
relating to the approval of the Securities and the Exchange Securities
by DTC for "book-entry" transfer and to comply in all material respects
with all agreements of the Trust or Company with Euroclear and Cedel
Bank relating to the approval of the Securities and the Exchange
Securities by them for "book-entry" transfer.
(q) The Trust and the Company will not, nor will the Company
permit any of its affiliates (as defined for the purposes of Rule 144
under the Securities Act) to, resell any of the Securities that may be
acquired by any of them.
(r) Not to engage directly or indirectly through any agent in any
"directed selling efforts" (as defined in Regulation S) with respect to
the Securities and the Exchange Securities, and to comply and cause any
person acting on its behalf to comply with the offering restrictions
requirement of Regulation S and not to take any other action, directly
or indirectly through any agent, which would require that the offering
of the Securities to or by the Initial Purchasers to be registered
pursuant to the Securities Act.
5. Representations and Warranties. (a) Each of the Issuers jointly and
severally represents and warrants to each of you, as of the date hereof and as
of the Closing Date, that:
<PAGE> 9
9
(i) The Preliminary Offering Memorandum and the Offering
Memorandum do not, and any supplement or amendment to them will not,
contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading,
except that the representations and warranties contained in this
paragraph (i) shall not apply (A) to statements in or omissions from the
Preliminary Offering Memorandum and the Offering Memorandum (or any
supplement or amendment thereto) made in reliance upon and in conformity
with information furnished to the Issuers in writing by you expressly
for use therein. There are no agreements, contracts, indentures, leases
or other documents or instruments of the Company or its subsidiaries
that are required to be described in the Offering Memorandum in order
that the statements made therein are not misleading in any material
respect or in order that there are no material omissions therefrom. No
stop order preventing the use of the Preliminary Offering Memorandum or
the Offering Memorandum, or any amendment or supplement thereto, or any
order asserting that any of the transactions contemplated by this
Agreement are subject to the registration requirements of the Securities
Act, has been issued. Each of the Preliminary Offering Memorandum and
the Offering Memorandum, as of its date, contains all the information
specified in, and meeting the requirements of, Rule 144A(d)(4) under the
Securities Act.
(ii) When the Securities are issued and delivered pursuant to
this Agreement, the Declaration and the Indenture, none of the
Securities will be of the same class (within the meaning of Rule 144A
under the Securities Act) as securities of the Trust or the Company that
are listed on a national securities exchange registered under Section 6
of the Exchange Act or that are quoted in a United States automated
inter-dealer quotation system.
(iii) The Company and each of its subsidiaries has been duly
organized, is validly existing as a corporation in good standing under
the laws of its respective jurisdiction of incorporation, has all
requisite corporate power and authority to carry on its business as it
is currently being conducted and as described in the Offering Memorandum
and to own, lease and operate its properties, and is duly qualified and
in good standing as a foreign corporation authorized to do business in
each jurisdiction in which the nature of its business or its ownership
or leasing of property requires such qualification except where the
failure to be so qualified (x) would not reasonably be expected,
individually or in the aggregate, to result in a material adverse effect
on the assets, properties, business, results of operations, condition
(financial or otherwise), affairs or prospects of the Company and its
subsidiaries, taken as a whole, (y) would materially interfere with or
adversely affect the issuance of the Securities or the Exchange
Securities or (z) would draw into question in any material respect the
validity of this Agreement or any other Operative Document (any of the
events set forth in clauses (x), (y) or (z), a "Material Adverse
Effect"); and the Trust has been duly created and is validly existing as
a business trust in good standing under the laws of the State of
Delaware, with power and authority to own, lease and operate its
properties as described in the Offering Memorandum.
<PAGE> 10
10
(iv) The Company has all requisite corporate power and
authority to execute, deliver and perform its obligations under this
Agreement and each of the other Operative Documents to which it is a
party and to consummate the transactions contemplated hereby and
thereby, including, without limitation, the corporate power and
authority to issue, sell and deliver the Senior Subordinated Notes, the
Preferred Securities Company Guarantee, the Exchange Notes and the
Exchange Preferred Securities Company Guarantee.
(v) The entities listed on Schedule II hereto are the only
subsidiaries, direct or indirect, of the Company. Except as otherwise
described in the Offering Memorandum, the Company owns, directly or
indirectly through other subsidiaries, the percentage of the outstanding
capital stock or other securities evidencing equity ownership of such
subsidiaries set forth opposite the name of each subsidiary on Schedule
II hereto, free and clear of any security interest, claim, lien,
limitation on voting rights or encumbrance (other than security
interests in favor of The Chase Manhattan Bank, as administrative
agent under the credit agreement dated as of April 11, 1997 ("Credit
Agreement"), among SNTL Acquisition Corp. (currently Superior Pacific
Insurance Group, Inc.), a Delaware corporation, The Chase Manhattan
Bank, as administrative agent (the "Administrative Agent") and the
lenders named therein, which security interests will be terminated at
Closing, and encumbrances or restrictions created by statute, rule,
regulation or order and applicable to the Company's regulated insurance
subsidiaries); and all of such securities have been duly authorized,
validly issued, are fully paid and nonassessable and were not issued in
violation of any preemptive or similar rights. Except as otherwise
described in the Offering Memorandum, there are no outstanding
subscriptions, rights, warrants, calls, commitments of sale or options
to acquire, or instruments convertible into or exchangeable for, any
such shares of capital stock or other equity interest of such
subsidiaries.
(vi) The shares of issued and outstanding capital stock of the
Company have been duly authorized and validly issued and are fully paid
and non-assessable and were not issued in violation of any preemptive or
similar rights. Except as disclosed in the Offering Memorandum, there
are no outstanding subscriptions, rights, warrants, calls, commitments
of sale or options to acquire, or instruments convertible into or
exchangeable for, any such shares of capital stock or other equity
interest of the Company. The Company and its subsidiaries had as of
September 30, 1997, an authorized and outstanding consolidated
capitalization as set forth in the Offering Memorandum.
(vii) All the outstanding beneficial interests in the Trust have
been duly and validly authorized and issued, are fully paid and
non-assessable and conform to the descriptions thereof contained in the
Offering Memorandum.
(viii) The Common Securities of the Trust have been duly authorized
on behalf of the Trust by the Preferred Trustee and upon delivery by the
Preferred Trustee to the Company against payment therefor as set forth
in the Declaration, will be duly and validly issued beneficial interests
in the Trust and will conform to the description thereof contained
<PAGE> 11
11
in the Offering Memorandum; the issuance of the Common Securities is not
subject to preemptive or other similar rights.
(ix) The Preferred Securities Company Guarantee, the Indenture,
the Senior Subordinated Notes and the Declaration (the Preferred
Securities Company Guarantee, the Indenture, the Senior Subordinated
Notes and the Declaration being collectively referred to as the
"Guarantor Agreements") have each been duly authorized and when validly
executed and delivered by the Company and, in the case of the Preferred
Securities Company Guarantee, by the Guarantee Trustee, in the case of
the Indenture, by the Indenture Trustee, in the case of the Declaration,
by the Preferred Trustee, and, in the case of the Senior Subordinated
Notes, when issued by the Company and delivered to the Preferred
Trustee, will constitute valid and legally binding obligations of the
Company, enforceable in accordance with their respective terms, subject
to the effects of bankruptcy, insolvency, fraudulent conveyance or
transfer, reorganization, moratorium and other similar laws relating to
or affecting creditors' rights generally, general equitable principles
(whether considered in a proceeding in equity or at law) and an implied
covenant of good faith and fair dealing; the Indenture, Declaration and
Preferred Securities Company Guarantee conform to the requirements of
the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act");
the Senior Subordinated Notes are entitled to the benefits of the
Declaration; and the Guarantor Agreements will conform in all material
respects to the descriptions thereof in the Offering Memorandum. Prior
to the Exchange Offer or the effectiveness of the Shelf Registration
Statement, the Indenture, Declaration and Company guarantee are not
required to be qualified under the Trust Indenture Act.
(x) This Agreement has been duly and validly authorized,
executed and delivered by each of the Issuers and is the legally valid
and binding agreement of each Issuer, enforceable against each of the
Issuers in accordance with its terms, except as the enforceability
thereof may be subject to the effects of bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and other similar laws
relating to or affecting creditors' rights generally and general
equitable principles (whether considered in a proceeding in equity or at
law) and except as the enforceability hereof may be limited by
considerations of public policy and an implied covenant of good faith
and fair dealing.
(xi) The Preferred Securities have been duly and validly
authorized and, when issued, executed and authenticated in accordance
with the terms of the Declaration and delivered against payment therefor
in accordance with the terms hereof, will be the legally valid and
binding obligations of the Trust, enforceable against the Trust in
accordance with their terms and entitled to the benefits of the
Declaration, except as the enforceability thereof may be subject to the
effects of bankruptcy, insolvency, fraudulent conveyance or transfer,
reorganization, moratorium and other similar laws relating to or
affecting creditors' rights generally and general equitable principles
(whether considered in a proceeding in equity or at law) and an implied
covenant of good faith and fair dealing. The Preferred Securities, when
issued, executed, authenticated and delivered, will conform to the
description thereof in the Offering Memorandum.
<PAGE> 12
12
(xii) The Exchange Preferred Securities have been duly and validly
authorized and, when issued, executed and authenticated in accordance
with the terms of the Declaration and the Registration Rights Agreement,
will be the legally valid and binding obligations of the Trust,
enforceable against the Trust in accordance with their terms and
entitled to the benefits of the Declaration, except as the
enforceability thereof may be subject to the effects of bankruptcy,
insolvency, fraudulent conveyance or transfer, reorganization,
moratorium and other similar laws relating to or affecting creditors'
rights generally and general equitable principles (whether considered in
a proceeding in equity or at law) and an implied covenant of good faith
and fair dealing.
(xiii) The Exchange Notes have been duly and validly authorized
and, when issued, executed and authenticated in accordance with the
terms of the Indenture and the Registration Rights Agreement, will be
the legally valid and binding obligations of the Company, enforceable
against the Company in accordance with their terms and entitled to the
benefits of the Indenture, except as the enforceability thereof may be
subject to the effects of bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and other similar laws relating to or
affecting creditors' rights generally and general equitable principles
(whether considered in a proceeding in equity or at law) and an implied
covenant of good faith and fair dealing.
(xiv) The Registration Rights Agreement has been duly and validly
authorized by each of the Trust and the Company and, when duly executed
and delivered by each of the Trust and the Company, will be the legally
valid and binding obligation of each of the Trust and the Company,
enforceable against each of the Trust and the Company in accordance with
its terms, except as (A) the enforceability thereof may be subject to
the effects of bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and other similar laws relating to or
affecting creditors' rights generally and general equitable principles
(whether considered in a proceeding in equity or at law), (B) any rights
to indemnity and contribution thereunder may be limited by federal and
state securities laws and by considerations of public policy and (C) an
implied covenant of good faith and fair dealing. The Registration Rights
Agreement, when executed and delivered, will conform to the description
thereof in the Offering Memorandum.
(xv) No Issuer (A) is in violation of its respective charter or
bylaws or other organizational documents or (B) is in default in the
performance of any bond, debenture, note, indenture, mortgage, deed of
trust or other agreement or instrument to which it is a party or by
which it is bound or to which any of its properties is subject, or (C)
is in violation of any law, statute, rule, regulation, judgment or court
decree applicable to the Company, any of its subsidiaries or their
assets or properties that in the case of clauses (A), (B) and (C) above,
would reasonably be expected to have a Material Adverse Effect. To the
best knowledge of the Issuers, there exists no condition that, with
notice, the passage of time or otherwise, would constitute a default
under any such document or instrument which default is reasonably likely
to result in a Material Adverse Effect.
<PAGE> 13
13
(xvi) The execution, delivery and performance by each Issuer of
the Operative Documents to which it is a party and the issuance and sale
of the Securities and Exchange Securities, and the consummation of the
transactions contemplated hereby and thereby by each such Issuer, will
not violate, conflict with or constitute a breach of any of the terms or
provisions of, or a default under (or an event that with notice or the
lapse of time, or both, would constitute a default), or require consent
under (other than those that have been or will be obtained prior to the
Closing Date), or result in the imposition of a lien or encumbrance on
any properties of such Issuer or any of its subsidiaries, or an
acceleration of indebtedness pursuant to, (i) the charter or bylaws or
other organizational documents of such Issuer, (ii) any bond, debenture,
note, indenture, mortgage, deed of trust or other agreement or
instrument to which such Issuer or any of its subsidiaries is a party or
by which any of them or their property is or may be bound, (iii) any
statute, rule or regulation applicable to such Issuer, any of its
subsidiaries or any of their assets or properties, or (iv) any judgment,
order or decree of any court or governmental agency or authority having
jurisdiction over such Issuer, any of its subsidiaries or their assets
or properties except insofar as any of (ii), (iii) or (iv) above would
not reasonably be expected, individually or in the aggregate, to result
in a Material Adverse Effect. No consent, approval, authorization or
order of, or filing, registration, qualification, license or permit of
or with, any court or governmental agency, body or administrative agency
is required for the execution, delivery and performance of this
Agreement and the other Operative Documents and the consummation of the
transactions contemplated hereby and thereby, except such as have been
obtained and made (or, in the case of the Registration Rights Agreement,
will be obtained and made) under the Securities Act, the Trust Indenture
Act, and state securities or Blue Sky laws and regulations or such as
may be required by the NASD and except such as would not reasonably be
expected, individually or in the aggregate, to result in a Material
Adverse Effect. No consents or waivers from any other person are
required for the execution, delivery and performance of this Agreement
and the other Operative Documents and the consummation of the
transactions contemplated hereby and thereby, other than such consents
and waivers as have been obtained (or, in the case of the Registration
Rights Agreement, will be obtained).
(xvii) Except as described in the Offering Memorandum, there is (i)
no action, suit or proceeding before or by any court, arbitrator or
governmental agency, body or official, domestic or foreign, now pending
or to the knowledge of each Issuer, threatened or contemplated, to which
any Issuer is or may be a party or to which the business or property of
any Issuer is or may be subject, (ii) to the knowledge of the Issuers,
no statute, rule, regulation, or order that has been enacted, adopted or
issued by any governmental agency or that has been proposed by any
governmental body, (iii) no injunction, restraining order or order of
any nature by a federal or state court or foreign court of competent
jurisdiction to which any Issuer or any of their respective business,
assets or property are or to the knowledge of such Issuer may be subject
that, in the case of clauses (i), (ii) and (iii) above, might, singly,
have a Material Adverse Effect.
<PAGE> 14
14
(xviii) There is (i) no significant strike, labor dispute, slowdown
or stoppage pending against the Company or any of its subsidiaries nor,
to the best knowledge of the Company and its subsidiaries, threatened
against the Company or any of its subsidiaries and (ii) to the best
knowledge of the Company and its subsidiaries, no union representation
question exists with respect to the employees of the Company and its
subsidiaries and, to the best knowledge of the Company and its
subsidiaries, no union organizing activities are taking place. Neither
the Company nor any of its subsidiaries has violated any federal, state
or local law or foreign law relating to discrimination in hiring,
promotion or pay of employees, nor any applicable wage or hour laws, nor
any provision of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), or the rules and regulations thereunder, or analogous
foreign laws and regulations, which violations could reasonably be
expected, either individually or in the aggregate, to have a Material
Adverse Effect.
(xix) All reinsurance treaties and arrangements to which any
subsidiary of the Company engaged in the business of insurance (an
"Insurance Subsidiary") is party are in full force and effect and no
Insurance Subsidiary is in violation of or in default in the
performance, observance or fulfillment of, any obligation, agreement,
covenant or condition contained therein, which violation or default
could reasonably be expected, either individually or in the aggregate,
to have a Material Adverse Effect; no Insurance Subsidiary has received
any notice from any of the other parties to such treaties, contracts
or agreements that such other party intends not to perform such treaty
and, to the best knowledge of the Company and the Insurance
Subsidiaries, the Company and Insurance Subsidiaries have no reason to
believe that any of the other parties to such treaties or arrangements
will be unable to perform such treaty or arrangement except to the
extent adequately and properly reserved for in the consolidated
financial statements of the Company included in the Offering Memorandum.
(xx) The Company and its subsidiaries have good and defensible
title to all personal property and other assets (including, without
limitation, contract rights), in each case as described in the Offering
Memorandum, and all such properties or rights are owned or possessed by
it, in each case free and clear of all liens, charges, encumbrances,
restrictions and defects except such as are described in the Offering
Memorandum or would not result in a Material Adverse Effect and do not
materially interfere with the use made and proposed to be made of such
properties by the Company and its subsidiaries (or security interests in
favor of the Administrative Agent to be terminated at Closing); and any
property held under lease by the Company and its subsidiaries are held
by them under valid, subsisting and enforceable leases with such
exceptions as would not have a Material Adverse Effect and do not
materially interfere with the use made and proposed to be made of such
property by the Company and its subsidiaries. Each of the Company and
its subsidiaries has (i) all licenses, certificates, permits,
authorizations, approvals, franchises and other rights from, and has
made all declarations and filings with, all foreign, federal, state and
local authorities, all self-regulatory authorities and all courts and
other tribunals (each an "Authorization") necessary to engage in the
business currently conducted by it in
<PAGE> 15
15
the manner described in the Offering Memorandum, except where failure to
hold such Authorizations would not have a Material Adverse Effect (each
a "Material Authorization") and (ii) no reason to believe that any
governmental body or agency is considering limiting, suspending or
revoking any such Material Authorization. All such Material
Authorizations are valid and in full force and effect and the Company
and its subsidiaries are in compliance in all material respects with the
terms and conditions of all such Material Authorizations and with the
rules and regulations of the regulatory authorities having jurisdiction
with respect thereto. Except as disclosed in the Offering Memorandum, no
insurance regulatory agency or body has issued, or commenced any
proceeding for the issuance of, any order or decree impairing,
restricting or prohibiting the payment of dividends by any Insurance
Subsidiary to its parent.
(xxi) All tax returns required to be filed by the Company or any
of its subsidiaries, in all jurisdictions, have been so filed. All
taxes, including withholding taxes, penalties and interest, assessments,
fees and other charges due or claimed to be due from such entities or
that are due and payable have been paid, other than those being
contested in good faith and for which adequate reserves have been
provided or which the failure to so pay would not reasonably be expected
to have a Material Adverse Effect. Neither the Company nor any of its
subsidiaries knows of any material proposed additional tax assessments
against it or any of its subsidiaries that have not been adequately
reserved for.
(xxii) None of the Issuers is or, after giving effect to the
offering and sale of the Securities or to any exchange of Securities for
Exchange Securities, will be (i) an "investment company" or a company
"controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended (the "Investment Company
Act"), or analogous foreign laws and regulations, or (ii) a "holding
company" or a "subsidiary company" or an "affiliate" of a holding
company within the meaning of the Public Utility Holding Company Act of
1935, as amended (the "Public Utility Holding Act"), or analogous
foreign laws and regulations.
(xxiii) There are no holders of securities of the Company or the
Trust who, by reason of the execution by the Company or the Trust of
this Agreement or any other Operative Document to which either is a
party or the consummation of the transactions contemplated hereby and
thereby, have the right to request or demand that the Company or the
Trust register under the Securities Act or analogous foreign laws and
regulations securities held by them.
(xxiv) Each certificate signed by any officer of any of the Issuers
and delivered to the Initial Purchasers or counsel for the Initial
Purchasers shall be deemed to be a representation and warranty by such
Issuer to each Initial Purchaser as to the matters covered thereby.
(xxv) The Company and each of its subsidiaries maintains a system
of internal accounting controls sufficient to provide reasonable
assurance that: (i) transactions are
<PAGE> 16
16
executed in accordance with management's general or specific
authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with applicable
generally accepted accounting principles and to maintain accountability
for assets in accordance with industry practice; (iii) access to
financial assets is permitted only in accordance with management's
general or specific authorizations; (iv) access to physical assets is
monitored in accordance with reasonably prudent business practices to
attempt to prevent and identify theft and (v) recorded assets are
compared with the existing assets at reasonable intervals in accordance
with industry standards.
(xxvi) The Company and each of its subsidiaries maintains insurance
covering (or self-insures) their properties, operations, personnel and
businesses. Such insurance insures against such losses and risks as are
adequate in accordance with customary industry practice to protect the
Company and its subsidiaries and their businesses. Neither the Company
nor any of its subsidiaries has received notice from any insurer or
agent of such insurer that substantial capital improvements or other
expenditures will have to be made in order to continue such insurance.
All such insurance is outstanding and duly in force on the date hereof
and will be outstanding and duly in force on the closing date.
(xxvii) Neither the Trust, the Company nor any of the Company's
subsidiaries has (i) taken, directly or indirectly, any action designed
to, or that might reasonably be expected to, cause or result in
stabilization or manipulation of the price of any security of the Trust
or the Company (or any of its subsidiaries) to facilitate the sale or
resale of the Securities or Exchange Securities or (ii) since the date
of the Preliminary Offering Memorandum (A) sold, bid for, purchased or
paid any person any compensation for soliciting purchases of, the
Securities or Exchange Securities or (B) paid or agreed to pay to any
person any compensation for soliciting another to purchase any other
securities of the Trust or the Company (or any of its subsidiaries).
(xxviii) No registration under the Securities Act of the Preferred
Securities is required for the sale of the Preferred Securities to the
Initial Purchasers as contemplated hereby or for the Exempt Resales
assuming (i) that the purchasers who buy the Preferred Securities in the
Exempt Resales are Eligible Purchasers (with the number of Accredited
Investors not exceeding 35) and (ii) the accuracy of the Initial
Purchasers' representations in Section 5(b) hereof. No form of general
solicitation or general advertising was used by the Issuers or any of
their representatives in connection with the offer and sale of any of
the Preferred Securities or in connection with Exempt Resales,
including, but not limited to, articles, notices or other communications
published in any newspaper, magazine, or similar medium or broadcast
over television or radio, or any seminar or meeting whose attendees have
been invited by any general solicitation or general advertising. No
securities of the same class or series as the Preferred Securities have
been issued and sold by the Trust within the six-month period
immediately prior to the date hereof. No Issuer has entered into any
contractual arrangement with respect to the distribution of the
Preferred Securities except for this Agreement and a commitment by
Zurich Reinsurance Centre Holdings, Inc. or its affiliate to purchase
Preferred Securities.
<PAGE> 17
17
(xxix) The execution and delivery of this Agreement, the other
Operative Documents and the sale of the Preferred Securities to be
purchased by the Eligible Purchasers will not involve any prohibited
transaction within the meaning of Section 406 of ERISA or Section 4975
of the Internal Revenue Code of 1986. The representation made by the
Issuers in the preceding sentence is made in reliance upon and subject
to the accuracy of, and compliance with, the representations and
covenants made or deemed made by the Eligible Purchasers as set forth in
the Offering Memorandum under the Section entitled "Notice to
Investors."
(xxx) Subsequent to the respective dates as of which information
is given in the Offering Memorandum and up to the Closing Date, except
as set forth in the Offering Memorandum, neither the Trust, the Company,
nor any of its subsidiaries has incurred any liabilities or obligations,
direct or contingent, which are material to the Trust or the Company and
its subsidiaries taken as a whole, nor entered into any transaction not
in the ordinary course of business, nor has there been, individually or
in the aggregate, any material adverse change, or any development which
may reasonably be expected to involve a material adverse change, in the
assets, properties, business, results of operations, condition
(financial or otherwise), affairs or prospects of the Trust or the
Company and its subsidiaries, taken as a whole (a "Material Adverse
Change") and there have not been dividends or distributions (other than
to the Company) of any kind declared, paid or made by the Company or any
of its subsidiaries on any class of its capital stock, other than
payments by the Company's subsidiaries which are made to its parents.
(xxxi) None of the Issuers nor any agent thereof acting on behalf
of any or all of the Issuers has taken, and none of them will take, any
action that might be expected to cause this Agreement or the issuance or
sale of the Securities or Exchange Securities to violate Regulation G
(12 C.F.R. Part 207), Regulation T (12 C.F.R. Part 220), Regulation U
(12 C.F.R. Part 221) or Regulation X (12 C.F.R. Part 224) of the Board
of Governors of the Federal Reserve System or analogous foreign laws and
regulations.
(xxxii) (a) The accountants who have certified or shall certify the
financial statements and supporting schedules included or to be included
as part of the Offering Memorandum are independent accountants under
Rule 101 of AICPA's Code of Professional Conduct and its interpretations
and rulings. The consolidated historical statements fairly present in
all material respects the consolidated financial condition and results
of operations of the Company and its subsidiaries at the respective
dates and for the respective periods indicated, in accordance with
generally accepted accounting principles consistently applied throughout
such periods, except as stated therein. The pro forma financial
statements included in the Offering Memorandum have been prepared on a
basis consistent with such historical statements of the Company and its
subsidiaries, except for the pro forma adjustments specified therein,
and give effect to assumptions made on a reasonable basis and present
fairly in all material respects the historical and proposed transactions
contemplated by this Agreement and the other Operative Documents. Other
financial and statistical information and data included in the Offering
Memorandum,
<PAGE> 18
18
historical and pro forma, are accurately presented in all material
respects and prepared on a basis consistent with such financial
statements and the books and records of the Company and its
subsidiaries.
(b) The statutory financial statements of the Insurance
Subsidiaries from which certain ratios and other statistical data in the
Offering Memorandum have been derived, have for each relevant period
been prepared in material conformity with statutory accounting
principles or practices required or permitted by the National
Association of Insurance Commissioners and by the appropriate Insurance
Department of the jurisdiction of domicile of each Insurance Subsidiary,
and such statutory accounting practices have been applied on a
consistent basis throughout the periods involved, except as may
otherwise be indicated therein or in the notes thereto, and present
fairly in all material respects the statutory financial position of the
Insurance Subsidiaries as of the dates thereof, and the statutory basis
results of operations of the Insurance Subsidiaries for the periods
covered thereby.
(c) Except as disclosed in the Offering Memorandum, the Company
and the Insurance Subsidiaries have made no material changes in their
insurance reserving practices since the most recent audited financial
statements included or incorporated in the Offering Memorandum.
(xxxiii) The Company does not, nor does it believe that it will,
incur debts beyond its ability to pay such debts as they mature. The
present fair saleable value of the assets of the Company and its
subsidiaries, taken as a whole, exceeds, and, upon the issuance of the
Securities will exceed, the amount that will be required to be paid on
or in respect of the existing debts and other liabilities (including
contingent liabilities) of such person as they become absolute and
matured. The assets of the Company and its subsidiaries, taken as a
whole, do not, and, upon the issuance of the Securities, will not,
constitute unreasonably small capital to carry out their businesses as
now conducted, including the capital needs of the Company and its
subsidiaries, taken as a whole, taking into account the projected
capital requirements and capital availability of the Company and its
subsidiaries, taken as a whole. The Company currently believes that it
and its subsidiaries, taken as a whole, are, and immediately after the
Closing Date (after giving effect to the issue and sale of the
Securities) will be, Solvent. As used herein, the term "Solvent" means,
with respect to a person on a particular date, that on such date (A) the
fair market value of the assets of such person is greater than the total
amount of liabilities (including contingent liabilities) of such person,
(B) the present fair saleable value of the assets of such person is
greater than the amount that will be required to pay the probable
liabilities of such person on its debts as they become absolute and
matured, (C) such person is able to realize upon its assets and pay its
debts and other liabilities, including contingent obligations, as they
mature and (D) such person does not have an unreasonably small capital.
<PAGE> 19
19
(xxxiv) There are no contracts, agreements or understandings between
the Trust or Company (or any of its subsidiaries) and any person that
would give rise to a valid claim against the Trust, the Company, its
subsidiaries or any Initial Purchaser for a brokerage commission,
finder's fee or like payment in connection with the issuance, purchase
and sale of the Securities and Preferred Securities.
Each Issuer acknowledges that the Initial Purchasers and, for purposes
of the opinions to be delivered to the Initial Purchasers pursuant to Section 7
hereof, counsel to each of the Issuers' and counsel to the Initial Purchasers
will rely upon the accuracy and truth of the foregoing representations and
hereby consent to such reliance.
(b) Each Initial Purchaser represents and warrants to the Company and
the other Initial Purchasers and agrees that:
(i) Such Initial Purchaser has such knowledge and experience in
financial and business matters as are necessary in order to evaluate the
merits and risks of an investment in the Securities and acknowledges
that the Securities have not been registered under the Securities Act
and that such securities may not be offered or sold within the United
States or to, or for the account or benefit of, U.S. persons (as defined
in Regulation S under the Securities Act) except pursuant to an
exemption from the registration requirements of the Securities Act.
(ii) Such Initial Purchaser (A) is not acquiring the Securities
with a view to any distribution thereof that would violate the
Securities Act or the securities laws of any state of the United States
or any other applicable jurisdiction and (B) will be reoffering and
reselling the Securities only to QIBs in reliance on and in conformity
with the exemption from the registration requirements of the Securities
Act provided by Rule 144A, to Non- U.S. Persons in transactions
conforming to the requirements of Regulation S under the Securities Act
(and in compliance with the applicable laws the relevant foreign
jurisdiction, including, without limitation, any applicable required
governmental filing and offering memorandum delivery requirements) and
to a limited number of Accredited Investors that execute and deliver a
letter containing representations and agreements in the form attached as
Annex A to the Offering Memorandum in a private placement exempt from
the registration requirements of the Securities Act.
(iii) No form of general solicitation or general advertising has
been or will be used by such Initial Purchaser or any of its
representatives in connection with the offer and sale of any of the
Securities, including, but not limited to, articles, notices or other
communications published in any newspaper, magazine, or similar medium
or broadcast over television or radio, or any seminar or meeting whose
attendees have been invited by any general solicitation or general
advertising.
(iv) Such Initial Purchaser agrees that, in connection with the
Exempt Resales, it will solicit offers to buy the Securities only from,
and will offer to sell the Securities
<PAGE> 20
20
only to, Eligible Purchasers (with the number of Accredited Investors
not exceeding 35). Such Initial Purchaser further agrees (A) that it
will offer to sell the Securities only to, and will solicit offers to
buy the Securities only from (1) QIBs who in purchasing such Securities
will be deemed to have represented and agreed that they are purchasing
the Securities for their own account or accounts with respect to which
they exercise sole investment discretion and that they or such accounts
are QIBs and otherwise in conformity with Rule 144A, (2) Non-U.S.
Persons who are purchasing such Securities in conformity with Regulation
S under the Securities Act and (3) Accredited Investors who make the
representations contained in, and execute and return to the Initial
Purchaser, a certificate in the form of Annex A attached to the Offering
Memorandum, (B) that such Eligible Purchasers will be deemed by their
purchase of the Securities to acknowledge and agree that such Securities
are not registered under the Securities Act and may be resold, pledged
or otherwise transferred only (x) (I) inside the United States to a
person who the seller reasonably believes is a QIB in a transaction
meeting the requirements of Rule 144A, (II) in a transaction meeting the
requirements of Rule 144, (III) outside the United States to a foreign
person in a transaction meeting the requirements of Rule 904 under the
Securities Act or (IV) in accordance with another exemption from the
registration requirements of the Securities Act (and based upon an
opinion of counsel if the Company so requests), (y) to the Company, or
(z) pursuant to an effective registration statement under the Securities
Act and, in each case, in accordance with any applicable securities laws
of any state of the United States or any other applicable jurisdiction
and (C) that the holder will, and each subsequent holder is required to,
notify any purchaser from it of the security evidenced thereby of the
resale restrictions set forth in (B) above.
(v) Such Initial Purchaser, and each of its affiliates and any
person acting on its behalf, has not engaged and will not engage in any
"directed selling efforts" (as defined in Regulation S) with respect to
the Securities, and it and they have complied and will comply with any
applicable offering restrictions requirement of Regulation S with
respect to the Securities.
(vi) Such Initial Purchaser, and each of its affiliates, agrees
that except as otherwise permitted pursuant to this Agreement, it will
not offer, sell or deliver the Securities in reliance on Regulation S
(A) as part of a distribution at any time or (B) otherwise until after
the expiration of the Restricted Period to, or for the account or
benefit of, U.S. Persons, and that it will send to each dealer to which
it sells Securities in reliance on Regulation S during the Restricted
Period a confirmation or other notice setting forth the restrictions on
offers and sales of the Securities to, or for the account or benefit of,
U.S. Persons. Capitalized terms used in this paragraph that are not
defined elsewhere in this Agreement have the meanings set forth in
Regulation S under the Securities Act.
(vii) Such Initial Purchaser also understands that the Company and
the Trust and, for purposes of the opinions to be delivered to you
pursuant to Section 7 hereof, counsel to the Company and the Trust and
counsel to the Initial Purchasers will rely upon the accuracy and truth
of the foregoing representations and hereby consents to such reliance.
<PAGE> 21
21
6. Indemnification.
(a) Each of the Issuers agrees to jointly and severally indemnify
and hold harmless (i) each of the Initial Purchasers, (ii) each person,
if any, who controls (within the meaning of Section 15 of the Securities
Act or Section 20 of the Exchange Act) any of the Initial Purchasers
(any of such persons referred to in this clause (ii) being hereinafter
referred to as a "controlling person"), and (iii) the respective
officers, directors, partners, employees, representatives and agents of
or any of the Initial Purchasers or any controlling person (any person
referred to in clause (i), (ii) or (iii) may hereinafter be referred to
as an "Indemnified Person") to the fullest extent lawful, from and
against any and all losses, claims, damages, assessments, judgments,
actions and expenses (including without limitation and as incurred,
reimbursement of all reasonable costs of investigating, preparing,
pursuing or defending any claim or action, or any investigation or
proceeding by any governmental agency or body, commenced or threatened
including the reasonable fees and expenses of counsel to any Indemnified
Person) directly or indirectly caused by, related to, based upon,
arising out of or in connection with any untrue statement or alleged
untrue statement of a material fact contained in the Preliminary
Offering Memorandum or the Offering Memorandum (or any amendment or
supplement thereto), or any omission or alleged omission therein of a
material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they
were made, not misleading, except insofar as such losses, claims,
damages, liabilities or expenses are finally judicially determined by a
competent court to have been caused by an untrue statement or omission
or alleged untrue statement or omission that is made in reliance upon
and in conformity with information relating to any Initial Purchaser
furnished in writing to an Issuer by such Initial Purchaser expressly
for use therein, which information is specified in the second paragraph
of Section 6(c). An Issuer shall notify you promptly of the institution,
threat or assertion of any claim, proceeding (including any governmental
investigation) or litigation in connection with the matter addressed by
this Agreement which involves an Issuer or an Indemnified Person.
(b) In case any action or proceeding (including any governmental
investigation) shall be brought or asserted against any of the
Indemnified Persons with respect to which indemnity may be sought
against an Issuer, such Indemnified Person shall promptly notify the
Company or the Trust (with a copy to the Company) in writing (provided,
that the failure to give such notice shall not relieve an Issuer of its
obligations pursuant to this Agreement). Such Indemnified Person shall
have the right to employ its own counsel (in addition to any local
counsel) subject to the consent of Issuer, which consent shall not be
unreasonably withheld, in any such action and, subject to the
Indemnified Person's obligation to pay fees and expenses not covered by
this Section 6, the reasonable and duly documented fees and expenses of
such counsel shall be paid, as incurred, by such Issuer (regardless of
whether it is ultimately determined that an Indemnified Person is not
entitled to indemnification hereunder, in which case such Indemnified
Person shall reimburse such Issuer for all amounts paid in respect of
such action or proceeding). Such Issuer shall not,
<PAGE> 22
22
in connection with any one such action or proceeding or separate but
substantially similar or related actions or proceedings in the same
jurisdiction arising out of the same general allegations or
circumstances, be liable for the reasonable fees and expenses of more
than one separate firm of attorneys (in addition to any local counsel)
at any time for the Indemnified Persons, which firm shall be designated
by Donaldson, Lufkin & Jenrette Securities Corporation (subject to the
reasonable consent of such Issuer). Such Issuer shall be liable for any
settlement of any such action or proceeding effected with such Issuer's
prior written consent, which consent will not be unreasonably withheld,
and each Issuer agrees to indemnify and hold harmless any Indemnified
Person from and against any loss, claim, damage, liability or expense by
reason of any settlement of any action effected with the written consent
of the Issuer. Notwithstanding the immediately preceding sentence, if at
any time an Indemnified Person shall have requested an indemnifying
party to reimburse the Indemnified Person for the duly documented fees
and expenses of counsel as contemplated by the second sentence of this
paragraph, the indemnifying party agrees that it shall be liable for any
settlement of any proceeding effected without its written consent if (i)
such settlement is entered into more than twenty business days after
receipt by such indemnifying party of the aforesaid request and (ii)
such indemnifying party shall not have reimbursed the Indemnified Person
in accordance with such request prior to the date of such settlement. An
Issuer shall not, without the prior written consent of an Indemnified
Person, settle or compromise or consent to the entry of judgment in or
otherwise seek to terminate any pending or threatened cause of action,
in respect of which indemnification or contribution may be sought
hereunder (whether or not any Indemnified Person is a party thereto) as
to which both such Issuer and any Indemnified Person are or may be a
party, unless such settlement, compromise, consent or termination
includes an unconditional release of such Indemnified Person from all
losses, claims, damages, liabilities or expenses arising out of the
action, claim, litigation or proceeding (or portion thereof) which is
the subject of the settlement.
(c) Each of the Initial Purchasers agrees, severally and not
jointly, to indemnify and hold harmless each Issuer, and its respective
directors, officers and any person controlling (within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act) such
Issuer, and the officers, directors, partners, employees,
representatives and agents of such controlling person, to the same
extent and in the same manner as the foregoing indemnity from the
Issuers to each of the Indemnified Persons, but only with respect to
losses, claims, damages, liabilities or expenses incurred in
investigating, preparing, pursuing or defending claims and actions
directly or indirectly caused by, related to, based upon, arising out of
or in connection with any untrue statement or omission or alleged untrue
statement or omission of a material fact contained in the Preliminary
Offering Memorandum or the Offering Memorandum that was made in reliance
upon and in conformity with information relating to such Initial
Purchaser furnished in writing by or on behalf of such Initial Purchaser
to such Issuer expressly for use in the Offering Memorandum. In no event
shall the liability of any Initial Purchaser be greater than the total
amount of the compensation received pursuant to Section 2 of this
<PAGE> 23
23
Agreement by such Initial Purchaser in connection with the offer and
sale of the Preferred Securities.
The statements in the Offering Memorandum in the first and second
sentence of the second paragraph and the second sentence of the tenth
and fifteenth paragraphs under "Plan of Distribution" constitute the
only information heretofore furnished to the Issuers in writing by any
Initial Purchaser expressly for use in the Preliminary Offering
Memorandum or the Offering Memorandum, or any amendment or supplement
thereto.
(d) If the indemnification provided for in this Section 6 is
unavailable to an Indemnified Person under Sections 6(a), 6(b) and 6(c)
hereof in respect of any losses, claims, damages, liabilities or
expenses referred to herein, then each indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid
or payable by such indemnified party as a result of such losses, claims,
damages, liabilities and expenses (i) in such proportion as is
appropriate to reflect the relative benefits received by the
indemnifying party on the one hand and the indemnified party on the
other hand from the offering of the Preferred Securities or (ii) if the
allocation provided by clause (i) above is not permitted by applicable
law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative
fault of the indemnifying party and the indemnified party, as well as
any other relevant equitable considerations. The relative benefits
received by the Issuers, on the one hand, and the Initial Purchasers, on
the other hand, shall be deemed to be in the same proportion as the
total proceeds from the offering of the Preferred Securities (net of the
Initial Purchasers' compensation under this Agreement but before
deducting expenses) received by the Issuers, on the one hand, and the
total compensation received by the Initial Purchasers, on the other
hand, bear to the total price of the Preferred Securities paid in the
Exempt Resales, in each case, as set forth in the table on the cover
page of the Offering Memorandum. The relative fault shall be determined
by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission
to state a material fact related to information supplied by the Issuers
or the Initial Purchasers and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such
statement or omission. The indemnity set forth herein shall be in
addition to any liability or obligation each Issuer may otherwise have
to any Indemnified Person.
The Issuers and the Initial Purchasers agree that it would not be
just and equitable if contribution to this Section 6(d) were determined
by pro rata allocation (even if the Initial Purchasers were treated as
one entity for such purpose) or by any other method of allocation which
does not take account of the equitable considerations referred to in the
immediately preceding paragraph. The amount paid or payable by an
indemnified party as a result of losses, claims, damages, liabilities or
expenses referred to in the immediately preceding paragraph shall be
deemed to include, subject to the limitations set forth above, any legal
or other fees or expenses reasonably incurred by such indemnified party
in connection with investigating or defending any such action or claim.
Notwithstanding the
<PAGE> 24
24
provisions of this Section 6, none of the Initial Purchasers (nor the
related Indemnified Persons) shall be required to contribute, in the
aggregate, any amount in excess of the amount by which the total
discounts and commissions received by such Initial Purchaser with
respect to the Preferred Securities, exceeds the amount of any damages
which such Initial Purchaser has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Initial Purchasers' obligations to contribute
pursuant to this Section 6(d) are several in proportion to the
respective principal amount of Preferred Securities purchased by each of
the Initial Purchasers hereunder and not joint.
7. Conditions of Initial Purchasers' Obligations. The several
obligations of the Initial Purchasers under this Agreement are subject to the
satisfaction of each of the following conditions:
(a) All of the representations and warranties of the Issuers
contained in this Agreement shall be true and correct on the date hereof
and on the Closing Date with the same force and effect as if made on and
as of the date hereof and the Closing Date, respectively. Each Issuer
shall have performed or complied with all of the agreements herein
contained and required to be performed or complied with by them at or
prior to the Closing Date.
(b) The Offering Memorandum shall have been printed and copies
distributed to the Initial Purchasers on the date of this Agreement or
at such later date and time as to which you may agree, and no stop order
suspending the qualification or exemption from qualification of any of
the Securities in any jurisdiction referred to in Section 4(e) shall
have been issued and no proceeding for that purpose shall have been
commenced or shall be pending or threatened.
(c) No action shall have been taken and no statute, rule,
regulation or order shall have been enacted, adopted or issued by any
governmental agency which would, as of the Closing Date, prevent the
issuance or sale of any of the Securities; no action, suit or proceeding
shall be pending against or affecting or, to the knowledge of any
Issuer, threatened against, the Trust, the Company or any of its
subsidiaries before any court or arbitrator or any governmental body,
agency or official that, if adversely determined, would have a Material
Adverse Effect; and no stop order preventing the use of the Offering
Memorandum, or any amendment or supplement thereto, or any order
asserting that any of the transactions contemplated by this Agreement
are subject to the registration requirements of the Securities Act shall
have been issued.
(d) Since the dates as of which information is given in the
Offering Memorandum, (i) there shall not have been any material change,
or any development that is reasonably likely to result in a material
change, in the capital stock or the long-term debt, or material increase
in the short-term debt, of the Company or any of its subsidiaries
<PAGE> 25
25
from that set forth in the Offering Memorandum, (ii) no dividend or
distribution of any kind shall have been declared, paid or made by the
Company on any class of its capital stock, and (iii) neither the Company
nor any of its subsidiaries shall have incurred any liabilities or
obligations, direct or contingent, that are material, individually or in
the aggregate, to the Company and its subsidiaries, taken as a whole,
and that are required to be disclosed on a balance sheet in accordance
with generally accepted accounting principles and are not disclosed on
the latest balance sheet included in the Offering Memorandum. Since the
date hereof and since the dates as of which information is given in the
Offering Memorandum, there shall not have been any Material Adverse
Change.
(e) You shall have received (i) a certificate, dated the Closing
Date, signed by (x) the President and Chief Executive Officer and (y)
the principal financial officer of the Company confirming, as of the
Closing Date, the matters set forth in paragraphs (a), (b), (c) and (d)
of this Section 7 and (ii) a certificate, dated the Closing Date, signed
by an officer of the Trust, confirming, as of the Closing Date, the
matters set forth in paragraphs (a), (b) and (c).
(f) You shall have received on the Closing Date an opinion
(satisfactory to you and your counsel), dated the Closing Date, of
Riordan & McKinzie, counsel to the Company, to the effect that and based
upon certain assumptions and representations as to factual matters from
various persons affiliated with the Company, under the federal laws of
the United States, the States of Delaware and New York (assuming the law
is the same as that of California and without giving effect to conflicts
of laws principles) and, where indicated, the State of California:
(i) The Company has been duly incorporated and is
validly existing as a corporation under the laws of the State of
Delaware, with all requisite corporate power and authority to
own, lease and operate its properties and to conduct its business
as it is currently being conducted and as described in the
Offering Memorandum, and is duly qualified and in good standing
as a foreign corporation authorized to do business in each
jurisdiction in which the ownership, leasing and operating of its
property and the conduct of its business requires such
qualification, except where the failure to be so qualified would
not be reasonably expected to have a Material Adverse Effect.
(ii) The authorized, issued and outstanding capital
stock of the Company has been duly and validly authorized and
issued and is fully paid and nonassessable.
(iii) The Company has all requisite corporate power and
authority to execute, deliver and perform its obligations under
this Agreement and the other Operative Documents to which it is a
party and to consummate the transactions contemplated hereby or
thereby, including, without limitation, the corporate power and
authority to issue, sell and deliver the Senior Subordinated
Notes, the Preferred
<PAGE> 26
26
Securities Company Guarantee, the Exchange Notes and the
Exchange Preferred Securities Company Guarantee.
(iv) This Agreement has been duly and validly
authorized, executed and delivered by the Company.
(v) The Indenture has been duly and validly
authorized, executed and delivered by the Company and the
Indenture constitutes a legally valid and binding agreement of
the Company, enforceable against the Company in accordance with
its terms, except as the enforceability thereof may be subject to
the effects of bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and other similar laws relating to or
affecting creditors' rights generally and general equitable
principles (whether considered in a proceeding in equity or at
law) and an implied covenant of good faith and fair dealing.
(vi) The Senior Subordinated Notes have been duly and
validly authorized by the Company and when the Senior
Subordinated Notes are issued and authenticated in accordance
with the terms of the Indenture and delivered against payment
therefor in accordance with the terms hereof, the Senior
Subordinated Notes will be the legally valid and binding
obligations of the Company, enforceable against the Company in
accordance with their terms and entitled to the benefits of the
Indenture, except as the enforceability thereof may be subject to
the effects of bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and other similar laws relating to or
affecting creditors' rights generally and general equitable
principles (whether considered in a proceeding in equity or at
law) and an implied covenant of good faith and fair dealing. The
Senior Subordinated Notes, when issued, authenticated and
delivered, will conform in all material respects to the
description thereof in the Offering Memorandum.
(vii) The Exchange Notes have been duly and validly
authorized by the Company, when the Exchange Notes are issued and
authenticated in accordance with the terms of the Indenture and
the Registration Rights Agreement, the Exchange Notes will be the
legally valid and binding obligations of the Company, enforceable
against the Company in accordance with their terms and entitled
to the benefits of the Indenture, except as the enforceability
thereof may be subject to the effects of bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and other
similar laws relating to or affecting creditors' rights generally
and general equitable principles (whether considered in a
proceeding in equity or at law) and an implied covenant of good
faith and fair dealing. The Exchange Notes, when issued,
authenticated and delivered, will conform in all material
respects to the description thereof in the Offering Memorandum.
<PAGE> 27
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(viii) The Preferred Securities Company Guarantee has
been duly and validly authorized by the Company and when the
Preferred Securities Company Guarantee is issued and
authenticated in accordance with the terms of the Declaration and
delivered upon receipt of consideration therefor in accordance
with the terms hereof, the Preferred Securities Company Guarantee
will be a legally valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms,
except as the enforceability thereof may be subject to the
effects of bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and other similar laws relating to or
affecting creditors' rights generally and general equitable
principles (whether considered in a proceeding in equity or at
law) and an implied covenant of good faith and fair dealing. The
Preferred Securities Company Guarantee, when issued,
authenticated and delivered, will conform in all material
respects to the description thereof in the Offering Memorandum.
(ix) The Exchange Preferred Securities Company
Guarantee has been duly and validly authorized by the Company,
when the Exchange Guarantee is issued and authenticated in
accordance with the terms of the Declaration and the Registration
Rights Agreement, the Exchange Preferred Securities Company
Guarantee will be a legally valid and binding obligation of the
Company, enforceable against the Company in accordance with their
terms and entitled to the benefits of the Indenture, except as
the enforceability thereof may be subject to the effects of
bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and other similar laws relating to or affecting
creditors' rights generally and general equitable principles
(whether considered in a proceeding in equity or at law) and an
implied covenant of good faith and fair dealing. The Exchange
Preferred Securities Company Guarantee, when issued,
authenticated and delivered, will conform in all material
respects to the description thereof in the Offering Memorandum.
(x) The Registration Rights Agreement has been duly and
validly authorized, executed and delivered by the Company and the
Registration Rights Agreement constitutes a legally valid and
binding obligation of the Company, enforceable against the
Company in accordance with its terms, except as the
enforceability thereof may be subject to the effects of
bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and other similar laws relating to or affecting
creditors' rights generally and general equitable principles
(whether considered in a proceeding in equity or at law) and
except that any rights to indemnity and contribution thereunder
may be limited by federal and state securities laws, by
considerations of public policy or by an implied covenant of good
faith and fair dealing. The Registration Rights Agreement
conforms in all material respects to the description thereof in
the Offering Memorandum.
<PAGE> 28
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(xi) Neither the Company nor any of its United States
subsidiaries (i) is in violation of its respective charter or, to
the knowledge of such counsel, its bylaws or other organizational
documents, (ii) to the knowledge of such counsel, is in default
in the performance of any bond, debenture, note, indenture,
mortgage, deed of trust or other agreement or instrument to which
it is a party or by which it is bound or to which any of its
properties is subject or (iii) is in violation of any United
States federal or State of California or Delaware law, statute,
rule, regulation, or, to the knowledge of such counsel, any
judgment or court decree applicable to the Company, any of its
subsidiaries or their assets or properties that in the case of
clauses (A), (B) and (C) above, would reasonably be expected,
individually or in the aggregate, to have a Material Adverse
Effect.
(xii) The execution, delivery and performance by the
Company of this Agreement, the Guarantor Agreements and the other
Operative Documents to which it is a party, the issuance and sale
of the Securities and the Exchange Securities, and the
consummation of the transactions contemplated hereby and thereby,
will not violate, conflict with or constitute a breach of any of
the terms or provisions of, or a default under (or an event that
with notice or the lapse of time, or both, would constitute a
default), or require consent under (other than those that have
been or will be obtained prior to the Closing Date), or result in
the imposition of a lien or encumbrance on any properties of the
Company or any of its subsidiaries, or an acceleration of
indebtedness pursuant to, (i) the charter or by-laws or other
organizational documents of the Company or any of its
subsidiaries, (ii) any material bond, debenture, note, indenture,
mortgage, deed of trust or other agreement or instrument to which
the Company or any of its subsidiaries is a party or by which any
of them or their property is or may be bound and identified to us
as material on a certificate of the Officers of the Company,
(iii) any United States federal or State of California or
Delaware statute applicable to the Company or any of its
subsidiaries or any of their assets or properties, (iv) any
United States federal or State of California or Delaware rule or
regulation normally applicable to transactions of the type
contemplated by the Operative Documents, or (v) to the knowledge
of such counsel, any judgment, order or decree of any United
States federal or State of California or Delaware court or United
States federal or State of California or Delaware governmental
agency or authority having jurisdiction over the Company, any of
its subsidiaries or their assets or properties except insofar as
any of (ii), (iii), (iv) or (v) above would not reasonably be
expected, individually or in the aggregate, to result in a
Material Adverse Effect. No consent, approval, authorization or
order of, or filing, registration, qualification, license or
permit of or with, any U.S. federal or State of California or
Delaware or governmental agency, body or administrative agency is
required for the execution, delivery and performance of this
Agreement and the other Operative Documents and the consummation
of the transactions contemplated hereby and thereby, except such
as have been obtained and made (or, in the case of the
Registration Rights Agreement, will be obtained and made) under
the Securities
<PAGE> 29
29
Act, the Trust Indenture Act, and state securities or Blue Sky
laws and regulations or such as may be required by the NASD.
(xiii) The Company owns, directly or indirectly through
other subsidiaries, 100 percent of the outstanding capital stock
or other securities evidencing equity ownership of the
subsidiaries listed on Schedule II. To the knowledge of such
counsel, there are no outstanding subscriptions, rights,
warrants, calls, commitments of sale or options to acquire, or
instruments convertible into or exchangeable for, any equity
interest of the Company or its subsidiaries, other than as set
forth in the Offering Memorandum.
(xiv) To the knowledge of such counsel, no action has
been taken and no statute, rule or regulation or order has been
enacted, adopted or issued by any United States federal or State
of California or Delaware agency that prevents the issuance of
the Securities or Exchange Securities; to the knowledge of such
counsel, no injunction, restraining order or order of any nature
by a United States federal or State of California or Delaware
court of competent jurisdiction has been issued that prevents the
issuance of the Securities or Exchange Securities or suspends the
sale of the Securities or Exchange Securities in any jurisdiction
referred to in Section 4(e) hereof; and to the knowledge of such
counsel, no action, suit or proceeding is pending against or
affecting or threatened against the Company or any of its
subsidiaries before any United States federal or State of
California or Delaware court or arbitrator or any governmental
body, agency or official which is reasonably likely to have a
Material Adverse Effect.
(xv) When the Securities are issued and delivered
pursuant to this Agreement, the Declaration and the Indenture,
none of the Securities will be of the same class (within the
meaning of Rule 144A under the Securities Act) as securities of
the Company that are listed on a national securities exchange
registered under Section 6 of the Exchange Act or that are quoted
in a United States automated inter-dealer quotation system.
(xvi) Assuming the accuracy of the Initial Purchasers'
representations and warranties contained in Section 5(b) and the
compliance by the Initial Purchasers with the agreements
contained in Section 5(b), no registration of the Securities
under the Securities Act, and no qualification of the Indenture
is required under the Trust Indenture Act, is required for the
sale of the Securities to you as contemplated hereby or for the
Exempt Resales solely in the manner contemplated by this
Agreement, the Declaration, the Indenture and the Offering
Memorandum.
(xvii) Neither the Trust, the Company nor any of its
subsidiaries is (i) an "investment company" or a company
"controlled" by an "investment company" within the meaning of the
Investment Company Act and regulations, or
<PAGE> 30
30
(ii) a "holding company" or a "subsidiary company" or an
"affiliate" of a holding company within the meaning of the
Public Utility Holding Act of 1935, as amended.
(xviii) Each of the Preliminary Offering Memorandum and
the Offering Memorandum, as of its date, and each amendment or
supplement thereto, as of its date (except for the financial
statements, including the notes thereto, and supporting schedules
and appendices and other financial, statistical and accounting
data included therein or omitted therefrom, as to which no
opinion need be expressed), contains all the information
specified in, and meeting the requirements of, Rule 144A(d)(4)
under the Securities Act.
(xix) The statements made in the Offering Memorandum
under the captions "Description of the Preferred Securities,"
"Description of the Senior Subordinated Notes," "Relationship
Among the Preferred Securities, the Senior Subordinated Notes and
the Preferred Securities Company Guarantee" and "Plan of
Distribution," insofar as they purport to constitute summaries of
certain contracts, agreements or documents, constitute accurate
summaries of such contracts, agreements or documents in all
material respects.
(xx) (A) The Trust will be characterized as a grantor
trust for United States federal income tax purposes and not as an
association taxable as a corporation; (B) the Senior Subordinated
Notes will be classified as indebtedness for United States
federal income tax purposes; and (C) the statements made in the
Offering Memorandum under the heading "Certain United States
Federal Income Tax Consequences" constitute accurate summaries of
the potential United States federal income tax consequences of an
investment in the Preferred Securities.
Such counsel shall also state that, for purposes of rendering the
opinions contained in paragraphs (iv), (v), (vi), (vii), (viii) and (ix) above,
such counsel has no reason to believe that any provision of New York law would
render any of the documents referred to in such paragraphs unenforceable in any
material respect (subject to each of the other assumptions and qualifications
contained in such opinion), assuming that New York law is the same as California
law, and that such counsel has no reason to believe that New York law is
different than California law (it being understood that such counsel has not
made an independent investigation into the relevant provisions of New York law
and that no member of such counsel is licensed to practice law in the State of
New York).
In addition, such counsel shall state that it has participated in
conferences with officers and other representatives of the Company,
representatives of the independent public accountants for the Company, your
representatives and your counsel in connection with the preparation of the
Preliminary Offering Memorandum and the Offering Memorandum and has considered
the matters required to be stated therein and the statements contained therein
and, although such counsel has not independently verified the accuracy,
completeness or fairness of such statements (except as
<PAGE> 31
31
indicated above) and relying as to materiality to the extent such counsel deems
appropriate upon the statements of officers and other representatives of the
Company, such counsel advises you that, on the basis of the foregoing, no facts
came to its attention that caused it to believe that the Preliminary Offering
Memorandum or the Offering Memorandum (as amended or supplemented, if
applicable), at the time such Preliminary Offering Memorandum or Offering
Memorandum was circulated or at the Closing Date, contained or contains an
untrue statement of a material fact or omitted or omits to state a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
Without limiting the foregoing, such counsel may further state that they assume
no responsibility for, and have not independently verified, the accuracy,
completeness or fairness of the financial statements, notes and schedules and
other financial data included in the Preliminary Offering Memorandum or the
Offering Memorandum or any amendment or supplement thereto.
The opinions of such counsel described in this paragraph shall be
rendered to you at the request of the Company and shall so state therein.
(g) You shall have received on the Closing Date an opinion
(satisfactory to you and your counsel), dated the Closing Date, of
Richards, Layton & Finger, P.A. special Delaware Counsel for the Trust
and the Company, to the effect that:
(i) The Trust has been duly created and is validly
existing in good standing as a business trust under the Delaware
Business Trust Act, and all filings required under the laws of
the State of Delaware with respect to the creation and valid
existence of the Trust as a business trust have been made.
(ii) Under the Delaware Business Trust Act and the
Declaration, the Trust has the trust power and authority to own
property and conduct its business, all as described in the
Offering Memorandum.
(iii) The Declaration constitutes a valid and binding
obligation of the Company and the Delaware Trustee, and is
enforceable against the Company and the Delaware Trustee, in
accordance with its terms, subject, as to enforcement, to the
effect upon the Declaration of (i) bankruptcy, insolvency,
moratorium, receivership, reorganization, liquidation, fraudulent
conveyance or transfer and other similar laws relating to or
affecting the rights and remedies of creditors generally, (ii)
principles of equity, including applicable law relating to
fiduciary duties (regardless of whether considered and applied in
a proceeding of equity or at law), and (iii) the effect of
applicable public policy on the enforceability of provisions
relating to indemnification or contribution.
(iv) Under the Delaware Business Trust Act and the
Declaration, the Trust has the trust power and authority to (a)
execute and deliver this Agreement and to perform its obligations
under this Agreement, and (b) issue and perform its obligations
under the Preferred Securities and the Common Securities.
<PAGE> 32
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(v) Under the Delaware Business Trust Act and the
Declaration, the execution and delivery by the Trust of this
Agreement and the performance by the Trust of its obligations
hereunder, have been duly authorized by all necessary trust
action on the part of the Trust.
(vi) The Preferred Securities have been duly
authorized by the Declaration and are duly and validly issued
and, subject to the qualifications set forth herein, fully paid
and nonassessable beneficial interests in the Trust and are
entitled to the benefits provided by the Declaration; the holders
of the Preferred Securities, as beneficial owners of the Trust,
will be entitled to the same limitation of personal liability
extended to stockholders of private corporations for profit
organized under the General Corporation Law of the State of
Delaware; provided that such counsel may note that the holders of
the Preferred Securities may be obligated, pursuant to the
Declaration, to (a) provide indemnity and/or security in
connection with and pay taxes or governmental charges arising
from transfers or exchanges of Preferred Securities certificates
and the issuance of replacement Preferred Securities certificates
and (b) provide security and indemnity in connection with
requests of or directions to the Preferred Trustee to exercise
its rights and remedies under the Declaration.
(vii) The Common Securities have been duly authorized
by the Declaration and are validly issued beneficial interests in
the Trust.
(viii) Under the Delaware Business Trust Act and the
Declaration, the issuance of the Preferred Securities and the
Common Securities is not subject to preemptive rights.
(ix) The issuance and sale by the Trust of Preferred
Securities and the Common Securities, the execution and delivery
of this Agreement and performance by the Trust of this Agreement,
the consummation by the Trust of the transactions contemplated
hereby and compliance by the Trust with its obligations hereunder
do not violate (a) any of the provisions of the Certificate of
Trust of the Trust or the Declaration, or (b) any applicable
Delaware law or administrative regulation.
(x) Assuming that the Trust derives no income from or
connected with services provided within the State of Delaware and
has no assets, activities (other than maintaining the Delaware
Trustee and the filing of documents with the Secretary of State
of the State of Delaware) or employees in the State of Delaware,
no authorization, approval, consent or order of any Delaware
court or governmental authority or agency is required to be
obtained by the Trust solely in connection with the issuance and
sale of the Preferred Securities and the Common Securities. In
rendering the opinion expressed in this paragraph (x), such
counsel need express no opinion concerning the securities laws of
the State of Delaware.
<PAGE> 33
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(xi) Assuming that the Trust derives no income from or
connected with services provided within the State of Delaware and
has no assets, activities (other than maintaining the Delaware
Trustee and the filing of documents with the Secretary of State
of the State of Delaware) or employees in the State of Delaware,
the holders of the Preferred Securities (other than those holders
of the Preferred Securities who reside or are domiciled in the
State of Delaware) will have no liability for income taxes
imposed by the State of Delaware solely as a result of their
participation in the Trust, and the Trust will not be liable for
any income tax imposed by the State of Delaware.
The opinion of Richards, Layton & Finger, P.A. described in this
paragraph (g) shall be rendered to you at the request of the Company and shall
so state therein.
(h) You shall have received on the Closing Date an opinion,
dated the Closing Date, of Richards, Layton & Finger, P.A., counsel to
the Indenture Trustee, the Guarantee Trustee, the Delaware Trustee and
the Preferred Trustee, in form and substance reasonably satisfactory to
counsel to the effect that:
(i) Wilmington Trust Company is a Delaware banking
corporation, duly incorporated, validly existing and in good
standing under the laws of the State of Delaware.
(ii) The execution, delivery and performance by the
Preferred Trustee of the Declaration, the execution, delivery and
performance by the Guarantee Trustee of the Guarantee Agreement,
and the execution, delivery and performance by the Indenture
Trustee of the Indenture, have been duly authorized by all
necessary corporate action on the part of the Preferred Trustee
and the Delaware Trustee, the Guarantee Trustee and the Indenture
Trustee, respectively. The Declaration, the Guarantee Agreement
and the Indenture have been duly executed and delivered by the
Preferred Trustee and the Delaware Trustee, the Guarantee Trustee
and the Indenture Trustee, respectively, and the Declaration
constitutes the valid and binding obligation of the Preferred
Trustee and the Delaware Trustee, and the Declaration, and with
respect to the Guarantee Agreement and Indenture, assuming each
is enforceable under New York law, are enforceable against the
Preferred Trustee and the Delaware Trustee, the Guarantee Trustee
and the Indenture Trustee, respectively, in accordance with their
terms, subject, as to enforcement, to the effect upon the
Declaration, the Guarantee and the Indenture of (i) bankruptcy,
insolvency, moratorium, receivership, reorganization,
liquidation, fraudulent conveyance or transfer and other similar
laws relating to or affecting the rights and remedies of
creditors generally, (ii) principles of equity, including
applicable law relating to fiduciary duties (regardless of
whether considered and applied in a proceeding of equity or at
law), and (iii) the effect of applicable public policy on the
enforceability of provisions relating to indemnification or
contribution.
<PAGE> 34
34
(iii) The execution, delivery and performance of the
Declaration, the Guarantee Agreement and the Indenture by the
Preferred Trustee and the Delaware Trustee, the Guarantee Trustee
and the Indenture Trustee, respectively, do not conflict with or
constitute a breach of the applicable organizational documents or
by-laws of the Preferred Trustee, the Delaware Trustee, the
Guarantee Trustee or the Indenture Trustee, respectively, or the
terms of any indenture or other agreement or instrument known to
such counsel and to which the Preferred Trustee and the Delaware
Trustee, the Guarantee Trustee or the Indenture Trustee,
respectively, is a party or is bound or any judgment, order or
decree known to such counsel to be applicable to the Preferred
Trustee, the Delaware Trustee, the Guarantee Trustee or the
Indenture Trustee, respectively, of any court, regulatory body,
administrative agency, governmental body or arbitrator having
jurisdiction over the Preferred Trustee, the Guarantee Trustee
or the Indenture Trustee, respectively.
(iv) No consent, approval or authorization of, or
registration with or notice to, any federal or Delaware state
banking authority is required for the execution, delivery or
performance by the Preferred Trustee or the Delaware Trustee, the
Guarantee Trustee or the Indenture Trustee of the Declaration,
the Guarantee Agreement or the Indenture, respectively.
(i) You shall have received an opinion, dated the Closing Date,
of Simpson Thacher & Bartlett, counsel to the Initial Purchasers, in
form and substance reasonably satisfactory to you, covering such matters
as are customarily covered in such opinions.
(j) At the time this Agreement is executed and delivered by the
Company and on the Closing Date, you shall have received letters,
substantially in the form previously approved by you, from KPMG Peat
Marwick LLP, independent public accountants, dated the date of such
execution, with respect to the financial statements and certain
financial information contained in Offering Memorandum.
(k) Simpson Thacher & Bartlett, counsel to the Initial
Purchasers, shall have been furnished with such documents and opinions,
in addition to those set forth above, as they may reasonably require for
the purpose of enabling them to review or pass upon the matters referred
to in this Section 7 and in order to evidence the accuracy, completeness
or satisfaction in all material respects of any of the representations,
warranties or conditions herein contained.
(l) Prior to the Closing Date, the Issuers shall have furnished
to you such further information, certificates and documents as you may
reasonably request.
(m) The Company and the Indenture Trustee shall have entered into
the Indenture and you shall have received counterparts, conformed as
executed, thereof.
<PAGE> 35
35
(n) The Trust and the Preferred Trustee, the Delaware Trustee and
the Company Trustees shall have entered into the Declaration and you
shall have received counterparts, conformed as executed thereof.
(o) The Company and the Trust shall have entered into the
Registration Rights Agreement and you shall have received counterparts,
conformed as executed, thereof.
(p) The Preferred Securities and the Exchange Preferred
Securities shall have been approved or accepted for "book entry"
settlement through the facilities of DTC.
All opinions, certificates, letters and other documents required by this
Section 7 to be delivered by the Issuers will be in compliance with the
provisions hereof only if they are reasonably satisfactory in form and substance
to you.
8. Defaults. If, on the Closing Date, any of the Initial Purchasers
shall fail or refuse to purchase the Preferred Securities that it has or they
have agreed to purchase hereunder on such date, and the aggregate principal
amount of such Preferred Securities that such defaulting Initial Purchaser (a
"Defaulting Initial Purchaser") agreed but failed or refused to purchase does
not exceed ten percent of the total principal amount of such Preferred
Securities that the Initial Purchasers are obligated to purchase on such Closing
Date, each non-defaulting Initial Purchaser shall be obligated to purchase the
amount of such Preferred Securities that such Defaulting Initial Purchaser or
Purchasers agreed but failed or refused to purchase. If, on the Closing Date, an
Initial Purchaser shall fail or refuse to purchase Preferred Securities in an
aggregate principal amount that exceeds ten percent of such total principal
amount and arrangement satisfactory to each other Initial Purchaser and the
Trust and the Company for the purchase of such Preferred Securities is not made
within 48 hours after such default, this Agreement shall terminate without
liability on the part of the non-defaulting Initial Purchaser or Purchasers or
the Trust and the Company, except as otherwise provided in Section 9. In any
such case that does not result in termination of this Agreement the Initial
Purchasers or the Trust and the Company may postpone the Closing Date for not
longer than seven days, in order that the required changes, if any, in the
Offering Memorandum or any other documents or arrangements may be effected. Any
action taken under this paragraph shall not relieve a Defaulting Initial
Purchaser or Purchasers, as the case may be, from liability in respect of any
default by any such Initial Purchaser or Purchasers, as the case may be, under
this Agreement.
9. Effective Date of Agreement and Termination. This Agreement shall
become effective upon the execution hereof.
This Agreement may be terminated at any time on or prior to the Closing
Date by you by notice to the Issuers if any of the following has occurred: (i)
subsequent to the date information is provided in the Offering Memorandum, any
Material Adverse Change which, in your reasonable judgment, materially impairs
the investment quality of any of the Securities, (ii) any outbreak or escalation
of hostilities or other national or international calamity or crisis or material
adverse change in the financial markets of the United States or elsewhere, or
any other substantial
<PAGE> 36
36
national or international calamity or emergency if the effect of such outbreak,
escalation, calamity, crisis, material adverse change or emergency would, in
your judgment, make it impracticable or inadvisable to market any of the
Securities or to enforce contracts for the sale of any of the Securities, (iii)
any suspension or limitation of trading generally in securities or trading in
the securities of the Company on the New York Stock Exchange or in the
over-the-counter markets or any setting of minimum prices for trading on such
exchange or markets, (iv) any declaration of a general banking moratorium by
U.S. federal or New York authorities, (v) the taking of any action by any
federal, state or local government or agency in respect of its monetary or
fiscal affairs that in your judgment has a material adverse effect on the
financial markets in the United States, and would, in your judgment, make it
impracticable or inadvisable to market any of the Securities or to enforce
contracts for the sale of any of the Securities, (vi) the enactment,
publication, decree, or other promulgation of any U.S. federal or state statute,
regulation, rule or order of any court or other governmental authority which, in
your judgment, would have a Material Adverse Effect, or (vii) any securities of
the Company or any of its subsidiaries shall have been downgraded or placed on
any "watch list" for possible downgrading by any nationally recognized
statistical rating organization.
The indemnities and contribution provisions and the other agreements,
representations and warranties of an Issuer, its respective officers and
directors and of the Initial Purchasers set forth in or made pursuant to this
Agreement shall remain operative and in full force and effect, and will survive
delivery of and payment for the Preferred Securities, regardless of (i) any
investigation, or statement as to the results thereof, made by or on behalf of
any of the Initial Purchasers or by or on behalf of an Issuer, its respective
officers or directors or a controlling person thereof, (ii) acceptance of the
Preferred Securities and payment for them hereunder and (iii) termination of
this Agreement.
If this Agreement shall be terminated by the Initial Purchasers pursuant
to clauses (i) or (vii) of the second paragraph of this Section 9 or because of
the failure or refusal on the part of any Issuer to comply with the terms or to
fulfill any of the conditions of this Agreement, such Issuer agrees to reimburse
you for all out-of-pocket expense, subject to the limitations provided in
Section 4(f) (including the fees and disbursements of counsel), incurred by you.
Notwithstanding any termination of this Agreement, the Company shall be liable
for all expenses which it has agreed to pay pursuant to Section 4(f) hereof;
provided, however, that no amount shall be payable pursuant to the second
sentence of Section 4(f) to a Defaulting Initial Purchaser.
Except as otherwise provided, this Agreement has been and is made solely
for the benefit of and shall be binding upon the Issuers, the Initial
Purchasers, any controlling person or Indemnified Person referred to herein and
their respective successors and assigns, all as and to the extent provided in
this Agreement, and no other person shall acquire or have any right under or by
virtue of this Agreement. The terms "successors and assigns" shall not include a
purchaser of any of the Preferred Securities from any of the Initial Purchasers
merely because of such purchase.
10. Miscellaneous. Notices given pursuant to any provision of this
Agreement shall be addressed as follows: (a) if to the Trust: Superior National
Capital Trust I, c/o Wilmington Trust
<PAGE> 37
37
Company, 1100 North Market Street, Rodney Square North, Wilmington, Delaware
19890, Attention: Corporate Trust Administration, with a copy to Superior
National Insurance Group, Inc., 26601 Agoura Road, Calabasas, California 91302,
Attention: Robert Nagle, (b) if to the Company, Superior National Insurance
Group, Inc., 26601 Agoura Road, Calabasas, California 91302, Attention: William
Gentz, with a copy to Superior National Insurance Group, Inc., 26601 Agoura
Road, Calabasas, California 91302, Attention: Robert Nagle, and (c) if to the
Initial Purchasers, c/o Donaldson, Lufkin & Jenrette Securities Corporation, 277
Park Avenue, New York, New York 10172, Attention: Jonathan Kelly, with a copy to
Simpson Thacher & Bartlett, 425 Lexington Avenue, New York, New York 10017,
Attention: Gary I. Horowitz, Esq., or in any case to such other address as the
person to be notified may have requested in writing.
<PAGE> 38
38
This Agreement shall be governed and construed in accordance with the
internal laws of the State of New York without regard to the conflicts of laws
and principles thereof. This Agreement may be signed in various counterparts
which together shall constitute one and the same instrument.
Very truly yours,
SUPERIOR NATIONAL INSURANCE GROUP, INC.
By: /s/ [SIGNATURE]
------------------------------------
Name:
Title:
SUPERIOR NATIONAL CAPITAL TRUST I
By: SUPERIOR NATIONAL INSURANCE GROUP,
INC., as sponsor
By: /s/ [SIGNATURE]
------------------------------------
Name:
Title:
<PAGE> 39
39
Accepted and agreed to as of the date
first above written:
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
CHASE SECURITIES INC.
By: DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION,
as Representative of the
two Initial Purchasers
By: /s/ [SIGNATURE]
---------------------------------
Name: Jonathan D. Kelly
Title: Vice President
<PAGE> 40
SCHEDULE I
<TABLE>
<CAPTION>
Principal Amount
<S> <C>
Donaldson, Lufkin & Jenrette
Securities Corporation...................................... 84,000,000
Chase Securities Inc.......................................... 21,000,000
------------
Total.......................................... $105,000,000
============
</TABLE>
<PAGE> 41
SCHEDULE II
Subsidiaries of the Company
1. Superior Pacific Insurance Group, Inc., a Delaware corporation;
2. Pacific Insurance Brokerage, Inc., a California corporation;
3. InfoNet Management Systems, Inc., a California corporation;
4. SN Insurance Services, Inc., a California corporation;
5. Superior (Bermuda) Ltd., a Bermuda corporation;
6. Superior Pacific Casualty Company, a California corporation;
7. Superior National Insurance Company, a California corporation;
8. Superior National Capital Holding Corporation, a Nevada corporation;
9. Superior National Capital Trust I, a Delaware statutory business trust;
10. Regional Benefits Insurance Services, Inc., a California corporation;
11. Western Select Service Corp., a California corporation; and
12. Superior National Capital, L.P., a Bermuda limited partnership.
<PAGE> 1
EXHIBIT 4.1
AMENDED AND RESTATED
DECLARATION OF TRUST
SUPERIOR NATIONAL CAPITAL TRUST I
Dated as of December 3, 1997
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
ARTICLE I Defined Terms............................................................. 1
Section 1.1 Definitions............................................................... 1
ARTICLE II ESTABLISHMENT OF THE TRUST................................................ 10
Section 2.1 Name...................................................................... 10
Section 2.2 Office of the Delaware Trustee; Principal Place of Business............... 10
Section 2.3 Initial Contribution of Trust Property; Organizational Expenses........... 10
Section 2.4 Issuance of the Preferred Securities...................................... 11
Section 2.5 Issuance of the Common Securities; Subscription and Purchase of the Notes. 11
Section 2.6 Purposes and Functions of the Trust....................................... 11
Section 2.7 Authorization to Enter into Certain Transactions.......................... 11
Section 2.8 Assets of Trust........................................................... 15
Section 2.9 Title to Trust Property................................................... 15
ARTICLE III PAYMENT ACCOUNT........................................................... 15
Section 3.1 Payment Account........................................................... 15
ARTICLE IV DISTRIBUTIONS; REDEMPTION................................................. 15
Section 4.1 Distributions............................................................. 15
Section 4.2 Redemption................................................................ 17
Section 4.3 Subordination of Common Securities........................................ 18
Section 4.4 Payment Procedures........................................................ 19
Section 4.5 Tax Returns and Reports................................................... 19
Section 4.6 Payment of Taxes, Duties, Etc. of Trust................................... 19
Section 4.7 Payments under Indenture.................................................. 19
ARTICLE V TRUST SECURITIES CERTIFICATES............................................. 20
Section 5.1 Initial Ownership......................................................... 20
Section 5.2 General Provisions Regarding Trust Securities............................. 20
Section 5.3 Execution and Authentication.............................................. 20
Section 5.4 Form and Dating........................................................... 21
Section 5.5 Transfer of Trust Securities.............................................. 22
Section 5.6 Transfer Procedures and Restrictions...................................... 23
Section 5.7 Temporary Securities...................................................... 29
Section 5.8 Securities Register and Securities Registrar.............................. 30
Section 5.9 Mutilated, Destroyed, Lost or Stolen Trust Securities Certificates........ 30
Section 5.10 Persons Deemed Securityholders............................................ 30
Section 5.11 Access to List of Securityholders' Names and Addresses.................... 31
Section 5.12 Maintenance of Office or Agency........................................... 31
</TABLE>
i
<PAGE> 3
TABLE OF CONTENTS (Continued)
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Section 5.13 Appointment of Paying Agent............................................... 31
Section 5.14 Ownership of Common Securities by Sponsor................................. 32
Section 5.15 Rights of Securityholders................................................. 32
ARTICLE VI ACTS OF SECURITYHOLDERS; MEETINGS; VOTING................................. 34
Section 6.1 Limitations on Voting Rights.............................................. 34
Section 6.2 Notice of Meetings........................................................ 36
Section 6.3 Meetings of Preferred Securities Securityholders.......................... 37
Section 6.4 Voting Rights............................................................. 37
Section 6.5 Proxies, etc.............................................................. 37
Section 6.6 Securityholder Action by Written Consent.................................. 38
Section 6.7 Record Date for Voting and Other Purposes................................. 38
Section 6.8 Acts of Securityholders................................................... 38
Section 6.9 Inspection of Records..................................................... 39
ARTICLE VII REPRESENTATIONS AND WARRANTIES............................................ 39
Section 7.1 Representations and Warranties of the Bank, the Preferred Trustee and the
Delaware Trustee.......................................................... 39
Section 7.2 Representations and Warranties of Sponsor................................. 41
ARTICLE VIII THE TRUSTEES.............................................................. 41
Section 8.1 Certain Duties and Responsibilities....................................... 41
Section 8.2 Certain Notices........................................................... 42
Section 8.3 Certain Rights of Preferred Trustee....................................... 43
Section 8.4 Not Responsible for Recitals or Issuance of Securities.................... 44
Section 8.5 May Hold Securities....................................................... 45
Section 8.6 Compensation; Indemnity; Fees............................................. 45
Section 8.7 Corporate Preferred Trustee Required; Eligibility of Trustees............. 46
Section 8.8 Conflicting Interests..................................................... 46
Section 8.9 Co-Trustees and Separate Trustee.......................................... 47
Section 8.10 Resignation and Removal; Appointment of Successor......................... 48
Section 8.11 Acceptance of Appointment by Successor.................................... 49
Section 8.12 Merger, Conversion, Consolidation or Succession to Business............... 50
Section 8.13 Preferential Collection of Claims Against Sponsor or Trust................ 50
Section 8.14 Reports by Preferred Trustee.............................................. 51
Section 8.15 Reports to the Preferred Trustee.......................................... 51
Section 8.16 Evidence of Compliance with Conditions Precedent.......................... 51
Section 8.17 Number of Trustees........................................................ 51
Section 8.18 Delegation of Power....................................................... 52
</TABLE>
ii
<PAGE> 4
TABLE OF CONTENTS (Continued)
<TABLE>
<CAPTION>
Page
<S> <C> <C>
ARTICLE IX DISSOLUTION, LIQUIDATION AND MERGER........................................ 52
Section 9.1 Dissolution Upon Expiration Date........................................... 52
Section 9.2 Early Dissolution.......................................................... 52
Section 9.3 Termination................................................................ 53
Section 9.4 Liquidation................................................................ 53
Section 9.5 Mergers, Consolidations, Amalgamations or Replacements of the Trust........ 55
ARTICLE X MISCELLANEOUS PROVISIONS................................................... 56
Section 10.1 Limitation of Rights of Securityholders.................................... 56
Section 10.2 Amendment.................................................................. 57
Section 10.3 Separability............................................................... 58
Section 10.4 Governing Law.............................................................. 58
Section 10.5 Payments Due on Non-Business Day........................................... 59
Section 10.6 Successors................................................................. 59
Section 10.7 Headings................................................................... 59
Section 10.8 Reports, Notices and Demands............................................... 59
Section 10.9 Agreement Not to Petition.................................................. 60
Section 10.10 Trust Indenture Act; Conflict with Trust Indenture Act..................... 60
Section 10.11 Acceptance of Terms of Declaration, Company Guarantee and Indenture........ 60
</TABLE>
iii
<PAGE> 5
SUPERIOR NATIONAL CAPITAL TRUST I
Certain Sections of this Amended and Restated Declaration of Trust
Relating to Sections 310 through 318 of the
Trust Indenture Act of 1939:
<TABLE>
<CAPTION>
Trust Indenture Trust Agreement
Act Section Section
- --------------- ---------------
<S> <C> <C>
(Section) 310 (a)(1)......................................................8.7
(a)(2)......................................................8.7
(a)(3)......................................................8.9
(a)(4)......................................................2.7(a)(ii)
(b).........................................................8.8
(Section) 311 (a).........................................................8.13
(b).........................................................8.13
(Section) 312 (a).........................................................5.7
(b).........................................................5.7
(c).........................................................5.7
(Section) 313 (a).........................................................8.14(a)
(a)(4)......................................................8.14(b)
(b).........................................................8.14(b)
(c).........................................................10.8
(d).........................................................8.14(c)
(Section) 314 (a).........................................................8.15
(b).........................................................Not Applicable
(c)(1)......................................................8.16
(c)(2)......................................................8.16
(c)(3)......................................................Not Applicable
(d).........................................................Not Applicable
(e).........................................................1.1, 8.16
(Section) 315 (a).........................................................8.1(a), 8.3(a)
(b).........................................................8.2, 10.8
(c).........................................................8.1(a)
(d).........................................................8.1, 8.3
(e).........................................................Not Applicable
(Section) 316 (a).........................................................Not Applicable
(a)(1)(A)...................................................Not Applicable
(a)(1)(B)...................................................Not Applicable
(a)(2)......................................................Not Applicable
(b).........................................................5.14
</TABLE>
iv
<PAGE> 6
<TABLE>
<S> <C> <C>
(c).........................................................6.7
(Section) 317 (a)(1)......................................................Not Applicable
(a)(2)......................................................Not Applicable
(b).........................................................5.9
(Section) 318 (a).........................................................10.10
</TABLE>
---------------
Note: This reconciliation and tie sheet shall not, for any purpose, be
deemed to be a part of the Amended and Restated Declaration of Trust.
v
<PAGE> 7
AMENDED AND RESTATED DECLARATION OF TRUST
OF
Superior National Capital Trust I
AMENDED AND RESTATED DECLARATION OF TRUST ("Declaration") dated
and effective as of December 3, 1997, by the Trustees (as defined herein), the
Sponsor (as defined herein) and by the holders, from time to time, of undivided
beneficial ownership interests in the assets of the Trust to be issued pursuant
to this Declaration;
WHEREAS, the Trustees and the Sponsor wish to continue Superior
National Capital Trust I (the "Trust"), a business trust created under the
Delaware Business Trust Act pursuant to the original Declaration of Trust of the
Trust, dated as of October 24, 1997 (the "Original Declaration"), and a
Certificate of Trust of the Trust, which was filed with the Secretary of State
of the State of Delaware on October 24, 1997;
WHEREAS, the purposes of the Trust shall be to provide for, among
other things, (i) the issuance of the Common Securities by the Trust to the
Sponsor, (ii) the issuance and sale of the Preferred Securities by the Trust
pursuant to the Purchase Agreement, (iii) the acquisition by the Trust from the
Sponsor of all of the right, title and interest in the Notes and (iv) the
appointment of the Trustees;
WHEREAS, all of the parties hereto, by this Declaration, amend
and restate each and every term and provision of the Original Declaration;
NOW, THEREFORE, it being the intention of the parties hereto to
continue the Trust as a business trust under the Delaware Business Trust Act and
that this Declaration constitute the governing instrument of such business
trust, the Trustees declare that all assets contributed to the Trust will be
held in trust for the benefit of the holders, from time to time, of the
securities representing undivided beneficial ownership interests in the assets
of the Trust issued hereunder, subject to the provisions of this Declaration.
ARTICLE I
Defined Terms
Section 1.1 Definitions.
For all purposes of this Declaration, except as otherwise
expressly provided or unless the context otherwise requires:
(a) the terms defined in this Article have the meanings assigned
to them in this Article and include the plural as well as the singular;
(b) all other terms used herein that are defined in the Trust
Indenture Act, either directly or by reference therein, have the meanings
assigned to them therein;
1
<PAGE> 8
(c) unless the context otherwise requires, any reference to an
"Article" or a "Section" refers to an Article or a Section, as the case may be,
of this Declaration; and
(d) the words "herein", "hereof" and "hereunder" and other words
of similar import refer to this Declaration as a whole and not to any particular
Article, Section or other subdivision.
"Accredited Investor Global Preferred Security" has the meaning
set forth in Section 5.4(a).
"Act" has the meaning specified in Section 6.8.
"Affiliate" of any specified Person means any other Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified Person, provided, however, that an Affiliate
of the Sponsor shall not be deemed to include the Trust. For the purposes of
this definition, "control" when used with respect to any specified Person means
the power to direct the management and policies of such Person, directly or
indirectly, whether through the ownership of voting securities, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Bank" means the Preferred Trustee in its separate corporate
capacity and not in its capacity as Preferred Trustee.
"Bankruptcy Event" means, with respect to any Person, under the
relevant jurisdiction:
(a) the entry of a decree or order by a court having jurisdiction
in the premises judging such Person a bankrupt or insolvent, or approving as
properly filed a petition seeking reorganization, arrangement, adjudication or
composition of or in respect of such Person under any applicable U.S. federal or
state bankruptcy, insolvency, reorganization or other similar law, or appointing
a receiver, liquidator, assignee, trustee, sequestrator (or other similar
official) of such Person or of any substantial part of its property or ordering
the winding up or liquidation of its affairs, and the continuance of any such
decree or order unstayed and in effect for a period of 60 consecutive days; or
(b) the institution by such Person of proceedings to be
adjudicated bankrupt or insolvent, or the consent by it to the institution or
bankruptcy or insolvency proceedings against it, or the filing by it of a
petition or answer or consent seeking reorganization or relief under any
applicable U.S. federal or state bankruptcy, insolvency, reorganization or other
similar law, or the consent by it to the filing of any such petition or to the
appointment of a receiver, liquidator, assignee, trustee, sequestrator (or other
similar official) of such Person or of any substantial part of its property, or
the making by it of an assignment for the benefit of creditors, or the admission
by it in writing of its inability to pay its debts generally as they become due
and its willingness to be adjudicated a bankrupt, or the taking of corporate
action by such Person in furtherance of any such action.
"Bankruptcy Laws" has the meaning specified in Section 10.9.
2
<PAGE> 9
"Board Resolution" means a copy of a resolution certified by the
Secretary, or an Assistant Secretary of the Sponsor to have been duly adopted by
the Sponsor's Board of Directors or such committee of the Board of Directors or
officers of the Sponsor to which authority to act on behalf of the Board of
Directors has been delegated, and to be in full force and effect on the date of
such certification and delivered to the Trustees.
"Book-Entry Interest" means a beneficial interest in the
Preferred Securities Certificates, ownership and transfers of which shall be
made through book entries by a Clearing Agency as described in Section 5.4(b).
"Business Day" means any day other than a day on which banking
institutions in The City of New York or Wilmington, Delaware, are authorized or
required by law to close.
"Certificate Depository Agreement" means the Agreement among the
Trust, the Sponsor and DTC, as the initial Clearing Agency, dated as of the
Closing Date, relating to the Trust Securities Certificates, substantially in
the form attached as Exhibit B, as the same may be amended and supplemented from
time to time.
"Change of Control Triggering Event" means the occurrence of a
Change of Control Event (as defined in the Indenture).
"Clearing Agency" means an organization registered as a "clearing
agency" pursuant to Section 17A of the Exchange Act. DTC will be the initial
Clearing Agency.
"Clearing Agency Participant" means a broker, dealer, bank, other
financial institution or other Person for whom from time to time a Clearing
Agency effects book-entry transfers and pledges of securities deposited with the
Clearing Agency.
"Closing Date" has the meaning specified in the Purchase
Agreement, which date is also the date of execution and delivery of this
Declaration.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission, as
from time to time constituted, created under the Exchange Act or, if at any time
after the execution of this instrument such Commission is not existing and
performing the duties now assigned to it under the Trust Indenture Act, then the
body performing such duties at such time.
"Common Securities" has the meaning specified in Section 5.2.
"Common Securities Certificate" means a certificate evidencing
ownership of Common Securities, substantially in the form attached as Exhibit C.
"Common Securities Company Guarantee" means the guarantee
Agreement dated as of December 3, 1997 of the Sponsor in respect of the Common
Securities.
3
<PAGE> 10
"Company Guarantees" means the Common Securities Company
Guarantee and the Preferred Securities Company Guarantee.
"Company Trustee" means each of William E. Gentz, Arnold J.
Senter and J. Chris Seaman, solely in such Person's capacity as Company Trustee
of the Trust and not in such Person's individual capacity, or such Company
Trustee's successor in interest in such capacity, or any successor trustee
appointed as herein provided.
"Corporate Trust Office" means the principal office of the
Preferred Trustee located at 1100 North Market Street, Rodney Square North,
Wilmington, Delaware.
"Declaration" means this Amended and Restated Declaration of
Trust, as the same may be modified, amended or supplemented in accordance with
the applicable provisions hereof, including all exhibits hereto, including, for
all purposes of this Declaration and any such modification, amendment or
supplement the provisions of the Trust Indenture Act that are deemed to be a
part of and govern this Declaration and any such modification, amendment or
supplement, respectively.
"Declaration Event of Default" means a Note Event of Default or a
default by the Sponsor under the Preferred Securities Company Guarantee.
"Definitive Preferred Securities" shall have the meaning set
forth in Section 5.4(c).
"Delaware Business Trust Act" means Chapter 38 of Title 12 of the
Delaware Code, 12 Del. C. Section 3801, et seq., as it may be amended from time
to time.
"Delaware Trustee" means Wilmington Trust Company, a Delaware
banking corporation, solely in its capacity as Delaware Trustee of the Trust and
not in its individual capacity, or its successor in interest in such capacity,
or any successor trustee appointed as herein provided.
"Distribution Date" has the meaning specified in Section 4.1(a).
"Distributions" means amounts payable in respect of the Trust
Securities as provided in Section 4.1.
"DTC" means The Depository Trust Company, which is the initial
Clearing Agency.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Exchange Offer" means the exchange offer (including any private
exchange offer) contemplated by Section 2(a) of the Registration Rights
Agreement.
"Expiration Date" has the meaning specified in Section 9.1.
"Extension Period" has the meaning specified in Section 4.1(f).
4
<PAGE> 11
"Global Preferred Security" means the Restricted Global Preferred
Securities, the Regulation S Global Preferred Securities, the Accredited
Investor Global Preferred Securities and the Unrestricted Global Preferred
Securities.
"Holder" has the meaning specified under the definition of
"Securityholder."
"Indenture" means the Senior Subordinated Indenture, dated as of
December 3, 1997, among the Sponsor and the Indenture Trustee, as trustee, as
amended or supplemented from time to time.
"Indenture Trustee" means Wilmington Trust Company, a Delaware
banking corporation, solely in its capacity as Trustee under the Indenture and
not in its individual capacity, and any successor in such capacity thereto.
"Investment Company Event" means the receipt by the Sponsor of an
Opinion of Counsel, rendered by a law firm having an independent tax and
securities practice and experienced in such matters, to the effect that, as a
result of the occurrence of a change in law or regulation or a change in
interpretation or application of law or regulation by any legislative body,
court, governmental agency or regulatory authority (a "Change in 1940 Act Law"),
the Trust is or will be considered an investment company which is required to be
registered under the 1940 Act, which Change in 1940 Act Law becomes effective on
or after the date of original issuance of the Preferred Securities under this
Declaration.
"Lien" means any lien, pledge, charge, encumbrance, mortgage,
deed of trust, adverse ownership interest, hypothecation, assignment, security
interest or preference, priority or other security agreement or preferential
arrangement of any kind or nature whatsoever.
"Like Amount" means (a) with respect to a redemption of Trust
Securities, Trust Securities having a Liquidation Amount equal to the principal
amount of Notes to be contemporaneously redeemed in accordance with the
Indenture, the proceeds of which will be used to pay the Redemption Price of
such Trust Securities, and (b) with respect to a distribution of Notes to
Holders of Trust Securities in connection with a dissolution or liquidation of
the Trust Securities of the Holder to whom such Notes are distributed.
"Liquidation Amount" means the stated amount of $1,000.00 per
Trust Security.
"Liquidation Date" means the date on which Notes are to be
distributed to Holders of Trust Securities in connection with a dissolution and
liquidation of the Trust pursuant to Section 9.4(a).
"Liquidation Distribution" has the meaning specified in
Section 9.4(d).
"1940 Act" means the Investment Company Act of 1940, as amended.
"Note Event of Default" means an "Event of Default" as defined
in the Indenture.
"Note Redemption Date" means, with respect to any Notes to be
redeemed under the Indenture, the date fixed for redemption under the Indenture.
5
<PAGE> 12
"Note Tax Event" means a "Tax Event" as defined in the Indenture.
"Notes" means the aggregate principal amount of the Sponsor's
10 3/4% Senior Subordinated Notes, issued pursuant to the Indenture.
"Offering Memorandum" has the meaning specified in Section 2.7(a).
"Officers' Certificate" means a certificate signed by (a) the
President and Chief Executive Officer, any Executive Vice President or Senior
Vice President, and by the Treasurer, an Assistant Treasurer, the Controller,
the Secretary or an Assistant Secretary or (b) any two members of the Board of
Directors of the Sponsor, and delivered to the appropriate Trustee. Any
Officers' Certificate delivered with respect to compliance with a condition or
covenant provided for in this Declaration shall include:
(a) a statement that each officer signing the Officers'
Certificate has read the covenant or condition and the definitions relating
thereto;
(b) a brief statement of the nature and scope of the examination
or investigation undertaken by each officer in rendering the Officers'
Certificates;
(c) a statement that each such officer has made such examination
or investigation as, in such officer's opinion, is necessary to enable such
officer to express an informed opinion as to whether or not such covenant or
condition has been complied with; and
(d) a statement as to whether, in the opinion of each such
officer, such condition or covenant has been complied with.
"Opinion of Counsel" means a written opinion of counsel, who may
be counsel for the Trust or the Sponsor, as the case may be, but, other than in
connection with the issuance of the Trust Securities, not an employee of any
thereof, and who shall be reasonably acceptable to the Preferred Trustee.
"Outstanding", when used with respect to Trust Securities means,
as of the date of determination, all Trust Securities theretofore executed and
delivered under this Declaration, except:
(a) Trust Securities theretofore canceled by the Trust or
delivered to the Trust for cancellation;
(b) Trust Securities for whose payment or redemption money in the
necessary amount has been theretofore deposited with the Preferred Trustee or
any Paying Agent for the Holders of such Trust Securities; provided, that if
such Trust Securities are to be redeemed, notice of such redemption has been
duly given pursuant to this Declaration; and
(c) Preferred Securities which have been paid or in exchange for
or in lieu of which other Preferred Securities have been executed and delivered
pursuant to Sections 5.4, 5.5 or 5.6;
6
<PAGE> 13
provided, however, that in determining whether the Holders of the requisite
Liquidation Amount of the Outstanding Preferred Securities have given any
request, demand, authorization, direction, notice, consent or waiver hereunder,
Preferred Securities owned by the Sponsor, any Trustee or any Affiliate of the
Sponsor or any Trustee shall be disregarded and deemed not to be Outstanding,
except that (a) in determining whether any Trustee shall be protected in relying
upon any such request, demand, authorization, direction, notice, consent or
waiver, only Preferred Securities that such Trustee knows to be so owned shall
be so disregarded and (b) the foregoing shall not apply at any time when all of
the outstanding Preferred Securities are owned by the Sponsor, one or more of
the Trustees and/or any such Affiliate. Preferred Securities so owned which have
been pledged in good faith may be regarded as Outstanding if the pledgee
establishes to the satisfaction of the Company Trustees the pledgee's right so
to act with respect to such Preferred Securities and that the pledgee is not the
Sponsor or any Affiliate of the Sponsor.
"Owner" means each Person who is the beneficial owner of a Global
Certificate (see Exhibit B for definition) as reflected in the records of the
Clearing Agency or, if a Clearing Agency Participant is not the owner, then as
reflected in the records of a Person maintaining an account with such Clearing
Agency (directly or indirectly, in accordance with the rules of such Clearing
Agency).
"Participants" has the meaning set forth in Section 5.4(b).
"Paying Agent" means any paying agent or co-paying agent
appointed pursuant to Section 5.13 and shall initially be the Bank.
"Payment Account" means a segregated non-interest-bearing
corporate trust account maintained by the Preferred Trustee with the Bank in its
trust department for the benefit of the Securityholders in which all amounts
paid in respect of the Notes will be held and from which the Preferred Trustee
shall make payments to the Securityholders in accordance with Sections 4.1 and
4.2.
"Person" means any individual, corporation, estate, partnership,
joint venture, association, joint-stock company, trust, limited liability
company, unincorporated organization, or government or any agency,
instrumentality or political subdivision thereof, or any other entity of
whatever nature.
"Preferred Security Beneficial Owner" means, with respect to a
Book-Entry Interest, a Person who is the beneficial owner of such Book-Entry
Interest, as reflected on the books of the Clearing Agency, or on the books of a
Person maintaining an account with such Clearing Agency (directly as a Clearing
Agency Participant or as an indirect participant, in each case in accordance
with the rules of such Clearing Agency).
"Preferred Securities" has the meaning specified in
Section 5.2(a).
"Preferred Securities Certificate" means a certificate evidencing
ownership of Preferred Securities, substantially in the form attached as Exhibit
D.
"Preferred Securities Company Guarantee" means the Guarantee
Agreement dated as of December 3, 1997 of the Sponsor in respect of the
Preferred Securities.
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"Preferred Trustee" means Wilmington Trust Company, a Delaware
banking corporation duly organized and existing under the laws of the State of
Delaware, solely in its capacity as Preferred Trustee of the Trust and not in
its individual capacity, or its successor in interest in such capacity, or any
successor Preferred Trustee appointed as herein provided.
"Purchase Agreement" means the Purchase Agreement dated November
26, 1997, for the offering and sale of Preferred Securities among the Trust, the
Sponsor and the initial purchasers named therein.
"QIBS" shall mean qualified institutional buyers as defined in
Rule 144A.
"Redemption Date" means, with respect to any Trust Security to be
redeemed, the date fixed for such redemption by or pursuant to this Declaration;
provided, that each Note Redemption Date and the stated maturity of the Notes
shall be a Redemption Date for a Like Amount of Trust Securities.
"Redemption Price" means, with respect to any Trust Security, the
Redemption Price (as defined in the Indenture) for the concurrent redemption of
a Like Amount of Notes, allocated on a pro rata basis, plus accrued and unpaid
Distributions to the Redemption Date, plus the related amount of the premium, if
any, paid by the Sponsor upon the concurrent redemption of a Like Amount of
Notes, allocated on a pro rata basis (based on Liquidation Amounts) among the
Trust Securities.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of the Closing Date, by and among Superior National
Insurance Group, Inc., the Trust and the Initial Purchasers named therein, as
such Agreement may be amended, modified or supplemented from time to time.
"Regulation S" means Regulation S under the Securities Act, as
such regulation may be amended from time to time, or any similar rule or
regulation hereafter adopted by the Commission.
"Regulation S Global Preferred Security" has the meaning set
forth in Section 5.4(a).
"Relevant Trustee" shall have the meaning specified in
Section 8.10.
"Restricted Definitive Preferred Security" means Definitive
Preferred Securities required by Section 5.4(a) to contain the Restricted
Securities Legend.
"Restricted Global Preferred Security" means Restricted Global
Preferred Securities required by Section 5.6(g) to contain the Restricted
Securities Legend.
"Restricted Preferred Security" means a Preferred Security
required by Section 5.6(g) to contain a Restricted Securities Legend.
"Restricted Securities Legend" has the meaning set forth in
Section 5.6(g).
"Rule 144" means Rule 144 under the Securities Act, as such rule
may be amended from time to time, or any similar rule or regulation hereafter
adopted by the Commission.
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"Rule 144A" means Rule 144A under the Securities Act, as such
rule may be amended from time to time, or any similar rule or regulation
hereafter adopted by the Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Register" and "Securities Registrar" have the
respective meanings specified in Section 5.8.
"Securityholder" or "Holder" means a Person in whose name a Trust
Security or Trust Securities is registered in the Securities Register; any such
Person being a beneficial owner within the meaning of the Delaware Business
Trust Act; provided, however, that in determining whether the Holders of the
requisite amount of Preferred Securities have voted on any matter provided for
in this Declaration, then for the purpose of any such determination, so long as
Definitive Preferred Securities Certificates have not been issued, the term
Securityholders or Holders as used herein shall refer to the Owners.
"Sponsor" means Superior National Insurance Group, Inc., a
corporation organized under the laws of the State of Delaware, including any
successors or assigns.
"Tax Event" means that the Sponsor shall have obtained an Opinion
of Counsel of independent tax counsel experienced in such matters to the effect
that, as a result of (a) any amendment to or change (including any announced
proposed change) in the laws (or any regulations thereunder) of the United
States or any political subdivision or taxing authority thereof or therein or
(b) any amendment to or change in an interpretation or application of such laws
or regulations by any legislative body, court, governmental agency or regulatory
authority (including the enactment of any legislation and the publication of any
judicial decision or regulatory determination on or after the date of issuance
of the Preferred Securities), which amendment or change is effective or which
proposed change, interpretation or pronouncement is announced on or after the
date of issuance of the Preferred Securities under this Declaration, there is
more than an insubstantial risk that (i) the Trust is, or will be, subject to
United States federal income tax with respect to interest received or accrued on
the Notes, (ii) interest payable to the Trust on the Notes is not or will not,
within ninety days of the delivery of the Opinion of Counsel, be deductible for
United States federal income tax purposes or (iii) the Trust is or will be,
within ninety days of the delivery of the Opinion of Counsel, subject to more
than a de minimis amount of other taxes, duties, assessments or other
governmental charges of whatever nature imposed by the United States or any
other taxing authority.
"Trust" means Superior National Capital Trust I, the Delaware
business trust created and continued hereby.
"Trust Indenture Act" means the Trust Indenture Act of 1939 as in
force at the date as of which this instrument was executed; provided, however,
that in the event the Trust Indenture Act of 1939 is amended after such date,
"Trust Indenture Act" means to the extent required by such amendment, the Trust
Indenture Act of 1939 as so amended.
"Trust Property" means (a) the Notes, (b) any cash on deposit in,
or owing to, the Payment Account and (c) all proceeds and rights in respect of
the foregoing and any other property and
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assets for the time being held or deemed to be held by the Preferred Trustee
pursuant to the terms of this Declaration.
"Trust Security" means any one of the Common Securities or the
Preferred Securities.
"Trust Securities Certificate" means any one of the Common
Securities Certificates or the Preferred Securities Certificates.
"Trustees" means, collectively, the Preferred Trustee, the
Delaware Trustee and the Company Trustees.
"Unrestricted Global Preferred Securities" means those Global
Preferred Securities not required to contain a Restricted Securities Legend.
ARTICLE II
ESTABLISHMENT OF THE TRUST
Section 2.1 Name.
The Trust created hereby shall be known as "Superior National
Capital Trust I," as such name may be modified from time to time by the Company
Trustees following written notice to the Holders of Trust Securities and the
other Trustees, in which name the Trustees may conduct the business of the
Trust, make and execute contracts and other instruments on behalf of the Trust
and sue and be sued.
Section 2.2 Office of the Delaware Trustee; Principal Place of
Business.
The address of the Delaware Trustee in the State of Delaware is
c/o Wilmington Trust Company, 1100 North Market Street, Rodney Square North,
Wilmington, Delaware 19890, Attention: Corporate Trust Administration, or such
other address in the State of Delaware as the Delaware Trustee may designate by
written notice to the Securityholders and the Sponsor.
The principal executive office of the Trust is c/o Superior
National Insurance Group, Inc., 26601 Agoura Road, Calabasas, California 91302.
Section 2.3 Initial Contribution of Trust Property;
Organizational Expenses.
The Preferred Trustee acknowledges receipt in trust from the
Sponsor of the sum of $10, which constituted the initial Trust Property.
Pursuant to the Indenture, the Sponsor, as borrower, shall pay organizational
expenses of the Trust as they arise or shall, upon request of any Trustee,
promptly reimburse such Trustee for any such expenses paid by such Trustee. The
Sponsor shall make no claim upon the Trust Property for the payment of such
expenses.
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Section 2.4 Issuance of the Preferred Securities.
The Sponsor, on behalf of the Trust, executed and delivered the
Purchase Agreement. Contemporaneously with the execution and delivery of this
Declaration, a Company Trustee, on behalf of the Trust, shall execute in
accordance with Section 5.2 and deliver to the Initial Purchasers named in the
Purchase Agreement Preferred Securities Certificates, registered in the name of
the nominee of the initial Clearing Agency, in an aggregate amount of 105,000
Preferred Securities having an aggregate Liquidation Amount of $105,000,000,
against receipt of such aggregate purchase price of such Preferred Securities of
$105,000,000, which amount the Company Trustee shall promptly deliver to the
Preferred Trustee.
Section 2.5 Issuance of the Common Securities; Subscription
and Purchase of the Notes.
Contemporaneously with the execution and delivery of this
Declaration, a Company Trustee, on behalf of the Trust, shall execute in
accordance with Section 5.2 and deliver to the Sponsor Common Securities
Certificates, registered in the name of the Sponsor, in an aggregate amount of
3,093 Common Securities having an aggregate Liquidation Amount of $3,248,000
against payment by the Sponsor of such amount. Contemporaneously therewith, a
Company Trustee, on behalf of the Trust, shall subscribe to and purchase from
the Sponsor Notes, registered in the name of the Trust and having an aggregate
principal amount equal to $108,248,000, and, in satisfaction of the purchase
price for such Notes, a Company Trustee and the Preferred Trustee, on behalf of
the Trust, shall deliver to the Sponsor the sum of $108,248,000.
Section 2.6 Purposes and Functions of the Trust.
The exclusive purposes and functions of the Trust are (a) to
issue and sell Trust Securities and use the proceeds from such sale to acquire
the Notes, and (b) to engage in only those other activities necessary,
convenient or incidental thereto. The Sponsor hereby appoints the Trustees as
trustees of the Trust, to have all the rights, powers and duties to the extent
set forth herein, and the Trustees hereby accept such appointment. The Preferred
Trustee hereby declares that it will hold the Trust Property in trust upon and
subject to the conditions set forth herein for the benefit of the Trust and the
Securityholders. The Company Trustees shall have all rights, powers and duties
set forth herein and in accordance with applicable law with respect to
accomplishing the purposes of the Trust. The Delaware Trustee shall not be
entitled to exercise any powers, nor shall the Delaware Trustee have any of the
duties and responsibilities, of the Preferred Trustee or the Company Trustees
set forth herein. Notwithstanding anything herein to the contrary, the Delaware
Trustee shall be one of the Trustees of the Trust for the sole and exclusive
purpose of fulfilling the requirements of Section 3807 of the Delaware Business
Trust Act.
Section 2.7 Authorization to Enter into Certain Transactions.
(a) The Trustees shall conduct the affairs of the Trust in
accordance with the terms of this Declaration. Subject to the limitations set
forth in paragraph (b) of this Section, and in accordance with the following
provisions (i) and (ii), the Trustees shall have the authority to enter into all
transactions and agreements determined by the Trustees to be appropriate in
exercising the
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authority, express or implied, otherwise granted to the Trustees under this
Declaration, and to perform all acts in furtherance thereof, including without
limitation, the following:
(i) As among the Trustees, each Company Trustee, acting
singly or collectively, shall have the power and authority to act on behalf of
the Trust with respect to the following matters:
(A) the issuance and sale of the Trust Securities;
(B) to cause the Trust to enter into, and to
execute, deliver and perform on behalf of the Trust, the Registration Rights
Agreement, the Certificate Depository Agreement and such other agreements as may
be necessary or desirable in connection with the purposes and function of the
Trust;
(C) assisting in the registration of the Preferred
Securities under the Securities Act and under state securities or blue sky laws,
and the qualification of this Declaration as a trust indenture under the Trust
Indenture Act;
(D) assisting in the preparation and execution, if
necessary, of an offering memorandum (the "Offering Memorandum") in preliminary
and final form, in relation to the offering and sale of Preferred Securities to
QIBs in reliance on Rule 144A, to institutional "accredited investors" (as
defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act) and outside
the United States to non-U.S. Persons in offshore transactions in reliance on
Regulation S;
(E) assisting in the registration of the Preferred
Securities under the Exchange Act in accordance with the terms of the
Registration Rights Agreement and in connection with the Exchange Offer and the
preparation and filing of all periodic and other reports and other documents
pursuant to the foregoing as well as in one or more applications to exempt the
Trust from the periodic reporting requirements of the Exchange Act;
(F) the sending of notices (other than notices of
default) and other information regarding the Trust to the Securityholders in
accordance with this Declaration;
(G) the appointment of a Paying Agent,
authenticating agent and Securities Registrar in accordance with this
Declaration;
(H) registering transfer of the Trust Securities in
accordance with this Declaration;
(I) to the extent provided in this Declaration,
the winding up of the affairs of and liquidation of the Trust and the
preparation, execution and filing of the certificate of cancellation with the
Secretary of State of the State of Delaware;
(J) unless otherwise required by the Trust
Indenture Act, to execute on behalf of the Trust (either acting alone or
together with any or all of the Company Trustees) any documents that the Company
Trustees have the power to execute pursuant to this Declaration; and
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(K) the taking of any action incidental to the
foregoing as the Company Trustees may from time to time determine is necessary
or advisable to give effect to the terms of this Declaration for the benefit of
the Securityholders (without consideration of the effect of any such action on
any particular Securityholder).
(ii) As among the Trustees, the Preferred Trustee shall
have the power, duty and authority to act on behalf of the Trust with respect to
the following matters:
(A) the establishment of the Payment Account;
(B) the receipt of the Notes;
(C) the collection of interest, principal and any
other payments made in respect of the Notes in the Payment Account;
(D) the distribution of amounts owed to the
Securityholders in respect of the Trust Securities;
(E) the exercise of all of the rights, powers and
privileges of a holder of the Notes;
(F) the sending of the notices of default and other
information regarding the Trust Securities and the Notes to the Securityholders
in accordance with this Declaration;
(G) the distribution of the Trust Property in
accordance with the terms of this Declaration;
(H) to the extent provided in this Declaration, the
winding up of the affairs of and liquidation of the Trust and the preparation,
execution and filing of the certificate of cancellation with the Secretary of
State of the State of Delaware;
(I) after a Declaration Event of Default, the
taking of any action incidental to the foregoing as the Preferred Trustee may
from time to time determine is necessary or advisable to give effect to the
terms of this Declaration for the benefit of the Securityholders (without
consideration of the effect of any such action on any particular
Securityholder); and
(J) except as otherwise provided in this
Section 2.7(a)(ii), the Preferred Trustee shall have none of the duties,
liabilities, powers or the authority of the Company Trustees set forth in
Section 2.7(a)(i).
(b) So long as this Declaration remains in effect, the Trust (or
the Trustees acting on behalf of the Trust) shall not undertake any business,
activities or transaction except as expressly provided herein or contemplated
hereby. In particular, the Trustees shall not (i) acquire any investments or
engage in any activities not authorized by this Declaration, (ii) sell, assign,
transfer, exchange, mortgage, pledge, set-off or otherwise dispose of any of the
Trust Property or interests therein, including to Securityholders, except as
expressly provided herein, (iii) take any action that would cause the Trust to
fail or cease to qualify for United States federal income tax purposes as a
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grantor trust or another entity which is not subject to United States federal
income tax purposes as held and derived directly by holders of interests in the
entity, (iv) incur any indebtedness for borrowed money or issue any other debt
or (v) take or consent to any action that would result in the placement of a
Lien on any of the Trust Property. The Company Trustees shall defend all claims
and demands of all Persons at any time claiming any Lien on any of the Trust
Property adverse to the interest of the Trust or the Securityholders in their
capacity as Securityholders.
(c) In connection with the issue and sale of the Preferred
Securities, the Sponsor shall have the right and responsibility to assist the
Trust with respect to, or effect on behalf of the Trust, the following (and any
actions taken by the Sponsor in furtherance of the following prior to the date
of this Declaration are hereby ratified and confirmed in all respects):
(i) the preparation and filing by the Trust with the
Commission and the execution on behalf of the Trust of a registration statement
under the Securities Act on the appropriate form in relation to the Preferred
Securities, including any amendments thereto.
(ii) the preparation and execution of the Offering
Memorandum in preliminary and final form, in relation to the offering and sale
of Preferred Securities to QIBs in reliance on Rule 144A, to institutional
"accredited investors" (as defined in Rule 501 (a)(1), (2), (3) or (7) under the
Securities Act) and outside the United States to non-U.S. Persons in offshore
transactions in reliance on Regulation S.
(iii) the determination of the States in which to take
appropriate action to qualify or register for sale all or part of the Preferred
Securities and the determination of any and all such acts, other than actions
which must be taken by or on behalf of the Trust, and the advice to the Trustees
of actions they must take on behalf of the Trust, and the preparation for
execution and filing of any documents to be executed and filed by the Trust or
on behalf of the Trust, as the Sponsor deems necessary or advisable in order to
comply with the applicable laws of any such States;
(iv) the preparation for filing by the Trust with the
Commission and the execution on behalf of the Trust of registration statement on
Form 8-A relating to the registration of the Preferred Securities under Section
12(b) or 12(g) of the Exchange Act, including any amendments thereto;
(v) the negotiation of the terms of, and the execution
and delivery of, the Purchase Agreement providing for the sale of the Preferred
Securities; and
(vi) the taking of any other actions necessary or
desirable to carry out any of the foregoing activities.
(d) Notwithstanding anything herein to the contrary, the Company
Trustees are authorized and directed to conduct the affairs of the Trust and to
operate the Trust so that the Trust will not be deemed to be an "investment
company" required to be registered under the 1940 Act, or taxed as a corporation
for United States federal income tax purposes and so that the Notes will be
treated as indebtedness of the Sponsor for United States federal income tax
purposes. In this connection, the Sponsor and the Company Trustees are
authorized to take any action, not inconsistent with applicable law, the
Certificate of Trust or this Declaration, that each of the Sponsor and the
Company Trustees
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determines in their discretion to be necessary or desirable for such purposes,
as long as such action does not adversely affect in any material respect the
interests of the Holders of Preferred Securities.
Section 2.8 Assets of Trust.
The assets of the Trust shall consist of the Trust Property.
Section 2.9 Title to Trust Property.
Legal title to all Trust Property shall be vested at all times in
the Preferred Trustee (in its capacity as such) and shall be held and
administered by the Preferred Trustee for the benefit of the Trust and the
Securityholders in accordance with this Declaration.
ARTICLE III
PAYMENT ACCOUNT
Section 3.1 Payment Account.
(a) On or prior to the Closing Date, the Preferred Trustee shall
establish the Payment Account. The Preferred Trustee and any agent of the
Preferred Trustee shall have exclusive control and sole right of withdrawal with
respect to the Payment Account for the purpose of making withdrawals from the
Payment Account in accordance with this Declaration. All monies and other
property deposited or held from time to time in the Payment Account shall be
held by the Preferred Trustee in the Payment Account for the exclusive benefit
of the Securityholders and for distribution as herein provided, including (and
subject to) any priority of payments provided for herein.
(b) The Preferred Trustee shall deposit in the Payment Account,
promptly upon receipt, all payments of principal of or interest on, and any
other payments or proceeds with respect to, the Notes. Amounts held in the
Payment Account shall not be invested by the Preferred Trustee pending
distribution thereof.
ARTICLE IV
DISTRIBUTIONS; REDEMPTION
Section 4.1 Distributions.
(a) Distributions on the Trust Securities shall be cumulative.
Distributions shall accrue from December 3, 1997 and shall be payable
semiannually in arrears on June 1 and December 1 of each year, commencing on
June 1, 1998, when and if the Trust has funds available for payment. If any date
on which a Distribution is otherwise payable on the Trust Securities is not a
Business Day, then the payment of such Distribution shall be made on the next
succeeding day that is a Business Day (and without any interest or other payment
in respect of any such delay) except that, if such Business Day is in the next
succeeding calendar year, payment of such Distribution shall be made on the
immediately preceding Business Day, in each case with the same force and effect
as if made on such
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date (each date on which distributions are payable in accordance with this
Section 4.1(a), a "Distribution Date").
(b) The Trust Securities represent undivided beneficial ownership
interests in the Trust Property. Distributions on the Trust Securities shall be
payable at a rate of 10 3/4% per annum of the Liquidation Amount of the Trust
Securities. Distributions in arrears for more than one semi-annual period (and
interest thereon) will accrue interest (compounded semi-annually) at the same
rate. The amount of Distributions payable for any full period shall be computed
on the basis of a 360-day year of twelve 30-day months. The amount of
Distributions for any partial period shall be computed on the basis of the
number of days elapsed in a 360-day year of twelve 30-day months.
(c) Distributions on the Trust Securities shall be made by the
Preferred Trustee from the Payment Account and shall be payable on each
Distribution Date only to the extent that the Trust has funds then legally
available in the Payment Account for the payment of such Distributions.
(d) Distributions on the Trust Securities with respect to a
Distribution Date shall be payable to the Holders thereof as they appear on the
Securities Register for the Trust Securities on the relevant record date, which
shall be one day prior to such Distribution Date; provided, however, that in the
event that the Preferred Securities do not remain in book-entry only form, the
relevant record date shall be the date 15 days prior to the relevant
Distribution Date.
(e) Upon the occurrence of any event specified in Section 2(e) of
the Registration Rights Agreement, additional interest will accrue on the
principal amount of the Senior Subordinated Notes, and, as a result, on the
liquidation amount of Preferred Securities, in the amounts set forth in and
otherwise in accordance with Section 3.7 of the Indenture.
(f) As long as no Note Event of Default has occurred and is
continuing under the Indenture, the Sponsor has the right under the Indenture to
defer payments of interest by extending the interest payment period at any time
and from time to time on the Notes for a period not exceeding 10 consecutive
calendar semi-annual periods (each an "Extension Period"), provided that no
Extension Period shall extend beyond the Maturity Date of the Notes. As a
consequence of such deferral, Distributions will also be deferred. Despite such
deferral, semi-annual Distributions will continue to accumulate with interest
thereon (to the extent permitted by applicable law, but not at a rate exceeding
the rate of interest then accruing on the Notes) at 10 3/4% compounded
semi-annually during any such Extension Period. Prior to the termination of any
such Extension Period, the Sponsor may further defer payments of interest by
further extending such Extension Period; provided that such Extension Periods,
together with all such previous and further extensions within such Extension
Period may not exceed 10 consecutive semi-annual periods, including the first
semi-annual period during such Extension Period, or extend beyond the Maturity
Date of the Notes. Payments of Distributions that have accumulated during any
Extension Period will be payable to Holders as they appear on the books and
records of the Trust on the record date for the first scheduled Distribution
payment date following the expiration of such Extension Period. Upon the
expiration of any Extension Period and the payment of all amounts then due, the
Sponsor may commence a new Extension Period, subject to the above requirements.
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Section 4.2 Redemption.
(a) On each Note Redemption Date and on the stated maturity of
the Notes, the Trust will be required to redeem a Like Amount of Trust
Securities at the Redemption Price. The Trust Securities shall not be redeemed
unless all accrued and unpaid Distributions have been paid on all Trust
Securities for all semi-annual distribution periods terminating on or prior to
the Redemption Date.
(b) Notice of redemption shall be given by the Preferred Trustee
by first-class mail, postage prepaid, mailed not less than 30 nor more than 60
days prior to the Redemption Date to each Holder of Trust Securities to be
redeemed, at such Holder's address appearing in the Security Register. All
notices of redemption shall be irrevocable and shall state:
(i) the Redemption Date;
(ii) the Redemption Price;
(iii) the CUSIP number;
(iv) if less than all the Outstanding Trust Securities are
to be redeemed, the identification and the total Liquidation Amount of the
particular Trust Securities to be redeemed; and
(v) that on the Redemption Date that the Redemption Price
will become due and payable upon each such Trust Security to be redeemed and
that distributions thereon will cease to accrue on and after said date.
(c) The Trust Securities redeemed on each Redemption Date shall
be redeemed at the Redemption Price with the proceeds from the contemporaneous
redemption of Notes. Redemptions of the Trust Securities shall be made and the
Redemption Price shall be payable on each Redemption Date only to the extent
that the Trust has funds then legally available in the Payment Account for the
payment of such Redemption Price.
(d) If the Preferred Trustee gives a notice of redemption in
respect of any Preferred Securities, then, by 12:00 noon, New York City time, on
the Redemption Date, subject to Section 4.2(c), the Preferred Trustee will, with
respect to the Preferred Securities that are in book- entry-only form,
irrevocably deposit with the Clearing Agency for the Preferred Securities funds
sufficient to pay the applicable Redemption Price to the holders thereof. With
respect to the Preferred Securities that are no longer in book-entry-only form,
the Preferred Trustee, subject to Section 4.2(c), will irrevocably deposit with
the Payment Agent funds sufficient to pay the applicable Redemption Price to the
Holders thereof upon surrender of their Preferred Securities Certificates.
Notwithstanding the foregoing, Distributions payable on or prior to the
Redemption Date for any Trust Securities called for redemption shall be payable
to the Holders of such Trust Securities as they appear on the Register for the
Trust Securities on the relevant record dates for the related Distribution
Dates. If notice of redemption shall have been given and funds deposited as
required, then upon the date of such deposit, all rights of Securityholders
holding Trust Securities so called for redemption will cease, except for the
right of such Securityholders to receive the Redemption Price and any
Distributions payable on or prior to the Redemption Date, but without interest
on the Redemption Price. In the event that any date on which any Redemption
Price is payable is not a Business Day, then payment of the Redemption Price
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payable on such date will be made on the next succeeding day that is a Business
Day (without any interest or other payment in respect of any such delay), except
that, if such Business Day falls in the next calendar year, such payment will be
made on the immediately preceding Business Day. In the event that payment of the
Redemption Price in respect of any Trust Securities called for redemption is
improperly withheld or refused and not paid either by the Trust or by the
Sponsor pursuant to the Guarantee, Distributions on such Trust Securities will
continue to accrue, at the then applicable rate, from the Redemption Date
originally established by the Trust for such Trust Securities to the date such
Redemption Price is actually paid, in which case the actual payment date will be
the date fixed for redemption for purposes of calculating the Redemption Price
(other than for purposes of calculating any premium).
(e) Payment of the Redemption Price on the Trust Securities shall
be made to the record holders thereof as they appear on the Securities Register
for the Trust Securities on the relevant record date, which shall be one day
prior to the relevant Redemption Date; provided, however, that with respect to
the Preferred Securities that are not in book-entry-only form, the relevant
record date shall be the date 15 days prior to the relevant Redemption Date. In
the event that any date on which payment of the Redemption Price on the
Preferred Securities is not a Business Day, payment of the Redemption Price
shall be made in accordance with Section 4.1(d) above.
(f) Subject to Section 4.3, if less than all the Outstanding
Trust Securities are to be redeemed on a Redemption Date, then the aggregate
Liquidation Amount of Trust Securities to be redeemed shall be allocated on a
pro rata basis (based on Liquidation Amounts) among the Common Securities and
the Preferred Securities. The particular Preferred Securities to be redeemed
shall be redeemed on a pro rata basis (based on Liquidation Amounts) not more
than 60 days prior to the Redemption Date by the Preferred Trustee from the
Outstanding Preferred Securities not previously called for redemption. The
Preferred Trustee shall promptly notify the Security Registrar in writing of the
Preferred Securities selected for redemption and, in the case of any Preferred
Securities selected for partial redemption, the Liquidation Amount thereof to be
redeemed. For all purposes of this Declaration, unless the context otherwise
requires, all provisions relating to the redemption of Preferred Securities
shall relate, in the case of any Preferred Securities redeemed or to be redeemed
only in part, to the portion of the Liquidation Amount of Preferred Securities
that has been or is to be redeemed.
(g) Subject to the foregoing and applicable law (including,
without limitation, United States federal securities laws), the Sponsor or its
subsidiaries may at any time and from time to time purchase Outstanding
Preferred Securities by tender, in the open market or by private agreement.
Section 4.3 Subordination of Common Securities.
Payment of Distributions on, and the Redemption Price of, the
Trust Securities, as applicable, shall be made, subject to Section 4.2(f), pro
rata among the Common Securities and the Preferred Securities based on the
respective Liquidation Amounts of the Trust Securities; provided, however, that
if on any Distribution Date or Redemption Date a Declaration Event of Default
shall have occurred and be continuing, no payment of any Distribution on, or
Redemption Price of, any Common Security, and no other payment on account of the
redemption, liquidation or other acquisition of Common Securities, shall be made
unless payment in full in cash of accumulated and unpaid Distributions on all
Outstanding Preferred Securities for all Distribution periods terminating on or
prior
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thereto, or in the case of payment of the Redemption Price the full amount of
such Redemption Price on all Outstanding Preferred Securities, shall have been
made or provided for, and all funds available to the Preferred Trustee shall
first be applied to the payment in full in cash of all Distributions on, or the
Redemption Price of, Preferred Securities then due and payable.
Section 4.4 Payment Procedures.
Payments of Distributions in respect of the Preferred Securities
shall be made by check mailed to the address of the Person entitled thereto as
such address shall appear on the Securities Register or, if the Preferred
Securities are held by a Clearing Agency, such Distributions shall be made to
the Clearing Agency in immediately available funds, which shall credit the
relevant Persons' accounts at such Clearing Agency on the applicable
distribution dates. Payments in respect of the Common Securities shall be made
in such manner as shall be mutually agreed between the Preferred Trustee and the
Common Security Securityholder.
Section 4.5 Tax Returns and Reports.
The Company Trustees shall prepare (or cause to be prepared), at
the expense of the Sponsor as issuer of the Notes, and file all United States
federal, state and local tax and information returns and reports required to be
filed by or in respect of the Trust. In this regard, the Company Trustees shall
(a) prepare and file (or cause to be prepared and filed) the appropriate
Internal Revenue Service form required to be filed in respect of the Trust in
each taxable year of the Trust and (b) prepare and furnish (or cause to be
prepared and furnished) to each Securityholder the appropriate Internal Revenue
Service form required to be provided on such form. The Company Trustees shall
comply with United States federal withholding and backup withholding tax laws
and information reporting requirements with respect to any payments to
Securityholders under the Trust Securities.
Section 4.6 Payment of Taxes, Duties, Etc. of Trust.
Pursuant to Section 10.18 of the Indenture, the Sponsor, in its
capacity as issuer of the Notes, has agreed to pay any taxes, duties or
governmental charges of whatsoever nature (other than withholding taxes) imposed
on the Trust by the United States or any other taxing authority.
Section 4.7 Payments under Indenture.
Any amount payable hereunder to any Holder of Preferred
Securities shall be reduced by the amount of any corresponding payment such
Holder (and any Owner with respect thereto) has directly received pursuant to
Section 5.12 of the Indenture.
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ARTICLE V
TRUST SECURITIES CERTIFICATES
Section 5.1 Initial Ownership.
Upon the creation of the Trust and the contribution by the
Sponsor pursuant to Section 2.3 and until the issuance of the Trust Securities,
and at any time during which no Trust Securities are outstanding, the Sponsor
shall be the sole beneficial owner of the Trust.
Section 5.2 General Provisions Regarding Trust Securities.
The Company Trustees shall, on behalf of the Trust, issue one
class of preferred securities representing undivided beneficial interests in the
assets of the Trust, which class may be divided into no more than two series
(the "Preferred Securities"), and one class of common securities representing
undivided beneficial interests in the assets of the Trust, which class may be
divided into no more than two series (the "Common Securities"). The Trust is
hereby authorized to issue Preferred Securities in accordance with and as
contemplated by the Registration Rights Agreement. The Trust shall issue no
securities or other interests in the assets of the Trust other than the
Preferred Securities and the Common Securities.
The consideration received by the Trust for the issuance of the
Trust Securities shall constitute a contribution to the capital of the Trust and
shall not constitute a loan to the Trust.
Upon issuance of the Trust Securities as provided in this
Declaration, the Trust Securities so issued shall be deemed to be validly
issued, fully paid and non-assessable.
Every Person, by virtue of having become a Holder or a Preferred
Security Beneficial Owner in accordance with the terms of this Declaration,
shall be deemed to have expressly assented and agreed to the terms of, and shall
be bound by, this Declaration.
Section 5.3 Execution and Authentication.
The Trust Securities shall be signed on behalf of the Trust by a
Company Trustee. In case any Company Trustee of the Trust who shall have signed
any of the Trust Securities shall cease to be such Company Trustee before the
Trust Securities so signed shall have been delivered by the Trust, such Trust
Securities nevertheless may be delivered as though the Person who signed such
Trust Securities had not ceased to be such Company Trustee; and any Trust
Securities may be signed on behalf of the Trust by such Person who, at the
actual date of execution of such Trust Security, shall be the Company Trustees
of the Trust, although at the date of the execution and delivery of the
Declaration any such Person was not such a Company Trustee.
One Company Trustee shall sign the Preferred Securities for the
Trust by manual or facsimile signature. Unless otherwise determined by the
Trust, such signature shall, in the case of the Common Securities, be a manual
signature.
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A Preferred Security shall not be valid until authenticated by
the manual signature of an authorized signatory of the Preferred Trustee. The
signature shall be conclusive evidence that the Preferred Security has been
authenticated under this Declaration.
Upon written order of the Trust signed by one Company Trustee,
the Preferred Trustee shall authenticate the Preferred Securities for original
issue. The aggregate number of Preferred Securities outstanding at any time
shall not exceed 100,000, except as provided in Section 5.6(j).
The Preferred Trustee may appoint an authenticating agent
acceptable to the Trust to authenticate Preferred Securities. An authenticating
agent may authenticate Preferred Securities whenever the Preferred Trustee may
do so. Each reference in this Declaration to authentication by the Preferred
Trustee includes authentication by such agent. An authenticating agent has the
same rights as the Preferred Trustee to deal with the Sponsor or an Affiliate.
Section 5.4 Form and Dating.
The Preferred Securities and the Preferred Trustee's certificate
of authentication shall be substantially in the form of Exhibit D, and the
Common Securities shall be substantially in the form of Exhibit C, each of which
being hereby incorporated in and expressly made a part of this Declaration.
Certificates representing the Trust Securities may be printed, lithographed or
engraved or may be produced in any other manner as is reasonably acceptable to
the Company Trustees, as evidenced by their execution thereof. The Trust
Securities may have letters, CUSIP or other numbers, notations or other marks of
identification or designation and such legends or endorsements required by law,
stock exchange rule, agreements to which the Trust is subject, if any, or usage
(provided that any such notation, legend or endorsement is in a form acceptable
to the Company Trustees). The Trust at the direction of the Sponsor shall
furnish any such legend not contained in Exhibit D to the Preferred Trustee in
writing. Each Preferred Security shall be dated the date of its authentication.
The forms of Trust Securities set forth in Exhibits C and D are part of the
terms of this Declaration and to the extent applicable, the Preferred Trustee,
the Company Trustees and the Sponsor, by their execution and delivery of the
Declaration, expressly agree to be bound thereby.
(a) Global Securities. Trust Securities offered and sold to QIBs
in reliance on Rule 144A, offered and sold outside the United States to non-U.S.
Persons in offshore transactions in reliance on Regulation S or offered and sold
to "accredited investors" (as defined in Rule 501(a)(1), (2), (3) or (7) under
the Securities Act) who did not purchase Preferred Securities in reliance on
Regulation S, as provided in the Purchase Agreement, shall be issued in the form
of one or more permanent Global Securities in definitive, fully registered form
without Distribution coupons with the appropriate global legends and Restricted
Securities Legend set forth in Exhibit D hereto (respectively, a "Restricted
Global Preferred Security," a "Regulation S Global Preferred Security" and an
"Accredited Investor Global Preferred Security,"), which shall be deposited on
behalf of the purchasers of the Preferred Securities represented thereby with
the Preferred Trustee, at its Wilmington, Delaware office, as custodian for the
Clearing Agency, and registered in the name of the Clearing Agency or a nominee
of the Clearing Agency, duly executed by the Trust and authenticated by the
Preferred Trustee as herein provided. The number of Preferred Securities
represented by the Restricted Global Preferred Security, the Regulation S Global
Preferred Security and the Accredited Investor Global Preferred Security may
from time to time be increased or decreased by adjustments made on the records
of the Preferred Trustee and the Clearing Agency or its nominee as hereinafter
provided.
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(b) Book-Entry Provisions. This Section 5.4(b) shall apply only
to the Restricted Global Preferred Securities, the Regulation S Global Preferred
Securities, and the Accredited Investor Global Preferred Securities and such
other Preferred Securities in global form as may be authorized by the Trust to
be deposited with or on behalf of the Clearing Agency.
A Company Trustee on behalf of the Trust shall execute and the
Preferred Trustee shall, in accordance with Section 5.3, authenticate and make
available for delivery initially one or more Restricted Global Preferred
Securities, one or more Regulation S Global Preferred Securities and one or more
Accredited Investor Global Preferred Securities that (i) shall be registered in
the name of Cede & Co. or other nominee of such Clearing Agency and (ii) shall
be delivered by the Preferred Trustee to such Clearing Agency or pursuant to
such Clearing Agency's written instructions or held by the Preferred Trustee as
custodian for the Clearing Agency.
Members of, or participants in, the Clearing Agency
("Participants") shall have no rights under this Declaration with respect to any
Restricted Global Preferred Security, any Regulation S Global Preferred Security
or any Accredited Investor Global Preferred Security held on their behalf by the
Clearing Agency or by the Preferred Trustee as the custodian of the Clearing
Agency or under such Restricted Global Preferred Security, such Regulations S
Preferred Security or such Accredited Investor Global Preferred Security, and
the Clearing Agency may be treated by the Trust, the Preferred Trustee and by
agents of the Trust or the Preferred Trustee as the absolute owner of such
Restricted Global Preferred Security, such Regulation S Global Preferred
Security or such Accredited Investor Global Preferred Security for all purposes
whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the
Trust, the Preferred Trustee or any agent of the Trust or the Preferred Trustee
from giving effect to any written certification, proxy or other authorization
furnished by the Clearing Agency or impair, as between the Clearing Agency and
its Participants, the operations or customary practices of such Clearing Agency
governing the exercise of the rights of a holder of beneficial interest in any
Restricted Global Preferred Security, any Regulation S Global Preferred Security
or any Accredited Investor Global Preferred Security.
(c) Definitive Preferred Securities. Except as provided in
Section 5.6, owners of a beneficial interest in a Restricted Global Preferred
Security, a Regulation S Global Preferred Security or an Accredited Investor
Global Preferred Security will not be entitled to receive physical delivery of
certificated Preferred Securities ("Definitive Preferred Securities").
Definitive Preferred Securities will bear the Restricted Securities Legend set
forth on Exhibit D unless removed in accordance with this Section 5.4. or
Section 5.6.
Section 5.5 Transfer of Trust Securities.
(a) Trust Securities may only be transferred, in whole or in
part, in accordance with the terms and conditions set forth in this Declaration
and in the terms of the Trust Securities. To the fullest extent permitted by
law, any transfer or purported transfer of any Trust Security not made in
accordance with this Declaration shall be null and void.
(b) Subject to the transfer requirements provided in this Article
V, Preferred Securities may only be transferred, in whole or in part, in
accordance with the terms and conditions set forth in this Declaration. Any
transfer or purported transfer of any Preferred Security not made in accordance
with this Declaration shall be null and void.
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(c) Subject to Section 9.5 and except as provided in Article VIII
of the Indenture, to the fullest extent permitted by law, the Sponsor may not
transfer the Common Securities.
(d) The Company Trustees shall provide for the registration of
Trust Securities and of the transfer of Trust Securities, which will be effected
without charge but only upon payments (with indemnity as the Company Trustees
may require) in respect of any tax or other governmental charges that may be
imposed in relation to it. Upon surrender for registration of transfer of any
Trust Securities, the Company Trustees shall cause one or more new Trust
Securities to be issued in the name of the designated transferee or transferees.
Every Trust Security surrendered for registration of transfer shall be
accompanied by a written instrument of transfer in form satisfactory to the
Company Trustees duly executed by the Holder or such Holder's attorney duly
authorized in writing. Each Trust Security surrendered for registration of
transfer shall be canceled by the Company Trustees. A transferee of a Trust
Security shall be entitled to the rights and subject to the obligations of a
Holder hereunder upon receipt by such transferee of a Trust Security. By
acceptance of a Trust Security, each transferee shall be deemed to have
expressly assumed and agreed to the terms of, and shall be bound by, this
Declaration.
Section 5.6 Transfer Procedures and Restrictions.
General. If Preferred Securities are issued upon the transfer,
exchange or replacement of Preferred Securities bearing the Restricted
Securities Legend in Exhibit D hereto, or if a request is made to remove the
Restricted Securities Legend on Preferred Securities, the Preferred Securities
so issued shall bear the Restricted Securities Legend, or the Restricted
Securities Legend shall not be removed, as the case may be, unless there is
delivered to the Trust and the Preferred Trustee such satisfactory evidence,
which shall include an Opinion of Counsel licensed to practice law in the State
of New York, as may be reasonably required by the Sponsor and the Preferred
Trustee, that neither the legend nor the restrictions on transfer set forth
therein are required to ensure that transfers thereof are made pursuant to an
exception from the registration requirements of the Securities Act or, with
respect to Restricted Securities, that such Trust Securities are not
"restricted" within the meaning of Rule 144. Upon provision of such satisfactory
evidence, the Preferred Trustee, at the written direction of a Company Trustee
on behalf of the Trust, shall authenticate and deliver Preferred Securities that
do not bear the legend.
(a) Transfer and Exchange of Definitive Preferred Securities.
When Definitive Preferred Securities are presented to the Securities Registrar:
(i) to register the transfer of such Definitive Preferred
Securities or
(ii) to exchange such Definitive Preferred Securities
which became mutilated, defaced, stolen or lost, for an equal number of
Definitive Preferred Securities, the Securities Registrar shall register the
transfer or make the exchange as requested if its reasonable requirements for
such transaction are met; provided, however, that the Definitive Preferred
Securities are surrendered for transfer or exchange:
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(x) shall be duly endorsed or accompanied by a
written instrument of transfer in form reasonably satisfactory to the Trust and
the Securities Registrar, duly executed by the Holder thereof or his attorney
duly authorized in writing; and
(y) in the case of Definitive Preferred
Securities that are Restricted Definitive Preferred Securities:
(A) if such Restricted Preferred
Securities are being delivered to the Securities Registrar by a Holder for
registration in the name of such Holder without transfer, a certification from
such Holder to that effect; or
(B) if such Restricted Preferred
Securities are being transferred: (x) a certification from the transferor in a
form substantially similar to that attached hereto as the "Assignment" in
Exhibit D, and (y) if the Trust or Securities Registrar so requested, evidence
reasonably satisfactory to them as to the compliance with the restrictions set
forth with the Restricted Securities Legend.
(b) Restrictions on Transfer of a Definitive Preferred Security
for a Beneficial Interest in a Global Preferred Security. A Definitive Preferred
Security may not be exchanged for a beneficial interest in a Global Preferred
Security except upon satisfaction of the requirements set forth below. Upon
receipt by the Preferred Trustee of a Definitive Preferred Security, duly
endorsed or accompanied by appropriate instruments of transfer, in form
satisfactory to the Preferred Trustee, together with:
(i) if such Definitive Preferred Security is a
Restricted Preferred Security, a written certificate (in a form substantially
similar to that attached hereto as the "Assignment" in Exhibit D); provided,
however, that such Definitive Preferred Security may only be exchanged for any
interest in a Regulation S Global Security where such Definitive Preferred
Security is being transferred pursuant to Regulation S or Rule 144 (if
available); and
(ii) whether or not such Definitive Preferred Security is
a Restricted Preferred Security, written instructions directing the Preferred
Trustee to make, or to direct the Clearing Agency to make, an adjustment on its
books and records with respect to the appropriate Global Preferred Security to
reflect an increase in the number of the Preferred Securities represented by
such Global Preferred Security,
then the Preferred Trustee shall cause such Definitive Preferred Security and
cause, or direct the Clearing Agency to cause, the aggregate number of Preferred
Securities represented by the appropriate Global Preferred Security to be
increased accordingly. If no Global Securities are then outstanding, a Company
Trustee shall cause the Trust to issue and the Preferred Trustee shall
authenticate, upon written order of any Company Trustee, an appropriate number
of Preferred Securities in global form.
(c) Transfer and Exchange of Global Preferred Securities. Subject
to Section 5.6(d), the transfer and exchange of Global Preferred Securities or
beneficial interests therein shall be effected through the Clearing Agency in
accordance with this Declaration (including applicable restrictions on transfer
set forth herein, if any) and the procedures of the Clearing Agency therefor.
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(d) Transfer of a Beneficial Interest in a Global Preferred
Security for a Definitive Preferred Security. Any Person having a beneficial
interest in a Global Preferred Security may upon request, but only upon 20 days
prior notice to the Preferred Trustee, and if accompanied by the information
specified below, exchange such beneficial interest for a Definitive Preferred
Security representing the same number of Preferred Securities. Upon receipt by
the Preferred Trustee from the Clearing Agency or its nominee on behalf of any
Person having a beneficial interest in a Global Preferred Security of written
instructions or such other form of instructions as is customary for the Clearing
Agency or the Person designated by the Clearing Agency as having such a
beneficial interest in a Restricted Preferred Security and a certification from
the transferor (in a form substantially similar to that attached hereto as the
"Assignment" in Exhibit D), which may be submitted by facsimile, then the
Preferred Trustee will cause the aggregate number of Preferred Securities
represented by Global Preferred Securities to be reduced on its books and
records and, following such reduction, a Company Trustee on behalf of the Trust
will execute and the Preferred Trustee will authenticate and make available for
delivery to the transferee a Definitive Preferred Security.
Definitive Preferred Securities issued in exchange for a
beneficial interest in a Global Preferred Security pursuant to this Section
5.6(d) shall be registered in such names and in such authorized denominations as
the Clearing Agency pursuant to instruction from its Participants or indirect
participants or otherwise, shall instruct the Preferred Trustee in writing. The
Preferred Trustee shall deliver such Preferred Securities to the Person in whose
names such Preferred Securities are so registered in accordance with the
instructions of the Clearing Agency.
(e) Restrictions on Transfer and Exchange of Global Preferred
Securities. Notwithstanding any other provisions in the Declaration (other than
the provisions set forth in Section 5.6(f)), a Global Preferred Security may not
be transferred as a whole except by the Clearing Agency to a nominee of the
Clearing Agency or another nominee of the Clearing Agency or by the Clearing
Agency or a nominee of such successor Clearing Agency.
(i) Beneficial interests in the Accredited Investor
Global Preferred Security may be, and prior to the expiration of the restricted
period, as contemplated by Regulation S, beneficial interests in the Regulation
S Global Preferred Security may be exchanged for beneficial interests in the
Restricted Global Preferred Security only if such exchange occurs in connection
with a transfer of the Preferred Securities pursuant to Rule 144A and the
transferor first delivers to the Trustee a written certificate (in a form
substantially similar to that attached hereto as the "Assignment" in Exhibit D)
to the effect that the Preferred Securities are being transferred to a Person
who the transferor reasonably believes is a QIB, purchasing for its own account
or the account of a QIB in a transaction meeting the requirements of Rule 144A
and in accordance with all applicable securities laws of the states of the
United States and other jurisdictions.
(ii) Beneficial interests in the Restricted Global
Preferred Security may be, and prior to the expiration of the restricted period,
as contemplated by Regulation S, beneficial interests in the Regulation S Global
Preferred Security may be, exchanged for beneficial interests in the Accredited
Investor Global Preferred Security only if such exchange occurs in connection
with a transfer of the Preferred Securities to an institutional "accredited
investor" within the meaning of subparagraph (a)(1), (2), (3) or (7) of Rule 501
under the Securities Act that is acquiring the Preferred Security for its own
account, or for the account of such institutional accredited investor, for
investment
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purposes and not with a view to, or for offer or sale in connection with, any
distribution in violation of the Securities Act.
(iii) Beneficial interests in the Restricted Global
Preferred Security or in the Accredited Investor Global Preferred Security may
be transferred to a Person who takes delivery in the form of an interest in the
Regulation S Global Preferred Security, whether before or after the expiration
of such restricted period, as contemplated by Regulation S, only if the
transferor first delivers to the Preferred Trustee a written certificate (in a
form substantially similar to that attached hereto as the "Assignment" in
Exhibit D) to the effect that such transfer is being made in accordance with
Rule 903 or 904 of Regulations S or Rule 144 (if available) and that, if such
transfer occurs prior to the expirations of such restricted period, the interest
transferred will be held immediately thereafter through Euroclear or CEDEL.
(f) Authentication of Definitive Preferred Securities. If at any
time:
(i) there occurs a Declaration Event of Default which
is continuing, or
(ii) a Company Trustee on behalf of the Trust, in its sole
discretion, notifies the Preferred Trustee in writing that it elects to cause
the issuance of Definitive Preferred Securities under this Declaration,
then a Company Trustee on behalf of the Trust will execute, and the Preferred
Trustee, upon receipt of a written order of the Trust signed by one Company
Trustee requesting authentication and delivery of Definitive Preferred
Securities to the Persons designated by the Trust, will authenticate and make
available for delivery Definitive Preferred Securities, equal in number to the
number of Preferred Securities represented by Global Preferred Securities, in
exchange for such Global Preferred Securities.
(g) Legend.
(i) Except as permitted by the following paragraph
(ii), each Preferred Security Certificate evidencing the Global Preferred
Securities and the Definitive Preferred Securities (and all Preferred Securities
issued in exchange therefor or substitution thereof, except in the Exchange
Offer) shall bear a legend (the "Restricted Securities Legend") in substantially
the following form:
THE PREFERRED SECURITIES REPRESENTED HEREBY HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT") OR ANY STATE SECURITIES LAWS OR ANY OTHER
APPLICABLE SECURITIES LAW. NEITHER THIS PREFERRED SECURITY NOR
ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD,
ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED
OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION
IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION.
THE HOLDER OF THE PREFERRED SECURITY BY ITS
ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR
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OTHERWISE TRANSFER THIS PREFERRED SECURITY, PRIOR TO THE DATE
(THE "RESALE RESTRICTION TERMINATION DATE") WHICH IS TWO YEARS
AFTER THE LATER OF THE ORIGINAL ISSUANCE DATE HEREOF AND THE LAST
DATE ON WHICH THE TRUST OR ANY "AFFILIATE" OF THE TRUST WAS THE
OWNER OF THIS PREFERRED SECURITY (OR ANY PREDECESSOR OF THIS
PREFERRED SECURITY) ONLY (A) TO THE TRUST, (B) PURSUANT TO A
REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER
THE SECURITIES ACT, (C) SO LONG AS THIS PREFERRED SECURITY IS
ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES
ACT ("RULE 144A"), TO A PERSON IT REASONABLY BELIEVES IS A
"QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A) THAT
PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED
INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE OFFER IS
BEING MADE IN RELIANCE OF RULE 144A, (D) PURSUANT TO OFFERS AND
SALES TO NONUNITED STATES PERSONS THAT OCCUR OUTSIDE THE UNITED
STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES
ACT, (E) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE
MEANING OF SUBPARAGRAPH (A)(1), (2), (3) OR (7) OF RULE 501 UNDER
THE SECURITIES ACT THAT IS ACQUIRING THIS PREFERRED SECURITY FOR
ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL
ACCREDITED INVESTOR, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW
TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN
VIOLATION OF THE SECURITIES ACT OR (F) PURSUANT TO ANY OTHER
AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS UNDER THE
SECURITIES ACT, SUBJECT TO THE RIGHT OF THE TRUST AND THE SPONSOR
PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER, (i) PURSUANT TO CLAUSE
(D), (E) OR (F) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL,
CERTIFICATIONS AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF
THEM AND (ii) PURSUANT TO CLAUSE (E) TO REQUIRE THAT THE
TRANSFEROR DELIVER TO THE TRUST A LETTER FROM THE TRANSFEREE
SUBSTANTIALLY IN THE FORM OF ANNEX A TO THE OFFERING MEMORANDUM
DATED NOVEMBER 26, 1997. SUCH HOLDER FURTHER AGREES THAT IT WILL
DELIVER TO EACH PERSON TO WHOM THIS PREFERRED SECURITY IS
TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND.
In the case of the Regulation S Global Preferred Security
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THIS PREFERRED SECURITY HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT AND MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED
STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, UNITED STATES
PERSONS UNLESS REGISTERED UNDER THE SECURITIES ACT OR AN
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES
ACT IS AVAILABLE.
(ii) Upon any sale or transfer of a Restricted Preferred
Security (including any Restricted Preferred Security represented by a Global
Preferred Security) pursuant to an effective registration statement under the
Securities Act or pursuant to Rule 144:
(A) in the case of any Restricted Preferred
Security that is a Definitive Preferred Security, the Securities Registrar shall
permit the Holder thereof to exchange such Restricted Preferred Security for a
Definitive Preferred Security that does not bear the Restricted Securities
Legend and rescind any restriction on the transfer of such Restricted Preferred
Security; and
(B) in the case of any Restricted Preferred
Security that is represented by a Global Preferred Security, the Securities
Registrar shall permit the Holder of such Global Preferred Security to exchange
such Global Preferred Security for another Global Preferred Security that does
not bear the Restricted Securities Legend.
(h) Cancellation or Adjustment of Global Preferred Security. At
such time as all beneficial interests in a Global Preferred Security have either
been exchanged for Definitive Preferred Securities to the extent permitted by
this Declaration or redeemed, repurchased or canceled in accordance with the
terms of this Declaration, such Global Preferred Security shall be returned to
the Clearing Agency for cancellation or retained and canceled by the Preferred
Trustee. At any time prior to such cancellation, if any beneficial interest in a
Global Preferred Security is exchanged for Definitive Preferred Securities,
Preferred Securities represented by such Global Preferred Security shall be
reduced and an adjustment shall be made on the books and records of the
Preferred Trustee (if it is then the custodian for such Global Preferred
Security) with respect to such Global Preferred Security, by the Preferred
Trustee, to reflect such reduction.
(i) No Obligations of the Preferred Trustee. The Preferred
Trustee shall have no responsibility or obligation to any beneficial owner of a
Global Preferred Security, a Participant in the Clearing Agency or other Person
with respect to the accuracy of the records of the Clearing Agency or its
nominee or of any Participant thereof, with respect of any ownership interest in
the Preferred Securities or with respect to the delivery of any Participant,
beneficial owner or other Person (other than the Clearing Agency) of any notice
(including any notice of redemption) or the payment of any amount, under or with
respect to such Preferred Securities. All notices and communications to be given
to the Holders and all payments to be made to Holders under the Preferred
Securities shall be given or made only to or upon the order of the registered
Holders (which shall be the Clearing Agency or its nominee in the case of a
Global Preferred Security). The rights of beneficial owners in any Global
Preferred Security shall be exercised only through the Clearing Agency subject
to the applicable rules and procedures of the Clearing Agency. The Preferred
Trustee may conclusively rely and shall be fully protected in relying upon
information furnished by the Clearing Agency or any agent thereof with respect
to its Participants and any beneficial owners.
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The Preferred Trustee and Securities Registrar shall have no
obligation or duty to monitor, determine or inquire as to compliance with any
restriction on transfer imposed under this Declaration or under applicable law
with respect to any transfer of any interest on any Preferred Security
(including any transfers between or among Clearing Agency Participants or
beneficial owners on any Global Preferred Security) other than to require
delivery of such certificates and other documentation or evidence as are
required by, and to do so if and when expressly required by law, the terms of
this Declaration, and to examine the same to determine substantial compliance as
to form with the express requirements hereof.
(j) Minimum Transfers. Preferred Securities may only be
transferred in minimum blocks of $100,000 aggregate Liquidation Amount until
such Preferred Securities are registered pursuant to an effective registration
statement filed under the Securities Act or are "unrestricted" pursuant to Rule
144:
Section 5.7 Temporary Securities.
(a) Until definitive Trust Securities are ready for delivery, a
Company Trustee on behalf of the Trust may prepare and, in the case of the
Preferred Securities, the Preferred Trustee shall authenticate temporary
Securities (the "Temporary Securities"). Temporary Securities shall be
substantially in the form of definitive Trust Securities but may have variations
that the Trust considers appropriate for temporary Trust Securities. Without
unreasonable delay, a Company Trustee on behalf of the Trust shall prepare, and
in the case of the Preferred Securities, the Preferred Trustee shall
authenticate definitive Trust Securities in exchange for Temporary Securities.
(b) A Global Preferred Security deposited with the Clearing
Agency or with the Preferred Trustee as custodian for the Clearing Agency
pursuant to Section 5.4 shall be transferred to the beneficial owners thereof in
the form of certificated Preferred Securities only if such transfer complies
with Section 5.6 and (i) the Clearing Agency notifies the Company that it is
unwilling or unable to continue as Clearing Agency for such Global Preferred
Security or if at any time such Clearing Agency ceases to be a "clearing agency"
registered under the Exchange Act and a clearing agency is not appointed by the
Sponsor within 90 days of such notice, (ii) a Declaration Event of Default has
occurred and is continuing or (iii) the Trust at its sole discretion elects to
cause the issuance of certificated Preferred Securities.
(c) Any Global Preferred Security that is transferable to the
beneficial owners thereof in the form of certificated Preferred Securities
pursuant to this Section 5.7 shall be surrendered by the Clearing Agency to the
Preferred Trustee located in Wilmington, Delaware, to be so transferred, in
whole or from time to time in part, without charge, and the Preferred Trustee
shall authenticate and make available for delivery, upon such transfer of each
portion of such Global Preferred Security, an equal aggregate Liquidation Amount
of Securities of authorized denominations in the form of certificated Preferred
Securities. Any portion of Global Preferred Security also transferred pursuant
to this Section shall be registered in such names as the Clearing Agency shall
direct. Any Preferred Security in the form of certificated Preferred Security
also delivered in exchange for an interest in the Restricted Global Preferred
Security shall, except as otherwise provided by Sections 5.4 and 5.5, bear the
Restricted Securities Legend set forth in Exhibit D hereto.
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(d) Subject to the provisions of Section 5.7(c), the Holder of a
Global Preferred Security may grant proxies and otherwise authorize any Person,
including Participants and Persons that may hold interests through Participants,
to take any action which such Holder is entitled to take under this Declaration
or the Trust Securities.
(e) In the event of the occurrence of any of the events specified
in Section 5.7(b), the Trust will promptly make available to the Preferred
Trustee a reasonable supply of certificated Preferred Securities in fully
registered form without Distribution coupons.
Section 5.8 Securities Register and Securities Registrar.
The Sponsor shall keep or cause to be kept, at the office or
agency maintained pursuant to Section 5.8, a register or registers for the
purpose of registering Trust Securities Certificates and transfers and exchanges
of Preferred Securities Certificates (the "Securities Register") in which the
registrar designated by the Sponsor (the "Securities Registrar"), subject to
such reasonable regulations as it may prescribe, shall provide for the
registration of Preferred Securities Certificates and Common Securities
Certificates (subject to Section 5.10 in the case of the Common Securities
Certificates) and registration of transfers and exchanges of Preferred
Securities Certificates as herein provided. The Preferred Trustee shall be the
initial Securities Registrar.
Section 5.9 Mutilated, Destroyed, Lost or Stolen Trust
Securities Certificates.
If (a) any mutilated Trust Securities Certificate shall be
surrendered to the Securities Registrar, or if the Securities Registrar shall
receive evidence to its satisfaction of the destruction, loss or theft of any
Trust Securities Certificate and (b) there shall be delivered to the Securities
Registrar and the Company Trustees such security or indemnity as may be required
by them to save each of them harmless, then in the absence of notice that such
Trust Securities Certificate shall have been acquired by a bona fide purchaser,
the Company Trustees, or any one of them, on behalf of the Trust, shall execute
and make available for delivery, in exchange for or in lieu of any such
mutilated, destroyed, lost or stolen Trust Securities Certificate, a new Trust
Securities Certificate of like class, tenor and denomination. In connection with
the issuance of any new Trust Securities Certificate under this Section, the
Company Trustees or the Securities Registrar may require the payment of a sum
sufficient to pay any tax or other governmental charge that may be imposed in
connection therewith. Any duplicate Trust Securities Certificate issued pursuant
to this Section shall constitute conclusive evidence of an undivided beneficial
interest in the assets of the Trust, as if originally issued, whether or not the
lost, stolen or destroyed Trust Securities Certificate shall be found at any
time.
Section 5.10 Persons Deemed Securityholders.
The Company Trustees or the Securities Registrar shall treat the
Person in whose name any Trust Securities Certificate shall be registered in the
Securities Register as the owner of such Trust Securities Certificate for the
purpose of receiving distributions and for all other purposes whatsoever, and
neither the Company Trustees nor the Securities Registrar shall be bound by any
notice to the contrary.
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Section 5.11 Access to List of Securityholders' Names and
Addresses.
Each Holder of a Trust Securities Certificate, and each Owner
shall be deemed to have agreed not to hold the Sponsor, the Preferred Trustee,
the Delaware Trustee or the Company Trustees accountable by reason of the
disclosure of its name and address, regardless of the source from which such
information was derived.
Section 5.12 Maintenance of Office or Agency.
The Company Trustees shall maintain an office or offices or
agency or agencies where Preferred Securities Certificates may be surrendered
for registration of transfer or exchange and where notices and demands to or
upon the Trustees in respect of the Trust Securities Certificates may be served.
The Company Trustees initially designate Wilmington Trust Company, 1100 North
Market Street, Rodney Square North, Wilmington, Delaware, Attention: Corporate
Trust Administration, as its principal corporate trust office for such purposes.
The Company Trustees shall give prompt written notice to the Sponsor and to the
Securityholders of any change in the location of the Securities Register or any
such office or agency.
Section 5.13 Appointment of Paying Agent.
The Paying Agent shall make Distributions to Securityholders from
the Payment Account and shall report the amounts of such Distributions to the
Preferred Trustee and the Company Trustees. Any Paying Agent shall have the
revocable power to withdraw funds from the Payment Account for the purpose of
making the Distributions referred to above. The Company Trustees may revoke such
power and remove the Paying Agent if such Trustees determine in their sole
discretion that the Paying Agent shall have failed to perform its obligations
under this Declaration in any material respect. The Paying Agent shall initially
be the Bank, and any co-paying agent chosen by the Bank, and acceptable to the
Company Trustees and the Sponsor. Any Person acting as Paying Agent shall be
permitted to resign as Paying Agent upon 30 days' written notice to the Company
Trustees, the Preferred Trustee and the Sponsor. In the event that the Bank
shall no longer be the Paying Agent or a successor Paying Agent shall resign or
its authority to act be revoked, the Company Trustees shall appoint a successor
that is acceptable to the Preferred Trustee and the Sponsor to act as Paying
Agent (which shall be a bank or trust company). The Company Trustees shall cause
such successor Paying Agent or any additional Paying Agent appointed by the
Company Trustees to execute and deliver to the Trustees an instrument in which
such successor Paying Agent or additional Paying Agent shall agree with the
Trustees that as Paying Agent, such successor Paying Agent or additional Paying
Agent will hold all sums, if any, held by it for payment to the Securityholders
in trust for the benefit of the Securityholders entitled thereto until such sums
shall be paid to such Securityholders. The Paying Agent shall return all
unclaimed funds to the Preferred Trustee, and upon removal of a Paying Agent
such Paying Agent shall return all funds in its possession to the Preferred
Trustee. The provisions of Sections 8.1, 8.3 and 8.6 herein shall apply to the
Bank also in its role as Paying Agent, for so long as the Bank shall act as
Paying Agent and, to the extent applicable, to any other Paying Agent appointed
hereunder. Any reference in this Declaration to the Paying Agent shall include
any co-paying agent unless the context requires otherwise.
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Section 5.14 Ownership of Common Securities by Sponsor.
On the Closing Date, the Sponsor shall acquire and retain
beneficial and record ownership of the Common Securities. To the fullest extent
permitted by law, other than a transfer in connection with a consolidation or
merger of the Sponsor into another Person, or any conveyance, transfer or lease
by the Sponsor of its properties and assets substantially as an entirety to any
Person, pursuant to Section 8.1 of the Indenture, any attempted transfer of the
Common Securities shall be void. The Company Trustees shall cause each Common
Securities Certificate issued to the Sponsor to contain a legend stating "THIS
CERTIFICATE IS NOT TRANSFERABLE EXCEPT AS PROVIDED IN THE DECLARATION."
Section 5.15 Rights of Securityholders.
(a) The legal title to the Trust Property is vested exclusively
in the Preferred Trustee (in its capacity as such) in accordance with Section
2.9, and the Securityholders shall not have any right or title therein other
than the undivided beneficial ownership interest in the assets of the Trust
conferred by their Trust Securities and they shall have no right to call for any
partition or division of property, profits or rights of the Trust except as
described below. The Trust Securities shall be personal property giving only the
rights specifically set forth therein, in this Declaration and in the Delaware
Business Trust Act. The Trust Securities shall have no preemptive or similar
rights and when issued and delivered to Securityholders against payment of the
purchase price therefor will be fully paid and nonassessable by the Trust. The
Holders of the Trust Securities, in their capacities as such, shall be entitled
to the same limitation of personal liability extended to stockholders of private
corporations for profit organized under the General Corporation Law of the State
of Delaware without giving effect to principles of conflict of laws.
(b) For so long as any Preferred Securities remain Outstanding,
if, upon a Declaration Event of Default, the Indenture Trustee fails or the
holders of not less than 25% in principal amount of the outstanding Notes fail
to declare the principal of all of the Notes to be immediately due and payable,
the Preferred Trustee shall have such right by a notice in writing to the
Sponsor and the Indenture Trustee; and upon any such declaration such principal
amount of and the accrued interest on all of the Notes shall become immediately
due and payable, provided, that the payment of principal and interest on such
Notes shall remain subordinated to the extent provided in the Indenture.
At any time after such a declaration of acceleration with respect
to the Notes has been made and before a judgment or decree for payment of the
money due has been obtained by the Indenture Trustee as provided in the
Indenture, the Holders of a majority in Liquidation Amount of the Preferred
Securities, by written notice to the Preferred Trustee, the Sponsor and the
Indenture Trustee, may rescind and annul such declaration and its consequences
if:
(i) the Sponsor has paid or deposited with the
Indenture Trustee a sum sufficient to pay:
(A) all overdue installments of interest on all
of the Notes,
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(B) the principal of (and premium, if any, on) any
Notes which have become due otherwise than by such declaration of acceleration
and interest thereon at the rate borne by the Notes, and
(C) all sums paid or advanced by the Indenture
Trustee under the Indenture and the reasonable compensation, expenses,
disbursements and advances of the Indenture Trustee, the Preferred Trustee and
the Delaware Trustee, their agents and counsel; and
(ii) any Note Event of Default, other than the non-payment
of the principal of the Notes which has become due solely by such acceleration,
has been cured or waived as provided in Section 5.13 of the Indenture.
In the case of any Declaration Event of Default, the Holder of
Common Securities will be deemed to have waived any such Declaration Event of
Default under this Declaration until all such Declaration Events of Default with
respect to the Preferred Securities have been cured, waived or otherwise
eliminated. Until any such Declaration Events of Default with respect to the
Preferred Securities have been so cured, waived or otherwise eliminated, the
Trustees shall act solely on behalf of the Holders of Preferred Securities and
not the Holder of the Common Securities, and only the Holders of Preferred
Securities will have the right to direct the Trustees to act on their behalf.
The Holders of a majority in aggregate Liquidation Amount of the
Preferred Securities may, on behalf of the Holders of all the Preferred
Securities, waive any past default under the Indenture, except a default in the
payment of principal or interest (unless such default has been cured and a sum
sufficient to pay all matured installments of interest and principal due
otherwise than by acceleration has been deposited with the Indenture Trustee) or
a default in respect of a covenant or provision which under the Indenture cannot
be modified or amended without the consent of the holder of each outstanding
Note. No such rescission shall affect any subsequent default or impair any right
consequent thereon. The Preferred Trustee shall not, as the initial holder of
the Notes, for so long as it holds such Notes, waive any Note Event of Default
without the consent of Holders of a majority in aggregate Liquidation Amount of
Preferred Securities then Outstanding.
A waiver of a Note Event of Default will constitute a waiver of
the corresponding Declaration Event of Default.
Upon receipt by the Preferred Trustee of written notice declaring
such rescission and annulment by Holders of Preferred Securities all or part of
which is represented by Book-Entry Interests, a record date shall be established
for determining Holders of Outstanding Preferred Securities entitled to join in
such notice, which record date shall be at the close of business on the day the
Preferred Trustee receives such notice. The Holders on such record date, or
their duly designated proxies, and only such Persons, shall be entitled to join
in such notice, whether or not such Holders remain Holders after such record
date; provided, that, unless such declaration of rescission and annulment shall
have become effective by virtue of the requisite percentage having joined in
such notice prior to the day which is 90 days after such record date, such
notice of declaration of rescission and annulment shall automatically and
without further action by any Holder be canceled and of no further effect.
Nothing in this paragraph shall prevent a Holder, or a proxy of a Holder, from
giving, after expiration of such 90-day period, a new written notice of
declaration of rescission and annulment that is identical to a written notice
which has been canceled pursuant to the proviso to the preceding
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sentence, in which event a new record date shall be established pursuant to the
provisions of this Section 5.15(b).
(c) For so long as any Preferred Securities remain Outstanding,
to the fullest extent permitted by law and subject to the terms of this
Declaration and the Indenture, if a Declaration Event of Default has occurred
and is continuing and such event is attributable to the failure of the Sponsor
to pay interest on or principal of the Notes on the date such interest or
principal is otherwise payable (or in the case of redemption, the redemption
date), then the Holders of at least 25% in Liquidation Amount of the Outstanding
Preferred Securities shall have the right to appoint a trustee (the "Special
Trustee") to act on behalf of all Holders of Preferred Securities. The Special
Trustee so appointed shall represent the Holders of all Outstanding Preferred
Securities unless Holders of at least a majority in Liquidation Amount of the
Outstanding Preferred Securities appoint an alternative Special Trustee, in
which case the Special Trustee appointed in accordance with the preceding
sentence shall resign as Special Trustee. At no time can there be more than one
Special Trustee acting on behalf of the Holders of Preferred Securities. To the
fullest extent permitted by law, the Special Trustee shall have the right to
directly institute a proceeding against the Sponsor (a "Trustee Action") for
enforcement of payment to Holders of Preferred Securities of the principal of or
interest on the Notes having a principal amount equal to the aggregate
Liquidation Amount of the Preferred Securities of such Holders. In connection
with any such Trustee Action, the rights of the Holder of the Common Securities
will be subrogated to the rights of any Holder of Preferred Securities to the
extent of any payment made by the Sponsor to such Holder of Preferred Securities
as a result of such Trustee Action. Except as set forth in Sections 5.15(b) and
(c), the Holders of Preferred Securities shall have no right to exercise
directly any right or remedy available to the holders of, or in respect of, the
Notes; provided, however, that if the Preferred Trustee or the Special Trustee
do not enforce such payment obligations, a Holder of Preferred Securities will,
to the fullest extent permitted by law, have the right to bring an action on
behalf of the Trust to enforce the Trust's rights under the Notes and the
Indenture.
(d) Upon the occurrence of a Change of Control Triggering Event,
each Holder of Preferred Securities shall have the right to require that the
Trust exchange Preferred Securities for Notes having an aggregate principal
amount equal to the aggregate Liquidation Amount of the Preferred Securities to
be exchanged. The Sponsor shall immediately redeem any Preferred Securities so
exchanged at a purchase price in cash equal to 101% of the principal amount
thereof plus accrued and unpaid interest, if any, to the date of purchase.
ARTICLE VI
ACTS OF SECURITYHOLDERS; MEETINGS; VOTING
Section 6.1 Limitations on Voting Rights.
(a) Except as provided in this Section, in Sections 5.15, 8.10
and 10.2 and in the Indenture and as otherwise required by law, no Holder of
Preferred Securities shall have any right to vote or in any manner otherwise
control the administration, operation and management of the Trust or the
obligations of the parties hereto, nor shall anything herein set forth, or
contained in the terms of the Trust Securities Certificates, be construed so as
to constitute the Securityholders from time to time as partners or members of an
association.
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(b) Subject to the requirement of the Preferred Trustee obtaining
an Opinion of Counsel in certain circumstances set forth in the last sentence of
this paragraph, Holders of a majority in Liquidation Amount of all Outstanding
Preferred Securities have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Preferred Trustee (or
Special Trustee, if appointed), or direct the exercise of any trust or power
conferred upon the Preferred Trustee under this Declaration including the right
to direct the Preferred Trustee, as holder of the Notes, to (i) exercise the
remedies available under the Indenture with respect to the Notes, (ii) waive any
past Note Event of Default that is waivable under the Indenture, (iii) exercise
any right to rescind or annul a declaration that the principal of all the Notes
shall be due and payable or (iv) consent to any amendment, modification, or
termination of the Indenture or the Notes where such consent shall be required;
provided, however, that, where a consent or action under the Indenture would
require the consent or act of the holders of more than a majority of the
aggregate principal amount of Notes affected thereby, only Holders of the
percentage of the Liquidation Amount of all Outstanding Preferred Securities
which is at least equal to the percentage required under the Indenture may
direct the Preferred Trustee to give such consent or take such action. The
Trustees shall not revoke any action previously authorized or approved by a vote
of the Holders of Preferred Securities, except by a subsequent vote of the
Holders of Preferred Securities. If the Preferred Trustee or the Special Trustee
fails to enforce its rights under the Notes to receive interest or principal on
the Notes on the date such interest or principal is otherwise payable (or in the
case of redemption, the redemption date), a Holder of Preferred Securities may,
to the fullest extent permitted by law, institute a legal proceeding on behalf
of the Trust against the Sponsor to enforce the Trust's rights under the Notes
without first instituting any legal proceeding against the Preferred Trustee or
any other Person. Holders of Preferred Securities shall not be able to exercise
directly any other remedies available to the holder of the Notes unless the
Preferred Trustee or the Indenture Trustee, acting for the benefit of the
Preferred Trustee, fail to do so. In such event, Holders of at least 25% in
Liquidation Amount of all Outstanding Preferred Securities shall, to the fullest
extent permitted by law, have a right to institute such proceedings. The
Preferred Trustee shall notify all Holders of Preferred Securities of any notice
of default received from the Indenture Trustee with respect to the Notes. Such
notice shall state that such Note Event of Default also constitutes a
Declaration Event of Default. Except with respect to directing the time, method
and place of conducting a proceeding for a remedy, the Preferred Trustee shall
not take any of the actions described in clause (i), (ii) or (iii) above unless
the Preferred Trustee has obtained an Opinion of Counsel rendered by a law firm
having a tax and securities practice to the effect that, as a result of such
action, the Trust will not fail to be classified as a grantor trust for United
States federal income tax purposes or another entity which is not subject to
United States federal income tax at the entity level and the assets and income
of which are treated for United States federal income tax purposes as held and
derived directly by holders of interests in the entity.
(c) In the event the consent of the Preferred Trustee, as the
holder of the Notes, is required under the Indenture with respect to any
amendment, modification or termination of the Indenture, the Preferred Trustee
shall request the direction of the Holders of Preferred Securities with respect
to such amendment, modification or termination and shall vote with respect to
such amendment, modification or termination as directed by a majority in
Liquidation Amount of all Outstanding Preferred Securities; provided, however,
that, where a consent under the Indenture would require the consent of the
holders of a majority or more of the aggregate principal amount of the Notes,
the Preferred Trustee may only give such consent at the direction of the Holders
of at least the same proportion in Liquidation Amount of all Outstanding
Preferred Securities. The Preferred Trustee shall not take any such action in
accordance with the directions of the Holders of Preferred Securities unless
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the Preferred Trustee has obtained an Opinion of Counsel rendered by a law firm
having an independent tax and securities practice experienced in such matters to
the effect that, as a result of such action, the Trust will not fail to be
classified as a grantor trust or another entity which is not subject to United
States federal income tax at the entity level and the assets and income of which
are treated for United States federal income tax purposes as held and derived
directly by holders of interests in the entity.
(d) If any proposed amendment to the Declaration pursuant to
Section 10.2 provides for, or the Trustees or the Sponsor otherwise propose to
effect, (i) any action that would adversely affect in any material respect the
powers, preferences or special rights of the Trust Securities, whether by way of
amendment to the Declaration or otherwise, or (ii) the dissolution, winding-up
or termination of the Trust, other than pursuant to the terms of this
Declaration, then the Holders of the Trust Securities voting together as a
single class will be entitled to vote on such amendment or proposal and such
amendment or proposal shall not be effective except with the approval of the
Holders of at least a majority in Liquidation Amount of the Trust Securities
affected thereby; provided, that if any amendment or proposal referred to in
clause (i) above would adversely affect only the Preferred Securities or the
Common Securities, then only the affected class will be entitled to vote on such
amendment or proposal and such amendment or proposal shall not be effective
except with the approval of at least a majority in Liquidation Amount of such
class of Trust Securities.
(e) Notwithstanding that Holders of Preferred Securities are
entitled to vote or consent under any of the circumstances described herein, any
of the Preferred Securities that are owned at such time by the Sponsor or any
entity directly or indirectly controlling or controlled by, or under direct or
indirect common control with, the Sponsor, shall not be entitled to vote or
consent and shall, for purposes of such vote or consent, be treated as if such
Preferred Securities were not Outstanding.
(f) Holders of Preferred Securities have no rights to appoint or
remove, or increase or decrease the number of, the Trustees, who may be
appointed, removed or replaced, increased or decreased solely by the Sponsor as
the indirect or direct Holder of all of the Common Securities. No vote or
consent of the Holders of Preferred Securities will be required for the Trust to
redeem and cancel Preferred Securities or distribute Notes in accordance with
the Declaration.
Section 6.2 Notice of Meetings.
Notice of all meetings at which the Preferred Securities
Securityholders are entitled to vote, or of all matters upon which action by
written consent of the Preferred Securities Securityholders is to be taken,
shall be given by the Preferred Trustee pursuant to Section 10.8 to each
Preferred Securities Securityholder of record, at his registered address, at
least 15 days and not more the 90 days before the meeting. Each such notice
shall include a statement setting forth the following information: (i) the date,
place and purpose of such meeting or the date by which such action is to be
taken and the purpose thereof; (ii) a description of any resolution proposed for
adoption at such meeting on which such Holders are entitled to vote or of such
matter upon which written consent is sought; and (iii) instructions for the
delivery of proxies or consents. At any such meeting, any business properly
before the meeting may be so considered whether or not stated in the notice of
the meeting. No vote or consent of the Holders of Preferred Securities will be
required for the Trust to redeem and cancel Preferred Securities or distribute
Notes in accordance with this Declaration. Any adjourned meeting may be held as
adjourned without further notice.
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Section 6.3 Meetings of Preferred Securities Securityholders.
Any required approval or direction of Holders of Preferred
Securities may be given at a separate meeting of Holders of Preferred Securities
convened for such purpose, at a meeting of all of the Holders of Trust
Securities or pursuant to written consent. No annual meeting of Securityholders
is required to be held. The Company Trustees, however, shall call a meeting of
Securityholders to vote on any matter upon the written request of the Preferred
Securities Securityholders of record of 25% of the Preferred Securities (based
upon their Liquidation Amount) and the Company Trustees or the Preferred Trustee
may, at any time in their discretion, call a meeting of Preferred Securities
Securityholders to vote on any matters as to which Preferred Securities
Securityholders are entitled to vote.
Preferred Securities Securityholders of record of 50% of the
Outstanding Preferred Securities (based upon their Liquidation Amount), present
in person or by proxy, shall constitute a quorum at any meeting of
Securityholders.
If a quorum is present at a meeting, an affirmative vote by the
Preferred Securities Securityholders of record present, in person or by proxy,
holding a majority of the Preferred Securities (based upon their Liquidation
Amount) held by the Preferred Securities Securityholders of record present,
either in person or by proxy, at such meeting shall constitute the action of the
Securityholders, unless this Declaration requires a greater number of
affirmative votes.
Section 6.4 Voting Rights.
Securityholders shall be entitled to one vote for each $1,000.00
of Liquidation Amount represented by their Trust Securities in respect of any
matter as to which such Securityholders are entitled to vote.
Section 6.5 Proxies, etc.
At any meeting of Securityholders, any Securityholder entitled to
vote thereat may vote by proxy, provided, that no proxy shall be voted at any
meeting unless it shall have been placed on file with the Company Trustees, or
with such other officer or agent of the Trust as the Company Trustees may
direct, for verification prior to the time at which such vote shall be taken.
Pursuant to a resolution of the Preferred Trustee, proxies may be solicited in
the name of the Preferred Trustee or one or more officers of the Preferred
Trustee. Only Securityholders of record shall be entitled to vote. When Trust
Securities are held jointly by several Persons, any one of them may vote at any
meeting in person or by proxy in respect of such Trust Securities, but if more
than one of them shall be present at such meeting in person or by proxy, and
such joint owners or their proxies so present disagree as to any vote to be
cast, such vote shall not be received in respect of such Trust Securities. A
proxy purporting to be executed by or on behalf of a Securityholder shall be
deemed valid unless challenged at or prior to its exercise, and the burden of
proving invalidity shall rest on the challenger. No proxy shall be valid more
than three years after its date of execution.
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Section 6.6 Securityholder Action by Written Consent.
Any action which may be taken by Securityholders at a meeting may
be taken without a meeting if Securityholders holding a majority of all
Outstanding Trust Securities (based upon their Liquidation Amount) entitled to
vote in respect of such action (or such larger proportion thereof as shall be
required by any express provision of this Declaration) shall consent to the
action in writing.
Section 6.7 Record Date for Voting and Other Purposes.
For the purposes of determining the Securityholders who are
entitled to notice of and to vote at any meeting or by written consent, or to
participate in any distribution of the Trust Securities in respect of which a
record date is not otherwise provided for in this Declaration, or for the
purpose of any other action, the Company Trustees may from time to time fix a
date, not more than 90 days prior to the date of any meeting of Securityholders
or the payment of a distribution or other action, as the case may be, as a
record date for the determination of the identity of the Securityholders of
record for such purposes.
Section 6.8 Acts of Securityholders.
Any request, demand, authorization, direction, notice, consent,
waiver or other action provided or permitted by this Declaration to be given,
made or taken by Securityholders or Owners may be embodied in and evidenced by
one or more instruments of substantially similar tenor signed by such
Securityholders or Owners in person or by an agent duly appointed in writing;
and, except as otherwise expressly provided herein, such action shall become
effective when such instrument or instruments are delivered to a Company
Trustee. Such instrument or instruments (and the action embodied therein and
evidenced thereby) are herein sometimes referred to as the "Act" of the
Securityholders or Owners signing such instrument or instruments. Proof of
execution of any such instrument or of a writing appointing any such agent shall
be sufficient for any purpose of this Declaration and (subject to Section 8.1)
conclusive in favor of the Trustees, if made in the manner provided in this
Section.
The fact and date of the execution by any Person of any such
instrument or writing may be proved by the affidavit of a witness of such
execution or by a certificate of a notary public or other officer authorized by
law to take acknowledgments of deeds, certifying that the individual signing
such instrument or writing acknowledged to him the execution thereof. Where such
execution is by a signer acting in a capacity other than his individual
capacity, such certificate or affidavit shall also constitute sufficient proof
of his authority. The fact and date of the execution of any such instrument or
writing, or the authority of the Person executing the same, may also be proved
in any other manner which any Trustee receiving the same deems sufficient.
The ownership of Preferred Securities shall be proved by the
Securities Register.
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Any request, demand, authorization, direction, notice, consent,
waiver or other Act of the Securityholder of any Trust Security shall bind every
future Securityholder of the same Trust Security and the Securityholder of every
Trust Security issued upon the registration of transfer thereof or in exchange
therefor or in lieu thereof in respect of anything done, omitted or suffered to
be done by the Trustees or the Trust in reliance thereon, whether or not
notation of such action is made upon such Trust Security.
Without limiting the foregoing, a Securityholder entitled
hereunder to take any action hereunder with regard to any particular Trust
Security may do so with regard to all or any part of the Liquidation Amount of
such Trust Security or by one or more duly appointed agents each of which may do
so pursuant to such appointment with regard to all or any part of such
Liquidation Amount.
If any dispute shall arise between the Securityholders and the
Company Trustees or among such Securityholders or Trustees with respect to the
authenticity, validity or binding nature of any request, demand, authorization,
direction, consent, waiver or other Act of such Securityholder or Trustee under
this Article VI, then the determination of such matter by the Preferred Trustee
shall be conclusive with respect to such matter.
Section 6.9 Inspection of Records.
Upon reasonable notice to the Company Trustees and the Preferred
Trustee, the records of the Trust shall be open to inspection by Securityholders
during normal business hours for any purpose reasonably related to such
Securityholder's interest as a Securityholder.
ARTICLE VII
REPRESENTATIONS AND WARRANTIES
Section 7.1 Representations and Warranties of the Bank, the
Preferred Trustee and the Delaware Trustee.
The Preferred Trustee and the Delaware Trustee, each severally on
behalf of and only as to itself, hereby represents and warrants for the benefit
of the Sponsor, the Company Trustees and the Securityholders that:
(a) the Preferred Trustee is a Delaware banking corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware;
(b) the Preferred Trustee has full corporate power, authority and
legal right to execute, deliver and perform its obligations under this
Declaration and has taken all necessary action to authorize the execution,
delivery and performance by it of this Declaration;
(c) the Delaware Trustee is a Delaware banking corporation duly
organized, validly existing and in good standing in the State of Delaware;
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(d) the Delaware Trustee has full corporate power, authority and
legal right to execute, deliver and perform its obligations under this
Declaration and has taken all necessary action to authorize the execution,
delivery and performance by it of this Declaration;
(e) this Declaration has been duly authorized, executed and
delivered by the Preferred Trustee and the Delaware Trustee and constitutes the
valid and legally binding agreement of each of the Preferred Trustee and the
Delaware Trustee enforceable against each of them in accordance with its terms,
subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability relating to or affecting
creditors' rights and to general equity principles;
(f) the execution, delivery and performance of this Declaration
by the Preferred Trustee and the Delaware Trustee has been duly authorized by
all necessary corporate or other action on the part of the Preferred Trustee and
the Delaware Trustee and does not require any approval of stockholders, of the
Preferred Trustee or the Delaware Trustee and such execution, delivery and
performance will not (i) violate the Charter or By-Laws of the Preferred Trustee
or the Delaware Trustee, (ii) violate any provision of, or constitute, with or
without notice or lapse of time, a default under, or result in the creation or
imposition of, any Lien on any properties including in the Trust Property
pursuant to the provisions of, any indenture, mortgage, credit agreement,
license or other agreement or instrument to which the Preferred Trustee or the
Delaware Trustee is a party or by which it is bound, or (iii) violate any law,
governmental rule or regulation of the United States or the State of Delaware,
as the case may be, governing the banking, trust or general powers of the
Preferred Trustee or the Delaware Trustee (as appropriate in context) or any
order, judgment or decree applicable to the Preferred Trustee or the Delaware
Trustee;
(g) neither the authorization, execution or delivery by the
Preferred Trustee or the Delaware Trustee of this Declaration nor the
consummation of any of the transactions by the Preferred Trustee or the Delaware
Trustee (as appropriate in context) contemplated herein or therein requires the
consent or approval of, the giving of notice to, the registration with or the
taking of any other action with respect to (i) any governmental authority or
agency under any existing federal or Delaware law governing the banking, trust
or general powers of the Preferred Trustee, (ii) with respect to any
governmental authority or agency under any existing federal or Delaware law
governing the banking, trust or general powers of the Delaware Trustee (in each
case, other than (a) the qualification of this Declaration, the Indenture and
the Company Guarantees under the Trust Indenture Act, and (b) the filing of the
Certificate of Trust as required under the Delaware Business Trust Act); and
(h) there are no proceedings pending or, to the best of each of
the Preferred Trustee's and the Delaware Trustee's knowledge, threatened against
or affecting the Preferred Trustee or the Delaware Trustee in any court or
before any governmental authority, agency or arbitration board or tribunal
which, individually or in the aggregate, would materially and adversely affect
the Trust or would question the right, power and authority of the Preferred
Trustee or the Delaware Trustee, as the case may be, to enter into or perform
its obligations as one of the Trustees under this Declaration.
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Section 7.2 Representations and Warranties of Sponsor.
The Sponsor hereby represents and warrants for the benefit of the
Securityholders that:
(a) the Trust Securities Certificates issued at each time of
delivery on behalf of the Trust have been duly authorized and will have been
duly and validly executed, issued and delivered by the Trustees pursuant to the
terms and provisions of, and in accordance with the requirements of, this
Declaration and the Securityholders will be, as of each such date, entitled to
the benefits of this Declaration; and
(b) there are no taxes, fees or other governmental charges
payable by the Trust (or the Trustees on behalf of the Trust) under the laws of
the State of Delaware or any political subdivision thereof in connection with
the execution, delivery and performance by the Preferred Trustee or the Delaware
Trustee, as the case may be, of this Declaration.
ARTICLE VIII
THE TRUSTEES
Section 8.1 Certain Duties and Responsibilities.
(a) The duties and responsibilities of the Trustees shall be as
provided by this Declaration and no implied covenants shall be read into this
Declaration. Notwithstanding the foregoing, no provision of this Declaration
shall require the Trustees to expend or risk their own funds or otherwise incur
any financial liability in the performance of any of their duties hereunder, or
in the exercise of any of their rights or powers, if they shall have reasonable
grounds for believing that repayment of such funds or adequate indemnity against
such risk or liability is not reasonably assured to it. Whether or not therein
expressly so provided, every provision of this Declaration relating to the
conduct or affecting the liability of or affording protection to the Trustees
shall be subject to the provisions of this Section. The Delaware Trustee shall
have no liability under this Declaration except for its gross negligence or
willful misconduct. To the extent that, at law or in equity, a Trustee has
duties (including fiduciary duties) and liabilities relating thereto to the
Trust or to the Securityholders, such Trustee shall not be liable to the Trust
or to any Securityholder for such Trustee's good faith reliance on the
provisions of this Declaration. The provisions of this Declaration, to the
extent that they restrict the duties and liabilities of the Trustees otherwise
existing at law or in equity, are agreed by the Sponsor and the Securityholders
to replace such other duties and liabilities of the Trustees.
(b) All payments made by the Preferred Trustee or a Paying Agent
in respect of the Trust Securities shall be made only from the revenue and
proceeds from the Trust Property and only to the extent that there shall be
sufficient revenue or proceeds from the Trust Property to enable the Preferred
Trustee or a Paying Agent to make payments in accordance with the terms hereof.
Each Securityholder, by its acceptance of a Trust Security, agrees that it will
look solely to the revenue and proceeds from the Trust Property to the extent
legally available for distribution to it as herein provided and that the
Trustees are not personally liable to it for any amount distributable in respect
of any Trust Security or for any other liability in respect of any Trust
Security. This Section 8.1(b) does not limit the liability of the Trustees
expressly set forth elsewhere in this Declaration or, in the case of the
Preferred Trustee, in the Trust Indenture Act.
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(c) No provision of this Declaration shall be construed to
relieve the Preferred Trustee from liability for its own negligent action, its
own negligent failure to act, or its own willful misconduct, except that:
(i) the Preferred Trustee shall not be liable for any
error of judgment made in good faith by an authorized officer of the Preferred
Trustee, unless it shall be proved that the Preferred Trustee was negligent in
ascertaining or failing to ascertain the pertinent facts;
(ii) the Preferred Trustee shall not be liable with
respect to any action taken or omitted to be taken by it in good faith in
accordance with the direction of the Holders of not less than a majority in
Liquidation Amount of the Trust Securities relating to the time, method and
place of conducting any proceeding for any remedy available to the Preferred
Trustee, or exercising any trust or power conferred upon the Preferred Trustee
under this Declaration;
(iii) the Preferred Trustee's sole duty with respect to
the custody, safe keeping and physical preservation of the Notes and the Payment
Account shall be to deal with such Trust Property in a similar manner as the
Preferred Trustee deals with similar property for its own account, subject to
the protections and limitations on liability afforded to the Preferred Trustee
under this Declaration and the Trust Indenture Act;
(iv) the Preferred Trustee shall not be liable for any
interest on any money received by it except as it may otherwise agree with the
Sponsor; and money held by the Preferred Trustee need not be segregated from
other funds held by it except in relation to the Payment Account maintained by
the Preferred Trustee pursuant to Section 3.1 and except to the extent otherwise
required by law; and
(v) the Preferred Trustee shall not be responsible for
monitoring the compliance by the Company Trustees or the Sponsor with their
respective duties under this Declaration, nor shall the Preferred Trustee be
liable for the default or misconduct of the Company Trustees or the Sponsor.
Section 8.2 Certain Notices.
Within five Business Days after the occurrence of any Declaration
Event of Default actually known to an officer in the Corporate Trust
Administration office of the Preferred Trustee, the Preferred Trustee shall
transmit, in the manner and to the extent provided in Section 10.8, notice of
such Declaration Event of Default to the Securityholders, the Company Trustees,
the Delaware Trustee and the Sponsor, unless such Declaration Event of Default
shall have been cured or waived.
Within ninety days after the receipt of notice of the Sponsor's
exercise of its right to defer the payment of interest on the Notes pursuant to
the Indenture, the Company Trustee shall transmit, in the manner and to the
extent provided in Section 10.8, notice of such exercise to the Securityholders,
the Delaware Trustee and the Preferred Trustee, unless such exercise shall have
been revoked.
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Section 8.3 Certain Rights of Preferred Trustee.
Subject to the provisions of Section 8.1:
(a) the Preferred Trustee may rely and shall be protected in
acting or refraining from acting in good faith upon any resolution, Opinion of
Counsel, certificate, written representation of a Holder or transferee,
certificate of auditors or any other certificates, statement, instrument,
opinion, report, notice, request, consent, order, appraisal, bond, debenture,
note, other evidence of indebtedness or other paper or document believed by it
to be genuine and to have been signed or presented by the proper party or
parties;
(b) If (i) in performing its duties under this Declaration the
Preferred Trustee is required to decide between alternative courses of action or
(ii) in construing any of the provisions of this Declaration the Preferred
Trustee finds the same ambiguous or inconsistent with any other provisions
contained herein or (iii) the Preferred Trustee is unsure of the application of
any provision of this Declaration, then, except as to any matter as to which the
Preferred Securities Securityholders are entitled to vote under the terms of
this Declaration, the Preferred Trustee shall deliver a notice to the Sponsor
requesting written instructions of the Sponsor as to the course of action to be
taken and the Preferred Trustee shall take such action, or refrain from taking
such action, as the Preferred Trustee shall be instructed in writing to take, or
to refrain from taking, by the Sponsor; provided, however, that if the Preferred
Trustee does not receive such instructions of the Sponsor within ten Business
Days after it has delivered such notice, or such reasonably shorter period of
time set forth in such notice (which to the extent practicable shall not be less
than five Business Days), it may, but shall be under no duty to, take or refrain
from taking such action not inconsistent with this Declaration as it shall deem
advisable and in the best interests of the Securityholders, in which event the
Preferred Trustee shall have no liability except for its own bad faith,
negligence or wilful misconduct;
(c) any direction or act of the Sponsor or the Company Trustees
contemplated by this Declaration shall be sufficiently evidenced by an Officers'
Certificate;
(d) whenever in the administration of this Declaration, the
Preferred Trustee shall deem it desirable that a matter be established before
undertaking, suffering or omitting any action hereunder, the Preferred Trustee
(unless other evidence is herein specifically prescribed) may, in the absence of
bad faith on its part, request and rely upon an Officers' Certificate which,
upon receipt of such request, shall be promptly delivered by the Sponsor or the
Company Trustees;
(e) the Preferred Trustee shall have no duty to see to any
recording, filing or registration of any instrument (including any financing or
continuation statement or any filing under tax or securities laws) or any
rerecording, refiling or re-registration thereof;
(f) the Preferred Trustee may consult with counsel (which counsel
may be counsel to the Sponsor or any of its Affiliates, and may include any of
its employees) and the advice of such counsel shall be full and complete
authorization and protection in respect of any action taken, suffered or omitted
by it hereunder in good faith and in reliance thereon and in accordance with
such advice; the Preferred Trustee shall have the right at any time to seek
instruction concerning the administration of this Declaration from any court of
competent jurisdiction;
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(g) the Preferred Trustee shall be under no obligation to
exercise any of the rights or powers vested in it by this Declaration at the
request or direction of any of the Securityholders pursuant to this Declaration,
unless such Securityholders shall have offered to the Preferred Trustee
reasonable security or indemnity against the costs, expenses and liabilities
which might be incurred by it in compliance with such request or direction;
(h) the Preferred Trustee shall not be bound to make any
investigation into the facts or matters stated in any resolution, certificate,
statement, instrument, opinion, report, notice, request, consent, order,
approval, bond, debenture, note or other evidence of indebtedness or other paper
or document, unless requested in writing to do so by one or more
Securityholders;
(i) the Preferred Trustee may execute any of the trusts or powers
hereunder or perform any duties hereunder either directly or by or through its
agents or attorneys, provided, that the Preferred Trustee shall be responsible
for its own negligence or recklessness with respect to the selection of any
agent or attorney appointed by it hereunder;
(j) whenever in the administration of this Declaration the
Preferred Trustee shall deem it desirable to receive instructions with respect
to enforcing any remedy or right or taking any other action hereunder the
Preferred Trustee (i) may request instructions from the Holders of the Trust
Securities which instructions may only be given by the Holders of the same
proportion in Liquidation Amount of the Trust Securities as would be entitled to
direct the Preferred Trustee under the terms of the Trust Securities in respect
of such remedy, right or action, (ii) may refrain from enforcing such remedy or
right or taking such other action until such instructions are received, and
(iii) shall be protected in action in accordance with such instructions; and
(k) except as otherwise expressly provided by this Declaration,
the Preferred Trustee shall not be under any obligation to take any action that
is discretionary under the provisions of this Declaration.
No provision of this Declaration shall be deemed to impose any
duty or obligation on the Preferred Trustee to perform any act or acts or
exercise any right, power, duty or obligation conferred or imposed on it, in any
jurisdiction in which it shall be illegal, or in which the Preferred Trustee
shall be unqualified or incompetent in accordance with applicable law, to
perform any such act or acts, or to exercise any such right, power, duty or
obligation. No permissive power or authority available to the Preferred Trustee
shall be construed to be a duty.
Section 8.4 Not Responsible for Recitals or Issuance of
Securities.
The recitals contained herein and in the Trust Securities
Certificates shall be taken as the statements of the Trust, and the Trustees do
not assume any responsibility for their correctness. The Trustees shall not be
accountable for the use or application by the Sponsor of the proceeds of the
Notes.
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Section 8.5 May Hold Securities.
Except as provided in the definition of the term "Outstanding" in
Article I, any Trustee or any other agent of any Trustee of the Trust, in its
individual or any other capacity, may become the owner or pledgee of Trust
Securities and, subject to Sections 8.8 and 8.13, may otherwise deal with the
Trust with the same rights it would have if it were not a Trustee or such other
agent.
Section 8.6 Compensation; Indemnity; Fees.
Pursuant to Section 10.18 of the Indenture, the Sponsor, in its
capacity as issuer of the Notes, agrees:
(a) to pay the Trustees from time to time reasonable compensation
for all services rendered by them hereunder (which compensation shall not be
limited by any provision of law in regard to the compensation of a trustee of an
express trust);
(b) except as otherwise expressly provided herein, to reimburse
the Trustees upon request for all reasonable expenses, disbursements and
advances incurred or made by the Trustees in accordance with any provision of
this Declaration (including the reasonable compensation and the expenses and
disbursements of their agents and counsel), except any such expense,
disbursement or advance as may be attributable to their negligence (or, in the
case of the Delaware Trustee, gross negligence) or bad faith;
(c) to the fullest extent permitted by applicable law, to
indemnify and hold harmless (i) each Trustee, (ii) any Affiliate of any Trustee,
(iii) any officer, director, shareholder, employee, representative or agent of
any Trustee, and (iv) any employee or agent of the Trust or its Affiliates
(referred to herein as an "Indemnified Person") from and against any loss,
damage, liability, tax, penalty, expense or claim of any kind or nature
whatsoever incurred by such Indemnified Person by reason of the creation,
operation, dissolution, winding-up or termination of the Trust or any act or
omission performed or omitted by such Indemnified Person in good faith on behalf
of the Trust and in a manner such Indemnified Person reasonably believed to be
within the scope of authority conferred on such Indemnified Person by this
Declaration, except that no Indemnified Person shall be entitled to be
indemnified in respect of any loss, damage or claim incurred by such Indemnified
Person by reason of its negligence (or, in the case of the Delaware Trustee and
its related Indemnified Persons, gross negligence) or willful misconduct with
respect to such acts or omissions; and
(d) to the fullest extent permitted by applicable law, to advance
expenses (including legal fees) incurred by an Indemnified Person in defending
any claim, demand, action, suit or proceeding prior to the final disposition of
such claim, demand, action, suit or proceeding upon receipt by the Sponsor of
(i) a written affirmation by or on behalf of the Indemnified Person of its or
his good faith belief that it or he has met the standard of conduct set forth in
this Section 8.6 and (ii) an undertaking by or on behalf of the Indemnified
Person to repay such amount if it shall be determined that the Indemnified
Person is not entitled to be indemnified as authorized in the preceding
subsection.
The provisions of this Section 8.6 shall survive the termination
of this Declaration and of the Trust.
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No Trustee may claim any lien or charge on any Trust Property as
a result of any amount due pursuant to this Section 8.6.
The Sponsor and any Trustee (subject to Section 8.8) may engage
in or possess an interest in other business ventures of any nature or
description, independently or with others, similar or dissimilar to the business
of the Trust, and the Trust and the Holders of Trust Securities shall have no
rights by virtue of this Declaration in and to such independent ventures or the
income or profits derived therefrom, and the pursuit of any such venture, even
if competitive with the business of the Trust, shall not be deemed wrongful or
improper. Neither the Sponsor, nor any Trustee, shall be obligated to present
any particular investment or other opportunity to the Trust even if such
opportunity is of a character that, if presented to the Trust, could be taken by
the Trust, and the Sponsor or any Trustee shall have the right to take for its
own account (individually or as a partner or fiduciary) or to recommend to
others any such particular investment or other opportunity. Any Trustee may
engage or be interested in any financial or other transaction with the Sponsor
or any Affiliate of the Sponsor, or may act as depository for, trustee or agent
for, or act on any committee or body of holders of, securities or other
obligations of the Sponsor or its Affiliates.
Section 8.7 Corporate Preferred Trustee Required; Eligibility
of Trustees.
(a) There shall at all times be a Preferred Trustee hereunder
with respect to the Trust Securities. The Preferred Trustee shall be a Person
that is eligible pursuant to the Trust Indenture Act to act as such and has a
combined capital and surplus of at least $50,000,000. If any such Person
publishes reports of condition at least annually, pursuant to law or to the
requirements of its supervising or examining authority, then for the purposes of
this Section, the combined capital and surplus of such Person shall be deemed to
be its combined capital and surplus as set forth in its most recent report of
condition so published. If at any time the Preferred Trustee with respect to the
Trust Securities shall cease to be eligible in accordance with the provisions of
this Section, it shall resign immediately in the manner and with the effect
hereinafter specified in this Article.
(b) There shall at all times be one or more Company Trustees
hereunder with respect to the Trust Securities. Each Company Trustee shall be
either a natural person who is at least 21 years of age or a legal entity that
shall act through one or more persons authorized to bind that entity.
(c) There shall at all times be a Delaware Trustee with respect
to the Trust Securities. The Delaware Trustee shall either be (i) a natural
person who is at least 21 years of age and a resident of the State of Delaware
or (ii) a legal entity with its principal place of business in the State of
Delaware and that otherwise meets the requirements of applicable Delaware law
that shall act through one or more persons authorized to bind such entity.
Section 8.8 Conflicting Interests.
If the Preferred Trustee has or shall acquire a conflicting
interest within the meaning of the Trust Indenture Act, the Preferred Trustee
shall either eliminate such interest or resign, to the extent and in the manner
provided by, and subject to the provisions of, the Trust Indenture Act and this
Declaration.
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Section 8.9 Co-Trustees and Separate Trustee.
Unless a Declaration Event of Default shall have occurred and be
continuing, at any time or times, for the purpose of meeting the legal
requirements of the Trust Indenture Act or of any jurisdiction in which any part
of the Trust Property may at the time be located, the Sponsor and the Company
Trustees, by agreed action of the majority of such Trustees, shall have power to
appoint, and upon the written request of the Company Trustees, the Sponsor shall
for such purpose join with the Company Trustees in the execution, delivery, and
performance of all instruments and agreements necessary or proper to appoint,
one or more Persons approved by the Preferred Trustee either to act as
co-trustee, jointly with the Preferred Trustee, of all or any part of such Trust
Property, or to the extent required by law to act as separate trustee of any
such property, in either case with such powers as may be provided in the
instrument of appointment, and to vest in such Person or Persons in the capacity
aforesaid, any property, title, right or power deemed necessary or desirable,
subject to the other provisions of this Section. If the Sponsor does not join in
such appointment within 15 days after the receipt by it of a request so to do,
or in case a Declaration Event of Default has occurred and is continuing, the
Preferred Trustee alone shall have power to make such appointment. Any
co-trustee or separate trustee appointed pursuant to this Section shall either
be (i) a natural person who is at least 21 years of age and a resident of the
United States or (ii) a legal entity with its principal place of business in the
United States that shall act through one or more persons authorized to bind such
entity.
Should any written instrument from the Sponsor be required by any
co-trustee or separate trustee so appointed for more fully confirming to such
co-trustee or separate trustee such property, title, right, or power, any and
all such instruments shall, on request, be executed, acknowledged and delivered
by the Sponsor.
Every co-trustee or separate trustee shall, to the extent
permitted by law, but to such extent only, be appointed subject to the following
terms, namely:
(a) The Trust Securities shall be executed and delivered and all
rights, powers, duties, and obligations hereunder in respect of the custody of
securities, cash and other personal property held by, or required to be
deposited or pledged with, the Trustees specified hereunder, shall be exercised,
solely by such Trustees and not by such co-trustee or separate trustee.
(b) The rights, powers, duties, and obligations hereby conferred
or imposed upon the Preferred Trustee in respect of any property covered by such
appointment shall be conferred or imposed upon and exercised or performed by the
Preferred Trustee or by the Preferred Trustee and such co-trustee or separate
trustee jointly, as shall be provided in the instrument appointing such
co-trustee or separate trustee, except to the extent that under any law of any
jurisdiction in which any particular act is to be performed, the Preferred
Trustee shall be incompetent or unqualified to perform such act, in which event
such rights, powers, duties and obligations shall be exercised and performed by
such co-trustee or separate trustee.
(c) The Preferred Trustee at any time, by an instrument in
writing executed by it, with the written concurrence of the Sponsor, may accept
the resignation of or remove any co-trustee or separate trustee appointed under
this Section, and, in case a Declaration Event of Default has occurred and is
continuing, the Preferred Trustee shall have power to accept the resignation of,
or remove, any such co-trustee or separate trustee without the concurrence of
the Sponsor. Upon the written request of
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the Preferred Trustee, the Sponsor shall join with the Preferred Trustee in the
execution, delivery and performance of all instruments and agreements necessary
or proper to effectuate such resignation or removal. A successor to any
co-trustee or separate trustee so resigned or removed may be appointed in the
manner provided in this Section.
(d) No co-trustee or separate trustee hereunder shall be
personally liable by reason of any act or omission of the Preferred Trustee or
any other trustee hereunder.
(e) The Preferred Trustee shall not be liable by reason of any
act of a co-trustee or separate trustee.
(f) Any Act of Holders delivered to the Preferred Trustee shall
be deemed to have been delivered to each such co-trustee and separate trustee.
Section 8.10 Resignation and Removal; Appointment of Successor.
No resignation or removal of any Trustee (the "Relevant Trustee")
and no appointment of a successor Trustee pursuant to this Article shall become
effective until the acceptance of appointment by the successor Trustee in
accordance with the applicable requirements of Section 8.11.
Subject to the immediately preceding paragraph, the Relevant
Trustee may resign at any time by giving written notice thereof to the
Securityholders, the Sponsor and the other Trustees. If the instrument of
acceptance by the successor Trustee required by Section 8.11 shall not have been
delivered to the Relevant Trustee within 30 days after the giving of such notice
of resignation, the Relevant Trustee may petition, at the expense of the Trust,
any court of competent jurisdiction for the appointment of a successor Relevant
Trustee.
Unless a Declaration Event of Default shall have occurred and be
continuing, any Trustee may be removed at any time by Act of the Common
Securities Securityholder. If a Declaration Event of Default shall have occurred
and be continuing, the Preferred Trustee or the Delaware Trustee, or both of
them, may be removed at such time by Act of the Holders of a majority in
Liquidation Amount of the Preferred Securities, delivered to the Relevant
Trustee (in its individual capacity and on behalf of the Trust). A Company
Trustee may be removed by the Common Securities Securityholder at any time.
If any Trustee shall resign, be removed or become incapable of
acting as Trustee, or if a vacancy shall occur in the office of any Trustee for
any cause, at a time when no Declaration Event of Default shall have occurred
and be continuing, the Common Securities Securityholder, by Act of the Common
Securities Securityholder delivered to the retiring Trustee, shall promptly
appoint a successor Trustee or Trustees, and the retiring Trustee shall comply
with the applicable requirements of Section 8.11. If the Preferred Trustee or
the Delaware Trustee shall resign, be removed or become incapable of continuing
to act as the Preferred Trustee or the Delaware Trustee, as the case may be, at
a time when a Declaration Event of Default shall have occurred and be
continuing, the Preferred Securities Securityholders, by Act of the
Securityholders of a majority in Liquidation Amount of the Preferred Securities
then Outstanding delivered to the retiring Relevant Trustee, shall promptly
appoint a successor Relevant Trustee or Trustees, and such successor Trustee
shall comply with the applicable requirements of Section 8.11. If a Company
Trustee shall resign, be removed or become incapable of
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acting as Company Trustee, at a time when a Declaration Event of Default shall
have occurred and be continuing, the Common Securities Securityholder by Act of
the Common Securities Securityholder delivered to the Company Trustee shall
promptly appoint a successor Company Trustee or Company Trustees and such
successor Company Trustee or Trustees shall comply with the applicable
requirements of Section 8.11. If no successor Relevant Trustee shall have been
so appointed by the Common Securities Securityholder or the Preferred Securities
Securityholders or if one has been appointed but has not accepted the
appointment in the manner required by Section 8.11, any Securityholder who has
been a Securityholder of Trust Securities for at least six months may, on behalf
of himself and all others similarly situated, petition any court of competent
jurisdiction for the appointment of a successor Relevant Trustee.
The Preferred Trustee shall give notice of each resignation and
each removal of a Trustee and each appointment of a successor Trustee to all
Securityholders in the manner provided in Section 10.8 and shall give notice to
the Sponsor. Each notice shall include the name of the successor Relevant
Trustee and the address of its Corporate Trust Office if it is the Preferred
Trustee.
Notwithstanding the foregoing or any other provision of this
Declaration, in the event any Company Trustee or a Delaware Trustee who is a
natural person dies or becomes, in the opinion of the Sponsor, incompetent or
incapacitated, the vacancy created by such death, incompetence or incapacity may
be filled by (a) the unanimous act of remaining Company Trustees if there are at
least two of them or (b) otherwise by the Sponsor (with the successor in each
case being a Person who satisfies the eligibility requirement for Company
Trustees or Delaware Trustee, as the case may be, set forth in Section 8.7).
Section 8.11 Acceptance of Appointment by Successor.
In case of the appointment hereunder of a successor Relevant
Trustee, the retiring Relevant Trustee and each successor Relevant Trustee with
respect to the Trust Securities shall execute and deliver an amendment hereto
wherein each successor Relevant Trustee shall accept such appointment and which
(a) shall contain such provisions as shall be necessary or desirable to transfer
and confirm to, and to vest in, each successor Relevant Trustee all the rights,
powers, trusts and duties of the retiring Relevant Trustee with respect to the
Trust Securities and the Trust and (b) shall add to or change any of the
provisions of this Declaration as shall be necessary to provide for or
facilitate the administration of the Trust by more than one Relevant Trustee, it
being understood that nothing herein or in such amendment shall constitute such
Relevant Trustees co-trustees and upon the execution and delivery of such
amendment the resignation or removal of the retiring Relevant Trustee shall
become effective to the extent provided therein and each such successor Relevant
Trustee, without any further act, deed or conveyance, shall become vested with
all the rights, powers, trusts and duties of the retiring Relevant Trustee; but,
on request of the Trust or any successor Relevant Trustee such retiring Relevant
Trustee shall duly assign, transfer and deliver to such successor Relevant
Trustee all Trust Property, all proceeds thereof and money held by such retiring
Relevant Trustee hereunder with respect to the Trust Securities and the Trust.
Upon request of any such successor Relevant Trustee, the Trust
shall execute any and all instruments for more fully and certainly vesting in
and confirming to such successor relevant Trustee all such rights, powers and
trusts referred to in the first or second preceding paragraph, as the case may
be.
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No successor Relevant Trustee shall accept its appointment unless
at the time of such acceptance such successor Relevant Trustee shall be
qualified and eligible under this Article.
Section 8.12 Merger, Conversion, Consolidation or Succession to
Business.
Any Person into which the Preferred Trustee or the Delaware
Trustee may be merged or converted or with which it may be consolidated, or any
Person resulting from any merger, conversion or consolidation to which such
Relevant Trustee shall be a party, or any Person succeeding to all or
substantially all the corporate trust business of such Relevant Trustee, shall
be the successor of such Relevant Trustee hereunder, provided such Person shall
be otherwise qualified and eligible under this Article, without the execution or
filing of any paper or any further act on the part of any of the parties hereto.
Section 8.13 Preferential Collection of Claims Against Sponsor
or Trust.
In case of the pendency of any receivership, insolvency,
liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or
other similar judicial proceeding relative to the Trust or any other obligor
upon the Trust Securities or the property of the Trust or of such other obligor
or their creditors, the Preferred Trustee (irrespective of whether any
Distributions on the Trust Securities shall then be due and payable as therein
expressed or by declaration or otherwise and irrespective of whether the
Preferred Trustee shall have made any demand on the Trust for the payment of any
past due Distribution) shall be entitled and empowered, to the fullest extent
permitted by law, by intervention in such proceeding or otherwise:
(a) to file and prove a claim for the whole amount of any
Distributions owing and unpaid in respect of the Trust Securities and to file
such other papers or documents as may be necessary or advisable in order to have
the claims of the Preferred Trustee (including any claim for the reasonable
compensation, expenses, disbursements and advances of the Preferred Trustee, its
agent and counsel) and of the Holders allowed in such judicial proceeding, and
(b) to collect and receive any moneys or other property payable
or deliverable on any such claims and to distribute the same;
and any custodian, receiver, assignee, trustee, liquidator, sequestrator or
other similar official in any such judicial proceeding is hereby authorized by
each Holder to make such payments to the Preferred Trustee and, in the event the
Preferred Trustee shall consent to the making of such payments directly to the
Holders, to pay to the Preferred Trustee any amount due it for the reasonable
compensation, expenses, disbursements and advances of the Preferred Trustee, its
agents and counsel, and any other amounts due to the Preferred Trustee.
Nothing herein contained shall be deemed to authorize the
Preferred Trustee to authorize or consent to or accept or adopt on behalf of any
Holder any plan of reorganization, arrangement, adjustment or compensation
affecting the Trust Securities or the rights of any Holder thereof or to
authorize the Preferred Trustee to vote in respect of the claim of any Holder in
any such proceeding.
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Section 8.14 Reports by Preferred Trustee.
(a) Not later than April 15 of each year commencing with April
15, 1998, the Preferred Trustee shall transmit to all Securityholders in
accordance with Section 10.8, and to the Sponsor, a brief report dated as of the
preceding December 31 with respect to:
(i) its eligibility under Section 8.7 or, in lieu
thereof, if to the best of its knowledge it has continued to be eligible under
said Section, a written statement to such effect;
(ii) a statement that the Preferred Trustee has complied
with all of its obligations under this Declaration during the twelve-month
period (or, in the case of the initial report, the period since the Closing
Date) ending with the preceding December 31 or, if the Preferred Trustee has not
complied in any material respect with such obligations, a description of such
noncompliance; and
(iii) any change in the property and funds in its
possession as Preferred Trustee since the date of its last report and any action
taken by the Preferred Trustee in the performance of its duties hereunder which
it has not previously reported and which in its opinion materially affects the
Trust Securities.
(b) In addition the Preferred Trustee shall transmit to
Securityholders such reports concerning the Preferred Trustee and its actions
under this Declaration as may be required pursuant to the Trust Indenture Act at
the times and in the manner provided pursuant thereto.
(c) A copy of each such report shall, at the time of such
transmission to Holders, be filed by the Preferred Trustee with the Commission
and with the Sponsor.
Section 8.15 Reports to the Preferred Trustee.
The Sponsor and the Company Trustees on behalf of the Trust shall
provide to the Preferred Trustee such documents, reports and information as
required by Section 314 of the Trust Indenture Act (if any) and the compliance
certificate required by Section 314(a) of the Trust Indenture Act in the form,
in the manner and at the times required by Section 314 of the Trust Indenture
Act.
Section 8.16 Evidence of Compliance with Conditions Precedent.
Each of the Sponsor and the Company Trustees on behalf of the
Trust shall provide to the Preferred Trustee such evidence of compliance with
any conditions precedent, if any, provided for in this Declaration that relate
to any of the matters set forth in Section 314(c) of the Trust Indenture Act.
Any certificate or opinion required to be given by an officer pursuant to
Section 314(c)(1) of the Trust Indenture Act shall be given in the form of an
Officers' Certificate.
Section 8.17 Number of Trustees.
(a) The number of Trustees shall be five, provided, that the
Holder of all of the Common Securities by written instrument may increase or
decrease the number of Company Trustees. The Preferred Trustee and the Delaware
Trustee may be the same Person.
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(b) If a Trustee ceases to hold office for any reason and the
number of Company Trustees is not reduced pursuant to Section 8.17(a), or if the
number of Trustees is increased pursuant to Section 8.17(a), a vacancy shall
occur. The vacancy shall be filled with a Trustee appointed in accordance with
Section 8.10.
(c) The death, resignation, retirement, removal, bankruptcy,
incompetence or incapacity to perform the duties of a Trustee shall not operate
to annul, dissolve or terminate the Trust. Whenever a vacancy in the number of
Company Trustees shall occur, until such vacancy is filled by the appointment of
a Company Trustee in accordance with Section 8.10, the Company Trustees in
office, regardless of their number (and notwithstanding any other provision of
this Agreement), shall have all the powers granted to the Company Trustees and
shall discharge all the duties imposed upon the Company Trustees by this
Declaration.
Section 8.18 Delegation of Power.
(a) Any Company Trustee may, by power of attorney consistent with
applicable law, delegate to any other natural person over the age of 21 his or
her power for the purpose of executing any documents contemplated in Section
2.7(a), including any registration statement or amendment thereto filed with the
Commission, or making any other governmental filing; and
(b) The Company Trustees shall have power to delegate from time
to time to such of their number or to the Sponsor the doing of such things and
the execution of such instruments either in the name of the Trust or the names
of the Company Trustees or otherwise as the Company Trustees may deem expedient,
to the extent such delegation is not prohibited by applicable law or contrary to
the provisions of this Declaration, as set forth herein.
ARTICLE IX
DISSOLUTION, LIQUIDATION AND MERGER
Section 9.1 Dissolution Upon Expiration Date.
Unless earlier dissolved, the Trust shall automatically dissolve
on October 24, 2047 (the "Expiration Date").
Section 9.2 Early Dissolution.
The first to occur of any of the following events is an "Early
Termination Event" and will cause a dissolution of the Trust:
(a) the occurrence of a Bankruptcy Event in respect of, or the
liquidation of, the Sponsor (or, in the case of a transfer pursuant to Section
5.14 hereof, the Holder of Common Securities);
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(b) the filing of a certificate of dissolution or its equivalent
with respect to the Sponsor (or, in the case of a transfer pursuant to Section
5.14 hereof, the Holder of Common Securities); or the revocation of the charter
or its equivalent of the Sponsor (or, in the case of a transfer pursuant to
Section 5.14 hereof, the Holder of Common Securities) and the expiration of 90
days after the date of revocation without a reinstatement thereof;
(c) the entry of a decree of judicial dissolution of the Sponsor
(or, in the case of a transfer pursuant to Section 5.14 hereof, the Holder of
Common Securities) or the Trust by a court of competent jurisdiction;
(d) all of the Trust Securities shall have been called for
redemption and the Redemption Price shall have been paid to the Holders in
accordance with this Declaration;
(e) the distribution of all the Trust Property;
(f) the written direction to the Preferred Trustee from the
Sponsor at any time (which direction is optional and wholly within the
discretion of the Sponsor) to dissolve the Trust and, after satisfaction of
liabilities to creditors of the Trust as provided by applicable law, distribute
Notes to Securityholders in exchange for the Preferred Securities;
(g) the redemption of all of the Preferred Securities in
connection with the redemption of all of the Notes;
(h) subject to Section 9.4(e), the occurrence of a Tax Event;
and
(i) the occurrence of an Investment Company Event.
Section 9.3 Termination.
The respective obligations and responsibilities of the Trustees
and the Trust created and continued hereby shall terminate upon the latest to
occur of the following: (a) the distribution by the Preferred Trustee to
Securityholders upon the liquidation of the Trust pursuant to Section 9.4, or
upon the redemption of all of the Trust Securities pursuant to Section 4.2, of
all amounts required to be distributed hereunder upon the final payment of the
Trust Securities; (b) the payment of any expenses owed by the Trust; and (c) the
discharge of all administrative duties of the Company Trustees, including the
performance of any tax reporting obligations with respect to the Trust or the
Securityholders.
Section 9.4 Liquidation.
(a) If an Early Termination Event specified in Section 9.2 (with
the exception of clauses (d) and (g)) occurs or upon the Expiration Date, the
Trust shall be liquidated by the Preferred Trustee and the Company Trustees as
expeditiously as such Trustees determine to be possible by distributing, after
satisfaction of liabilities to creditors of the Trust as provided by applicable
law, to each Securityholder a Like Amount of Notes, subject to Section 9.4(d).
Notice of liquidation shall be given by the Preferred Trustee by first-class
mail, postage prepaid mailed not later than 30 nor more
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than 60 days prior to the Liquidation Date to each Holder of Trust Securities at
such Holder's address appearing in the Securities Register. All notices of
liquidation shall:
(i) state the Liquidation Date;
(ii) state that from and after the Liquidation Date, the
Trust Securities will no longer be deemed to be Outstanding and any Trust
Securities Certificates not surrendered for exchange will be deemed to represent
a Like Amount of Notes; and
(iii) provide such information with respect to the
mechanics by which Holders may exchange Trust Securities Certificates for Notes,
or if Section 9.4(d) applies receive a Liquidation Distribution, as the Company
Trustees or the Preferred Trustee shall deem appropriate.
(b) Except where Section 9.2(d), 9.2(g) or 9.4(d) applies, in
order to affect the liquidation of the Trust and distribution of the Notes to
Securityholders, the Preferred Trustee shall establish a record date for such
distribution (which shall be not more than 45 days prior to the Liquidation
Date) and, either itself acting as exchange agent or through the appointment of
a separate exchange agent, shall establish such procedures as it shall deem
appropriate to effect the distribution of Notes in exchange for the Outstanding
Trust Securities Certificates.
(c) Except where Section 9.2(d), 9.2(g) or 9.4(d) applies, after
the Liquidation Date, (i) the Trust Securities will no longer be deemed to be
Outstanding, (ii) certificates representing a Like Amount of Notes will be
issued to Holders of Trust Securities Certificates, upon surrender of such
certificates to the Company Trustees or their agent for exchange, (iii) any
Trust Securities Certificates not so surrendered for exchange will be deemed to
represent a Like Amount of Notes, accruing interest at the rate provided for in
the Notes from the last Distribution Date on which a Distribution was made on
such Trust Securities Certificates until such certificates are so surrendered
(and until such certificates are so surrendered, no payments of interest or
principal will be made to Holders of Trust Securities Certificates with respect
to such Notes) and (iv) all rights of Securityholders holding Trust Securities
will cease, except the right of such Securityholders to receive Notes upon
surrender of Trust Securities Certificates.
(d) In the event that, notwithstanding the other provisions of
this Section 9.4, whether because of an order for dissolution entered by a court
of competent jurisdiction or otherwise, distribution of the Notes in the manner
provided herein is determined by the Preferred Trustee not to be practical, the
Trust Property shall be liquidated, and the Trust shall be wound-up and
terminated, by the Preferred Trustee in such manner as the Preferred Trustee
determines. In such event, on the date of the winding-up and termination of the
Trust, Securityholders will be entitled to receive out of the assets of the
Trust available for distribution to Securityholders, after satisfaction of
liabilities to creditors of the Trust as provided by applicable law, an amount
equal to the Liquidation Amount per Trust Security plus accumulated and unpaid
Distributions thereon to the date of payment (such amount being the "Liquidation
Distribution"). If, upon any such winding-up or termination, the Liquidation
Distribution can be paid only in part because the Trust has insufficient assets
available to pay in full the aggregate Liquidation Distribution, then, subject
to the next succeeding sentence, the amounts payable by the Trust on the Trust
Securities shall be paid on a pro rata basis (based upon Liquidation Amounts).
The Holder of the Common Securities will be entitled to receive Liquidation
Distributions upon any such winding-up or termination pro rata (determined as
aforesaid) with Holders of Preferred
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Securities, except that, if a Declaration Event of Default has occurred and is
continuing, the Preferred Securities shall have a priority over the Common
Securities.
(e) If the Early Termination Event specified in Section 9.2(h)
occurs, the Trust shall be liquidated within 90 days following the occurrence of
such Tax Event as provided in this Section 9.4; provided, however, that such
liquidation and distribution shall be conditioned on (i) the Trustees' receipt
of an Opinion of Counsel of an independent tax counsel experienced in such
matters (a "No Recognition Opinion") which opinion may rely on published revenue
rulings of the Internal Revenue Service, to the effect that the Holders of the
Preferred Securities will not recognize any income, gain or loss for United
States federal income tax purposes as a result of such liquidation and
distribution of Notes, and (ii) the Sponsor being unable to avoid such Tax Event
within such 90-day period by taking some ministerial action or pursuing some
other reasonable measure that will have no adverse effect on the Trust, the
Sponsor or the Holders of the Preferred Securities and will involve no material
cost. If (i) the Sponsor has received an Opinion of Counsel (a "Redemption Tax
Opinion") of an independent tax counsel or advisors experienced in such matters
that, as a result of a Tax Event, there is more than an insubstantial risk that
the Sponsor would be precluded from deducting the interest on the Notes for
United States federal income tax purposes, even after the Notes were distributed
to the Holders of the Preferred Securities upon liquidation of the Trust as
provided above, or (ii) the Trustees shall have been informed by such tax
counsel that it cannot deliver a No Recognition Opinion, the Sponsor has the
right to redeem the Notes in whole, in which case all the Preferred Securities
and Common Securities will be entitled to receive the Liquidation Distribution;
provided, however, that, if at the time there is available to the Company or the
Trust the opportunity to eliminate, within such ninety-day period, the Tax Event
by taking some ministerial action or pursuing some other reasonable measure that
will not have an adverse effect on the Trust, the Company or the Holders of the
Preferred Securities and will involve no material cost, the Trust or the Company
will pursue such measure in lieu of redemption.
Section 9.5 Mergers, Consolidations, Amalgamations or
Replacements of the Trust.
The Trust may not consolidate, amalgamate, merge with or into, or
be replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to any Person, except pursuant to this Section 9.5
or Section 9.4. At the request of the Sponsor, with the consent of the Company
Trustees and without the consent of the Holders of Preferred Securities, the
Preferred Trustee or the Delaware Trustee, the Trust may consolidate,
amalgamate, merge with or into, or be replaced by or convey, transfer or lease
its properties and assets substantially as an entirety to, a trust organized as
such under the laws of any state of the United States of America; provided, that
(i) if the Trust is not the survivor, such successor entity either (a) expressly
assumes all of the obligations of the Trust under the Trust Securities or (b)
substitutes for the Trust Securities other securities having substantially the
same terms as the Trust Securities (the "Successor Securities") as long as the
Successor Securities rank the same as the Trust Securities with respect to
Distributions and payments upon liquidation, redemption and otherwise, (ii) the
Sponsor expressly appoints a trustee of the successor entity that possesses the
same powers and duties as the Preferred Trustee as the holder of the Notes,
(iii) the Preferred Securities or any Successor Securities are listed or traded,
or any Successor Securities will be listed upon notification of issuance, on any
national securities exchange or other organization on which the Preferred
Securities are then listed or traded, if any, (iv) such merger, consolidation,
amalgamation, replacement, conveyance, transfer or lease does not cause the
Preferred Securities (including any Successor Securities) to be downgraded by
any nationally recognized
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statistical rating organization, (v) such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease does not adversely affect the rights,
preferences and privileges of the holders of the Trust Securities (including any
Successor Securities) in any material respect, (vi) such successor entity has a
purpose substantially identical to that of the Trust, (vii) the Sponsor has
provided a guarantee to the holders of the Successor Securities with respect to
such successor entity having substantially the same terms as the Company
Guarantee, and (viii) prior to such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease, the Sponsor has received an Opinion
of Counsel rendered by a law firm having a tax and securities practice
experienced in such matters to the effect that (x) such successor entity will be
treated as a grantor trust for United States federal income tax purposes or
otherwise as an entity that is not subject to United States federal income tax
at the entity level and the assets and income of which are treated for United
States federal income tax purposes as held and derived directly by holders of
interests in the entity, (y) following such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease, neither the Sponsor nor such
successor entity will be required to register as an investment company under the
1940 Act and (z) such merger, consolidation, amalgamation or replacement,
conveyance, transfer or lease, will not adversely affect the rights,
preferences, privileges and limited liability of the Preferred Securities in any
material respect, and (ix) the Company Trustees shall have furnished the
Preferred Trustee and the Delaware Trustee at least five Business Days' prior
written notice of the consummation of such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease; provided, however, that the failure
to provide such notice shall not affect the validity of any such transaction.
Notwithstanding the foregoing, the Trust shall not, except with the consent of
Holders of 100% in Liquidation Amount of the Trust Securities, consolidate,
amalgamate, merge with or into, be replaced by, convey, transfer or lease its
properties and assets substantially as an entirety to any other Person or permit
any other Person to consolidate, amalgamate, merge with or into or replace it,
if such consolidation, amalgamation, merger, replacement, conveyance, transfer
or lease would cause the Trust or the successor entity to be classified as other
than a grantor trust for United States federal income tax purposes or another
entity which is not subject to United States federal income tax at the entity
level and the assets and income of which are treated for United States federal
income tax purposes as held and derived directly by holders of interests in the
entity.
ARTICLE X
MISCELLANEOUS PROVISIONS
Section 10.1 Limitation of Rights of Securityholders.
The death, incapacity, bankruptcy, dissolution or termination of
any Person having an interest, beneficial or otherwise, in Trust Securities
shall not operate to terminate this Declaration, nor dissolve, terminate or
annul the Trust, nor entitle the legal representatives or heirs or successors of
such Person or any Securityholder for such Person, to claim an accounting, take
any action or bring any proceeding in any court for a partition or winding-up of
the arrangements contemplated hereby, nor otherwise affect the rights,
obligations and liabilities of the parties hereto or any of them.
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Section 10.2 Amendment.
(a) This Declaration may be amended from time to time by the
Trustees and the Sponsor, without the consent of any Securityholders, (i) to
cure any ambiguity, correct or supplement any provision herein which may be
inconsistent with any other provision herein, or to make any other provisions
with respect to matters or questions arising under this Declaration, which shall
not be inconsistent with the other provisions of this Declaration, or (ii) to
modify, eliminate or add to any provisions of this Declaration to such extent as
shall be necessary to ensure that the Trust will be classified for United States
federal income tax purposes as a grantor trust or other entity which is not
subject to United States federal income tax at the entity level and the assets
and income of which are treated for United States federal income tax purposes as
held and derived directly by holders of interests in the entity at all times
that any Trust Securities are Outstanding or to ensure that the Trust will not
be required to register as an investment company under the 1940 Act; provided,
however, that in the case of clause (i), such action shall not adversely affect
in any material respect the interests of any Securityholder, and any such
amendments of this Declaration shall become effective when notice thereof is
given to the Securityholders.
(b) If any proposed amendment provides for, or the Trustees or
the Sponsor otherwise propose to effect, (i) any action that would adversely
affect the powers, preferences or special rights of the Trust Securities,
whether by way of amendment to this Declaration or otherwise or (ii) the
dissolution, winding-up or termination of the Trust other than pursuant to the
terms of this Declaration, then the Securityholders voting together as a single
class will be entitled to vote on such amendment or proposal and such amendment
or proposal shall not be effective except with the approval of at least a
majority (based upon Liquidation Amounts) of the Trust Securities affected
thereby; provided, that if any amendment or proposal referred to in clause (i)
above would adversely affect only the Preferred Securities or the Common
Securities, then only the affected class will be entitled to vote on such
amendment or proposal and such amendment or proposal shall not be effective
except with the approval of at least a majority (based on Liquidation Amounts)
of such class of Trust Securities; provided, further, that no amendment or
modification may be made to this Declaration if such amendment or modification
would (x) cause the Trust to be classified for purposes of United States federal
income taxation as other than a grantor trust or another entity which is not
subject to United States federal income tax at the entity level and the assets
and income of which are treated for United States federal income tax purposes as
held and derived directly by holders of interest in the entity, (y) reduce or
otherwise adversely affect the powers of the Trustees or (z) cause the Trust to
be deemed an investment company which is required to be registered under the
1940 Act.
(c) Except as provided in Section 10.2(b) and 10.2(d) hereof, any
provision of this Declaration may be amended by the Trustees and the Sponsor
with (i) the consent of Securityholders representing not less than a majority
(based upon Liquidation Amounts) of the Trust Securities then Outstanding and
(ii) receipt by the Trustees of an Opinion of Counsel to the effect that such
amendment or the exercise of any power granted to the Trustees in accordance
with such amendment will not affect the Trust's status for United States federal
income tax purposes as a grantor trust or other entity which is not subject to
United States federal income tax at the entity level and the assets and income
of which are treated for United States federal income tax purposes as held and
derived directly by holders of interests in the entity, or cause the Trust to be
deemed an investment company which is required to register under the 1940 Act.
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(d) In addition to and notwithstanding any other provision in
this Declaration, without the consent of each affected Securityholder (such
consent being obtained in accordance with Section 6.3 or 6.6 hereof), this
Declaration may not be amended to (i) change the amount or timing of any
Distribution on the Trust Securities or otherwise adversely affect the amount of
any Distribution required to be made in respect of the Trust Securities as of a
specified date or (ii) restrict the right of a Securityholder to institute suit
for the enforcement of any such payment on or after such date; notwithstanding
any other provision herein, without the unanimous consent of the Securityholders
(such consent being obtained in accordance with Section 6.3 or 6.6 hereof), this
paragraph (d) of this Section 10.2 may not be amended.
(e) Notwithstanding any other provisions of this Declaration, no
Trustee shall enter into or consent to any amendment to this Declaration which
would cause the Trust to fail or cease to qualify for the exemption from status
of an investment company under the 1940 Act or fail or cease to be classified
for purposes of United States federal income taxation as other than a grantor
trust or another entity which is not subject to United States federal income tax
at the entity level and the assets and income of which are treated for United
States federal income tax purposes as held and derived directly by holders of
interests in the entity.
(f) Notwithstanding anything in this Declaration to the contrary,
without the consent of the Sponsor, this Declaration may not be amended in a
manner which imposes any additional obligation on the Sponsor.
(g) In the event that any amendment to this Declaration is made,
the Company Trustees shall promptly provide to the Sponsor a copy of such
amendment.
(h) Neither the Preferred Trustee nor the Delaware Trustee shall
be required to amend this Declaration in any manner which affects its own
rights, duties or immunities under this Declaration. The Preferred Trustee and
the Delaware Trustee shall be entitled to receive an Opinion of Counsel and an
Officers' Certificate stating that any amendment to this Declaration is in
compliance with this Declaration.
Section 10.3 Separability.
In case any provision in this Declaration or in the Trust
Securities Certificates shall be invalid, illegal or unenforceable, the
validity, legality and enforceability of the remaining provisions shall not in
any way be affected or impaired thereby.
Section 10.4 Governing Law.
This Declaration and the rights and obligations of each of the
Securityholders, the Trust and the Trustees with respect to this Declaration and
the Trust Securities shall be construed in accordance with and governed by the
laws of the State of Delaware without giving effect to principles of conflict of
laws.
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Section 10.5 Payments Due on Non-Business Day.
If the date fixed for any payment on any Trust Security shall be
a day that is not a Business Day, then such payment need not be made on such
date but may be made on the next succeeding day that is a Business Day (except
as otherwise provided in Sections 4.1 (a) and (e) and 4.2(d) and (e)), with the
same force and effect as though made on the date fixed for such payment, and no
interest shall accrue thereon for the period after such date.
Section 10.6 Successors.
This Declaration shall be binding upon and shall inure to the
benefit of any successor to the Sponsor, the Trust or the Relevant Trustee,
including any successor by operation of law. Except in connection with a
consolidation, merger or sale involving the Sponsor that is permitted under
Article VIII of the Indenture and pursuant to which the assignee agrees in
writing to perform the Sponsor's obligations hereunder, the Sponsor shall not
assign its obligations hereunder.
Section 10.7 Headings.
The Article and Section headings are for convenience only and
shall not affect the construction of this Declaration.
Section 10.8 Reports, Notices and Demands.
Any report, notice, demand or other communication which by any
provision of this Declaration is required or permitted to be given or served to
or upon any Securityholder or the Sponsor may be given or served in writing by
deposit thereof, first-class postage prepaid, in the United States mail, hand
delivery or facsimile transmission, in each case, addressed, (a) in the case of
a Preferred Securityholder, to such Preferred Securityholder as such
Securityholder's name and address may appear on the Securities Register; and (b)
in the case of the Common Securityholder or the Sponsor, to Superior National
Insurance Group, Inc., 26601 Agoura Road, Calabasas, California 91302, Attn:
Chief Financial Officer, facsimile no.: (818) 880-8615. Such notice, demand or
other communication to or upon a Securityholder shall be deemed to have been
sufficiently given or made, for all purposes, upon hand delivery, mailing or
transmission.
Any notice, demand or other communication which by any provision
of this Declaration is required or permitted to be given or served to or upon
the Trust, the Preferred Trustee, the Delaware Trustee or the Company Trustees
shall be given in writing by deposit thereof, first-class postage prepaid, in
the United States mail, hand delivery or facsimile transmission, in each case,
addressed (until another address is published by the Trust) as follows: (a) with
respect to the Preferred Trustee and the Delaware Trustee to Wilmington Trust
Company, 1100 North Market Street, Rodney Square North, Wilmington, Delaware,
Attention: Corporate Trust Administration; and (b) with respect to the Company
Trustees, to them at the address above for notices to the Sponsor, marked
"Attention Company Trustees of Superior National Capital Trust I." Such notice,
demand or other communication to or upon the Trust or the Preferred Trustee
shall be deemed to have been sufficiently given or made only upon actual receipt
of the writing by the Trust or the Preferred Trustee.
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Section 10.9 Agreement Not to Petition.
Each of the Trustees and the Sponsor agree for the benefit of the
Securityholders that, until at least one year and one day after the Trust has
been terminated in accordance with Article IX, they shall not file, or join in
the filing of, a petition against the Trust under any bankruptcy, insolvency,
reorganization or other similar law (including, without limitation, the United
States Bankruptcy Code) (collectively, "Bankruptcy Laws") or otherwise join in
the commencement of any proceeding against the Trust under any Bankruptcy Law.
In the event the Sponsor takes action in violation of this Section 10.9, the
Preferred Trustee agrees, for the benefit of Securityholders, that at the
expense of the Sponsor, it shall file an answer with the bankruptcy court or
otherwise properly contest the filing of such petition by the Sponsor against
the Trust or the commencement of such action and raise the defense that the
Sponsor has agreed in writing not to take such action and should be estopped and
precluded therefrom and such other defenses, if any, as counsel for the Trustee
or the Trust may assert. The provisions of this Section 10.9 shall survive the
termination of this Declaration.
Section 10.10 Trust Indenture Act; Conflict with Trust Indenture
Act.
(a) This Declaration is subject to the provisions of the Trust
Indenture Act that are required to be part of this Declaration and shall, to the
extent applicable, be governed by such provisions.
(b) The Preferred Trustee shall be the only Trustee which is a
trustee for the purposes of the Trust Indenture Act.
(c) If any provision hereof limits, qualities or conflicts with
another provision hereof which is required to be included in this Declaration by
any of the provisions of the Trust Indenture Act, such required provision shall
control. If any provision of this Declaration modifies or excludes any provision
of the Trust Indenture Act which may be so modified or excluded, the latter
provision shall be deemed to apply to this Declaration as so modified or
excluded, as the case may be.
(d) The application of the Trust Indenture Act to this
Declaration shall not affect the nature of the Securities as equity securities
representing undivided beneficial interests in the assets of the Trust.
Section 10.11 Acceptance of Terms of Declaration, Company
Guarantee and Indenture.
THE RECEIPT AND ACCEPTANCE OF A TRUST SECURITY OR ANY INTEREST
THEREIN BY OR ON BEHALF OF A SECURITYHOLDER OR ANY BENEFICIAL OWNER, WITHOUT ANY
SIGNATURE OR FURTHER MANIFESTATION OF ASSENT, SHALL CONSTITUTE THE UNCONDITIONAL
ACCEPTANCE BY THE SECURITYHOLDER AND ALL OTHERS HAVING A BENEFICIAL INTEREST IN
SUCH TRUST SECURITY OF ALL THE TERMS AND PROVISIONS OF THIS DECLARATION AND
AGREEMENT TO THE SUBORDINATION PROVISIONS AND OTHER TERMS OF THE COMPANY
GUARANTEE AND THE INDENTURE, AND SHALL CONSTITUTE THE AGREEMENT OF THE TRUST,
SUCH SECURITYHOLDER AND SUCH OTHERS THAT THE TERMS AND PROVISIONS OF THIS
DECLARATION SHALL BE BINDING, OPERATIVE AND EFFECTIVE AS BETWEEN THE TRUST AND
SUCH SECURITYHOLDER AND SUCH OTHERS.
60
<PAGE> 67
SUPERIOR NATIONAL INSURANCE GROUP, INC.
a Delaware corporation
By: /s/ [SIGNATURE]
------------------------------------------
Name: William L. Gentz
Title: President and Chief Executive Officer
WILMINGTON TRUST COMPANY, a Delaware
banking corporation, not in its individual capacity but
solely as Preferred Trustee
By: /s/ [SIGNATURE]
------------------------------------------
Name: _____________________
Title: _____________________
WILMINGTON TRUST COMPANY, a Delaware
banking corporation, not in its individual capacity but
solely as Delaware Trustee
By: /s/ [SIGNATURE]
------------------------------------------
Name: ______________________
Title: ______________________
/s/ [SIGNATURE]
--------------------------------------
William L. Gentz, as Company Trustee
/s/ [SIGNATURE]
--------------------------------------
Arnold J. Senter, as Company Trustee
/s/ [SIGNATURE]
--------------------------------------
J. Chris Seaman, as Company Trustee
61
<PAGE> 68
EXHIBIT A
CERTIFICATE OF TRUST OF SUPERIOR NATIONAL CAPITAL TRUST I
This Certificate of Trust of Superior National Capital Trust I
(the "Trust"), dated as of October 24, 1997, is being duly executed and filed by
the undersigned, as trustees, to form a business trust under the Delaware
Business Trust Act (12 Del. C. ss. 3801 et seq.)
1. Name. The name of the business trust formed hereby is Superior
National Capital Trust I.
2. Delaware Trustee. The name and business address of the trustee of the
Trust in the State of Delaware are Wilmington Trust Company, 1100 North Market
Street, Rodney Square North, Wilmington, New Castle County, Delaware 19890-0001.
3. Effective Date. This Certificate of Trust shall be effective upon
filing.
IN WITNESS WHEREOF, the undersigned, being the trustees of the
Trust, have executed this Certificate of Trust as of the date first-above
written.
WILMINGTON TRUST COMPANY, not in its
individual capacity, but solely as Trustee
By: /s/ [SIGNATURE]
---------------------------------------
Name: Patricia A. Evans
Title: Financial Services Officer
/s/ [SIGNATURE]
-------------------------------------------------
J. Chris Seaman, not in his individual capacity,
but solely as Trustee
Exhibit A-1
<PAGE> 69
EXHIBIT B
LETTER OF REPRESENTATIONS
Exhibit B-1
BOOK-ENTRY-ONLY CORPORATE EQUITY ISSUES
LETTER OF REPRESENTATIONS
(To be Completed by Issuer and Agent)
Superior National Capital Trust I
-----------------------------------------------------
(Name of Issuer)
Wilmington Trust Company
-----------------------------------------------------
(Name of Agent)
December 3, 1997
-----------------
(Date)
Attention: General Counsel's Office
THE DEPOSITORY TRUST COMPANY
55 Water Street; 49th Floor
New York, NY 10041-0099
Re: US $105,000,000 Aggregate Liquidation Amount
----------------------------------------------------
10.75% Trust Preferred Securities
----------------------------------------------------
Liquidation Amount of $1,000 per Preferred Security
----------------------------------------------------
(Issue Description, including CUSIP number)
Ladies and Gentlemen:
The purpose of this letter is to set forth certain matters relating to
the issuance and deposit with The Depository Trust Company ("DTC") of the
Superior National Capital Trust I 10.75% Preferred Securities (the "Preferred
Securities"), of Superior National Capital Trust I, a Delaware business trust
(the "Trust"), created pursuant to a Declaration of Trust dated as of October
24, 1997 of Superior National Capital Trust I (the "Declaration"). The payment
of distributions on the Preferred Securities, to the extent the Trust has funds
legally available for the payment thereof are guaranteed by Superior National
Insurance Group, Inc. (the "Company") to the extent set forth in a Guarantee
Agreement dated December 3, 1997 by the Company with respect to the Preferred
Securities. The Company and the Trust propose to sell the Preferred Securities
to certain Initial Purchasers (the "Initial Purchasers") pursuant to a Purchase
Agreement dated November 26, 1997 by and among the Initial Purchasers, the
Trust and the Company, and the Initial Purchasers wish to take delivery of this
Preferred Securities through DTC. Wilmington Trust Company, the Preferred
Trustee under the Declaration, is acting as transfer agent and registrar with
respect to the Preferred Securities (the "Transfer Agent and Registrar").
To induce DTC to accept the Securities as eligible for deposit at DTC,
and to act in accordance with its Rules with respect to the Securities, Issuer
and Agent make the following representations to DTC.
1. Prior to closing on the Securities on December 3, 1997, there shall
be deposited with DTC one Security certificate registered in the name of DTC's
nominee, Cede & Co., for each of the Securities with the offering value set
forth on Schedule A hereto, the total of which represents 100% of the offering
value of such Securities. If, however, the offering value of any Security
exceeds $200 million, one certificate will be issued with respect to each $200
million of offering value and an additional certificate will be issued with
respect to any remaining offering value. Each Security certificate shall bear
the following legend:
<PAGE> 70
This Preferred Security is a Global Certificate within the
meaning of the Declaration hereinafter referred to and is registered in
the name of The Depository Trust Company (the "Depository") or a nominee
of the Depository. This Preferred Security is exchangeable for Preferred
Securities registered in the name of a person other than the Depository
or its nominee only in the limited circumstances described in the
Declaration and no transfer of this Preferred Security (other than a
transfer of this Preferred Security as a whole by the Depository to a
nominee of the Depository or by a nominee of the Depository to the
Depository or another nominee of the Depository) may be registered
except in limited circumstances.
Unless this certificate is presented by an authorized
representative of The Depository Trust Company, a New York corporation
("DTC"), to Issuer or its agent for registration of transfer, exchange,
or payment, and any certificate issued is registered in the name of Cede
& Co. or in such other name as is requested by an authorized
representative of DTC (and any payment is made to Cede & Co. or to such
other entity as is requested by an authorized representative of DTC).
ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO
ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede &
Co., has an interest herein.
If the Securities will be held by agent, as custodian for DTC, such Security
certificate shall remain in Agent's custody pursuant to the provisions of the
FAST Balance Certificate Agreement currently in effect between Agent and DTC.
2. Issuer: (a) understands that DTC has no obligation to, and will
not, communicate to its Participants or to any person having an interest in the
Securities any information contained in the Security certificate(s); and (b)
acknowledges that neither DTC's Participants nor any person having an interest
in the Securities shall be deemed to have notice of the provisions of the
Security certificate(s) by virtue of submission of such certificate(s) to DTC.
3. In the event of any solicitation of consents from or voting by
holders of the Securities, Issuer or Agent shall establish a record date for
such purposes (with no provision for revocation of consents or votes by
subsequent holders) and shall send notice of such record date to DTC not less
than 15 calendar days in advance of such record date. Notices to DTC pursuant
to this Paragraph by telecopy shall be sent to DTC's Reorganization Department
at (212) 709-6896 or (212) 709-6897, and receipt of such notices shall be
confirmed by telephoning (212) 709-6870. Notices to DTC pursuant to this
Paragraph by mail or by any other means shall be sent to DTC's Reorganization
Department as indicated in Paragraph 7.
4. In the event of a stock split, recapitalization, conversion, or any
similar transaction resulting in the cancellation of all or any part of the
Securities represented thereby, the Agent shall send DTC a notice of such event
as soon as practicable, but in no event less than five business days prior to
the effective date of such transaction.
5. In the event of a full or partial redemption, Issuer or Agent shall
send a notice to DTC specifying: (a) the amount of the redemption or refunding;
(b) in the case of a refunding, the maturity date(s) established under the
refunding; and (c) the date such notice is to be distributed to Security
holders or published (the "Publication Date"). Such notice shall be sent to DTC
by a secure means (e.g., legible telecopy, registered or certified mail,
overnight delivery) in a timely manner designed to assure that such notice is
in DTC's possession no later than the close of business on the business day
before or, if possible, two business days before the Publication Date. Issuer
or Agent shall forward such notice either in a separate secure transmission for
each CUSIP number or in a secure transmission for multiple CUSIP numbers (if
applicable) which includes a manifest or list of each CUSIP number submitted in
that transmission. (The party sending such notice shall have a method to verify
subsequently the use of such means and the timeliness of such notice.) The
Publication Date shall be not less than 30 days nor more than 60 days prior to
the redemption date or, in the case of an advance refunding, the date that the
proceeds are deposited in escrow. Notices to DTC pursuant to this Paragraph by
telecopy shall be sent to DTC's Call Notification Department at (516) 227-4039
or (516) 227-4190. If the party sending the notice does not receive a telecopy
receipt from DTC confirming that the notice has been received, such party shall
telephone (516) 227-4070. Notices to DTC pursuant to this Paragraph by mail or
by any other means shall be sent to:
Manager: Call Notification Department
The Depository Trust Company
711 Stewart Avenue
Garden City, NY 11530-4719
<PAGE> 71
6. In the event of an offering or issuance of rights with respect to the
Securities outstanding, Agent shall send DTC's Dividend and Reorganization
Departments a notice specifying: (a) the amount of and conditions, if any,
applicable to such rights offering or issuance; (b) any applicable expiration
or deadline date, or any date by which any action on the part of holders of
such Securities is required; and (c) the Publication Date of such notice.
The Publication Date will be as soon as practicable after the announcement
by the Company of any such offering or issuance of rights with respect to the
Securities represented thereby. DTC requires that the Publication Date be not
less than 30 days nor more than 60 days prior to the related payment date,
distribution date, or issuance date, respectively.
Notices to DTC pursuant to this Paragraph by telecopy shall be sent to
DTC's Dividend Department at (212) 709-1623, and receipt of such notices shall
be confirmed by telephoning (212) 709-1282. Notices to DTC pursuant to the
above by mail or any other means shall be sent to:
Supervisor; Stock Dividends
Dividend Department
7 Hanover Square; 24th Floor
New York, NY 10004-2695
Notices to DTC pursuant to this Paragraph by telecopy shall be sent to
DTC's Reorganization Department at (212) 709-1093, and receipt of such fax
shall be confirmed by telephoning (212) 709-1063. Notices to DTC pursuant to
the above by mail or any other means shall be sent to:
Supervisor; Rights Offerings
Reorganization Department
7 Hanover Square; 23rd Floor
New York, NY 10004-2695
7. In the event of an invitation to tender the Securities (including
mandatory tenders, exchanges, and capital changes), notice by Issuer or Agent
to Security holders specifying the terms of the tender and the Publication Date
of such notice shall be sent to DTC by a secure means in the manner set forth
in Paragraph 5. Notices to DTC pursuant to this Paragraph and notices of other
corporate actions by telecopy shall be sent to DTC's Reorganization Department
at (212) 709-1093 or (212) 709-1094, and receipt of such notices shall be
confirmed by telephoning (212) 709-6884. Notices to DTC pursuant to the above
by mail or by any other means shall be sent to:
Manager; Reorganization Department
Reorganization Window
The Depository Trust Company
7 Hanover Square; 23rd Floor
New York, NY 10004-2695
8. All notices and payment advices sent to DTC shall contain the CUSIP
number of the Securities (listed on Schedule A hereto) and the accompanying
description of such Securities, which, as of the date of this letter, is
"10.75% Trust Preferred Securities."
9. Issuer or Agent shall provide written notice of dividend payment
information to a standard dividend announcement service subscribed to by DTC as
soon as the information is available. In the event that no such service exists,
Issuer or Agent shall provide such notice directly to DTC electronically, as
previously arranged by Issuer or Agent and DTC, as soon as the payment
information is available. If electronic transmission has not been arranged,
absent any other arrangements between Issuer or Agent and DTC, such
information should be sent by telecopy to DTC's Dividend Department at (212)
709-1723 or (212) 709-1686, and receipt of such notices shall be confirmed by
telephoning (212) 709-1270. Notices to DTC pursuant to the above by mail or by
any other means shall be sent to:
<PAGE> 72
Manager; Announcements
Dividend Department
The Depository Trust Company
7 Hanover Square; 22nd Floor
New York, NY 10004-2695
After establishing the amount of payment to be made on the Securities
in question, Issuer or Agent will notify DTC's Dividend Department of the
payment and payment date preferably five, but not less than two, business days
prior to the effective date for such transaction.
10. Issuer or Agent shall provide CUSIP-level detail for dividend payments
to DTC no later than noon (Eastern Time) on the payment date.
11. Dividend payments and cash distributions shall be received by Cede &
Co. as nominee of DTC, or its registered assigns, in same-day funds no later
than 2:30 p.m. (Eastern Time) on each payment date. Absent any other
arrangements between Issuer or Agent and DTC, such funds shall be wired as
follows:
The Chase Manhattan Bank
ABA # 021 000 021
For credit to a/c Cede & Co.
c/o The Depository Trust Company
Dividend Deposit Account # 066-026776
12. Redemption payments shall be received by Cede & Co., as nominee of
DTC, or its registered assigns, in same-day funds no later than 2:30 p.m.
(Eastern Time) on payment date. Absent any other arrangements between Agent and
DTC, such funds shall be wired as follows:
The Chase Manhattan Bank
ABA # 021 000 021
For credit to a/c Cede & Co.
c/o The Depository Trust Company
Dividend Deposit Account # 066-027306
13. Reorganization payments resulting from corporate actions (such as
tender offers or mergers) shall be received by Cede & Co., as nominee of DTC,
or its registered assigns, in same-day funds no later than 2:30 p.m. (Eastern
Time) on payment date. Absent any other arrangements between Agent and DTC,
such funds shall be wired as follows:
The Chase Manhattan Bank
ABA # 021 000 021
For credit to a/c Cede & Co.
c/o The Depository Trust Company
Dividend Deposit Account # 066-027608
14. DTC may direct Issuer or Agent to use any other number or address as
the number or address to which notices or payments of dividends, distributions,
or redemption proceeds may be sent.
15. In the event of a redemption, acceleration, or any other similar
transaction (e.g., tender made and accepted in response to Issuer's or Agent's
invitation) necessitating a reduction in the aggregate principal amount of
Securities outstanding or an advance refunding of part of the Securities
outstanding, DTC, in its discretion: (a) may request Issuer or Agent to issue
and authenticate a new Security certificate; or (b) may make an appropriate
notation on the Security certificate indicating the date and amount of such
reduction in the number of Securities outstanding, except in the case of final
redemption, in which case the certificate will be presented to Issuer or Agent
prior to payment, if required.
-4-
<PAGE> 73
Notes: Very truly yours,
- -----
SUPERIOR NATIONAL CAPITAL TRUST I
A. If there is an Agent (as defined in ------------------------------------
this Letter of Representations). Agent, (Issuer)
as well as Issuer, must sign this
Letter. If there is no Agent in signing By: /s/ J. CHRIS SEAMAN
this Letter Issuer itself undertakes to --------------------------------
perform all of the obligations set forth (Authorized Officer's Signature)
herein.
------------------------------------
B. Schedule B contains statements that (Agent)
DTC believes accurately describe DTC,
the method of effecting book entry By: ________________________________
transfers of securities distributed (Authorized Officer's Signature)
through DTC, and certain related
matters.
Received and Accepted:
THE DEPOSITORY TRUST COMPANY
By:_________________________
<PAGE> 74
16. In the event that Issuer determines that beneficial owners of
Securities shall be able to obtain certificated Securities, Issuer or Agent
shall notify DTC of the availability of certificates. In such event, Issuer or
Agent shall issue, transfer, and exchange certificates in appropriate amounts,
as required by DTC and others.
17. DTC may discontinue providing its services as securities depository
with respect to the Securities at any time by giving reasonable notice to Issuer
or Agent (at which time DTC will confirm with Issuer or Agent the aggregate
principal amount of Securities outstanding). Under such circumstances, at DTC's
request Issuer and Agent shall cooperate fully with DTC by taking appropriate
action to make available one or more separate certificates evidencing Securities
to any DTC Participant having Securities credited to its DTC accounts.
18. Nothing herein shall be deemed to require Agent to advance funds on
behalf of Issuer.
19. This Letter of Representations may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original,
but all such counterparts together constitute but one and the same instrument.
21. The following riders, attached hereto, are hereby incorporated into
this Letter of Representations:
Representations for Rule 144A Securities, Representations for
Deposit/Withdrawal at Custodian Eligible for Transfer Pursuant to Regulation S,
Representations for Change of Control Provisions.
NOTES:
- ------
A. If there is an Agent (as defined
in this Letter of Representations),
Agent as well as Issuer must sign
this Letter. If there is no Agent
in signing this Letter Issuer itself
undertakes to perform all of the
obligations set forth herein.
Very truly yours,
B. Schedule B contains statements
that DTC believes accurately describe
DTC, the method of effecting book-
entry transfers of securities
distributed through DTC, and certain
related matters.
________________________________________
(Issuer)
By:_____________________________________
(Authorized Officer's Signature)
Wilmington Trust Company, as Trustee
______________________________________
(Agent)
[SIG]
By:_____________________________________
(Authorized Officer's Signature)
Received and Accepted:
THE DEPOSITORY TRUST COMPANY
By: [SIG]
----------------------
CC: Underwriter
Underwriters Counsel
-5-
<PAGE> 75
SCHEDULE A
US $105,000,000 Aggregate Liquidation Amount
- --------------------------------------------------------------------------------
Trust Preferred Securities
- --------------------------------------------------------------------------------
(Describe Issue)
CUSIP Number Share Total Offering ($) Value
- ------------ ----------- ------------------
868223207
- ------------
(Rule 144A)
868223306
- ------------
(Accredited Investors)
U86795108
- ------------
(Reg. S)
------------------
$105,000,000
<PAGE> 76
7. Neither DTC nor Cede & Co. will consent or vote with respect to
Securities. Under its usual procedures, DTC mails an Omnibus Proxy to Issuer as
soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s
consenting or voting rights to those Direct Participants to whose accounts the
Securities are credited on the record date (identified in a listing attached to
the Omnibus Proxy).
8. Redemption proceeds, distributions, and dividend payments on the
Securities will be made to Cede & Co., as nominee of DTC. DTC's practice is to
credit Direct Participants' accounts, upon DTC's receipt of funds and
corresponding detail information from Issuer or Agent on payable date in
accordance with their respective holdings shown on DTC's records. Payments by
Participants to Beneficial Owners will be governed by standing instructions and
customary practices, as is the case with securities held for the accounts of
customers in bearer form or registered in "street name," and will be the
responsibility of such Participant and not of DTC, Agent, or Issuer, subject to
any statutory or regulatory requirements as may be in effect from time to time.
Payment of redemption proceeds, distributions, and dividends to Cede & Co. is
the responsibility of Issuer or Agent, disbursement of such payments to Direct
Participants shall be the responsibility of Cede & Co., and disbursement of such
payments to the Beneficial Owners shall be the responsibility of Direct and
Indirect Participants.
[9. A Beneficial Owner shall give notice to elect to have its Securities
purchased or tendered, through its Participant, to [Tender/Remarketing] Agent,
and shall effect delivery of such Securities by causing the Direct
Participant to transfer the Participant's interest in the Securities, on DTC's
records, to [Tender/Remarketing] Agent. The requirement for physical delivery
of Securities in connection with an optional tender or a mandatory purchase
will be deemed satisfied when the ownership rights in the Securities are
transferred by Direct Participants on DTC's records and followed by a
book-entry credit of tendered securities to [Tender/Remarketing] Agent's DTC
account.]
10. DTC may discontinue providing its services as securities depository
with respect to the Securities at any time by giving reasonable notice to
Issuer or Agent. Under such circumstances, in the event that a successor
securities depository is not obtained, Security certificates are required to be
printed and delivered.
11. Issuer may decide to discontinue use of the system of book-entry
transfers through DTC (or a successor securities depository). In that event,
Security certificates will be printed and delivered.
12. The information in this section concerning DTC and DTC's book-entry
system has been obtained from sources that Issuer believes to be reliable, but
Issuer takes no responsibility for the accuracy thereof.
<PAGE> 77
[LOGO]
1. Issuer represents that the time of initial registration in the name of
DTC's nominee, Cede & Co., the Securities were Legally or Contractually
Restricted Securities, eligible for transfer under Rule 144A under the
Securities Act of 1833, as amended (the "Securities Act"), and identified by a
CUSIP or CINS identification number that was different from any CUSIP or CINS
number assigned to any securities of the same class that were not Legally or
Contractually Restricted Securities. Issuer shall ensure that a CUSIP or CINS
identification number is obtained for all unrestricted securities of the same
class that is different from any CUSIP or CINS identification number assigned
to a Legally or Contractually Restricted Security such class, and shall notify
DTC promptly in the event that it is unable to do so. Issuer represents that it
has agreed to comply with all applicable information requirements of Rule 144A.
2. Issuer represents that the Securities are (Notes Issuer must represent
one of the following and may cross out the other).
[included within PORTAL, a Self-Regulatory Organization system approved by the
Securities and Exchange Commission for the reporting of quotation and trade
information of securities eligible for transfer pursuant to Rule 144A (an "SRO
Rule 144A System").]
3. If the Securities are not Investment-Grade Securities, Issuer and Agent
acknowledge that if such Securities cease to be included in an SRO Rule 144A
System during any period in which such Securities are Legally or Contractually
Restricted Securities, such Securities shall no longer be eligible for DTC's
services. Furthermore, DTC may discontinue providing its services as securities
depository with respect to the Securities at any time by giving reasonable
notice to Issuer or Agent. Under any of the aforementioned circumstances at
DTC's request, Issuer and Agent shall cooperate fully with DTC by taking
appropriate action to make available one or more separate certificates
evidencing Securities to any Participant having Securities credited to its DTC
accounts.
______________
(1) A "Legally Restricted Security" is a security that is a restricted
security, as defined in Rule 144(a)(3). A "Contractually Restricted Security is
a security that upon issuance and continually thereafter can only be sold
pursuant to Regulation S under the Securities Act, Rule 144A. Rule 144, or in a
transaction exempt from the registration requirements of the Securities Act
pursuant to Section 4 of the Securities Act and not involving any public
offering provided, however, that once the security is sold pursuant to the
provisions of Rule 144, including Rule 144(k), it will thereby cease to be a
"Contractually Restricted Security." For purposes of this definition, in order
for a depositary receipt to be considered a "Legally or Contractually
Restricted Security," the underlying security must also be a "Legally or
Contractually Restricted Security."
<PAGE> 78
4. Issuer and Agent acknowledge that so long as Cede & Co. is a record
owner of the Securities, Cede & Co. shall be entitled to all applicable voting
rights and to receive the full amount of all distributions payable with respect
thereto. Issuer and Agent acknowledge that DTC shall treat any DTC Participant
("Participant") having Securities credited to its DTC accounts as entitled to
the full benefits of ownership of such Securities. Without limiting the
generality of the preceding sentence, Issuer and Agent acknowledge that DTC
shall treat any Participant having Securities credited to its DTC accounts as
entitled to receive distributions (and voting rights, if any) in respect of
Securities, and to receive from DTC certificates evidencing Securities. Issuer
and Agent recognize that DTC does not in any way undertake to, and shall not
have any responsibility to, monitor or ascertain the compliance of any
transactions in the Securities with any of the provisions: (a) of Rule 144A;
(b) of other exemptions from registration under the Securities Act of any other
state or federal securities law; or (c) of the offering documents.
<PAGE> 79
[LOGO]
REPRESENTATIONS FOR DEPOSIT/WITHDRAWAL AT CUSTODIAN ("DWAC") --
to be included in DTC Letter of Representations
The Security certificate(s) shall remain in Agent's custody as a
"Balance Certificate" subject to the provisions of the Balance Certificate
Agreement between Agent and DTC currently in effect.
On each day on which Agent is open for business and on which it
receives an instruction originated by a Participant through DTC's
Deposit/Withdrawal at Custodian ("DWAC") system to increase the Participant's
account by a specified number of shares, units, or obligations (a "Deposit
Instruction"), Agent shall, before 6:30 p.m. (Eastern Time) that day, either
approve or cancel the Deposit Instruction through the DWAC system.
On each day on which Agent is open for business and on which it
receives an instruction originated by a Participant through the DWAC system
to decrease the Participant's account by a specified number of shares, units,
or obligations (a "Withdrawal Instruction"), Agent shall, before 6:30 p.m.
(Eastern Time) that day, either approve or cancel the Withdrawal Instruction
through the DWAC system.
Agent agrees that its approval of a Deposit or Withdrawal Instruction
shall be deemed to be the receipt by DTC of a new, reissued or reregistered
certificated security on registration of transfer to the name of Cede & Co. for
the quantity of Securities evidenced by the Balance Certificate after the
Deposit or Withdrawal Instruction is effected.
<PAGE> 80
[LOGO]
REPRESENTATIONS FOR SECURITIES ELIGIBLE FOR TRANSFER
PURSUANT TO REGULATION S
WHERE ISSUER HAS REQUESTED A TEMPORARY "CHILL"
ON DELIVER ORDERS -
to be included in DTC Letter of Representations
Issuer has requested that, with respect to the Securities that are
eligible for transfer pursuant to Regulation S, which have been identified by a
separate CUSIP number (the "Regulation S Securities"), DTC not effect
book-entry deliveries (except deliveries via DTC's DWAC system in Participant
accounts maintained by the banks that act as depositaries for Cedel and
Euroclear) until ________________, 199__ (, or -- if not specified -- until
further notice in the manner set forth below).
In the event that Issuer desires an extension or shortening of this
"Deliver Order Chill," Issuer or Agent shall send DTC a notice requesting that
the Deliver Order Chill be eliminated as of a specified date. Such notice shall
be sent to DTC by a secure means (e.g., legible telecopy, registered or
certified mail, overnight delivery) in a timely manner designed to assure that
such notice is in DTC's possession no later than the close of business two
business days prior to the date specified for elimination of the Deliver Order
Chill. If sent by telecopy, such notice shall be sent to (212) 344-1531 or
(212) 344-1530. Issuer or Agent shall confirm DTC's receipt of such telecopy by
telephoning DTC's Underwriting Department at (212) 898-3731. If delivered by
hand or sent by mail or overnight delivery, such notice shall be sent to:
Manager; Eligibility Section
Underwriting Department
The Depository Trust Company
55 Water Street, 50th Floor
New York, NY 10041-0099
<PAGE> 81
[LOGO]
REPRESENTATIONS FOR PRO RATA REDUCTION OF PRINCIPAL
To be included in Letter of Representations
In the event of a pro rata reduction of principal, Trustee/Agent shall
send DTC written notice with respect to the dollar amount per $1,000 original
face value (or other minimum authorized denomination (if less than $1,000 face
value) payable on each payment date allocated as the interest and principal
portions thereof preferably 5, but not less than 2, business days prior to such
payment date. Such notices, which shall clearly indicate that they relate to a
pro rata reduction of principal and which shall also contain the current pool
factor or ratio and Trustee/Agent contact's name and telephone number, shall be
sent by telecopy to DTC's Dividend Department at (212) 709-1723, or by mail or
by any other means to:
Manager's Announcements
Dividend Department
7 Hanover Square, 22nd Floor
New York, NY 10004-2695
<PAGE> 82
[DTC LOGO]
REPRESENTATION FOR ERISA-RESTRICTED SECURITIES -
to be included in DTC Letter of Representations
Issuer and agent recognize that DTC does not in any way undertake to, and
shall not have any responsibility to, monitor or ascertain whether a transfer
of Securities could give rise to a transaction prohibited or not otherwise
permissible under the Employee Retirement Income Security Act of 1974 or under
Section 4975 of the Internal Revenue Code of 1986. Issuer and Agent
acknowledge that: a) so long as Cede & Co. is the sole record owner of the
Securities, it shall be entitled to all voting rights in respect thereof and to
receive the full amount of all principal, premium, if any, and interest payable
with respect thereto; and b) DTC shall treat any DTC Participant having
Securities credited to its DTC accounts as entitled to the full benefits of
ownership of such Securities even if the crediting of such Securities to the
DTC accounts of such Participant results from transfers or failures to transfer
in violation of such laws. (The treatment by DTC of the effects of the
crediting by it of Securities to the accounts of DTC Participants shall not
affect the rights of Issuer or purchasers, sellers, or holders of Securities
against any DTC Participant.)
<PAGE> 83
[LOGO]
Representations for Change of Control Provision
To be included in DTC Letter of Representations
It is understood that if the holders of the Securities shall at any time
have the right to tender the Securities to Issuer and require that Issuer
repurchase such holders' Securities pursuant to the Document and Cede & Co., as
nominee of DTC, or its registered assigns, as the record owner, is entitled to
tender the Securities, such tenders will be effected by means of DTC's
Repayment Option Procedures. Under the Repayment Option Procedures, DTC will
receive during the applicable tender period instructions from its Participants
to tender Securities for purchase. The undersigned agree that such tender for
purchase may be made by DTC by means of a book-entry credit of such Securities
to the account of Trustee, as agent for Issuer, provided that such credit is
made on or before the final day of the applicable tender period. DTC agrees
that promptly after the recording of any such book-entry credit, it will
provide to Trustee, as agent for Issuer, as Agent Receipt and Confirmation or
the equivalent in accordance with the Repayment Option Procedures; identifying
the Securities and the aggregate principal amount thereof as to which such
tender for purchase has been made.
Trustee or Issuer shall send DTC a notice regarding such optional tender
by hand or by a secure means (e.g. legible facsimile transmission, registered
or certified mail, overnight delivery) in a timely manner designed to assure
that such notice is in DTC's possession no later than the close of business two
business days before the Publication Date. The Publication Date shall be not
less than 15 days prior to the expiration date of the applicable tender period.
Such notice shall state whether any partial redemption of the Securities is
scheduled to occur during the applicable optional tender period.
If delivered by hand or sent by mail or overnight delivery, such notice
shall be sent to:
Supervisor, Put Bond Unit
Reorganization Department
The Depository Trust Company
7 Hanover Square - 23rd Floor
New York, NY 10004-2695
If sent by facsimile transmission, such notice shall be sent to (212) 709-6895.
Trustee or Issuer shall confirm DTC's receipt of such facsimile transmission by
telephoning (212) 709-1470.
<PAGE> 84
EXHIBIT C
THIS CERTIFICATE IS NOT TRANSFERABLE
EXCEPT AS PROVIDED IN THE DECLARATION
FORM OF COMMON SECURITY CERTIFICATE
[FORM OF FACE OF SECURITY]
THE COMMON SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE
SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAW. NEITHER THIS COMMON
SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD,
ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE
ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT
SUBJECT TO, REGISTRATION.
THE HOLDER OF THIS COMMON SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER,
SELL OR OTHERWISE TRANSFER THIS COMMON SECURITY, PRIOR TO THE DATE (THE "RESALE
RESTRICTION TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE
ORIGINAL ISSUANCE DATE HEREOF AND THE LAST DATE ON WHICH THE TRUST OR ANY
"AFFILIATE" OF THE TRUST WAS THE OWNER OF THIS COMMON SECURITY (OR ANY
PREDECESSOR OF THIS COMMON SECURITY) ONLY (A) TO THE TRUST, (B) PURSUANT TO A
REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES
ACT, (C) SO LONG AS TIES COMMON SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE
144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON IT REASONABLY BELIEVES
IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A) THAT PURCHASES
FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO
WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE OF RULE 144A,
(D) PURSUANT TO OFFERS AND SALES TO NON-UNITED STATES PERSONS THAT OCCUR OUTSIDE
THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT,
(E) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH
(A)(1), (2), (3) OR (7) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING
THIS COMMON SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN
INSTITUTIONAL ACCREDITED INVESTOR, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW
TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF
THE SECURITIES ACT OR (F) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS UNDER THE SECURITIES ACT, SUBJECT TO THE RIGHT OF THE
TRUST AND THE SPONSOR PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (i) PURSUANT TO
CLAUSE (D), (E) OR (F) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL,
CERTIFICATIONS AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM AND (ii)
PURSUANT TO CLAUSE (E) TO REQUIRE THAT THE TRANSFEROR DELIVER TO THE TRUST A
LETTER FROM THE TRANSFEREE SUBSTANTIALLY IN THE FORM OF ANNEX A TO THE OFFERING
MEMORANDUM DATED NOVEMBER 26, 1997. SUCH HOLDER FURTHER AGREES THAT IT DELIVER
TO EACH PERSON TO WHOM THIS COMMON SECURITY IS TRANSFERRED A NOTICE
SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND.
Exhibit C-1
<PAGE> 85
Certificate Number Number of Common Securities
C-1
Certificate Evidencing Common Securities
of
Superior National Capital Trust I
10 3/4% Common Securities
(liquidation amount $1,000.00 per Common Security)
Superior National Capital Trust I, a statutory business trust
created under the laws of the State of Delaware (the "Trust"), hereby certifies
that Superior National Insurance Group, Inc. (the "Holder") is the registered
owner of three thousand two-hundred forty-eight (3,248) common securities of the
Trust representing beneficial ownership interest in the Trust and designated the
10 3/4% Common Securities (liquidation amount $1,000.00 per Common Security)(the
"Common Securities"). Except as provided in Section 5.5 of the Declaration (as
defined below) the Common Securities are not transferable and any attempted
transfer hereof shall be void. The designations, rights, privileges,
restrictions, preferences and other terms and provisions of the Common
Securities are set forth in, and this certificate and the Common Securities
represented hereby are issued and shall in all respects be subject to the terms
and provisions of, the Amended and Restated Declaration of Trust of Superior
National Capital Trust I dated as of December 3, 1997, as the same may be
amended from time to time (the "Declaration"), including the designation of the
terms of the Common Securities as set forth therein. The Trust will furnish a
copy of the Declaration to the Holder without charge upon written request to the
Trust at its principal place of business or registered office.
Upon receipt of this certificate, the Holder is bound by the
Declaration and is entitled to the benefits thereunder.
IN WITNESS WHEREOF, one of the Company Trustees of the Trust has
executed this certificate this _____ day of __________, 1997.
SUPERIOR NATIONAL CAPITAL TRUST I
By: _________________________________________
Name: _______________________________________
Title: Company Trustee
Exhibit C-2
<PAGE> 86
FORM OF REVERSE OF SECURITY
Distributions payable on each Common Security will be fixed at a
rate per annum of 10 3/4% (the "Coupon Rate") of the Liquidation Amount of $
1,000 per Common Security, such rate being the rate of interest payable on the
Notes to be held by the Preferred Trustee. Distributions in arrears for more
than one semi-annual period will bear interest thereon compounded semi-annually
at the Coupon Rate (to the extent permitted by applicable law). The term
"Distributions," as used herein, includes such cash distributions and any such
interest payable unless otherwise stated. A Distribution is payable only to the
extent that payments are made in respect of the Notes held by the Preferred
Trustee and to the extent the Preferred Trustee has funds on hand legally
available therefor.
Distributions on the Common Securities will be cumulative, will
accumulate from the most recent date to which Distributions have been paid and
will be payable semi-annually in arrears on June 1 and December 1 of each year,
commencing on June 1, 1998, except as otherwise described below and in the
Declaration. Distributions will be computed on the basis of a 360-day year
constituting twelve 30-day months and, for any period of less than a full
calendar month, the number of days elapsed in such month. As long as no Event of
Default has occurred and is continuing under the Indenture, the issuer of the
Note ("Note Issuer") has the right under the Indenture to defer payments of
interest by extending the interest payment period at any time and from time to
time on the Notes for a period not exceeding 10 consecutive calendar semi-annual
periods (each an "Extension Period"), provided that no Extension Period shall
extend beyond the Maturity Date of the Notes. As a consequence of such deferral,
Distributions will also be deferred. Despite such deferral, semi-annual
Distributions will continue to accumulate with interest thereon (to the extent
permitted by applicable law, but not at a rate exceeding the rate of interest
then accruing on the Notes) at the Coupon Rate compounded semi-annually during
any such Extension Period. Prior to the termination of any such Extension
Period, the Note Issuer may further defer payments of interest by further
extending such Extension Period, provided that such Extension Periods, together
with all such previous and further extensions within such Extension Period may
not exceed 10 consecutive semi-annual periods, including the first semi-annual
period during such Extension Period, or extend beyond the Maturity Date of the
Notes. Payments of Distributions that have accumulated during any Extension
Period will be payable to Holders as they appear on the books and records of the
Trust on the record date for the first scheduled Distribution payment date
following the expiration of such Extension Period. Upon the expiration of any
Extension Period and the payment of all amounts then due, the Note Issuer may
commence a new Extension Period, subject to the above requirements. Capitalized
terms used herein and not otherwise defined are used as defined in the
Declaration.
The Company Trustees shall, at the direction of the Sponsor, at
any time dissolve and liquidate the Trust and, after satisfaction of liabilities
to creditors of the Trust, cause the Notes to be distributed to the holders of
the Securities in liquidation of the Trust or simultaneously with any redemption
of the Notes, cause a Like Amount of the Securities to be redeemed by the Trust.
The Common Securities shall be redeemable as provided in the
Declaration.
Exhibit C-3
<PAGE> 87
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned assigns and transfers this
Common Security to:
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
(Insert assignee's social security or tax identification number)
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
(Insert address and zip code of assignee)
and irrevocably appoints
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
agent to transfer this Common Securities Certificate on the books of the Trust.
The agent may substitute another to act for him or her.
Date:______________________________
Signature: ___________________________________________________ (Sign exactly as
your name appears on the other side of this Common Securities Certificate)
_______________________________________________________________________________
The signature(s) should be guaranteed by an eligible guarantor
institution (banks, stockbrokers, savings and loan associations
and credit unions with membership in an approved signature
guarantee medallion program), pursuant to S.E.C. Rule 17Ad-15.
Exhibit C-4
<PAGE> 88
[Include the following if the Common Security bears a Restricted Securities
Legend]
In connection with any transfer of any of the Common Securities evidenced by
this certificate, the undersigned confirms that such Common Securities are
being:
Check one box below
[ ] (1) exchanged for the undersigned's own account without
transfer; or
[ ] (2) transferred pursuant to and in compliance with Rule 144A
under the Securities Act of 1933, as amended; or
[ ] (3) transferred to an institutional "accredited investor"
within the meaning of subparagraph (a)(1), (2), (3) or (7)
of Rule 501 under the Securities Act of 1933, as amended,
that is acquiring the Common Securities for its own
account, or for the account of such an institutional
"accredited investor," for investment purposes and not
with a view to, or for offer or sale in connection with,
any distribution in violation of the Securities Act of
1933, as amended; or
[ ] (4) transferred pursuant to another available exemption
from the registration requirements of the Securities Act
of 1933, as amended; or
[ ] (5) transferred pursuant to an effective registration
statement.
unless one of the boxes is checked, the Securities Registrar will refuse to
register any of the Common Securities evidenced by this certificate in the name
of any person other than the registered Holder thereof; provided, however, that
if box (3), (4) or (5) is checked, the Securities Registrar may require, prior
to registering any such transfer of the Common Securities such legal opinions,
certifications and other information as the trust has reasonably requested to
confirm that such transfer is being made pursuant to an exemption from, or in a
transaction not subject to, the registration requirements of the Securities Act
of 1933, as amended, such as the exemption provided by Rule 144 under such Act;
provided, further, that (i) if box (2) is checked, the transferee must also
certify that it is a qualified institutional buyer as defined in Rule 144A or
(ii) if box (4) is checked, the transferee must also provide to the Securities
Registrar a Transferee Letter of Representation in the form attached to the
Offering Memorandum dated November 26, 1997.
Date: _________________________
Signature: ___________________________________________________ (Sign exactly as
your name appears on the other side of this Common Security)
Exhibit C-5
<PAGE> 89
EXHIBIT D
FORM OF PREFERRED SECURITY CERTIFICATE
[FORM OF FACE OF SECURITY]
[IF THIS GLOBAL SECURITY IS A GLOBAL PREFERRED SECURITY INSERT: THIS PREFERRED
SECURITY IS A GLOBAL PREFERRED SECURITY WITHIN THE MEANING OF THE DECLARATION
HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF THE DEPOSITORY TRUST
COMPANY (THE "CLEARING AGENCY") OR A NOMINEE OF THE CLEARING AGENCY. THIS
PREFERRED SECURITY IS EXCHANGEABLE FOR PREFERRED SECURITIES REGISTERED IN THE
NAME OF A PERSON OTHER THE CLEARING AGENCY OR ITS NOMINEE ONLY IN THE LIMITED
CIRCUMSTANCES DESCRIBED IN THE DECLARATION AND NO TRANSFER OF THIS PREFERRED
SECURITY (OTHER THAN A TRANSFER OF THIS PREFERRED SECURITY AS A WHOLE BY THE
CLEARING AGENCY TO A NOMINEE OF THE CLEARING AGENCY OR BY A NOMINEE OF THE
CLEARING AGENCY TO ANOTHER NOMINEE OF THE CLEARING AGENCY) MAY BE REGISTERED
EXCEPT IN LIMITED CIRCUMSTANCES.]
[IF THIS GLOBAL SECURITY IS A RESTRICTED GLOBAL SECURITY INSERT: UNLESS THIS
PREFERRED SECURITY IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY (55 WATER STREET, NEW YORK, NEW YORK) TO THE TRUST OR
ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, ANY PREFERRED
SECURITY ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY AND
ANY PAYMENT HEREON IS MADE TO CEDE & CO., ANY TRANSFER, PLEDGE OR OTHER USE
HEREOF FOR VALUE OR OTHERWISE BY A PERSON IS WRONGFUL SINCE THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.]
THE PREFERRED SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE
SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAW. NEITHER THIS PREFERRED
SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD,
ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE
ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT
SUBJECT TO, REGISTRATION.
THE HOLDER OF THIS PREFERRED SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER,
SELL OR OTHERWISE TRANSFER THIS PREFERRED SECURITY, PRIOR TO THE DATE (THE
"RESALE RESTRICTION TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE
ORIGINAL ISSUANCE DATE HEREOF AND THE LAST DATE ON WHICH THE TRUST OR ANY
"AFFILIATE" OF THE TRUST WAS THE OWNER OF THIS PREFERRED SECURITY (OR ANY
PREDECESSOR OF THIS PREFERRED SECURITY) ONLY (A) TO THE TRUST, (B) PURSUANT TO A
REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES
ACT, (C) SO LONG AS THIS PREFERRED SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO
RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON IT REASONABLY
BELIEVES IS A "QUALIFIED
Exhibit D-1
<PAGE> 90
INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A) THAT PURCHASES FOR ITS OWN
ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS
GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO
OFFERS AND SALES TO NON-UNITED STATES PERSONS THAT OCCUR OUTSIDE THE UNITED
STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN
INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (A)(1),
(2), (3) OR (7) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THIS
PREFERRED SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN
INSTITUTIONAL ACCREDITED INVESTOR, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW
TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF
THE SECURITIES ACT OR (F) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS UNDER THE SECURITIES ACT, SUBJECT TO THE RIGHT OF THE
TRUST AND THE SPONSOR PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (i) PURSUANT TO
CLAUSE (D), (E) OR (F) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL,
CERTIFICATIONS AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM AND (ii)
PURSUANT TO CLAUSE (E) TO REQUIRE THAT THE TRANSFEROR DELIVER TO THE TRUST A
LETTER FROM THE TRANSFEREE SUBSTANTIALLY IN THE FORM OF ANNEX A TO THE OFFERING
MEMORANDUM DATED NOVEMBER 26, 1997. SUCH HOLDER FURTHER AGREES THAT IT WILL
DELIVER TO EACH PERSON TO WHOM THIS PREFERRED SECURITY IS TRANSFERRED A NOTICE
SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND.
[IF THIS GLOBAL SECURITY IS A REGULATION S GLOBAL SECURITY, INSERT: THIS
PREFERRED SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT AND MAY NOT
BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT
OF, UNITED STATES PERSONS UNLESS REGISTERED UNDER THE SECURITIES ACT OR AN
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT IS
AVAILABLE.]
Exhibit D-2
<PAGE> 91
CERTIFICATE NUMBER NUMBER OF PREFERRED SECURITIES
CUSIP NO.
CERTIFICATE EVIDENCING PREFERRED SECURITIES
OF
SUPERIOR NATIONAL CAPITAL TRUST I
10 3/4% TRUST PREFERRED SECURITIES
(LIQUIDATION AMOUNT $1,000.00 PER PREFERRED SECURITY)
Superior National Capital Trust I, a statutory business trust created
under the laws of the State of Delaware (the "Trust"), hereby certifies that
_____________ (the "Holder") is the registered owner of____( ) preferred
securities of the Trust representing an undivided beneficial ownership interest
in the assets of the Trust and designated the Superior National Capital Trust I
10 3/4% Trust Preferred Securities (liquidation amount $1,000.00 per Preferred
Security) (the "Preferred Securities"). The Preferred Securities are
transferable on the books and records of the Trust, in person or by a duly
authorized attorney, upon surrender of this certificate duly endorsed and in
proper form for transfer as provided in the Declaration (as defined below). The
designations, rights, privileges, restrictions, preferences and other terms and
provisions of the Preferred Securities are set forth in, and this certificate
and the Preferred Securities represented hereby are issued and shall in all
respects be subject to the terms and provision of, the Amended and Restated
Declaration of Trust of Superior National Capital Trust I dated as of December
3, 1997, as the same may be amended from time to time (the "Declaration"),
including the designation of the terms of Preferred Securities as set forth
therein. The Holder is entitled to the benefits of the Guarantee Agreement
entered into by Superior National Insurance Group, Inc., a Delaware corporation,
and Wilmington Trust Company, as guarantee trustee, dated as of December 3,
1997, (the "Company Guarantee"), to the extent provided therein. The Trust will
furnish a copy of the Declaration and the Company Guarantee to the Holder
without charge upon written request to the Trust at its principal place of
business or registered office.
Upon receipt of this certificate, the Holder is bound by the
Declaration and is entitled to the benefits thereunder.
Exhibit D-3
<PAGE> 92
IN WITNESS WHEREOF, one of the Company Trustees of the Trust has
executed this certificate this 3rd day of December, 1997.
SUPERIOR NATIONAL CAPITAL TRUST I
By: _________________________________
Name: _______________________________
Title: Company Trustee
PREFERRED TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Preferred Securities referred to in the
within-mentioned Declaration.
Dated____________________ WILMINGTON TRUST COMPANY,
as Preferred Trustee
By: _________________________________
Authorized Signatory
Exhibit D-4
<PAGE> 93
FORM OF REVERSE OF SECURITY
Distributions payable on each Preferred Security will be fixed at a
rate per annum of 10 3/4% (the "Coupon Rate") of the Liquidation Amount of
$1,000 per Preferred Security, such rate being the rate of interest payable on
the Notes to be held by the Preferred Trustee. Distributions in arrears for more
than one semi-annual period will bear interest thereon compounded semiannually
at the Coupon Rate (to the extent permitted by applicable law). The term
"Distributions," as used herein, includes such cash distributions and any such
interest payable unless otherwise stated. A Distribution is payable only to the
extent that payments are made in respect of the Notes held by the Preferred
Trustee and to the extent that the payments are made in respect of the Notes
held by the Preferred Trustee and to the extent the Preferred Trustee has funds
on hand legally available therefor.
Distributions on the Preferred Securities will be cumulative, will
accumulate from the most recent date to which Distributions have been paid and
will be payable semiannually in arrears on June 1 and December 1 of each year,
commencing on June 1, 1998, except as otherwise described below and in the
Declaration. Distributions will be computed on the basis of a 360-day year
consisting of twelve 30-day months and, for any period of less than a full
calendar month, the number of days elapsed in such month. As long as no Event of
Default has occurred and is continuing under the Indenture, the issuer of the
Note ("Note Issuer") has the right under the Indenture to defer payments of
interest by extending the interest payment period at any time and from time to
time on the Notes for a period not exceeding 10 consecutive calendar semi-annual
periods (each an "Extension Period"), provided that no Extension Period shall
extend beyond the Maturity Date of the Notes. As a consequence of such deferral,
Distributions will also be deferred. Despite such deferral, semi-annual
Distributions will continue to accumulate with interest thereon (to the extent
permitted by applicable law, but not at a rate exceeding the rate of interest
then accruing on the Notes) at the Coupon Rate compounded semi-annually during
any such Extension Period. Prior to the termination of any such Extension
Period, the Note Issuer may further defer payments of interest by further
extending such Extension Period; provided that such Extension Periods, together
with all such previous and further extensions within such Extension Period may
not exceed 10 consecutive semi-annual periods, including the first semi-annual
period during such Extension Period, or extend beyond the Maturity Date of the
Notes. Payments of Distributions that have accumulated during any Extension
Period will be payable to Holders as they appear on the books and records of the
Trust on the record date for the first scheduled Distribution payment date
following the expiration of such Extension Period. Upon the expiration of any
Extension Period and the payment of all amounts then due, the Note Issuer may
commence a new Extension Period, subject to the above requirements. Capitalized
terms used herein and not otherwise defined are used as defined in the
Declaration.
The Company Trustees shall, at the direction of the Sponsor, at any
time dissolve and liquidate the Trust and, after satisfaction of liabilities to
creditors of the Trust, cause the Notes to be distributed to the holders of the
Securities in liquidation of the Trust or simultaneously with any redemption of
the Notes, cause a Like Amount of the Securities to be redeemed by the Trust.
The Preferred Securities shall be redeemable as provided in the
Declaration.
Exhibit D-5
<PAGE> 94
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned assigns and transfers this Common
Security to:
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
(Insert assignee's social security or tax identification number)
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
(Insert address and zip code of assignee)
and irrevocably appoints
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
agent to transfer this Preferred Securities Certificate on the books of the
Trust. The agent may substitute another to act for him or her.
Date: _________________________
Signature: ___________________________________________________ (Sign exactly as
your name appears on the other side of this Preferred Securities Certificate)
_______________________________________________________________________________
The signature(s) should be guaranteed by an eligible guarantor
institution (banks, stockbrokers, savings and loan associations and
credit unions with membership in an approved signature guarantee
medallion program), pursuant to S.E.C. Rule 17Ad-15.
Exhibit D-6
<PAGE> 95
[Include the following if the Preferred Security bears a Restricted Securities
Legend]
In connection with any transfer of any of the Preferred Securities evidenced by
this certificate, the undersigned confirms that such Preferred Securities are
being:
Check one box below
[ ] (1) exchanged for the undersigned's own account without
transfer, or
[ ] (2) transferred pursuant to and in compliance with Rule 144A
under the Securities Act of 1933, as amended; or
[ ] (3) transferred to an institutional "accredited investor"
within the meaning of subparagraph (a)(1), (2), (3) or (7)
of Rule 501 under the Securities Act of 1933, as amended,
that is acquiring the Preferred Securities for its own
account, or for the account of such an institutional
"accredited investor," for investment purposes and not
with a view to, or for offer or sale in connection with,
any distribution in violation of the Securities Act of
1933, as amended; or
[ ] (4) transferred pursuant to another available exemption
from the registration requirements of the Securities Act
of 1933, as amended; or
[ ] (5) transferred pursuant to an effective registration
statement.
unless one of the boxes is checked, the Securities Registrar will refuse to
register any of the Preferred Securities evidenced by this certificate in the
name of any person other than the registered Holder thereof; provided, however,
that if box (3), (4) or (5) is checked, the Securities Registrar may require,
prior to registering any such transfer of the Preferred Securities such legal
opinions, certifications and other information as the Trust has reasonably
requested to confirm that such transfer is being made pursuant to an exemption
from, or in a transaction not subject to, the registration requirements of the
Securities Act of 1933, as amended, such as the exemption provided by Rule 144
under such Act; provided, further, that (i) if box (2) is checked, the
transferee must also certify that it is a qualified institutional buyer as
defined in Rule 144A or (ii) if box (4) is checked, the transferee must also
provide to the Securities Registrar a Transferee Letter of Representation in the
form attached to the Offering Memorandum dated November 26, 1997.
Date: __________________________
Signature: ___________________________________________________ (Sign exactly as
your name appears on the other side of this Preferred Security)
Exhibit D-7
<PAGE> 1
EXHIBIT 4.2
===============================================================================
REGISTRATION RIGHTS AGREEMENT
Dated December 3, 1997
among
SUPERIOR NATIONAL INSURANCE GROUP, INC.,
SUPERIOR NATIONAL CAPITAL TRUST I
and
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
and
CHASE SECURITIES INC.
as Initial Purchasers
===============================================================================
<PAGE> 2
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and
entered into as of December 3, 1997 among SUPERIOR NATIONAL INSURANCE GROUP,
INC., a Delaware corporation (the "Company"), SUPERIOR NATIONAL CAPITAL TRUST I,
a business trust created under the laws of the state of Delaware (the "Trust"),
and DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION ("DLJ") and CHASE
SECURITIES INC. (together the "Initial Purchasers").
This Agreement is made pursuant to the Purchase Agreement, dated
November 26, 1997 (the "Purchase Agreement"), among the Company, as issuer of
the 10 3/4% Senior Subordinated Notes due 2017 (the "Senior Subordinated
Notes"), the Trust and the Initial Purchasers, which provides for, among other
things, the sale by the Trust to the Initial Purchasers of 105,000 of the
Trust's 10 3/4% Trust Preferred Securities, liquidation amount $1,000 per Trust
Preferred Security (the "Preferred Securities"), the proceeds of which will be
used by the Trust to purchase Senior Subordinated Notes. The Preferred
Securities, together with the Senior Subordinated Notes and the Company's
guarantee of the Preferred Securities (the "Company Guarantee"), are
collectively referred to as the "Securities." In order to induce the Initial
Purchasers to enter into the Purchase Agreement, the Company and the Trust have
agreed to provide to the Initial Purchasers and their direct and indirect
transferees the registration rights set forth in this Agreement. The execution
and delivery of this Agreement is a condition to the closing under the Purchase
Agreement.
In consideration of the foregoing, the parties hereto agree as
follows:
1. Definitions. As used in this Agreement, the following
capitalized defined terms shall have the following meanings:
"Advice" shall have the meaning set forth in the last paragraph
of Section 3 hereof.
"Applicable Period" shall have the meaning set forth in Section
3(t) hereof.
"Business Day" shall mean a day that is not a Saturday, a Sunday,
or a day on which banking institutions in New York, New York or
Wilmington, Delaware are authorized or required to be closed.
"Closing Time" shall mean the Closing Time as defined in the
Purchase Agreement.
"Company" shall have the meaning set forth in the preamble to
this Agreement and also includes the Company's successors and permitted
assigns.
"Declaration" or "Declaration of Trust" shall mean the Amended
and Restated Declaration of Trust, dated as of December 3, 1997, by and
among the Company
<PAGE> 3
2
Trustees, the Preferred Trustee and the Delaware Trustee, each as
defined therein, and the Company, as sponsor, and by the holders, from
time to time, of undivided beneficial interests in the assets of the
Trust.
"Depositary" shall mean The Depository Trust Company, or any
other depositary appointed by the Trust; provided, however, that such
depositary must have an address in the Borough of Manhattan, in The City
of New York.
"Effectiveness Period" shall have the meaning set forth in
Section 2(b) hereof.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
"Exchange Offer" shall mean the offer by the Company and the
Trust to the Holders to exchange all of the Registrable Securities
(other than Private Exchange Securities) for a like principal amount of
Exchange Securities pursuant to Section 2(a) hereof.
"Exchange Offer Registration" shall mean a registration under the
Securities Act effected pursuant to Section 2(a) hereof.
"Exchange Offer Registration Statement" shall mean an exchange
offer registration statement on Form S-4 (or, if applicable, on another
appropriate form), and all amendments and supplements to such
registration statement, in each case including the Prospectus contained
therein, all exhibits thereto and all material incorporated by reference
therein.
"Exchange Period" shall have the meaning set forth in Section
2(a) hereof.
"Exchange Securities" shall mean (i) with respect to the Senior
Subordinated Notes, the 10 3/4% Senior Subordinated Notes due December
1, 2017 which are to be offered in exchange for the Subordinated Notes
(the "Exchange Notes") and which will contain terms identical to the
Senior Subordinated Notes (except that they will not contain terms with
respect to the transfer restrictions under the Securities Act, will not
require transfers thereof to be in minimum blocks of $100,000 principal
amount and will not provide for any increase in the interest rate
thereon), (ii) with respect to the Preferred Securities, the Trust's 10
3/4% Trust Preferred Securities, liquidation amount $1,000 per Preferred
Security, which are to be offered in exchange for the Preferred
Securities (the "Exchange Preferred Securities") and which will have
terms identical to the Preferred Securities (except they will not
contain terms with respect to transfer restrictions under the Securities
Act, will not require minimum transfers thereof to be in blocks of
$100,000 liquidation amount and will not provide for any increase in the
distribution rate thereon) and (iii) with respect to the Company
Guarantee, the
<PAGE> 4
3
Company's guarantee (the "Exchange Company Guarantee") of the Exchange
Preferred Securities which will have terms identical to the Company
Guarantee.
"Holder" shall mean the Initial Purchasers, for so long as they
own any Registrable Securities, and each of their respective successors,
assigns and direct and indirect transferees who become registered owners
of Registrable Securities under the Indenture or Declaration of Trust.
"Indenture" shall mean the Indenture relating to the Senior
Subordinated Notes and the Exchange Notes dated as of December 3, 1997
among the Company, as issuer, and the Indenture Trustee, as defined
therein, as the same may be amended from time to time in accordance with
the terms thereof.
"Initial Purchasers" shall have the meaning set forth in the
preamble to this Agreement.
"Inspectors" shall have the meaning set forth in Section 3(n)
hereof.
"Issue Date" shall mean the date of original issuance of the
Securities.
"Majority Holders" shall mean the Holders of a majority of the
aggregate liquidation amount of outstanding Preferred Securities.
"Participating Broker-Dealer" shall have the meaning set forth
in Section 3(t) hereof.
"Person" shall mean an individual, partnership, corporation,
trust or unincorporated organization, limited liability company, or a
government or agency or political subdivision thereof.
"Private Exchange" shall have the meaning set forth in Section
2(a) hereof.
"Private Exchange Securities" shall have the meaning set forth in
Section 2(a) hereof.
"Prospectus" shall mean the prospectus included in a Registration
Statement, including any preliminary prospectus, and any such prospectus
as amended or supplemented by any prospectus supplement, including a
prospectus supplement with respect to the terms of the offering of any
portion of the Registrable Securities covered by a Shelf Registration
Statement, and by all other amendments and supplements to a prospectus,
including post-effective amendments, and in each case including all
material incorporated by reference therein.
<PAGE> 5
4
"Purchase Agreement" shall have the meaning set forth in the
preamble to this Agreement.
"Records" shall have the meaning set forth in Section 3(n)
hereof.
"Registrable Securities" shall mean the Securities and, if
issued, the Private Exchange Securities; provided, however, that
Securities or Private Exchange Securities, as the case may be, shall
cease to be Registrable Securities when (i) a Registration Statement
with respect to such Securities or Private Exchange Securities for the
exchange or resale thereof, as the case may be, shall have been declared
effective under the Securities Act and such Securities or Private
Exchange Securities, as the case may be, shall have been disposed of
pursuant to such Registration Statement, (ii) such Securities or Private
Exchange Securities, as the case may be, may be sold to the public
pursuant to Rule 144(k) (or any similar provision then in force, but not
Rule 144A) under the Securities Act, (iii) such Securities or Private
Exchange Securities, as the case may be, shall have ceased to be
outstanding or (iv) with respect to the Securities, such Securities have
been exchanged for Exchange Securities upon consummation of the Exchange
Offer and are thereafter freely tradeable by the holder thereof (other
than an affiliate of the Company).
"Registration Expenses" shall mean any and all expenses incident
to performance of or compliance by the Company with this Agreement,
including without limitation: (i) all SEC or National Association of
Securities Dealers, Inc. (the "NASD") registration and filing fees,
including, if applicable, the fees and expenses of any "qualified
independent underwriter" (and its counsel) that is required to be
retained by any Holder of Registrable Securities in accordance with the
rules and regulations of the NASD, (ii) all fees and expenses incurred
in connection with compliance with state securities or blue sky laws
(including reasonable fees and disbursements of counsel for any
underwriters or Holders in connection with blue sky qualification of any
of the Exchange Securities or Registrable Securities) and compliance
with the rules of the NASD, (iii) all expenses of any Persons in
preparing or assisting in preparing, word processing, printing and
distributing any Registration Statement, any Prospectus and any
amendments or supplements thereto, and in preparing or assisting in
preparing, printing and distributing any underwriting agreements,
securities sales agreements and other documents relating to the
performance of and compliance with this Agreement, (iv) all rating
agency fees, (v) the fees and disbursements of counsel for the Company
and of the independent certified public accountants of the Company,
including the expenses of any "cold comfort" letters required by or
incident to such performance and compliance, (vi) the fees and expenses
of the Trustee, and any exchange agent or custodian, (vii) all fees and
expenses incurred in connection with the listing, if any, of any of the
Registrable Securities on any securities exchange or exchanges and
(viii) the reasonable fees and expenses of any special experts retained
by the Company in connection with any Registration Statement.
<PAGE> 6
5
"Registration Statement" shall mean any registration statement of
the Company and the Trust which covers any of the Exchange Securities or
Registrable Securities pursuant to the provisions of this Agreement, and
all amendments and supplements to any such Registration Statement,
including post-effective amendments, in each case including the
Prospectus contained therein, all exhibits thereto and all material
incorporated by reference therein.
"Rule 144(k) Period" shall mean the period of two years (or such
shorter period as may hereafter be referred to in Rule 144(k) under the
Securities Act (or similar successor rule)) commencing on the Issue
Date.
"SEC" shall mean the Securities and Exchange Commission.
"Securities" shall have the meaning set forth in the preamble to
this Agreement.
"Securities Act" shall mean the Securities Act of 1933, as
amended from time to time.
"Senior Subordinated Notes" shall have the meaning set forth in
the preamble to this Agreement.
"Shelf Registration" shall mean a registration effected pursuant
to Section 2(b) hereof.
"Shelf Registration Event" shall have the meaning set forth in
Section 2(b) hereof.
"Shelf Registration Event Date" shall have the meaning set forth
in Section 2(b) hereof.
"Shelf Registration Statement" shall mean a "shelf" registration
statement of the Company and the Trust pursuant to the provisions of
Section 2(b) hereof which covers all of the Registrable Securities or
all of the Private Exchange Securities, as the case may be, on an
appropriate form under Rule 415 under the Securities Act, or any similar
rule that may be adopted by the SEC, and all amendments and supplements
to such registration statement, including post-effective amendments, in
each case including the Prospectus contained therein, all exhibits
thereto and all material incorporated by reference therein.
"TIA" shall have the meaning set forth in Section 3(1) hereof.
"Trustees" shall mean any and all trustees with respect to (i)
the Preferred Securities under the Declaration, (ii) the Senior
Subordinated Notes under the Indenture and (iii) the Company Guarantee.
<PAGE> 7
6
2. Registration Under the Securities Act.
(a) Exchange Offer. To the extent not prohibited by any
applicable law or applicable interpretation of the staff of the SEC, the Company
and the Trust shall, for the benefit of the Holders, at the Company's cost, use
its best efforts to (i) cause to be filed with the SEC by December 31, 1997 an
Exchange Offer Registration Statement on an appropriate form under the
Securities Act covering the Exchange Offer, (ii) cause such Exchange Offer
Registration Statement to be declared effective under the Securities Act by the
SEC not later than the date which is 180 days after the Issue Date, and (iii)
keep such Exchange Offer Registration Statement effective for not less than 30
calendar days (or longer if required by applicable law) after the date notice of
the Exchange Offer is mailed to the Holders. Upon the effectiveness of the
Exchange Offer Registration Statement, the Company and the Trust shall promptly
commence the Exchange Offer, it being the objective of such Exchange Offer to
enable each Holder eligible and electing to exchange Registrable Securities for
a like principal amount of Exchange Notes or a like liquidation amount of
Exchange Preferred Securities, together with the Exchange Company Guarantee, as
applicable (assuming that such Holder is not an affiliate of the Company within
the meaning of Rule 405 under the Securities Act and is not a broker-dealer
tendering Registrable Securities acquired directly from the Company for its own
account, acquires the Exchange Securities in the ordinary course of such
Holder's business and has no arrangements or understandings with any Person to
participate in the Exchange Offer for the purpose of distributing the Exchange
Securities), to transfer such Exchange Securities from and after their receipt
without any limitations or restrictions under the Securities Act and under state
securities or blue sky laws.
In connection with the Exchange Offer, the Company and the Trust
shall:
(i) mail to each Holder a copy of the Prospectus forming
part of the Exchange Offer Registration Statement, together with an
appropriate letter of transmittal and related documents;
(ii) keep the Exchange Offer open for acceptance for a period
of not less than 30 days after the date notice thereof is mailed to the
Holders (or longer if required by applicable law) (such period referred
to herein as the "Exchange Period");
(iii) utilize the services of the Depositary for the Exchange
Offer;
(iv) permit Holders to withdraw tendered Securities at any
time prior to the close of business, New York time, on the last Business
Day of the Exchange Period, by sending to the institution specified in
the notice, a telegram, telex, facsimile transmission or letter setting
forth the name of such Holder, the principal amount of Securities
delivered for exchange, and a statement that such Holder is withdrawing
his election to have such Securities exchanged;
<PAGE> 8
7
(v) notify each Holder that any Security not tendered by
such Holder in the Exchange Offer will remain outstanding and continue
to accrue interest or accumulate distributions, as the case may be, but
will not retain any rights under this Agreement (except in the case of
the Initial Purchasers and Participating Broker-Dealers as provided
herein); and
(vi) otherwise comply in all respects with all applicable
laws relating to the Exchange Offer.
If any Initial Purchaser determines upon advice of its outside
counsel that it is not eligible to participate in the Exchange Offer with
respect to the exchange of Securities constituting any portion of an unsold
allotment in the initial distribution, as soon as practicable upon receipt by
the Company and the Trust of a written request from such Initial Purchaser, the
Company and the Trust, as applicable, shall issue and deliver to such Initial
Purchaser in exchange (the "Private Exchange") for the Securities held by such
Initial Purchaser, a like liquidation amount of Preferred Securities of the
Trust, together with the Exchange Company Guarantee, or a like principal amount
of the Senior Subordinated Notes of the Company, as applicable, that are
identical (except that such securities may bear a customary legend with respect
to restrictions on transfer pursuant to the Securities Act) to the Exchange
Securities (the "Private Exchange Securities") and which are issued pursuant to
the Indenture, the Declaration or the Company Guarantee (each of which provides
that the Exchange Securities will not be subject to the transfer restrictions
set forth in the Indenture or the Declaration, as applicable, and that the
Exchange Securities, the Private Exchange Securities and the Securities will
vote and consent together on all matters as one class and that neither the
Exchange Securities, the Private Exchange Securities nor the Securities will
have the right to vote or consent as a separate class on any matter). The
Private Exchange Securities shall be of the same series as the Exchange
Securities and the Company and the Trust will seek to cause the CUSIP Service
Bureau to issue the same CUSIP Numbers for the Private Exchange Securities as
for the Exchange Securities issued pursuant to the Exchange Offer.
As soon as practicable after the close of the Exchange Offer and,
if applicable, the Private Exchange, the Company and the Trust, as the case
requires, shall:
(i) accept for exchange all Securities or portions thereof
tendered and not validly withdrawn pursuant to the Exchange Offer or the
Private Exchange;
(ii) deliver, or cause to be delivered, to the applicable
Trustee for cancellation all Securities or portions thereof so accepted
for exchange by the Company; and
(iii) issue, and cause the applicable Trustee under the
Indenture, the Declaration or the Company Guarantee, as applicable, to
promptly authenticate and deliver to each Holder, new Exchange
Securities or Private Exchange Securities, as applicable, equal in
principal amount to the principal amount of the Senior
<PAGE> 9
8
Subordinated Notes or equal in liquidation amount to the liquidation
amount of the Preferred Securities (together with the guarantee thereof)
as are surrendered by such Holder.
Distributions on each Exchange Preferred Security and interest on
each Exchange Note issued pursuant to the Exchange Offer and in the Private
Exchange will accrue from the last date on which a distribution or interest was
paid on the Preferred Security or the Subordinated Note surrendered in exchange
therefor or, if no distribution or interest has been paid on such Preferred
Security or Subordinated Note, from the Issue Date. To the extent not prohibited
by any law or applicable interpretation of the staff of the SEC, the Company and
the Trust shall use their best efforts to complete the Exchange Offer as
provided above, and shall comply with the applicable requirements of the
Securities Act, the Exchange Act and other applicable laws in connection with
the Exchange Offer. The Exchange Offer shall not be subject to any conditions,
other than that the Exchange Offer does not violate applicable law or any
applicable interpretation of the staff of the SEC. Each Holder of Registrable
Securities who wishes to exchange such Registrable Securities for Exchange
Securities in the Exchange Offer will be required to make certain customary
representations in connection therewith, including, in the case of any Holder of
Preferred Securities, representations that (i) it is not an affiliate of the
Trust or the Company (or, if it is an affiliate, it will comply with the
registration and prospectus delivery requirements of the Securities Act to the
extent applicable), (ii) the Exchange Securities to be received by it were
acquired in the ordinary course of its business, (iii) at the time of the
Exchange Offer, it has no arrangement with any Person to participate in the
distribution (within the meaning of the Securities Act) and does not intend to
engage in the distribution of the Exchange Preferred Securities and (iv) any
additional representations that in the opinion of counsel to the Company are
necessary under then-existing interpretations of the Commission in order for the
Exchange Offer Registration Statement to be declared effective. If a holder is a
Participating Broker-Dealer, the representations shall also include those set
forth in Section 3(t). The Company and the Trust shall inform the Initial
Purchasers, after consultation with the Trustee, of the names and addresses of
the Holders to whom the Exchange Offer is made, and the Initial Purchasers shall
have the right to contact such Holders and otherwise facilitate the tender of
Registrable Securities in the Exchange Offer.
Upon consummation of the Exchange Offer in accordance with this
Section 2(a), the provisions of this Agreement shall continue to apply solely
with respect to Registrable Securities that are Private Exchange Securities and
Exchange Securities held by Participating Broker-Dealers, and the Company and
the Trust shall have no further obligation to register the Registrable
Securities (other than Private Exchange Securities) pursuant to Section 2(b) of
this Agreement.
(b) Shelf Registration. In the event that (i) the Company, the
Trust or the Majority Holders reasonably determine, after conferring with
counsel (which may be in-house counsel), that the Exchange Offer Registration
provided in Section 2(a) above is not available because of any change in law or
in currently prevailing interpretations of the staff of the SEC, (ii) the
Exchange Offer Registration Statement is not declared effective within 180 days
of the
<PAGE> 10
9
Issue Date, (iii) upon the request of any Initial Purchaser with respect
to any Registrable Securities held by it, if such Initial Purchaser is not
permitted, in the reasonable opinion of Simpson Thacher & Bartlett, pursuant to
applicable law or applicable interpretations of the staff of the SEC, to
participate in the Exchange Offer and thereby receive securities that are freely
tradeable without restriction under the Securities Act and applicable blue sky
or state securities laws or (iv) the Company has received an opinion of
independent tax counsel experienced in such matters, to the effect that, as a
result of the consummation of the Exchange Offer, there is more than an
insubstantial risk that (x) the Trust would be subject to United States federal
income tax with respect to income received or accrued on the Senior Subordinated
Notes or the Exchange Notes, (y) interest payable by the Company on such Senior
Subordinated Notes or Exchange Notes would not be deductible by the Company, in
whole or in part, for United States federal income tax purposes or (z) the Trust
would be subject to more than a de minimus amount of other taxes, duties or
other governmental charges (any of the events specified in (i)-(iv) being a
"Shelf Registration Event" and the date of occurrence thereof, the "Shelf
Registration Event Date"), the Company and the Preferred Trustee on behalf of
the Trust will (a) promptly deliver to the Holders and the Delaware Trustee
written notice thereof and (b) at the Company's sole expense, as promptly as
practicable after such Shelf Registration Event Date, as the case may be, and,
in any event, within 45 days after such Shelf Registration Event Date (which
shall be no earlier than 75 days after the Closing Time), file a Shelf
Registration Statement providing for the sale by the Holders of all of the
Registrable Securities, and shall use its best efforts to have such Shelf
Registration Statement declared effective by the SEC as soon as practicable. No
Holder of Registrable Securities shall be entitled to include any of its
Registrable Securities in any Shelf Registration pursuant to this Agreement
unless and until such Holder agrees in writing to be bound by all of the
provisions of this Agreement applicable to such Holder and furnishes to the
Company and the Trust in writing, within 15 days after receipt of a request
therefor, such information as the Company and the Trust may, after conferring
with counsel with regard to information relating to Holders that would be
required by the SEC to be included in such Shelf Registration Statement or
Prospectus including therein, reasonably request for inclusion in any Shelf
Registration Statement or Prospectus included therein. Each Holder as to which
any Shelf Registration is being effected agrees to furnish to the Company and
the Trust all information with respect to such Holder necessary to make the
information previously furnished to the Company by such Holder not materially
misleading.
The Company and the Trust agree to use their best efforts to keep
the Shelf Registration Statement continuously effective for the Rule 144(k)
Period (subject to extension pursuant to the last paragraph of Section 3 hereof)
or for such shorter period which will terminate when all of the Registrable
Securities covered by the Shelf Registration Statement have been sold pursuant
to the Shelf Registration Statement or cease to be outstanding (the
"Effectiveness Period"). The Company and the Trust shall not permit any
securities other than Registrable Securities to be included in the Shelf
Registration. The Company and the Trust will, in the event a Shelf Registration
Statement is filed, provide to each Holder a reasonable number of copies of the
Prospectus which is a part of the Shelf Registration Statement, notify each such
Holder when the Shelf Registration has become effective and take certain other
<PAGE> 11
10
actions as are required to permit certain unrestricted resales of the
Registrable Securities. The Company and the Trust further agree, if necessary,
to supplement or amend the Shelf Registration Statement, if required by the
rules, regulations or instructions applicable to the registration form used by
the Company for such Shelf Registration Statement or by the Securities Act or by
any other rules and regulations thereunder for shelf registrations, and the
Company and the Trust agree to furnish to the Holders of Registrable Securities
copies of any such supplement or amendment promptly after its being used or
filed with the SEC.
(c) Expenses. The Company, in its capacity as borrower, shall pay
all Registration Expenses in connection with the registration pursuant to
Section 2(a) or 2(b) hereof and will reimburse the Initial Purchasers for the
reasonable fees and disbursements of Simpson Thacher & Bartlett, counsel for the
Initial Purchasers, incurred in connection with the Exchange Offer (if the
assistance of such counsel is requested by the Company but not if requested by
the Holders, Initial Purchasers or Participating Broker-Dealers) and, if
applicable, the Private Exchange, and either Simpson Thacher & Bartlett or any
one other ounsel designated in writing by the Majority Holders to act as counsel
for the Holders of the Registrable Securities in connection with a Shelf
Registration Statement, which other counsel shall be reasonably satisfactory to
the Company. Except as provided herein, each Holder shall pay all expenses of
its counsel, underwriting discounts and commissions and transfer taxes if any,
relating to the sale or disposition of such Holder's Registrable Securities
pursuant to the Shelf Registration Statement.
(d) Effective Registration Statement. An Exchange Offer
Registration Statement pursuant to Section 2(a) hereof or a Shelf Registration
Statement pursuant to Section 2(b) hereof will not be deemed to have become
effective unless it has been declared effective by the SEC; provided, however,
that if after it has been declared effective, the offering of Registrable
Securities pursuant to a Shelf Registration Statement is interfered with by any
stop order, injunction or other order or requirement of the SEC or any other
governmental agency or court, such Registration Statement will be deemed not to
have been effective during the period of such interference, until the offering
of Registrable Securities pursuant to such Registration Statement may legally
resume. The Company and the Trust will be deemed not to have used their best
efforts to cause the Exchange Offer Registration Statement or the Shelf
Registration Statement, as the case may be, to become, or to remain, effective
during the requisite period if either of them voluntarily takes any action that
would result in any such Registration Statement not being declared effective or
in the Holders of Registrable Securities covered thereby not being able to
exchange or offer and sell such Registrable Securities during that period unless
such action is required by applicable law.
(e) Additional Interest. In the event that (i) (A) neither the
Exchange Offer Registration Statement nor a Shelf Registration Statement is
filed with the SEC on or prior to December 31, 1997 or (B) notwithstanding that
the Company and the Trust have consummated or will consummate an Exchange Offer,
the Company and the Trust are required to file a Shelf Registration Statement
and such Shelf Registration Statement is not filed on or prior to the date
required by Section 2(b) hereof, then commencing on the day after the applicable
required
<PAGE> 12
11
filing date, additional interest shall accrue on the principal amount of the
Senior Subordinated Notes, and additional distributions shall accumulate on the
liquidation amount of the Preferred Securities, each at a rate of 0.25% per
annum; or
(ii)(A) neither the Exchange Offer Registration Statement nor a
Shelf Registration Statement is declared effective by the SEC on or prior to the
180th day after Issue Date or (B) notwithstanding that the Company and the Trust
have consummated or will consummate an Exchange Offer, the Company and the Trust
are required to file a Shelf Registration Statement and such Shelf Registration
Statement is not declared effective by the SEC on or prior to the 180th day
after the Issue Date, then, commencing on the 181st day after the Issue Date,
additional interest shall accrue on the principal amount of the Senior
Subordinated Notes and additional distributions shall accumulate on the
liquidation amount of the Preferred Securities, each at a rate of 0.25% per
annum; or
(iii) (A) the Trust has not exchanged Exchange Preferred
Securities for all Preferred Securities or the Company has not exchanged
Exchange Company Guarantees or Exchange Notes for all Company Guarantees or all
Senior Subordinated Notes validly tendered, in accordance with the terms of the
Exchange Offer on or prior to the 30th day after the date on which the Exchange
Offer Registration Statement was declared effective or (B) if applicable, the
Shelf Registration Statement has been declared effective and such Shelf
Registration Statement ceases to be effective at any time prior to the second
anniversary of the Issue Date (other than after such time as all Preferred
Securities have been disposed of thereunder or otherwise cease to be Registrable
Securities), then additional interest shall accrue on the principal amount of
Senior Subordinated Notes, and additional distributions shall accumulate on the
liquidation amount of the Preferred Securities, each at a rate of 0.25% per
annum commencing on (x) the 31st day after such effective date, in the case of
(A) above, or (y) the day such Shelf Registration Statement ceases to be
effective in the case of (B) above;
provided, however, that neither the additional interest rate on the Senior
Subordinated Notes, nor the additional distribution rate on the liquidation
amount of the Preferred Securities, may exceed in the aggregate 0.25% per annum;
provided, further, however, that (1) upon the filing of the Exchange Offer
Registration Statement or a Shelf Registration Statement (in the case of clause
(i) above), (2) upon the effectiveness of the Exchange Offer Registration
Statement or a Shelf Registration Statement (in the case of clause (ii) above),
or (3) upon the exchange of Exchange Preferred Securities, Exchange Company
Guarantees and Exchange Notes for all Preferred Securities, Company Guarantees
and Senior Subordinated Notes tendered (in the case of clause (iii)(A) above),
or upon the effectiveness of the Shelf Registration Statement which had ceased
to remain effective (in the case of clause (iii)(B) above), additional interest
on the Senior Subordinated Notes, and additional distributions on the
liquidation amount of the Preferred Securities as a result of such clause (or
the relevant subclause thereof), as the case may be, shall cease to accrue.
Any amounts of additional interest and additional distributions
due pursuant to Section 2(e)(i), (ii) or (iii) above will be payable in cash on
the relevant record dates for the
<PAGE> 13
12
payment of interest and distributions pursuant to the Indenture and the
Declaration respectively.
(f) Specific Enforcement. Without limiting the remedies available
to the Holders, the Company and the Trust acknowledge that any failure by the
Company or the Trust to comply with its obligations under Section 2(a) and
Section 2(b) hereof may result in material irreparable injury to the Holders for
which there is no adequate remedy at law, that it would not be possible to
measure damages for such injuries precisely and that, in the event of any such
failure, any Holder may obtain such relief as may be required to specifically
enforce the Company's and the Trust's obligations under Section 2(a) and Section
2(b) hereof.
3. Registration Procedures. In connection with the obligations of
the Company and the Trust with respect to the Registration Statements pursuant
to Sections 2(a) and 2(b) hereof, the Company and the Trust shall use their best
efforts to:
(a) prepare and file with the SEC a Registration Statement or
Registration Statements as prescribed by Sections 2(a) and 2(b) hereof within
the relevant time period specified in Section 2 hereof on the appropriate form
under the Securities Act, which form (i) shall be selected by the Company and
the Trust, (ii) shall, in the case of a Shelf Registration, be available for the
sale of the Registrable Securities by the selling Holders thereof and (iii)
shall comply as to form in all material respects with the requirements of the
applicable form and include all financial statements required by the SEC to be
filed therewith; and use its best efforts to cause such Registration Statement
to become effective and remain effective in accordance with Section 2 hereof;
provided, however, that if (1) such filing is pursuant to Section 2(b), or (2) a
Prospectus contained in an Exchange Offer Registration Statement filed pursuant
to Section 2(a) is required to be delivered under the Securities Act by any
Participating Broker-Dealer who seeks to sell Exchange Securities, before filing
any Registration Statement or Prospectus or any amendments or supplements
thereof, the Company and the Trust shall furnish to and afford the Holders of
the Registrable Securities and each such Participating Broker-Dealer, as the
case may be, covered by such Registration Statement, their counsel and the
managing underwriters, if any, a reasonable opportunity to review copies of all
such documents (including copies of any documents to be incorporated by
reference therein and all exhibits thereto) proposed to be filed. The Company
and the Trust shall not file any Registration Statement or Prospectus or any
amendments or supplements thereto in respect of which the Holders must be
afforded an opportunity to review prior to the filing of such document if the
Majority Holders or such Participating Broker-Dealer, as the case may be, their
counsel or the managing underwriters, if any, shall reasonably object;
(b) prepare and file with the SEC such amendments and
post-effective amendments to each Registration Statement as may be necessary to
keep such Registration Statement effective for the Effectiveness Period or the
Applicable Period, as the case may be; and cause each Prospectus to be
supplemented, if so determined by the Company or the Trust or requested by the
SEC, by any required prospectus supplement and as so supplemented to be filed
pursuant to Rule 424 (or any similar provisions then in force) under the
Securities Act,
<PAGE> 14
13
and comply with the provisions of the Securities Act, the Exchange Act and the
rules and regulations promulgated thereunder applicable to it with respect to
the disposition of all securities covered by each Registration Statement during
the Effectiveness Period or the Applicable Period, as the case may be, in
accordance with the intended method or methods of distribution by the selling
Holders thereof described in this Agreement (including sales by any
Participating Broker-Dealer);
(c) in the case of a Shelf Registration, (i) notify each Holder
of Registrable Securities included in the Shelf Registration Statement, at least
three Business Days prior to filing, that a Shelf Registration Statement with
respect to the Registrable Securities is being filed and advising such Holder
that the distribution of Registrable Securities will be made in accordance with
the method selected by the Majority Holders; and (ii) furnish to each Holder of
Registrable Securities included in the Shelf Registration Statement and to each
underwriter of an underwritten offering of Registrable Securities, if any,
without charge, as many copies of each Prospectus, including each preliminary
Prospectus, and any amendment or supplement thereto and such other documents as
such Holder or underwriter may reasonably request, in order to facilitate the
public sale or other disposition of the Registrable Securities; and (iii)
consent to the use of the Prospectus or any amendment or supplement thereto by
each of the selling Holders of Registrable Securities included in the Shelf
Registration Statement in connection with the offering and sale of the
Registrable Securities covered by the Prospectus or any amendment or supplement
thereto;
(d) in the case of a Shelf Registration, use its best efforts to
register or qualify the Registrable Securities under all applicable state
securities or "blue sky" laws of such jurisdictions by the time the applicable
Registration Statement is declared effective by the SEC as any Holder of
Registrable Securities covered by a Registration Statement and each underwriter
of an underwritten offering of Registrable Securities shall reasonably request
in writing in advance of such date of effectiveness, and do any and all other
acts and things which may be reasonably necessary or advisable to enable such
Holder and underwriter to consummate the disposition in each such jurisdiction
of such Registrable Securities owned by such Holder; provided, however, that the
Company and the Trust shall not be required to (i) qualify as a foreign
corporation or as a dealer in securities in any jurisdiction where it would not
otherwise be required to qualify but for this Section 3(d), (ii) file any
general consent to service of process in any jurisdiction where it would not
otherwise be subject to such service of process or (iii) subject itself to
taxation in any such jurisdiction if it is not then so subject;
(e) in the case of (1) a Shelf Registration or (2) Participating
Broker-Dealers from whom the Company or the Trust has received prior written
notice that they will be utilizing the Prospectus contained in the Exchange
Offer Registration Statement as provided in Section 3(t) hereof and who are
seeking to sell Exchange Securities and are required to deliver Prospectuses,
notify each Holder of Registrable Securities, or such Participating
Broker-Dealers, as the case may be, their counsel and the managing underwriters,
if any, promptly and promptly confirm such notice in writing (i) when a
Registration Statement has become
<PAGE> 15
14
effective and when any post-effective amendments and supplements thereto become
effective, (ii) of any request by the SEC or any state securities authority for
amendments and supplements to a Registration Statement or Prospectus or for
additional information after the Registration Statement has become effective,
(iii) of the issuance by the SEC or any state securities authority of any stop
order suspending the effectiveness of a Registration Statement or the
qualification of the Registrable Securities or the Exchange Securities to be
offered or sold by any Participating Broker-Dealer in any jurisdiction described
in paragraph 3(d) hereof or the initiation of any proceedings for that purpose,
(iv) in the case of a Shelf Registration, if, between the effective date of a
Registration Statement and the closing of any sale of Registrable Securities
covered thereby, the representations and warranties of the Company and the Trust
contained in any purchase agreement, securities sales agreement or other similar
agreement, if any cease to be true and correct in all material respects, (v) of
the happening of any event or the failure of any event to occur or the discovery
of any facts or otherwise, during the Effectiveness Period which makes any
statement made in such Registration Statement or the related Prospectus untrue
in any material respect or which causes such Registration Statement or
Prospectus to omit to state a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, and (vi) of the Company and the Trust's reasonable determination
that a post-effective amendment to the Registration Statement would be
appropriate;
(f) make every reasonable effort to obtain the withdrawal of any
order suspending the effectiveness of a Registration Statement at the earliest
possible moment;
(g) in the case of a Shelf Registration, furnish to each Holder
of Registrable Securities included within the coverage of such Shelf
Registration Statement, without charge, at least one conformed copy of each
Registration Statement relating to such Shelf Registration and any
post-effective amendment thereto (without documents incorporated therein by
reference or exhibits thereto, unless requested);
(h) in the case of a Shelf Registration, cooperate with the
selling Holders of Registrable Securities to facilitate the timely preparation
and delivery of certificates representing Registrable Securities to be sold and
not bearing any restrictive legends and in such denominations (consistent with
the provisions of the Indenture and the Declaration) and registered in such
names as the selling Holders or the underwriters may reasonably request at least
two Business Days prior to the closing of any sale of Registrable Securities
pursuant to such Shelf Registration Statement;
(i) in the case of a Shelf Registration or an Exchange Offer
Registration, upon the occurrence of any circumstance contemplated by Section
3(e)(ii), 3(e)(iii), 3(e)(v) or 3(e)(vi) hereof, use its best efforts to prepare
a supplement or post-effective amendment to a Registration Statement or the
related Prospectus or any document incorporated therein by reference or file any
other required document so that, as thereafter delivered to the purchasers of
the Registrable Securities, such Prospectus will not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in the
<PAGE> 16
15
light of the circumstances under which they were made, not misleading; and to
notify each Holder to suspend use of the Prospectus as promptly as practicable
after the occurrence of such an event, and each Holder hereby agrees to suspend
use of the Prospectus to correct such misstatement or omission;
(j) in the case of a Shelf Registration, a reasonable time prior
to the filing of any document which is to be incorporated by reference into a
Registration Statement or a Prospectus after the initial filing of a
Registration Statement, provide a reasonable number of copies of such document
to the Holders; and make such of the representatives of the Company and the
Trust as shall be reasonably requested by the Holders of Registrable Securities
or the Initial Purchasers on behalf of such Holders available for discussion of
such document;
(k) obtain a CUSIP number for all Exchange Preferred Securities
and the Preferred Securities (and if the Trust has made a distribution of the
Senior Subordinated Notes to the Holders of the Preferred Securities, the Senior
Subordinated Notes or the Exchange Notes) as the case may be, not later than the
effective date of a Registration Statement, and provide the Trustee with printed
certificates for the Exchange Securities or the Registrable Securities, as the
case may be, in a form eligible for deposit with the Depositary;
(l) cause the Indenture, the Declaration, the Company Guarantee
and the Exchange Company Guarantee to be qualified under the Trust Indenture Act
of 1939 (the "TIA") in connection with the registration of the Exchange
Securities or Registrable Securities, as the case may be, and effect such
changes to such documents as may be required for them to be so qualified in
accordance with the terms of the TIA and execute, and use its best efforts to
cause the relevant trustee to execute, all documents as may be required to
effect such changes, and all other forms and documents required to be filed with
the SEC to enable such documents to be so qualified in a timely manner;
(m) in the case of a Shelf Registration, enter into such
agreements (including underwriting agreements) as are customary in underwritten
offerings and take all such appropriate actions as are reasonably requested in
order to expedite or facilitate the registration or the disposition of such
Registrable Securities, and in such connection, whether or not an underwriting
agreement is entered into and whether or not the registration is an underwritten
registration, if requested by (x) any Initial Purchaser, in the case where an
Initial Purchaser holds Securities acquired by it as part of its initial
distribution and (y) other Holders of Securities covered thereby: (i) make such
representations and warranties to Holders of such Registrable Securities and the
underwriters (if any), with respect to the business of the Trust, the Company
and its subsidiaries as then conducted and the Registration Statement,
Prospectus and documents, if any, incorporated or deemed to be incorporated by
reference therein, in each case, as are customarily made by issuers to
underwriters in underwritten offerings and confirm the same if and when
requested; (ii) obtain opinions of counsel to the Company and the Trust and
updates thereof (which may be in the form of a reliance letter) in form and
substance reasonably satisfactory to the managing underwriters (if any) and the
Holders of a majority in principal amount of the Registrable Securities being
sold, addressed to each selling Holder and
<PAGE> 17
16
the underwriters (if any) covering the matters customarily covered in opinions
requested in underwritten offerings and such other matters as may be reasonably
requested by such underwriters (it being agreed that the matters to be covered
by such opinion may be subject to customary qualifications and exceptions);
(iii) obtain "cold comfort" letters and updates thereof in form and substance
reasonably satisfactory to the managing underwriters from the independent
certified public accountants of the Company and the Trust (and, if necessary,
any other independent certified public accountants of any subsidiary of the
Company and the Trust or of any business acquired by the Company and the Trust
for which financial statements and financial data are, or are required to be,
included in the Registration Statement), addressed to each of the underwriters,
such letters to be in customary form and covering matters of the type
customarily covered in "cold comfort" letters in connection with underwritten
offerings and such other matters as are reasonably requested by such
underwriters in accordance with Statement on Auditing Standards No. 72; and (iv)
if an underwriting agreement is entered into, the same shall contain
indemnification provisions and procedures no less favorable than those set forth
in Section 4 hereof (or such other provisions and procedures acceptable to
Holders of a majority in aggregate principal amount of Registrable Securities
covered by such Registration Statement and the managing underwriters or agents)
with respect to all parties to be indemnified pursuant to said Section
(including, without limitation, such underwriters and selling Holders). The
above shall be done at each closing under such underwriting agreement, or as and
to the extent required thereunder;
(n) if (1) a Shelf Registration is filed pursuant to Section 2(b)
or (2) a Prospectus contained in an Exchange Offer Registration Statement filed
pursuant to Section 2(a) is required to be delivered under the Securities Act by
any Participating Broker-Dealer who seeks to sell Exchange Securities during the
Applicable Period, make reasonably available for inspection by any selling
Holder of such Registrable Securities being sold, or each such Participating
Broker-Dealer, as the case may be, any underwriter participating in any such
disposition of Registrable Securities, if any, and any attorney, accountant or
other agent retained by any such selling Holder or each such Participating
Broker-Dealer, as the case may be, or underwriter (collectively, the
"Inspectors"), at the offices where normally kept, during reasonable business
hours, all financial and other records, pertinent corporate documents and
properties of the Trust, the Company and its subsidiaries (collectively, the
"Records") as shall be reasonably necessary to enable them to exercise any
applicable due diligence responsibilities, and cause the officers, directors and
employees of the Trust, the Company and its subsidiaries to supply all relevant
information in each case reasonably requested by any such Inspector in
connection with such Registration Statement; provided, however, that the
foregoing inspection and information gathering shall be coordinated on behalf of
the Initial Purchasers by you and on behalf of the other parties, by one counsel
designated by you and on behalf of such other parties as described in Section
2(c) hereof. Records which the Company and the Trust determine, in good faith,
to be confidential and any records which it notifies the Inspectors are
confidential shall not be disclosed by the Inspectors unless (i) the disclosure
of such Records is necessary to avoid or correct a material misstatement or
omission in such Registration Statement provided that at least three (3)
business days' notice is provided to the Company prior to such disclosure, (ii)
the release of such Records is ordered pursuant to a
<PAGE> 18
17
subpoena or other order from a court of competent jurisdiction or is necessary
in connection with any action, suit or proceeding or (iii) the information in
such Records has been made generally available to the public. Each selling
Holder of such Registrable Securities and each such Participating Broker-Dealer
will be required to agree in writing that information obtained by it as a result
of such inspections shall be deemed confidential and shall not be used by it as
the basis for any market transactions in the securities of the Trust or the
Company unless and until such is made generally available to the public by the
Company. Each selling Holder of such Registrable Securities and each such
Participating Broker-Dealer will be required to further agree in writing that it
will, upon learning that disclosure of such Records is sought in a court of
competent jurisdiction, give notice to the Company and allow the Company at its
expense to undertake appropriate action to prevent disclosure of the Records
deemed confidential;
(o) comply with all applicable rules and regulations of the SEC
so long as any provision of this Agreement shall be applicable and make
generally available to its securityholders earning statements satisfying the
provisions of Section 11(a) of the Securities Act and Rule 158 thereunder (or
any similar rule promulgated under the Securities Act) no later than 45 days
after the end of any 12-month period (or 90 days after the end of any 12-month
period if such period is a fiscal year) (i) commencing at the end of any fiscal
quarter in which Registrable Securities are sold to underwriters in a firm
commitment or best efforts underwritten offering and (ii) if not sold to
underwriters in such an offering, commencing on the first day of the first
fiscal quarter of the Company after the effective date of a Registration
Statement, which statements shall cover said 12-month periods;
(p) upon consummation of an Exchange Offer or a Private Exchange,
if requested by a Trustee, obtain an opinion of counsel to the Company addressed
to the Trustee for the benefit of all Holders of Registrable Securities
participating in the Exchange Offer or the Private Exchange, as the case may be,
and which includes an opinion that (i) the Company and the Trust, as the case
requires, has duly authorized, executed and delivered the Exchange Securities
and Private Exchange Securities, and (ii) each of the Exchange Securities or the
Private Exchange Securities, as the case may be, constitute a legal, valid and
binding obligation of the Company or the Trust, as the case requires,
enforceable against the Company or the Trust, as the case requires, in
accordance with its respective terms (in each case, with customary exceptions);
(q) if an Exchange Offer or a Private Exchange is to be
consummated, upon delivery of the Registrable Securities by Holders to the
Company or the Trust, as applicable (or to such other Person as directed by the
Company or the Trust, respectively), in exchange for the Exchange Securities or
the Private Exchange Securities, as the case may be, the Company or the Trust,
as applicable, shall mark, or cause to be marked, on such Registrable Securities
delivered by such Holders that such Registrable Securities are being cancelled
in exchange for the Exchange Securities or the Private Exchange Securities, as
the case may be; in no event shall such Registrable Securities be marked as paid
or otherwise satisfied;
<PAGE> 19
18
(r) cooperate with each seller of Registrable Securities covered
by any Registration Statement and each underwriter, if any, participating in the
disposition of such Registrable Securities and their respective counsel in
connection with any filings required to be made with the NASD;
(s) use its best efforts to take all other steps necessary to
effect the registration of the Registrable Securities covered by a Registration
Statement contemplated hereby;
(t) (A) in the case of the Exchange Offer Registration Statement
(i) include in the Exchange Offer Registration Statement a section entitled
"Plan of Distribution," which section shall be reasonably acceptable to the
Initial Purchasers or another representative of the Participating
Broker-Dealers, and which shall contain a summary statement of the positions
taken or policies made by the staff of the SEC with respect to the potential
"underwriter" status of any broker-dealer (a "Participating Broker-Dealer") that
holds Registrable Securities acquired for its own account as a result of
market-making activities or other trading activities and that will be the
beneficial owner (as defined in Rule 13d-3 under the Exchange Act) of Exchange
Securities to be received by such broker-dealer in the Exchange Offer, whether
such positions or policies have been publicly disseminated by the staff of the
SEC or such positions or policies, in the reasonable judgment of the Initial
Purchasers or such other representative, represent the prevailing views of the
staff of the SEC, including a statement that any such broker-dealer who receives
Exchange Securities for Registrable Securities pursuant to the Exchange Offer
may be deemed a statutory underwriter and must deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such
Exchange Securities, (ii) furnish to each Participating Broker-Dealer who has
delivered to the Company the notice referred to in Section 3(e), without charge,
as many copies of each Prospectus included in the Exchange Offer Registration
Statement, including any preliminary prospectus, and any amendment or supplement
thereto, as such Participating Broker-Dealer may reasonable request (each of the
Company and the Trust hereby consents to the use of the Prospectus forming part
of the Exchange Offer Registration Statement or any amendment or supplement
thereto by any Person subject to the prospectus delivery requirements of the
Securities Act, including all Participating Broker-Dealers, in connection with
the sale or transfer of the Exchange Securities covered by the Prospectus or any
amendment or supplement thereto), (iii) use its best efforts to keep the
Exchange Offer Registration Statement effective and to amend and supplement the
Prospectus contained therein in order to permit such Prospectus to be lawfully
delivered by all Persons subject to the prospectus delivery requirements of the
Securities Act for such period of time as such Persons must comply with such
requirements under the Securities Act and applicable rules and regulations in
order to resell the Exchange Securities; provided, however, that such period
shall not be required to exceed 90 days (or such longer period if extended
pursuant to the last sentence of Section 3 hereof) (the "Applicable Period"),
and (iv) include in the transmittal letter or similar documentation to be
executed by an exchange offeree in order to participate in the Exchange Offer
(x) the following provision:
<PAGE> 20
19
"If the exchange offeree is a broker-dealer holding Registrable
Securities acquired for its own account as a result of market
making activities or other trading activities, it will deliver a
prospectus meeting the requirements of the Securities Act in
connection with any resale of Exchange Securities received in
respect of such Registrable Securities pursuant to the Exchange
Offer";
and (y) a statement to the effect that by a broker-dealer making the
acknowledgment described in clause (x) and by delivering a Prospectus in
connection with the exchange of Registrable Securities, the broker-dealer will
not be deemed to admit that it is an underwriter within the meaning of the
Securities Act; and
(B) in the case of any Exchange Offer Registration Statement, the
Company and the Trust agree to deliver to the Initial Purchasers or to another
representative of the Participating Broker-Dealers, if requested by any such
Initial Purchasers or such other representative of the Participating
Broker-Dealers, on behalf of the Participating Broker- Dealers upon consummation
of the Exchange Offer (i) an opinion of counsel in form and substance reasonable
satisfactory to the Initial Purchasers or such other representative of the
Participating Broker-Dealers, covering the matters customarily covered in
opinions requested in connection with Exchange Offer Registration Statements and
such other matters as may be reasonably requested (it being agreed that the
matters to be covered by such opinion may be subject to customary qualifications
and exceptions), (ii) an officers' certificate containing certifications
substantially similar to those set forth in Section 5(g) of the Purchase
Agreement and such additional certifications as are customarily delivered in a
public offering of debt securities and (iii) as well as upon the effectiveness
of the Exchange Offer Registration Statement, a comfort letter, in each case, in
customary form if permitted by Statement on Auditing Standards No. 72.
The Company or the Trust may require each seller of Registrable
Securities as to which any registration is being effected to furnish to the
Company or the Trust, as applicable, such information regarding such seller as
may be required by the staff of the SEC to be included in a Registration
Statement. The Company or the Trust may exclude from such registration the
Registrable Securities of any seller who unreasonably fails to furnish such
information within a reasonable time after receiving such request. The Company
shall have no obligation to register under the Securities Act the Registrable
Securities of a seller who so fails to furnish such information.
In the case of (1) a Shelf Registration Statement or (2)
Participating Broker- Dealers who have notified the Company and the Trust that
they will be utilizing the Prospectus contained in the Exchange Offer
Registration Statement as provided in Section 3(t) hereof and who are seeking to
sell Exchange Securities and are required to deliver Prospectuses, each Holder
agrees that, upon receipt of any notice from the Company or the Trust of the
happening of any event of the kind described in Section 3(e)(ii), 3(e)(iii),
3(e)(v) or 3(e)(vi) hereof, such
<PAGE> 21
20
Holder will forthwith discontinue disposition of Registrable Securities pursuant
to a Registration Statement until such Holder's receipt of the copies of the
supplemented or amended Prospectus contemplated by Section 3(i) hereof or until
it is advised in writing (the "Advice") by the Company and the Trust that the
use of the applicable Prospectus may be resumed, and, if so directed by the
Company and the Trust, such Holder will deliver to the Company or the Trust (at
the Company's or the Trust's expense, as the case requires) all copies in such
Holder's possession of the Prospectus covering such Registrable Securities or
Exchange Securities, as the case may be, current at the time of receipt of such
notice. If the Company or the Trust shall give any such notice to suspend the
disposition of Registrable Securities or Exchange Securities, as the case may
be, pursuant to a Registration Statement, the Company and the Trust shall use
their best efforts to file and have declared effective (if an amendment) as soon
as practicable an amendment or supplement to the Registration Statement and
shall extend the period during which such Registration Statement shall be
maintained effective pursuant to this Agreement by the number of days in the
period from and including the date of the giving of such notice to and including
the date when the Company and the Trust shall have made available to the Holders
(x) copies of the supplemented or amended Prospectus necessary to resume such
dispositions or (y) the Advice.
4. Indemnification and Contribution. (a) In connection with any
Registration Statement, the Company and the Trust shall, jointly and severally,
indemnify and hold harmless each Initial Purchaser, each Holder, each
underwriter who participates in an offering of the Registrable Securities, each
Participating Broker-Dealer, each Person, if any, who controls any of such
parties within the meaning of Section 15 of the Securities Act or Section 20 of
the Exchange Act and each of their respective directors, officers, employees and
agents, as follows:
(i) from and against any and all loss, liability, claim, damage
and expense whatsoever, joint or several, as incurred, arising out of
any untrue statement or alleged untrue statement of a material fact
contained in any Registration Statement (or any amendment thereto),
covering Registrable Securities or Exchange Securities, including all
documents incorporated therein by reference, or the omission or alleged
omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading or arising out
of any untrue statement or alleged untrue statement of a material fact
contained in any Prospectus (or any amendment or supplement thereto) or
the omission or alleged omission therefrom of a material fact necessary
in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
(ii) from and against any and all loss, liability, claim, damage
and expense whatsoever, joint or several, as incurred, to the extent of
the aggregate amount paid in settlement of any litigation, or any
investigation or proceeding by any court or governmental agency or body,
commenced or threatened, or of any claim whatsoever based upon any such
untrue statement or omission, or any such alleged untrue statement
<PAGE> 22
21
or omission, if such settlement is effected with the prior written
consent of the Company; and
(iii) from and against any and all expenses whatsoever, as
incurred (including reasonable fees and disbursements of counsel chosen
by such Holder (which such counsel shall be subject to the reasonable
approval of the Company), such Participating Broker-Dealer, or any
underwriter (except to the extent otherwise expressly provided in
Section 4(c) hereof)), reasonably incurred in investigating, preparing
or defending against any litigation, or any investigation or proceeding
by any court or governmental agency or body, commenced or threatened, or
any claim whatsoever based upon any such untrue statement or omission,
or any such alleged untrue statement or omission, to the extent that any
such expense is not paid under subparagraph (i) or (ii) of this Section
4(a);
provided, however, that (i) this indemnity does not apply to any loss,
liability, claim, damage or expense to the extent arising out of an untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished in writing to the
Company or the Trust by such Holder, such Participating Broker- Dealer or any
underwriter with respect to such Holder, Participating Broker-Dealer or any
Underwriter, as the case may be, expressly for use in the Registration Statement
(or any amendment thereto) or any Prospectus (or any amendment or supplement
thereto) and (ii) the Company and the Trust shall not be liable to any such
Holder, Participating Broker-Dealer, any underwriter or controlling person, with
respect to any untrue statement or alleged untrue statement or omission or
alleged omission in any preliminary Prospectus to the extent that any such loss,
liability, claim, damage or expense of any Holder, Participating Broker-Dealer,
any underwriter or controlling person results from the fact that such Holder,
Participating Broker- Dealer, underwriter or controlling person sold Securities
to a Person to whom there was not sent or given, at or prior to the written
confirmation of such sale, a copy of the final Prospectus as then amended or
supplemented if the Company had previously furnished copies thereof to such
Holder, Participating Broker-Dealer, underwriter or controlling person and the
loss, liability, claim, damage or expense of such Holder, Participating
Broker-Dealer, underwriter or controlling person results from an untrue
statement or omission of a material fact contained in the preliminary Prospectus
which was corrected in the final Prospectus. Any amounts advanced by the Company
or the Trust to an indemnified party pursuant to this Section 4 as a result of
such losses shall be returned to the Company or the Trust if it shall be finally
determined by such a court in a judgment not subject to appeal or final review
that such indemnified party was not entitled to indemnification by the Company
or the Trust.
(b) Each Holder agrees, severally and not jointly, to indemnify
and hold harmless the Company, the Trust, any underwriter and the other selling
Holders and each of their respective directors, officers (including each officer
of the Company and the Trust who signed the Registration Statement), employees,
trustees and agents and each Person, if any, who controls the Company, the
Trust, any underwriter or any other selling Holder within the meaning of Section
15 of the Securities Act or Section 20 of the Exchange Act, from and
<PAGE> 23
22
against any and all loss, liability, claim, damage and expense whatsoever
described in the indemnity contained in Section 4(a) hereof, as incurred, but
only with respect to actions taken in connection with distribution of the
Securities in violation of, or untrue statements or omissions, or alleged untrue
statements or omissions of material fact, made in, the Registration Statement
(or any amendment thereto) or any Prospectus (or any amendment to supplement
thereto) in reliance upon and in conformity with written information furnished
to the Company or the Trust by such selling Holder with respect to such Holder
expressly for use in the Registration Statement (or any amendment thereto), or
any such Prospectus (or any amendment or supplement thereto); provided, however,
that, in the case of a Shelf Registration Statement, no such Holder shall be
liable for any claims hereunder in excess of the amount of net proceeds received
by such Holder from the sale of Registrable Securities pursuant to such Shelf
Registration Statement.
(c) Each indemnified party shall give prompt notice to each
indemnifying party of any action commenced against it in respect of which
indemnity may be sought hereunder, enclosing a copy of all papers properly
served on such indemnified party, but failure to so notify an indemnifying party
shall not relieve such indemnifying party from any liability which it may have
under this Section 4, except to the extent that it is materially prejudiced by
such failure. An indemnifying party may participate at its own expense in the
defense of such action. If an indemnifying party so elects within a reasonable
time after receipt of such notice, an indemnifying party, severally or jointly
with any other indemnifying parties receiving such notice, may assume the
defense of such action with counsel chosen by it and reasonably acceptable to
the indemnified parties defendant in such action; provided, however, that if (i)
representation of such indemnified party by the same counsel would present a
conflict of interest or (ii) the actual or potential defendants in, or targets
of, any such action include both the indemnified party and the indemnifying
party and any such indemnified party reasonably determines and advises in
writing that there may be any material legal defenses available to such
indemnified party which are different from or in addition to those available to
such indemnifying party, then in the case of clauses (i) and (ii) of this
Section 4(c), such indemnifying party and counsel for each indemnifying party or
parties shall not be entitled to assume such defense. If an indemnifying party
is not entitled to assume the defense of such action as a result of the proviso
to the preceding sentence, counsel for such indemnifying party and counsel for
each indemnified party or parties shall be entitled to conduct the defense of
such indemnified party or parties. If an indemnifying party assumes the defense
of such action, in accordance with and as permitted by the provisions of this
paragraph, such indemnifying parties shall not be liable for any fees and
expenses of counsel for the indemnified parties incurred thereafter in
connection with such action. Subject to the foregoing, in no event shall the
indemnifying parties be liable for the fees and expenses of more than one
counsel (in addition to local counsel), separate from its own counsel, for all
indemnified parties in connection with any one action or separate but similar or
related actions in the same jurisdiction arising out of the same general
allegations or circumstances. No indemnifying party shall, without the prior
written consent of the indemnified parties, settle or compromise or consent to
the entry of any judgment with respect to any litigation, or any investigation
or proceeding by any governmental agency or body, commenced or threatened,
<PAGE> 24
23
or any claim whatsoever in respect of which indemnification or contribution
could be sought under this Section 4 (whether or not the indemnified parties are
actual or potential parties thereto), unless such settlement, compromise or
consent (i) includes an unconditional written release in form and substance
satisfactory to the indemnified parties of each indemnified party from all
liability arising out of such litigation, investigation, proceeding or claim and
(ii) does not (without the prior written consent of an affected indemnified
party) include a statement as to or an admission of fault, culpability or a
failure to act by or on behalf of any indemnified party.
(d) In order to provide for just and equitable contribution in
circumstances under which any of the indemnity provisions set forth in this
Section 4 is for any reason held to be unavailable to the indemnified parties
although applicable in accordance with its terms, the Company, the Trust and the
Holders shall contribute to the aggregate losses, liabilities, claims, damages
and expenses of the nature contemplated by such indemnity agreement incurred by
the Company, the Trust and the Holders, as incurred; provided that no Person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the 1933 Act) shall be entitled to contribution from any Person that was not
guilty of such fraudulent misrepresentation. As between the Company, the Trust
and the Holders, such parties shall contribute to such aggregate losses,
liabilities, claims, damages and expenses of the nature contemplated by such
indemnity agreement in such proportion as shall be appropriate to reflect the
relative fault of the Company and Trust, on the one hand, and the Holders, on
the other hand, with respect to the statements or omissions which resulted in
such loss, liability, claim, damage or expense, or action in respect thereof, as
well as any other relevant equitable considerations. The relative fault of the
Company and the Trust, on the one hand, and of the Holders, on the other hand,
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company or the
Trust, on the one hand, or by or on behalf of the Holders, on the other, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company, the Trust and the
Holders of the Registrable Securities agree that it would not be just and
equitable if contribution pursuant to this Section 4 were to be determined by
pro rata allocation or by any other method of allocation that does not take into
account the relevant equitable considerations. For purposes of this Section 4,
each affiliate of a Holder, and each director, officer, employee, agent and
Person, if any, who controls a Holder or such affiliate within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act shall have
the same rights to contribution as such Holder, and each director or trustee of
each of the Company and the Trust, each officer or trustee of each of the
Company and the Trust who signed the Registration Statement, and each Person, if
any, who controls each of the Company and the Trust within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act, shall have
the same rights to contribution as each of the Company or the Trust.
5. Participation in Underwritten Registrations. No Holder may
participate in any underwritten registration hereunder unless such Holder (a)
agrees to sell such Holder's Registrable Securities on the basis provided in any
underwriting arrangements approved by the
<PAGE> 25
24
Persons entitled hereunder to approve such arrangements and (b) completes and
executes all reasonable questionnaires, powers of attorney, indemnities,
underwriting agreements, lockup letters and other documents reasonably required
under the terms of such underwriting arrangements.
6. Selection of Underwriters. The Holders of Registrable
Securities covered by the Shelf Registration Statement who desire to do so may
sell the securities covered by such Shelf Registration in an underwritten
offering. In any such underwritten offering, the underwriter or underwriters and
manager or managers that will administer the offering will be selected by the
Holders of a majority in aggregate principal amount of the Registrable
Securities included in such offering; provided, however, that such underwriters
and managers must be satisfactory to the Company and the Trust.
7. Miscellaneous.
(a) Rule 144 and Rule 144A. For so long as the Company or the
Trust is subject to the reporting requirements of Section 13 or 15 of the
Exchange Act and any Registrable Securities remain outstanding, each of the
Company and the Trust, as the case may be, will use its best efforts to file the
reports required to be filed by it under the Securities Act and Section 13(e) or
15(d) of the Exchange Act and the rules and regulations adopted by the SEC
thereunder, that if it ceases to be so required to file such reports, it will,
upon the request of any Holder of Registrable Securities (a) make publicly
available such information as is necessary to permit sales of their securities
pursuant to Rule 144A under the Securities Act, (b) deliver such information to
a prospective purchaser as is necessary to permit sales of their securities
pursuant to Rule 144A under the Securities Act and it will take such further
action as any Holder of Registrable Securities may reasonably request, and (c)
take such further action that is reasonable in the circumstances, in each case,
to the extent required from time to time to enable such Holder to sell its
Registrable Securities without registration under the Securities Act within the
limitation of the exemptions provided by (i) Rule 144 under the Securities Act,
as such rule may be amended from time to time, (ii) Rule 144A under the
Securities Act, as such rule may be amended from time to time, or (iii) any
similar rules or regulations hereafter adopted by the SEC. Upon the request of
any Holder of Registrable Securities, the Company and the Trust will deliver to
such Holder a written statement as to whether it has complied with such
requirements.
(b) No Inconsistent Agreements. The Company or the Trust has not
entered into nor will the Company or the Trust on or after the date of this
Agreement enter into any agreement which is inconsistent with the rights granted
to the Holders of Registrable Securities in this Agreement or otherwise
conflicts with the provisions hereof. The rights granted to the Holders
hereunder do not conflict with and are not inconsistent with the rights granted
to the holders of the Company's or the Trust's other issued and outstanding
securities under any such agreements.
<PAGE> 26
25
(c) Amendments and Waivers. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions thereof
may not be given unless the Company and the Trust has obtained the written
consent of Holders of at least a majority in aggregate principal amount of the
outstanding Registrable Securities affected by such amendment, modification,
supplement, waiver or departure; provided no amendment, modification,
supplement, waiver or consent to the departure with respect to the provisions of
Section 4 hereof shall be effective as against any Holder of Registrable
Securities unless consented to in writing by such Holder of Registrable
Securities. Notwithstanding the foregoing sentence, (i) this Agreement may be
amended, without the consent of any Holder of Registrable Securities, by written
agreement signed by the Company, the Trust and DLJ, to cure any ambiguity,
correct or supplement any provision of this Agreement that may be inconsistent
with any other provision of this Agreement or to make any other provisions with
respect to matters or questions arising under this Agreement which shall not be
inconsistent with other provisions of this Agreement, (ii) this Agreement may be
amended, modified or supplemented, and waivers and consents to departures from
the provisions hereof may be given, by written agreement signed by the Company,
the Trust and DLJ to the extent that any such amendment, modification,
supplement, waiver or consent is, in their reasonable judgment, necessary or
appropriate to comply with applicable law (including any interpretation of the
Staff of the SEC) or any change therein and (iii) to the extent any provision of
this Agreement relates to the Initial Purchasers, such provision may be amended,
modified or supplemented, and waivers or consents to departures from such
provisions may be given, by written agreement signed by DLJ, the Company and the
Trust.
(d) Notices. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand-delivery, registered
first-class mail, telefax, telecopier, or any courier guaranteeing overnight
delivery (i) if to a Holder, at the most current address given by such Holder to
the Company or the Trust by means of a notice given in accordance with the
provisions of this Section 7(d), which address initially is, with respect to the
Initial Purchasers, the address set forth in the Purchase Agreement; and (ii) if
to the Company or the Trust, initially at the Company's address set forth in the
Purchase Agreement and thereafter at such other address, notice of which is
gives in accordance with the provisions of this Section 7(d).
All such notices and communications shall be deemed to have been
duly given: at the time delivered by hand, if personally delivered; five
Business Days after being deposited in the mail, postage prepaid, if mailed;
when answered back, if telexed; when receipt is acknowledged, if telecopied; and
on the next Business Day, if timely delivered to an air courier guaranteeing
overnight delivery.
Copies of all such notices, demands or other communications shall
be concurrently delivered by the Person giving the same to the Trustee, at the
address specified in the Indenture.
<PAGE> 27
26
(e) Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the successors, assigns and transferees of the
Initial Purchasers, including, without limitation and without the need for an
express assignment, subsequent Holders; provided, however, that nothing herein
shall be deemed to permit any assignment, transfer or other disposition of
Registrable Securities in violation of the terms of the Purchase Agreement or
the Indenture. If any transferee of any Holder shall acquire Registrable
Securities, in any manner, whether by operation of law or otherwise, such
Registrable Securities shall be held subject to all of the terms of this
Agreement, and by taking and holding such Registrable Securities, such Person
shall be conclusively deemed to have agreed to be bound by and to perform all of
the terms and provisions of this Agreement and such Person shall be entitled to
receive the benefits hereof.
(f) Third Party Beneficiary. Each of the Initial Purchasers shall
be a third party beneficiary of the agreements made hereunder between the
Company and the Trust, on the one hand, and the Holders, on the other hand, and
shall have the right to enforce such agreements directly to the extent it deems
such enforcement necessary or advisable to protect its rights or the rights of
Holders hereunder.
(g) Counterparts. This agreement may be executed in any number of
counterparts and by the parties herein in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(h) Headings. The headings in this Agreement are for convenience
of reference only and shall not limit or otherwise affect the meaning hereof.
(i) GOVERNING LAW. THIS AGREEMENT SHALL BE DEEMED TO HAVE BEEN
MADE IN THE STATE OF NEW YORK. THE VALIDITY AND INTERPRETATION OF THIS
AGREEMENT, AND THE TERMS AND CONDITIONS SET FORTH HEREIN, SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT
GIVING EFFECT TO ANY PROVISIONS RELATING TO CONFLICTS OF LAWS.
(j) Severability. In the event that any one or more of the
provisions contained herein, or the application thereof in any circumstance, is
held invalid, illegal or unenforceable, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions contained herein shall not be affected or impaired thereby.
(k) Securities Held by the Company, the Trust or its Affiliates.
Whenever the consent or approval of Holders of a specified percentage of
Registrable Securities is required hereunder, Registrable Securities held by the
Company, the Trust or its affiliates (as such term is defined in Rule 405 under
the Securities Act) shall not be counted in determining whether such consent or
approval was given by the Holders of such required percentage.
<PAGE> 28
IN WITNESS WHEREOF, the parties have executed this Agreement as
of the date first written above.
SUPERIOR NATIONAL INSURANCE GROUP,
INC.
By: /s/ [SIGNATURE]
-------------------------------
Name:
Title:
SUPERIOR NATIONAL CAPITAL TRUST I
By: /s/ [SIGNATURE]
-------------------------------
Name:
Title: Company Trustee
Confirmed and accepted as of
the date first above written:
DONALDSON, LUFKIN & JENRETTE SECURITIES
CORPORATION
CHASE SECURITIES INC.
By: DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION,
as Representative of the Several
Initial Purchasers
By: /s/ [SIGNATURE]
-------------------------------
Name:
Title:
<PAGE> 1
EXHIBIT 4.3
----------------------------------------------------------
SUPERIOR NATIONAL INSURANCE GROUP, INC.
As Issuer
WILMINGTON TRUST COMPANY
As Trustee
---------------
SENIOR SUBORDINATED INDENTURE
DATED AS OF DECEMBER 3, 1997
---------------
----------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
ARTICLE I. DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION....................... 1
Section 1.1. Definitions............................................................. 1
Section 1.2. Compliance Certificate and Opinions..................................... 16
Section 1.3. Form of Documents Delivered to Trustee.................................. 17
Section 1.4. Acts of Holders; Record Date............................................ 17
Section 1.5. Notices, Etc., to Trustee and Company................................... 18
Section 1.6. Notice to Holders; Waiver............................................... 18
Section 1.7. Conflict with Trust Indenture Act....................................... 19
Section 1.8. Effect of Headings and Table of Contents................................ 19
Section 1.9. Successors and Assigns.................................................. 19
Section 1.10. Separability Clause.................................................... 19
Section 1.11. Acknowledgement of Rights.............................................. 19
Section 1.12. Governing Law.......................................................... 19
Section 1.13. Non-Business Days...................................................... 20
Section 1.14. Duplicate Originals.................................................... 20
Section 1.15. No Recourse Against Others............................................. 20
ARTICLE II. SECURITY FORMS............................................................... 20
Section 2.1. Forms Generally......................................................... 20
Section 2.2. Form of Face of Security................................................ 20
Section 2.3. Form of Reverse of Security............................................. 22
Section 2.4. Additional Provisions Required in Global Security....................... 25
Section 2.5. Legends................................................................. 25
Section 2.6. Form of Trustee's Certificate of Authentication......................... 26
ARTICLE III. THE SECURITIES.............................................................. 27
Section 3.1. Title and Terms......................................................... 27
Section 3.2. Denominations........................................................... 27
Section 3.3. Execution, Authentication, Delivery and Dating.......................... 27
Section 3.4. Temporary Securities.................................................... 28
Section 3.5. Registration, Registration of Transfer and Exchange..................... 28
Section 3.6. Mutilated, Destroyed, Lost and Stolen Securities........................ 30
Section 3.7. Payment of Interest; Interest Rights Preserved.......................... 30
Section 3.8. Persons Deemed Owners................................................... 32
Section 3.9. Cancellation............................................................ 32
Section 3.10. Computation of Interest................................................ 33
Section 3.11. Right of Set-Off....................................................... 33
Section 3.12. Agreed Tax Treatment................................................... 33
Section 3.13. CUSIP Numbers.......................................................... 33
ARTICLE IV. SATISFACTION AND DISCHARGE................................................... 33
Section 4.1. Satisfaction and Discharge of Indenture................................. 33
Section 4.2. Application of Trust Money; Reinstatement............................... 34
Section 4.3. Satisfaction, Discharge and Defeasance of Securities.................... 35
ARTICLE V. REMEDIES...................................................................... 36
</TABLE>
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<PAGE> 3
<TABLE>
<S> <C> <C>
Section 5.1. Events of Default....................................................... 36
Section 5.2. Acceleration of Maturity; Rescission and Annulment...................... 37
Section 5.3. Collection of Indebtedness and Suits for Enforcement by Trustee......... 39
Section 5.4. Trustee May File Proofs of Claim........................................ 39
Section 5.5. Trustee May Enforce Claims Without Possession of Securities............. 40
Section 5.6. Application of Money Collected.......................................... 40
Section 5.7. Limitation on Suits..................................................... 40
Section 5.8. Unconditional Right of Holders to Receive Principal, Premium and Interest 41
Section 5.9. Restoration of Rights and Remedies...................................... 41
Section 5.10. Rights and Remedies Cumulative......................................... 41
Section 5.11. Delay or Omission Not Waiver. ......................................... 42
Section 5.12. Control by Holders. ................................................... 42
Section 5.13. Waiver of Defaults. ................................................... 42
Section 5.14. Undertaking for Costs. ................................................ 43
Section 5.15. Waiver of Usury, Stay or Extension Laws. .............................. 43
ARTICLE VI. THE TRUSTEE.................................................................. 43
Section 6.1. Certain Duties and Responsibilities. ................................... 43
Section 6.2. Notice of Defaults. .................................................... 44
Section 6.3. Certain Rights of Trustee. ............................................. 44
Section 6.4. Not Responsible for Recitals or Issuance of Securities. ................ 45
Section 6.5. May Hold Securities. ................................................... 45
Section 6.6. Money Held in Trust. ................................................... 45
Section 6.7. Compensation and Reimbursement. ........................................ 45
Section 6.8. Disqualification; Conflicting Interests. ............................... 46
Section 6.9. Corporate Trustee Required; Eligibility. ............................... 46
Section 6.10. Resignation and Removal; Appointment of Successor. .................... 47
Section 6.11. Acceptance of Appointment by Successor. ............................... 47
Section 6.12. Merger, Conversion, Consolidation or Succession to Business. .......... 48
Section 6.13. Preferential Collection of Claims Against Company. .................... 48
Section 6.14. Appointment of Authenticating Agent. .................................. 48
ARTICLE VII. HOLDER'S LISTS AND REPORTS BY TRUSTEE AND COMPANY .......................... 49
Section 7.1. Company to Furnish Trustee Names and Addresses of Holders............... 49
Section 7.2. Preservation of Information, Communications to Holders. ................ 50
Section 7.3. Reports by Trustee. .................................................... 50
Section 7.4. Reports by Company. .................................................... 50
ARTICLE VIII. CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE....................... 51
Section 8.1. Company May Consolidate, Etc., Only on Certain Terms. .................. 51
Section 8.2. Successor Corporation Substituted. ..................................... 51
ARTICLE IX. SUPPLEMENTAL INDENTURES...................................................... 52
Section 9.1. Supplemental Indentures Without Consent of Holders. .................... 52
Section 9.2. Supplemental Indentures with Consent of Holders. ....................... 53
Section 9.3. Execution of Supplemental Indentures.................................... 54
Section 9.4. Effect of Supplemental Indentures. ..................................... 54
Section 9.5. Conformity with Trust Indenture Act. ................................... 54
Section 9.6. Reference in Securities to Supplemental Indentures. .................... 54
ARTICLE X. COVENANTS..................................................................... 54
</TABLE>
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<PAGE> 4
<TABLE>
<S> <C> <C>
Section 10.1. Payment of Principal, Premium and Interest. ........................... 54
Section 10.2. Maintenance of Office or Agency. ...................................... 54
Section 10.3. Money for Security Payments to be Held in Trust. ...................... 55
Section 10.4. Existence.............................................................. 56
Section 10.5. Maintenance of Properties.............................................. 56
Section 10.6. Payment of Taxes and Other Claims...................................... 56
Section 10.7. Maintenance of Insurance............................................... 57
Section 10.8. Limitation on Incurrence of Indebtedness............................... 57
Section 10.9. Limitation on Restricted Payments...................................... 58
Section 10.10. Limitation on Restrictions on Distributions from Subsidiaries......... 59
Section 10.11. Senior Subordinated Indebtedness; Liens............................... 59
Section 10.12. Limitation on Affiliate Transactions.................................. 60
Section 10.13. Limitation on Sales of Assets and Subsidiary Stock.................... 60
Section 10.14. Change of Control..................................................... 61
Section 10.15. Statement as to Compliance and Default. .............................. 61
Section 10.16. Ownership of the Trust................................................ 62
Section 10.17. Waiver of Certain Covenants. ......................................... 62
Section 10.18. Payment of Expenses................................................... 62
ARTICLE XI. REDEMPTION OF SECURITIES .................................................... 63
Section 11.1. Applicability of this Article. ........................................ 63
Section 11.2. Election to Redeem; Notice to Trustee. ................................ 63
Section 11.3. Selection of Securities to be Redeemed. ............................... 63
Section 11.4. Notice of Redemption. ................................................. 64
Section 11.5. Deposit of Redemption Price. .......................................... 64
Section 11.6. Payment of Securities Called for Redemption. .......................... 64
Section 11.7. Company's Right of Redemption. ........................................ 65
ARTICLE XII. SUBORDINATION OF SECURITIES ................................................ 65
Section 12.1. Securities Subordinate to Senior Indebtedness. ........................ 65
Section 12.2. Payment Over of Proceeds Upon Dissolution, Etc. ....................... 66
Section 12.3. Prior Payment to Senior Indebtedness Upon Acceleration of Securities. . 66
Section 12.4. No Payment When Specified Senior Indebtedness in Default. ............. 67
Section 12.5. Payment Permitted If No Default. ...................................... 68
Section 12.6. Subrogation to Rights of Holders of Senior Indebtedness. .............. 68
Section 12.7. Provisions Solely to Define Relative Rights. .......................... 68
Section 12.8. Trustee to Effectuate Subordination. .................................. 68
Section 12.9. No Waiver of Subordination Provisions. ................................ 69
Section 12.10. Notice to Trustee. ................................................... 69
Section 12.11. Reliance on Judicial Order or Certificate of Liquidating Agent. ...... 69
Section 12.12. Trustee Not Fiduciary for Holders of Senior Indebtedness. ............ 69
Section 12.13. Rights of Trustee as Holder of Senior Indebtedness; Preservation of
Trustee's Rights..................................................... 70
Section 12.14. Article Applicable to Paying Agents. ................................. 70
Section 12.15. Certain Conversions or Exchanges Deemed Payment. ..................... 70
ARTICLE XIII. EXTENSION OF INTEREST PAYMENT PERIOD........................................ 70
Section 13.1. Extension of Interest Payment Period................................... 70
Section 13.2. Notice of Extension.................................................... 71
</TABLE>
- iii -
<PAGE> 5
EXHIBITS
Exhibit Amended and Restated Declaration of Trust of Superior National
Capital Trust I
- iv -
<PAGE> 6
- v -
<PAGE> 7
SUPERIOR NATIONAL CAPITAL TRUST I
Reconciliation and tie between the Trust Indenture Act of 1939 (including
cross-references to provisions of Sections 310 to and including 317 which,
pursuant to Section 318(c) of the Trust Indenture Act of 1939, as amended by the
Trust Reform Act of 1990, are a part of and govern the Indenture whether or not
physically contained therein) and the Senior Subordinated Indenture, dated as of
December 3, 1997.
<TABLE>
<CAPTION>
TRUST INDENTURE INDENTURE
ACT SECTION SECTION
- --------------- ---------
<S> <C> <C>
Section 310 (a) (1), (2) and (5)...............................................6.9
(a) (3)............................................................Not Applicable
(a) (4)............................................................Not Applicable
(b)................................................................6.8, 6.10
(c)................................................................Not Applicable
Section 311 (a)................................................................6.13
(b)................................................................6.13
(b) (2)............................................................6.13
Section 312 (a)................................................................7.1, 7.2(a)
(b)................................................................7.2(b)
(c)................................................................7.2(c)
Section 313 (a)................................................................7.3(a)
(b)................................................................7.3(a)
(c)................................................................7.3(a), 7.3(b)
(d)................................................................7.3(c)
Section 314 (a) (1), (2) and (3)...............................................7.4
(a) (4)............................................................10.15
(b)................................................................Not Applicable
(c) (1)............................................................1.2
(c) (2)............................................................1.2
(c) (3)............................................................Not Applicable
(d)................................................................Not Applicable
(e)................................................................1.2
(f)................................................................Not Applicable
Secton 315 (a)................................................................6.1(a)
(b)................................................................6.2
(c)................................................................6.1(b)
(d)................................................................6.1(c)
(d) (1)............................................................6.1(a) (1)
(d) (2)............................................................6.1(c) (2)
(d) (3)............................................................6.1(c) (3)
(e)................................................................5.14
Secton 316 (a)................................................................1.1
</TABLE>
<TABLE>
<S> <C> <C>
(a) (1) (A)........................................................5.12
(a) (1) (B)........................................................5.13
(a) (2)............................................................Not Applicable
(b)................................................................5.8
(c)................................................................1.4(f)
Section 317 (a) (1)............................................................5.3
(a) (2)............................................................5.4
(b)................................................................10.3
Section 318 (a)................................................................1.7
</TABLE>
- ----------
Note: This reconciliation and tie shall not, for any purpose, be deemed to be
a part of the Senior Subordinated Indenture.
<PAGE> 8
SENIOR SUBORDINATED INDENTURE, dated as of December 3, 1997, between
SUPERIOR NATIONAL INSURANCE GROUP, INC., a corporation organized under the laws
of the State of Delaware (hereinafter called the "Company") having its principal
office at 26601 Agoura Road, Calabasas, California 91302, and WILMINGTON TRUST
COMPANY, a Delaware banking corporation duly organized and existing under the
laws of the State of Delaware, as Trustee (hereinafter called the "Trustee").
RECITALS OF THE COMPANY
The Company has duly authorized the execution and delivery of this
Indenture to provide for the issuance of its 10 3/4% Senior Subordinated Notes
due December 1, 2017 (hereinafter called the "Securities" or "Security") of
substantially the tenor hereinafter provided, including, without limitation,
Securities issued to evidence loans made to the Company of the proceeds from the
issuance by Superior National Capital Trust I, a Delaware business trust (the
"Trust"), of the Trust Preferred Securities (the "Preferred Securities") and
Common Securities in such Trust (the "Common Securities" and, collectively with
the Preferred Securities, the "Trust Securities"), and to provide the terms and
conditions upon which the Securities are to be authenticated, issued and
delivered.
All things necessary to make the Securities, when executed by the
Company and authenticated and delivered hereunder and duly issued by the
Company, and this Indenture a valid agreement of the Company and in accordance
with its terms, have been done.
NOW THEREFORE, THIS INDENTURE WITNESSETH: For and in consideration of
the premises and the purchase of the Securities by the Holders thereof, it is
mutually covenanted and agreed, for the equal and proportionate benefit of all
Holders of the Securities, as follows:
ARTICLE I. DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
Section 1.1. Definitions.
For all purposes of this Indenture, except as otherwise expressly
provided or unless the context otherwise requires:
(1) The terms defined in this Article have the meanings assigned to
them in this Article, and include the plural as well as the singular;
(2) All other terms used herein which are defined in the Trust
Indenture Act, either directly or by reference therein, have the meanings
assigned to them therein;
(3) All accounting terms not otherwise defined herein have the meanings
assigned to them in accordance with GAAP;
(4) Unless otherwise specifically set forth herein, all calculations or
determinations of a Person shall be performed or made on a consolidated
basis in accordance with generally accepted accounting principles; and
(5) The words "herein," "hereof" and "hereunder" and other words of
similar import refer to this Indenture as a whole and not to any particular
Article, Section or other subdivision.
Certain terms, used principally in Article VI, are defined in that
Article.
"Act" when used with respect to any Holder has the meaning specified in
Section 1.4.
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"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) in a Related Business; (ii) the Capital Stock of
a Person that becomes a Subsidiary as a result of the acquisition of such
Capital Stock by the Company or another Subsidiary; or (iii) Capital Stock
constituting a minority interest in any Person that at such time is a
Subsidiary; provided that any such Subsidiary described in clauses (ii) or (iii)
above is primarily engaged in a Related Business.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person; provided that an Affiliate of the Company
shall not be deemed to include the Trust. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing. For
purposes of Sections 10.9, 10.12 and 10.13 only, "Affiliate" shall also mean any
beneficial owner of Capital Stock representing 5% or more of the total voting
power of the Voting Stock (on a fully diluted basis) of the Company or of rights
or warrants to purchase such Capital Stock (whether or not currently
exercisable) and any Person who would be an Affiliate of any such beneficial
owner pursuant to the first sentence hereof.
"Affiliate Transaction" has the meaning specified in Section 10.12(a).
"Approved Lender" has the meaning specified under the definition of
"Temporary Cash Investments."
"Asset Disposition" means any sale, lease, transfer or other
disposition (or series of related sales, leases, transfers or dispositions) by
the Company or any Subsidiary, including any disposition by means of a merger,
consolidation or similar transaction (each referred to for the purposes of this
definition as a "disposition"), of (i) any shares of Capital Stock of any
Subsidiary (other than directors' qualifying shares or shares required by
applicable law to be held by a Person other than the Company or a Subsidiary),
(ii) all or substantially all the assets of any division or line of business of
the Company or any Subsidiary or (iii) any other assets of the Company or any
Subsidiary outside of the ordinary course of business of the Company or such
Subsidiary (other than, in the case of (i), (ii) and (iii) above, (y) a
disposition by a Subsidiary to the Company or by the Company or a Subsidiary to
a Wholly Owned Subsidiary and (z) for purposes of Section 10.13 only, a
disposition that constitutes a Restricted Payment permitted by Section 10.9).
"Associates" means each of Centre Reinsurance Limited, a Bermuda
corporation, International Insurance Advisors, Inc., a New York corporation,
International Insurance Investors, L.P., a Bermuda limited partnership, and any
person or entity that controls, is under common control with, or is controlled
by Insurance Partners, L.P., a Delaware limited partnership, or Insurance
Partners Offshore (Bermuda), L.P., a Bermuda limited partnership, and all
individuals who are officers, directors or control persons of any such entities,
including Insurance Partners, L.P. or Insurance Partners Offshore (Bermuda),
L.P.
"Average Life" means, as of the date of determination, with respect to
any Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the
sum of the products of numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
"Authenticating Agent" means any Person authorized by the Trustee
pursuant to Section 6.14 to act on behalf of the Trustee to authenticate
Securities.
"Blockage Notice" has the meaning specified in Section 12.4.
"Board of Directors" means, with respect to the Company or a
Subsidiary, as the case may be, the Board of Directors (or other body performing
functions similar to any of those performed by a Board of Directors).
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"Board Resolution" means, with respect to the Company, a copy of a
resolution certified by the Secretary or an Assistant Secretary to have been
duly adopted by the Board of Directors, or such committee of the Board of
Directors or officers of the Company to which authority to act on behalf of the
Board of Directors has been delegated, and to be in full force and effect on the
date of such certification, and delivered to the Trustee.
"Business Day" means any day other than (i) a Saturday or Sunday, (ii)
a day on which banking institutions in The City of New York are authorized or
required by law or executive order to remain closed or (iii) a day on which the
Corporate Trust Office of the Trustee or, with respect to the Preferred
Securities, the Corporate Trust Office of the Preferred Trustee under the
Declaration, is closed for business.
"Capital Lease Obligations" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting purposes
in accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
"Capital Stock" of any Person means any and all shares, interests,
rights to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into such equity.
"Change of Control" means any transaction or series of transactions in
which any Person or group (within the meaning of Rule 13d-5 under the Exchange
Act and Section 13(d) and 14(d) of the Exchange Act) other than the Company and
its Subsidiaries or Insurance Partners, L.P. or its Associates acquires all or
substantially all of the Company's assets or becomes the direct or indirect
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), by way of
merger, consolidation, other business combination or otherwise, of greater than
50% of the total voting power (on a fully diluted basis as if all convertible
securities had been converted and all options and warrants had been exercised)
entitled to vote in the election of directors of the Company or the Surviving
Person (if other than the Company).
"Change of Control Triggering Event" means the occurrence of a Change of
Control.
"Collateral Agent" means Wilmington Trust Company or any successor
Trustee under this Indenture and any Collateral Agent appointed as provided in
this Indenture.
"Commission" means the United States Securities and Exchange Commission.
"Common Securities" has the meaning specified in the first paragraph of
the Recitals to this Indenture.
"Company" means the Person named as the "Company" in the first
paragraph of this Indenture until a successor corporation shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Company" shall mean such successor corporation.
"Company Guarantees" means the Common Securities Company Guarantee, the
Preferred Securities Company Guarantee, the Exchange Common Securities Company
Guarantee and the Exchange Preferred Securities Company Guarantee.
"Common Securities Company Guarantee" means the guarantee by the
Company of distributions on the Common Securities of the Trust to the extent
provided in the Common Securities Guarantee Agreement, dated as of December 3,
1997.
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"Company Request" and "Company Order" mean, respectively, the written
request or order signed in the name of the Company by any two members of the
Board of Directors and delivered to the Trustee.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of EBITDA for the Company's most recently
ended four full fiscal quarters for which internal financial statements are
available immediately preceding the date of such determination to (ii)
Consolidated Interest Expense for such four fiscal quarters; provided that (1)
if the Company or any Subsidiary has Incurred any Indebtedness since the
beginning of such period that remains outstanding or if the transaction giving
rise to the need to calculate the Consolidated Coverage Ratio is an Incurrence
of Indebtedness, or both, EBITDA and Consolidated Interest Expense for such
period shall be calculated after giving effect on a pro forma basis to such
Indebtedness as if such Indebtedness had been Incurred on the first day of such
period and the discharge of any other Indebtedness repaid, repurchased, defeased
or otherwise discharged with the proceeds of such new Indebtedness as if such
discharge had occurred on the first day of such period, (2) if since the
beginning of such period the Company or any Subsidiary shall have made any Asset
Disposition, the EBITDA for such period shall be reduced by an amount equal to
the EBITDA (if positive) directly attributable to the assets which are the
subject of such Asset Disposition for such period, or increased by an amount
equal to the EBITDA (if negative), directly attributable thereto for such period
and Consolidated Interest Expense for such period shall be reduced by an amount
equal to the Consolidated Interest Expense directly attributable to any
Indebtedness of the Company or any Subsidiary repaid, repurchased, defeased or
otherwise discharged with respect to the Company and its continuing Subsidiaries
in connection with such Asset Disposition for such period (or, if the Capital
Stock of any Subsidiary is sold, the Consolidated Interest Expense for such
period directly attributable to the Indebtedness of such Subsidiary to the
extent the Company and its continuing Subsidiaries are no longer liable for such
Indebtedness after such sale), (3) if since the beginning of such period the
Company or any Subsidiary (by merger or otherwise) shall have made an Investment
in any Subsidiary (or any Person which becomes a Subsidiary) or an acquisition
of assets, including any acquisition of assets occurring in connection with a
transaction requiring a calculation to be made hereunder, which constitutes all
or substantially all of an operating unit of a business, EBITDA and Consolidated
Interest Expense for such period shall be calculated after giving pro forma
effect thereto (including the Incurrence of any Indebtedness) as if such
Investment or acquisition occurred on the first day of such period and (4) if
since the beginning of such period any Person (that subsequently became a
Subsidiary or was merged with or into the Company or any Subsidiary since the
beginning of such period) shall have made any Asset Disposition, any Investment
or acquisition of assets that would have required an adjustment pursuant to
clause (2) or (3) above if made by the Company or a Subsidiary during such
period, EBITDA and Consolidated Interest Expense for such period shall be
calculated after giving pro forma effect thereto as if such Asset Disposition,
Investment or acquisition occurred on the first day of such period. For purposes
of this definition, whenever pro forma effect is to be given to an acquisition
of assets, the amount of income or earnings relating thereto and the amount of
Consolidated Interest Expense associated with any Indebtedness Incurred in
connection therewith, the pro forma calculations shall be determined in good
faith by a responsible financial or accounting officer of the Company. If any
Indebtedness bears a floating rate of interest and is being given pro forma
effect, the interest of such Indebtedness shall be calculated as if the rate in
effect on the date of determination had been the applicable rate for the entire
period (taking into account any Interest Rate Agreement applicable to such
Indebtedness if such Interest Rate Agreement has a remaining term in excess of
12 months).
"Consolidated Interest Expense" means, for any period, the total
interest expense of the Company and its consolidated Subsidiaries, plus, to the
extent not included in such total interest expense, and to the extent incurred
by the Company or its Subsidiaries, (i) interest expense attributable to capital
leases, (ii) amortization of debt discount and debt issuance cost, (iii)
capitalized interest, (iv) non-cash interest expenses, (v) commissions,
discounts and other fees and charges owed with respect to letters of credit and
bankers' acceptance financing, (vi) net costs associated with Hedging
Obligations (including amortization of fees), (vii) Preferred Stock dividends in
respect of all Preferred Stock held by Persons other than the Company or a
Wholly Owned Subsidiary, (viii) interest incurred in connection with Investments
in discontinued operations, (ix) interest accruing on any Indebtedness of any
other Person to the extent such Indebtedness is Guaranteed by the Company or any
Subsidiary and (x) the cash contributions to any employee
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stock ownership plan or similar trust to the extent such contributions are used
by such plan or trust to pay interest or fees to any Person (other than the
Company) in connection with Indebtedness Incurred by such plan or trust.
"Consolidated Net Income" means, for any period, the net income of the
Company and its consolidated Subsidiaries; provided that there shall not be
included in such Consolidated Net Income: (i) any net income of any Person if
such Person is not a Subsidiary, except that (A) subject to the exclusion
contained in clause (iv) below, the Company's equity in the net income of any
such Person for such period shall be included in such Consolidated Net Income up
to the aggregate amount of cash actually distributed by such Person during such
period to the Company or a Subsidiary as a dividend or other distribution
(subject, in the case of a dividend or other distribution paid to a Subsidiary,
to the limitations contained in clause (iii) below) and (B) the Company's equity
in a net loss of any such Person for such period shall be included in
determining such Consolidated Net Income; (ii) any net income (or loss) of any
Person acquired by the Company or a Subsidiary in a pooling of interests
transaction for any period prior to the date of such acquisition; (iii) any net
income of any Subsidiary that is not a Wholly Owned Subsidiary if such
Subsidiary is subject to contractual, governmental or regulatory restrictions,
directly or indirectly, on the payment of dividends or the making of
distributions by such Subsidiary, directly or indirectly, to the Company, except
that (A) subject to the exclusion contained in clause (iv) below, the Company's
equity in the net income of any such Subsidiary for such period shall be
included in such Consolidated Net Income up to the aggregate amount of cash
actually distributed by such Subsidiary during such period to the Company or
another Subsidiary as a dividend or other distribution (subject, in the case of
a dividend or other distribution paid to another Subsidiary that is not a Wholly
Owned Subsidiary, to the limitation contained in this clause) and (B) the
Company's equity in a net loss of any such Subsidiary for such period shall be
included in determining such Consolidated Net Income; (iv) any gain (but not
loss) realized upon the sale or other disposition of any assets of the Company
or its consolidated Subsidiaries (including pursuant to any sale and leaseback
arrangement) that is not sold or otherwise disposed of in the ordinary course of
business and any gain (but not loss) realized upon the sale or other disposition
of any Capital Stock of any Person; (v) extraordinary gains or losses; and (vi)
the cumulative effect of a change in accounting principles.
"Consolidated Net Worth" means the total of the amounts shown on the
balance sheet of the Company and its consolidated Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the Company's most
recently ended fiscal quarter for which internal financial statements are
available prior to the taking of any action for the purpose of which the
determination is being made, as (i) the par or stated value of all outstanding
Capital Stock of the Company plus (ii) paid-in capital or capital surplus
relating to such Capital Stock plus (iii) any retained earnings or earned
surplus less (A) any accumulated deficit and (B) any amounts attributable to
Disqualified Stock.
"Corporate Trust Office" means the principal office of the Trustee in
Wilmington, Delaware.
"Corporation" means a corporation, association, partnership, business
trust or other business entity.
"Currency Agreement" means any foreign currency exchange contract,
currency swap agreement or other similar agreement or arrangement designed and
entered into to protect the Company or any Subsidiary against fluctuations in
currency interest rates.
"Declaration" means the Amended and Restated Declaration of Trust
substantially in the form attached hereto as Exhibit A, as amended from time to
time.
"Default" means any event that is, or after notice or passage of time
or both would be, an Event of Default.
"Defaulted Interest" has the meaning specified in Section 3.7.
"Definitive Securities" means those Securities issued in fully
registered, certificated form not otherwise in global form.
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"Depository" means, with respect to the Securities issuable or issued
in whole or in part in the form of one or more Global Securities, the Person
designated as Depository by the Company (or any successor thereto).
"Disqualified Stock" means, with respect to any Person, any Capital
Stock that by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable) or upon the happening of any event
(i) matures or is mandatorily redeemable pursuant to a sinking fund obligation
or otherwise, (ii) is convertible or exchangeable for Indebtedness or
Disqualified Stock or (iii) is redeemable at the option of the holder thereof,
in whole or in part, in each case on or prior to the first anniversary of the
Stated Maturity of the Securities; provided that any Capital Stock that would
not constitute Disqualified Stock but for provisions thereof giving holders
thereof the right to require such Person to repurchase or redeem such Capital
Stock upon the occurrence of an "asset sale" or "change of control" occurring
prior to the first anniversary of the Stated Maturity of the Securities shall
not constitute Disqualified Stock if the "asset sale" or "change of control"
provisions applicable to such Capital Stock are not more favorable to the
holders of such Capital Stock than the provisions of Sections 10.13 and 10.14.
"Dollar" means the currency of the United States of America that, as at
the time of payment, is legal tender for the payment of public and private
debts.
"EBITDA" for any period means the sum of Consolidated Net Income, plus
Consolidated Interest Expense plus the following to the extent deducted in
calculating such Consolidated Net Income: (a) all income tax expense of the
Company and its Subsidiaries, (b) depreciation expense and (c) amortization
expense, in each case for such period. Notwithstanding the foregoing, the
provision for taxes based on the income or profits of, and the depreciation and
amortization of, a Subsidiary that is not a Wholly Owned Subsidiary shall be
added to Consolidated Net Income to compute EBITDA only to the extent (and in
the same proportion) that the net income of such Subsidiary was included in
calculating Consolidated Net Income and only if a corresponding amount would be
permitted at the date of determination to be dividended to the Company by such
Subsidiary without prior approval (that has not been obtained), pursuant to the
terms of its charter and all agreements, instruments, judgments, decrees,
orders, statutes, rules and governmental regulations applicable to such
Subsidiary or its stockholders.
"Event of Default" has the meaning specified in Section 5.1.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Common Securities Company Guarantee" means the Common
Securities Company Guarantee Agreement, issued pursuant to an Exchange Offer.
"Exchange Offer" means the offer that may be made pursuant to the
Registration Rights Agreement (i) by the Company to exchange Exchange Trust
Securities for Trust Securities, to exchange an Exchange Preferred Securities
Company Guarantee for a Preferred Securities Company Guarantee and to exchange
an Exchange Common Securities Company Guarantee for a Common Securities Company
Guarantee and (ii) by the Trust to exchange Exchange Securities for Initial
Securities.
"Exchange Offer Registration Statement" shall mean an exchange offer
registration statement on Form S-4 (or, if applicable, on another appropriate
form), and all amendments and supplements to such registration statement, in
each case including the Prospectus contained therein, all exhibits thereto and
all material incorporated by reference therein.
"Exchange Preferred Securities Company Guarantee" means the Preferred
Securities Company Guarantee Agreement, issued pursuant to an Exchange Offer.
"Exchange Securities" means the Company's 10 3/4% Senior Subordinated
Notes due 2017, issued pursuant to an Exchange Offer, as authenticated and
issued under this Indenture.
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"Exchange Trust Securities" means the Trust Securities issued pursuant
to an Exchange Offer.
"Extension Period" has the meaning set forth in Section 13.1.
"GAAP" means generally accepted accounting principles in the United
States of America as in effect as of the Issue Date, including those set forth
(i) in the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants, (ii) statements and
pronouncements of the Financial Accounting Standards Board, (iii) in such other
statements by such other entity as approved by a significant segment of the
accounting profession, and (iv) the rules and regulations of the Commission
governing the inclusion of financial statements (including pro forma financial
statements) in periodic reports required to be filed pursuant to Section 13 of
the Exchange Act, including opinions and pronouncements in staff accounting
bulletins and similar written statements from the accounting staff of the
Commission.
"Global Security" means a Security in the form prescribed in Section
2.4 evidencing all or part of the Securities, issued to the Depository or its
nominee for such series, and registered in the name of such Depository or its
nominee.
"Guarantee" means any obligation, contingent or otherwise, of any
Person directly or indirectly guaranteeing any Indebtedness or other obligation
of any Person and any obligation, direct or indirect, contingent or otherwise,
of such Person (i) to purchase or pay (or advance or supply funds for the
purchase or payment of) such Indebtedness or other obligation of such Person
(whether arising by virtue of partnership arrangements, or by agreements to
keep-well, to purchase assets, goods, securities or services, to take-or-pay or
to maintain financial statement conditions or otherwise) or (ii) entered into
for the purpose of assuring in any other manner the obligee of such Indebtedness
or other obligation of the payment thereof or to protect such obligee against
loss in respect thereof (in whole or in part); provided that the term Guarantee
shall not include endorsements for collection or deposit in the ordinary course
of business. The term Guarantee used as a verb has a corresponding meaning.
"Guarantor" means any Person Guaranteeing any obligation.
"Hedging Obligations" of any Person means the obligations of such
Person pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" means a Person in whose name a Security is registered in the
Securities Register. The Preferred Trustee shall be the initial Holder of the
Securities.
"Incur" means issue, assume, Guarantee, incur or otherwise become
liable for; provided that any Indebtedness or Capital Stock of a Person existing
at the time such Person becomes a Subsidiary (whether by merger, consolidation,
acquisition or otherwise) shall be deemed to be Incurred by such Subsidiary at
the time it becomes a Subsidiary. The term "Incurrence" when used as a noun
shall have a correlative meaning. The accretion of principal of a non-interest
bearing or other discount security shall be deemed the Incurrence of
Indebtedness.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of (A) indebtedness of such Person for money borrowed and (B)
indebtedness evidenced by notes, debentures, bonds or other similar instruments
for the payment of which such Person is responsible or liable; (ii) all Capital
Lease Obligations of such Person; (iii) all obligations of such Person issued or
assumed as the deferred purchase price of property or services, all conditional
sale obligations of such Person and all obligations of such Person under any
title retention agreement (other than (x) customary reservations or retentions
of title under agreements with suppliers entered into in the ordinary course of
business, (y) trade debt incurred in the ordinary course of business and due
within six months of the incurrence thereof and (z) obligations incurred under a
pension, retirement or deferred compensation program or arrangement regulated
under the Employee Retirement Income Security Act of 1974, as amended, or the
laws of a foreign government); (iv) all obligations of such Person
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for the reimbursement of any obligor on any letter of credit, bank guaranty,
banker's acceptance or similar credit transaction (other than obligations with
respect to letters of credit and bank guaranties (A) issued to guaranty or
support the payment of performance bonds, workers' compensation claims relating
to the Company's employees, insurance claims and contested appeals and
compliance with operational and regulatory obligations incurred in the ordinary
course of business and (B) securing obligations (other than obligations
described in (i) through (iii) above) entered into in the ordinary course of
business of such Person to the extent such letters of credit are not drawn upon
or, if and to the extent drawn upon, such drawing is reimbursed no later than
the tenth Business Day following receipt by such Person of a demand for
reimbursement following payment on the letter of credit); (v) the amount of all
obligations of such Person with respect to the redemption, repayment or other
repurchase of any Disqualified Stock or, with respect to any subsidiary of such
Person, any Preferred Stock (but excluding, in each case, any accrued
dividends); (vi) all obligations of the type referred to in clauses (i) through
(v) of other Persons and all dividends of other Persons for the payment of
which, in either case, such Person is responsible or liable, directly or
indirectly, as obligor, guarantor or otherwise, including by means of any
Guarantee; (vii) all obligations of the type referred to in clauses (i) through
(vi) of other Persons secured by any Lien on any property or asset of such
Person (whether or not such obligation is assumed by such Person), the amount of
such obligation being deemed to be the lesser of the value of such property or
assets or the amount of the obligation so secured; and (viii) to the extent not
otherwise included in this definition, Hedging Obligations of such Person. The
amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above and the
maximum liability, upon the occurrence of the contingency giving rise to the
obligation, of any contingent obligations at such date.
"Indenture" means this instrument as originally executed or as it may
from time to time be supplemented or amended by one or more indentures
supplemental hereto entered into pursuant to the applicable provisions hereof,
including, for all purposes of this instrument and any such supplemental
indenture, the provisions of the Trust Indenture Act that are deemed to be a
part of and govern this instrument and any such supplemental indenture,
respectively, and shall include the terms of the Securities established as
contemplated by Section 3.1.
"Initial Securities" means the Company's 10 3/4% Senior Subordinated
Notes due 2017, as authenticated and issued under this Indenture as of the Issue
Date.
"Insurance Subsidiary" means any Subsidiary, whether now owned or
hereafter acquired, that is authorized or admitted to carry on or transact the
business of selling, issuing or underwriting insurance or reinsurance, in any
state.
"Interest Payment Date" means June 1 and December 1 of each year,
commencing June 1, 1998.
"Interest Rate" means the rate of interest specified or determined as
specified as being the rate of interest payable on the Securities.
"Interest Rate Agreement" means any interest rate swap agreement,
interest rate cap agreement or other financial agreement or arrangement designed
and entered into to protect the Company or any Subsidiary against fluctuations
in interest rates.
"Invested Assets" means the amount on a consolidated basis of a
Person's Investments as reflected on such Person's most recent quarterly balance
sheet prepared in accordance with GAAP.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of such Person) or other
extensions of credit (including by way of Guarantee or similar arrangement) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition of Capital Stock, Indebtedness or other
similar instruments issued by such Person.
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"Investment Company Event" means the receipt by the Company of an
Opinion of Counsel, rendered by an independent law firm having experience in tax
and securities matters, to the effect that, as a result of the occurrence of a
change in law or regulation or a change in interpretation or application of law
or regulation by any legislative body, court, governmental agency or regulatory
authority (a "Change in 1940 Act Law"), the Trust is or will be considered an
"investment company" that is required to be registered under the 1940 Act, which
Change in 1940 Act Law becomes effective on or after the date of original
issuance of the Preferred Securities of the Trust.
"Investment Grade" means a rating of BBB- or higher by S&P and Baa3 or
higher by Moody's and the equivalent in respect of Rating Categories of any
Rating Agency substituted for S&P or Moody's.
"Investment-Grade Securities" means: (i) U.S. Government Obligations;
(ii) any certificate of deposit, maturing not more than 270 days after the date
of acquisition, issued by, or time deposit of, a commercial banking institution
that has combined capital and surplus of not less than $100.0 millon or its
equivalent in foreign currency, whose debt is rated at the time as of which any
investment therein is made, "A" (or higher) according to S&P or Moody's, or if
neither S&P nor Moody's shall then exist or if the debt of such bank has not
been rated by S&P or Moody's, the equivalent of such rating by any other
internationally recognized securities rating agency; (iii) commercial paper,
maturing not more than 270 days after the date of acquisition, issued by a
corporation (other than an Affiliate or Subsidiary of the Issuer) with a rating,
at the time as of which any investment therein is made, of "A-1" (or higher)
according to S&P or "P-1" (or higher) according to Moody's, or if neither S&P
nor Moody's shall then exist, the equivalent of such rating by any other
internationally recognized securities rating agency; (iv) any banking
acceptances, any private loans or any money market deposit accounts, in each
case, issued or offered by any commercial bank having capital and surplus in
excess of $100.0 million or its equivalent in foreign currency, whose debt or
credit-paying ability is rated at the time as of which any investment therein is
made, "A" (or higher) according to S&P or Moody's, or if neither S&P nor Moody's
shall then exist or if the debt or credit paying ability of such bank has not
been rated by S&P or Moody's, the equivalent of such rating by any other
internationally recognized securities rating agency; (v) any other debt
securities or debt instruments with a rating of "BBB-1" or higher by S&P,
"Baa-3" or higher by Moody's, Class "2" or higher by the NAIC or the equivalent
of such rating by S&P, Moody's or the NAIC, or if none of S&P, Moody's and the
NAIC shall then exist or if such security has not been rated by S&P, Moody's or
the NAIC, the equivalent of such rating by any other internationally recognized
securities rating agency; and (vi) any fund investing exclusively in investments
of the types described in clauses (i) through (v) above.
"Issue Date" means the date on which the Securities are originally
issued.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien
or charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Marketable Securities" means securities listed on a national securities
exchange which have a minimum weekly trading volume for the most recently
completed 52 weeks of at least 100,000 shares.
"Maturity" when used with respect to any Security means the date on
which the principal of such Security becomes due and payable as therein or
herein provided, whether at the Stated Maturity or by declaration of
acceleration, call for redemption or otherwise.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"1940 Act" means the Investment Company Act of 1940, as amended.
"NAIC" means the National Association of Insurance Commissioners.
"Net Available Cash" from an Asset Disposition means cash payments
received therefrom (including any cash payments received by way of deferred
payment of principal pursuant to a note or installment receivable or
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otherwise, but only as and when received, but excluding any other consideration
received in the form of assumption by the acquiring Person of Indebtedness or
other obligations relating to such properties or assets or received in any other
non-cash form) in each case net of (i) all legal, title and recording tax
expenses, commissions and other fees and expenses incurred, and all Federal,
state, provincial, foreign and local taxes required to be accrued as a liability
under GAAP, as a consequence of such Asset Disposition, (ii) all payments made
on any Indebtedness which is secured by any assets subject to such Asset
Disposition in accordance with the terms of any Lien upon or other security
agreement of any kind with respect to such assets, or which must by its terms,
or in order to obtain a necessary consent to such Asset Disposition, or by
applicable law, be repaid out of the proceeds from such Asset Disposition, (iii)
all distributions and other payments required to be made to minority interest
holders in Subsidiaries or joint ventures as a result of such Asset Disposition
and (iv) the deduction of appropriate amounts provided by the seller as a
reserve, in accordance with GAAP, against any liabilities associated with the
property or other assets disposed in such Asset Disposition and retained by the
Company or any Subsidiary after such Asset Disposition.
"Net Cash Proceeds," with respect to any issuance or sale of Capital
Stock, means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"Non-Investment Grade Investments" means any Investments (including,
without limitation, debt securities, equity securities, real estate investments
and real estate loans) other than Investment-Grade Securities.
"Officers' Certificate" means a certificate signed by (a) the Chairman
of the Board, Chief Executive Officer, President or Vice President, and by the
Treasurer, an Assistant Treasurer, the Controller, the Secretary or an Assistant
Secretary, or (b) any two members of the Board of Directors of the Company, and
delivered to the appropriate Trustee.
"Opinion of Counsel" or "opinion of counsel" means, as to the Company,
a written opinion of counsel, who may be counsel for the Company, as the case
may be, but, other than in connection with the issuance of the Securities, not
an employee of any thereof, and who shall be reasonably acceptable to the
Trustee.
"Outstanding" means, when used in reference to any Securities, as of
the date of determination, all Securities theretofore authenticated and
delivered under this Indenture, except:
(i) Securities theretofore canceled by the Trustee or delivered to the
Trustee for cancellation;
(ii) Securities for whose payment or redemption money in the necessary
amount has been theretofore deposited with the Trustee or any Paying Agent in
trust for the Holders of such Securities (other than the Company) in trust or
set aside and segregated in trust by the Company (if the Company shall act as
its own Paying Agent) for the Holders of such Securities; provided that if such
Securities are to be redeemed, notice of such redemption has been duly given
pursuant to this Indenture or provision therefor satisfactory to the Trustee has
been made;
(iii) Securities in substitution for or in lieu of which other
Securities have been authenticated and delivered or which have been paid
pursuant to Section 3.6, unless proof satisfactory to the Trustee is presented
that any such Securities are held by a bona fide purchaser in whose hands such
Securities are valid, binding and legal obligations of the Company; and
(iv) Securities which have been defeased pursuant to Section 4.3 hereof.
provided that in determining whether the Holders of the requisite principal
amount of Outstanding Securities have given any request, demand, authorization,
direction, notice, consent or waiver hereunder, Securities owned by the Company
or any other obligor upon the Securities or any Affiliate of the Company or such
other obligor shall be
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disregarded and deemed not to be Outstanding, except that, in determining
whether the Trustee shall be protected in relying upon any such request, demand,
authorization, direction, notice, consent or waiver, only Securities which the
Trustee knows to be so owned shall be so disregarded. Securities so owned which
have been pledged in good faith may be regarded as Outstanding if the pledgee
establishes to the satisfaction of the Trustee the pledgee's right so to act
with respect to such Securities and that the pledgee is not the Company or any
other obligor upon the Securities or any Affiliate of the Company or such other
obligor. Upon the written request of the Trustee, the Company shall furnish to
the Trustee promptly an Officers' Certificate listing and identifying all
Securities, if any, known by the Company to be owned or held by or for the
account of the Company, or any other obligor on the Securities or any Affiliate
of the Company or such other obligor, and, subject to the provisions of Section
6.1, the Trustee shall be entitled to accept such Officers' Certificate as
conclusive evidence of the facts therein set forth and of the fact that all
Securities not listed therein are Outstanding for the purpose of any such
determination.
"Payment Blockage Period" has the meaning specified in Section 12.4(b).
"Paying Agent" means the Trustee or any Person authorized by the
Company to pay the principal of or interest on any Securities on behalf of the
Company.
"Permitted Investment" means an Investment by the Company or any
Subsidiary in (i) a Person that will, upon the making of such Investment, be or
become a Subsidiary; provided that the primary business of such Subsidiary is a
Related Business; (ii) a Person if as a result of such Investment such other
Person is merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, the Company or a Subsidiary; provided that such
Person's primary business is a Related Business; (iii) Temporary Cash
Investments; (iv) any demand deposit account with an Approved Lender; (v)
receivables owing to the Company or any Subsidiary if created or acquired in the
ordinary course of business and payable or dischargeable in accordance with
customary trade terms; provided that such trade terms may include such
concessionary trade terms as the Company or any such Subsidiary deems reasonable
under the circumstances; (vi) payroll, travel and similar advances to cover
matters that are expected at the time of such advances ultimately to be treated
as expenses for accounting purposes and that are made in the ordinary course of
business; (vii) loans or advances to employees made in the ordinary course of
business consistent with past practices of the Company or such Subsidiary;
(viii) stock, obligations or securities received in settlement of debts created
in the ordinary course of business and owing to the Company or any Subsidiary or
in satisfaction of judgments; (ix) any Person to the extent such Investment
represents the non-cash portion of the consideration received for an Asset
Disposition as permitted pursuant to Section 10.13; and (x) any Affiliate (the
primary business of which is a Related Business) that is not a Subsidiary (other
than the Company), provided that the aggregate of all such Investments
outstanding at any one time under this clause (x) shall not exceed $3,000,000,
(xi) Investments by the Insurance Subsidiaries in Investment-Grade Securities,
(xii) Investments by the Insurance Subsidiaries in Non-Investment Grade
Securities; provided that on the date such Investment is made, the fair market
value of such Investment when taken with all other such Investments shall not
exceed in the aggregate 15% of the total Invested Assets of the Insurance
Subsidiaries taken as a whole (except that investments permitted to be
classified as part of the workers' compensation deposit under California
Insurance Code Section 11715 and the regulations promulgated thereunder shall
not be classified as Non-Investment Grade Securities for purposes of determining
the percentage of Non-Investment Grade Securities held); provided further that
such Investment in other Investment-Grade Securities and Non-Investment Grade
Securities in any single issuer, together with all other Investments in the same
issuer, as determined at the date such Investment is made and after giving
effect thereto, shall not exceed in the aggregate those percentages of the total
Invested Assets of the Insurance Subsidiaries permitted by state law or
regulations (as they may be amended from time to time) determined as of the end
of the preceding calendar quarter, and (xiii) Investments in an aggregate amount
not to exceed $20,000,000 at any one time outstanding.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, government
or any agency, instrumentality or political subdivision thereof, or any other
entity.
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"Predecessor Security" of any particular Security means every previous
Security evidencing all or a portion of the same debt as that evidenced by such
particular Security; and, for the purposes of this definition, any security
authenticated and delivered under Section 3.6 in lieu of a lost, destroyed or
stolen Security shall be deemed to evidence the same debt as the lost, destroyed
or stolen Security.
"Preferred Securities" has the meaning specified in the first paragraph
of the Recitals to this Indenture.
"Preferred Securities Company Guarantee" means the guarantee by the
Company of distributions on the Preferred Securities of the Trust to the extent
provided in the Preferred Securities Guarantee Agreement, dated December 3,
1997.
"Preferred Stock", as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes (however designated) which is
preferred as to the payment of dividends, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation.
"Preferred Trustee" means Wilmington Trust Company, a Delaware banking
corporation duly organized and existing under the laws of the State of Delaware,
solely in its capacity as Preferred Trustee of the Trust and not in its
individual capacity, or its successor in interest in such capacity, or any
successor Preferred Trustee appointed as provided in the Declaration.
"Principal" of a Security means the principal of the Security plus the
premium, if any, payable on the Security which is due or overdue or is to become
due at the relevant time.
"Proceeding" has the meaning specified in Section 12.2.
"Redemption Date," when used with respect to any Security to be
redeemed, means the date fixed for such redemption by or pursuant to this
Indenture.
"Redemption Price," when used with respect to any Security to be
redeemed, means the price at which it is to be redeemed pursuant to this
Indenture.
"Refinance" means, in respect of any Indebtedness, to refinance,
extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue
other Indebtedness in exchange or replacement for, such indebtedness.
"Refinanced" and "Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of the Company or any Subsidiary existing on the Issue Date or
Incurred in compliance with the Indenture including Indebtedness that Refinances
Refinancing Indebtedness; provided that (i) such Refinancing Indebtedness has a
Stated Maturity no earlier than the Stated Maturity of the Indebtedness being
Refinanced, (ii) such Refinancing Indebtedness has an Average Life at the time
such Refinancing Indebtedness is Incurred that is equal to or greater than the
Average Life of the Indebtedness being Refinanced and (iii) such Refinancing
Indebtedness has an aggregate principal amount (or if Incurred with original
issue discount, an aggregate issue price) that is equal to or less than the
aggregate principal amount (or if Incurred with original issue discount, the
aggregate accreted value) then outstanding or committed (plus fees and expenses,
including any premium and defeasance costs) under the Indebtedness being
Refinanced; provided further that Refinancing Indebtedness shall not include (x)
Indebtedness of a Subsidiary that Refinances Indebtedness of the Company or (y)
Indebtedness of the Company or a Subsidiary that Refinances Indebtedness of
another Subsidiary.
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"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of December 3, 1997, by and among the Company, the Trust and
the initial purchasers named therein as such agreement may be amended, modified
or supplemented from time to time.
"Regular Record Date" for the interest payable on any Interest Payment
Date means the date which is the fifteenth day immediately preceding such
Interest Payment Date (whether or not a Business Day).
"Related Business" means the business of providing workers'
compensation insurance and any business related, ancillary or complementary to
such business of the Company or the Subsidiaries.
"Responsible Officer" when used with respect to the Trustee means any
officer of the Trustee assigned by the Trustee from time to time to administer
its corporate trust matters.
"Restricted Payment" with respect to any Person means (i) the
declaration or payment of any dividends or any other distributions of any sort
in respect of its Capital Stock (including any payment in connection with any
merger or consolidation involving such Person) or similar payment to the direct
or indirect holders of its Capital Stock (other than dividends or distributions
payable solely in its Capital Stock (other than Disqualified Stock)) and
dividends or distributions payable solely to the Company or a Subsidiary, and
other than pro rata dividends or other distributions made by a Subsidiary that
is not a Wholly Owned Subsidiary to minority stockholders (or owners of an
equivalent interest in the case of a Subsidiary that is an entity other than a
corporation)), (ii) the purchase, redemption or other acquisition or retirement
for value of any Capital Stock of the Company held by any Person or of any
Capital Stock of a Subsidiary held by any Affiliate of the Company (other than a
Subsidiary), including the exercise of any option to exchange any Capital Stock
(other than into Capital Stock of the Company that is not Disqualified Stock),
(iii) the purchase, repurchase, redemption, defeasance or other acquisition or
retirement for value, prior to scheduled maturity, scheduled repayment or
scheduled sinking fund payment of any Subordinated Obligations (other than the
purchase, repurchase or other acquisition of Subordinated Obligations purchased
in anticipation of satisfying a sinking fund obligation, principal installment
or final maturity, in each case due within one year of the date of acquisition)
or (iv) the making of any Investment in any Person (other than a Permitted
Investment).
"Secured Indebtedness" means any Indebtedness of the Company secured by
a Lien.
"Securities" or "Security" means, collectively, the Initial Securities
and the Exchange Securities.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Register" and "Securities Registrar" have the respective
meanings specified in Section 3.5.
"Senior Indebtedness" means, with respect to the Company, (i)
Indebtedness of such Person, whether outstanding on the Issue Date or thereafter
incurred and (ii) accrued and unpaid interest (including interest accruing on or
after the filing of any petition in bankruptcy or for reorganization relating to
such Person, whether or not the claim for such interest is allowed as a claim
after such filing) in respect of (A) Indebtedness of such Person for money
borrowed and (B) Indebtedness evidenced by notes, debentures, bonds or other
similar instruments for the payment of which such Person is responsible or
liable unless, in the instrument creating or evidencing the same or pursuant to
which the same is outstanding, it is provided that such obligations are
subordinate in right of payment to the Securities; provided that Senior
Indebtedness shall not include (1) any obligation of such Person to any
subsidiary of such Person, (2) any liability for federal, state, local or other
taxes owed or owing by such Person, (3) any accounts payable or other liability
to trade creditors arising in the ordinary course of business (including
guarantees thereof or instruments evidencing such liabilities), (4) any
Indebtedness of such Person (and any accrued and unpaid interest in respect
thereof) which is subordinate or junior in any respect to any other Indebtedness
or other obligation of such Person or (5) that portion of any Indebtedness which
at the time of incurrence is incurred in violation of the Indenture.
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"Senior Subordinated Indebtedness" means the Securities and any other
Indebtedness of the Company that specifically provides that such Indebtedness is
to rank pari passu with the Securities in right of payment and is not
subordinated by its terms in right of payment to any Indebtedness or other
obligation of the Company that is not Senior Indebtedness.
"Senior Subordinated Payment" has the meaning specified in Section
12.2.
"S&P" means Standard & Poor's Corporation and its successors.
"Shelf Registration Statement" shall mean a "shelf" registration
statement of the Company and the Trust pursuant to the provisions of Section
2(b) of the Registration Rights Agreement on an appropriate form under Rule 415
under the Securities Act or any similar rule that may be adopted by the
Commission, and all amendments and supplements to such registration statement,
including post-effective amendments, in each case including the prospectus
contained therein, all exhibits thereto and all material incorporated by
reference therein.
"Specified Senior Indebtedness" means, with respect to the Company,
Senior Indebtedness of such Person permitted under the Indenture the outstanding
principal amount of which is more than $10,000,000 at the time of determination.
"Special Record Date" for the payment of any Defaulted Interest means a
date fixed by the Trustee pursuant to Section 3.7.
"Stated Maturity" means, with respect to any security, the date
specified in such security as the fixed date on which the final payment of
principal of such security is due and payable, including pursuant to any
mandatory redemption provision (but excluding any provision providing for the
repurchase of such security at the option of the holder thereof upon the
happening of any contingency unless such contingency has occurred).
"Subordinated Obligation" means any Indebtedness of the Company
(whether outstanding on the Issue Date or thereafter Incurred) that is
subordinate or junior in right of payment to the Securities pursuant to a
written agreement to that effect.
"Subsidiary" means any corporation, association, partnership or other
business entity of which more than 50% of the total voting power of shares of
Capital Stock or other interests (including partnership interests) entitled
(without regard to the occurrence of any contingency) to vote in the election of
directors, managers or trustees thereof is at the time owned or controlled,
directly or indirectly, by the Company or by one or more Subsidiaries, or by the
Company and one or more Subsidiaries.
"Surviving Person" means, with respect to any Person involved in any
merger, consolidation or other business combination or the sale, assignment,
transfer, lease, conveyance or other disposition of all or substantially all of
such Person's assets, the Person formed by or surviving such transaction or the
Person to which such disposition is made.
"Tax Event" means that the Company shall have obtained an opinion of an
independent tax counsel experienced in such matters to the effect that, as a
result of (a) any amendment to or change (including any announced proposed
change) in the laws (or any regulations thereunder) of the United States or any
political subdivision or taxing authority thereof or therein or (b) any
amendment to or change in an interpretation or application of such laws or
regulations by any legislative body, court, governmental agency or regulatory
authority (including the enactment of any legislation and the publication of any
judicial decision or regulatory determination on or after the date of issuance
of the Preferred Securities), which amendment or change is effective or which
proposed change, interpretation or pronouncement is announced on or after the
date of original issuance of the Preferred Securities, there is more than an
insubstantial risk that (i) the Trust is or, within 90 days of the delivery of
an Opinion of Counsel, will be subject
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to United States federal income tax with respect to interest received or accrued
on the Securities, (ii) interest payable to the Trust on the Securities is not
or, within 90 days of the delivery of an Opinion of Counsel, will not be
deductible for United States federal income tax purposes by the Company or (iii)
the Trust is or, within 90 days of the delivery of an Opinion of Counsel, will
be subject to more than a de minimis amount of other taxes, duties, assessments
or other governmental charges of whatever nature imposed by the United States or
any other taxing authority.
"Taxes" means all taxes (including penalties, interest and other
liabilities related thereto) imposed or levied by or on behalf of the United
States of America or of any territory, authority or agency thereof having power
to tax.
"Temporary Cash Investments" means any of the following: (a) U.S.
Government Obligations, (b) time deposits and certificates of deposit,
Eurodollar time deposits and Eurodollar certificates of deposit of any United
States commercial bank of recognized standing (y) having capital and surplus in
excess of $500,000,000 and (z) whose short-term commercial paper rating from S&P
is at least A-1 or the equivalent thereof or from Moody's is at least P-1 or the
equivalent thereof (any such bank being an "Approved Lender"), in each case with
maturities of not more than 270 days from the date of acquisition, (c)
commercial paper and variable or fixed rate notes issued by an Approved Lender
(or by the parent company thereof) and maturing within six months of the date of
acquisition, (d) repurchase agreements entered into by a Person with a bank or
trust company or recognized securities dealer having capital and surplus in
excess of $500,000,000 for (i) U.S. Government Obligations, (ii) time deposits
or certificates of deposit described under subsection (b) above, or (iii)
commercial paper or other notes described under subsection (c) above, in which,
in each such case, such bank, trust company or dealer shall have a perfected
first priority security interest (subject to no other Liens) and having, on the
date of purchase thereof, a fair market value of at least 100% of the amount of
the repurchase obligations, (e) obligations of any State of the United States or
any political subdivision thereof, the interest with respect to which is exempt
from federal income taxation under Section 103 of the U.S. Internal Revenue
Code, having a long term rating of at least AA- or Aa-3 by S&P or Moody's,
respectively, and maturing within three years from the date of acquisition
thereof, (f) Investments in municipal auction preferred stock (i) rated AAA (or
the equivalent thereof) or better by S&P or Aaa (or the equivalent thereof) or
better by Moody's and (ii) with dividends that reset at least once every 365
days and (g) Investments, classified in accordance with GAAP as current assets,
in money market investment programs registered under the 1940 Act which are
administered by reputable financial institutions having capital of at least
$100,000,000 and the portfolios of which are limited to Investments of the
character described in clauses (a), (b), (c), (e) and (f) above.
"Trust" has the meaning specified in the first paragraph of the Recitals
to this Indenture.
"Trustee" means the Person named as the "Trustee" in the first paragraph
of this Indenture until a successor Trustee shall have become such pursuant to
the applicable provisions of this Indenture, and thereafter "Trustee" shall mean
or include each Person who is then a Trustee hereunder.
"Trust Indenture Act" means the Trust Indenture Act of 1939 as amended
and as in force at the date as of which this Indenture was executed, except as
provided in Section 9.5; provided that in the event the Trust Indenture Act of
1939 is amended after such date, "Trust Indenture Act" means, to the extent
required by any such amendment, the Trust Indenture Act of 1939 as so amended.
"Trust Securities" has the meaning specified in the first paragraph of
the Recitals to this Indenture.
"U.S. Government Obligations" means securities that are (i) direct
obligations of the United States of America the timely payment of which its full
faith and credit is pledged or (ii) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States of
America the timely payment of which is unconditionally guaranteed as a full
faith and credit obligation by the United States of America, and shall also
include a depositary receipt issued by a bank (as defined in Section 3(a)(2) of
the Securities Act) as custodian with respect to any such U.S. Government
Obligation or a specific payment of principal of or interest on any such U.S.
Government Obligation held by such custodian for the account of the holder of
such depositary receipt; provided that
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(except as required by law) such custodian is not authorized to make any
deduction from the amount payable to the holder of such depositary receipt for
any amount received by the custodian in respect of the U.S. Government
Obligation or the specific payment of principal of or interest on the U.S.
Government Obligation evidenced by such depositary receipt.
"Vice President" when used with respect to the Company or the Trustee
means any duly appointed vice president, whether or not designated by a number
or a word or words added before or after the title "vice president."
"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof.
"Wholly Owned Subsidiary" means a Subsidiary all the Capital Stock of
which (other than directors' qualifying shares and shares held by other Persons
to the extent such shares are required by applicable law to be held by a Person
other than the Company or a Subsidiary) is owned by the Company or by one or
more Wholly Owned Subsidiaries, or by the Company and one or more Wholly Owned
Subsidiaries.
Section 1.2. Compliance Certificate and Opinions.
Upon any application or request by the Company to the Trustee to take
or refrain from taking any action under any provision of this Indenture, the
Company shall furnish to the Trustee an Officers' Certificate stating that all
conditions precedent (including covenants, compliance with which constitutes a
condition precedent), if any, provided for in this Indenture relating to the
proposed action or inaction, as the case may be, have been complied with and an
Opinion of Counsel stating that in the opinion of such counsel all such
conditions precedent, if any, have been complied with, except that in the case
of any such application or request as to which the furnishing of such documents
is specifically required by any provision of this Indenture relating to such
particular application or request, no additional certificate or opinion need be
furnished.
Every certificate or opinion with respect to compliance with a
condition precedent or covenant provided for in this Indenture (other than the
certificates provided pursuant to Section 10.15) shall include:
(1) a statement that each individual signing such certificate or
opinion has read such covenant or condition and the definitions herein
relating thereto;
(2) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(3) a statement that, in the opinion of each such individual, he has
made such examination or investigation as is necessary to enable him to
express an informed opinion as to whether such covenant or condition has
been complied with; and
(4) a statement as to whether, in the opinion of each such individual,
such condition or covenant has been complied with.
Section 1.3. Form of Documents Delivered to Trustee.
In any case where several matters are required to be certified by, or
covered by an opinion of, any specified Person, it is not necessary that all
such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other such Persons as to other matters, and any such Person may certify
or give an opinion as to such matters in one or several documents.
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<PAGE> 24
Any certificate or opinion of an officer of the Company may be based,
insofar as it relates to legal matters, upon a certificate or opinion of, or
representations by, counsel, unless such officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to the matters upon which his certificate or opinion is based are
erroneous. Any such certificate or Opinion of Counsel may be based, insofar as
it relates to factual matters, upon a certificate or opinion of, or
representations by, an officer or officers of the Company stating that the
information with respect to such factual matters is in the possession of the
Company, unless the individual attorneys actively engaged in the transaction
which is the subject matter of such opinion in the office of such counsel have
actual knowledge that the certificate or opinion or representations with respect
to such matters are erroneous. Counsel delivering an Opinion of Counsel may rely
as to matters of fact on certificates of the Company or government or other
officials customary for opinions of the type required.
Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.
Section 1.4. Acts of Holders; Record Date.
(a) Any request, demand, authorization, direction, notice, consent,
waiver or other action provided by this Indenture to be given to or taken by
Holders may be embodied in and evidenced by one or more instruments of
substantially similar tenor signed by such Holders in person or by an agent duly
appointed in writing; and, except as herein otherwise expressly provided, such
action shall become effective when such instrument or instruments is or are
delivered to the Trustee, and, where it is hereby expressly required, to the
Company. Such instrument or instruments (and the action embodied therein and
evidenced thereby) are herein sometimes referred to as the "Act" of the Holders
signing such instrument or instruments. Proof of execution of any such
instrument or of a writing appointing any such agent shall be sufficient for any
purpose of this Indenture and (subject to Section 6.1) conclusive in favor of
the Trustee and the Company, if made in the manner provided in this Section 1.4.
(b) The fact and date of the execution by any Person of any such
instrument or writing may be proved by the affidavit of a witness of such
execution or by the certificate of a notary public or other officer authorized
by law to take acknowledgments of deeds, certifying that the individual signing
such instrument or writing acknowledged to him the execution thereof. Where such
execution is by a Person acting in other than his individual capacity, such
certificate or affidavit shall also constitute sufficient proof of his
authority.
(c) The fact and date of the execution by any Person of any such
instrument or writing, or the authority of the Person executing the same, may
also be proved in any other manner which the Trustee deems sufficient and in
accordance with such reasonable rules as the Trustee may determine.
(d) The ownership of Securities shall be proved by the Securities
Register.
(e) Any request, demand, authorization, direction, notice, consent,
waiver or other Act of the Holder of any Security shall bind every future Holder
of the same Security and the Holder of every Security issued upon the
registration of transfer thereof or in exchange therefor or in lieu thereof in
respect of anything done, omitted or suffered to be done by the Trustee or the
Company in reliance thereon, whether or not notation of such action is made upon
such Security.
(f) The Company may, but shall not be obligated to, fix a record date
for the purpose of determining the Holders entitled to take any action under
this Indenture by vote or consent. Except as otherwise provided herein, such
record date shall be the later of 30 days prior to the first solicitation of
such consent or vote or the date of the most recent list of Securityholders
furnished to the Trustee pursuant to Section 7.1 prior to such solicitation. If
a record date is fixed, those Persons who were Securityholders at such record
date (or their duly designated proxies), and only those Persons, shall be
entitled to take such action by vote or consent or to revoke any vote or consent
previously
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<PAGE> 25
given, whether or not such persons continue to be Holders after such record
date, provided that unless such vote or consent is obtained from the Holders (or
their duly designated proxies) of the requisite principal amount of Outstanding
Securities prior to the date which is the 90th day after such record date, any
such vote or consent previously given shall automatically and without further
action by any Holder be cancelled and of no further effect.
Section 1.5. Notices, Etc., to Trustee and Company.
Any request, demand, authorization, direction, notice, consent, waiver
or Act of Holders or other document provided or permitted by this Indenture to
be made upon, given or furnished to, or filed with,
(1) the Trustee by any Holder, the Company or the holders of or agents
for any Senior Indebtedness shall be sufficient for every purpose hereunder
if made, given, furnished or filed in writing and hand delivered, mailed
with first-class prepaid postage, sent by facsimile or delivered by
overnight courier, to or with the Trustee at its Corporate Trust Office or
at any other address previously furnished in writing to the Holders, the
Company, and the holders of or agent for any Senior Indebtedness; or
(2) the Company by the Trustee or by any Holder shall be sufficient for
every purpose (except as otherwise provided in Sections 5.1 and 5.2 hereof)
hereunder if in writing and hand delivered, mailed with first-class prepaid
postage, sent by facsimile or delivered by overnight courier to the Company
at the address of its principal office specified in the first paragraph of
this Indenture or at any other address previously furnished in writing to
the Trustee by the Company; provided that all notices sent to the Company
pursuant to this Indenture shall be sent in copy to Superior National
Insurance Group, Inc. (26601 Agoura Road, Calabassas, California 91302,
Attn: President).
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five Business
Days after being deposited in the mail with first-class prepaid postage, if
mailed; when receipt is acknowledged, if sent by facsimile; and the Business Day
on which a courier delivers such notice, if sent by courier, provided that if
delivery by courier is not made on a Business Day, the next succeeding Business
Day.
Section 1.6. Notice to Holders; Waiver.
Where this Indenture provides for notice to Holders of any event, such
notice shall be sufficiently given (unless otherwise herein expressly provided)
if in writing and hand delivered, mailed with first-class prepaid postage, sent
by facsimile or delivered by overnight courier to each Holder affected by such
event, at the address of such Holder as it appears in the Securities Register,
not later than the latest date (if any), and not earlier than the earliest date
(if any), prescribed for the giving of such notice. In any case where notice to
Holders is given by mail, neither the failure to mail such notice, nor any
defect in any notice so mailed, to any particular Holder shall affect the
sufficiency of such notice with respect to other Holders. Where this Indenture
provides for notice in any manner, such notice may be waived in writing by the
Person entitled to receive such notice, either before or after the event, and
such waiver shall be the equivalent of such notice. Waivers of notice by Holders
shall be filed with the Trustee, but such filing shall not be a condition
precedent to the validity of any action taken in reliance upon such waiver.
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five Business
Days after being deposited in the mail with first-class prepaid postage, if
mailed; when receipt is acknowledged, if sent by facsimile; and the Business Day
on which a courier delivers such notice, if sent by courier, provided that if
delivery by courier is not made on a Business Day, the next succeeding Business
Day.
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<PAGE> 26
In case by reason of the suspension of regular mail service or by
reason of any other cause it shall be impracticable to give such notice by mail,
then such notification as shall be made with the approval of the Trustee shall
constitute a sufficient notification for every purpose hereunder.
Section 1.7. Conflict with Trust Indenture Act.
If any provision hereof limits, qualifies or conflicts with a provision
of the Trust Indenture Act that is required or deemed under the Trust Indenture
Act to be part of and govern this Indenture, the latter provision shall control.
If any provision of this Indenture modifies or excludes any provision of the
Trust Indenture Act that may be so modified or excluded, the latter provision
shall be deemed to apply to this Indenture as so modified or to be excluded, as
the case may be.
Section 1.8. Effect of Headings and Table of Contents.
The Article and Section headings herein and the Table of Contents are
for convenience only and shall not affect the construction hereof.
Section 1.9. Successors and Assigns.
All covenants and agreements in this Indenture by the Company shall
bind its respective successors and assigns, whether so expressed or not.
Section 1.10. Separability Clause.
In case any provision in this Indenture or in the Securities shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
Section 1.11. Acknowledgement of Rights.
The Company acknowledges that, with respect to any Securities held by
the Trust or a trustee of the Trust, if the Preferred Trustee of such Trust
fails to enforce its rights under this Indenture as the holder of the Securities
held as the assets of the Trust, any holder of the Trust Securities may
institute legal proceedings directly against the Company to enforce such
Preferred Trustee's rights under this Indenture without first instituting any
legal proceedings against such Preferred Trustee or any other person or entity.
Notwithstanding the foregoing, if an Event of Default has occurred and is
continuing and such event is attributable to the failure of the Company to pay
principal of (or premium, if any) or interest on the Securities when due, the
Company acknowledges that a holder of Trust Securities may directly institute a
proceeding for enforcement of payment to such holder of the principal of (or
premium, if any) or interest on the Securities having a principal amount equal
to the aggregate liquidation amount of the Trust Securities of such holder on or
after the respective due date specified in the Securities.
Section 1.12. Governing Law.
THIS INDENTURE AND THE SECURITIES ENDORSED THEREON SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
Section 1.13. Non-Business Days.
In any case where any Interest Payment Date, Redemption Date or Stated
Maturity of any Security shall not be a Business Day, then (notwithstanding any
other provision of this Indenture or the Securities) payment of interest or
principal (and premium, if any) need not be made on such date, but may be made
on the next succeeding Business Day (and no interest shall accrue for the period
from and after such Interest Payment Date, Redemption Date
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<PAGE> 27
or Stated Maturity, as the case may be, until such next succeeding Business Day
except that, if such Business Day is in the next succeeding calendar year, such
payment shall be made on the immediately preceding Business Day (in each case
with the same force and effect as if made on the Interest Payment Date or
Redemption Date or at the Stated Maturity)).
Section 1.14. Duplicate Originals.
The parties may sign any number of copies of this Indenture. Each
signed copy shall be an original, but all of them together represent the same
agreement.
Section 1.15. No Recourse Against Others.
A Director, officer, employee, stockholder or incorporator, as such, of
the Company shall not have any liability for any obligations of the Company
under the Securities or this Indenture for any claims based on, in respect of or
by reason of such obligations or their creation. Each Holder by accepting a
Security waives and releases all such liability. Such waiver and release
constitute part of the consideration for the issuance of the Securities.
ARTICLE II. SECURITY FORMS
Section 2.1. Forms Generally.
The Securities and the Trustee's certificate of authentication shall be
in substantially the forms set forth in this Article.
Section 2.2. Form of Face of Security.
SUPERIOR NATIONAL INSURANCE GROUP, INC.
10 3/4% SENIOR SUBORDINATED NOTES DUE DECEMBER 1, 2017
No. $__
SUPERIOR NATIONAL INSURANCE GROUP, INC., a corporation organized and
existing under the laws of Delaware (hereinafter called the "Company", which
term includes any successor corporation under the Indenture hereinafter referred
to), for value received, hereby promises to pay to Wilmington Trust Company, as
Preferred Trustee of Superior National Capital Trust I, or registered assigns,
the principal sum of $___________ Dollars on December 1, 2017. The Company
further promises to pay interest on said principal sum semi-annually in arrears
on June 1 and December 1 of each year, commencing June 1, 1998, (each such date,
an "Interest Payment Date") at the rate of 10 3/4% per annum until the principal
hereof is paid or duly provided for or made available for payment and on any
overdue principal and (without duplication and to the extent that payment of
such interest is enforceable under applicable law) on any interest which is in
arrears at the rate of 10 3/4% per annum, compounded semi-annually. The amount
of interest payable for any period shall be computed on the basis of twelve
30-day months and a 360-day year. The amount of interest payable for any partial
period shall be computed on the basis of the number of days elapsed in a 360-day
year of twelve 30-day months. In the event that any date on which interest is
payable on this Security is not a Business Day, then a payment of the interest
payable on such date will be made on the next succeeding day which is a Business
Day (and without any interest or other payment in respect of any such delay),
except that, if such Business Day is in the next succeeding calendar year, such
payment shall be made on the immediately preceding Business Day, in each case
with the same force and effect as if made on the date the payment
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<PAGE> 28
was originally payable. A "Business Day" shall mean any day other than (i) a
Saturday or Sunday, (ii) a day on which banking institutions in The City of New
York are authorized or required by law or executive order to remain closed or
(iii) a day on which the Corporate Trust Office of the Trustee, or, with respect
to the Preferred Securities, the principal office of the Preferred Trustee under
the Declaration hereinafter referred to for Superior National Capital Trust I,
is closed for business. The interest installment so payable, and punctually paid
or duly provided for, on any Interest Payment Date will, as provided in the
Indenture, be paid to the Person in whose name this Security (or one or more
Predecessor Securities, as defined in the Indenture) is registered at the close
of business on the Regular Record Date for such interest installment, which
shall be the date which is the fifteenth day immediately preceding such Interest
Payment Date (whether or not a Business Day). Any such interest installment not
so punctually paid or duly provided for shall forthwith cease to be payable to
the Holder on such Regular Record Date and may either be paid to the Person in
whose name this Security (or one or more Predecessor Securities) is registered
at the close of business on a Special Record Date for the payment of such
Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to
Holders not less than ten days prior to such Special Record Date, or be paid at
any time in any other lawful manner not inconsistent with the requirements of
any securities exchange on which the Securities may be listed, and upon such
notice as may be required by such exchange, all as more fully provided in said
Indenture.
Payments on this Security issued as a Global Security shall be made in
immediately available funds to the Depository. In the event that this Security
is issued in certificated form, the principal of (and premium, if any) and
interest on the Security will be payable at the office maintained by the Company
under the Indenture; provided that unless the Security is held by the Trust or
any permissible successor entity as provided under the Declaration in the event
of a merger, consolidation or amalgamation of the Trust, payment of interest may
be made at the option of the Company by check mailed to the address of the
person entitled thereto, as such address shall appear in the Register.
The indebtedness evidenced by this Security is, to the extent provided
in the Indenture, subordinate and subject in right of payment to the prior
payment in full of all Senior Indebtedness, and this Security is issued subject
to the provisions of the Indenture with respect thereto. Each Holder of this
Security, by accepting the same, (a) agrees to and shall be bound by such
provisions, (b) authorizes and directs the Trustee on his behalf to take such
actions as may be necessary or appropriate to effectuate the subordination so
provided and (c) appoints the Trustee his attorney-in-fact for any and all such
purposes. Each Holder hereof, by his acceptance hereof, waives all notice of the
acceptance of the subordination provisions contained herein and in the Indenture
by each holder of Senior Indebtedness, whether now outstanding or hereafter
incurred, and waives reliance by each such holder upon said provisions.
Reference is hereby made to the further provisions of this Security set
forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been executed by
the Trustee referred to on the reverse hereof by manual signature, this Security
shall not be entitled to any benefit under the Indenture or be valid or
obligatory for any purpose.
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<PAGE> 29
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed.
Dated: December 3, 1997 SUPERIOR NATIONAL INSURANCE GROUP,
INC.
By: ______________________________________
Name:
Title:
By:_______________________________________
Name:
Title:
ATTEST:
By:_______________________________________
Name:
Title:
Section 2.3. Form of Reverse of Security.
This Security is one of a duly authorized issue of securities of the
Company (herein called the "Securities"), issued under a Senior Subordinated
Indenture, dated as of December 3, 1997 (herein called the "Indenture"), between
the Company and Wilmington Trust Company, as Trustee (herein called the
"Trustee", which term includes any successor trustee under the Indenture), to
which Indenture and all indentures supplemental thereto reference is hereby made
for a statement of the respective rights, limitations of rights, duties and
immunities thereunder of the Trustee, the Company and the Holders of the
Securities, and of the terms upon which the Securities are, and are to be,
authenticated and delivered.
All terms used in this Security that are defined in the Indenture and
in the Amended and Restated Declaration of Trust, dated as of December 3, 1997,
as amended (the "Declaration"), for Superior National Capital Trust I, shall
have the meanings assigned to them in the Indenture or the Declaration, as the
case may be.
On or after December 1, 2005, the Company may, at its option, subject
to the terms and conditions of Article IV of the Indenture, redeem this Security
in whole at any time or in part from time to time, upon not less than 30 or more
than 60 days' notice, at the Redemption Prices (expressed as a percentage of
principal amount) set forth below plus accrued and unpaid interest, if any, to
the Redemption Date (subject to the right of Holders of record on the relevant
Regular Record Date to receive interest due on an Interest Payment Date that is
on or prior to the Redemption Date) if redeemed during the 12-month period
beginning on December 1 of the years indicated below:
<TABLE>
<CAPTION>
ERCENTAGE OF
PRINCIPAL
YEAR AMOUNT
- ---- --------------
<S> <C>
2005.......................................................... 105.375%
2006.......................................................... 103.583%
2007.......................................................... 101.792%
2008 and thereafter........................................... 100.000%
</TABLE>
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<PAGE> 30
If a Tax Event or an Investment Company Event in respect of the Trust
shall occur and be continuing, the Company shall cause the Trustees (as defined
in the Indenture) to liquidate the Trust and cause Securities to be distributed
to the holders of the Trust Securities in liquidation of the Trust or, in the
event of a Tax Event only, may cause the Securities to be redeemed, in each
case, subject to and in accordance with the provisions of the Declaration and
subject to Article XI of the Indenture, within 90 days following the occurrence
of such Tax Event or Investment Company Event. Any redemption of the Securities
as a result of a Tax Event shall be in whole at 100% of the principal amount
thereof, plus accrued and unpaid interest, if any, to the Redemption Date.
The Securities do not have the benefit of any sinking fund obligations.
In the event of redemption of this Security in part only, a new
Security for the unredeemed portion hereof will be issued in the name of the
Holder hereof upon the cancellation hereof.
If an Event of Default shall occur and be continuing, the principal of
all the Securities may be declared due and payable in the manner, with the
effect and subject to the conditions provided in the Indenture.
The Indenture contains provisions for satisfaction, discharge and
defeasance at any time of the entire indebtedness of this Security upon
compliance by the Company with certain conditions set forth in the Indenture.
The Indenture permits, with certain exceptions as therein provided, the
Company and the Trustee at any time to enter into a supplemental indenture or
indentures for the purpose of modifying in any manner the rights and obligations
of the Company and of the Holders of the Securities, with the consent of the
Holders of not less than a majority in principal amount of the Outstanding
Securities to be affected by such supplemental indenture. The Indenture also
contains provisions permitting Holders of specified percentages in aggregate
outstanding principal amount of the Securities affected thereby, on behalf of
the Holders of all Securities, to waive compliance by the Company with certain
provisions of the Indenture and certain existing or past defaults under the
Indenture and their consequences. Any such consent or waiver by the Holder of
this Security shall be conclusive and binding upon such Holder and upon all
future Holders of this Security and upon any Security issued upon the
registration of transfer hereof or in exchange herefor or in lieu hereof,
whether or not notation of such consent or waiver is made upon this Security.
The Indenture also provides that without notice to or the consent of the
Holders, the Company and the Trustee may enter into one or more supplemental
indentures provided that any change effected by such supplemental indenture does
not (i) create a gain or loss for the Holders for federal income tax purposes or
(ii) materially adversely affect the interests of the Holders.
As provided in and subject to the provisions of the Indenture, if an
Event of Default with respect to the Securities at the time Outstanding occurs
and is continuing, then and in every such case the Trustee or the Holders of not
less than 25% in aggregate principal amount of the Outstanding Securities may
declare the principal amount of and interest on all the Outstanding Securities
to be due and payable immediately, by a notice in writing to the Company (and to
the Trustee if given by Holders), provided that if the Trustee or such Holders
fail to do so, the Preferred Trustee shall have such right by a notice in
writing to the Company and the Trustee; and upon any such declaration such
specified amount of and the accrued interest on all the Securities shall become
immediately due and payable, provided that the payment of principal and interest
on such Securities shall remain subordinated to the extent provided in Article
XII of the Indenture.
No reference herein to the Indenture and no provision of this Security
or of the Indenture shall alter or impair the obligation of the Company, which
is absolute and unconditional, to pay the principal of (and premium, if any) and
interest on this Security at the times, place and rate, and in the coin or
currency, herein prescribed.
As provided in the Indenture and subject to certain limitations therein
set forth, the transfer of this Security is registrable in the Securities
Register, upon surrender of this Security for registration of transfer at the
office or agency of the Company maintained under Section 10.2 of the Indenture
duly endorsed by, or accompanied by a written
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<PAGE> 31
instrument of transfer in form satisfactory to the Company and the Securities
Registrar duly executed by, the Holder hereof or his attorney duly authorized in
writing, and thereupon one or more new Securities, of authorized denominations
and for the same aggregate principal amount, will be issued to the designated
transferee or transferees. No service charge shall be made for any such
registration of transfer or exchange, but the Company may require payment of a
sum sufficient to cover any tax or other governmental charge payable in
connection therewith.
Prior to due presentment of this Security for registration of transfer,
the Company, the Trustee and any agent of the Company or the Trustee may treat
the Person in whose name this Security is registered as the owner hereof, for
all purposes, whether or not this Security be overdue, and neither the Company,
the Trustee nor any such agent shall be affected by notice to the contrary.
The Company shall have the right, at any time and from time to time
during the term of the Securities, to defer payments of interest by extending
the interest payment period of such Securities for a period not exceeding ten
consecutive semi-annual periods, including the first such semi-annual period
during such extension period, and not to extend beyond the Maturity Date of the
Securities (an "Extension Period"), at the end of which period the Company shall
pay all interest then accrued and unpaid together with interest thereon at the
rate specified for the Securities (to the extent that payment of such interest
is enforceable under applicable law). Before the termination of any such
Extension Period, the Company may further defer payments of interest by further
extending such Extension Period, provided that such Extension Period, together
with all such previous and further extensions within such Extension Period,
shall not exceed ten consecutive semi-annual periods, including the first
semi-annual period during such Extension Period, or extend beyond the Maturity
Date of the Securities. Upon the termination of any such Extension Period and
the payment of all accrued and unpaid interest and any additional amounts then
due, the Company may commence a new Extension Period, subject to the foregoing
requirements. The Company's election to so defer payments shall not be deemed an
Event of Default.
During any such Extension Period, the Company has agreed that it will
not (i) declare or pay any dividends or distributions on, or redeem, purchase,
acquire, or make a liquidation payment with respect to, any of the Company's
Capital Stock (which includes common and preferred stock) or (ii) make any
payment of principal, interest or premium, if any, on or repay or repurchase or
prepay any debt securities of the Company that rank pari passu with or junior in
right of payment to the Securities or (iii) make any guarantee payments with
respect to any guarantee by the Company of the debt securities of any Subsidiary
of the Company if such guarantee ranks pari passu or junior in right of payment
to the Securities (excluding, in each case (a) dividends or distributions in
shares of, or options, warrants or rights to subscribe for or purchase shares
of, common stock of the Company, (b) any declaration of a dividend in connection
with the implementation of a stockholder rights plan, or the issuance of stock
under any such plan in the future, or the prepayment or repurchase of any such
rights pursuant thereto, (c) payments under the Common Securities Company
Guarantee or the Preferred Securities Company Guarantee, (d) as a result of a
reclassification of the Company's Capital Stock or the exchange or the
conversion of one class or series of the Company's Capital Stock for another
class or series of the Company's Capital Stock, (e) the purchase of fractional
interests in shares of the Company's Capital Stock pursuant to the exchange or
conversion of such Capital Stock or the security being exchanged or converted,
and (f) purchases or issuances of Common Stock under any of the Company's stock
option, stock purchase, stock loan or other benefit plans for its directors,
officers or employees or any of the Company's dividend reinvestment plans, in
each case as now existing or hereafter established or amended). The Company's
election to so defer payments shall not be deemed an Event of Default.
The Company will have the right at any time to dissolve Superior
National Capital Trust I and, after satisfaction of any liabilities of creditors
or the Trust, cause the Securities to be distributed to the holders of the Trust
Securities in liquidation of the Trust.
The Securities are issuable only in registered form without coupons in
denominations of $1,000 and any integral multiple thereof. As provided in the
Indenture and subject to certain limitations therein set forth, Securities
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<PAGE> 32
are exchangeable for a like aggregate principal amount of Securities of a
different authorized denomination, as requested by the Holder surrendering the
same.
The Company and, by its acceptance of this Security or a beneficial
interest therein, the Holder of, and any Person that acquires a beneficial
interest in, this Security agree that for United States federal, state and local
tax purposes it is intended that this Security constitute indebtedness.
THE INDENTURE AND THIS SECURITY SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
Section 2.4. Additional Provisions Required in Global Security.
Any Global Security issued hereunder shall, in addition to the
provisions contained in Sections 2.2 and 2.3, bear a legend in substantially the
following form:
"This Security is a Global Security within the meaning of the Indenture
hereinafter referred to and is registered in the name of The Depository
Trust Company (the "Depository") or a nominee of the Depository. This
Security is exchangeable for Securities registered in the name of a Person
other than the Depository or its nominee only in the limited circumstances
described in the Indenture and no transfer of this Security (other than a
transfer of this Security as a whole by the Depository to a nominee of the
Depository or by a nominee of the Depository to the Depository or another
nominee of the Depository) may be registered except in limited
circumstances.
Unless this Security is presented by an authorized representative of
The Depository Trust Company (55 Water Street, New York) to SUPERIOR
NATIONAL INSURANCE GROUP, INC. or its agent for registration of transfer,
exchange or payment, and any Security issued is registered in the name of
Cede & Co. or such other name as requested by an authorized representative
of The Depository Trust Company and any payment hereon is made to Cede &
Co., ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY A
PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has
an interest herein."
Section 2.5. Legends.
Except as determined by the Company in accordance with applicable law,
each Initial Security and each Exchange Security of which the Holder is either
(A) a broker-dealer who purchased such Initial Security directly from the
Company for resale pursuant to Rule 144A or any other available exemption under
the Securities Act, (B) a Person participating in the distribution of the
Initial Securities, (C) a Person who is an affiliate (as defined in Rule 144
under the Securities Act) of the Company or (D) a qualified institutional buyer
shall bear the applicable legends relating to restrictions on transfers pursuant
to the securities laws in substantially the form set forth below:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE
SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAW. NEITHER THIS
SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD,
ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE
ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR
NOT SUBJECT TO, REGISTRATION.
THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL
OR OTHERWISE TRANSFER THIS SECURITY, PRIOR TO THE DATE (THE "RESALE
RESTRICTION TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE
ORIGINAL ISSUANCE
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<PAGE> 33
DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY
"AFFILIATE" OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY
PREDECESSOR OF THIS SECURITY) ONLY (A) TO THE COMPANY, (B) PURSUANT TO A
REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE
SECURITIES ACT, (C) SO LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE
PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A
PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" (AS
DEFINED IN RULE 144A) THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE
ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT
THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO
OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED
STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, (E)
TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF
SUBPARAGRAPH (A)(1), (2), (3) OR (7) OF RULE 501 UNDER THE SECURITIES
ACT THAT IS ACQUIRING THIS SECURITY FOR ITS OWN ACCOUNT, OR FOR THE
ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, FOR INVESTMENT
PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION
WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F)
PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION
REQUIREMENTS UNDER THE SECURITIES ACT, SUBJECT TO THE RIGHT OF THE TRUST
AND THE COMPANY PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (i) PURSUANT
TO CLAUSE (D), (E) OR (F) TO REQUIRE THE DELIVERY OF AN OPINION OF
COUNSEL, CERTIFICATIONS AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF
THEM, AND (ii) PURSUANT TO CLAUSE (E) TO REQUIRE THAT THE TRANSFEROR
DELIVER TO THE TRUST A LETTER FROM THE TRANSFEREE SUBSTANTIALLY IN THE
FORM OF ANNEX A TO THE OFFERING MEMORANDUM DATED NOVEMBER 26, 1997. SUCH
HOLDER FURTHER AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS
SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS
LEGEND.
If the Security is sold pursuant to Regulation S of the Securities Act:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT AND MAY NOT
BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR
BENEFIT OF, U.S. PERSONS UNLESS REGISTERED UNDER THE SECURITIES ACT OR AN
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT IS
AVAILABLE.
Section 2.6. Form of Trustee's Certificate of Authentication.
This is one of the Securities referred to in the within mentioned
Indenture.
WILMINGTON TRUST COMPANY,
as Trustee
By:____________________________
Authorized officer
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ARTICLE III. THE SECURITIES
Section 3.1. Title and Terms.
The aggregate principal amount of Securities which may be authenticated
and delivered under this Indenture is limited to $108,248,000 except for
Securities authenticated and delivered upon registration of transfer of, or in
exchange for, or in lieu of, other Securities pursuant to Section 3.4, 3.5, 3.6,
9.6 or 11.6.
The Securities shall be known and designated as the "10 3/4% Senior
Subordinated Notes due December 1, 2017" of the Company. Their Stated Maturity
shall be December 1, 2017, at which time the Securities shall become due and
payable together with any accrued and unpaid interest thereon and they shall
bear interest at the rate of 10 3/4% per annum, from the Issue Date, payable
semi-annually in arrears on each Interest Payment Date subject to Article XIII,
to the Persons in whose name the Securities are registered at the close of
business on the Regular Record Date.
Interest on the Securities shall accrue from the most recent date on
which interest has been paid or, if no interest has been paid, from the Issue
Date. Interest in arrears shall accrue interest (compounded semi-annually) at
the same rate to the extent permitted by applicable law.
Payments on the Securities issued as a Global Security shall be made in
immediately available funds to the Depository. In the event that Securities are
issued in certificated form, the principal of (and premium, if any) and interest
on the Securities shall be payable at the office maintained by the Company
pursuant to Section 10.2; provided that unless the Securities are held by the
Trust or any permissible successor entity as provided under the Declaration in
the event of a merger, consolidation or amalgamation of the Trust, payment of
interest may be made at the option of the Company by check mailed to the address
of the persons entitled thereto, as such address shall appear in the Register.
The Securities shall be redeemable as provided in Article XI.
The Securities shall be subject to a limited right of repurchase by the
Company as provided in Sections 10.13 and 10.14.
The Securities shall be subordinated in right of payment to Senior
Indebtedness of the Company as provided in Article XII.
The Securities shall be subject to defeasance at the option of the
Company as provided in Section 4.3.
Section 3.2. Denominations.
The Securities shall be issuable only in registered form without
coupons and only in denominations of $1,000 and any integral multiple thereof.
Section 3.3. Execution, Authentication, Delivery and Dating.
The Securities shall be executed on behalf of the Company by any two
officers. The signature of any of these officers on the Securities may be manual
or facsimile.
Securities bearing the manual or facsimile signatures of individuals
who were at any time the proper officers of the Company shall bind the Company,
notwithstanding that such individuals or any of them have ceased to hold such
offices prior to the authentication and delivery of such Securities or did not
hold such offices at the date of such Securities.
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Each Security shall be dated the date of its authentication.
No Security endorsed thereon shall be entitled to any benefit under
this Indenture or be valid or obligatory for any purpose, unless there appears
on such Security a certificate of authentication substantially in the form
provided for herein executed by the Trustee by the manual signature of one of
its authorized officers.
Section 3.4. Temporary Securities.
Pending the preparation of Definitive Securities, the Company may
execute, and upon Company Order the Trustee shall authenticate and deliver,
temporary Securities which are printed, lithographed, typewritten, mimeographed
or otherwise produced, in any authorized denomination, substantially of the
tenor of the Definitive Securities in lieu of which they are issued and with
such appropriate insertions, omissions, substitutions and other variations as
the officers executing such Securities may determine, as evidenced by their
execution of such Securities.
If temporary Securities are issued, the Company will cause Definitive
Securities to be prepared without unreasonable delay. After the preparation of
Definitive Securities, the temporary Securities shall be exchangeable for
Definitive Securities upon surrender of the temporary Securities at the office
or agency of the Company designated for that purpose without charge to the
Holder. Upon surrender for cancellation of any one or more temporary Securities,
the Company shall execute, and the Trustee shall authenticate and deliver in
exchange therefor a like principal amount of Definitive Securities of authorized
denominations having the same Issue Date and Stated Maturity, having the same
terms and like tenor. Until so exchanged, the temporary Securities shall in all
respects be entitled to the same benefits under this Indenture as Definitive
Securities.
Section 3.5. Registration, Registration of Transfer and Exchange.
(a) Registration. The Company shall cause to be kept at the Corporate
Trust Office of the Trustee, a register in which, subject to such reasonable
regulations as it may prescribe, the Company shall provide for the registration
of Securities and of transfers of Securities. Such register is herein sometimes
referred to as the "Securities Register." The Trustee is hereby appointed
"Securities Registrar" for the purpose of registering Securities and transfers
of Securities as herein provided.
Upon surrender for registration of transfer of any Security at the
office or agency of the Company designated for that purpose, the Company shall
execute, and the Trustee shall authenticate and deliver, in the name of the
designated transferee or transferees, one or more new Securities of any
authorized denominations of a like aggregate principal amount, of the same Issue
Date and Stated Maturity.
At the option of the Holder, Securities may be exchanged for other
Securities of any authorized denominations, of a like aggregate principal
amount, of the same Issue Date and Stated Maturity and having the same terms and
like tenor upon surrender of the Securities to be exchanged at such office or
agency. Whenever any Securities are so surrendered for exchange, the Company
shall execute, and the Trustee shall authenticate and deliver, the Securities
which the Holder making the exchange is entitled to receive.
All Securities issued upon any registration of transfer or exchange of
Securities shall be the valid obligations of the Company, evidencing the same
debt and entitled to the same benefits under this Indenture as the Securities
surrendered upon such registration of transfer or exchange.
Every Security presented or surrendered for registration of transfer or
for exchange shall (if so required by the Company or the Trustee) be duly
endorsed, or be accompanied by a written instrument of transfer in form
satisfactory to the Company and the Securities Registrar, duly executed by the
Holder thereof or his attorney duly authorized in writing.
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No service charge shall be made to a Holder for any registration of
transfer or exchange of Securities, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
connection with any registration of transfer or exchange of Securities.
Neither the Company nor the Securities Registrar shall be required to
(i) issue, register the transfer of or exchange Securities during a period
beginning at the opening of business 15 days before the day of mailing of a
notice of prepayment or any notice of selection of Securities for prepayment and
ending at the close of business on the day of such mailing; (ii) register the
transfer of or exchange any Security so selected for prepayment in whole or in
part, except the unprepaid portion of any Security being prepaid in part; or
(iii) register the transfer or exchange of a Security between a record date and
the next succeeding Interest Payment Date.
Notwithstanding any of the foregoing, any Global Security shall be
exchangeable pursuant to this Section 3.5 for Securities registered in the names
of Persons other than the Depository for such Global Security or its nominee
only if (i) such Depository notifies the Company that it is unwilling or unable
to continue as Depository for such Global Security or if at any time such
Depository ceases to be a clearing agency registered under the Exchange Act,
(ii) the Company executes and delivers to the Trustee a Company Order that such
Global Security shall be so exchangeable or (iii) there shall have occurred and
be continuing an Event of Default with respect to the Securities. Any Global
Security that is exchangeable pursuant to the preceding sentence shall be
exchangeable for Securities registered in such names as such Depository shall
direct.
Notwithstanding any other provision in this Indenture, a Global
Security may not be transferred except as a whole by the Depository with respect
to such Global Security to a nominee of such Depository or by a nominee of such
Depository to such Depository or another nominee of such Depository.
Neither the Company nor the Trustee shall be required to, pursuant to
the provisions of this Section, (a) issue, register the transfer of or exchange
any Security during a period beginning at the opening of business 15 days before
any selection for redemption of Securities pursuant to Article XI and ending at
the close of business on the earliest date on which the relevant notice of
redemption is deemed to have been given to all Holders of Securities to be so
redeemed, and (b) register the transfer of or exchange any Security so selected
for redemption, in whole or in part, except, in the case of any Security to be
redeemed in part, any portion thereof not to be redeemed.
(b) Exchange of Initial Securities for Exchange Securities. The Initial
Securities may be exchanged for Exchange Securities pursuant to the terms of the
Exchange Offer. The Trustee shall make the exchange as follows:
The Company shall present the Trustee with an Officers' Certificate
certifying the following:
(i) upon issuance of the Exchange Securities, the transactions
contemplated by the Exchange Offer will have been consummated; and
(ii)the principal amount of Initial Securities properly tendered in the
Exchange Offer that are represented by a Global Security and the
principal amount of the Initial Securities properly tendered in the
Exchange Offer that are represented by Definitive Securities, the
name of each Holder of such Definitive Securities, the principal
amount at maturity properly tendered in the Exchange Offer by each
such Holder and the name and address to which Definitive Securities
for Exchange Securities shall be registered and sent for each such
Holder.
The Trustee, upon receipt of (i) such Officers' Certificate, (ii) an
Opinion of Counsel (x) to the effect that the Exchange Securities have been
registered under Section 6 of the Securities Act and the Indenture has been
qualified under the Trust Indenture Act and (y) with respect to the matters set
forth in Section 3(p) of the Registration Rights Agreement and (iii) a Company
Order, shall authenticate (A) a Global Security for Exchange Securities in
aggregate principal amount equal to the aggregate principal amount of Initial
Securities as having been properly tendered and
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(B) Definitive Securities representing Exchange Securities registered in the
names of, and in the principal amounts indicated in, such Officers' Certificate.
If the principal amount at maturity of the Global Security for the
Exchange Securities is less than the principal amount at maturity of the Global
Security for the Initial Securities, the Trustee shall make an endorsement on
such Global Security for the Initial Securities indicating a reduction in the
principal amount at maturity represented thereby.
The Trustee shall deliver such Definitive Securities for exchange to
the holders thereof as indicated in such Officers' Certificate.
Section 3.6. Mutilated, Destroyed, Lost and Stolen Securities.
If any mutilated Security is surrendered to the Trustee together with
such security or indemnity as may be required by the Company or the Trustee to
save each of them harmless, the Company shall execute and the Trustee shall
authenticate and deliver in exchange therefor, a new Security of like tenor and
principal amount, having the same Issue Date and Stated Maturity and bearing the
same Interest Rate as such mutilated Security, and bearing a number not
contemporaneously outstanding.
If there shall be delivered to the Company and to the Trustee (i)
evidence to their satisfaction of the destruction, loss or theft of any
Security, and (ii) such security or indemnity as may be required by each of them
to save each of them and any agent of either of them harmless, then, in the
absence of notice to the Company or the Trustee that such Security has been
acquired by a bona fide purchaser, the Company shall execute and upon its
request the Trustee shall authenticate and deliver, in lieu of any such
destroyed, lost or stolen Security, a new Security of like tenor and principal
amount, having the same Issue Date and Stated Maturity and bearing the same
Interest Rate as such destroyed, lost or stolen Security, and bearing a number
not contemporaneously outstanding.
In case any such mutilated, destroyed, lost or stolen Security has
become or is about to become due and payable, the Company in its discretion may,
instead of issuing a new Security, pay such Security.
Upon the issuance of any new Security under this Section, the Company
may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Trustee) connected therewith.
Every new Security issued pursuant to this Section in lieu of any
destroyed, lost or stolen Security shall constitute an original additional
contractual obligation of the Company, whether or not the destroyed, lost or
stolen Security shall be at any time enforceable by anyone, and shall be
entitled to all the benefits of this Indenture equally and proportionately with
any and all other Securities duly issued hereunder.
The provisions of this Section are exclusive and shall preclude (to the
extent lawful) all other rights and remedies with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Securities.
Section 3.7. Payment of Interest; Interest Rights Preserved.
Interest on any Security which is payable, and is punctually paid or
duly provided for, on any Interest Payment Date, shall be paid to the Person in
whose name that Security (or one or more Predecessor Securities) is registered
at the close of business on the Regular Record Date for such interest, except
that interest payable on the Stated Maturity of a Security shall be paid to the
Person to whom principal is paid.
Subject to Article XIII, any interest on any Security which is payable,
but is not punctually paid or duly provided for, on any Interest Payment Date
(herein called "Defaulted Interest"), shall forthwith cease to be payable
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to the Holder on the relevant Regular Record Date by virtue of having been such
Holder, and such Defaulted Interest may be paid by the Company, at its election
in each case, as provided in Clause (1) or (2) below:
(1) The Company may elect to make payment of any Defaulted Interest to
the Persons in whose names the Securities (or their respective Predecessor
Securities) are registered at the close of business on a Special Record
Date for the payment of such Defaulted Interest, which shall be fixed in
the following manner. The Company shall notify the Trustee in writing of
the amount of Defaulted Interest proposed to be paid on each Security and
the date of the proposed payment, and at the same time the Company shall
deposit with the Trustee an amount of money equal to the aggregate amount
proposed to be paid in respect of such Defaulted Interest or shall make
arrangements satisfactory to the Trustee for such deposit prior to the date
of the proposed payment, such money when deposited to be held in trust for
the benefit of the Persons entitled to such Defaulted Interest as in this
Clause provided. Thereupon the Trustee shall fix a Special Record Date for
the payment of such Defaulted Interest which shall be not more than 15 days
and not less than 10 days prior to the date of the proposed payment and not
less than 10 days after the receipt by the Trustee of the notice of the
proposed payment. The Trustee shall promptly notify the Company of such
Special Record Date and, in the name and at the expense of the Company,
shall cause notice of the proposed payment of such Defaulted Interest and
the Special Record Date therefor to be mailed, first-class, postage
prepaid, to each Holder at the address of such Holder as it appears in the
Securities Register not less than 10 days prior to such Special Record
Date. The Trustee may, in its discretion, in the name and at the expense of
the Company, cause a similar notice to be published at least once in a
newspaper, customarily published in the English language on each Business
Day and of general circulation in the Borough of Manhattan, The City of New
York, but such publication shall not be a condition precedent to the
establishment of such Special Record Date. Notice of the proposed payment
of such Defaulted Interest and the Special Record Date therefor having been
mailed as aforesaid, such Defaulted Interest shall be paid to the Persons
in whose names the Securities (or their respective Predecessor Securities)
are registered at the close of business on such Special Record Date and
shall no longer be payable pursuant to the following Clause (2). Such
payments shall be deemed to cure any such Default.
(2) The Company may make payment of any Defaulted Interest in any other
lawful manner not inconsistent with the requirements of any securities
exchange on which the Securities may be listed, upon such notice as may be
required by such exchange (or by the Trustee if the Securities are not
listed), if, after notice given by the Company to the Trustee of the
proposed payment pursuant to this Clause, such manner of payment shall be
deemed practicable by the Trustee.
Subject to the foregoing provisions of this Section, each Security
delivered under this Indenture upon registration of transfer of or in exchange
for or in lieu of any other Security shall carry the rights to interest accrued
and unpaid, and to accrue, which were carried by such other Security.
Under the Registration Rights Agreement, upon the occurrence of the
events discussed below, additional interest shall become payable in respect of
the Securities, and corresponding additional distributions shall become payable
on the Trust Securities as follows:
a. If (X) neither the Exchange Offer Registration Statement nor a Shelf
Registration Statement is filed with the Commission on or prior to December
31, 1997 or (Y) notwithstanding that the Company and the Trust have
consummated or will consummate an Exchange Offer, the Company and the Trust
are required to file a Shelf Registration Statement and such Shelf
Registration Statement is not filed on or prior to the date required by
Section 2(b) of the Registration Rights Agreement, then commencing on the
day after the applicable required filing date, additional interest shall
accrue on the principal amount of the Securities, and additional
distributions shall accumulate on the liquidation amount of the Preferred
Securities, each at a rate of 0.25% per annum; or
b. If (X) neither the Exchange Offer Registration Statement nor a Shelf
Registration Statement is declared effective by the Commission on or prior
to the 180th day after the Issue Date or (Y) notwithstanding
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that the Company and the Trust have consummated or will consummate an
Exchange Offer, the Company and the Trust are required to file a Shelf
Registration Statement and such Shelf Registration Statement is not
declared effective by the Commission on or prior to the 180th day after
the Issue Date, then, additional interest shall accrue on the principal
amount of the Securities and additional distributions shall accumulate
on the liquidation amount of the Preferred Securities, each at a rate of
0.25% per annum; or
c. If (X) the Trust has not exchanged Exchange Preferred Securities for
all Preferred Securities or the Company has not exchanged Exchange Company
Guarantees or Exchange Securities for all Company Guarantees or all
Securities validly tendered, in accordance with the terms of the Exchange
Offer on or prior to the 30th day after the date on which the Exchange
Offer Registration Statement was declared effective or (Y) if applicable,
the Shelf Registration Statement has been declared effective and such Shelf
Registration Statement ceases to be effective at any time prior to the
second anniversary of the Issue Date (other than after such time as all
Preferred Securities have been disposed of thereunder or otherwise cease to
be registrable securities within the meaning of the Registration Rights
Agreement), then additional interest shall accrue on the principal amount
of Securities, and additional distributions shall accumulate on the
liquidation amount of the Preferred Securities, each at a rate of 0.25% per
annum commencing on (i) the 31st day after such effective date, in the case
of (X) above, or (ii) the day such Shelf Registration Statement ceases to
be effective in the case of (Y) above;
provided, that neither the additional interest rate on the Securities, nor the
additional distribution rate on the liquidation amount of the Preferred
Securities, may exceed in the aggregate 0.25% per annum; provided, further, that
(1) upon the filing of the Exchange Offer Registration Statement or a Shelf
Registration Statement (in the case of clause a. above), (2) upon the
effectiveness of the Exchange Offer Registration Statement or a Shelf
Registration Statement (in the case of clause b. above), or (3) upon the
exchange of Exchange Preferred Securities, Exchange Company Guarantees and
Exchange Securities for all Preferred Securities, Company Guarantees and
Securities tendered (in the case of clause c.(X) above), or upon the
effectiveness of the Shelf Registration Statement which had ceased to remain
effective (in the case of clause c.(Y) above), additional interest on the
Securities, and additional distributions on the liquidation amount of the
Preferred Securities as a result of such clause (or the relevant subclause
thereof), as the case may be, shall cease to accrue or accumulate, as the case
may be.
Any amounts of additional interest and additional distributions due
pursuant to subsections a., b. or c. above will be payable in cash to the
holders of record on the relevant record dates for the payment of interest and
distributions pursuant to this Indenture and the Declaration respectively.
Section 3.8. Persons Deemed Owners.
Prior to the presentment of a Security for registration of transfer,
the Company, the Trustee and any agent of the Company or the Trustee may treat
the Person in whose name such Security is registered as the owner of such
Security for the purpose of receiving payment of principal of (and premium, if
any) and (subject to Section 3.7) interest on such Security and for all other
purposes whatsoever, whether or not such Security be overdue, and neither the
Company, the Trustee nor any agent of the Company or the Trustee shall be
affected by notice to the contrary.
Section 3.9. Cancellation.
All Securities surrendered for payment, redemption, registration of
transfer or exchange shall, if surrendered to any Person other than the Trustee,
be delivered to the Trustee, and any such Securities surrendered directly to the
Trustee for any such purpose shall be promptly canceled by it. The Company may
at any time deliver to the Trustee for cancellation any Securities previously
authenticated and delivered hereunder which the Company may have acquired in any
manner whatsoever, and all Securities so delivered shall be promptly canceled by
the Trustee. No Securities shall be authenticated in lieu of or in exchange for
any Securities canceled as provided in this Section, except as expressly
permitted by this Indenture. Subject to the records retention requirements of
the Exchange Act, all cancelled Securities shall be destroyed by the Trustee and
the Trustee shall deliver to the Company a
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certificate of such destruction. Upon request of the Company, the Trustee shall
provide the Company with a list of all Securities that have been cancelled.
Section 3.10. Computation of Interest.
Interest on the Securities shall be computed on the basis of a 360-day
year of twelve 30-day months and, for any partial period, on the basis of the
number of days elapsed in a 360-day year of twelve 30-day months. Interest on
the Securities shall accrue from the last Interest Payment Date or, or if no
interest has been paid, from the Issue Date.
Section 3.11. Right of Set-Off.
Notwithstanding anything to the contrary in this Indenture, the Company
shall have the right to set-off any payment it is otherwise required to make
hereunder in respect of any Security to the extent the Company has theretofore
made, or is concurrently on the date of such payment making, a payment under the
Company Guarantee relating to such Security or under Section 5.8 of this
Indenture.
Section 3.12. Agreed Tax Treatment.
Each Security issued hereunder shall provide that the Company and, by
its acceptance of a Security or a beneficial interest therein, the Holder of,
and any Person that acquires a beneficial interest in, such Security agree that
for United States federal, state and local tax purposes it is intended that such
Security constitutes indebtedness.
Section 3.13. CUSIP Numbers.
The Company in issuing the Securities may use "CUSIP" numbers (if then
generally in use), and, if so, the Trustee shall use "CUSIP" numbers in notices
of redemption or exchange as a convenience to Holders; provided that any such
notice may state that no representation is made as to the correctness of such
numbers either as printed on the Securities or as contained in any notice of a
redemption or an exchange and that reliance may be placed only on the other
identification numbers printed on the Securities, and any such redemption shall
not be affected by any defect in or omission of such numbers.
ARTICLE IV. SATISFACTION AND DISCHARGE
Section 4.1. Satisfaction and Discharge of Indenture.
This Indenture shall cease to be of further effect (except as to (i)
any surviving rights of registration of transfer, substitution and exchange of
Securities, (ii) rights hereunder of Holders to receive payments of principal of
(and premium, if any) and interest on the Securities and other rights, duties
and obligations of the Holders as beneficiaries hereof with respect to the
amounts, if any, deposited with the Trustee pursuant to this Article IV and
(iii) the rights and obligations of the Trustee hereunder), and the Trustee, on
demand of and at the expense of the Company, shall execute proper instruments
acknowledging satisfaction and discharge of this Indenture, when
(1) either:
(A) all Securities theretofore authenticated and delivered (other than
(i) Securities which have been destroyed, lost or stolen and which have been
replaced or paid as provided in Section 3.6 and (ii) Securities for whose
payment money has theretofore been deposited in trust or segregated and held in
trust by the Company and thereafter repaid to the Company or discharged from
such trust, as provided in Section 10.3) have been delivered to the Trustee for
cancellation; or
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(B) all such Securities not theretofore delivered to the Trustee for
cancellation
(i) have become due and payable, or
(ii) will become due and payable at their Stated Maturity within one
year of the date of deposit,
and the Company, in the case of Clause (B) (i) or (B) (ii) above, has
deposited or caused to be deposited with the Trustee as trust funds in
trust for such purpose an amount in the currency or currencies in which the
Securities are payable sufficient (without reinvestment) to pay and
discharge the entire indebtedness on such Securities not theretofore
delivered to the Trustee for cancellation, for principal (and premium, if
any) and interest to the date of such deposit (in the case of Securities
which have become due and payable) or to the Stated Maturity;
(2) the Company has paid or caused to be paid all other sums payable
hereunder by the Company; and
(3) the Company has delivered to the Trustee an Opinion of Counsel to
the effect that the Holders of the Outstanding Securities will not
recognize gain or loss for United States federal income tax purposes as a
result of the application of this Section 4.1 and will be subject to United
States federal income tax, if any, on the same amount, in the same manner
and at the same times as would have been the case if such satisfaction and
discharge of the Indenture had not occurred; and
(4) the application of this Section 4.1 shall not cause the Trustee to
have a conflicting interest as defined in Section 6.8 hereof and for
purposes of the Trust Indenture Act with respect to any securities of the
Company; and
(5) the funds deposited with the Trustee pursuant to Clause (1)(B)
above shall not result in the Trustee, or in the trust arising from such
deposit, being deemed an "investment company" as defined in the 1940 Act,
or such trust shall be qualified under the 1940 Act or exempt from
regulation thereunder; and
(6) the Company has delivered to the Trustee an Officers' Certificate
and an Opinion of Counsel, each stating that all conditions precedent
provided in this subsection 4.1 relating to the satisfaction and discharge
of this Indenture have been complied with.
Notwithstanding the satisfaction and discharge of this Indenture pursuant to
this Article IV, the obligations of the Company to the Trustee under Section 6.7
and, if money shall have been deposited with the Trustee pursuant to subclause
(B) of Clause (1) of this Section, the obligations of the Trustee under Section
4.2 and the last paragraph of Section 10.3, shall survive.
Section 4.2. Application of Trust Money; Reinstatement.
Subject to the provisions of the last paragraph of Section 10.3, all
money deposited with the Trustee pursuant to Section 4.1 or money or U.S.
Government Obligations deposited with the Trustee pursuant to Section 4.3, or
received by the Trustee in respect of U.S. Government Obligations deposited with
the Trustee pursuant to Section 4.3, shall be held in trust and applied by the
Trustee, in accordance with the provisions of the Securities and this Indenture,
to the payment, either directly or through any Paying Agent (including the
Company acting as its own Paying Agent) as the Trustee may determine, to the
Persons entitled thereto, of the principal (and premium, if any) and interest
for the payment of which such money or U.S. Government Obligations have been
deposited with or received by the Trustee; provided that such moneys need not be
segregated from other funds held in trust except to the extent required by law.
Money so held in trust shall not be subject to the provisions of Article XII.
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If the Trustee or the Paying Agent is unable to apply any money in
accordance with Section 4.1 or 4.3 by reason of any order or judgment of any
court or governmental authority enjoining, restraining or otherwise prohibiting
such application, then the obligations of the Company under this Indenture, and
the Securities shall be revived and reinstated as though no deposit had occurred
pursuant to this Article IV until such time as the Trustee or Paying Agent is
permitted to apply all such money in accordance with Section 4.1 or 4.3;
provided that if the Company makes any payment of principal of (and premium, if
any) or interest on any Security following the reinstatement of its obligations,
the Company shall be subrogated to the rights of the Holders of such Securities
to receive such payment from the money held by the Trustee or the Paying Agent.
Section 4.3. Satisfaction, Discharge and Defeasance of Securities.
The Company shall be deemed to have paid and discharged the entire
indebtedness on all the Outstanding Securities and the Trustee, at the expense
of the Company, shall execute proper instruments acknowledging satisfaction and
discharge of such indebtedness, when
(1) with respect to all Outstanding Securities,
(A) the Company has irrevocably deposited or caused to be
irrevocably deposited with the Trustee as trust funds in trust for such
purpose an amount sufficient to pay and discharge the entire
indebtedness on all Outstanding Securities for principal (and premium,
if any) and interest to the Stated Maturity or any Redemption Date as
contemplated by the penultimate paragraph of this Section 4.3, as the
case may be; or
(B) the Company has irrevocably deposited or caused to be
irrevocably deposited with the Trustee as obligations in trust for such
purpose an amount of U.S. Government Obligations as will, in the
written opinion of independent public accountants delivered to the
Trustee, together with predetermined and certain income to accrue
thereon, without consideration of any reinvestment thereof, be
sufficient to pay and discharge when due the entire indebtedness on all
Outstanding Securities for principal (and premium, if any) and interest
to the Stated Maturity or any Redemption Date as contemplated by the
penultimate paragraph of this Section 4.3, as the case may be; and
(2) the Company has paid or caused to be paid all other sums payable
with respect to the Outstanding Securities; and
(3) the Company has delivered to the Trustee an Opinion of Counsel to
the effect that the Holders of the Outstanding Securities will not
recognize gain or loss for United States federal income tax purposes as a
result of the application of this Section 4.3 and will be subject to United
States federal income tax, if any, on the same amount, in the same manner
and at the same times as would have been the case if such satisfaction,
discharge and defeasance of the Securities had not occurred; and
(4) the Company has delivered to the Trustee an Officers' Certificate
to the effect that the Securities, if then listed on any securities
exchange, will not be delisted as a result of the deposit pursuant to
Clause (1) above; and
(5) the application of this Section 4.3 shall not cause the Trustee to
have a conflicting interest as defined in Section 6.8 hereof and for
purposes of the Trust Indenture Act with respect to any securities of the
Company; and
(6) at the time of the deposit pursuant to Clause (1) above: (A) no
default in the payment of all or a portion of principal of (or premium, if
any) or interest on any Senior Indebtedness of the Company shall have
occurred and be continuing, and no Event of Default with respect to any
such Senior Indebtedness shall have
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occurred and be continuing and shall have resulted in such Senior
Indebtedness becoming or being declared due and payable prior to the date
on which it would otherwise have become due and payable and (B) no other
Event of Default with respect to any Senior Indebtedness of the Company
shall have occurred and be continuing permitting (after notice or the lapse
of time, or both) the holders of such Senior Indebtedness (or a
representative on behalf of the holders thereof) to declare such Senior
Indebtedness due and payable prior to the date on which it would otherwise
have become due and payable, or, in the case of either Clause (A) or Clause
(B) above, each such Default or Event of Default shall have been cured or
waived or shall have ceased to exist; and
(7) no Event of Default or event which with notice or lapse of time or
both would become an Event of Default shall have occurred and be continuing
on the date of such deposit; and
(8) the funds deposited with the Trustee pursuant to Clause (1) above
shall not result in the Trustee, or in the trust arising from such deposit,
being deemed an investment company as defined in the 1940 Act, or such
trust shall be qualified under the 1940 Act or exempt from regulation
thereunder; and
(9) the Company has delivered to the Trustee an Officers' Certificate
and an Opinion of Counsel, each stating that all conditions precedent
herein provided for relating to the satisfaction and discharge of the
entire indebtedness on all Outstanding Securities have been complied with.
Any deposits with the Trustee referred to in Section 4.3(1) above shall
be irrevocable and shall be made under the terms of an escrow trust agreement in
form and substance reasonably satisfactory to the Trustee. If any Outstanding
Securities are to be redeemed prior to their Stated Maturity, whether pursuant
to any optional or mandatory redemption provisions, the applicable escrow trust
agreement shall provide therefor and the Company shall make such arrangements as
are satisfactory to the Trustee for the giving of notice of redemption by the
Trustee in the name, and at the expense, of the Company. If the Securities are
not to become due and payable at their Stated Maturity or upon call for
redemption within one year of the date of deposit, then the Company shall give,
not later than the date of such deposit, notice of such deposit to the Holders.
Upon the satisfaction of the conditions set forth in this Section 4.3
with respect to all the Outstanding Securities, the terms and conditions of the
Securities, including the terms and conditions with respect thereto set forth in
this Indenture, shall no longer be binding upon, or applicable to, the Company;
provided that the Company shall not be discharged from any payment obligations
in respect of Securities which are deemed not to be Outstanding under clause
(iii) of the definition thereof if such obligations continue to be valid
obligations of the Company under applicable law.
ARTICLE V. REMEDIES
Section 5.1. Events of Default.
"Event of Default" wherever used herein means any one of the following
events (whatever the reason for such Event of Default and whether it shall be
voluntary or involuntary or be effected by operation of law or pursuant to any
judgment, decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(1) default in the payment of any interest upon any Security, when it
becomes due and continuance of such default for 30 days; or
(2) default in the payment of the principal of (or premium, if any, on)
any Security at its Maturity; or
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(3) default in the performance, or breach, in any material respect, of
any covenant or warranty of the Company in this Indenture (other than a
covenant or warranty a default in the performance of which or the breach of
which is elsewhere in this Section specifically dealt with), and
continuance of such default or breach for a period of 90 days after there
has been given, by registered or certified mail, to the Company by the
Trustee or to the Company and the Trustee by the Holders of at least 25% in
principal amount of the Outstanding Securities a written notice specifying
such default or breach and requiring it to be remedied; or
(4) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any Subsidiary (or the
payment of which is guaranteed by the Company or any Subsidiary), whether
such Indebtedness or Guarantee now exists or is incurred after the Issue
Date, if (A) such default results in the acceleration of such Indebtedness
prior to its express maturity or shall constitute a default in the payment
of such Indebtedness and (B) the principal amount of any such Indebtedness
that has been accelerated or not paid at maturity, when added to the
aggregate principal amount of all other such Indebtedness, at such time,
that has been accelerated or not paid at maturity, exceeds $10,000,000; or
(5) the dissolution, winding up or termination of the Trust, except in
connection with the distribution of Securities to the holders of Preferred
Securities in liquidation of the Trust and in connection with such mergers,
consolidations or amalgamations as are permitted by the Declaration; or
(6) the entry of a decree or order by a court having jurisdiction in
the premises adjudging the Company a bankrupt or insolvent, or approving as
properly filed a petition seeking reorganization, arrangement, adjustment
or composition of or in respect of the Company under any applicable United
States federal or state bankruptcy, insolvency, reorganization or other
similar law, or appointing a receiver, liquidator, assignee, trustee,
sequestrator (or other similar official) of the Company or of any
substantial part of its property or ordering the winding up or liquidation
of its affairs, and the continuance of any such decree or order unstayed
and in effect for a period of 60 consecutive days; or
(7) the institution by the Company of proceedings to be adjudicated a
bankrupt or insolvent, or the consent by it to the institution of
bankruptcy or insolvency proceedings against it, or the filing by it of a
petition or answer or consent seeking reorganization or relief under any
applicable United States federal or state bankruptcy, insolvency,
reorganization or other similar law, or the consent by it to the filing of
any such petition or to the appointment of a receiver, liquidator,
assignee, trustee, sequestrator (or other similar official) of the Company
or of any substantial part of its property, or the making by it of an
assignment for the benefit of creditors, or the admission by it in writing
of its inability to pay its debts generally as they become due and its
willingness to be adjudicated a bankrupt, or the taking of corporate action
by the Company in furtherance of any such action.
A default under any other Indebtedness of the Company or any of its
Subsidiaries or joint ventures or the Trust would not constitute an Event of
Default under the Securities. A deferral of payment of interest as provided in
Article XIII shall not be deemed an Event of Default.
Section 5.2. Acceleration of Maturity; Rescission and Annulment.
As provided in and subject to the provisions of this Indenture, if an
Event of Default with respect to the Securities at the time Outstanding occurs
and is continuing, then and in every such case the Trustee or the Holders of not
less than 25% in aggregate principal amount of the Outstanding Securities may
declare the principal amount of and interest on the Outstanding Securities to be
due and payable immediately, by a notice in writing to the Company (and to the
Trustee if given by Holders), provided that if the Trustee or such Holders fail
to do so, the Preferred Trustee shall have such right by a notice in writing to
the Company and the Trustee; and upon any such declaration such specified amount
of and the accrued and unpaid interest on the Outstanding Securities shall
become immediately
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due and payable, provided that the payment of principal and interest on such
Outstanding Securities shall remain subordinated to the extent provided in
Article XII.
At any time after such a declaration of acceleration has been made and
before a judgment or decree for payment of the money due has been obtained by
the Trustee as hereinafter in this Article provided, the Holders of a majority
in aggregate principal amount of the Outstanding Securities, by written notice
to the Company and the Trustee, may rescind and annul such declaration and its
consequences if:
(1) the Company has paid or deposited with the Trustee a sum sufficient
to pay:
(A) all overdue installments of interest on the Securities,
(B) the principal of (and premium, if any, on) any Securities which
have become due otherwise than by such declaration of acceleration and,
to the extent that the payment of such interest is lawful, interest
thereon at the rate borne by the Securities, and
(C) all sums paid or advanced by the Trustee hereunder and the
reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel; and
(2) all Events of Default, other than the non-payment of the principal
of Securities which have become due solely by such declaration of
acceleration, have been cured or waived as provided in Section 5.13.
The Holders of a majority in aggregate outstanding principal amount of
the Securities affected thereby may, on behalf of the Holders of all the
Securities, waive any existing or past default, except a default in the payment
of principal, premium, if any, or interest (unless such default has been cured
and a sum sufficient to pay all matured installments of interest, premium, if
any, and principal due otherwise than by acceleration has been deposited with
the Trustee) or a default in respect of a covenant or provision which under this
Indenture cannot be modified or amended without the consent of the Holder of
each Outstanding Security and, should the Holders of such Securities fail to
annul such declaration and waive such default, the holders of a majority in
aggregate liquidation amount of the Preferred Securities shall have such right.
The Preferred Trustee, as the initial Holder of the Securities, has agreed under
the Declaration not to waive an Event of Default with respect to the Securities
without the consent of holders of a majority in aggregate liquidation amount of
the Preferred Securities then outstanding.
No such rescission shall affect any subsequent default or impair any
right consequent thereon.
Upon receipt by the Trustee of written notice declaring such an
acceleration, or rescission and annulment thereof, a record date shall be
established for determining Holders of Outstanding Securities entitled to join
in such notice, which record date shall be at the close of business on the day
the Trustee receives such notice. The Holders on such record date, or their duly
designated proxies, and only such Persons, shall be entitled to join in such
notice, whether or not such Holders remain Holders after such record date;
provided that unless such declaration of acceleration, or rescission and
annulment, as the case may be, shall have become effective by virtue of the
requisite percentage having joined in such notice prior to the day which is 90
days after such record date, such notice of declaration of acceleration, or
rescission and annulment, as the case may be, shall automatically and without
further action by any Holder be canceled and of no further effect. Nothing in
this paragraph shall prevent a Holder, or a proxy of a Holder, from giving,
after expiration of such 90-day period, a new written notice of declaration of
acceleration, or rescission and annulment thereof, as the case may be, that is
identical to a written notice which has been canceled pursuant to the proviso to
the preceding sentence, in which event a new record date shall be established
pursuant to the provisions of this Section 5.2.
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Section 5.3. Collection of Indebtedness and Suits for Enforcement by
Trustee.
The Company covenants that if:
(1) default is made in the payment of any installment of interest on
any Security when such interest becomes due and payable and such default
continues for a period of 30 days, or
(2) default is made in the payment of the principal of (and premium, if
any, on) any Security at the Maturity thereof,
the Company will, upon demand of the Trustee, pay to the Trustee, for the
benefit of the Holders of such Securities, the whole amount then due and payable
on such Securities for principal (and premium, if any) and interest; and, in
addition thereto, all amounts owing the Trustee under Section 6.7.
If the Company fails to pay such amounts forthwith upon such demand,
the Trustee, in its own name and as trustee of an express trust, may institute a
judicial proceeding for the collection of the sums so due and unpaid, and may
prosecute such proceeding to judgment or final decree, and may enforce the same
against the Company or any other obligor upon the Securities and collect the
moneys adjudged or decreed to be payable in the manner provided by law out of
the property of the Company or any other obligor upon the Securities, wherever
situated.
Subject to Section 6.3 hereof, if an Event of Default occurs and is
continuing, the Trustee may in its discretion proceed to protect and enforce its
rights and the rights of the Holders under this Indenture by such appropriate
judicial proceedings as the Trustee shall deem most effectual to protect and
enforce any such rights, whether for the specific enforcement of any covenant or
agreement in this Indenture or in aid of the exercise of any power granted
herein, or to enforce any other proper remedy.
Section 5.4. Trustee May File Proofs of Claim.
In case of the pendency of any receivership, insolvency, liquidation,
bankruptcy, reorganization, arrangement, adjustment, composition or other
judicial proceeding relative to the Company or any other obligor upon the
Securities or the property of the Company or of such other obligor or their
creditors,
(a) the Trustee (irrespective of whether the principal of the
Securities shall then be due and payable as therein expressed or by declaration
or otherwise and irrespective of whether the Trustee shall have made any demand
on the Company for the payment of overdue principal (and premium, if any) or
interest) shall be entitled and empowered, by intervention in such proceeding or
otherwise,
(i) to file and prove a claim for the whole amount of principal (and
premium, if any) and interest owing and unpaid in respect to the Securities and
to file such other papers or documents as may be necessary or advisable and to
take any and all actions as are authorized under the Trust Indenture Act in
order to have the claims of the Holders and any predecessor to the Trustee under
Section 6.7 and of the Holders allowed in any such judicial proceedings; and
(ii) in particular, the Trustee shall be authorized to collect and
receive any moneys or other property payable or deliverable on any such claims
and to distribute the same in accordance with Section 5.6; and
(b) any custodian, receiver, assignee, trustee, liquidator,
sequestrator (or other similar official) in any such judicial proceeding is
hereby authorized by each Holder to make such payments to the Trustee for
distribution in accordance with Section 5.6, and in the event that the Trustee
shall consent to the making of such payments directly to the Holders, to pay to
the Trustee any amount due to it and any predecessor Trustee under Section 6.7.
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Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Holder any plan of
reorganization, arrangement, adjustment or composition affecting the Securities
or the rights of any Holder thereof, or to authorize the Trustee to vote in
respect of the claim of any Holder in any such proceeding; provided that the
Trustee may, on behalf of the Holders, vote for the election of a trustee in
bankruptcy or similar official and be a member of a creditors' or other similar
committee.
Section 5.5. Trustee May Enforce Claims Without Possession of
Securities.
All rights of action and claims under this Indenture or the Securities
may be prosecuted and enforced by the Trustee without the possession of any of
the Securities or the production thereof in any proceeding relating thereto, and
any such proceeding instituted by the Trustee shall be brought in its own name
as trustee of an express trust, and any recovery of judgment shall, after
provision for the payment of all the amounts owing the Trustee and any
predecessor Trustee under Section 6.7, its agents and counsel, be for the
ratable benefit of the Holders of the Securities in respect of which such
judgment has been recovered.
Section 5.6. Application of Money Collected.
Any money or property collected or to be applied by the Trustee with
respect to the Securities pursuant to this Article shall, subject to Article
XII, be applied in the following order, at the date or dates fixed by the
Trustee and, in case of the distribution of such money or property on account of
principal (or premium, if any) or interest, upon presentation of the Securities
and the notation thereon of the payment if only partially paid and upon
surrender thereof if fully paid:
FIRST: To the payment of all amounts due the Trustee and any
predecessor Trustee under Section 6.7;
SECOND: To the extent provided in Article XII, to the holders of
Senior Indebtedness of the Company in accordance with Article XII;
THIRD: To the payment of the amounts then due and unpaid upon
such Securities for principal (and premium, if any) and interest, in
respect of which or for the benefit of which such money has been
collected, ratably, without preference or priority of any kind,
according to the amounts due and payable on such Securities for
principal (and premium, if any) and interest, respectively; and
FOURTH: The balance, if any, to the Person or Persons lawfully
entitled thereto.
Section 5.7. Limitation on Suits.
No Holder of any Security shall have any right to institute any
proceeding, judicial or otherwise, with respect to this Indenture or for the
appointment of a receiver, assignee, trustee, liquidator, sequestrator (or other
similar official) or for any other remedy hereunder, unless:
(1) such Holder has previously given written notice to the Trustee of a
continuing Event of Default;
(2) if the Preferred Trustee is not the Holder of the Securities, the
Holders of not less than 25% in aggregate principal amount of the
Outstanding Securities shall have made written request to the Trustee to
institute proceedings in respect of such Event of Default in its own name
as Trustee hereunder;
(3) such Holder or Holders have offered to the Trustee reasonable
indemnity against the costs, expenses and liabilities to be incurred in
compliance with such request;
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(4) the Trustee for 60 days after its receipt of such notice, request
and offer of indemnity has failed to institute any such proceeding; and
(5) no direction inconsistent with such written request has been given
to the Trustee during such 60-day period by the Holders of a majority in
aggregate principal amount of the Outstanding Securities;
it being understood and intended that no one or more Holders shall have any
right in any manner whatever by virtue of, or by availing of, any provision of
this Indenture to affect, disturb or prejudice the rights of any other Holders,
or to obtain or to seek to obtain priority or preference over any other Holders
or to enforce any right under this Indenture, except in the manner herein
provided and for the equal and ratable benefit of all the Holders.
The foregoing limitations shall not apply to a suit instituted by a Holder
of a Security for enforcement of payment of the principal of and premium, it
any, or interest on such Security on or after the respective due dates expressed
in such Security.
Section 5.8. Unconditional Right of Holders to Receive Principal,
Premium and Interest.
Notwithstanding any other provision in this Indenture, the Holder of
any Security shall have the right which is absolute and unconditional to receive
payment of the principal of (and premium, if any) and (subject to Section 3.7)
interest on such Security on the respective Stated Maturities expressed in such
Security and to institute suit for the enforcement of any such payment, and such
rights shall not be impaired without the consent of such Holder. Except as set
forth in the Declaration, the holders of Preferred Securities shall have no
right to exercise directly any right or remedy available to the Holders of, or
in respect of, the Securities; provided that if the Preferred Trustee or the
Special Trustee (as defined in the Declaration) do not enforce such payment
obligations, a holder of any Security will have the right to bring an action on
behalf of the Trust to enforce the Trust's rights under the Securities and the
Indenture.
The Company and the Trustee acknowledge that pursuant to the
Declaration, the holders of Preferred Securities are entitled, in the
circumstances and subject to the limitations set forth therein, to commence a
direct action with respect to any Event of Default under this Indenture and the
Securities.
Section 5.9. Restoration of Rights and Remedies.
If the Trustee or any Holder has instituted any proceeding to enforce
any right or remedy under this Indenture and such proceeding has been
discontinued or abandoned for any reason, or has been determined adversely to
the Trustee or to such Holder, then and in every such case the Company, the
Trustee and the Holders shall, subject to any determination in such proceeding,
be restored severally and respectively to their former positions hereunder, and
thereafter all rights and remedies of the Trustee and the Holders shall continue
as though no such proceeding had been instituted.
Section 5.10. Rights and Remedies Cumulative.
Except as otherwise provided in the last paragraph of Section 3.6, no
right or remedy herein conferred upon or reserved to the Trustee or to the
Holders is intended to be exclusive of any other right or remedy, and every
right and remedy shall, to the extent permitted by law, be cumulative and in
addition to every other right and remedy given hereunder or now or hereafter
existing at law or in equity or otherwise. The assertion or employment of any
right or remedy hereunder, or otherwise, shall not prevent the concurrent
assertion or employment of any other appropriate right or remedy.
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Section 5.11. Delay or Omission Not Waiver.
Except as otherwise provided in the last paragraph of Section 3.6, no
delay or omission of the Trustee or of any Holder of any Security to exercise
any right or remedy accruing upon any Event of Default shall impair any such
right or remedy or constitute a waiver of any such Event of Default or an
acquiescence therein.
Every right and remedy given by this Article or by law to the Trustee
or to the Holders may be exercised from time to time, and as often as may be
deemed expedient, by the Trustee or by the Holders as the case may be.
Section 5.12. Control by Holders.
The Holders of a majority in aggregate principal amount of the
Outstanding Securities shall have the right, subject to Section 6.3 hereof, to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee, with respect to the Securities, provided that:
(1) such direction shall not be in conflict with any rule of law or
with this Indenture,
(2) the Trustee may take any other action deemed proper by the Trustee
which is not inconsistent with such direction, and
(3) subject to the provisions of Section 6.1, the Trustee shall have
the right to decline to follow such direction if the Trustee in good faith
shall, by a Responsible Officer or Officers of the Trustee, determine that
the proceeding so directed would be unjustly prejudicial to the Holders not
joining in any such direction or would involve the Trustee in personal
liability.
Upon receipt by the Trustee of any written notice directing the time,
method or place of conducting any such proceeding or exercising any such trust
or power, a record date shall be established for determining Holders of
Outstanding Securities entitled to join in such notice, which record date shall
be at the close of business on the day the Trustee receives such notice. The
Holders on such record date, or their duly designated proxies, and only such
Persons, shall be entitled to join in such notice, whether or not such Holders
remain Holders after such record date; provided that, unless the Holders of a
majority in principal amount of the Outstanding Securities shall have joined in
such notice prior to the day which is 90 days after such record date, such
notice shall automatically and without further action by any Holder be canceled
and be of no further effect. Nothing in this paragraph shall prevent a Holder,
or a proxy of a Holder, from giving, after expiration of such 90-day period, a
new notice identical to a notice which has been canceled pursuant to the proviso
to the preceding sentence, in which event a new record date shall be established
pursuant to the provisions of this Section 5.12.
Section 5.13. Waiver of Defaults.
The Holders of not less than a majority in aggregate principal amount
of the Outstanding Securities affected thereby may on behalf of the Holders of
all the Securities waive any existing or past default or Event of Default
hereunder and its consequences with respect to the Securities except a default:
(1) in the payment of the principal of (or premium, if any) or interest
on any Security, or
(2) in respect of a covenant or provision hereof which under Article IX
cannot be modified or amended without the consent of the Holder of each
Outstanding Security affected.
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Upon any such waiver, such default shall cease to exist, and any Event
of Default arising therefrom shall be deemed to have been cured, for every
purpose of this Indenture; but no such waiver shall extend to any subsequent or
other default or impair any right consequent thereon.
Section 5.14. Undertaking for Costs.
All parties to this Indenture agree, and each Holder of any Security by
his acceptance thereof shall be deemed to have agreed, that any court may in its
discretion require, in any suit for the enforcement of any right or remedy under
this Indenture, or in any suit against the Trustee for any action taken or
omitted by it as Trustee, the filing by any party litigant in such suit of an
undertaking to pay the costs of such suit, and that such court may in its
discretion assess reasonable costs, including reasonable attorneys' fees,
against any party litigant in such suit, having due regard to the merits and
good faith of the claims or defenses made by such party litigant; but the
provisions of this Section shall not apply to any suit instituted by the Trustee
or by any Holder, or group of Holders, holding in the aggregate more than 10% in
principal amount of the Outstanding Securities, or to any suit instituted by any
Holder for the enforcement of the payment of the principal of (or premium, if
any) or interest on any Security on or after the respective Stated Maturities
expressed in such Security.
Section 5.15. Waiver of Usury, Stay or Extension Laws.
The Company covenants (to the extent that it may lawfully do so) that
it will not at any time insist upon, or plead, or in any manner whatsoever claim
or take the benefit or advantage of, any usury, stay or extension law wherever
enacted, now or at any time hereafter in force, which may affect the covenants
or the performance of this Indenture; and the Company (to the extent that it may
lawfully do so) hereby expressly waives all benefit or advantage of any such
law, and covenants that it will not hinder, delay or impede the execution of any
power herein granted to the Trustee, but will suffer and permit the execution of
every such power as though no such law had been enacted.
ARTICLE VI. THE TRUSTEE
Section 6.1. Certain Duties and Responsibilities.
(a) Except during the continuance of an Event of Default,
(1) the Trustee undertakes to perform such duties and only such duties
as are specifically set forth in this Indenture and as are required under
the Trust Indenture Act, and no implied covenants or obligations shall be
read into this Indenture against the Trustee; and
(2) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness of
the opinions expressed therein, upon certificates or opinions furnished to
the Trustee, conforming to the requirements of this Indenture and
reasonably believed by it to be genuine and to have been signed by the
proper party or parties; but in the case of any such certificates or
opinions which by any provisions hereof are specifically required to be
furnished to the Trustee, the Trustee shall be under a duty to examine the
same to determine whether or not they conform to the requirements of this
Indenture.
(b) In case an Event of Default has occurred and is continuing, the
Trustee shall exercise such of the rights and powers vested in it by this
Indenture, and use the same degree of care and skill in their exercise, as a
prudent person would exercise or use under the circumstances in the conduct of
his own affairs.
(c) No provision of this Indenture shall be construed to relieve the
Trustee from liability for its own negligent action, its own negligent failure
to act, or its own willful misconduct except that
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(1) this Subsection shall not be construed to limit the effect of
Subsection (a) of this Section;
(2) the Trustee shall not be liable for any error of judgment made in
good faith by a Responsible Officer, unless it shall be proved that the
Trustee was negligent in ascertaining the pertinent facts; and
(3) the Trustee shall not be liable with respect to any action taken or
omitted to be taken by it in good faith in accordance with the direction of
Holders pursuant to Section 5.12 relating to the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or
exercising any trust or power conferred upon the Trustee, under this
Indenture with respect to the Securities.
(d) No provision of this Indenture shall require the Trustee to expend
or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder, or in the exercise of any of its
rights or powers, if there shall be reasonable grounds for believing that
repayment of such funds or adequate indemnity against such risk or liability is
not reasonably assured to it.
(e) Whether or not therein expressly so provided, every provision of
this Indenture relating to the conduct or affecting the liability of or
affording protection to the Trustee shall be subject to the provisions of this
Section.
Section 6.2. Notice of Defaults.
Within 90 days after actual knowledge by a Responsible Officer of the
Trustee of the occurrence of any default hereunder with respect to the
Securities, the Trustee shall transmit by mail to all Holders, as their names
and addresses appear in the Securities Register, notice of such default
hereunder known to the Trustee, unless such default shall have been cured or
waived; provided that except in the case of a default in the payment of the
principal of (or premium, if any) or interest on any Security, the Trustee shall
be protected in withholding such notice if and so long as the board of
directors, the executive committee or a trust committee of directors and/or
Responsible Officers of the Trustee in good faith determines that the
withholding of such notice is in the interests of the Holders; and provided that
in the case of any default of the character specified in Section 5.1(3), no such
notice to Holders shall be given until at least 30 days after the occurrence
thereof. For the purpose of this Section, the term "default" means any event
which is, or after notice or passage of time or both would be, an Event of
Default.
Section 6.3. Certain Rights of Trustee.
Subject to the provisions of Section 6.1:
(a) the Trustee may rely and shall be protected in acting or refraining
from acting upon any resolution, certificate, statement, instrument,
opinion, report, notice, request, direction, consent, order, bond,
debenture, note, Security or other evidence of indebtedness, or other paper
or document reasonably believed by it to be genuine and to have been signed
or presented by the proper party or parties;
(b) any request or direction of the Company mentioned herein shall be
sufficiently evidenced by a Company Request or Company Order and any
resolution of the Board of Directors may be sufficiently evidenced by a
Board Resolution;
(c) whenever in the administration of this Indenture the Trustee shall
deem it desirable that a matter be proved or established prior to taking,
suffering or omitting any action hereunder, the Trustee (unless other
evidence be herein specifically prescribed) may, in the absence of bad
faith on its part, rely upon an Officers' Certificate;
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(d) the Trustee may consult with counsel and the written advice of such
counsel or any Opinion of Counsel shall be full and complete authorization
and protection in respect of any action taken, suffered or omitted by it
hereunder in good faith and in reliance thereon;
(e) the Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Indenture at the request or direction
of any of the Holders pursuant to this Indenture, unless such Holders shall
have offered to the Trustee reasonable security or indemnity against the
costs, expenses and liabilities which might be incurred by it in compliance
with such request or direction;
(f) the Trustee shall not be bound to make any investigation into the
facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order,
bond, debenture, note, Security or other evidence of indebtedness, or other
paper or document, but the Trustee in its discretion may make such further
inquiry or investigation into such facts or matters as it may see fit, and,
if the Trustee shall determine to make such further inquiry or
investigation, it shall be entitled to examine the books, records and
premises of the Company personally or by agent or attorney; and
(g) the Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents or
attorneys and the Trustee shall not be responsible for any misconduct or
negligence on the part of any agent (other than an agent who is an employee
of the Trustee) or attorney appointed with due care by it hereunder.
Section 6.4. Not Responsible for Recitals or Issuance of Securities.
The recitals contained herein and in Securities endorsed thereon,
except the Trustee's certificates of authentication, shall be taken as the
statements of the Company and the Trustee assumes no responsibility for their
correctness. The Trustee makes no representations as to the validity or
sufficiency of this Indenture or of the Securities. The Trustee shall not be
accountable for the use or application by the Company of the Securities or the
proceeds thereof.
Section 6.5. May Hold Securities.
The Trustee, any Paying Agent, Securities Registrar or any other agent
of the Company, in its individual or any other capacity, may become the owner or
pledgee of Securities and, subject to Sections 6.8 and 6.13, may otherwise deal
with the Company with the same rights it would have if it were not Trustee,
Paying Agent, Securities Registrar or such other agent.
Section 6.6. Money Held in Trust.
Money held by the Trustee in trust hereunder need not be segregated
from other funds except to the extent required by law. The Trustee shall be
under no liability for interest on any money received by it hereunder except as
otherwise agreed in writing with the Company.
Section 6.7. Compensation and Reimbursement.
The Company, as borrower, agrees
(1) to pay to the Trustee from time to time reasonable compensation for
all services rendered by it hereunder in such amounts as the Company and
the Trustee shall agree from time to time (which compensation shall not be
limited by any provision of law in regard to the compensation of a trustee
of an express trust);
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(2) except as otherwise expressly provided herein, to reimburse the
Trustee upon its request for all reasonable expenses, disbursements and
advances incurred or made by the Trustee in accordance with any
provision of this Indenture (including the reasonable compensation and the
reasonable expenses and disbursements of its agents and counsel), except
any such expense, disbursement or advance as may be attributable to its
negligence or bad faith; and
(3) to indemnify the Trustee for, and to hold it harmless against, any
loss, liability or expense (including the reasonable compensation and the
reasonable expenses and disbursements of its agents and counsel) incurred
without negligence or bad faith on its part, arising out of or in
connection with the acceptance or administration of this trust or the
performance of its duties hereunder, including the costs and expenses of
defending itself against any claim or liability in connection with the
exercise or performance of any of its powers or duties hereunder. This
indemnification shall survive the termination of this Agreement; provided
that the Trustee shall notify the Company promptly of any claim for which
it may seek indemnity. Failure by the Trustee to so notify the Company
shall not relieve the Company of its obligations hereunder except to the
extent such failure shall have materially prejudiced the Company. The
Company shall defend the claim and the Trustee shall provide reasonable
assistance. The Trustee may retain separate counsel and the Company shall
pay the reasonable fees and expenses of such counsel.
To secure the Company's payment obligations in this Section, the Company
and the Holders agree that the Trustee shall have a lien prior to the Securities
on all money or property held or collected by the Trustee. Such lien shall
survive the satisfaction and discharge of this Indenture.
When the Trustee incurs expenses or renders services after an Event of
Default specified in Section 5.1(6) or (7) occurs, the expenses and the
compensation for the services are intended to constitute expenses of
administration under any applicable United States Federal or State bankruptcy,
insolvency or other similar law.
Section 6.8. Disqualification; Conflicting Interests.
The Trustee shall be subject to the provisions of Section 310(b) of the
Trust Indenture Act. Nothing herein shall prevent the Trustee from filing with
the Commission the application referred to in the second to last paragraph of
Section 301(b) of the Trust Indenture Act.
Section 6.9. Corporate Trustee Required; Eligibility.
There shall at all times be a Trustee hereunder which shall be
(a) a corporation organized and doing business under the laws of the
United States of America or of any State, Territory or the District of Columbia,
authorized under such laws to exercise corporate trust powers and subject to
supervision or examination by Federal, State, Territorial or District of
Columbia authority, or
(b) a corporation or other Person organized and doing business under
the laws of a foreign government that is permitted to act as Trustee pursuant to
a rule, regulation or order of the Commission, authorized under such laws to
exercise corporate trust powers, and subject to supervision or examination by
authority of such foreign government or a political subdivision thereof
substantially equivalent to supervision or examination applicable to United
States institutional trustees, in either case having a combined capital and
surplus of at least $50,000,000, subject to supervision or examination by
Federal or State authority. If such corporation publishes reports of condition
at least annually, pursuant to law or to the requirements of the aforesaid
supervising or examining authority, then, for the purposes of this Section, the
combined capital and surplus of such corporation shall be deemed to be its
combined capital and surplus as set forth in its most recent report of condition
so published. If at any time the Trustee shall cease to be eligible in
accordance with the provisions of this Section, it shall resign immediately in
the manner
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and with the effect hereinafter specified in this Article. Neither the Company
nor any Person directly or indirectly controlling, controlled by or under common
control with the Company shall serve as Trustee.
Section 6.10. Resignation and Removal; Appointment of Successor.
(a) No resignation or removal of the Trustee and no appointment of a
successor Trustee pursuant to this Article shall become effective until the
acceptance of appointment by the successor Trustee under Section 6.11.
(b) The Trustee may resign at any time by giving written notice thereof
to the Company. If an instrument of acceptance by a successor Trustee shall not
have been delivered to the Trustee within 30 days after the giving of such
notice of resignation, the resigning Trustee may petition any court of competent
jurisdiction for the appointment of a successor Trustee.
(c) The Trustee may be removed at any time with respect to the
Securities by Act of the Holders of a majority in aggregate principal amount of
the Outstanding Securities, delivered to the Trustee and to the Company.
(d) If at any time:
(1) the Trustee shall fail to comply with Section 6.8 after written
request therefor by the Company or by any Holder who has been a bona fide
Holder of a Security for at least six months, or
(2) the Trustee shall cease to be eligible under Section 6.9 and shall
fail to resign after written request therefor by the Company or by any such
Holder, or
(3) the Trustee shall become incapable of acting or shall be adjudged a
bankrupt or insolvent or a receiver of the Trustee or of its property shall
be appointed or any public officer shall take charge or control of the
Trustee or of its property or affairs for the purpose of rehabilitation,
conservation or liquidation,
then, in any such case, (i) the Company, acting pursuant to the authority of a
Board Resolution, may remove the Trustee, or (ii) subject to Section 5.14, any
Holder who has been a bona fide Holder of a Security for at least six months
may, on behalf of himself and all others similarly situated, petition any court
of competent jurisdiction for the removal of the Trustee and the appointment of
a successor Trustee.
(e) If the Trustee shall resign, be removed or become incapable of
acting, or if a vacancy shall occur in the office of Trustee for any cause, the
Company, by a Board Resolution, shall promptly appoint a successor Trustee. If,
within one year after such resignation, removal or incapability, or the
occurrence of such vacancy, a successor Trustee shall be appointed by Act of the
Holders of a majority in principal amount of the Outstanding Securities
delivered to the Company and the retiring Trustee, the successor Trustee so
appointed shall, forthwith upon its acceptance of such appointment, become the
successor Trustee and supersede the successor Trustee appointed by the Company.
If no successor Trustee shall have been so appointed by the Company or the
Holders and accepted appointment in the manner hereinafter provided, any Holder
who has been a bona fide Holder of a Security for at least six months may,
subject to Section 5.14, on behalf of himself and all others similarly situated,
petition any court of competent jurisdiction for the appointment of a successor
Trustee.
(f) The Company shall give notice of each resignation and each removal
of the Trustee and each appointment of a successor Trustee to all Holders in the
manner provided in Section 1.6. Each notice shall include the name of the
successor Trustee and the address of its Corporate Trust Office.
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Section 6.11. Acceptance of Appointment by Successor.
(a) In case of the appointment hereunder of a successor Trustee, every
such successor Trustee so appointed shall execute, acknowledge and deliver to
the Company and to the retiring Trustee an instrument accepting such
appointment, and thereupon the resignation or removal of the retiring Trustee
shall become effective and such successor Trustee, without any further act, deed
or conveyance, shall become vested with all the rights, powers, trusts and
duties of the retiring Trustee; but, on the request of the Company or the
successor Trustee, such retiring Trustee shall, upon payment of its charges,
execute and deliver an instrument transferring to such successor Trustee all the
rights, powers and trusts of the retiring Trustee and shall duly assign,
transfer and deliver to such successor Trustee all property and money held by
such retiring Trustee hereunder.
(b) Upon request of any such successor Trustee, the Company shall
execute any and all instruments for more fully and certainly vesting in and
confirming to such successor Trustee all rights, powers and trusts referred to
in paragraph (a) of this Section.
(c) No successor Trustee shall accept its appointment unless at the
time of such acceptance such successor Trustee shall be qualified and eligible
under this Article.
Section 6.12. Merger, Conversion, Consolidation or Succession to
Business.
Any corporation into which the Trustee may be merged or converted or
with which it may be consolidated, or any corporation resulting from any merger,
conversion or consolidation to which the Trustee shall be a party, or any
corporation succeeding to all or substantially all of the corporate trust
business of the Trustee, shall be the successor of the Trustee hereunder,
provided that such corporation shall be otherwise qualified and eligible under
this Article, without the execution or filing of any paper or any further act on
the part of any of the parties hereto. In case any Securities shall have been
authenticated, but not delivered, by the Trustee then in office, any successor
by merger, conversion or consolidation to such authenticating Trustee may adopt
such authentication and deliver the Securities so authenticated, and in case any
Securities shall not have been authenticated, any successor to the Trustee may
authenticate such Securities either in the name of any predecessor Trustee or in
the name of such successor Trustee, and in all cases the certificate of
authentication shall have the full force which it is provided anywhere in the
Securities or in this Indenture that the certificate of the Trustee shall have.
Section 6.13. Preferential Collection of Claims Against Company.
If and when the Trustee shall be or become a creditor of the Company or
any other obligor upon the Securities, the Trustee shall be subject to the
provisions of the Trust Indenture Act regarding the collection of claims against
the Company or any such other obligor.
Section 6.14. Appointment of Authenticating Agent.
The Trustee may appoint an Authenticating Agent or Agents which shall
be authorized to act on behalf of the Trustee to authenticate Securities issued
upon original issue and upon exchange, registration of transfer or partial
redemption thereof, and Securities so authenticated shall be entitled to the
benefits of this Indenture and shall be valid and obligatory for all purposes as
if authenticated by the Trustee hereunder. Wherever reference is made in this
Indenture to the authentication and delivery of Securities by the Trustee or the
Trustee's certificate of authentication, such reference shall be deemed to
include authentication and delivery on behalf of the Trustee by an
Authenticating Agent. Each Authenticating Agent shall be acceptable to the
Company and shall at all times be a corporation organized and doing business
under the laws of the United States of America, any State thereof, or any
Territory or the District of Columbia, authorized under such laws to act as
Authenticating Agent, having a combined capital and surplus of not less than
$50,000,000 and subject to supervision or examination by Federal or State
authority. If such Authenticating Agent publishes reports of condition at least
annually, pursuant to law or to the requirements of said
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supervising or examining authority, then for the purposes of this Section, the
combined capital and surplus of such Authenticating Agent shall be deemed to be
its combined capital and surplus as set forth in its most recent report of
condition so published. If at any time an Authenticating Agent shall cease to be
eligible in accordance with the provisions of this Section, such Authenticating
Agent shall resign immediately in the manner and with the effect specified in
this Section.
Any corporation into which an Authenticating Agent may be merged or
converted or with which it may be consolidated, or any corporation resulting
from any merger, conversion or consolidation to which such Authenticating Agent
shall be a party, or any corporation succeeding to all or substantially all of
the corporate trust business of an Authenticating Agent shall be the successor
Authenticating Agent hereunder, provided such corporation shall be otherwise
eligible under this Section, without the execution or filing of any paper or any
further act on the part of the Trustee or the Authenticating Agent.
An Authenticating Agent may resign at any time by giving written notice
thereof to the Trustee and to the Company. The Trustee may at any time terminate
the agency of an Authenticating Agent by giving written notice thereof to such
Authenticating Agent and to the Company. Upon receiving such a notice of
resignation or upon such a termination, or in case at any time such
Authenticating Agent shall cease to be eligible in accordance with the
provisions of this Section, the Trustee may appoint a successor Authenticating
Agent which shall be acceptable to the Company and shall give notice of such
appointment in the manner provided in Section 1.6 to all Holders of Securities.
Any successor Authenticating Agent upon acceptance of its appointment hereunder
shall become vested with all the rights, powers and duties of its predecessor
hereunder, with like effect as if originally named as an Authenticating Agent.
No successor Authenticating Agent shall be appointed unless eligible under the
provision of this Section.
The Trustee agrees to pay to each Authenticating Agent from time to
time reasonable compensation for its services under this Section, and the
Trustee shall be entitled to be reimbursed for such payments, subject to the
provisions of Section 6.7.
If an appointment is made pursuant to this Section, the Securities may
have endorsed thereon, in addition to the Trustee's certificate of
authentication, an alternative certificate of authentication in the following
form:
This is one of the Securities referred to in the within mentioned
Indenture.
_____________________________________
_____________________________________
As Trustee
By: _________________________________
As Authenticating Agent
By: _________________________________
Authorized Officer
ARTICLE VII. HOLDER'S LISTS AND REPORTS BY TRUSTEE AND COMPANY
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Section 7.1. Company to Furnish Trustee Names and Addresses of Holders.
The Company will furnish or cause to be furnished to the Trustee:
(a) semi-annually, not more than 15 days after each Regular Record
Date, a list, in such form as the Trustee may reasonably require, of the names
and addresses of the Holders as of such Regular Record Date,
(b) at such other times as the Trustee may request in writing, within
30 days after the receipt by the Company of any such request, a list of similar
form and content as of a date not more than 15 days prior to the time such list
is furnished;
excluding from any such list names and addresses received by the Trustee in its
capacity as Securities Registrar; provided that so long as the Trustee is the
Securities Registrar, no such list shall be required.
Section 7.2. Preservation of Information, Communications to Holders.
(a) The Trustee shall preserve, in as current a form as is reasonably
practicable, the names and addresses of Holders contained in the most recent
list furnished to the Trustee as provided in Section 7.1 and the names and
addresses of Holders received by the Trustee in its capacity as Securities
Registrar. The Trustee may destroy any list furnished to it as provided in
Section 7.1 upon receipt of a new list so furnished.
(b) The rights of Holders to communicate with other Holders with
respect to their rights under this Indenture or under the Securities, and the
corresponding rights, privileges and duties of the Trustee, shall be as provided
by the Trust Indenture Act.
(c) Every Holder of Securities, by receiving and holding the same,
agrees with the Company and the Trustee that none of the Company, the Trustee
and any agent of any of them shall be held accountable by reason of any
disclosure of information as to the names and addresses of the Holders made
pursuant to the Trust Indenture Act.
Section 7.3. Reports by Trustee.
(a) The Trustee shall transmit to Holders such reports concerning the
Trustee and its actions under this Indenture as may be required pursuant to the
Trust Indenture Act, at the times and in the manner provided pursuant thereto.
(b) Reports so required to be transmitted at stated intervals of not
more than 12 months shall be transmitted no later than May 15 in each calendar
year, commencing with the first May 15 after the first issuance of Securities
under this Indenture.
(c) A copy of each such report shall, at the time of such transmission
to Holders, be filed by the Trustee with each stock exchange upon which the
Securities are listed, and also with the Commission, and delivered to the
Company.
Section 7.4. Reports by Company.
The Company shall file with the Trustee and with the Commission, and
transmit to Holders, such information, documents and other reports, and such
summaries thereof, as may be required pursuant to the Trust Indenture Act at the
times and in the manner provided in the Trust Indenture Act; provided that
whether or not required by the rules and regulations of the Commission, so long
as any Securities are Outstanding, the Company shall provide the Trustee and the
Holders with (i) all annual financial information that would be required to be
contained in a filing with the Commission on Form 10-K as if the Company were
required to file such Forms, and (ii) quarterly
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financial statements as of and for the period from the beginning of each year to
the close of each quarterly period (other than the fourth quarter), together
with comparable information for the corresponding periods of the preceding year,
including, in each case, a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and, with respect to the annual information
only, a report thereon from the Company's certified independent public
accountants. (In addition, whether or not required by the rules and regulations
of the Commission, the Company will file, to the extent permitted by the
Commission, a copy of all such information and reports with the Commission for
public availability and make such information and reports available to
securities analysts and prospective investors upon request.) The Company shall
also comply with the other provisions of Trust Indenture Act Section 314(a).
ARTICLE VIII. CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
Section 8.1. Company May Consolidate, Etc., Only on Certain Terms.
The Company shall not consolidate or merge with or into any other
Person (whether or not the Company is the Surviving Person) or convey, transfer,
assign, sell, lease or otherwise dispose of, in one or more related
transactions, all or substantially all of its properties and assets as an
entirety to any Person, unless:
(1) the Surviving Person shall be a corporation, organized and existing
under the laws of the United States of America or any State thereof or the
District of Columbia;
(2) the Surviving Person (if other than the Company) shall expressly
assume, by an indenture supplemental hereto, executed and delivered to the
Trustee, in form reasonably satisfactory to the Trustee, all the
obligations of the Company under the Securities, the Indenture and the
Security Documents;
(3) at the time of, and immediately after giving effect to, such
transaction, no Default or Event of Default, shall have occurred and be
continuing;
(4) the Surviving Person will have Consolidated Net Worth (immediately
after the transaction) equal to or greater than the Consolidated Net Worth
of the Company immediately preceding the transaction;
(5) at the time of such transaction and after giving pro forma effect
thereto, the Surviving Person would be permitted to incur at least $1.00 of
additional Indebtedness pursuant to paragraph (a) of Section 10.8; and
(6) the Company has delivered to the Trustee an Officers' Certificate
and an Opinion of Counsel each stating that such consolidation, merger,
conveyance, transfer, assignment, sale, lease or disposition, and any such
supplemental indenture complies with this Article and that all conditions
precedent herein provided for relating to such transaction have been
complied with; and the Trustee, subject to Section 6.1, may rely upon such
Officers' Certificate and Opinion of Counsel as conclusive evidence that
such transaction complies with this Section 8.1.
Section 8.2. Successor Corporation Substituted.
Upon any consolidation or merger by the Company with or into any other
Person, or any conveyance, transfer, sale, assignment, lease or other
disposition by the Company, in one or more transactions, of substantially all of
its properties and assets as an entirety to any Person in accordance with
Section 8.1, the Surviving Person shall succeed to, and be substituted for, and
may exercise every right and power of, the Company under this Indenture with the
same effect as if such Surviving Person had been named as the Company herein,
and thereafter the Company shall be discharged from all obligations and
covenants under the Indenture and the Securities.
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Such Surviving Person may cause to be signed, and may issue either in
its own name or in the name of the Company, any or all of the Securities
issuable hereunder which theretofore shall not have been signed by the Company
and delivered to the Trustee; and, upon the order of such Surviving Person
instead of the Company and subject to all the terms, conditions and limitations
in this Indenture prescribed, the Trustee shall authenticate and shall deliver
any Securities which previously shall have been signed and delivered by the
officers of the Company to the Trustee for authentication pursuant to such
provisions and any Securities which such Surviving Person thereafter shall cause
to be signed and delivered to the Trustee on its behalf for the purpose pursuant
to such provisions. All the Securities so issued shall in all respects have the
same legal rank and benefit under this Indenture as the Securities theretofore
or thereafter issued in accordance with the terms of this Indenture as though
all of such Securities had been issued at the date of the execution hereof.
In case of any such consolidation, merger, sale, assignment, transfer,
conveyance, lease, or other disposition such changes in phraseology and form may
be made in the Securities thereafter to be issued as may be appropriate.
ARTICLE IX. SUPPLEMENTAL INDENTURES
Section 9.1. Supplemental Indentures Without Consent of Holders.
Without the consent of any Holders, the Company, when authorized by a
Board Resolution of the Company, and the Trustee, at any time and from time to
time, may enter into one or more indentures supplemental hereto, in form
satisfactory to the Trustee, for any of the following purposes:
(1) to evidence the succession of another Person to the Company, and
the assumption by any such successor of the covenants of the Company herein
and in the Securities; or
(2) to convey, transfer, assign, mortgage or pledge any property to or
with the Trustee or to surrender any right or power herein conferred upon
the Company; or
(3) to establish the form or terms of Securities as permitted by
Section 2.1; or
(4) to add to the covenants of the Company for the benefit of the
Holders or to surrender any right or power herein conferred upon the
Company; or
(5) to add any additional Events of Default; or
(6) to cure any ambiguity, to correct or supplement any provision
herein which may be inconsistent with any other provision herein, or to
make any other provisions with respect to matters or questions arising
under this Indenture, provided that such action pursuant to this clause (6)
shall not materially adversely affect the interest of the Holders or, for
so long as any of the Preferred Securities shall remain outstanding, the
holders of such Preferred Securities; or
(7) to evidence and provide for the acceptance of appointment hereunder
by a successor Trustee with respect to the Securities and to add to or
change any of the provisions of this Indenture as shall be necessary to
provide for or facilitate the administration of the trusts hereunder by
more than one Trustee, pursuant to the requirements of Section 6.11(b); or
(8) to comply with the requirements of the Commission in order to
effect or maintain the qualification of this Indenture under the Trust
Indenture Act;
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provided that the Company shall not enter into any supplemental indenture
without the consent of a majority in aggregate principal amount of the
Outstanding Securities affected by such supplemental indenture if such
supplemental indenture shall either (i) create a gain or loss for the Holders
for federal income tax purposes or (ii) materially adversely affect the
interests of the Holders.
Section 9.2. Supplemental Indentures with Consent of Holders.
With the consent of the Holders of not less than a majority in
aggregate principal amount of the Outstanding Securities affected by such
supplemental indenture, by Act of said Holders delivered to the Company and the
Trustee, the Company, when authorized by a Board Resolution of the Company, and
the Trustee may modify the Indenture or enter into an indenture or indentures
supplemental hereto for the purpose of adding any provisions to or changing in
any manner or eliminating any of the provisions of this Indenture or of
modifying in any manner the rights of the Holders under this Indenture; provided
that no such supplemental indenture shall, without the consent of the Holder of
each Outstanding Security affected thereby,
(1) extend the Stated Maturity of the principal of any Security, or
reduce the principal amount thereof, or reduce the rate or extend the time
of payment of interest thereon, or reduce any premium payable upon the
redemption thereof, or change the place of payment where, or the currency
of payment of any principal of, or any premium or interest on any Security,
or impair the right to institute suit for the enforcement of any such
payment on or with respect to a Security (or, in the case of redemption, on
or after the date fixed for redemption thereof); or
(2) reduce the percentage in principal amount of Securities, the
consent of whose Holders is required for any such modification or
supplemental indenture, or the consent of whose Holders is required for any
waiver (of compliance with certain provisions of this Indenture or certain
defaults hereunder and their consequences) provided for in this Indenture;
or
(3) modify any of the provisions of this Section, Section 5.13 or
Section 10.17, except to increase any such percentage or to provide that
certain other provisions of this Indenture cannot be modified or waived
without the consent of the Holder of each Outstanding Security affected
thereby; or
(4) modify the provisions in this Indenture relating to the
subordination of Outstanding Securities in a manner adverse to the Holders.
provided that so long as any of the Preferred Securities remains outstanding, no
such amendment shall be made that materially adversely affects the holders of
such Preferred Securities, and no termination of this Indenture shall occur, and
no waiver of any Event of Default or compliance with any covenant under this
Indenture shall be effective, without the prior consent of the holders of at
least a majority of the aggregate liquidation preference of such Preferred
Securities then outstanding unless and until the principal of (and premium, if
any, on) the Securities and all accrued and, subject to Section 3.7, unpaid
interest thereon have been paid in full; and provided further that, so long as
any of the Preferred Securities remain outstanding, no amendment shall be made
to Section 5.8 of this Indenture without the prior consent of the holders of
each Preferred Security then outstanding unless and until the principal (and
premium, if any) of the Securities and all accrued and (subject to Section 3.7)
unpaid interest thereon have been paid in full.
It shall not be necessary for any Act of Holders under this Section to
approve the particular form of any proposed supplemental indenture, but it shall
be sufficient if such Act shall approve the substance thereof.
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The Trustee may, but shall not be required to, fix a record date for
the purpose of determining the Holders entitled to consent to any supplemental
indenture. If a record date is fixed, Holders at such record date (or their duly
designated proxies), and only those Holders, shall be entitled to consent to
such supplemental indenture by written notice received by the Trustee.
No consent shall be effective for more than 90 days after such record
date. Until a supplemental indenture becomes effective, a consent to it by a
Holder is a continuing consent by such Holder and every subsequent Holder of
that Security, regardless of whether notation of the consent is made on such
Security; provided that any Holder may revoke the consent as to his Security by
providing written notice to the Trustee of such revocation prior to the
effective date of the supplemental indenture.
Section 9.3. Execution of Supplemental Indentures.
In executing or accepting the additional trusts created by any
supplemental indenture permitted by this Article or the modifications thereby of
the trusts created by this Indenture, the Trustee shall be entitled to receive,
and (subject to Section 6.1) shall be fully protected in relying upon, an
Officers' Certificate and an Opinion of Counsel stating that the execution of
such supplemental indenture is authorized or permitted by this Indenture, and
that all conditions precedent have been complied with. The Trustee may, but
shall not be obligated to, enter into any such supplemental indenture which
affects the Trustee's own rights, duties or immunities under this Indenture or
otherwise.
Section 9.4. Effect of Supplemental Indentures.
Upon the execution of any supplemental indenture under this Article,
this Indenture shall be modified in accordance therewith, and such supplemental
indenture shall form a part of this Indenture for all purposes; and every Holder
of Securities theretofore or thereafter authenticated and delivered hereunder
shall be bound thereby. No such supplemental indenture shall directly or
indirectly modify the provisions of Article XII, Sections 5.3, 5.6 or the
Security Documents in any manner which might terminate or impair the rights of
the Senior Indebtedness pursuant to such subordination provisions.
Section 9.5. Conformity with Trust Indenture Act.
Every supplemental indenture executed pursuant to this Article shall
conform to the requirements of the Trust Indenture Act as then in effect.
Section 9.6. Reference in Securities to Supplemental Indentures.
Securities authenticated and delivered after the execution of any
supplemental indenture pursuant to this Article may, and shall if required by
the Company, bear a notation in form approved by the Company as to any matter
provided for in such supplemental indenture. If the Company shall so determine,
new Securities so modified as to conform, in the opinion of the Company, to any
such supplemental indenture may be prepared and executed by the Company and
authenticated and delivered by the Trustee in exchange for Outstanding
Securities. Failure to make an appropriate notation or issue new Securities
shall not affect the validity and effect of such supplemental indenture.
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ARTICLE X. COVENANTS
Section 10.1. Payment of Principal, Premium and Interest.
The Company covenants and agrees for the benefit of each of the
Securities that it will duly and punctually pay the principal of (and premium,
if any) and interest on the Securities in accordance with the terms of such
Securities and this Indenture.
Section 10.2. Maintenance of Office or Agency.
The Company will maintain in Wilmington, Delaware an office or agency
where Securities may be presented or surrendered for payment and an office or
agency where Securities may be surrendered for registration of transfer or for
exchange and where notices and demands to or upon the Company in respect of the
Securities and this Indenture may be served. The Company initially appoints the
Trustee, acting through its office or agency in Wilmington, Delaware, as its
agent for said purposes. The Company will give prompt written notice to the
Trustee of any change in the location of any such office or agency. If at any
time the Company shall fail to maintain such office or agency or shall fail to
furnish the Trustee with the address thereof, such presentations, surrenders,
notices and demands may be made or served at the Corporate Trust Office of the
Trustee, and the Company hereby appoints the Trustee as its agent to receive all
such presentations, surrenders, notices and demands.
The Company may also from time to time designate one or more other
offices or agencies in or outside Wilmington, Delaware, where the Securities may
be presented or surrendered for any or all of such purposes, and may from time
to time rescind such designations; provided that no such designation or
rescission shall in any manner relieve the Company of its obligation to maintain
an office or agency in the Borough of Manhattan, The City of New York for such
purposes. The Company will give prompt written notice to the Trustee of any such
designation or rescission and of any change in the location of any such other
office or agency.
Section 10.3. Money for Security Payments to be Held in Trust.
If the Company shall at any time act as its own Paying Agent, it will,
on or before each due date of the principal of (and premium, if any) or interest
on any of the Securities, segregate and hold in trust for the benefit of the
Persons entitled thereto a sum sufficient to pay the principal (and premium, if
any) or interest so becoming due until such sums shall be paid to such Persons
or otherwise disposed of as herein provided, and will promptly notify the
Trustee of its action or failure so to act.
Whenever the Company shall have one or more Paying Agents, it will, on
or prior to 11:00 a.m. New York City time on each due date of the principal of
(and premium, if any) or interest on any Securities, deposit with a Paying Agent
a sum sufficient to pay the principal, premium, or interest so becoming due,
such sum to be held in trust for the benefit of the Persons entitled to such
principal, premium or interest, and (unless such Paying Agent is the Trustee)
the Company will promptly notify the Trustee of its action or failure so to act.
The Company will cause each Paying Agent other than the Trustee to
execute and deliver to the Trustee an instrument in which such Paying Agent
shall agree with the Trustee, subject to the provisions of this Section, that
such Paying Agent will:
(1) hold all sums held by it for the payment of the principal of (and
premium, if any) or interest on Securities in trust for the benefit of the
Persons entitled thereto until such sums shall be paid to such Persons or
otherwise disposed of as herein provided;
(2) give the Trustee notice of any default by the Company (or any other
obligor upon the Securities) in the making of any payment of principal (and
premium, if any) or interest;
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(3) at any time during the continuance of any such default, upon the
written request of the Trustee, forthwith pay to the Trustee all sums so
held in trust by such Paying Agent; and
(4) comply with the provisions of the Trust Indenture Act applicable to
it as a Paying Agent.
The Company may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, pay, or
by Company Order direct any Paying Agent to pay, to the Trustee all sums held in
trust by the Company or such Paying Agent, such sums to be held by the Trustee
upon the same trusts as those upon which such sums were held by the Company or
such Paying Agent; and, upon such payment by the Company or any Paying Agent to
the Trustee, the Company or such Paying Agent shall be released from all further
liability with respect to such money.
Any money deposited with the Trustee or any Paying Agent, or then held
by the Company, in trust for the payment of the principal of (and premium, if
any) or interest on any Security and remaining unclaimed for two years after
such principal (and premium, if any) or interest has become due and payable
shall (unless otherwise required by mandatory provision of applicable escheat or
abandoned or unclaimed property law) be paid on Company Request to the Company,
or (if then held by the Company) shall (unless otherwise required by mandatory
provision of applicable escheat or abandoned or unclaimed property law) be
discharged from such trust; and the Holder of such Security shall thereafter, as
an unsecured general creditor, look only to the Company for payment thereof, and
all liability of the Trustee or such Paying Agent with respect to such trust
money, and all liability of the Company as trustee thereof, shall thereupon
cease; provided that the Trustee or such Paying Agent, before being required to
make any such repayment, may at the expense of the Company cause to be published
once, in a newspaper published in the English language, customarily published on
each Business Day and of general circulation in The Borough of Manhattan, The
City of New York, notice that such money remains unclaimed and that, after a
date specified therein, which shall not be less than 30 days from the date of
such publication, any unclaimed balance of such money then remaining will be
repaid to the Company.
Section 10.4. Existence.
Subject to Article VIII and the other Sections of this Article X, the
Company will do or cause to be done all things necessary to preserve and keep in
full force and effect the existence, rights (charter and statutory) and
franchises of the Company; provided that the Company shall not be required to
preserve any such right or franchise if the Board of Directors of the Company in
good faith shall determine that the preservation thereof is no longer desirable
in the conduct of the business of the Company and that the loss thereof is not
disadvantageous in any material respect to the Holders; provided further that
the foregoing shall not prohibit a sale, transfer or conveyance of a Subsidiary
or of any of the Company's assets in compliance with the terms of Article VIII.
Section 10.5. Maintenance of Properties.
Subject to Article VIII and the other Sections of this Article X, the
Company will cause all properties used or useful in the conduct of its business
or the business of any Subsidiary of the Company to be maintained and kept in
good condition, repair and working order and supplied with all necessary
equipment and will cause to be made all necessary repairs, renewals,
replacements, betterments and improvements thereof, all as in the judgment of
the Company may be necessary so that the business carried on in connection
therewith may be properly and advantageously conducted at all times; provided
that nothing in this Section shall prevent the Company from discontinuing the
operation or maintenance of any of such properties if such discontinuance is, as
determined by the Company in good faith, desirable in the conduct of its
business or the business of any Subsidiary and not disadvantageous in any
material respect to the Holders.
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Section 10.6. Payment of Taxes and Other Claims.
The Company will pay or discharge or cause to be paid or discharged,
before the same shall become delinquent, (a) all material taxes, assessments and
governmental charges levied or imposed upon the Company or any of its
Subsidiaries or upon the income, profits or property of the Company or any of
its Subsidiaries, and (b) all material lawful claims for labor, materials and
supplies which, if unpaid, might by law become a Lien upon the property of the
Company or any of its Subsidiaries; provided that the Company shall not be
required to pay or discharge or cause to be paid or discharged any such tax,
assessment, charge or claim whose amount, applicability or validity is being
contested in good faith by appropriate proceedings.
Section 10.7. Maintenance of Insurance.
The Company shall, and shall cause its Subsidiaries to, keep at all
times all of their properties which are of an insurable nature insured against
loss or damage with insurers believed by the Company to be responsible to the
extent that property of similar character is usually so insured by corporations
similarly situated and owning like properties in accordance with good business
practice. The Company shall, and shall cause its Subsidiaries to, use the
proceeds from any such insurance policy to repair, replace or otherwise restore
the property to which such proceeds relate, except to the extent that a
different use of such proceeds is, as determined by the Company, in good faith,
desirable in the conduct of its business or the business of any Subsidiary and
not disadvantageous in any material respect to the Holders.
Section 10.8. Limitation on Incurrence of Indebtedness.
(a) The Company shall not, and shall not permit any Subsidiary to,
Incur, directly or indirectly, any Indebtedness unless, on the date of such
Incurrence (and after giving effect thereto), the Consolidated Coverage Ratio
exceeds 2.0 to 1.
(b) The foregoing limitations contained in paragraph (a) do not apply
to the Incurrence of any of the following Indebtedness:
(1) Indebtedness owed to and held by a Wholly Owned Subsidiary;
provided that any subsequent issuance or transfer of any Capital Stock that
results in any such Wholly Owned Subsidiary ceasing to be a Wholly Owned
Subsidiary or any subsequent transfer of such Indebtedness (other than to
another Wholly Owned Subsidiary) shall be deemed, in each case, to
constitute the Incurrence of such Indebtedness by the Company;
(2) the Securities;
(3) Indebtedness incurred, in each case, to provide all or a portion of
the purchase price or cost of construction of an asset or, in the case of a
sale/leaseback transaction, to finance the value of such asset owned by the
Company or a Subsidiary, in an aggregate principal amount which, together
with all other Indebtedness outstanding on the date of such Incurrence
(other than Indebtedness permitted by paragraph (a) or clause (1) or (6) of
this paragraph (b)), does not exceed $10,000,000;
(4) Refinancing Indebtedness in respect of Indebtedness Incurred
pursuant to paragraph (a) or pursuant to clause (2) or (3) of this
paragraph (b);
(5) Indebtedness under a reverse repurchase program or other derivative
instrument if such Indebtedness is secured only by an Investment by the
Company or its Subsidiaries (or the proceeds of the sale of such an
Investment), provided such Indebtedness has a term of 90 days or less;
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(6) customer deposits and advance payments received from customers for
goods or services purchased in the ordinary course of business; and
(7) Indebtedness in an aggregate principal amount which, together with
all other Indebtedness of the Company and its Subsidiaries outstanding on
the date of such Incurrence (other than Indebtedness permitted by paragraph
(a) or clauses (1) through (6) of this paragraph (b)), does not exceed
$5,000,000.
(c) Notwithstanding the foregoing, the Company shall not, and shall not
permit any Subsidiary to, Incur, directly or indirectly, any Indebtedness (i)
that is subordinate or junior in ranking in right of payment to its Senior
Indebtedness unless such Indebtedness is Senior Subordinated Indebtedness or is
expressly subordinated in right of payment to Senior Subordinated Indebtedness,
or (ii) pursuant to paragraph (b) above if the proceeds thereof are used,
directly or indirectly, to Refinance any Subordinated Obligations unless such
Indebtedness shall be subordinated to the Securities to at least the same extent
as such Subordinated Obligations.
(d) For purposes of determining compliance with the foregoing covenant,
(i) in the event that an item of Indebtedness meets the criteria of more than
one of the types of Indebtedness described above, the Company, in its sole
discretion, will classify such item of Indebtedness and only be required to
include the amount and type of such Indebtedness in one of the above clauses and
(ii) an item of Indebtedness may be divided and classified in more than one of
the types of Indebtedness described above.
Section 10.9. Limitation on Restricted Payments.
(a) The Company shall not, and shall not permit any Subsidiary to,
directly or indirectly, make any Restricted Payment if at the time the Company
or such Subsidiary makes such Restricted Payment:
(1) a Default shall have occurred and be continuing (or would result
therefrom);
(2) the Company is not able to Incur an additional $1.00 of
Indebtedness pursuant to paragraph (a) of Section 10.8; or
(3) the aggregate amount of such Restricted Payment and all other
Restricted Payments since the Issue Date would exceed the sum of: (A) 50%
of the Consolidated Net Income accrued during the period (treated as one
accounting period) from the Issue Date to the end of the Company's most
recently ended fiscal quarter for which internal financial statements are
available at the time of such Restricted Payment (or, in case such
Consolidated Net Income shall be a deficit, minus 100% of such deficit);
(B) the aggregate Net Cash Proceeds received by the Company from the
issuance or sale of its Capital Stock (other than Disqualified Stock)
subsequent to the Issue Date (other than an issuance or sale to a
Subsidiary and other than an issuance or sale to an employee stock
ownership plan or to a trust established by the Company or any of its
Subsidiaries for the benefit of their employees); and (C) the amount by
which Indebtedness of the Company is reduced on the Company's balance sheet
upon the conversion or exchange (other than by a Subsidiary), subsequent to
the Issue Date, of any Indebtedness of the Company convertible or
exchangeable for Capital Stock (other than Disqualified Stock) of the
Company (less the amount of any cash, or the fair value of any other
property, distributed by the Company upon such conversion or exchange).
(b) The provisions of the foregoing paragraph (a) shall not prohibit:
(1) any purchase or redemption of Capital Stock or Subordinated
Obligations of the Company made by exchange for, or out of the proceeds of
the substantially concurrent sale of, Capital Stock of the Company (other
than Disqualified Stock and other than Capital Stock issued or sold to a
Subsidiary or an employee stock ownership plan or to a trust established by
the Company or any of its Subsidiaries for the benefit of their employees);
provided that (A) such purchase or redemption shall be excluded in the
calculation of the amount
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of Restricted Payments and (B) the Net Cash Proceeds from such sale
shall be excluded from the calculation of amounts under clause (3)(B) of
paragraph (a) above;
(2) any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Subordinated Obligations made by
exchange for, or out of the proceeds of the substantially concurrent sale
of, Indebtedness of the Company which is permitted to be Incurred pursuant
to Section 10.8; provided that such purchase, repurchase, redemption,
defeasance or other acquisition or retirement for value shall be excluded
in the calculation of the amount of Restricted Payments; or
(3) dividends paid within 60 days after the date of declaration thereof
if at such date of declaration such dividend would have complied with this
covenant; provided that at the time of payment of such dividend, no other
Default shall have occurred and be continuing (or result therefrom);
provided further that such dividend shall be included in the calculation of
the amount of Restricted Payments.
Section 10.10. Limitation on Restrictions on Distributions from
Subsidiaries.
The Company shall not, and shall not permit any Subsidiary to,
voluntarily create or otherwise cause or permit to exist or become effective any
consensual encumbrance or restriction on the ability of any Subsidiary (a) to
pay dividends or make any other distributions on its Capital Stock to the
Company or any other Subsidiary or pay any Indebtedness owed to the Company or
any other Subsidiary, (b) to pay any management fees or billing fees to the
Company or any other Subsidiary, (c) to make any loans or advances to the
Company or any other Subsidiary or (d) transfer any of its property or assets to
the Company or any other Subsidiary, except:
(i) any encumbrance or restriction pursuant to an agreement in effect at
or entered into on the Issue Date;
(ii) any encumbrance or restriction with respect to a Subsidiary pursuant
to an agreement relating to any Indebtedness Incurred by such Subsidiary on
or prior to the date on which such Subsidiary was acquired by the Company
(other than Indebtedness Incurred as consideration in, or to provide all or
any portion of the funds or credit support utilized to consummate the
transaction or series of related transactions pursuant to which such
Subsidiary became a Subsidiary or was acquired by the Company) and
outstanding on such date;
(iii) any encumbrance or restriction pursuant to an agreement effecting a
Refinancing of Indebtedness Incurred pursuant to an agreement referred to
in clause (i) or (ii) above or this clause (iii) or contained in any
amendment to an agreement referred to in clause (i) or (ii) above or this
clause (iii); provided that the encumbrances and restrictions with respect
to such Subsidiary contained in any such refinancing agreement or amendment
are no less favorable to the Holders than encumbrances and restrictions
with respect to such Subsidiary contained in such agreements;
(iv) any such encumbrance or restriction consisting of customary
non-assignment provisions in leases governing leasehold interests or in
licensing agreements to the extent such provisions restrict the transfer of
the lease or the property leased thereunder or the licensing agreement or
the rights licensed thereunder;
(v) in the case of clause (d) above, restrictions contained in security
agreements or mortgages securing Indebtedness of a Subsidiary to the extent
such restrictions restrict the transfer of the property subject to such
security agreements or mortgages; and
(vi) any restriction with respect to a Subsidiary imposed pursuant to an
agreement entered into for the sale or disposition of all or substantially
all the Capital Stock or assets of such Subsidiary pending the closing of
such sale or disposition.
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Section 10.11. Senior Subordinated Indebtedness; Liens.
The Company shall not, and shall not permit any Subsidiary to, Incur:
(1) any Indebtedness if such Indebtedness is subordinate or junior in ranking in
any respect to any Senior Indebtedness, unless such Indebtedness is Senior
Subordinated Indebtedness or is expressly subordinated in right of payment to
Senior Subordinated Indebtedness; or (2) any Secured Indebtedness that is not
Senior Indebtedness unless (A) contemporaneously therewith effective provision
is made to secure the Securities equally and ratably with such Secured
Indebtedness for so long as such Secured Indebtedness is secured by a Lien or
(B) such Secured Indebtedness is permitted by clause (3) or (4) of paragraph (b)
of Section 10.8.
Section 10.12. Limitation on Affiliate Transactions.
(a) The Company shall not, and shall not permit any Subsidiary to,
enter into any transaction (including the purchase, sale, lease or exchange of
any property, employee compensation arrangements or the rendering of any
service) with any Affiliate of the Company (an "Affiliate Transaction"), (other
than reinsurance with an affiliate in the ordinary course of business) if such
Affiliate Transaction involves an amount in excess of $500,000 unless the terms
thereof:
(1) are set forth in writing; and
(2) have been approved by a majority of the disinterested members of
the Board of Directors of the Company or such Subsidiary.
(b) The provisions of paragraph (a) above shall not prohibit:
(1) any Restricted Payment permitted to be paid pursuant to Section
10.9;
(2) transactions or payments pursuant to any employee arrangements or
employee or director benefit plans entered into by the Company or any of
its Subsidiaries in the ordinary course of business of the Company or such
Subsidiary; and
(3) any Affiliate Transaction between the Company and a Wholly Owned
Subsidiary or between Wholly Owned Subsidiaries.
Section 10.13. Limitation on Sales of Assets and Subsidiary Stock.
(a) The Company shall not, and shall not permit any Subsidiary to,
directly or indirectly, consummate any Asset Disposition unless:
(1) the Company or such Subsidiary receives consideration at the time
of such Asset Disposition at least equal to the fair market value
(including as to the value of all non-cash consideration), as determined in
good faith by the Board of Directors of the Company or such Subsidiary as
the case may be, of the shares and assets subject to such Asset Disposition
and at least 75% of the consideration thereof received by the Company or
such Subsidiary is in the form of cash, cash equivalents or Marketable
Securities; and
(2) an amount equal to 100% of the Net Available Cash from such Asset
Disposition is applied by the Company (or such Subsidiary, as the case may
be) (A) first, to the extent the Company elects (or is required by the
terms of any Senior Indebtedness), to prepay, repay, redeem or purchase
Senior Indebtedness or Indebtedness (other than any Disqualified Stock) of
a Wholly Owned Subsidiary (in each case other than Indebtedness owed to the
Company or an Affiliate of the Company) within eighteen months from the
later of the date of such Asset Disposition or the receipt of such Net
Available Cash; (B) second, to the extent of the balance of such Net
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Available Cash after application in accordance with clause (A), to the
extent the Company elects, to acquire Additional Assets within eighteen
months from the later of the date of such Asset Disposition or the receipt
of such Net Available Cash; and (C) third, to the extent of the balance of
such Net Available Cash after application in accordance with clauses (A)
and (B), to make an offer to the Holders of the Securities to purchase
Securities pursuant to and subject to the conditions contained in the
Indenture; provided that in connection with any prepayment, repayment or
purchase of Indebtedness pursuant to clause (A) or (C) above, the Company
or such Subsidiary shall retire such Indebtedness and shall cause the
related loan commitment (if any) to be permanently reduced in an amount
equal to the principal amount so prepaid, repaid or purchased.
Notwithstanding the foregoing provisions of this paragraph, the Company and
the Subsidiaries shall not be required to apply any Net Available Cash in
accordance with this paragraph except to the extent that the
aggregate Net Available Cash from all Asset Dispositions which are not
applied in accordance with this paragraph exceeds $5,000,000. Pending
application of Net Available Cash pursuant to this covenant, such Net
Available Cash shall be invested in Permitted Investments.
For the purposes of this covenant, the following are deemed to be cash or cash
equivalents: (x) the assumption of Indebtedness of the Company or any Subsidiary
and the release of the Company or such Subsidiary from all liability on such
Indebtedness in connection with such Asset Disposition and (y) securities
received by the Company or any Subsidiary from the transferee that are promptly
converted by the Company or such Subsidiary into cash.
(b) In the event of an Asset Disposition that requires the purchase of
the Securities pursuant to clause (a)(2)(C) above, the Company will be required
to purchase Securities tendered pursuant to an offer by the Company for the
Securities at a purchase price of 101% of their principal amount (without
premium) plus accrued but unpaid interest, in accordance with the procedures
(including prorating in the event of oversubscription) set forth in the
Indenture. The Company shall not be required to make such an offer to purchase
Securities pursuant to this covenant if the Net Available Cash available
therefor is less than $5,000,000 (which lesser amount shall be carried forward
for purposes of determining whether such an offer is required with respect to
any subsequent Asset Disposition).
(c) The Company shall comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Securities pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company shall comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations under this clause by virtue thereof.
Section 10.14. Change of Control.
(a) Upon the occurrence of a Change of Control Triggering Event, each
holder of Preferred Securities shall have the right to require that the Trust
exchange all or any part of the Preferred Securities for Securities having an
aggregate principal amount equal to the aggregate liquidation amount of the
Securities to be exchanged. The Company shall immediately redeem any Preferred
Securities so exchanged at a purchase price in cash equal to 101% of the
principal amount thereof plus accrued and unpaid interest, if any, to the date
of purchase.
(b) Within 30 days following a Change of Control Triggering Event, the
Company shall mail a notice to each holder of Preferred Securities with a copy
to the Trustee stating: (1) that a Change of Control Triggering Event has
occurred and that such holder has the right to require the Trust to exchange
such holder's Preferred Securities for Securities; (2) that the Company shall
immediately redeem any Securities so exchanged at a purchase price in cash equal
to 101% of the principal amount thereof plus accrued and unpaid interest, if
any, to the date of purchase; (3) the circumstances and relevant facts regarding
such Change of Control Triggering Event (including information with respect to
pro forma historical income, cash flow and capitalization after giving effect to
such Change of Control); and (4) the instructions determined by the Company,
consistent with the covenant described hereunder, that a Holder must follow in
order to have its Securities redeemed.
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(c) The Company shall comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Securities pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of this covenant, the Company shall
comply with the applicable securities laws and regulations and shall not be
deemed to have breached its obligations under this covenant by virtue thereof.
Section 10.15. Statement as to Compliance and Default.
(a) The Company shall deliver to the Trustee, within 95 days after the
end of each of their respective calendar years ending after the date hereof, an
Officers' Certificate covering the preceding calendar year, stating whether or
not to the best knowledge of the signers thereof the Company is in default in
the performance, observance or fulfillment of or compliance with any of the
terms, provisions, covenants and conditions of this Indenture and, if the
Company shall be in default, specifying all such defaults and the nature and
status thereof of which they may have knowledge.
(b) The Company shall deliver to the Trustee, as soon as possible and
in any event within 10 days after the Company becomes aware of the occurrence of
an Event of Default or an event which, with notice or the lapse of time or both,
would constitute an Event of Default, an Officers' Certificate setting forth the
details of such Event of Default or default, and the action which the Company
proposes to take with respect thereto.
Section 10.16. Ownership of the Trust.
The Company shall continue (i) to directly or indirectly maintain 100%
ownership of the Common Securities of the Trust; provided that any permitted
successor of the Company hereunder may succeed to the Company's ownership of
such Common Securities and (ii) to use its reasonable efforts to cause the Trust
(x) to remain a statutory business trust, except in connection with the
distribution of Securities to the holders of Trust Securities in liquidation of
the Trust, the redemption of all of the Trust Securities, or certain mergers,
consolidations or amalgamations, each as permitted by the Declaration, and (y)
to otherwise continue to be classified for United States federal income tax
purposes as a grantor trust or another entity which is not subject to United
States federal income tax at the entity level and the assets and income of which
are treated for United States federal income tax purposes as held and derived
directly by holders of interests in the entity.
Section 10.17. Waiver of Certain Covenants.
The Company may omit in any particular instance to comply with any
covenant or condition set forth in Section 8.1 and Sections 10.4 to 10.16, if
before or after the time for such compliance the Holders of at least a majority
in principal amount of the Outstanding Securities shall, by Act of such Holders,
either waive such compliance in such instance or generally waive compliance with
such covenant or condition, but no such waiver shall extend to or affect such
covenant or condition except to the extent so expressly waived, and, until such
waiver shall become effective, the obligations of the Company in respect of any
such covenant or condition shall remain in full force and effect.
Section 10.18. Payment of Expenses.
In connection with the offering, sale and issuance of the Securities to
the Trust and in connection with the sale of the Trust Securities by the Trust,
the Company, in its capacity as borrower with respect to the Securities, shall:
(a) pay all costs and expenses relating to the offering, sale and
issuance of the Securities, including commissions to the initial purchasers
payable pursuant to the Purchase Agreement, fees and expenses in connection with
the Exchange Offer or other action to be taken pursuant to the Registration
Rights Agreement and compensation of the Trustee in accordance with the
provisions of Section 6.7;
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(b) pay all costs and expenses of the Trust (including, but not limited
to, costs and expenses relating to the organization of the Trust, the offering,
sale and issuance of the Trust Securities (including commissions to the initial
purchasers in connection therewith), the fees and expenses of the Preferred
Trustee and the Delaware Trustee, the costs and expenses relating to the
operation of the Trust, including without limitation, costs and expenses of
accountants, attorneys, statistical or bookkeeping services, expenses for
printing and engraving and computing or accounting equipment, paying agent(s),
registrar(s), transfer agent(s), duplicating, travel and telephone and other
telecommunications expenses and costs and expenses incurred in connection with
the acquisition, financing and disposition of Trust assets;
(c) be primarily and fully liable for any indemnification obligations
arising with respect to the Declaration;
(d) pay any and all taxes, duties, assessments or governmental charges
of whatever nature (other than United States withholding taxes attributable to
the Trust or its assets) imposed on the Trust by the United States or any other
taxing authority including any and all liabilities, costs and expenses with
respect to such taxes of the Trust (collectively "Taxes and Expenses") so that
the net amounts received and retained by the Trust and the Preferred Trustee
after paying such Taxes and Expenses will be equal to the amounts the Trust and
the Preferred Trustee would have received had no such Taxes and Expenses been
incurred by or imposed upon the Trust; and
(e) pay all other fees, expenses, debts and obligations (other than the
Trust Securities) related to the Trust.
The foregoing obligations of the Company are for the benefit of, and shall be
enforceable by, any person to whom any such debts, obligations, costs, expenses
and taxes are owed (each, a "Creditor") whether or not such Creditor has
received notice thereof. Any such Creditor may enforce such obligations of the
Company directly against the Company, and the Company irrevocably waives any
right or remedy to require that any such Creditor take any action against the
Trust or any other person before proceeding against the Company. The Company
shall execute such additional agreements as may be necessary or desirable to
give full effect to the foregoing.
ARTICLE XI. REDEMPTION OF SECURITIES
Section 11.1. Applicability of this Article.
Redemption of Securities as permitted or required by any provision of
this Indenture shall be made in accordance with such provision and this Article.
Each Security shall be subject to partial redemption only in the amount of
$1,000, or integral multiples thereof.
Section 11.2. Election to Redeem; Notice to Trustee.
The election of the Company to redeem any Securities shall be evidenced
by or pursuant to a Board Resolution. In case of any redemption at the election
of the Company of less than all of the Securities, the Company shall, not less
than 30 nor more than 60 days prior to the date fixed for redemption (unless a
shorter notice shall be satisfactory to the Trustee), notify the Trustee of such
date and of the principal amount of Securities to be redeemed. In the case of
any redemption of Securities prior to the expiration of any restriction on such
redemption provided in the terms of such Securities, the Company shall furnish
the Trustee with an Officers' Certificate and an Opinion of Counsel evidencing
compliance with such restriction.
Section 11.3. Selection of Securities to be Redeemed.
If less than all the Securities to be redeemed (unless such redemption
affects only a single Security), the particular Securities to be redeemed shall
be selected not more than 60 days prior to the Redemption Date by the Trustee,
from the Outstanding Securities not previously called for redemption, by such
method as the Trustee shall deem fair and appropriate and which may provide for
the selection for redemption of a portion of the principal amount
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of any Security, provided that the unredeemed portion of the principal amount of
any Security shall be in an authorized denomination (which shall not be less
than the minimum authorized denomination) for such Security.
The Trustee shall promptly notify the Company in writing of the
Securities selected for partial redemption and the principal amount thereof to
be redeemed. For all purposes of this Indenture, unless the context otherwise
requires, all provisions relating to the redemption of Securities shall relate,
in the case of any Security redeemed or to be redeemed only in part, to the
portion of the principal amount of such Security which has been or is to be
redeemed. If the Company shall so direct, Securities registered in the name of
the Company, any Affiliate or any Subsidiary thereof shall not be included in
the Securities selected for redemption.
Section 11.4. Notice of Redemption.
Notice of redemption shall be given by first-class mail, postage
prepaid, mailed not earlier than the thirtieth day, and not later than the
sixtieth day, prior to the date fixed for redemption, to each Holder of
Securities to be redeemed, at the address of such Holder as it appears in the
Securities Register.
With respect to the Securities to be redeemed, each notice of
redemption shall state:
(a) the Redemption Date;
(b) the Redemption Price;
(c) if less than all Outstanding Securities are to be redeemed, the
identification (and, in the case of partial redemption, the respective principal
amounts) of the particular Securities to be redeemed;
(d) that on the Redemption Date, the Redemption Price will become due
and payable upon each such Security or portion thereof, and that interest
thereon, if any, shall cease to accrue on and after said date; and
(e) the place or places where such Securities are to be surrendered for
payment of the Redemption Price at which such Securities are to be redeemed.
Notice of redemption of Securities to be redeemed at the election of
the Company shall be given by the Company or, at the Company's request, by the
Trustee in the name and at the expense of the Company and shall not be
irrevocable. The notice if mailed in the manner herein provided shall be
conclusively presumed to have been duly given, whether or not the Holder
receives such notice. In any case, a failure to give such notice by mail or any
defect in the notice to the Holder of any Security designated for redemption as
a whole or in part shall not affect the validity of the proceedings for the
redemption of any other Security.
Section 11.5. Deposit of Redemption Price.
On or prior to 11:00 a.m. New York City time on the Redemption Date
specified in the notice of redemption given as provided in Section 11.4, the
Company will deposit with the Trustee or with one or more Paying Agents (or if
the Company is acting as Paying Agent, segregate and hold in trust as provided
in Section 10.3) an amount of money sufficient to redeem on the Redemption Date
all the Securities so called for redemption at the applicable Redemption Price.
Section 11.6. Payment of Securities Called for Redemption.
If any notice of redemption has been given as provided in Section 11.4,
the Securities or portion of Securities with respect to which such notice has
been given shall become due and payable on the date and at the place or places
stated in such notice at the applicable Redemption Price, and from and after
such date (unless the Company
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shall default on the payment of the Redemption Price and accrued interest) such
Securities shall cease to bear interest. On presentation and surrender of such
Securities at a place of payment in said notice specified, the said Securities
or the specified portions thereof shall be paid and redeemed by the Company at
the applicable Redemption Price.
Upon presentation of any Security redeemed in part only, the Company
shall execute and the Trustee shall authenticate and deliver to the Holder
thereof, at the expense of the Company, a new Security of authorized
denominations, in aggregate principal amount equal to the unredeemed portion of
the Security so presented and having the same Issue Date, Stated Maturity and
terms. If a Global Security is so surrendered, such new Security will also be a
new Global Security.
If any Security called for redemption shall not be so paid upon
surrender thereof for redemption, the principal of and premium, if any, on such
Security shall, until paid, bear interest from the Redemption Date at the rate
prescribed therefor in the Security.
Section 11.7. Company's Right of Redemption.
(a) The Company may, at its option, redeem the Securities after their
date of issuance in whole at any time or in part from time to time after
December 1, 2005, subject to the provisions of this clause (a) and the other
provisions of this Article XI. The Redemption Prices (expressed as a percentage
of principal amount) for any Security so redeemed pursuant to this clause (a)
shall be as set forth below plus any accrued and unpaid interest to the
Redemption Date (subject to the right of Holders of record on the relevant
Regular Record Date to receive interest due on an Interest Payment Date that is
on or prior to the Redemption Date) if redeemed during the twelve-month period
beginning on December 1 of the years indicated below:
<TABLE>
<CAPTION>
PERCENTAGE OF
PRINCIPAL
YEAR AMOUNT
- ---- -------
<S> <C>
2005.................................................. 105.375%
2006.................................................. 103.583%
2007.................................................. 101.792%
2008 and thereafter................................... 100.000%
</TABLE>
(b) If a Tax Event or an Investment Company Event in respect of the
Trust shall occur and be continuing, the Company shall cause the trustees of the
Trust to dissolve and liquidate the Trust and, after satisfaction of liabilities
to creditors of the Trust cause Securities to be distributed to the holders of
the Trust Securities in liquidation of the Trust or, in the event of a Tax Event
only, may cause the Securities to be redeemed, in each case, subject to and in
accordance with the provisions of the Declaration and subject to Article XI of
this Indenture, within 90 days following the occurrence of such Tax Event or
Investment Company Event. Any redemption of the Securities as a result of a Tax
Event shall be in whole at 100% of the principal amount thereof, plus accrued
and unpaid interest, to the Redemption Date.
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ARTICLE XII. SUBORDINATION OF SECURITIES
Section 12.1. Securities Subordinate to Senior Indebtedness.
The Company covenants and agrees, and each Holder of a Security, by its
acceptance thereof, likewise covenants and agrees, that, to the extent and in
the manner hereinafter set forth in this Article (subject to Article IV), the
payment of the principal of (including any payments on redemption or
repurchase), premium, if any, and interest on each and all of the Securities are
hereby expressly made subordinate and subject in right of payment to the prior
payment in full of all amounts then due and payable in respect of all Senior
Indebtedness of the Company whether outstanding on the date the Securities are
originally issued or thereafter incurred.
Section 12.2. Payment Over of Proceeds Upon Dissolution, Etc.
In case of the pendency of any receivership, insolvency, liquidation,
bankruptcy, reorganization, arrangement, adjustment, composition or other
similar judicial proceeding relative to the Company or its property (each such
event, if any, herein sometimes referred to as a "Proceeding"), the holders of
Senior Indebtedness of the Company shall be entitled to receive payment in full
of principal of (and premium, if any) and interest, if any, on such Senior
Indebtedness, or provision shall be made for such payment in cash or cash
equivalents or otherwise in a manner satisfactory to the holders of Senior
Indebtedness, before the Holders of the Securities are entitled to receive or
retain any payment or distribution of any kind or character, whether in cash,
property or securities (including any payment or distribution which may be
payable or deliverable by reason of the payment of any other Indebtedness of the
Company (including the Securities) subordinated to the payment of the
Securities, such payment or distribution being hereinafter referred to as a
"Senior Subordinated Payment"), on account of principal of (or premium, if any)
or interest on the Securities or on account of the purchase or other acquisition
of Securities by the Company or any Subsidiary, and to that end the holders of
Senior Indebtedness shall be entitled to receive, for application to the payment
thereof, any payment or distribution of any kind or character, whether in cash,
property or securities, including any Senior Subordinated Payment, which may be
payable or deliverable in respect of the Securities in any such Proceeding.
In the event that, notwithstanding the foregoing provisions of this
Section, the Trustee or the Holder of any Security shall have received any
payment or distribution of assets of the Company of any kind or character,
whether in cash, property or securities, including any Senior Subordinated
Payment, before all Senior Indebtedness is paid in full or payment thereof is
provided for in cash or cash equivalents or otherwise in a manner satisfactory
to the holders of Senior Indebtedness, and if such fact shall, at or prior to
the time of such payment or distribution, have been made known to the Trustee
or, as the case may be, such Holder, then and in such event such payment or
distribution shall be paid over or delivered forthwith to the trustee in
bankruptcy, receiver, liquidating trustee, custodian, assignee, agent or other
Person making payment or distribution of assets of the Company for application
to the payment of all Senior Indebtedness remaining unpaid, to the extent
necessary to pay all Senior Indebtedness in full, after giving effect to any
concurrent payment or distribution to or for the holders of Senior Indebtedness.
For purposes of this Article only, the words "any payment or
distribution of any kind or character, whether in cash, property or securities"
shall not be deemed to include (i) shares of stock of the Company as reorganized
or readjusted, or securities of the Company or any other corporation provided
for by a plan of reorganization or readjustment which securities are
subordinated in right of payment to all then outstanding Senior Indebtedness to
substantially the same extent as the Securities are so subordinated as provided
in this Article, or (ii) payments or other distributions from any defeasance
trust pursuant to Section 4.2. The consolidation of the Company with, or the
merger of the Company into, another Person or the liquidation or dissolution of
the Company following the sale of all or substantially all of its properties and
assets as an entirety to another Person upon the terms and conditions set forth
in Article VIII shall not be deemed a Proceeding for the purposes of this
Section if the Person formed by such consolidation or into which the Company is
merged or the Person which acquires by sale such properties and assets as an
entirety, as the case may be, shall, as a part of such consolidation, merger, or
sale comply with the conditions set forth in Article VIII.
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Section 12.3. Prior Payment to Senior Indebtedness Upon Acceleration
of Securities.
In the event that, upon the occurrence of an Event of Default, any
Securities are declared due and payable before their Stated Maturity, then (a)
the Company or the Trustee, at the direction of the Company, shall promptly
notify the holders of Senior Indebtedness of the Company or the representative
of such holders of the acceleration, and (b) in such event, if any Senior
Indebtedness is outstanding, the Company may not pay the Securities until five
Business Days after the representative of all issues of Senior Indebtedness
receive notice of such acceleration and, thereafter, may pay the Securities only
if payment is otherwise permitted hereunder at that time.
In the event that, notwithstanding the foregoing, the Company shall
make any payment to the Trustee or the Holder of any Security prohibited by the
foregoing provisions of this Section, and if such fact shall, at or prior to the
time of such payment, have been made known to the Trustee or, as the case may
be, such Holder, then and in such event such payment shall be paid over and
delivered forthwith to the Company.
The provisions of this Section shall not apply to any payment with
respect to which Section 12.2 would be applicable.
Section 12.4. No Payment When Specified Senior Indebtedness in
Default.
(a) The Company may not pay principal of, or premium (if any) or
interest on, the Securities, and may not repurchase, redeem or otherwise retire
any Securities (collectively "pay the Notes") if (i) any Specified Senior
Indebtedness of the Company is not paid when due or (ii) any other default on
Specified Senior Indebtedness of the Company occurs and the maturity of such
Specified Senior Indebtedness is accelerated in accordance with its terms,
unless, in either case, the default has been cured or waived and any such
acceleration has been rescinded or such Specified Senior Indebtedness has been
paid in full. However, the Company may pay the Notes without regard to the
foregoing if the Company and the Trustee receive written notice approving such
payment from a representative of the Specified Senior Indebtedness with respect
to which either of the events set forth in clause (i) or (ii) of the immediately
preceding sentence has occurred and is continuing.
(b) During the continuance of any default (other than a default
described in clause (i) or (ii) of the preceding paragraph (a)) with respect to
any Specified Senior Indebtedness of the Company pursuant to which the maturity
thereof may be accelerated immediately without further notice (except such
notice as may be required to effect such acceleration) or the expiration of any
applicable grace periods, the Company may not pay the Notes to the Holders for a
period (a "Payment Blockage Period") commencing upon the receipt by the Trustee
(with a copy to the Company) of written notice (a "Blockage Notice") of such
default from the representative of the holders of such Specified Senior
Indebtedness specifying an election to effect a Payment Blockage Period and
ending 179 days thereafter (or earlier if such Payment Blockage Period is
terminated (i) by written notice to the Trustee and the Company from the
representative of the holders of such Specified Senior Indebtedness, (ii)
because the default giving rise to such Blockage Notice is no longer continuing,
as certified to the Trustee by the representative of the holders of such
Specified Senior Indebtedness, or (iii) because such Specified Senior
Indebtedness has been repaid in full, as certified to the Trustee by the
representative of the holders of such Specified Senior Indebtedness).
(c) Notwithstanding the preceding paragraph (b), unless the holders of
such Specified Senior Indebtedness or the representative of such holders have
accelerated the maturity of such Specified Senior Indebtedness, the Company may
resume payments on the Securities after the end of such Payment Blockage Period.
The Securities shall not be subject to more than one Payment Blockage Period in
any consecutive 360-day period, irrespective of the number of defaults with
respect to Specified Senior Indebtedness during such period.
(d) In the event that, notwithstanding the foregoing, the Company shall
make any payment to the Trustee or the Holder of any Security prohibited by the
foregoing provisions of this Section, and if such fact shall, at or prior
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to the time of such payment, have been made known to the Trustee or, as the case
may be, such Holder, then and in such event such payment shall be paid over and
delivered forthwith to the Company.
The provisions of this Section shall not apply to any payment with
respect to which Section 12.2 would be applicable.
Section 12.5. Payment Permitted If No Default.
Nothing contained in this Article or elsewhere in this Indenture or in
any of the Securities shall prevent (a) the Company, at any time except during
the pendency of any Proceeding referred to in Section 12.2 or under the
conditions described in Sections 12.3 and 12.4, from making payments at any time
of principal of (and premium, if any) or interest on the Securities, or (b) the
application by the Trustee of any money or U.S. Government Obligations deposited
with it hereunder in accordance with the provisions of Section 4.3 to the
payment of or on account of the principal of (and premium, if any) or interest
on the Securities or the retention of such payment by the Holders, if, at the
time of such payment or application, as the case may be, by the Company or the
Trustee, as the case may be, the Company or the Trustee, as the case may be, did
not have knowledge that such payment would have been prohibited by the
provisions of this Article.
Section 12.6. Subrogation to Rights of Holders of Senior Indebtedness.
Subject to the payment in full of all Senior Indebtedness of the
Company, or the provision for such payment in cash or cash equivalents or
otherwise in a manner satisfactory to the holders of Senior Indebtedness of the
Company, the Holders of the Securities shall be subrogated to the extent of the
payments or distributions made to the holders of such Senior Indebtedness
pursuant to the provisions of this Article (equally and ratably with the holders
of all Indebtedness of the Company which by its express terms is subordinated to
Senior Indebtedness of the Company to substantially the same extent as the
Securities are subordinated to the Senior Indebtedness and is entitled to like
rights of subrogation by reason of any payments or distributions made to holders
of such Senior Indebtedness) to the rights of the holders of such Senior
Indebtedness to receive payments and distributions of cash, property and
securities applicable to the Senior Indebtedness of the Company until the
principal of (and premium, if any) and interest on the Securities shall be paid
in full. For purposes of such subrogation or assignment, no payments or
distributions to the holders of the Senior Indebtedness of the Company of any
cash, property or securities to which the Holders of the Securities or the
Trustee would be entitled except for the provisions of this Article, and no
payments pursuant to the provisions of this Article to the holders of Senior
Indebtedness by Holders of the Securities or the Trustee, shall, as among the
Company, its creditors other than holders of Senior Indebtedness, and the
Holders of the Securities, be deemed to be a payment or distribution by the
Company to or on account of the Senior Indebtedness.
Section 12.7. Provisions Solely to Define Relative Rights.
The provisions of this Article are and are intended solely for the
purpose of defining the relative rights of the Holders of the Securities on the
one hand and the holders of Senior Indebtedness on the other hand. Nothing
contained in this Article or elsewhere in this Indenture or in the Securities is
intended to or shall (a) impair, as between the Company and the Holders of the
Securities, the obligations of the Company, which are absolute and
unconditional, to pay to the Holders of the Securities the principal of (and
premium, if any) and interest on the Securities as and when the same shall
become due and payable in accordance with their terms; or (b) affect the
relative rights against the Company of the Holders of the Securities and
creditors of the Company other than their rights in relation to the holders of
Senior Indebtedness of the Company; or (c) prevent the Trustee or the Holder of
any Security from exercising all remedies otherwise permitted by applicable law
upon default under this Indenture including, without limitation, filing and
voting claims in any Proceeding, subject to the rights, if any, under this
Article of the holders of Senior Indebtedness to receive cash, property and
securities otherwise payable or deliverable to the Trustee or such Holder.
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Section 12.8. Trustee to Effectuate Subordination.
Each Holder of a Security by his or her acceptance thereof authorizes
and directs the Trustee on his or her behalf to take such action as may be
necessary or appropriate to acknowledge or effectuate the subordination provided
in this Article and appoints the Trustee his or her attorney-in-fact for any and
all such purposes.
Section 12.9. No Waiver of Subordination Provisions.
No right of any present or future holder of any Senior Indebtedness to
enforce subordination as herein provided shall at any time in any way be
prejudiced or impaired by any act or failure to act on the part of the Company
or by any act or failure to act, in good faith, by any such holder, or by any
noncompliance by the Company with the terms, provisions and covenants of this
Indenture, regardless of any knowledge thereof that any such holder may have or
be otherwise charged with.
Without limiting the foregoing paragraph, the holders of Senior
Indebtedness may from time to time, without the consent of or notice to the
Trustee or the Holders and without releasing the subordination of the Securities
to the Senior Indebtedness, do any of the following: (a) change the manner,
place or terms of payment or extend the time of payment of, or renew or alter,
the Senior Indebtedness, or otherwise amend or supplement in any manner the
Senior Indebtedness or any instrument evidencing the same; (b) sell, exchange,
release or otherwise deal with any property pledged, mortgaged or otherwise
securing Senior Indebtedness; (c) release any Person liable in any manner for
the collection of Senior Indebtedness; and (d) exercise or refrain from
exercising any rights against the Company and any other Person.
Section 12.10. Notice to Trustee.
The Company shall give prompt written notice to the Trustee of any fact
known to the Company which would prohibit the making of any payment to or by the
Trustee in respect of the Securities. Notwithstanding the provisions of this
Article or any other provision of this Indenture, the Trustee shall not be
charged with knowledge of the existence of any facts which would prohibit the
making of any payment to or by the Trustee in respect of the Securities, unless
and until a Responsible Officer of the Trustee shall have received written
notice thereof from the Company or a holder of Senior Indebtedness or from any
trustee, agent or representative therefor (whether or not the facts contained in
such notice are true); provided that if the Trustee shall not have received the
notice provided for in this Section at least two Business Days prior to the date
upon which by the terms hereof any monies may become payable for any purpose
(including, without limitation, the payment of the principal of (and premium, if
any) or interest on any Security), then, anything herein contained to the
contrary notwithstanding, the Trustee shall have full power and authority to
receive such monies and to apply the same to the purpose for which they were
received and shall not be affected by any notice to the contrary which may be
received by it within two Business Days prior to such date.
Section 12.11. Reliance on Judicial Order or Certificate of
Liquidating Agent.
Upon any payment or distribution of assets of the Company referred to
in this Article, the Trustee, subject to the provisions of Article VI, and the
Holders of the Securities shall be entitled to rely upon any order or decree
entered by any court of competent jurisdiction in which such Proceeding is
pending, or a certificate of the trustee in bankruptcy, receiver, liquidating
trustee, custodian, assignee for the benefit of creditors, agent or other Person
making such payment or distribution, delivered to the Trustee or to the Holders
of Securities, for the purpose of ascertaining the Persons entitled to
participate in such payment or distribution, the holders of the Senior
Indebtedness and other indebtedness of the Company, the amount thereof or
payable thereon, the amount or amounts paid or distributed thereon and all other
facts pertinent thereto or to this Article.
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Section 12.12. Trustee Not Fiduciary for Holders of Senior
Indebtedness.
The Trustee, in its capacity as trustee under this Indenture, shall not
be deemed to owe any fiduciary duty to the holders of Senior Indebtedness of the
Company and shall not be liable to any such holders if it shall in good faith
mistakenly pay over or distribute to Holders of Securities or to the Company or
to any other Person cash, property or securities to which any holders of Senior
Indebtedness of the Company shall be entitled by virtue of this Article or
otherwise.
Section 12.13. Rights of Trustee as Holder of Senior Indebtedness;
Preservation of Trustee's Rights.
The Trustee in its individual capacity shall be entitled to all the
rights set forth in this Article with respect to any Senior Indebtedness of the
Company which may at any time be held by it, to the same extent as any other
holder of Senior Indebtedness of the Company, and nothing in this Indenture
shall deprive the Trustee of any of its rights as such holder.
Section 12.14. Article Applicable to Paying Agents.
In case at any time any Paying Agent other than the Trustee shall have
been appointed by the Company and be then acting hereunder, the term "Trustee"
as used in this Article shall in such case (unless the context otherwise
requires) be construed as extending to and including such Paying Agent within
its meaning as fully for all intents and purposes as if such Paying Agent were
named in this Article in addition to or in place of the Trustee.
Section 12.15. Certain Conversions or Exchanges Deemed Payment.
For the purposes of this Article only, (a) the issuance and delivery of
junior securities upon conversion or exchange of Securities shall not be deemed
to constitute a payment or distribution on account of the principal of (or
premium, if any) or interest on Securities or on account of the purchase or
other acquisition of Securities, and (b) the payment, issuance or delivery of
cash, property or securities (other than junior securities) upon conversion or
exchange of a Security shall be deemed to constitute payment on account of the
principal of such security. For the purposes of this Section, the term "junior
securities" means (i) shares of any stock of any class of the Company and (ii)
securities of the Company which are subordinated in right of payment to all
Senior Indebtedness of the Company which may be outstanding at the time of
issuance or delivery of such securities to substantially the same extent as, or
to a greater extent than, the Securities are so subordinated as provided in this
Article.
ARTICLE XIII. EXTENSION OF INTEREST PAYMENT PERIOD
Section 13.1. Extension of Interest Payment Period.
(a) Unless an Event of Default has occurred and is continuing, the
Company shall have the right, at any time during the term of the Securities, to
defer the payment of interest at any time or from time to time for a period not
exceeding 10 consecutive semi-annual periods, including the first such
semi-annual period during such extension period (the "Extension Period"), during
which Extension Period no interest shall be due and payable; provided that no
Extension Period may extend beyond the Stated Maturity. To the extent permitted
by applicable law, interest, the payment of which has been deferred because of
the extension of the interest payment period pursuant to this Section 13.1, will
bear interest thereon at 10 3/4% compounded semi-annually for each semi-annual
period of the Extension Period ("Compounded Interest"). At the end of the
Extension Period, the Company shall pay all interest accrued and unpaid on the
Securities, including any Compounded Interest that shall be payable to the
Holders of the Securities in whose names the Securities are registered in the
Security Register on the first record date after the end of the Extension
Period. Such deferment of payments of interest shall not be deemed an Event of
Default.
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(b) During any such Extension Period, the Company shall not (i) declare
or pay any dividends or distributions on, or redeem, purchase, acquire, or make
a liquidation payment with respect to, any of the Company's Capital Stock, (ii)
make any payment of principal and interest or premium, if any, on or repay,
repurchase or redeem any debt securities of the Company that rank pari passu
with or junior in right of payment to the Securities or (iii) make any guarantee
payments with respect to any guarantee by the Company of the debt securities of
any Subsidiary if such guarantee ranks pari passu with or junior in right of
payment to the Securities (excluding, in each case, (a) dividends or
distributions in shares of or options, warrants or rights to subscribe for or
purchase Capital Stock of the Company, (b) any declaration of a dividend in
connection with the implementation of a stockholders' rights plan,
the issuance of stock under any such plan in the future, or the redemption or
repurchase of any such rights pursuant thereto, (c) payments under the Company
Guarantee, (d) as a result of a reclassification of the Company's Capital Stock
or the exchange or conversion of one class or series of the Company's Capital
Stock for another class or series of the Company's Capital Stock, (e) the
purchase of fractional interests in shares of the Company's Capital Stock
pursuant to the conversion or exchange provisions of such Capital Stock or the
security being converted or exchanged, and (f) purchases or issuances of Capital
Stock under any of the Company's stock option, stock purchase, stock loan or
other benefit plans for its directors, officers or employees or any of the
Company's dividend reinvestment plans, in each case as now existing or hereafter
established or amended).
(c) Before the termination of any Extension Period, the Company may
defer payments of interest by further extending such period, provided that such
period, together with all such previous and further extensions within such
Extension Period, shall not exceed ten consecutive semi-annual periods,
including the first such semi-annual period during such Extension Period, or
extend beyond the Maturity Date of the Securities. Upon the termination of any
Extension Period and the payment of all Compounded Interest then due, the
Company may elect to commence a new Extension Period, subject to the foregoing
requirements. No interest shall be due and payable during an Extension Period,
except at the end thereof, but the Company may prepay at any time all or any
portion of the interest accrued during an Extension Period.
Section 13.2. Notice of Extension.
(a) The Company must give the Trustee and the Preferred Trustee notice
of its election of any Extension Period (or an extension thereof) at least five
Business Days prior to the earlier of (i) the Interest Payment Date and (ii) the
date the Trustee is required to give notice to any securities exchange or to
holders of Trust Securities of the record date or the date such distributions on
the Trust Securities are payable, but in any event not less than five Business
Days prior to such record date. The Trustee shall give notice of the Company's
election to begin or extend a new Extension Period to the Holders of the Trust
Securities.
(b) The semi-annual period in which any notice is given pursuant to
paragraph (a) of this Section 13.2 shall be counted as one of the ten
semi-annual periods permitted in the maximum Extension Period permitted under
Section 13.1. There is no limitation on the number of times that the Company may
elect to begin an Extension Period.
[rest of page intentionally left blank]
-71-
<PAGE> 79
Wilmington Trust Company hereby accepts the trusts in this Indenture
declared and provided, upon the terms and conditions hereinabove set forth.
This instrument may be executed in any number of counterparts, each of
which so executed shall be deemed to be an original, but all such counterparts
shall together constitute but one and the same instrument.
-72-
<PAGE> 80
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be
duly executed, all as of the day and year first above written.
SUPERIOR NATIONAL INSURANCE GROUP, INC.,
As Issuer
By: /s/ [SIGNATURE]
------------------------------------
Name:
Title:
By: /s/ [SIGNATURE]
------------------------------------
Name:
Title:
WILMINGTON TRUST COMPANY,
As Trustee and not in its individual capacity
By: /s/ [SIGNATURE]
-------------------------------
Name:
Title:
-73-
<PAGE> 1
EXHIBIT 4.4
================================================================================
GUARANTEE AGREEMENT
between
Superior National Insurance Group, Inc.
(as Guarantor)
and
Wilmington Trust Company
(as Trustee)
dated as of
December 3, 1997
================================================================================
<PAGE> 2
CROSS-REFERENCE TABLE*
<TABLE>
<CAPTION>
Section of Section of
Trust Indenture Act Guarantee
of 1939, as Amended Agreement
- ------------------- ----------
<S> <C>
310(a)................................................................ 4.1(a)
310(b).....................................................4.1(c), 2.B
310(c)................................................................ Inapplicable
311(a)................................................................ 2.2(b)
311(b)................................................................ 2.2(b)
311(c)................................................................ Inapplicable
312(a)................................................................ 2.2(a)
312(b)................................................................ 2.2(b)
313............................................................... 2.3
314(a)................................................................ 2.4
314(b)................................................................ Inapplicable
314(c)................................................................ 2.5
314(d)................................................................ Inapplicable
314(e)................................................................ 1.1, 2.5, 3.2
314(f)................................................................ 2.1, 3.2
315(a)................................................................ 3.1(d)
315(b)................................................................ 2.7
315(c)................................................................ 3.1
315(d)............................................................... 3.1(d)
316(a)................................................................ 1.1, 2.6, 5.4
316(b)................................................................ 5.3
316(c)................................................................ 8.2
317(a)................................................................ Inapplicable
317(b)....................................................Inapplicable
318(a)................................................................ 2.1(b)
318(b)................................................................ 2.1
318(c)................................................................ 2.1(a)
</TABLE>
- ---------------------
* This Cross-Reference Table does not constitute part of the Guarantee
Agreement and shall not affect the interpretation of any of its terms or
provisions.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
ARTICLE I. DEFINITIONS............................................ 1
SECTION 1.1. Definitions................................................... 1
ARTICLE II. TRUST INDENTURE ACT................................... 4
SECTION 2.1. Trust Indenture Act; Application.............................. 4
SECTION 2.2. List of Holders............................................... 4
SECTION 2.3. Reports by the Guarantee Trustee.............................. 4
SECTION 2.4. Periodic Reports to the Guarantee Trustee..................... 4
SECTION 2.5. Evidence of Compliance with Condition Precedent............... 5
SECTION 2.6. Events of Default; Waiver..................................... 5
SECTION 2.7. Event of Default; Notice...................................... 5
SECTION 2.8. Conflicting Interests......................................... 5
ARTICLE III. POWERS, DUTIES AND RIGHTS OF THE
GUARANTEE TRUSTEE................................... 6
SECTION 3.1. Powers and Duties of the Guarantee Trustee.................... 6
SECTION 3.2. Certain Rights of Guarantee Trustee........................... 7
SECTION 3.3. Indemnity..................................................... 9
ARTICLE IV. GUARANTEE TRUSTEE..................................... 9
SECTION 4.1. Guarantee Trustee; Eligibility................................ 9
SECTION 4.2. Appointment, Removal and Resignation of the Guarantee
Trustee....................................................... 10
ARTICLE V. GUARANTEE............................................. 10
SECTION 5.1. Guarantee..................................................... 10
SECTION 5.2. Waiver of Notice and Demand................................... 10
SECTION 5.3. Obligations Not Affected...................................... 11
SECTION 5.4. Rights of Holders............................................. 11
SECTION 5.5. Guarantee of Payment.......................................... 12
SECTION 5.6. Subrogation................................................... 12
SECTION 5.7. Independent Obligations....................................... 12
ARTICLE VI. SUBORDINATION........................................ 12
SECTION 6.1. Subordination................................................. 12
ARTICLE VII. TERMINATION......................................... 14
SECTION 7.1 Termination................................................... 14
ARTICLE VIII. MISCELLANEOUS...................................... 14
</TABLE>
i
<PAGE> 4
<TABLE>
<CAPTION>
Page
<S> <C> <C>
SECTION 8.1. Successors and Assigns........................................ 14
SECTION 8.2. Amendments.................................................... 14
SECTION 8.3. Notices....................................................... 15
SECTION 8.4. Benefit....................................................... 16
SECTION 8.5. Interpretation................................................ 16
SECTION 8.6. Governing Law................................................. 16
</TABLE>
ii
<PAGE> 5
GUARANTEE AGREEMENT
This GUARANTEE AGREEMENT, dated as of December 3, 1997, is
executed and delivered by Superior National Insurance Group, Inc., a corporation
organized under the laws of the State of Delaware ("Guarantor"), having its
principal office at 26601 Agoura Road, Calabasas, California 91302, and
Wilmington Trust Company, a Delaware banking corporation duly organized and
existing under the laws of the State of Delaware, as trustee (the "Guarantee
Trustee"), for the benefit of the Holders (as defined herein) from time to time
of the Preferred Securities (as defined herein) of Superior National Capital
Trust I, a Delaware statutory business trust (the "Trust").
WHEREAS, pursuant to the terms of an Amended and Restated
Declaration of Trust dated as of December 3, 1997 (the "Declaration"), the Trust
is issuing up to $105,000,000 aggregate liquidation amount of its 10 3/4% Trust
Preferred Securities, liquidation amount $1,000 per preferred security (the
"Preferred Securities") representing undivided beneficial ownership interests in
the assets of the Trust and having the terms set forth in the Declaration;
WHEREAS, the Preferred Securities will be issued by the Trust and
the proceeds thereof, together with the proceeds from the issuance of the
Trust's Common Securities (as defined below), will be used to purchase the Notes
(as defined in the Declaration) of the Guarantor which will be held by
Wilmington Trust Company, as Preferred Trustee under the Declaration, as trust
assets;
WHEREAS, the Guarantor has agreed to separately guarantee the
obligations of the Trust with respect to the Common Securities (as herein
defined) (Exhibit A); and
WHEREAS, as incentive for the Holders to purchase Preferred
Securities the Guarantor desires irrevocably and unconditionally to guarantee,
to the extent set forth herein, payment to the Holders of the Preferred
Securities of the Guarantee Payments (as defined herein) and to make certain
other payments on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the purchase by each Holder
of Preferred Securities, which purchase the Guarantor hereby agrees shall
benefit the Guarantor, the Guarantor executes and delivers this Guarantee
Agreement for the benefit of the Holders from time to time of the Preferred
Securities.
ARTICLE I. DEFINITIONS
SECTION 1.1. Definitions.
As used in this Guarantee Agreement, the terms set forth below
shall, unless the context otherwise requires, have the following meanings.
Capitalized or otherwise defined terms used but not otherwise defined herein
shall have the meanings assigned to such terms in the Declaration as in effect
on the date hereof.
<PAGE> 6
2
"Affiliate" of any specified Person means any other Person
directly or indirectly controlling or controlled by or under direct common
control with such specified Person; provided that an Affiliate of the Guarantor
shall not be deemed to include the Trust. For the purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Common Security" means an undivided beneficial interest in the
assets of the Trust, having a Liquidation Amount (as defined in the Declaration)
of $1,000 and having the rights provided therefor in the Declaration, including
the right to receive Distributions and a Liquidation Distribution as provided
therein.
"Event of Default" means a default by the Guarantor on any of its
payment obligations under this Guarantee Agreement.
"Guarantee Payments" means the following payments or
distributions, without duplication, with respect to the Preferred Securities, to
the extent not paid or made by or on behalf of the Trust: (i) any accumulated
and unpaid Distributions required to be paid on the Preferred Securities, to the
extent the Trust has funds legally available therefor, (ii) the Redemption Price
with respect to the Preferred Securities called for redemption, to the extent
the Trust has funds legally available therefor and (iii) upon a voluntary or
involuntary dissolution, winding up or liquidation of the Trust (unless the
Senior Subordinated Notes are distributed to the Holders of the Preferred
Securities), the lesser of (a) the aggregate of the liquidation amount and all
accrued and unpaid Distributions on the Preferred Securities to the date of
payment, to the extent the Trust has funds legally available therefor and (b)
the amount of cash assets of the Trust remaining legally available for
distribution to Holders of the Preferred Securities upon liquidation of the
Trust.
"Guarantee Trustee" means Wilmington Trust Company, until a
Successor Guarantee Trustee has been appointed and has accepted such appointment
pursuant to the terms of this Guarantee Agreement and thereafter means each such
Successor Guarantee Trustee.
"Holder" means any holder, as registered on the books and records
of the Trust, of any Preferred Securities; provided that in determining whether
the holders of the requisite percentage of Preferred Securities have given any
request, demand, authorization, direction, notice, consent or waiver hereunder,
"Holder" shall not include the Guarantor, any Trustee, or any Affiliate of the
Guarantor or of any Trustee.
"Indenture" means the Senior Subordinated Indenture dated as of
December 3, 1997, among the Guarantor and Wilmington Trust Company, as trustee.
"List of Holders" has the meaning specified in Section 2.2(a).
<PAGE> 7
3
"Majority in Liquidation Amount of the Preferred Securities"
means, except as provided by the Trust Indenture Act, a vote by the Holder(s),
voting separately as a class, of more than 50% of the liquidation amount of all
then outstanding Preferred Securities issued by the Trust.
"Officers' Certificate" means a certificate signed by (a) the
Chairman of the Board, Chief Executive Officer, President or Vice President, and
by the Treasurer, an Assistant Treasurer, the Controller, the Secretary or an
Assistant Secretary, or (b) any two members of the Board of Directors of the
Company, and delivered to the appropriate Trustee. Any Officers' Certificate
delivered with respect to compliance with a condition or covenant provided for
in this Guarantee Agreement shall include:
(a) a statement that each individual signing the Officers'
Certificate has read the covenant or condition and the definitions relating
thereto;
(b) a brief statement of the nature and scope of the examination
or investigation undertaken by each individual in rendering the Officers'
Certificate;
(c) a statement that each individual has made such examination or
investigation as, in such officer's opinion, is necessary to enable such officer
to express an informed opinion as to whether such covenant or condition has been
complied with; and
(d) a statement as to whether, in the opinion of each officer,
such condition or covenant has been complied with.
"Person" means any individual, corporation, estate, partnership,
joint venture, association, joint-stock company, limited liability company,
trust, unincorporated organization, or government or any agency, instrumentality
or political subdivision thereof, or any other entity of whatever nature.
"Responsible Officer" means, with respect to the Guarantee
Trustee, any Senior Vice President, any Vice President, any Assistant Vice
President, the Secretary, any Assistant Secretary, the Treasurer, any Assistant
Treasurer, any Trust Officer or Assistant Trust Officer or any other officer of
the Corporate Trust Department of the Guarantee Trustee and also means, with
respect to a particular corporate trust matter, any other officer to whom such
matter is referred because of that officer's knowledge of and familiarity with
the particular subject.
"Senior Indebtedness" has the meaning specified in the Indenture.
"Successor Guarantee Trustee" means a successor Guarantee Trustee
possessing the qualifications to act as Guarantee Trustee under Section 4.1.
<PAGE> 8
4
"Trust Indenture Act" means the Trust Indenture Act of 1939 as in
force at the date as of which this instrument was executed; provided that in the
event the Trust Indenture Act of 1939 is amended after such date, "Trust
Indenture Act" means, to the extent required by any such amendment, the Trust
Indenture Act of 1939 as so amended.
ARTICLE II. TRUST INDENTURE ACT
SECTION 2.1. Trust Indenture Act; Application.
(a) This Guarantee Agreement is subject to the provisions of the
Trust Indenture Act that are required to be part of this Guarantee Agreement and
shall, to the extent applicable, be governed by such provisions.
(b) If and to the extent that any provision of this Guarantee
Agreement limits, qualifies or conflicts with the duties imposed by Sections 310
to 317, inclusive, of the Trust Indenture Act, such imposed duties shall
control.
SECTION 2.2. List of Holders.
(a) The Guarantor shall furnish or cause to be furnished to the
Guarantee Trustee (a) semiannually, on or before June 1 and December 1 of each
year, a list, in such form as the Guarantee Trustee may reasonably require, of
the names and addresses of the Holders ("List of Holders") as of a date not more
than 15 days prior to the delivery thereof, and (b) at such other times as the
Guarantee Trustee may request in writing, within 30 days after the receipt by
the Guarantor of any such request, a List of Holders as of a date not more than
15 days prior to the time such list is furnished, in each case to the extent
such information is in the possession or control of the Guarantor and is not
identical to a previously supplied list of Holders or has not otherwise been
received by the Guarantee Trustee in its capacity as such. The Guarantee Trustee
may destroy any List of Holders previously given to it on receipt of a new List
of Holders.
(b) The Guarantee Trustee shall comply with its obligations under
Section 311(a), Section 311(b) and Section 312(b) of the Trust Indenture Act.
SECTION 2.3. Reports by the Guarantee Trustee.
Not later than April 30 of each year, commencing April 30, 1998,
the Guarantee Trustee shall provide to the Holders such reports as are required
by Section 313 of the Trust Indenture Act, if any, in the form and in the manner
provided by Section 313 of the Trust Indenture Act. The Guarantee Trustee shall
also comply with the requirements of Section 313(d) of the Trust Indenture Act.
SECTION 2.4. Periodic Reports to the Guarantee Trustee.
<PAGE> 9
5
The Guarantor shall provide to the Guarantee Trustee, the
Securities and Exchange Commission and the Holders such documents, reports and
information, if any, as required by Section 314 of the Trust Indenture Act and
the compliance certificate required by Section 314 of the Trust Indenture Act,
in the form, in the manner and at the times required by Section 314 of the Trust
Indenture Act.
SECTION 2.5. Evidence of Compliance with Condition
Precedent.
The Guarantor shall provide to the Guarantee Trustee such
evidence of compliance with such conditions precedent, if any, provided for in
this Guarantee Agreement that relate to any of the matters set forth in Section
314(c) of the Trust Indenture Act. Any certificate or opinion required to be
given by an officer pursuant to Section 314(c)(1) may be given in the form of an
Officers' Certificate.
SECTION 2.6. Events of Default; Waiver.
The Holders of a Majority in Liquidation Amount of the Preferred
Securities may, by vote, on behalf of all Holders, waive any past Event of
Default and its consequences. Upon such waiver, any such Event of Default shall
cease to exist, and any Event of Default arising therefrom shall be deemed to
have been cured, for every purpose of this Guarantee Agreement, but no such
waiver shall extend to any subsequent or other default or Event of Default or
impair any right consequent therefrom.
SECTION 2.7. Event of Default; Notice.
(a) The Guarantee Trustee shall, within 90 days after the
occurrence of an Event of Default, transmit by mail, first class postage
prepaid, to the Holders, notices of all Events of Default known to the Guarantee
Trustee, unless such defaults have been cured before the giving of such notice,
provided that, except in the case of a default in the payment of a Guarantee
Payment, the Guarantee Trustee shall be protected in withholding such notice if
and so long as the Board of Directors, the executive committee or a trust
committee of directors and/or Responsible Officers of the Guarantee Trustee in
good faith determines that the withholding of such notice is in the interests of
the Holders.
(b) The Guarantee Trustee shall not be deemed to have knowledge
of any Event of Default unless the Guarantee Trustee shall have received written
notice, or a Responsible Officer charged with the administration of the
Declaration shall have obtained written notice, of such Event of Default.
SECTION 2.8. Conflicting Interests.
The Declaration shall be deemed to be specifically described in
this Guarantee Agreement for the purposes of clause (i) of the first proviso
contained in Section 310(b) of the Trust Indenture Act.
<PAGE> 10
6
ARTICLE III. POWERS, DUTIES AND RIGHTS OF THE
GUARANTEE TRUSTEE
SECTION 3.1. Powers and Duties of the Guarantee Trustee.
(a) This Guarantee Agreement shall be held by the Guarantee
Trustee for the benefit of the Holders, and the Guarantee Trustee shall not
transfer this Guarantee Agreement to any Person except a Holder exercising his
or her rights pursuant to Section 5.4(iv) or to a Successor Guarantee Trustee on
acceptance by such Successor Guarantee Trustee of its appointment to act as
Successor Guarantee Trustee. The right, title and interest of the Guarantee
Trustee shall automatically vest in any Successor Guarantee Trustee, upon
acceptance by such Successor Guarantee Trustee of its appointment hereunder, and
such vesting and cessation of title shall be effective whether conveyancing
documents have been executed and delivered pursuant to the appointment of such
Successor Guarantee Trustee.
(b) If an Event of Default has occurred and is continuing, the
Guarantee Trustee shall enforce this Guarantee Agreement for the benefit of the
Holders.
(c) The Guarantee Trustee, before the occurrence of any Event of
Default and after the curing of all Events of Default that may have occurred,
shall undertake to perform only such duties as are specifically set forth in
this Guarantee Agreement, and no implied covenants shall be read into this
Guarantee Agreement against the Guarantee Trustee. In case an Event of Default
has occurred (that has not been cured or waived pursuant to Section 2.6), the
Guarantee Trustee shall exercise such of the rights and powers vested in it by
this Guarantee Agreement, and use the same degree of care and skill in its
exercise thereof, as a prudent person would exercise or use under the
circumstance in the conduct of his or her own affairs.
(d) No provision of this Guarantee Agreement shall be construed
to relieve the Guarantee Trustee from liability for its own negligent action,
its own negligent failure to act or its own willful misconduct, except that:
(i) prior to the occurrence of any Event of Default and
after the curing or waiving of all such Events of Default that may have
occurred:
(A) the duties and obligations of the Guarantee Trustee
shall be determined solely by the express provisions of this
Guarantee Agreement, and the Guarantee Trustee shall not be
liable except for the performance of such duties and obligations
as are specifically set forth in this Guarantee Agreement; and
(B) in the absence of bad faith on the part of the
Guarantee Trustee, the Guarantee Trustee may conclusively rely,
as to the truth of the statements and
<PAGE> 11
7
the correctness of the opinions expressed therein, upon any
certificates or opinions furnished to the Guarantee Trustee and
conforming to the requirements of this Guarantee Agreement; but
in the case of any such certificates or opinions that by any
provision hereof or of the Trust Indenture Act are specifically
required to be furnished to the Guarantee Trustee, the Guarantee
Trustee shall be under a duty to examine the same to determine
whether they conform to the requirements of this Guarantee
Agreement;
(ii) the Guarantee Trustee shall not be liable for any error
of judgment made in good faith by a Responsible Officer of the Guarantee
Trustee, unless it shall be proved that the Guarantee Trustee was
negligent in ascertaining the pertinent facts upon which such judgment
was made;
(iii) the Guarantee Trustee shall not be liable with respect
to any action taken or omitted to be taken by it in good faith in
accordance with the direction of the Holders of not less than a Majority
in Liquidation Amount of the Preferred Securities relating to the time,
method and place of conducting any proceeding for any remedy available
to the Guarantee Trustee, or exercising any trust or power conferred
upon the Guarantee Trustee under this Guarantee Agreement; and
(iv) no provision of this Guarantee Agreement shall require
the Guarantee Trustee to expend or risk its own funds or otherwise incur
personal financial liability in the performance of any of its duties or
in the exercise of any of its rights or powers, if the Guarantee Trustee
shall have reasonable grounds for believing that the repayment of such
funds or liability is not reasonably assured to it under the terms of
this Guarantee Agreement or adequate indemnity against such risk or
liability is not reasonably assured to it.
SECTION 3.2. Certain Rights of Guarantee Trustee.
(a) Subject to the provisions of Section 3.1:
(i) The Guarantee Trustee may rely and shall be fully
protected in acting or refraining from acting upon any resolution,
certificate, statement, instrument, opinion, report, notice, request,
direction, consent, order, bond, debenture, note, other evidence of
indebtedness or other paper or document reasonably believed by it to be
genuine and to have been signed, sent or presented by the proper party
or parties.
(ii) Any direction or act of the Guarantor contemplated by
this Guarantee Agreement shall be sufficiently evidenced by an Officers'
Certificate unless otherwise prescribed herein.
(iii) Whenever, in the administration of this Guarantee
Agreement, the Guarantee Trustee shall deem it desirable that a matter
be proved or established before
<PAGE> 12
8
taking, suffering or omitting to take any action hereunder, the
Guarantee Trustee (unless other evidence is herein specifically
prescribed) may, in the absence of bad faith on its part, request and
rely upon an Officers' Certificate which, upon receipt of such request
from the Guarantee Trustee, shall be promptly delivered by the
Guarantor.
(iv) The Guarantee Trustee may consult with legal counsel,
and the written advice or opinion of such legal counsel with respect to
legal matters shall be full and complete authorization and protection in
respect of any action taken, suffered or omitted to be taken by it
hereunder in good faith and in accordance with such advice or opinion.
Such legal counsel may be legal counsel to the Guarantor or any of its
Affiliates and may be one of its employees. The Guarantee Trustee shall
have the right at any time to seek instructions concerning the
administration of this Guarantee Agreement from any court of competent
jurisdiction.
(v) The Guarantee Trustee shall be under no obligation to
exercise any of the rights or powers vested in it by this Guarantee
Agreement at the request or direction of any Holder, unless such Holder
shall have provided to the Guarantee Trustee such adequate security and
indemnity as would satisfy a reasonable person in the position of the
Guarantee Trustee, against the costs, expenses (including attorneys'
fees and expenses) and liabilities that might be incurred by it in
complying with such request or direction, including such reasonable
advances as may be requested by the Guarantee Trustee; provided that
nothing contained in this Section 3.2(a)(v) shall be taken to relieve
the Guarantee Trustee, upon the occurrence of an Event of Default, of
its obligation to exercise the rights and powers vested in it by this
Guarantee Agreement.
(vi) The Guarantee Trustee shall not be bound to make any
investigation into the facts or matters stated in any resolution,
certificate, statement, instrument, opinion, report, notice, request,
direction, consent, order, bond, debenture, note, other evidence of
indebtedness or other paper or document, but the Guarantee Trustee, in
its reasonable discretion, may make such further inquiry or
investigation into such facts or matters as it may see fit.
(vii) The Guarantee Trustee may execute any of the trusts or
powers hereunder or perform any duties hereunder either directly or by
or through its agents or attorneys, and the Guarantee Trustee shall not
be responsible for any misconduct or negligence on the part of any such
agent or attorney appointed with due care by it hereunder.
(viii) Whenever in the administration of this Guarantee
Agreement the Guarantee Trustee shall deem it desirable to receive
instructions with respect to enforcing any remedy or right or take any
other action hereunder, the Guarantee Trustee (A) may request
instructions from the Holders, (B) may refrain from enforcing such
remedy or right or taking such other action until such instructions are
received, and (C) shall be protected in acting in accordance with such
instructions.
<PAGE> 13
9
(b) No provision of this Guarantee Agreement shall be deemed to
impose any duty or obligation on the Guarantee Trustee to perform any act or
acts or exercise any right, power, duty or obligation conferred or imposed on it
in any jurisdiction in which it shall be illegal, or in which the Guarantee
Trustee shall be unqualified or incompetent in accordance with applicable law,
to perform any such act or acts or to exercise any such right, power, duty
or obligation. No permissive power or authority available to the Guarantee
Trustee shall be construed to be a duty to act in accordance with such power and
authority.
SECTION 3.3. Indemnity.
The Guarantor agrees to indemnify the Guarantee Trustee for, and
to hold it harmless against, any loss, liability or expense incurred without
negligence or bad faith on the part of the Guarantee Trustee, arising out of or
in connection with the acceptance or administration of this Guarantee Agreement,
including the costs and expenses of defending itself against any claim or
liability in connection with the exercise or performance of any of its powers or
duties hereunder (including the fees of counsel, provided that the selection of
such counsel will be subject to the consent of the Guarantor, which consent
shall not be unreasonably withheld); provided that the Guarantee Trustee shall
notify the Guarantor with reasonable promptness of any claim for which it may
seek indemnity. Failure by the Guarantee Trustee to so notify the Guarantor
shall not relieve the Guarantor of its obligations hereunder except to the
extent such failure has materially prejudiced the Guarantor's defense. The
Guarantor shall defend the claim and the Guarantee Trustee shall provide
reasonable assistance. The Guarantee Trustee may retain separate counsel and the
Guarantor shall pay the reasonable fees and expenses of such counsel. The
Guarantee Trustee shall not claim or exact any lien or charge on any Guarantee
Payments as a result of any amount due to it under this Guarantee Agreement.
ARTICLE IV. GUARANTEE TRUSTEE
SECTION 4.1. Guarantee Trustee; Eligibility.
(a) There shall at all times be a Guarantee Trustee which shall:
(i) not be an Affiliate of the Guarantor; and
(ii) be a Person that is eligible pursuant to the Trust
Indenture Act to act as such and has a combined capital and surplus of
at least $50,000,000, and shall be a corporation meeting the
requirements of Section 310(c) of the Trust Indenture Act. If such
corporation publishes reports of condition at least annually, pursuant
to law or to the requirements of the supervising or examining authority,
then, for the purposes of this Section and to the extent permitted by
the Trust Indenture Act, the combined capital and surplus of such
corporation shall be deemed to be its combined capital and surplus as
set forth in its most recent report of condition so published.
<PAGE> 14
10
(b) If at any time the Guarantee Trustee shall cease to be
eligible to so act under Section 4.1(a), the Guarantee Trustee shall immediately
resign in the manner and with the effect set out in Section 4.2(c).
(c) If the Guarantee Trustee has or shall acquire any
"conflicting interest" within the meaning of Section 310(b) of the Trust
Indenture Act, the Guarantee Trustee and Guarantor shall in all respects comply
with the provisions of Section 310(b) of the Trust Indenture Act.
SECTION 4.2. Appointment, Removal and Resignation of the
Guarantee Trustee.
(a) Subject to Section 4.2(b), the Guarantee Trustee may be
appointed or removed without cause at any time by the Guarantor.
(b) The Guarantee Trustee shall not be removed until a Successor
Guarantee Trustee has been appointed and has accepted such appointment by
written instrument executed by such Successor Guarantee Trustee and delivered to
the Guarantor.
(c) The Guarantee Trustee appointed hereunder shall hold office
until a Successor Guarantee Trustee shall have been appointed or until its
removal or resignation. The Guarantee Trustee may resign from office (without
need for prior or subsequent accounting) by an instrument in writing executed by
the Guarantee Trustee and delivered to the Guarantor, which resignation shall
not take effect until a Successor Guarantee Trustee has been appointed and has
accepted such appointment by instrument in writing executed by such Successor
Guarantee Trustee and delivered to the Guarantor and the resigning Guarantee
Trustee.
(d) If no Successor Guarantee Trustee shall have been appointed
and accepted appointment as provided in this Section 4.2 within 60 days after
delivery to the Guarantor of an instrument of resignation, the resigning
Guarantee Trustee may petition, at the expense of the Guarantor, any court of
competent jurisdiction for appointment of a Successor Guarantee Trustee. Such
court may thereupon, after prescribing such notice, if any, as it may deem
proper, appoint a Successor Guarantee Trustee.
ARTICLE V. GUARANTEE
SECTION 5.1. Guarantee.
The Guarantor irrevocably and unconditionally agrees to pay in
full on a senior subordinated basis, to the extent set forth herein, to the
Holders the Guarantee Payments (without duplication of amounts theretofore paid
by or on behalf of the Trust), as and when due, regardless of any defense, right
of set-off or counterclaim which the Trust may have or
<PAGE> 15
11
assert, other than the defense of payment. The Guarantor's obligation to make a
Guarantee Payment may be satisfied by direct payment of the required amounts by
the Guarantor to the Holders or by causing the Trust to pay such amounts to the
Holders.
SECTION 5.2. Waiver of Notice and Demand.
The Guarantor hereby waives notice of acceptance of the Guarantee
Agreement and of any liability to which it applies or may apply, presentment,
demand for payment, any right to require a proceeding first against the
Guarantee Trustee, Trust or any other Person before proceeding against the
Guarantor, protest, notice of nonpayment, notice of dishonor, notice of
redemption and all other notices and demands.
SECTION 5.3. Obligations Not Affected.
The obligations, covenants, agreements and duties of the
Guarantor under this Guarantee Agreement shall in no way be affected or impaired
by reason of the happening from time to time of any of the following:
(a) the release or waiver, by operation of law or otherwise, of
the performance or observance by the Trust of any express or implied agreement,
covenant, term or condition relating to the Preferred Securities to be performed
or observed by the Trust;
(b) the extension of time for the payment by the Trust of all or
any portion of the Distributions, Redemption Price, Liquidation Distribution or
any other sums payable under the terms of the Preferred Securities or the
extension of time for the performance of any other obligation under, arising out
of, or in connection with, the Preferred Securities;
(c) any failure, omission, delay or lack of diligence on the part
of the Holders to enforce, assert or exercise any right, privilege, power or
remedy conferred on the Holders pursuant to the terms of the Preferred
Securities, or any action on the part of the Trust granting indulgence or
extension of any kind;
(d) the voluntary or involuntary liquidation, dissolution, sale
of any collateral, receivership, insolvency, bankruptcy, assignment for the
benefit of creditors, reorganization, arrangement, composition or readjustment
of debt of, or other similar proceedings affecting the Trust or any of the
assets of the Trust;
(e) any invalidity of, or defect or deficiency in, the Preferred
Securities;
(f) the settlement or compromise of any obligation guaranteed
hereby or hereby incurred; or
(g) any other circumstance whatsoever that might otherwise
constitute a legal or equitable discharge or defense of a guarantor, it being
the intent of this Section 5.3 that the
<PAGE> 16
12
obligations of the Guarantor hereunder shall be absolute and unconditional under
any and all circumstances. There shall be no obligation of the Holders to give
notice to, or obtain the consent of, the Guarantor with respect to the happening
of any of the foregoing.
SECTION 5.4. Rights of Holders.
The Guarantor expressly acknowledges that: (i) this Guarantee
Agreement will be deposited with the Guarantee Trustee to be held for the
benefit of the Holders; (ii) the Guarantee Trustee has the right to enforce this
Guarantee Agreement on behalf of the Holders; (iii) the Holders of a Majority in
Liquidation Amount of the Preferred Securities have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the Guarantee Trustee in respect of this Guarantee Agreement or exercising any
trust or power conferred upon the Guarantee Trustee under this Guarantee
Agreement; and (iv) upon the occurrence of an Event of Default, any Holder may
institute a legal proceeding directly against the Guarantor to enforce its
rights under this Guarantee Agreement, without first instituting a legal
proceeding against the Guarantee Trustee, the Trust or any other Person.
SECTION 5.5. Guarantee of Payment.
This Guarantee Agreement creates a guarantee of payment and not
of collection. This Guarantee Agreement will not be discharged except by payment
of the Guarantee Payments in full (without duplication of amounts theretofore
paid by the Trust out of funds legally available therefor) or upon the
termination of this Guarantee Agreement as provided in Section 7.1.
SECTION 5.6. Subrogation.
The Guarantor shall be subrogated to all (if any) rights of the
Holders against the Trust in respect of any amounts paid to the Holders by the
Guarantor under this Guarantee Agreement and shall have the right to waive
payment by the Trust pursuant to Section 5.1; provided, however, that the
Guarantor shall not (except to the extent required by mandatory provisions of
law) be entitled to enforce or exercise any rights which it may acquire by way
of subrogation or any indemnity, reimbursement or other agreement, in all cases
as a result of payment under this Guarantee Agreement, at the time of any such
payment, any amounts are due and unpaid under this Guarantee Agreement. If any
amount shall be paid to the Guarantor in violation of the preceding sentence,
the Guarantor agrees to hold such amount in trust for the Holders and to pay
over such amount to the Holders.
SECTION 5.7. Independent Obligations.
The Guarantor acknowledges that its obligations hereunder are
independent of the obligations of the Trust with respect to the Preferred
Securities and that the Guarantor shall be liable as principal and as debtor
hereunder to make Guarantee Payments pursuant to the
<PAGE> 17
13
terms of this Guarantee Agreement notwithstanding the occurrence of any event
referred to in subsection (a) through (g), inclusive, of Section 5.3 hereof.
ARTICLE VI. SUBORDINATION
SECTION 6.1. Subordination.
(a) This Guarantee Agreement will constitute an unsecured
obligation of the Guarantor and will rank subordinate and junior in right of
payment to all Senior Indebtedness of the Guarantor.
(b) The Guarantor may not make a Guarantee Payment to the Holders
if (i) any Senior Indebtedness of the Guarantor having an outstanding principal
amount at the time of determination in excess of $10,000,000 (the "Specified
Senior Indebtedness") is not paid when due or (ii) any other default on
Specified Senior Indebtedness of the Guarantor occurs and the maturity of such
Specified Senior Indebtedness is accelerated in accordance with its terms,
unless, in either case, the default has been cured or waived and any such
acceleration has been rescinded or such Specified Senior Indebtedness has been
paid in full. However, the Guarantor may make a Guarantee Payment without regard
to the foregoing if the Guarantor and the Guarantee Trustee receive written
notice approving such payment from a representative of the holders of Specified
Senior Indebtedness with respect to which either of the events set forth in
clause (i) or (ii) of the immediately preceding sentence has occurred and is
continuing. During the continuance of any default (other than a default
described in clause (i) or (ii) of the second preceding sentence) with respect
to any Specified Senior Indebtedness of the Guarantor pursuant to which the
maturity thereof may be accelerated immediately without further notice (except
such notice as may be required to effect such acceleration) or the expiration of
any applicable grace periods, the Guarantor may not make a Guarantee Payment to
the holders of Preferred Securities for a period (a "Payment Blockage Period")
commencing upon the receipt by the Guarantee Trustee (with a copy to the
Guarantor) of written notice (a "Blockage Notice") of such default from the
representative of the holders of such Specified Senior Indebtedness specifying
an election to effect a Payment Blockage Period and ending 179 days thereafter
(or earlier if such Payment Blockage Period is terminated (i) by written notice
to the Guarantee Trustee and the Guarantor from the representative of the
holders of such Specified Senior Indebtedness, (ii) because the default giving
rise to such Blockage Notice is no longer continuing or (iii) because such
Specified Senior Indebtedness has been repaid in full). Notwithstanding the
provisions described in the immediately preceding sentence, unless the holders
of such Specified Senior Indebtedness or the representative of such holders have
accelerated the maturity of such Specified Senior Indebtedness, the Guarantor
may resume Guarantee Payments after the end of such Payment Blockage Period. The
Guarantee Agreement shall not be subject to more than one Payment Blockage
Period in any consecutive 360-day period, irrespective of the number of defaults
with respect to Specified Senior Indebtedness during such period.
<PAGE> 18
14
(c) Upon any payment or distribution of the assets of the
Guarantor upon a total or partial liquidation or dissolution or reorganization
of or similar proceeding relating to the Guarantor or its property, the holders
of Senior Indebtedness of the Guarantor will be entitled to receive payment in
full, and until the Senior Indebtedness of the Guarantor is paid in full, any
payment or Distribution to which the Holders would be entitled but for this
Section 6.1 will be made to holders of such Senior Indebtedness as their
interests may appear. If a Distribution is made to the Holders, that, due to
this Section 6.1, should not have been made to them, such Holders are required
to hold it in trust for the holders of Senior Indebtedness of the Guarantor and
pay it over to them as their interests may appear.
(d) If a Guarantee Payment is to be made by the Guarantor to the
Holders, the Guarantor or the Guarantee Trustee shall promptly notify the
holders of Senior Indebtedness of the Guarantor or the representative of such
holders of such Guarantee Payment. If any Senior Indebtedness of the Guarantor
is outstanding, the Guarantor may not pay such Guarantee Payment until five
Business Days after the representatives of all the issues of Senior Indebtedness
of the Guarantor receive notice of such Guarantee Payment and, thereafter, may
pay such Guarantee Payment only if the Guarantee Agreement otherwise permits
payment at that time.
ARTICLE VII. TERMINATION
SECTION 7.1 Termination.
This Guarantee Agreement shall terminate and be of no further
force and effect upon (i) full payment of the Redemption Price of the Preferred
Securities, (ii) the distribution of the Notes to the Holders in exchange for
all of the Preferred Securities or (iii) full payment of the amounts payable in
accordance with the Declaration upon dissolution of the Trust. Notwithstanding
the foregoing, this Guarantee Agreement will continue to be effective or will be
reinstated, as the case may be, if at any time any Holder must restore payment
of any sums paid with respect to Preferred Securities or this Guarantee
Agreement.
ARTICLE VIII. MISCELLANEOUS
SECTION 8.1. Successors and Assigns.
All guarantees and agreements in this Guarantee Agreement shall
bind the successors, assigns, receivers, trustees and representatives of the
Guarantor and shall inure to the benefit of the Holders of the Preferred
Securities then outstanding. Except in connection with a consolidation, merger
or sale involving the Guarantor that is permitted under Article
<PAGE> 19
15
Eight of the Indenture and pursuant to which the assignee agrees in writing to
perform the Guarantor's obligations hereunder, the Guarantor shall not assign
its obligations hereunder.
SECTION 8.2. Amendments.
Except with respect to any changes that do not adversely affect
the rights of the Holders in any material respect (in which case no consent of
the Holders will be required), this Guarantee Agreement may only be amended with
the prior approval of the Holders of not less than a Majority in Liquidation
Amount of the Preferred Securities. The provisions of Article VI of the
Declaration concerning meetings of the Holders shall apply to the giving of such
approval. This Guarantee Agreement shall not be amended without the prior
receipt by the Guarantor of an opinion of independent tax counsel to the effect
that such amendment of this Guarantee Agreement will not result in the
recognition of income, gain or loss by the Holders.
SECTION 8.3. Notices.
Any notice, request or other communication required or permitted
to be given hereunder shall be in writing, duly signed by the party giving such
notice, and delivered, telecopied or mailed by first class mail or sent by
overnight courier as follows:
(a) if given to the Guarantor, to the address set forth below or
such other address, facsimile number or to the attention of such other Person as
the Guarantor may give notice to the Holders:
Superior National Insurance Group, Inc.
26601 Agoura Road
Calabasas, California 91302
Facsimile No.: (818) 880-5902
Attention: President
(b) If given to the Trust, in care of the Guarantee Trustee, at
the Trust's (and the Guarantee Trustee's) address set forth below or such other
address as the Guarantee Trustee on behalf of the Trust may given notice to the
Holders:
Superior National Capital Trust I
c/o Wilmington Trust Company
1100 North Market Street
Rodney Square North
Wilmington, Delaware 19890
Facsimile No.:
<PAGE> 20
16
Attention: Corporate Trust Administration
(c) if given to any Holder, at the address set forth on the books
and records of the Trust.
All such notices and communications shall be deemed to have been
duly given: at the time delivered by hand, if personally delivered; five
Business Days after being deposited in the mail with first-class prepaid
postage, if mailed; when receipt is acknowledged, if sent by facsimile; and the
Business Day on which a courier delivers such notice, if sent by courier,
provided that if delivery by courier is not made on a Business Day, the next
succeeding Business Day; provided that if a notice or other document is refused
delivery or cannot be delivered because of a changed address of which no notice
was given, such notice or other document shall be deemed to have been delivered
on the date of such refusal or inability to deliver.
SECTION 8.4. Benefit.
This Guarantee Agreement is solely for the benefit of the Holders
and is not separately transferable from the Preferred Securities.
SECTION 8.5. Interpretation.
In this Guarantee Agreement, unless the context otherwise
requires:
(a) capitalized terms used in this Guarantee Agreement but not
defined in the preamble hereto have the respective meanings assigned to them in
Section 1.1;
(b) a term defined anywhere in this Guarantee Agreement has the
same meaning throughout;
(c) all references to "the Guarantee Agreement" or "this
Guarantee Agreement" are to this Guarantee Agreement as modified, supplemented
or amended from time to time;
(d) all references in this Guarantee Agreement to Articles and
Sections are to Articles and Sections of this Guarantee Agreement unless
otherwise defined in this Guarantee Agreement or unless the context otherwise
requires;
(e) a term defined in the Trust Indenture Act has the same
meaning when used in this Guarantee Agreement unless otherwise defined in this
Guarantee Agreement or unless the context otherwise requires;
(f) a reference to the singular includes the plural and vice
versa; and
<PAGE> 21
17
(g) the masculine, feminine or neuter genders used herein shall
include the masculine, feminine and neuter genders.
SECTION 8.6. Governing Law.
THIS GUARANTEE AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
This instrument may be executed in any number of counterparts,
each of which so executed shall be deemed to be an original, but all such
counterparts shall together constitute but one and the same instruments.
<PAGE> 22
THIS GUARANTEE AGREEMENT is executed as of the day and year first
above written.
Superior National Insurance Group, Inc.
By: /s/ [SIGNATURE]
------------------------------------
Name:
Title:
By: /s/ [SIGNATURE]
------------------------------------
Name:
Title:
Wilmington Trust Company,
as Guarantee Trustee and not in its
individual capacity
By: /s/ [SIGNATURE]
------------------------------------
Name:
Title:
<PAGE> 23
EXHIBIT A
Exhibit A is included in this Registration Statement as Exhibit 4.5
<PAGE> 1
EXHIBIT 4.5
GUARANTEE AGREEMENT WITH RESPECT TO COMMON SECURITIES
This Agreement, dated as of December 3, 1997, is executed and
delivered by Superior National Insurance Group, Inc., a corporation organized
under the laws of the State of Delaware ("Guarantor"), having its principal
office at 26601 Agoura Road, Calabasas, California 91302, for the benefit of the
holders from time to time (the "Holders") of the Common Securities (as defined
in the Guarantee Agreement) of Superior National Capital Trust I, a Delaware
statutory business trust (the "Trust").
WHEREAS, pursuant to the Guarantee Agreement, dated as of
December 3, 1997, between Superior National Insurance Group, Inc., as Guarantor,
and Wilmington Trust Company, as Trustee (the "Guarantee Agreement"), the
Guarantor has irrevocably and unconditionally agreed to pay in full to the
holders of Preferred Securities (as defined therein) the Guarantee Payments (as
defined therein).
NOW, THEREFORE, it is hereby agreed that:
Section 1.0 Definitions.
Capitalized or otherwise defined terms used but not otherwise
defined herein shall have the meanings assigned to such terms in the Guarantee
Agreement as in effect on the date hereof.
Section 2.0 Guarantee.
The Guarantor irrevocably and unconditionally agrees to pay in
full to the Holders Guarantee Payments to the same extent as the guarantee
provided to the holders of Preferred Securities under the Guarantee Agreement;
provided, however, that upon the occurrence and during the continuation of a
Declaration Event of Default (as defined in the Declaration), holders of
Preferred Securities shall have priority over the Holders with respect to the
Guarantee Payments.
Section 3.0 Governing Law.
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
NEW YORK.
This instrument may be executed in any number of counterparts,
each of which so executed shall be deemed to be an original, but all such
counterparts shall together constitute but one and the same instrument.
<PAGE> 2
2
THIS AGREEMENT is executed as of the day and year first above
written.
Superior National Insurance Group, Inc.
By: /s/ [SIGNATURE]
------------------------------------
Name:
Title:
By: /s/ [SIGNATURE]
------------------------------------
Name:
Title:
<PAGE> 1
Exhibit 4.6
================================================================================
EXCHANGE GUARANTEE AGREEMENT
between
Superior National Insurance Group, Inc.
(as Exchange Guarantor)
and
Wilmington Trust Company
(as Trustee)
dated as of
____________, 1998
================================================================================
<PAGE> 2
CROSS REFERENCE TABLE*
<TABLE>
<CAPTION>
Section of Section of
Trust Indenture Act Exchange Guarantee
of 1939, as Amended Agreement
<S> <C>
310(a).......................................................4.1(a)
310(b).......................................................4.1(c), 2.B
310(c).......................................................Inapplicable
311(a).......................................................2.2(b)
311(b).......................................................2.2(b)
311(c).......................................................Inapplicable
312(a).......................................................2.2(a)
312(b).......................................................2.2(b)
313..........................................................2.3
314(a).......................................................2.4
314(b).......................................................Inapplicable
314(c).......................................................2.5
314(d).......................................................Inapplicable
314(e).......................................................1.1, 2.5, 3.2
314(f).......................................................2.1, 3.2
315(a).......................................................3.1(d)
315(b).......................................................2.7
315(c).......................................................3.1
315(d).......................................................3.1(d)
316(a).......................................................1.1, 2.6, 5.4
316(b).......................................................5.3
316(c).......................................................8.2
317(a).......................................................Inapplicable
317(b).......................................................Inapplicable
318(a).......................................................2.1(b)
318(b).......................................................2.1
318(c).......................................................2.1(a)
</TABLE>
- --------
* This Cross-Reference Table does not constitute part of the Exchange
Guarantee Agreement and shall not affect the interpretation of any of
its terms or provisions.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I. DEFINITIONS....................................... 2
SECTION 1.1. Definitions.................................................. 2
ARTICLE II. TRUST INDENTURE ACT............................. 4
SECTION 2.1. Trust Indenture Act; Application............................. 4
SECTION 2.2. List of Holders.............................................. 4
SECTION 2.3. Reports by the Exchange Guarantee Trustee.................... 5
SECTION 2.4. Periodic Reports to the Exchange Guarantee Trustee........... 5
SECTION 2.5. Evidence of Compliance with Condition Precedent.............. 5
SECTION 2.6. Events of Default; Waiver.................................... 5
SECTION 2.7. Event of Default; Notice..................................... 5
SECTION 2.8. Conflicting Interests........................................ 6
ARTICLE III. POWERS, DUTIES AND RIGHTS OF THE EXCHANGE
GUARANTEE TRUSTEE............................................ 6
SECTION 3.1. Powers and Duties of the Exchange Guarantee Trustee.......... 6
SECTION 3.2. Certain Rights of Exchange Guarantee Trustee................. 8
SECTION 3.3. Indemnity.................................................... 9
ARTICLE IV. EXCHANGE GUARANTEE TRUSTEE...................... 10
SECTION 4.1. Exchange Guarantee Trustee; Eligibility...................... 10
SECTION 4.2. Appointment, Removal and Resignation of the Exchange
Guarantee Trustee........................................... 10
ARTICLE V. GUARANTEE........................................ 11
SECTION 5.1. Exchange Guarantee........................................... 11
SECTION 5.2. Waiver of Notice and Demand.................................. 11
SECTION 5.3. Obligations Not Affected..................................... 11
SECTION 5.4. Rights of Holders............................................ 12
SECTION 5.5. Guarantee of Payment......................................... 13
SECTION 5.6. Subrogation.................................................. 13
SECTION 5.7. Independent Obligations...................................... 13
ARTICLE VI. SUBORDINATION................................... 13
SECTION 6.1. Subordination................................................ 13
ARTICLE VII. TERMINATION.................................... 15
SECTION 7.1. Termination.................................................. 15
</TABLE>
i
<PAGE> 4
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE VIII. MISCELLANEOUS................................. 15
SECTION 8.1. Successors and Assigns....................................... 15
SECTION 8.2. Amendments................................................... 15
SECTION 8.3. Notices...................................................... 16
SECTION 8.4. Benefit...................................................... 17
SECTION 8.5. Interpretation............................................... 17
SECTION 8.6. Governing Law................................................ 17
</TABLE>
ii
<PAGE> 5
EXCHANGE GUARANTEE AGREEMENT
This EXCHANGE GUARANTEE AGREEMENT, dated as of ____________, 1998, is
executed and delivered by Superior National Insurance Group, Inc., a corporation
organized under the laws of the State of Delaware ("Exchange Guarantor"), having
its principal office at 26601 Agoura Road, Calabasas, California 91302, and
Wilmington Trust Company, a Delaware banking corporation duly organized and
existing under the laws of the State of Delaware, as trustee (the "Exchange
Guarantee Trustee"), for the benefit of the Holders (as defined herein) from
time to time of the Exchange Preferred Securities (as defined herein) of
Superior National Trust I, a Delaware statutory business trust (the "Issuer").
WHEREAS, pursuant to the terms of an Amended and Restated Declaration
of Trust dated as of December 3, 1997 (the "Declaration"), among the trustees of
Issuer, the Exchange Guarantor, as sponsor, and the holders from time to time of
undisclosed beneficial interests in the assets of the Issuer, the Issuer is
issuing on the date hereof 105,000 Exchange Preferred Securities having an
aggregate liquidation amount of $105,000,000, such Exchange Preferred Securities
being designated as 10 3/4% Exchange Preferred Securities (and being herein
referred to as the "Exchange Preferred Securities") in connection with the
consummation of the Exchange Offer (as defined in the Declaration);
WHEREAS, as incentive for the Holders of Preferred Securities issued on
December 3, 1997 to exchange the Preferred Securities for Exchange Preferred
Securities in the Exchange Offer, the Exchange Guarantor desires irrevocably and
unconditionally to guarantee, to the extent set forth herein, payment to the
Holders of the Exchange Preferred Securities the Guarantee Payments (as defined
herein) and to make certain other payments on the terms and conditions set forth
herein.
NOW, THEREFORE, in consideration of the exchange by each Holder of
Exchange Preferred Securities, which exchange the Exchange Guarantor hereby
shall benefit the Exchange Guarantor, the Exchange Guarantor executes and
delivers this Exchange Guarantee Agreement for the benefit of the Holders from
time to time of the Exchange Preferred Securities.
ARTICLE I. DEFINITIONS
SECTION 1.1. Definitions.
As used in this Exchange Guarantee Agreement, the terms set forth below
shall, unless the context otherwise requires, have the following meanings.
Capitalized or otherwise defined terms used but not otherwise defined herein
shall have the meanings assigned to such terms in the Declaration as in effect
on the date hereof.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct common control with such
specified Person; provided, however, that an Affiliate of the Exchange Guarantor
shall not be deemed to include the Issuer. For the purposes of this definition,
"control" when used with respect to
<PAGE> 6
any specified Person means the power to direct the management and policies of
such Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Common Security" means an undivided beneficial interest in the assets
of the Issuer, having a Liquidation Amount (as defined in the Declaration) of
$1,000 and having the rights provided therefor in the Declaration, including the
right to receive Distributions and a Liquidation Distribution as provided
therein.
"Event of Default" means a default by the Exchange Guarantor on any of
its payment obligations under this Exchange Guarantee Agreement.
"Exchange Guarantee Trustee" means Wilmington Trust Company, until a
Successor Exchange Guarantee Trustee has been appointed and has accepted such
appointment pursuant to the terms of this Exchange Guarantee Agreement and
thereafter means each such Successor Exchange Guarantee Trustee.
"Guarantee Payments" means the following payments or distributions,
without duplication, with respect to the Exchange Preferred Securities, to the
extent not paid or made by or on behalf of the Issuer: (i) any accumulated and
unpaid Distributions required to be paid on the Exchange Preferred Securities,
to the extent the Issuer has funds legally available therefor, (ii) the
Redemption Price with respect to the Exchange Preferred Securities called for
redemption, to the extent the Issuer has funds legally available therefor and
(iii) upon a voluntary or involuntary dissolution, winding up or liquidation of
the Issuer (unless the Exchange Notes are distributed to the Holders of the
Exchange Preferred Securities), the lesser of (a) the aggregate of the
liquidation amount and all accrued and unpaid distributions on the Exchange
Preferred Securities to the date of payment, to the extent the Issuer has funds
legally available therefor and (b) the amount of cash assets of the Issuer
remaining legally available for distribution to Holders of the Exchange
Preferred Securities upon liquidation of the Issuer.
"Holder" means any holder, as registered on the books and records of
the Issuer, of any Exchange Preferred Securities; provided, however, that in
determining whether the holders of the requisite percentage of Exchange
Preferred Securities have given any request, demand, authorization, direction,
notice, consent or waiver hereunder, "Holder" shall not include the Exchange
Guarantor, any Trustee, or any Affiliate of the Exchange Guarantor or of any
Trustee.
"Indenture" means the Senior Subordinated Indenture dated as of
December 3, 1997, among the Exchange Guarantor and Wilmington Trust Company,
as trustee.
"List of Holders" has the meaning specified in Section 2.2(a).
2
<PAGE> 7
"Majority in liquidation amount of the Securities" means, except as
provided by the Trust Indenture Act, a vote by the Holder(s), voting separately
as a class, of more than 50% of the liquidation amount of all then outstanding
Exchange Preferred Securities issued by the Issuer.
"Officers' Certificate" means a certificate signed by (a) the Chairman
and Chief Executive Officer, President or Vice President, and by the Treasurer,
an Assistant Treasurer, the Controller, the Secretary or an Assistant Secretary,
or (b) any two members of the Board of Directors of the Company, and delivered
to the appropriate Trustee. Any Officers' Certificate delivered with respect to
compliance with a condition or covenant provided for in this Exchange Guarantee
Agreement shall include:
(a) a statement that each officer signing the Officers' Certificate has
read the covenant or condition and the definitions relating thereto;
(b) a brief statement of the nature and scope of the examination or
investigation undertaken by each officer in rendering the Officers' Certificate;
(c) a statement that each officer has made such examination or
investigation as, in such officer's opinion, is necessary to enable such officer
to express an informed opinion as to whether such covenant or condition has been
complied with; and
(d) a statement as to whether, in the opinion of each officer, such
condition or covenant has been complied with.
"Person" means any individual, corporation, estate, partnership, joint
venture, association, joint-stock company, limited liability company, trust,
unincorporated organization, or government or any agency, instrumentality or
political subdivision thereof, or any other entity of whatever nature.
"Responsible Officer" means, with respect to the Exchange Guarantee
Trustee, any Senior Vice President, any Vice President, any Assistant Vice
President, the Secretary, any Assistant Secretary, the Treasurer, any Assistant
Treasurer, any Trust Officer or Assistant Trust Officer or any other officer of
the Corporate Trust Department of the above-designated officers and also means,
with respect to a particular corporate trust matter, any other officer to whom
such matter is referred because of that officer's knowledge of and familiarity
with the particular subject.
"Senior Indebtedness" has the meaning specified in the Indenture.
"Successor Exchange Guarantee Trustee" means a successor Exchange
Guarantee Trustee possessing the qualifications to act as Exchange Guarantee
Trustee under Section 4.1.
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"Trust Indenture Act" means the Trust Indenture Act of 1939 as in force
at the date as of which this instrument was executed; provided, however, that in
the event the Trust Indenture Act of 1939 is amended after such date, "Trust
Indenture Act" means, to the extent required by any such amendment, the Trust
Indenture Act of 1939 as so amended.
ARTICLE II. TRUST INDENTURE ACT
SECTION 2.1. Trust Indenture Act; Application.
(a) This Exchange Guarantee Agreement is subject to the provisions of
the Trust Indenture Act that are required to be part of this Exchange Guarantee
Agreement and shall, to the extent applicable, be governed by such provisions.
(b) If and to the extent that any provision of this Exchange Guarantee
Agreement limits, qualifies or conflicts with the duties imposed by Sections 310
to 317, inclusive, of the Trust Indenture Act, such imposed duties shall
control.
SECTION 2.2. List of Holders.
(a) The Exchange Guarantor shall furnish or cause to be furnished to
the Exchange Guarantee Trustee (a) semiannually, on or before June 1 and
December 1 of each year, a list, in such form as the Exchange Guarantee Trustee
may reasonably require, of the names and addresses of the Holders ("List of
Holders") as of a date not more than 15 days prior to the delivery thereof, and
(b) at such other times as the Exchange Guarantee Trustee may request in
writing, within 30 days after the receipt by the Exchange Guarantor of any such
request, a List of Holders as of a date not more than 15 days prior to the time
such list is furnished, in each case to the extent such information is in the
possession or control of the Exchange Guarantor and is not identical to a
previously supplied list of Holders or has not otherwise been received by the
Exchange Guarantee Trustee in its capacity as such. The Exchange Guarantee
Trustee may destroy any List of Holders previously given to it on receipt of a
new List of Holders.
(b) The Exchange Guarantee Trustee shall comply with its obligations
under Section 311(a), Section 311(b) and Section 312(b) of the Trust Indenture
Act.
SECTION 2.3. Reports by the Exchange Guarantee Trustee.
Not later than April 30 of each year, commencing April 30, 1998, the
Exchange Guarantee Trustee shall provide to the Holders such reports as are
required by Section 313 of the Trust Indenture Act, if any, in the form and in
the manner provided by Section 313 of the Trust Indenture Act. The Exchange
Guarantee Trustee shall also comply with the requirements of Section 313(d) of
the Trust Indenture Act.
SECTION 2.4. Periodic Reports to the Exchange Guarantee Trustee.
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The Exchange Guarantor shall provide to the Exchange Guarantee Trustee,
the Securities and Exchange Commission and the Holders such documents, reports
and information, if any, as required by Section 314 of the Trust Indenture Act
and the compliance certificate required by Section 314 of the Trust Indenture
Act, in the form, in the manner and at the times required by Section 314 of the
Trust Indenture Act.
SECTION 2.5. Evidence of Compliance with Condition Precedent.
The Exchange Guarantor shall provide to the Exchange Guarantee Trustee
such evidence of compliance with such conditions precedent, if any, provided for
in this Exchange Guarantee Agreement that relate to any of the matters set forth
in Section 314(c) of the Trust Indenture Act. Any certificate or opinion
required to be given by an officer pursuant to Section 314(c) (1) may be given
in the form of an Officers' Certificate.
SECTION 2.6. Events of Default; Waiver.
The Holders of a Majority in liquidation amount of the Securities may,
by vote, on behalf of the Holders, waive any past Event of Default and its
consequences. Upon such waiver, any such Event of Default shall cease to exist,
and any Event of Default arising therefrom shall be deemed to have been cured,
for every purpose of this Exchange Guarantee Agreement, but no such waiver shall
extend to any subsequent or other default or Event of Default or impair any
right consequent therefrom.
SECTION 2.7. Event of Default; Notice.
(a) The Exchange Guarantee Trustee shall, within 90 days after the
occurrence of an Event of Default, transmit by mail, first class postage
prepaid, to the Holders, notices of all Events of Default known to the Exchange
Guarantee Trustee, unless such defaults have been cured before the giving of
such notice, provided, that, except in the case of a default in the payment of a
Guarantee Payment, the Exchange Guarantee Trustee shall be protected in
withholding such notice if and so long as the Board of Directors, the executive
committee or a trust committee of directors and/or Responsible Officers of the
Exchange Guarantee Trustee in good faith determines that the withholding of such
notice is in the interests of the Holders.
(b) The Exchange Guarantee Trustee shall not be deemed to have
knowledge of any Event of Default unless the Exchange Guarantee Trustee shall
have received written notice, or a Responsible Officer charged with the
administration of the Declaration shall have obtained written notice, of such
Event of Default.
SECTION 2.8. Conflicting Interests.
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The Declaration shall be deemed to be specifically described in this
Exchange Guarantee Agreement for the purposes of clause (i) of the first proviso
contained in Section 310(b) of the Trust Indenture Act.
ARTICLE III. POWERS, DUTIES AND RIGHTS OF THE EXCHANGE GUARANTEE
TRUSTEE
SECTION 3.1. Powers and Duties of the Exchange Guarantee Trustee.
(a) This Exchange Guarantee Agreement shall be held by the Exchange
Guarantee Trustee for the benefit of the Holders, and the Exchange Guarantee
Trustee shall not transfer this Exchange Guarantee Agreement to any Person
except a Holder exercising his or her rights pursuant to Section 5.4 (iv) or to
a Successor Exchange Guarantee Trustee on acceptance by such Successor Exchange
Guarantee Trustee of its appointment to act as Successor Exchange Guarantee
Trustee. The right, title and interest of the Exchange Guarantee Trustee shall
automatically vest in any Successor Exchange Guarantee Trustee, upon acceptance
by such Successor Exchange Guarantee Trustee of its appointment hereunder, and
such vesting and cessation of title shall be effective whether conveyancing
documents have been executed and delivered pursuant to the appointment of such
Successor Exchange Guarantee Trustee.
(b) If an Event of Default has occurred and is continuing, the Exchange
Guarantee Trustee shall enforce this Exchange Guarantee Agreement for the
benefit of the Holders.
(c) The Exchange Guarantee Trustee, before the occurrence of any Event
of Default and after the curing of all Events of Default that may have occurred,
shall undertake to perform only such duties as are specifically set forth in
this Exchange Guarantee Agreement, and no implied covenants shall be read into
this Exchange Guarantee Agreement against the Exchange Guarantee Trustee. In
case an Event of Default has occurred (that has not been cured or waived
pursuant to Section 2.6), the Exchange Guarantee Trustee shall exercise such of
the rights and powers vested in it by this Exchange Guarantee Agreement, and use
the same degree of care and skill in its exercise thereof, as a prudent person
would exercise or use under the circumstance in the conduct of his or her own
affairs.
(d) No provision of this Exchange Guarantee Agreement shall be
construed to relieve the Exchange Guarantee Trustee from liability for its own
negligent action, its own negligent failure to act or its own willful
misconduct, except that:
(i) prior to the occurrence of any Event of Default and after
the curing or waiving of all such Events of Default that may have
occurred:
(A) the duties and obligations of the Exchange
Guarantee Trustee shall be determined solely by the express
provisions of this Exchange Guarantee Agreement, and the
Exchange Guarantee Trustee shall not be liable
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except for the performance of such duties and obligations as
are specifically set forth in this Exchange Guarantee
Agreement; and
(B) in the absence of bad faith on the part of the
Exchange Guarantee Trustee, the Exchange Guarantee Trustee may
conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon any
certificates or opinions furnished to the Exchange Guarantee
Trustee and conforming to the requirements of this Exchange
Guarantee Agreement; but in the case of any such certificates
or opinions that by any provision hereof or of the Trust
Indenture Act are specifically required to be furnished to the
Exchange Guarantee Trustee, the Exchange Guarantee Trustee
shall be under a duty to examine the same to determine whether
they conform to the requirements of this Exchange Guarantee
Agreement;
(ii) the Exchange Guarantee Trustee shall not be liable for
any error of judgment made in good faith by a Responsible Officer of
the Exchange Guarantee Trustee, unless it shall be proved that the
Exchange Guarantee Trustee was negligent in ascertaining the pertinent
facts upon which such judgment was made;
(iii) the Exchange Guarantee Trustee shall not be liable with
respect to any action taken or omitted to be taken by it in good faith
in accordance with the direction of the holders of not less than a
Majority in liquidation amount of the Securities relating to the time,
method and place of conducting any proceeding for any remedy available
to the Exchange Guarantee Trustee, or exercising any trust or power
conferred upon the Exchange Guarantee Trustee under this Exchange
Guarantee Agreement; and
(iv) no provision of this Exchange Guarantee Agreement shall
require the Exchange Guarantee Trustee to expend or risk his own funds
or otherwise incur personal financial liability in the performance of
any of its duties or in the exercise of any of its rights or powers, if
the Exchange Guarantee Trustee shall have reasonable grounds for
believing that the repayment of such funds or liability is not
reasonably assured to it under the terms of this Exchange Guarantee
Agreement or adequate indemnity against such risk or liability is not
reasonably assured to it.
SECTION 3.2. Certain Rights of Exchange Guarantee Trustee.
(a) Subject to the provisions of Section 3.1:
(i) The Exchange Guarantee Trustee may rely and shall be fully
protected in acting or refraining from acting upon any resolution,
certificate, statement, instrument, opinion, report, notice, request,
direction, consent, order, bond, debenture, note, or other evidence of
indebtedness or other paper or document
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reasonably believed by it to be genuine and to have been signed, sent
or presented by the proper party or parties.
(ii) any direction or act of the Exchange Guarantor
contemplated by this Exchange Guarantee Agreement shall be sufficiently
evidenced by an Officers' Certificate unless otherwise prescribed
herein.
(iii) Whenever, in the administration of this Exchange
Guarantee Agreement, the Exchange Guarantee Trustee shall deem it
desirable that a matter be proved or established before taking,
suffering or omitting to take any action hereunder, the Exchange
Guarantee Trustee (unless other evidence is herein specifically
prescribed) may, in the absence of bad faith on its part, request and
rely upon an Officers' Certificate which, upon receipt of such request
from the Exchange Guarantee Trustee, shall be promptly delivered by the
Exchange Guarantor.
(iv) The Exchange Guarantee Trustee may consult with legal
counsel, and the written advice or opinion of such legal counsel with
respect to legal matters shall be full and complete authorization and
protection in respect of any action taken, suffered or omitted to be
taken by it hereunder in good faith and in accordance with such advice
or opinion. Such legal counsel may be legal counsel to the Exchange
Guarantor or any of its Affiliates and may be one of its employees. The
Exchange Guarantee Trustee shall have the right at any time to seek
instructions concerning the administration of this Exchange Guarantee
Agreement from any court of competent jurisdiction.
(v) The Exchange Guarantee Trustee shall be under no
obligation to exercise any of the rights or powers vested in it by this
Exchange Guarantee Agreement at the request or direction of any Holder,
unless such Holder shall have provided to the Exchange Guarantee
Trustee such adequate security and indemnity as would satisfy a
reasonable person in the position of the Exchange Guarantee Trustee,
against the costs, expenses (including attorneys' fees and expenses)
and liabilities that might be incurred by it in complying with such
request or direction, including such reasonable advances as may be
requested by the Exchange Guarantee Trustee; provided that, nothing
contained in this Section 3.2(a) (v) shall be taken to relieve the
Exchange Guarantee Trustee, upon the occurrence of an Event of Default,
of its obligation to exercise the rights and powers vested in it by
this Exchange Guarantee Agreement.
(vi) The Exchange Guarantee Trustee shall not be bound to make
any investigation into the facts or matters stated in any resolution,
certificate, statement, instrument, opinion, report, notice, request,
direction, consent, order, bond, debenture, note, other evidence of
indebtedness or other paper or document, but the Exchange Guarantee
Trustee, in its discretion, may make such further inquiry or
investigation into such facts or matters as it may see fit.
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(vii) The Exchange Guarantee Trustee may execute any of the
trusts or powers hereunder or perform any duties hereunder either
directly or by or through its agents or attorneys, and the Exchange
Guarantee Trustee shall not be responsible for any misconduct or
negligence on the part of any such agent or attorney appointed with due
care by it hereunder.
(viii) Whenever in the administration of this Exchange
Guarantee Agreement the Exchange Guarantee Trustee shall deem it
desirable to receive instructions with respect to enforcing any remedy
or right or take any other action hereunder, the Exchange Guarantee
Trustee (A) may request instructions from the Holders, (B) may refrain
from enforcing such remedy or right or taking such other action until
such instructions are received, and (C) shall be protected in acting in
accordance with such instructions.
(b) No provision of this Exchange Guarantee Agreement shall be deemed
to impose any duty or obligation on the Exchange Guarantee Trustee to perform
any act or acts or exercise any right, power, duty or obligation conferred or
imposed on it in any jurisdiction in which it shall be illegal, or in which the
Exchange Guarantee Trustee shall be unqualified or incompetent in accordance
with applicable law, to perform any such act or acts or to exercise any such
right, power, duty or obligation. No permissive power or authority available to
the Exchange Guarantee Trustee shall be construed to be a duty to act in
accordance with such power and authority.
SECTION 3.3. Indemnity.
The Exchange Guarantor agrees to indemnify the Exchange Guarantee
Trustee for, and to hold it harmless against, any loss, liability or expense
incurred without negligence or bad faith on the part of the Exchange Guarantee
Trustee, arising out of or in connection with the acceptance or administration
of this Exchange Guarantee Agreement, including the costs and expenses of
defending itself against any claim or liability in connection with the exercise
or performance of any of its powers or duties hereunder (including the fees of
counsel, provided that the selection of such counsel will be subject to the
consent of the Exchange Guarantor, which consent shall not be unreasonably
withheld). The Exchange Guarantee Trustee will not claim or exact any lien or
charge on any Guarantee Payments as a result of any amount due to it under this
Exchange Guarantee Agreement.
ARTICLE IV. EXCHANGE GUARANTEE TRUSTEE
SECTION 4.1. Exchange Guarantee Trustee; Eligibility.
(a) There shall at all times be a Exchange Guarantee Trustee which
shall:
(i) not be an Affiliate of the Exchange Guarantor; and
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(ii) be a Person that is eligible pursuant to the Trust
Indenture Act to act as such and has a combined capital and surplus of
at least $50,000,000, and shall be a corporation meeting the
requirements of Section 310(c) of the Trust Indenture Act. If such
corporation publishes reports of condition at least annually, pursuant
to law or to the requirements of the supervising or examining
authority, then, for the purposes of this Section and to the extent
permitted by the Trust Indenture Act, the combined capital and surplus
of such corporation shall be deemed to be its combined capital and
surplus as set forth in its most recent report of condition so
published.
(b) If at any time the Exchange Guarantee Trustee shall cease to be
eligible to so act under Section 4.1(e), the Exchange Guarantee Trustee shall
immediately resign in the manner and with the effect set out in Section 4.2(c).
(c) If the Exchange Guarantee Trustee has or shall acquire any
"conflicting interest" within the meaning of Section 310(b) of the Trust
Indenture Act, the Exchange Guarantee Trustee and Exchange Guarantor shall in
all respects comply with the provisions of Section 310(b) of the Trust Indenture
Act.
SECTION 4.2. Appointment, Removal and Resignation of the Exchange
Guarantee Trustee.
(a) Subject to Section 4.2(b), the Exchange Guarantee Trustee may be
appointed or removed without cause at any time by the Exchange Guarantor.
(b) The Exchange Guarantee Trustee shall not be removed until a
Successor Exchange Guarantee Trustee has been appointed and has accepted such
appointment by written instrument executed by such Successor Exchange Guarantee
Trustee and delivered to the Exchange Guarantor.
(c) The Exchange Guarantee Trustee appointed hereunder shall hold
office until a Successor Exchange Guarantee Trustee shall have been appointed or
until its removal or resignation. The Exchange Guarantee Trustee may resign from
office (without need for prior or subsequent accounting) by an instrument in
writing executed by the Exchange Guarantee Trustee and delivered to the Exchange
Guarantor, which resignation shall not take effect until a Successor Exchange
Guarantee Trustee has been appointed and has accepted such appointment by
instrument in writing executed by such Successor Exchange Guarantee Trustee and
delivered to the Exchange Guarantor and the resigning Exchange Guarantee
Trustee.
(d) If no Successor Exchange Guarantee Trustee shall have been
appointed and accepted appointment as provided in this Section 4.2 within 60
days after delivery to the Exchange Guarantor of an instrument of resignation,
the resigning Exchange Guarantee
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Trustee may petition, at the expense of the Exchange Guarantor, any court of
competent jurisdiction for appointment of a Successor Exchange Guarantee
Trustee. Such court may thereupon, after prescribing such notice, if any, as it
may deem proper, appoint a Successor Exchange Guarantee Trustee.
ARTICLE V. GUARANTEE
SECTION 5.1. Exchange Guarantee.
The Exchange Guarantor irrevocably and unconditionally agrees to pay in
full or a senior subordinated basis, to the extent set forth herein, to the
Holders the Guarantee Payments (without duplication of amounts theretofore paid
by or on behalf of the Issuer), as and when due, regardless of any defense,
right of setoff or counterclaim which the Issuer may have or assert, other than
the defense of payment. The Exchange Guarantor's obligation to make a Guarantee
Payment may be satisfied by direct payment of the required amounts by the
Exchange Guarantor to the Holders or by causing the Issuer to pay such amounts
to the Holders.
SECTION 5.2. Waiver of Notice and Demand.
The Exchange Guarantor hereby waives notice of acceptance of the
Exchange Guarantee Agreement and of any liability to which it applies or may
apply, presentment, demand for payment, any right to require a proceeding first
against the Exchange Guarantee Trustee, Issuer or any other Person before
proceeding against the Exchange Guarantor, protest, notice of nonpayment, notice
of dishonor, notice of redemption and all other notices an demands.
SECTION 5.3. Obligations Not Affected.
The obligations, covenants, agreements and duties of the Exchange
Guarantor under this Exchange Guarantee Agreement shall in no way be affected or
impaired by reason of the happening from time to time of any of the following:
(a) the release or waiver, by operation of law or otherwise, of the
performance or observance by the Issuer of any express or implied agreement,
covenant, term or condition relating to the Exchange Preferred Securities to be
performed or observed by the Trust;
(b) the extension of time for the payment by the Issuer of all or any
portion of the Distributions, Redemption Price, Liquidation Distribution or any
other sums payable under the terms of the Exchange Preferred Securities or the
extension of time for the performance of any other obligation under, arising out
of, or in connection with, the Exchange Preferred Securities;
(c) any failure, omission, delay or lack of diligence on. the part of
the Holders to enforce, assert or exercise any right, privilege, power or remedy
conferred on the Holders
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pursuant to the terms of the Exchange Preferred Securities, or any action
on the part of the Issuer granting indulgence or extension of any kind;
(d) the voluntary or involuntary liquidation, dissolution, sale of any
collateral, receivership, insolvency, bankruptcy, assignment for the benefit of
creditors, reorganization., arrangement, composition or readjustment of debt of,
or other similar proceedings affecting the Issuer or any of the assets of the
Issuer;
(e) any invalidity of, or defect or deficiency in, the Exchange
Preferred Securities;
(f) the settlement or compromise of any obligation guaranteed
hereby or hereby incurred; or
(g) any other circumstance whatsoever that might otherwise constitute a
legal or equitable discharge or defense of a guarantor, it being the intent of
this Section 5.3 that the obligations of the Exchange Guarantor hereunder shall
be absolute and unconditional under any and all circumstances. There shall be no
obligation of the Holders to give notice to, or obtain the consent of, the
Exchange Guarantor with respect to the happening of any of the foregoing.
SECTION 5.4. Rights of Holders.
The Exchange Guarantor expressly acknowledges that: (i) this Exchange
Guarantee Agreement will be deposited with the Exchange Guarantee Trustee to be
held for the benefit of the Holders; (ii) the Exchange Guarantee Trustee has the
right to enforce this Exchange Guarantee Agreement on behalf of the Holders;
(iii) the Holders of a Majority in liquidation amount of the Securities have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Exchange Guarantee Trustee in respect of this Exchange
Guarantee Agreement or exercising any trust or power conferred upon the Exchange
Guarantee Trustee under this Exchange Guarantee Agreement; and (iv) upon the
occurrence of an Event of Default, any Holder may institute a legal proceeding
directly against the Exchange Guarantor to enforce its rights under this
Exchange Guarantee Agreement, without first instituting a legal proceeding
against the Exchange Guarantee Trustee, the Issuer or any other Person.
SECTION 5.5. Guarantee of Payment.
This Exchange Guarantee Agreement creates a guarantee of payment and
not of collection. This Exchange Guarantee Agreement will not be discharged
except by payment of the Guarantee Payments in full (without duplication of
amounts theretofore paid by the Issuer out of funds legally available therefor)
or upon distribution of Notes to Holders as provided in the Declaration.
SECTION 5.6. Subrogation.
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The Exchange Guarantor shall be subrogated to all (if any) rights of
the Holders against the Issuer in respect of any amounts paid to the Holders by
the Exchange Guarantor under this Exchange Guarantee Agreement and shall have
the right to waive payment by the Issuer pursuant to Section 5.1; provided,
however, that the Exchange Guarantor shall not (except to the extent required by
mandatory provisions of law) be entitled to enforce or exercise any rights which
it may acquire by way of subrogation or any indemnity, reimbursement or other
agreement, in all cases as a result of payment under this Exchange Guarantee
Agreement, at the time of any such payment, any amounts are due and unpaid under
this Exchange Guarantee Agreement. If any amount shall be paid to the Exchange
Guarantor in violation of the preceding sentence, the Exchange Guarantor agrees
to hold such amount in trust for the Holders and to pay over such amount to the
Holders.
SECTION 5.7. Independent Obligations.
The Exchange Guarantor acknowledges that its obligations hereunder are
independent of the obligations of the Issuer with respect to the Exchange
Preferred Securities and that the Exchange Guarantor shall be liable as
principal and as debtor hereunder to make Guarantee Payments pursuant to the
terms of this Exchange Guarantee Agreement notwithstanding the occurrence of any
event referred to in subsection (a) through (g), inclusive, of Section 5.3
hereof.
ARTICLE VI. SUBORDINATION
SECTION 6.1. Subordination.
(a) This Exchange Guarantee Agreement will constitute an unsecured
obligation of the Exchange Guarantor and will rank subordinate and junior in
right of payment to all Senior Indebtedness of the Exchange Guarantor.
(b) The Exchange Guarantor may not make a Guarantee Payment to the
Holders if (i) any Senior Indebtedness of the Exchange Guarantor having an
outstanding principal amount at the time of determination in excess of
$10,000,000 (the "Specified Indebtedness") is not paid when due or (ii) any
other default on Specified Senior Indebtedness of the Exchange Guarantor occurs
and the maturity of such Specified Senior Indebtedness is accelerated in
accordance with its terms, unless, in either case, the default has been cured or
waived and any such acceleration has been rescinded or such Specified Senior
Indebtedness has been paid in full. However, the Exchange Guarantor may make a
Guarantee Payment without regard to the foregoing if the Exchange Guarantor and
the Exchange Guarantee Trustee receive written notice approving such payment
from a representative of the Specified Senior Indebtedness with respect to which
either of the events set forth in clause (i) or (ii) of the immediately
preceding sentence has occurred and is continuing. During the continuance of any
default (other than a default described in clause (i) or (ii) of the second
preceding sentence) with respect to any Specified Senior Indebtedness of the
Exchange Guarantor pursuant to which the maturity thereof may be accelerated
immediately without further notice
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(except such notice as may be required to effect such acceleration) or the
expiration of any applicable grace periods, the guarantor may not make a
Guarantee Payment to the holders of Exchange Preferred Securities for a period
(a "Payment Blockage Period") commencing upon the receipt by the Exchange
Guarantee Trustee (with a copy to the Exchange Guarantor) of written notice (a
"Blockage Notice") of such default from the representative of the holders of
such Specified Senior Indebtedness specifying an election to effect a Payment
Blockage Period and ending 179 days thereafter (or earlier if such Payment
Blockage Period is terminated (i) by written notice to the Exchange Guarantee
Trustee and the Exchange Guarantor from the representative of the holders of
such Specified Senior Indebtedness, (ii) because the default giving rise to such
Blockage Notice is no longer continuing or (iii) because such Specified Senior
Indebtedness has been repaid in full). Notwithstanding the provisions described
in the immediately preceding sentence, unless the holders of such Specified
Senior Indebtedness or the representative of such holders have accelerated the
maturity of such Specified Senior Indebtedness, the Exchange Guarantor may
resume Guarantee Payments after the end of such Payment Blockage Period. The
Exchange Guarantee Agreement shall not be subject to more than one Payment
Blockage Period in any consecutive 360-day period, irrespective of the number of
defaults with respect to Specified Senior Indebtedness during such period.
(c) Upon any payment or distribution of the assets of the Exchange
Guarantor upon a total or partial liquidation or dissolution or reorganization
of or similar proceeding relating to the Exchange Guarantor or its property, the
holders of Senior Indebtedness of the Exchange Guarantor will be entitled to
receive payment in full, and until the Senior Indebtedness of the Exchange
Guarantor is paid in full, any payment or distribution to which the Holders
would be entitled but for this Section 6.1 will be made to holders of such
Senior Indebtedness as their interests may appear. If a Distribution is made to
the Holders, that, due to this Section 6.1, should not have been made to them,
such Holders are required to hold it in trust for the holders of Senior
Indebtedness of the Exchange Guarantor and pay it over to them as their
interests may appear.
(d) If a Guarantee Payment is to be made by the Exchange Guarantor to
the Holders, the Exchange Guarantor or the Exchange Guarantee Trustee shall
promptly notify the holders of Senior Indebtedness of the Exchange Guarantor or
the representative of such holders of such Guarantee Payment. If any Senior
Indebtedness of the Exchange Guarantor is outstanding, the Exchange Guarantor
may not pay such Guarantee Payment until five Business Days after the
representative of all the issues of Senior Indebtedness of the Exchange
Guarantor receives notice of such Guarantee Payment and, thereafter, may pay
such Guarantee Payment only if the Exchange Guarantee Agreement otherwise
permits payment at that time.
ARTICLE VII. TERMINATION
SECTION 7.1. Termination.
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This Exchange Guarantee Agreement shall terminate and be of no further
force and effect upon (i) full payment of the Redemption Price of the Exchange
Preferred Securities, (ii) the distribution of Exchange Notes to the Holders in
exchange for all of the Exchange Preferred Securities or (iii) full payment of
the amounts payable in accordance with the Declaration upon liquidation of the
Issuer. Notwithstanding the foregoing, this Exchange Guarantee Agreement will
continue to be effective or will be reinstated, as the case may be, if at any
time any Holder must restore payment of any sums paid with respect to Exchange
Preferred Securities or this Exchange Guarantee Agreement.
ARTICLE VIII. MISCELLANEOUS
SECTION 8.1. Successors and Assigns.
All guarantees and agreements in this Exchange Guarantee Agreement
shall bind the successors, assigns, receivers, trustees and representatives of
the Exchange Guarantor and shall inure to the benefit of the Holders of the
Exchange Preferred Securities then outstanding. Except in connection with a
consolidation, merger or sale involving the Exchange Guarantor that is permitted
under Article Eight of the Indenture and pursuant to which the assignee agrees
in writing to perform the Exchange Guarantor's obligations hereunder, the
Exchange Guarantor shall not assign its obligations hereunder.
SECTION 8.2. Amendments.
Except with respect to any changes that do not adversely affect the
rights of the Holders in any material respect (in which case no consent of the
Holders will be required), this Exchange Guarantee Agreement may only be amended
with the prior approval of the Holders of not less than a Majority in
liquidation amount of all outstanding Exchange Preferred Securities. The
provisions of Article VI of the Declaration concerning meetings of the Holders
shall apply to the giving of such approval. This Exchange Guarantee Agreement
shall not be amended without the prior receipt by the Exchange Guarantor of an
opinion of independent tax counsel to the effect that such amendment of this
Exchange Guarantee Agreement will not result in the recognition of income, gain
or loss by the Holders.
SECTION 8.3. Notices.
Any notice, request or other communication required or permitted to be
given hereunder shall be in writing, duly signed by the party giving such
notice, and delivered, telecopied or mailed by first class mail as follows:
(a) if given to the Exchange Guarantor, to the address set forth below
or such other address, facsimile number or to the attention of such other Person
as the Exchange Guarantor may give notice to the Holders:
Superior National Insurance Group, Inc.
15
<PAGE> 20
26601 Agoura Road
Calabasas, California 91302
Facsimile No.: (818) 880-5902
Attention: President
(b) If given to the Issuer, in care of the Exchange Guarantee Trustee,
at the Issuer's (and the Exchange Guarantee Trustee's) address set forth below
or such other address as the Exchange Guarantee Trustee on behalf of the Issuer
may given notice to the Holders:
Superior National Capital Trust I
c/o Wilmington Trust Company
1100 North Market Street
Rodney Square North
Wilmington, Delaware 19890
Facsimile No.:
Attention: Corporate Trust Administration
(c) if given to any Holder, at the address set forth on the books and
records of the Trust.
All notices hereunder shall be deemed to have been given when received
in person, telecopied with receipt confirmed, or mailed by first class mail,
postage prepaid, except that if a notice or other document is refused delivery
or cannot be delivered because of a changed address of which no notice was
given, such notice or other document shall be deemed to have been delivered on
the date of such refusal or inability to deliver.
SECTION 8.4. Benefit.
This Exchange Guarantee Agreement is solely for the benefit of the
Holders and is not separately transferable from the Exchange Preferred
Securities.
SECTION 8.5. Interpretation.
In this Exchange Guarantee Agreement, unless the context otherwise
requires:
(a) capitalized terms used in this Exchange Guarantee Agreement but not
defined in the preamble hereto have the respective meanings assigned to them in
Section 1.1;
(b) a term defined anywhere in this Exchange Guarantee Agreement has
the same meaning throughout;
16
<PAGE> 21
(c) all references to "the Exchange Guarantee Agreement" or "this
Exchange Guarantee Agreement" are to this Exchange Guarantee Agreement as
modified, supplemented or amended from time to time;
(d) all references to this Exchange Guarantee Agreement to Articles and
Sections are to Articles and Sections of this Exchange Guarantee Agreement
unless otherwise defined in this Exchange Guarantee Agreement or unless the
context otherwise requires;
(e) a term defined in the Trust Indenture Act has the same meaning when
used in this Exchange Guarantee Agreement unless otherwise defined in this
Exchange Guarantee Agreement or unless the context otherwise requires;
(f) a reference to the singular includes the plural and vice versa; and
(g) the masculine, feminine or neuter genders used herein shall include
the masculine, feminine and neuter genders.
SECTION 8.6. Governing Law.
THIS EXCHANGE GUARANTEE AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
This instrument may be executed in any number of counterparts, each of
which so executed shall be deemed to be an original, but all such counterparts
shall together constitute but one and the same instruments.
17
<PAGE> 22
THIS EXCHANGE GUARANTEE AGREEMENT is executed as of the day and year
first above written.
Superior National Insurance Group, Inc.
By:_______________________________________
Name:
Title:
By:_______________________________________
Name:
Title:
Wilmington Trust Company,
as Exchange Guarantee Trustee
By:_______________________________________
Name:____________________________________
Title:_____________________________________
18
<PAGE> 1
EXHIBIT 5.1
RIORDAN & McKINZIE
300 South Grand Avenue, Suite 2900
Los Angeles, California 90071
December 30, 1997
Superior National Insurance Group, Inc.
Superior National Capital Trust I
26601 Agoura Road
Calabasas, CA 91302
Re: Superior National Insurance Group, Inc.-- 10-3/4% Senior
Subordinated Notes due December 1, 2017; Guarantee
with respect to 10-3/4% Trust Preferred Securities of
Superior National Capital Trust I --
Registration Statement on Form S-4
-----------------------------------------------------
Ladies and Gentlemen:
We have acted as counsel to Superior National Insurance Group,
Inc., a Delaware corporation (the "Company") and Superior National Capital Trust
I, a Delaware business trust (the "Trust"), in connection with the registration
under the Securities Act of 1933, as amended (the "Securities Act"), of, and the
offer to exchange, (i) the Company's 10-3/4% Senior Subordinated Notes due
December 1, 2017 to be registered with the Securities and Exchange Commission
(the "Commission") (the "Exchange Notes"), for its outstanding 10 3/4% Senior
Subordinated Notes due December 1, 2017, and (ii) the Company's Guarantee (the
"Exchange Guarantee") of payments of cash distributions and payments upon
liquidation of the Trust or redemption of the Trust's 10-3/4% Trust Preferred
Securities to be registered under the Securities Act of 1933, as amended, for a
like guarantee now outstanding. This opinion is delivered to you in connection
with the Registration Statement on Form S-4 (the "Registration Statement") for
the aforementioned Exchange Notes, Exchange Guarantee and exchange offer, filed
as of the date hereof with the Commission under the Securities Act. Capitalized
terms used herein without definition shall have the meanings given to them in
the Registration Statement.
In rendering this opinion, we have examined copies identified to
our satisfaction as being copies of the Indenture, attached as an exhibit to the
Registration Statement, the form of Exchange Notes, and the form of the
agreement in respect of the
<PAGE> 2
Superior National Insurance Group, Inc.
Superior National Capital Trust I
December 30, 1997
Page 2
Exchange Guarantee, and originals, counterparts or copies identified to our
satisfaction as being true copies of such other documents as we have deemed
necessary or appropriate to render the opinions given below. We have assumed the
authenticity of all documents submitted to us as originals and the conformity to
authentic original documents of all documents submitted to us as certified,
conformed or photostatic copies.
We have investigated such questions of law for the purpose of
rendering this opinion as we have deemed necessary. We express no opinion with
respect to compliance with state securities laws or with respect to any state or
federal fraudulent conveyance statutes.
Based upon the foregoing and subject to the qualifications,
exceptions and limitations set forth herein, we are of the opinion that, when
the Indenture shall become qualified under the Trust Indenture Act of 1939, as
amended, and when the Exchange Notes and the Exchange Guarantee shall have been
duly executed, authenticated and delivered in accordance with the Indenture and
the exchange offer contemplated by the Registration Statement, the Exchange
Notes and Exchange Guarantee will be legally issued and fully paid and
constitute the legally valid and binding obligations of the Company.
To the extent that the obligations of the Company under the
Indenture may be dependent upon such matters, we assume for purposes of this
opinion that the Trustee is duly organized, validly existing and in good
standing under the laws of its jurisdiction of organization; that the Trustee is
duly qualified to engage in the activities contemplated by the Indenture; that
the Indenture has been duly authorized, executed and delivered by the Trustee
and constitutes the valid, binding and enforceable obligation of the Trustee;
that the Trustee is in compliance, generally and with respect to acting as a
trustee under the Indenture, with all applicable laws and regulations; and that
the Trustee has the requisite corporate and legal power and authority to perform
its obligations under the Indenture.
We hereby consent to the filing of this opinion as an exhibit to
the Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the Prospectus which is a part of the Registration Statement.
Very truly yours,
/s/ Riordan & McKinzie
<PAGE> 1
EXHIBIT 5.2
[Letterhead of Richards, Layton & Finger]
December 29, 1997
Superior National Capital Trust I
c/o Superior National Insurance Group, Inc.
26601 Agoura Road
Calabasas, California 91302
RE: SUPERIOR NATIONAL CAPITAL TRUST I
Ladies and Gentlemen:
We have acted as special Delaware counsel for Superior National
Insurance Group, Inc., a Delaware corporation (the "Company"), and Superior
National Capital Trust I, a Delaware business trust (the "Trust"), in connection
with the matters set forth herein. At your request, this opinion is being
furnished to you.
For purposes of giving the opinions hereinafter set forth, our
examination of documents has been limited to the examination of originals or
copies of the following:
(a) The Certificate of Trust of the Trust, dated as of October
24, 1997 (the "Certificate"), as filed in the office of the Secretary of State
of the State of Delaware (the "Secretary of State") on October 24, 1997;
(b) The Declaration of Trust of the Trust, dated as of October
24, 1997, by and among the Company and the trustees of the Trust named therein;
(c) The Amended and Restated Declaration of Trust of the Trust,
dated as of December 3, 1997 (including Exhibits A, C and D thereto) (the
"Declaration"), among the Company, as sponsor, the trustees of the Trust named
therein, and the holders, from time to time, of undivided beneficial interests
in the assets of the Trust;
(d) The Registration Statement on Form S-4 (the "Registration
Statement"), including a preliminary prospectus (the "Prospectus"), relating to
the 10 3/4% Trust Preferred Securities of the Trust representing undivided
beneficial interests in the assets of the Trust (each, an "Exchange Preferred
Security" and collectively, the "Exchange Preferred Securities"), as
<PAGE> 2
Superior National Capital Trust I
December 29, 1997
Page 2
proposed to be filed by the Company and the Trust with the Securities and
Exchange Commission on or about December 29, 1997; and
(e) A Certificate of Good Standing for the Trust, dated December
29, 1997, obtained from the Secretary of State.
Initially capitalized terms used herein and not otherwise defined
are used as defined in the Declaration.
For purposes of this opinion, we have not reviewed any documents
other than the documents listed in paragraphs (a) through (e) above. In
particular, we have not reviewed any document (other than the documents listed
in paragraphs (a) through (e) above) that is referred to in or incorporated by
reference into the documents reviewed by us. We have assumed that there exists
no provision in any document that we have not reviewed that is inconsistent with
the opinions stated herein. We have conducted no independent factual
investigation of our own but rather have relied solely upon the foregoing
documents, the statements and information set forth therein and the additional
matters recited or assumed herein, all of which we have assumed to be true,
complete and accurate in all material respects.
With respect to all documents examined by us, we have assumed (i)
the authenticity of all documents submitted to us as authentic originals, (ii)
the conformity with the originals of all documents submitted to us as copies or
forms, and (iii) the genuineness of all signatures.
For purposes of this opinion, we have assumed (i) that the
Declaration constitutes the entire agreement among the parties thereto with
respect to the subject matter thereof, including with respect to the creation,
operation and termination of the Trust, and that the Declaration and the
Certificate are in full force and effect and have not been amended, (ii) except
to the extent provided in paragraph 1 below, the due creation or due
organization or due formation, as the case may be, and valid existence in good
standing of each party to the documents examined by us under the laws of the
jurisdiction governing its creation, organization or formation, (iii) the legal
capacity of natural persons who are parties to the documents examined by us,
(iv) that each of the parties to the documents examined by us has the power and
authority to execute and deliver, and to perform its obligations under, such
documents, (v) the due authorization, execution and delivery by all parties
thereto of all documents examined by us, (vi) the receipt by each Person to whom
an Exchange Preferred Security is to be issued by the Trust (collectively, the
"Exchange Preferred Security Holders") of a Preferred Securities Certificate and
the consideration for the Exchange Preferred Security acquired by it, in
accordance with the Declaration and the Registration Statement, and (vii) that
the Exchange Preferred Securities are issued to the Exchange Preferred Security
Holders in accordance with the Declaration and the Registration Statement. We
have not participated in the preparation of the Registration Statement and
assume no responsibility for its contents.
<PAGE> 3
Superior National Capital Trust I
December 29, 1997
Page 3
This opinion is limited to the laws of the State of Delaware
(excluding the securities laws of the State of Delaware), and we have not
considered and express no opinion on the laws of any other jurisdiction,
including federal laws and rules and regulations relating thereto. Our opinions
are rendered only with respect to Delaware laws and rules, regulations and
orders thereunder that are currently in effect.
Based upon the foregoing, and upon our examination of such
questions of law and statutes of the State of Delaware as we have considered
necessary or appropriate, and subject to the assumptions, qualifications,
limitations and exceptions set forth herein, we are of the opinion that:
1. The Trust has been duly created and is validly existing in
good standing as a business trust under the Delaware Business Trust Act.
2. The Exchange Preferred Securities will represent valid and,
subject to the qualifications set forth in paragraph 3 below, fully paid and
nonassessable undivided beneficial interests in the assets of the Trust.
3. The Exchange Preferred Security Holders, as beneficial owners
of the Trust, will be entitled to the same limitation of personal liability
extended to stockholders of private corporations for profit organized under the
General Corporation Law of the State of Delaware. We note that the Exchange
Preferred Security Holders may be obligated to make payments as set forth in the
Declaration.
We consent to the filing of this opinion with the Securities and
Exchange Commission as an exhibit to the Registration Statement. In addition, we
hereby consent to the use of our name under the heading "Legal Matters" in the
Prospectus. In giving the foregoing consents, we do not thereby admit that we
come within the category of Persons whose consent is required under Section 7 of
the Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder. Except as stated above, without
our prior written consent, this opinion may not be furnished or quoted to, or
relied upon by, any other Person for any purpose.
Very truly yours,
/s/ Richards, Layton & Finger
<PAGE> 1
EXHIBIT 8
December 29, 1997
Superior National Insurance Group, Inc.
Superior National Capital Trust I
26601 Agoura Road
Calabasas, California 91302
Ladies and Gentlemen:
We have acted as special tax counsel for Superior National
Insurance Group, Inc., a Delaware corporation (the "Company"), and Superior
National Capital Trust I, a Delaware business trust (the "Trust"), in connection
with a Registration Statement on Form S- 4 filed with the Securities and
Exchange Commission on or about December 29, 1997 (the "Registration Statement")
which registers under the Securities Act of 1933, as amended (the "Securities
Act"), (i) the 10 3/4% Trust Preferred Securities (the "Exchange Preferred
Securities") of the Trust (liquidation amount of $1,000 per Exchange Preferred
Security), (ii) the Company's 10 3/4% Senior Subordinated Notes due December 1,
2017 (the "Exchange Notes") and (iii) the guarantee of the Company with respect
to the Exchange Preferred Securities (the "Exchange Guarantee"). In connection
therewith, we have participated in the preparation of, and have reviewed, the
Registration Statement, including the prospectus which is a part thereof.
We have examined and relied upon the Registration Statement and,
in each case as filed with the Registration Statement, (i) the Senior
Subordinated Indenture dated as of December 3, 1997 (the "Indenture") between
the Company and Wilmington Trust Company, as trustee, which includes a form of
Exchange Note; (ii) the Amended and Restated Declaration of Trust for the Trust
dated as of December 3, 1997 (the "Declaration"), which includes a form of
Exchange Preferred Security, (iii) the form of Exchange Guarantee Agreement to
be entered into by the Company and Wilmington Trust Company, as trustee, with
respect to the Exchange Guarantee (the "Exchange Guarantee Agreement") and (iv)
certain other relevant documents used in connection with the issuance of the
Exchange Notes, the Exchange Preferred Securities and the Exchange Guarantee
(collectively, the "Operative Documents"). As to certain questions of fact
material or relevant to the opinions expressed herein, we have relied upon a
certificate obtained from an officer of the Company and have assumed the
accuracy of the facts certified or stated to us and have made no independent
investigation of such facts and assume no obligation to do so.
Based on the foregoing and assuming that the Exchange Guarantee
Agreement and forms of Exchange Note and Preferred Security are executed and
delivered in substantially the forms filed as exhibits to the Registration
Statement and that the transactions contemplated to occur under the Operative
Documents in fact occur in accordance with the terms thereof, we hereby confirm,
in all material respects, that the discussions set forth in the Registration
<PAGE> 2
Statement under the heading "Certain United States Federal Income Tax
Consequences" is a fair and accurate summary of the matters addressed therein,
based upon current law and the assumptions stated or referred to therein. There
can be no assurance that contrary positions may not be taken by the Internal
Revenue Service.
We hereby consent to the use of our name in the Registration
Statement and to the filing of this opinion as Exhibit 8 to the Registration
Statement. In giving such consent, we do not thereby admit that we are in the
category of persons whose consent is required under Section 7 of the Securities
Act. This opinion is expressed as of the date hereof, unless otherwise expressly
stated, and we disclaim any undertaking to advise you of any subsequent changes
of the facts stated or assumed herein or any subsequent changes in applicable
law.
Very truly yours,
Riordan & McKinzie
<PAGE> 1
EXHIBIT 10.19
TERMINATION AND RELEASE AGREEMENT
TERMINATION AND RELEASE AGREEMENT, dated as of December 3,
1997 (this "Agreement"), among SUPERIOR NATIONAL INSURANCE GROUP, INC., a
Delaware corporation ("SNIG"), SUPERIOR PACIFIC INSURANCE GROUP, INC., a
Delaware corporation ("the Borrower"), the Subsidiaries of SNIG (the
"Subsidiaries") appearing on the signature pages hereto, the financial
institutions party to the Credit Agreement (as defined below) (the "Banks") and
THE CHASE MANHATTAN BANK, as Administrative Agent (the "Administrative Agent")
for the Banks under the Credit Agreement and as agent for the Banks entitled to
the benefits of the Pledge Agreement (as defined below) (in such capacity, the
"Collateral Agent"). All capitalized terms used herein and not otherwise
defined shall have the respective meanings provided such terms in the Credit
Agreement referred to below.
W I T N E S S E T H:
WHEREAS, SNIG, the Borrower, the Banks and the Administrative
Agent are parties to the Credit Agreement, dated as of April 11, 1997 (as
amended, modified and supplemented, the "Credit Agreement");
WHEREAS, in connection with the Credit Agreement, SNIG, the
Borrower and the Subsidiaries entered into a Pledge Agreement, dated as of
April 11, 1997 (as amended, modified and supplemented to the date hereof, the
"Pledge Agreement") in favor of and for the benefit of, inter alia, the
Collateral Agent;
WHEREAS, the Borrower desires to repay, and the Administrative
Agent, on behalf of the Banks, is willing to accept repayment of, all Loans and
other amounts outstanding under the Credit Agreement, the Notes (such Notes
being referred to herein as the "Notes") and the Pledge Agreement; and
WHEREAS, in connection with the aforesaid, SNIG, the Borrower
and the Subsidiaries have requested the Administrative Agent and the Banks to
enter into this Agreement, and the Administrative Agent and the Banks have
agreed to enter into this Agreement;
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Repayment, etc. (x) Effective upon (i) the receipt
by White & Case of fees owing to it in connection with the transaction in an
amount equal to $6,897.00 in immediately available funds on December 3, 1997
and (ii) the receipt by the Administrative Agent of $40,773,675 in immediately
available funds on December 3, 1997 (assuming that payment in full is received
by the Administrative Agent by 1:00 p.m. New York time on such
<PAGE> 2
date) (such amounts described in (i) and (ii) collectively, the "Payoff
Amount"), the Administrative Agent and the Banks hereby (a) acknowledge receipt
of full payment of all Loans, together with interest thereon and all other
amounts due and owing to the Administrative Agent and the Banks under the
Credit Agreement, the Notes issued pursuant thereto and all related documents
and instruments (the "Credit Agreement Documents") and (b) waive any
requirement under the Credit Agreement for written notice from the Borrower
relating to the repayment of Loans under the Credit Agreement and (y) the
parties hereto hereby (a) acknowledge the termination of the Credit Agreement
and (b) acknowledge that none of them is a party to any Interest Rate
Protection Agreement with SNIG, the Borrower or any Subsidiary.
Notwithstanding anything to the contrary contained in this Agreement, (i) all
provisions, including indemnity and expense obligation provisions, contained in
the Credit Agreement and the other Credit Agreement documents that by their
express terms survive the termination of the Credit Agreement or such other
Credit Agreement documents shall survive the termination thereof and (ii) all
reinstatement provisions contained in any guarantees shall survive the
termination thereof.
2. Release of Liens; etc. (a) Effective upon the
receipt by the Administrative Agent of the Payoff Amount, the Pledge Agreement
is hereby terminated and the Collateral Agent hereby releases assigns,
transfers and delivers to SNIG, the Borrower and the Subsidiaries, without
recourse and without representation or warranty of any kind or nature, all of
their respective Collateral (as defined in the Pledge Agreement). Effective
upon the receipt by the Administrative Agent of the Payoff Amount, the
Collateral Agent hereby acknowledges that the security interests and liens
granted under the Pledge Agreement and all related agreements have been
terminated and have been released, and the Collateral Agent agrees (and the
Banks hereby expressly authorize the Collateral Agent) to execute and deliver
to the Borrower at the expense of the Borrower, such documents as it shall
reasonably request to evidence the termination or assignment of the security
interests and the release or assignment of the assets of the Borrower pursuant
to this Section 2.
(b) The Collateral Agent, SNIG, the Borrower and
the Subsidiaries each hereby acknowledges that set forth on Schedule I attached
hereto is a true, correct and complete list of all Pledged Securities (as such
term is defined in the Pledge Agreement) which are in the Collateral Agent's
possession as of the date hereof.
(c) The Administrative Agent, SNIG, the Borrower
and the Subsidiaries each hereby acknowledges that set forth on Schedule II
attached hereto is a true, correct and complete list of all UCC-I Financial
Statements filed in connection with the Pledge Agreement.
3. Further Assurances. From time to time, upon the
reasonable request by SNIG, the Borrower or any Subsidiary, the Administrative
Agent and the Collateral Agent shall, and the Banks hereby expressly authorize
the Administrative Agent and the Collateral Agent to, without further
consideration other than reimbursement or, as the Administrative
2
<PAGE> 3
Agent or the Collateral Agent shall reasonably require, advance payment for any
reasonable and necessary costs and expenses, execute, deliver and acknowledge
all such further documents, agreements, certificates and instruments and do
such further acts (together with all such acts regarding such further
documents, "Further Acts") as SNIG, the Borrower or any Subsidiary may
reasonably require to evidence or effectuate the transactions contemplated by
this Agreement, including, but not limited to, termination of the Credit
Agreement, the release and termination of the Pledge Agreement and the release
and discharge of all security interests and all other rights and interests that
the Administrative Agent, the Collateral Agent or the Banks has or may have had
in the Collateral, unless such requested Further Act (i) would expose the
Collateral Agent, the Administrative Agent or a Bank or an officer of the
Collateral Agent, the Administrative Agent or a Bank to personal liability or
(ii) would be or might reasonably be contrary to applicable law.
4. Miscellaneous. This Agreement may not be amended,
modified or waived except in a writing signed by the party against whom
enforcement of such amendment, modification or waiver is sought. THIS
AGREEMENT SHALL BE CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF NEW YORK. This Agreement may be executed in one of more counterparts,
each of which shall be deemed an original, but all of which, when taken
together, shall constitute one and the same instrument.
5. Effectiveness. This Agreement shall become effective
when all parties hereto shall have executed and delivered a counterpart hereof
(including by way of facsimile transmission).
* * *
3
<PAGE> 4
IN WITNESS WHEREOF, the undersigned have entered into this
Agreement as of the day and year first above written.
SUPERIOR NATIONAL INSURANCE
GROUP, INC.
By /s/ [SIGNATURE]
------------------------------------
Title:
SUPERIOR PACIFIC INSURANCE GROUP, INC.
By /s/ [SIGNATURE]
------------------------------------
Title:
PACIFIC INSURANCE BROKERAGE, INC.
By /s/ [SIGNATURE]
------------------------------------
Title:
INFONET MANAGEMENT SYSTEMS, INC.
By /s/ [SIGNATURE]
------------------------------------
Title:
SN INSURANCE SERVICES, INC.
By /s/ [SIGNATURE]
------------------------------------
Title:
4
<PAGE> 5
THE CHASE MANHATTAN BANK,
Individually, as Administrative Agent and
as Collateral Agent
By /s/ [SIGNATURE]
--------------------------------
Title:
DRESDNER BANK AG, New York
Branch and Grand Cayman Branch
By /s/ [SIGNATURE]
--------------------------------
Title:
By /s/ [SIGNATURE]
--------------------------------
Title:
UNION BANK OF CALIFORNIA, N.A.
By /s/ [SIGNATURE]
--------------------------------
Title:
BANKBOSTON, N.A.
By /s/ [SIGNATURE]
--------------------------------
Title:
SANWA BANK CALIFORNIA
By /s/ [SIGNATURE]
--------------------------------
Title:
IMPERIAL BANK
By /s/ [SIGNATURE]
--------------------------------
Title:
5
<PAGE> 6
SCHEDULE I
1. PLEDGED SECURITIES
SUBSIDIARY OF SNIG
<TABLE>
<CAPTION>
SUBSIDIARIES CLASS OF STOCK SHAREHOLDER % OWNERSHIP SHARES PLEDGED
------------ -------------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Borrower Common Stock SNIG 100 100%
</TABLE>
SUBSIDIARIES OF THE BORROWER
----------------------------
<TABLE>
<CAPTION>
SUBSIDIARIES CLASS OF STOCK SHAREHOLDER % OWNERSHIP SHARES PLEDGED
------------ -------------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
SPCC Common Stock Borrower 100 100%
Pacific Insurance Common Stock Borrower 100 100%
InfoNet Common Stock Borrower 100 100%
SN Insurance Common Stock Borrower 100 100%
Superior (Bermuda) Common Stock Borrower 100 65%
SNIC Common Stock Borrower 100 100%
</TABLE>
II. PLEDGED NOTES - NONE
<PAGE> 7
SCHEDULE II
UCC-1 FINANCING STATEMENTS
<TABLE>
<CAPTION>
DEBTOR SECURED PARTY FILE# FILING DATE JURISDICTION
- ---------------------------------- ---------------------------- ---------- ----------- ----------------------
<S> <C> <C> <C> <C>
Superior National Insurance Group, The Chase Manhattan Bank, as 9711260104 4.18.97 Secretary of State, CA
Inc. Collateral Agent
26601 Agoura Road One Chase Manhattan Plaza
Calabasas, CA 91302 New York, NY 10081
SN Insurance Services, Inc. The Chase Manhattan Bank, as 9711260083 4.18.97 Secretary of State, CA
26601 Agoura Road Collateral Agent
Calabasas, CA 91302 One Chase Manhattan Plaza
New York, NY 10081
InfoNet Management Systems, Inc. The Chase Manhattan Bank, as 9711260069 4.18.97 Secretary of State,CA
26601 Agoura Road Collateral Agent
Calabasas, CA 91302 One Chase Manhattan Plaza
New York, NY 10081
Pacific Insurance Brokerage, Inc. The Chase Manhattan Bank, as 9711160973 4.18.97 Secretary of State, CA
26001 Agoura Road Collateral Agent
Calabasas, CA 91302 One Chase Manhattan Plaza
New York, NY 10081
Superior Pacific Holding The Chase Manhattan Bank, as 9711160946 4.18.97 Secretary of State, CA
Corporation Collateral Agent
26601 Agoura Road One Chase Manhattan Plaza
Calabasas, CA 91302 New York, NY 10081
</TABLE>
<PAGE> 1
EXHIBIT 10.21
Form of Common Stock Purchase Warrant
Schedule of Holders
<TABLE>
Number of
Holder Shares
------ ---------
<S> <C>
Edwin Wilson 12,347
J. Chris Seaman 58,795
Joseph P. Wolonsky 10,582
Richard D. Hotchkiss 6,173
Karl O. Johnson 4,262
TJS Partners, L.P. 173,223
The Ravenswood Investment Company, L.P. 57,750
Estate of Bernice P. Bishop 326,552
Centre Reinsurance (Bermuda) Ltd. 395,128
Fluor Reinsurance Investments Inc. 151,199
Carlisle Ventures, Inc. 138,785
Beach Haven Investors, Inc. 1,636
International Insurance Investors (Bermuda) Ltd. 13,183
Robert Spass 5,580
International Insurance Advisors, Inc. 401K and Pension Plans FBO B. Cooper 930
International Insurance Advisors, Inc. 401K and Pension Plans FBO C. Schwarberg 2,790
International Insurance Advisors, Inc. 401K and Pension Plans FBO P. Warren 930
Paul Warren 1,860
International Insurance Investors, L.P. 204,759
</TABLE>
<PAGE> 2
COMMON STOCK PURCHASE WARRANT
Issued By
SUPERIOR NATIONAL INSURANCE GROUP, INC.
THIS WARRANT AND ANY SECURITIES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE TRANSFERRED
IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT,
EXCEPT UNDER CIRCUMSTANCES WHERE NEITHER SUCH REGISTRATION NOR SUCH AN
EXEMPTION IS REQUIRED BY LAW. THIS WARRANT AND SUCH SECURITIES MAY BE
TRANSFERRED ONLY UPON THE FULFILLMENT OF THE CONDITIONS SPECIFIED IN THIS
WARRANT.
THE EXERCISE AND TRANSFER OF THIS WARRANT AND THE EXERCISE OF THE REGISTRATION
RIGHTS CONTAINED HEREIN ARE SUBJECT TO CERTAIN RESTRICTIONS PURSUANT TO
SUPERIOR NATIONAL INSURANCE GROUP, INC.'S (THE "COMPANY") CHARTER AND THAT
CERTAIN LETTER AGREEMENT, RELATING TO THIS WARRANT, AMONG THE COMPANY, THE
RECORD HOLDER OF THIS WARRANT AND CERTAIN OTHER PARTIES (THE "LETTER
AGREEMENT"). ANY EXERCISE OR TRANSFER OF THIS WARRANT OR EXERCISE OF
REGISTRATION RIGHTS IN VIOLATION OF THE CHARTER OF THE COMPANY OR THE LETTER
AGREEMENT SHALL BE VOID AB INITIO. A COPY OF THE LETTER AGREEMENT AND THE
CHARTER OF THE COMPANY MAY BE OBTAINED FROM THE COMPANY WITHOUT CHARGE UPON
WRITTEN REQUEST.
- --------------------------------------------------------------------------------
No. 1992 W-__ Dated as of ____, 199_
- --------------------------------------------------------------------------------
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TABLE OF CONTENTS
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SECTION 1 EXERCISE OF WARRANT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.1 Manner of Exercise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.2 When Exercise Effective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.3 Delivery of Stock Certificates, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.4 Company to Reaffirm Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 1.5 Payment by Application of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 1.6 Compliance with Law, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
SECTION 2. ADJUSTMENT OF COMMON STOCK ISSUABLE UPON EXERCISE OF WARRANT . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 2.1 General; Warrant Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 2.2 Adjustment of Warrant Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 2.3 Options and Convertible Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 2.4 Stock Dividends, Stock Splits, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 2.5 Computation of Consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 2.6 Dilution in Case of Other Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 2.7 Adjustments for Combinations, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 2.8 Other Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 2.9 Determinations by Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
SECTION 3 ADJUSTMENTS FOR CONSOLIDATION, MERGER, SALE OF ASSETS, REORGANIZATION, ETC. . . . . . . . . . . . . . . . . 8
SECTION 4 OTHER DILUTIVE EVENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
SECTION 5 NO DILUTION OR IMPAIRMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
SECTION 6 ACCOUNTANTS' REPORT AS TO ADJUSTMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
SECTION 7 NOTICES OF CORPORATE ACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
SECTION 8 RESTRICTIONS ON TRANSFER; REGISTRATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 8.1 Restrictive Legends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 8.2 Notice of Proposed Transfer; Opinions of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 8.3 Registration on Request . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 8.4 Incidental Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 8.5 Registration Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 8.6 Preparation; Reasonable Investigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 8.7 Termination of Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Section 8.8 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
</TABLE>
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SECTION 9 PREEMPTIVE RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
SECTION 10 AVAILABILITY OF INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
SECTION 11 RESERVATION OF STOCK, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
SECTION 12 LISTING ON SECURITIES EXCHANGES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 13 MAINTENANCE OF OFFICE OR AGENCY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 14 OWNERSHIP, REGISTRATION OF TRANSFER, EXCHANGE ANDSUBSTITUTION OF WARRANTS . . . . . . . . . . . . . . . . 24
Section 14.1 Ownership of Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 14.2 Transfer and Exchange of Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 14.3 Replacement of Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 14.4 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 15 DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 16 REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
SECTION 17 NO RIGHTS OR LIABILITIES AS STOCKHOLDER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
SECTION 18 WARRANT AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
SECTION 19 NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 20 MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 21 EXPIRATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
SUBSCRIPTION NOTICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
ASSIGNMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
</TABLE>
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<PAGE> 5
COMMON STOCK PURCHASE WARRANT
No. 1992 W - __ Dated as of ____, 199_
Superior National Insurance Group, Inc., a California
corporation (the "Company"), for value received, hereby certifies that ________
is entitled to purchase from the Company ________ duly authorized, validly
issued, fully paid and non-assessable shares of Common Stock (as defined in
Section 15 herein) at the purchase price per share of $4.00, at any time or
from time to time prior to 5:00 p.m. Pacific time, on April 1, 2002 (or such
later date as may be determined pursuant to Section 21), all subject to the
terms, conditions and adjustments set forth below in this Warrant, and is
entitled to exercise the other rights, powers and privileges hereinafter
specified.
This Warrant constitutes (or has been issued in exchange or
substitution for, or upon registration of transfer of) one of the Common Stock
Purchase Warrants originally issued and delivered to the several purchasers
named in Schedule I to the Note Purchase Agreement (the "Note Purchase
Agreement"), dated as of March 31, 1992, between the Company and such several
purchasers, pursuant to which the Company issued and sold $10,340,000 in
aggregate principal amount of the Company's 14.5% Senior Subordinated Notes
Series A due April 1, 2002, $630,000 in aggregate principal amount of the
Company's 14.5% Senior Subordinated Notes Series B due April 1, 1992 and
$30,000 in aggregate principal amount of the Company's 14.5% Senior
Subordinated Voting Notes due April 1, 1992 (all such notes being hereinafter
collectively referred to as the "Notes", such term also to include all notes
issued in exchange or substitution therefor or upon registration of transfer
thereof). The Note Purchase Agreement is available for inspection by the
holder of this Warrant during normal business hours at the office or agency
maintained by the Company pursuant to Section 13 and at the principal office of
the Company referred to in, or notice of which is given by the Company pursuant
to, Section 19, and, upon request therefor, the Company will furnish to the
holder of this Warrant a true and complete copy of the Note Purchase Agreement
as in effect at the time. All the Warrants, as originally so issued, evidenced
the right to purchase an aggregate of 1,616,886 shares of Common Stock, subject
to adjustment as provided herein. The term "Warrants", when used herein, means
this Warrant and all Warrants issued in exchange or substitution therefor or
upon registration of transfer hereof. The Warrants, although issued in
connection with the issuance and sale of the Notes and although containing
provisions that refer to the Notes and the Note Purchase Agreement, are
detachable warrants and, accordingly, are exercisable and transferable (subject
to compliance with Section 8, if applicable) without presentation of any of the
Notes.
Certain terms used in this Warrant are defined in Section 15.
<PAGE> 6
SECTION 1. EXERCISE OF WARRANT
Section 1.1 Manner of Exercise. This Warrant may be
exercised by the holder hereof, in whole or in part, during normal business
hours on any Business Day by surrender of this Warrant, with the form of
subscription at the end hereof (or a reasonable facsimile thereof) duly
executed by such holder, to the Company at the office or agency maintained by
the Company pursuant to Section 13, accompanied by payment, in cash or by
certified or official bank check payable to the order of the Company (subject
to the provisions of Section 1.5 with respect to payment by the application of
Notes), in the amount obtained by multiplying (a) the number of shares of
Common Stock (without giving effect to any adjustment therein) designated in
such form of subscription (or such reasonable facsimile) by (b) $4.00, and such
holder shall thereupon be entitled to receive the number of duly authorized,
validly issued, fully paid and non-assessable shares of Common Stock (or Other
Securities) determined as provided in Section 2.
Section 1.2 When Exercise Effective. Each exercise of this
Warrant shall be deemed to have been effected immediately prior to the close of
business on the Business Day on which this Warrant shall have been surrendered
as provided in Section 1.1, and immediately prior to the close of business on
such Business Day the Person or Persons in whose name or names any certificate
or certificates for shares of Common Stock (or Other Securities) shall be
issuable upon such exercise as provided in Section 1.3 shall be deemed to have
become the holder or holders of record thereof.
Section 1.3 Delivery of Stock Certificates, etc. As soon as
practicable after the exercise of this Warrant in whole or in part, and in any
event within five Business Days thereafter, the Company at its expense
(including the payment by it of any applicable issue taxes) will cause to be
issued in the name of and delivered to the holder hereof or, subject to Section
8, as such holder (upon payment by such holder of any applicable transfer
taxes) may direct,
(a) a certificate or certificates for the number of fully
paid and non-assessable shares of Common Stock (or Other Securities)
to which such holder shall be entitled upon such exercise plus, in
lieu of any fractional share to which such holder would otherwise be
entitled, cash in an amount equal to the same fraction (calculated to
the nearest 1/100th of a share) of the Market Price of one full share
on the Business Day next preceding the date of such exercise, and
(b) in case such exercise is in part only, a new Warrant
or Warrants of like tenor, calling in the aggregate on the face or
faces thereof for the number of shares of Common Stock equal (without
giving effect to any adjustment therein) to the number of such shares
called for on the face of this Warrant minus the number of such shares
designated by the holder upon such exercise as provided in Section
1.1.
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<PAGE> 7
Section 1.4 Company to Reaffirm Obligations. The Company
will, at the time of each exercise of this Warrant, acknowledge in writing its
continuing obligation to afford to such holder all rights (including, without
limitation, any rights to registration, pursuant to Section 8, of the shares of
Common Stock or Other Securities issued upon such exercise) to which such
holder shall continue to be entitled after such exercise in accordance with the
terms of this Warrant; provided, however, that if the Company shall fail to
make any such written acknowledgment, such failure shall not affect the
continuing obligation of the Company to afford such rights to such holder.
Section 1.5 Payment by Application of Notes. If, upon the
exercise of this Warrant in whole or in part by the holder hereof, such holder
shall be the registered holder of any Notes, such holder may, at its option,
instruct the Company, by written notice given at the time of such exercise, to
apply all or any specified part of the unpaid principal amount of any one or
more of such Notes against the payment required upon such exercise pursuant to
Section 1.1, in which case the Company will accept the unpaid principal amount
specified in such notice in lieu of a like amount of such payment. In case
less than the entire unpaid principal amount of any Note shall be so specified,
the unpaid principal amount so specified shall be credited, as of the date of
such exercise, against the required payments and prepayments of principal then
remaining unpaid on such Note in the inverse order of the dates on which such
payments or prepayments are required to be made. Within five days after
receipt of any such notice, the Company will pay to the registered holder of
the Note or Notes giving such notice all unpaid interest on the principal
amount so specified in such notice, accrued to the date of the exercise of this
Warrant. The holder of any such Note or Notes shall surrender such Note or
Notes in connection with the exercise of this Warrant, and any part of the
unpaid principal amount thereof not applied to such payment shall be treated as
if presented for exchange for a single Note equal in denomination to such
unpaid principal amount pursuant to the Note Purchase Agreement.
Section 1.6 Compliance with Law, etc. Each exercise of this
Warrant shall at all times be subject to the provisions of any applicable law
relating to the rights of non-citizens of the United States of America or other
classes of Persons to own shares of the Company.
SECTION 2. ADJUSTMENT OF COMMON STOCK ISSUABLE UPON EXERCISE OF WARRANT
Section 2.1 General; Warrant Price. The number of shares of
Common Stock which the holder of this Warrant shall be entitled to receive upon
the exercise hereof shall be determined by multiplying the number of shares of
Common Stock which would otherwise (but for the provisions of this Section 2)
be issuable upon such exercise, as designated by the holder hereof pursuant to
Section 1.1, by the fraction of which (a) the numerator is $4.00 and (b) the
denominator is the Warrant Price (as defined below in this Section 2.1) in
effect on the date of such exercise. The "Warrant Price" per share of Common
Stock shall initially be $4.00, shall be adjusted and readjusted from time to
time as provided in this Section 2 and, as so adjusted or
3
<PAGE> 8
readjusted, shall remain in effect until a further adjustment or readjustment
thereof is required by this Section 2.
Section 2.2 Adjustment of Warrant Price.
Section 2.2.1 In case the Company, at any time or from time
to time after the Closing Date, shall issue or sell Additional Shares of Common
Stock (including Additional Shares of Common Stock deemed to be issued pursuant
to Section Section 2.3 or 2.4) without consideration or for a consideration
per share less than the greater of the Current Market Price and the Warrant
Price in effect immediately prior to such issue or sale, then, and in each such
case, such Warrant Price shall be reduced, concurrently with such issue or
sale, to a price (calculated to the nearest cent) determined by multiplying
such Warrant Price by a fraction:
(a) the numerator of which shall be the number of shares
of Common Stock outstanding, which number shall for purposes of this
Section 2.2.1(a) include the Common Stock Deemed to be Outstanding,
immediately prior to such issue or sale, plus the number of shares of
Common Stock which the aggregate consideration received by the Company
for the total number of such Additional Shares of Common Stock so
issued or sold would purchase at the greater of such Current Market
Price and such Warrant Price; and
(b) the denominator of which shall be the number of
shares of Common Stock outstanding, which number shall for purposes of
this Section 2.2.1(b) include the Common Stock Deemed to be
Outstanding, immediately after such issue or sale;
provided, however, that for the purposes of this Section 2.2.1, treasury
shares shall not be deemed to be outstanding.
Section 2.2.2 In case the Company, at any time or from time
to time after the Closing Date, shall declare, order, pay or make a dividend or
other distribution (including, without limitation, any distribution of other or
additional stock or other securities or property or Options by way of dividend
or spin-off, reclassification, recapitalization, merger or consolidation in
which the Company is the continuing or resulting corporation, or similar
corporate rearrangement) on the Common Stock, other than (a) a dividend payable
in Additional Shares of Common Stock and (b) a regular periodic cash dividend
declared out of earned surplus of the Company as at December 31, 1991, as
increased by any credits (other than credits resulting from a revaluation of
property) and decreased by any debits made thereto after such date (but, in the
case of such a cash dividend, only in an amount that does not exceed 110% of
the immediately preceding cash dividend, if any), then, and in each such case,
the Warrant Price in effect immediately prior to the close of business on the
record date fixed for the determination of the Persons entitled to receive such
dividend or distribution shall be adjusted, effective as of the close of
business on such record date, to a price (calculated to the nearest cent)
determined by multiplying such Warrant Price by a fraction:
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<PAGE> 9
(i) the numerator of which shall be the
Current Market Price in effect on such record date
less the amount of such dividend or distribution (as
determined in good faith by the Board of Directors of
the Company) applicable to one share of Common Stock;
and
(ii) the denominator of which shall be
such Current Market Price.
Section 2.3 Options and Convertible Securities. In case the
Company, at any time or from time to time after the Closing Date, shall issue,
sell, grant or assume, or shall fix a record date for the determination of
holders of any class of securities entitled to receive, any Options (other than
those provided for and reserved pursuant to the Stock Option Plan as of the
date of the original issuance of this Warrant) or Convertible Securities, then,
and in each such case, the maximum number of shares (as set forth in the
instrument relating thereto without regard to any provisions contained therein
for a subsequent adjustment of such number) of Common Stock issuable upon the
exercise of such Options or, in the case of Convertible Securities and Options
therefor, the conversion or exchange of such Convertible Securities, shall be
deemed to be Additional Shares of Common Stock issued as of the time of such
issue, sale, grant or assumption or, in case such a record date shall have been
fixed, as of the close of business on such record date; provided, however, that
Additional Shares of Common Stock shall not be deemed to have been issued
unless the consideration per share (determined in accordance with Section 2.5)
of such shares would be less than the greater of the Current Market Price and
the Warrant Price in effect on the date of and immediately prior to such issue,
sale, grant or assumption or immediately prior to the close of business on such
record date, as the case may be, and provided, further, that in any such case
in which Additional Shares of Common Stock are deemed to be issued:
(a) no further adjustment of the Warrant Price shall be
made upon the subsequent issue or sale of Convertible Securities or
shares of Common Stock upon the exercise of such Options or the
conversion or exchange of such Convertible Securities;
(b) if such Options or Convertible Securities by their
terms provide, with the passage of time or otherwise, for any increase
or decrease in the consideration payable to the Company, or any
increase or decrease in the number of shares of Common Stock issuable,
upon the exercise, conversion or exchange thereof (by change of rate
or otherwise), the Warrant Price computed upon the original issue,
sale, grant or assumption thereof (or upon the occurrence of a record
date with respect thereto), and any subsequent adjustments based
thereon, shall, upon any such increase or decrease becoming effective,
be recomputed to reflect such increase or decrease insofar as it
affects such Options, or the rights of conversion or exchange under
such Convertible Securities, which are outstanding at such time;
(c) upon the expiration (or purchase by the Company and
cancellation) of any such Options or any rights of conversion or
exchange under such Convertible Securities which shall not have been
exercised, the Warrant Price computed upon the
5
<PAGE> 10
original issue, sale, grant or assumption thereof (or upon the
occurrence of a record date with respect thereto), and any subsequent
adjustments based thereon, shall, upon such expiration (or such
cancellation, as the case may be), be recomputed as if:
(i) in the case of Convertible Securities or Options
for Common Stock, the only Additional Shares of Common Stock
issued or sold were the shares of Common Stock, if any,
actually issued or sold upon the exercise of such Options or
the conversion or exchange of such Convertible Securities and
the consideration received therefor was the consideration
actually received by the Company for the issue, sale, grant or
assumption of all such Options, whether or not exercised, plus
the consideration actually received by the Company upon such
exercise, or for the issue or sale of all such Convertible
Securities which were actually converted or exchanged, plus
the additional consideration, if any, actually received by the
Company upon such conversion or exchange; and
(ii) in the case of Options for Convertible
Securities, only the Convertible Securities, if any, actually
issued or sold upon the exercise thereof were issued at the
time of the issue, sale, grant or assumption of such Options,
and the consideration received by the Company for the
Additional Shares of Common Stock deemed to have then been
issued was the consideration actually received by the Company
for the issue, sale, grant or assumption of all such Options,
whether or not exercised, plus the consideration deemed to
have been received by the Company (in accordance with Section
2.5) upon the issue or sale of the Convertible Securities in
respect of the issue, sale, grant or assumption of such
Options or Convertible Securities;
(d) no readjustment pursuant to clause (b) or (c) above
shall have the effect of increasing the Warrant Price by an amount in
excess of the amount of the adjustment thereof originally made in
respect of the issue, sale, grant or assumption of such Options or
Convertible Securities; and
(e) in the case of any Options which expire by their
terms not more than 30 days after the date of issue, sale, grant or
assumption thereof, no adjustment of the Warrant Price shall be made
until the expiration or exercise of all such Options, whereupon such
adjustment shall be made in the manner provided in clause (c) above.
Section 2.4 Stock Dividends, Stock Splits, etc. In case the
Company, at any time or from time to time after the Closing Date, shall declare
or pay any dividend on the Common Stock or any other security, payable in
Common Stock, or shall effect a subdivision of the outstanding shares of Common
Stock into a greater number of shares of Common Stock (by reclassification or
otherwise than by payment of a dividend in Common Stock), then, and in each
such case, the Warrant Price in effect immediately prior to the payment of such
dividend or effectiveness of such subdivision shall be proportionately reduced
(a) in the case of any such dividend, immediately after the close of business
on the record date for the determination of
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holders of any class of securities entitled to receive such dividend, or (b) in
the case of any such subdivision, at the close of business on the day
immediately prior to the day upon which such corporate action becomes
effective.
Section 2.5 Computation of Consideration. For the purposes
of this Section 2:
(a) the consideration for the issue or sale of any
Additional Shares of Common Stock shall, irrespective of the
accounting treatment of such consideration:
(i) insofar as it consists of cash, be computed at
the net amount of cash received by the Company, before
deducting any expenses paid or incurred by the Company and all
commissions and compensation paid and concessions and
discounts allowed to underwriters, dealers or others
performing similar services in connection with such issue or
sale;
(ii) insofar as it consists of property (including
securities) other than cash, be computed at the fair value
thereof at the time of such issue or sale, as determined in
good faith by the Board of Directors of the Company; and
(iii) in case Additional Shares of Common Stock are
issued or sold together with other stock or securities or
other assets of the Company for a consideration which covers
both, be the applicable proportion of such consideration so
received, computed as provided in clauses (i) and (ii) above,
as determined in good faith by the Board of Directors of the
Company.
(b) Additional Shares of Common Stock deemed to have been
issued pursuant to Section 2.3, relating to Options and Convertible
Securities, shall be deemed to have been issued for a consideration
per share determined by dividing:
(i) the total amount, if any, received and
receivable by the Company as consideration for the issue,
sale, grant or assumption of the Options or Convertible
Securities in question, plus the minimum aggregate amount of
additional consideration (as set forth in the instruments
relating thereto, without regard to any provision contained
therein for a subsequent adjustment of such consideration)
payable to the Company upon the exercise of such Options or
the conversion or exchange of such Convertible Securities or,
in the case of Options for Convertible Securities, the
exercise of such Options for Convertible Securities and the
conversion or exchange of such Convertible Securities, in each
case computing such consideration as provided in the foregoing
subdivision (a),
by
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(ii) the maximum number of shares of Common
Stock (as set forth in the instruments relating
thereto, without regard to any provision contained
therein for a subsequent adjustment of such number)
issuable upon the exercise of such Options or the
conversion or exchange of such Convertible
Securities;
and
(c) Additional Shares of Common Stock deemed to have been
issued pursuant to Section 2.4, relating to stock dividends and stock
splits, shall be deemed to have been issued for no consideration.
Section 2.6 Dilution in Case of Other Securities. In case
any Other Securities shall be issued or sold or shall become subject to issue
or sale upon the conversion or exchange of any stock (or Other Securities) of
the Company (or any issuer of Other Securities or any other Person referred to
in Section 3) or to subscription, purchase or other acquisition pursuant to any
Options issued or granted by the Company (or any other issuer or Person), the
computations, adjustments and readjustments provided for in this Section 2 with
respect to the Warrant Price shall be made as nearly as possible in the manner
so provided and applied to determine the amount of Other Securities from time
to time receivable upon the exercise of the Warrants, so as to protect the
holders of the Warrants against the effect of the dilution of the purchase
rights granted by the Warrants.
Section 2.7 Adjustments for Combinations, etc. In case the
outstanding shares of Common Stock shall be combined or consolidated, by
reclassification or otherwise, into a lesser number of shares of Common Stock,
then, and in each such case, the Warrant Price in effect immediately prior to
such combination or consolidation shall, concurrently with the effectiveness of
such combination or consolidation, be proportionately increased.
Section 2.8 Other Adjustments. Adjustments shall also be
made at the times and under the circumstances specified in Sections 3 and 4.
Section 2.9 Determinations by Board of Directors. All
determinations by the Board of Directors of the Company under the provisions of
this Warrant shall be made in good faith with due regard to the interests of
the holder of this Warrant, and in accordance with good financial practice.
SECTION 3. ADJUSTMENTS FOR CONSOLIDATION, MERGER, SALE
OF ASSETS, REORGANIZATION, ETC.
In case the Company, after the Closing Date, (a) shall
consolidate with or merge into any other Person and shall not be the continuing
or surviving corporation in such consolidation or merger, (b) shall permit any
other Person to consolidate with or merge into the Company and the Company
shall be the continuing or surviving Person but, in connection
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with such consolidation or merger, the Common Stock or Other Securities shall
be changed into or exchanged for stock of other securities of any other Person
or cash or any other property, (c) shall transfer all or substantially all of
its properties or assets to any other Person, or (d) shall effect a capital
reorganization or reclassification of the Common Stock or Other Securities
(other than a capital reorganization or reclassification resulting in the issue
of Additional Shares of Common Stock for which adjustment in the Warrant Price
is provided in Section 2.2), then, and in each such case, proper provision
shall be made so that, upon the basis and the terms and in the manner provided
in this Section 3, the holder of this Warrant, upon the exercise hereof at any
time after the consummation of such consolidation, merger, transfer,
reorganization or reclassification, shall be entitled to receive (at the
aggregate Warrant Price in effect at the time of such consummation for all
Common Stock or Other Securities issuable upon such exercise immediately prior
to such consummation), in lieu of the Common Stock or Other Securities issuable
upon such exercise prior to such consummation, the stock and other securities,
cash and property to which such holder would have been entitled upon such
consummation if such holder had exercised this Warrant immediately prior
thereto, subject to adjustments (subsequent to such corporate action) as nearly
equivalent as possible to the adjustments provided for in Section 2 and this
Section 3; provided, however (and the Company covenants), that (1) the Company
shall not effect any of the transactions described in clauses (a) through (c)
above with any Person other than a corporation, and that (2) the Company shall
not effect any of the transactions described in clauses (a) through (d) above
unless, immediately after the date of the consummation of such transaction, the
Acquiring Corporation or its Parent is required to file, and in each of its
three fiscal years immediately preceding the date of the consummation of such
transaction has filed, reports with the Commission pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act. In the event that the Acquiring
Corporation fulfills the requirements contained in the immediately preceding
proviso, then, if the holder of this Warrant shall elect (or shall be deemed to
elect) to receive common stock pursuant to clause (b) above, such holder shall
be entitled to receive, upon the basis stated in such clause (b), the common
stock of the Acquiring Corporation and not of its Parent. Notwithstanding
anything contained herein to the contrary, the Company will not effect any of
the transactions described in clauses (a) through (d) above unless, prior to
the consummation thereof, each Person (other than the Company) which may be
required to deliver any stock, securities, cash or property upon the exercise
hereof shall assume, by written instrument delivered and satisfactory to the
holder of this Warrant, the obligation to deliver to such holder such shares of
stock, securities, cash or property as, in accordance with the foregoing
provisions, such holder may be entitled to purchase, and such Person shall have
furnished to the holder hereof an opinion of counsel for such Person, which
counsel shall be satisfactory to such holder, stating that this Warrant shall
thereafter continue in full force and effect and the terms hereof (including,
without limitation, all of the provisions of Section 2 and this Section 3)
shall be applicable to the stock, securities, cash or property which such
Person may be required to deliver upon the exercise hereof.
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SECTION 4. OTHER DILUTIVE EVENTS
In case any event shall occur as to which the provisions of
Section 2 or Section 3 are not strictly applicable but the failure to make any
adjustment would not fairly protect the purchase rights represented by this
Warrant in accordance with the essential intent and principles of such
Sections, then, in each such case, the Company shall appoint a firm of
independent certified public accountants of recognized national standing (which
may be the regular independent auditors of the Company), which shall give their
opinion upon the adjustment, if any, on a basis consistent with the essential
intent and principles established in Sections 2 and 3, necessary to preserve,
without dilution, the purchase rights represented by this Warrant. Upon
receipt of such opinion, the Company will promptly mail a copy thereof to the
holder of this Warrant and shall make the adjustments described therein.
SECTION 5. NO DILUTION OR IMPAIRMENT
The Company will not, by amendment of its charter or through
any consolidation, merger, reorganization, transfer of assets, dissolution,
issue or sale of securities or any other voluntary action, avoid or seek to
avoid the observance or performance of any of the terms of the Warrants, but
will at all times in good faith carry out all such terms and take all such
action as may be necessary or appropriate in order to protect the rights of the
holders of the Warrants against dilution or other impairment. Without limiting
the generality of the foregoing, the Company (a) will not permit the par value
of any shares of stock receivable upon the exercise of the Warrants to exceed
the amount payable therefor upon such exercise, (b) will take all such action
as may be necessary or appropriate in order that the Company may validly and
legally issue, free from preemptive rights, fully paid and non-assessable
shares of stock upon the exercise of all Warrants from time to time
outstanding, (c) will not take any action which results in any adjustment of
the Warrant Price if the total number of shares of Common Stock (or Other
Securities) issuable after the action upon the exercise of all of the Warrants
would exceed the total number of shares of Common Stock (or Other Securities)
then authorized by the Company's charter and available for the purpose of issue
upon such exercise, and (d) will not issue any capital stock of any class which
is preferred as to dividends or as to the distribution of assets upon voluntary
or involuntary dissolution, liquidation or winding-up, unless the rights of the
holders thereof shall be limited to a fixed sum or percentage of par value in
respect of participation in dividends and in any such distribution of assets.
SECTION 6. ACCOUNTANTS' REPORT AS TO ADJUSTMENTS
In the case of any adjustment or readjustment in the shares of
Common Stock (or Other Securities) issuable upon the exercise of the Warrants,
the Company at its expense will promptly compute such adjustment or
readjustment in accordance with the terms of the Warrants and cause independent
public accountants of recognized national standing selected by the Company to
verify such computation and prepare a report setting forth such adjustment or
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readjustment and showing in detail the facts upon which such adjustment or
readjustment is based, including a statement of (a) the consideration received
or to be received by the Company for any Additional Shares of Common Stock
issued or sold or deemed to have been issued, (b) the number of shares of
Common Stock outstanding or deemed to be outstanding, and (c) the Warrant Price
in effect immediately prior to such issue or sale and as adjusted and
readjusted (if required by Section 2) on account thereof. The Company will
forthwith mail a copy of each such report to each holder of a Warrant, and
will, upon the written request at any time of any holder of a Warrant, furnish
to such holder a like report setting forth the Warrant Price at the time in
effect and showing how it was calculated. The Company will also keep copies of
all such reports at its principal office and at the office or agency maintained
by the Company pursuant to Section 13, and will cause the same to be available
for inspection at such offices during normal business hours by any holder of a
Warrant or any prospective purchaser of a Warrant designated by the holder
thereof.
SECTION 7. NOTICES OF CORPORATE ACTION
In the event of a proposal by the Company (or of which the
Company shall have knowledge) for:
(a) any taking by the Company of a record of the holders of
any class of securities for the purpose of determining the holders
thereof who are entitled to receive any dividend (other than a cash
dividend payable out of earned surplus at the rate most recently
established by the Board of Directors of the Company) or other
distribution, or any right to subscribe for, purchase or otherwise
acquire any shares of stock of any class or any other securities or
property, or to receive any other right, or
(b) any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the
Company or any consolidation, merger or exchange of shares involving
the Company and any other Person or any transfer of all or
substantially all the assets of the Company to any other Person, or
(c) any voluntary or involuntary dissolution, liquidation or
winding-up of the Company,
the Company will mail to each holder of a Warrant a notice specifying (i) the
date or expected date on which any such record is to be taken for the purpose
of such dividend, distribution or right, and stating the amount and character
of such dividend, distribution or right, and (ii) the date or expected date on
which any such reorganization, reclassification, recapitalization,
consolidation, merger, exchange of shares, transfer, dissolution, liquidation
or winding-up is to take place and the time, if any such time is to be fixed,
as of which the holders of record of Common Stock (or Other Securities) shall
be entitled to exchange their shares of Common Stock (or Other Securities) for
securities or other property deliverable upon such reorganization,
reclassification, recapitalization, consolidation, merger, exchange of shares,
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transfer, dissolution, liquidation or winding-up. Such notice shall be mailed
at least 30 days prior to the date therein specified.
SECTION 8. RESTRICTIONS ON TRANSFER; REGISTRATION
Section 8.1 Restrictive Legends. Except as otherwise
permitted by this Section 8, the Warrant originally issued pursuant to the Note
Purchase Agreement, each Warrant issued in exchange or substitution for any
Warrant pursuant to Section 14, and each Warrant issued upon the registration
of transfer of any Warrant, shall be stamped or otherwise imprinted with a
legend in substantially the following form:
"This Warrant and any securities acquired upon the
exercise of this Warrant have not been registered under the
Securities Act of 1933 and may not be transferred in the
absence of such registration or an exemption therefrom under
such Act, except under circumstances where neither such
registration nor such an exemption is required by law. This
Warrant and such securities may be transferred only upon the
fulfillment of the conditions specified in this Warrant."
Except as otherwise permitted by this Section 8, each certificate representing
shares of Common Stock (or Other Securities) issued upon the exercise of any
Warrant, and each certificate issued upon the registration of transfer of any
shares of such Common Stock (or Other Securities), shall be stamped or
otherwise imprinted with a legend in substantially the following form:
"The securities represented by this certificate have
not been registered under the Securities Act of 1933 and may
not be transferred in the absence of such registration or an
exemption therefrom under such Act, except under circumstances
where neither such registration nor such an exemption is
required by law. Such securities may be transferred only upon
the fulfillment of the conditions specified in certain Common
Stock Purchase Warrants issued pursuant to the Note Purchase
Agreement, dated as of March 31, 1992, between Superior
National Insurance Group, Inc. (the "Company"), and the
several purchasers named on Schedule I thereto. A complete
and correct copy of the form of such Warrant is available for
inspection at the principal office of the Company or at the
office or agency maintained by the Company as provided in such
Warrants and will be furnished to the holder of such
securities upon written request and without charge."
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Section 8.2 Notice of Proposed Transfer; Opinions of
Counsel. Prior to any transfer of any Restricted Securities, the holder
thereof will give written notice to the Company of such holder's intention to
effect such transfer and to comply in all other respects with this Section
8.2. Each such notice (a) shall describe the manner and circumstances of the
proposed transfer in sufficient detail to enable counsel to render the opinions
referred to below, and (b) shall designate counsel for the holder giving such
notice (who may be in-house counsel for such holder). The holder giving such
notice will submit a copy thereof to the counsel designated in such notice and
the Company will promptly submit a copy thereof to its counsel. The following
provisions shall then apply:
(i) If in the opinion of each such counsel the
proposed transfer may be effected without registration of such
Restricted Securities under the Securities Act, the Company
will promptly notify the holder thereof and such holder shall
thereupon be entitled to transfer such Restricted Securities
in accordance with the terms of the notice delivered by such
holder to the Company. Each Warrant or certificate, if any,
issued upon or in connection with such transfer shall bear the
applicable restrictive legend set forth in Section 8.1,
unless in the opinion of each such counsel such legend is no
longer required to ensure compliance with the Securities Act.
If for any reason counsel for the Company (after having been
furnished with the information required to be furnished by
clause (a) of this Section 8.2) shall fail to deliver an
opinion to the Company, or the Company shall fail to notify
such holder thereof as aforesaid, within 15 days after counsel
for such holder shall have delivered its opinion to such
holder (with a copy to the Company), then for all purposes of
this Warrant the opinion of counsel for such holder shall be
sufficient to authorize the proposed transfer and the opinion
of counsel for the Company shall not be required in connection
with such proposed transfer; and
(ii) If in the opinion of either or both of such
counsel the proposed transfer may not be effected without
registration of such Restricted Securities under the
Securities Act, the Company will promptly so notify the holder
thereof and such holder shall not be entitled to transfer such
Restricted Securities until receipt of a further notice from
the Company under clause (i) above or until registration of
such Restricted Securities under the Securities Act has become
effective.
Notwithstanding the foregoing provisions of this Section 8.2, International
Insurance Investors, L.P., a Bermuda limited partnership ("III") shall be
permitted at any time or from time to time to transfer any Restricted
Securities to a limited number of institutional investors; provided, however,
that (w) each such investor represents in writing that it is acquiring such
Restricted Securities for investment and not with a view to the distribution
thereof (subject, however, to any requirement of law to the effect that the
disposition thereof shall at all times be within the control of such
transferee), (x) each such investor agrees in writing to be bound by all the
restrictions on transfer of such Restricted Securities contained in this
Section 8.2, (y) III delivers to
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the Company an opinion of LeBoeuf, Lamb, Leiby & MacRae or in-house counsel for
III, or other counsel satisfactory to the Company, stating that such transfer
may be effected without registration under the Securities Act, and (z) III
delivers to the Company, at least 10 days prior to such transfer, the name of
the counsel who will deliver the opinion referred to in clause (y) above. The
Company will pay the reasonable fees and disbursements of counsel (other than
in-house counsel) for any holder of Restricted Securities and of counsel for
the Company in connection with all opinions rendered by them pursuant to this
Section 8.2 and pursuant to Section 8.7.
Section 8.3 Registration on Request. Any holder or holders
of Restricted Securities shall be entitled to request in writing that the
Company use its best efforts to effect the registration under the Securities
Act of all or part of such holder's or holders' Restricted Securities in
accordance with the following provisions of this Section 8.3. Any such
request for registration shall specify the intended method of disposition of
the Restricted Securities by such holder or holders and, upon receiving a
request for registration, the Company will promptly give written notice of such
requested registration to all holders of Restricted Securities, and thereupon
will, as provided in Section 8.5, use its best efforts to effect the
registration under the Securities Act of:
(a) the Restricted Securities which the Company has been
so requested to register, and
(b) all other Restricted Securities which the Company has
been requested in writing to register by the holders of Restricted
Securities (which requests are given to the Company within 30 days
after the giving of such written notice by the Company);
provided, however, that the Company shall not be obligated to file a
registration statement for Restricted Securities requested to be registered
under this Section 8.3 if (i) less than $7.5 million of Restricted Securities
or 90% of the Restricted Securities, whichever is less, are to be registered in
such registration, (ii) the Company has any other registration statement on
file but not yet declared effective, (iii) the Company has filed any other
registration statement that has an effective date within a period of 180 days
prior to the filing of the requested registration, or (iv) the Company has paid
the Registration Expenses for two registrations under this Section 8.3.
The Company will pay all Registration Expenses in connection
with two registrations under this Section 8.3 which are either effected under
the Securities Act or withdrawn prior to the effective date thereof; provided,
however, that any such withdrawal as the result of the actions of any Person or
Persons other than the holders so requesting registration under this Section
8.3, or based upon material adverse information relating to the Company that is
different from the information known by or available (upon request from the
Company or otherwise) to the requesting holders at the time of their request
for registration under this Section 8.3, shall not diminish the number of
registrations in connection with which the Company agrees to pay Registration
Expenses; provided, further, that if such withdrawal is the result of the
actions of the requesting holders, then such holders may in their sole and
unlimited discretion elect to bear the Registration Expenses of such
registration proceeding, in which case such registration
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proceeding shall not be counted as a requested registration pursuant to this
Section 8.3. In the event that the requesting holders elect to bear the
Registration Expenses (and underwriting discounts and commissions and transfer
taxes, if any) in connection with any registration requested under this Section
8.3, such Registration Expenses shall be apportioned among the holders whose
Restricted Securities are then being registered, on the basis of the respective
amounts (by number of shares or other relevant units) of Restricted Securities
then being registered by them or on their behalf.
Section 8.4 Incidental Registration. (a) In case the
Company, at any time or from time to time, proposes to register any of its
securities under the Securities Act (other than a registration of securities
solely in connection with any plan for the acquisition of securities by
employees of the Company or any dividend reinvestment plan, and other than a
registration of securities, the registration statement pertaining to which does
not permit secondary sales or include substantially the same information as
would be required to be included in a registration statement covering the sale
of Restricted Securities), it will at each such time give written notice to all
holders of Restricted Securities of its intention to do so and, upon the
written request of holders of at least 33 1/3% (by number of shares or other
relevant units) of all Restricted Securities outstanding at the end of the
period within which such requests must be made, made within 30 days after the
receipt of any such notice (which request shall specify the Restricted
Securities intended to be disposed of by such holder and the intended method of
disposition thereof; provided, however, that if the registration of which the
Company gives notice is for a registered public offering involving an
underwriting, or will be distributed with the assistance of a selling agent,
the right of any such holder to request registration pursuant to this Section
8.4 shall be conditioned upon such holder's participation in such underwriting
or distribution and the inclusion of such holder's Restricted Securities in the
underwriting or distribution to the extent provided herein), the Company will,
as provided in Section 8.5, use its best efforts to effect the registration
under the Securities Act of all Restricted Securities which the Company has
been so requested to register by the holders of Restricted Securities, to the
extent requisite to permit the disposition (in accordance with the intended
methods thereof as aforesaid) of the Restricted Securities so to be registered;
provided, however, that if, at any time after giving written notice of its
intention to register any securities and prior to the effective date of the
registration statement filed in connection with such registration, the Company
shall determine for any reason not to register such securities, the Company
may, at its election, give written notice of such determination to each holder
of Restricted Securities and, thereupon, shall be relieved from its obligation
to register any Restricted Securities in connection with such registration (but
not from its obligation to pay the Registration Expenses in connection
therewith), without prejudice, however, to the rights of any holder of
Restricted Securities to request that such registration be effected as a
registration under Section 8.3.
(b) The holder of the Warrant acknowledges that the Company
has granted to other holders of Options and Convertible Securities the right to
request registration of securities at such time as the Company proposes to
register any of its securities under the Securities Act. Notwithstanding any
other provision of this Section 8.4, if such proposed registration is for a
registered public offering involving an underwriting, in the event the
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representative of the underwriters advises the Company in writing that
marketing factors require a limitation on the number of shares to be
underwritten, the representative may (subject to the limitations set forth
below) exclude all Restricted Securities from, or limit the number of
Restricted Securities to be included in, the registration and underwriting.
The Company shall so advise all holders of securities requesting registration,
and the number of shares of securities that are entitled to be included in the
registration and underwriting shall be allocated first to the Company for
securities being sold for its own account and thereafter shall be allocated
among the holders of the Warrants and other selling holders entitled to request
and requesting inclusion of securities pro rata on the basis of the number of
shares of Common Stock that would be held by such holders and other selling
holders, assuming exercise, exchange or conversion; provided, however, so that
such allocation shall not operate to reduce the aggregate number of Restricted
Securities to be included in such registration, if any holder of Warrants or
other selling holder does not request inclusion of the maximum number of shares
of Common Stock allocated to him pursuant to the above-described procedure, the
remaining portion of his allocation shall be reallocated among those requesting
holders of Warrants and other selling holders whose allocations did not satisfy
their requests pro rata on the basis of the number of shares of Common Stock
which would be held by such holders and other selling holders, assuming
conversion, and this procedure shall be repeated until all of the shares of
Common Stock which may be included in the registration on behalf of the holders
of Warrants and other selling holders have been so allocated. The Company
shall not limit the number of shares of Common Stock to be included in a
registration pursuant to this Agreement in order to include shares held by
stockholders with no registration rights or to include any shares of stock
issued to employees, officers, directors or consultants pursuant to the Stock
Option Plan, or in order to include in such registration securities registered
for the Company's own account.
If any securities are withdrawn from the registration or if
the number of shares of Common Stock to be included in such registration was
previously reduced as a result of marketing factors, the Company shall then
offer to all Persons who have retained the right to include securities in the
registration the right to include additional securities in the registration in
an aggregate amount equal to the number of securities so withdrawn, with such
securities to be allocated among the Persons requesting additional inclusion
pro rata in accordance with the terms of this Section 8.4(b).
(c) The Company will pay all Registration Expenses in
connection with each registration of Restricted Securities under this Section
8.4. No registration effected under this Section 8.4 shall relieve the
Company from its obligation to effect registrations upon request under Section
8.3.
Section 8.5 Registration Procedures. If and whenever the
Company is requested to effect the registration of any Restricted Securities
under the Securities Act as provided in Section Section 8.3 and 8.4, the
Company will promptly use its best efforts to:
(a) prepare and (in any event within 90 days after the
end of the period within which requests for registration may be given
to the Company) file with the
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Commission a registration statement with respect to such securities
and use its best efforts to cause such registration statement to
become effective;
(b) prepare and file with the Commission such amendments
and supplements to such registration statement and the prospectus used
in connection therewith as may be necessary to keep such registration
statement effective and to comply with the provisions of the
Securities Act with respect to the disposition of all securities
covered by such registration statement until such time as all of such
securities have been disposed of in accordance with the intended
methods of disposition by the seller or sellers thereof set forth in
such registration statement, but in no event for a period of more than
six months (or, with respect to any registration statement covering
Restricted Securities the distribution of which has been deferred
pursuant to Section 8.4(c), nine months) after such registration
statement becomes effective;
(c) furnish to each seller of such securities such number
of conformed copies of such registration statement and of each such
amendment and supplement thereto (in each case including all exhibits,
except that the Company shall not be obligated to furnish any seller
of securities with more than two copies of such exhibits), such number
of copies of the prospectus contained in such registration statement
(including each preliminary prospectus and any summary prospectus), in
conformity with the requirements of the Securities Act, and such other
documents, as such seller may reasonably request in order to
facilitate the disposition of the securities owned by such seller;
(d) in the case of any registration pursuant to Section
8.3, use its best efforts to register or qualify such securities
covered by such registration statement under such other securities or
blue sky laws of such jurisdictions as each seller shall request, and
do any and all other acts and things which may be necessary or
advisable to enable such seller to consummate the disposition in such
jurisdictions of the securities owned by such seller, except that the
Company shall not for any such purpose be required to qualify
generally to do business as a foreign corporation in any jurisdiction
wherein it is not so qualified, or to subject itself to taxation in
any such jurisdiction, or to consent to general service of process in
any such jurisdiction;
(e) notify each seller of any such securities covered by
such registration statement, at any time when a prospectus relating
thereto is required to be delivered under the Securities Act, of the
happening of any event as a result of which the prospectus included in
such registration statement, as then in effect, includes an untrue
statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make statements therein
not misleading in the light of the circumstances then existing, and
prepare and furnish to such seller a reasonable number of copies of a
supplement to or an amendment of such prospectus as may be necessary
so that, as thereafter delivered to the purchasers of such securities,
such prospectus shall not include an untrue statement of a material
fact or omit to state a material fact
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required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then
existing;
(f) advise each seller as to the time when such
registration statement becomes effective and as to the issuance by the
Commission of any stop order suspending the effectiveness of such
registration statement or the institution of any proceedings for that
purpose, and use its best efforts to prevent the issuance of any such
stop order and to obtain as soon as possible the lifting thereof, if
issued;
(g) otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make available
to its security holders, as soon as reasonably practicable, an
earnings statement covering the period of at least twelve months, but
not more than eighteen months, beginning with the first month after
the effective date of the registration statement, which earnings
statement shall satisfy the provisions of Section 11(a) of the
Securities Act;
(h) use its best efforts to list such securities on any
securities exchange (or the NASDAQ - National Market System) on which
shares of the Common Stock (or Other Securities) are then listed, if
such securities are not already so listed pursuant to Section 12 and
if such listing is then permitted under the rules of such exchange;
and
(i) furnish to each seller a signed counterpart,
addressed to the sellers, of
(x) an opinion of counsel for the Company,
dated the effective date of such registration
statement, and
(y) a "comfort letter" signed by the
independent public accountants who have certified the
Company's financial statements included in such
registration statement,
covering substantially the same matters with respect to such registration
statement (and the prospectus included therein) and, in the case of such
accountants' letter, with respect to events subsequent to the date of such
financial statements, as are customarily covered in opinions of issuer's
counsel and in accountants' letters delivered to the underwriters in
underwritten public offerings of securities; provided, however, that the
Company shall not be obligated to furnish such accountants' letter except in
connection with an underwritten offering.
The Company may require each seller of any securities as to which any
registration is being effected to furnish the Company such information
regarding such seller and the distribution of such securities as the Company
may from time to time request in writing and as shall be required by law in
connection therewith.
Section 8.6 Preparation; Reasonable Investigation. In
connection with the preparation and filing of each registration statement
registering Restricted Securities under the
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Securities Act, the Company will give the holders of such Restricted Securities
so registered and their underwriters, if any, and their respective counsel and
financial advisors, the opportunity to participate in the preparation of such
registration statement, each prospectus included therein or filed with the
Commission, and each amendment thereof or supplement thereto, and will give
each of them such access to its books and records and such opportunities to
discuss the business of the Company with its officers and the independent
public accountants who have certified its financial statements as shall be
necessary, in the opinion of such holders' and such underwriters' respective
counsel, to conduct a reasonable investigation within the meaning of the
Securities Act; provided, however, that other than III and any general partner
or limited partner thereof, the Company shall not be obligated to give such
opportunities and access to any holder of Restricted Securities not equal to or
exchangeable for or convertible into at least 1,000,000 shares of Common Stock.
Section 8.7 Termination of Restrictions. The restrictions
imposed by this Section 8 upon the transferability of Warrants and Common Stock
(or Other Securities) shall cease and terminate as to any particular Warrants
or Common Stock (or Other Securities) (a) when such securities shall have been
effectively registered under the Securities Act and disposed of in accordance
with the registration statement covering such securities, or (b) when, in the
opinions of both counsel for the holder thereof and counsel for the Company, or
when, on the basis of a pertinent Commission rule or regulation promulgated
under the Securities Act, or a pertinent "no-action" position taken by the
staff of the Commission, such restrictions are no longer required in order to
ensure compliance with the Securities Act. Whenever such restrictions shall
terminate as to any Warrants or Common Stock (or Other Securities), the holder
thereof shall be entitled to receive from the Company, without expense (other
than transfer taxes, if any), new securities of like tenor not bearing the
applicable legend set forth in Section 8.1.
Section 8.8 Indemnification.
Section 8.8.1 In the event of any registration of any
Restricted Securities under the Securities Act pursuant to Section Section 8.3
or 8.4, the Company will indemnify and hold harmless the seller of such
securities, its directors and officers, legal counsel, accountants and
financial advisors, and each other Person, if any, who controls such seller or
any such participating Person within the meaning of the Securities Act, against
any losses, claims, damages or liabilities, joint or several, to which such
seller or any such director or officer or participating Person or controlling
Person may become subject under the Securities Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions or proceedings in
respect thereof) arise out of or are based upon (a) any untrue statement or
alleged untrue statement of any material fact contained in any registration
statement under which such securities were registered under the Securities Act,
any preliminary prospectus, final prospectus or summary prospectus contained
therein, or any amendment or supplement thereto, or (b) any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; and the Company will
reimburse such seller and each such director, officer, participating Person and
controlling Person for any legal or any
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other expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, liability or action; provided, however, that
the Company shall not be liable in any such case to the extent that any such
loss, claim, damage or liability (or actions or proceedings in respect thereof)
arises out of or is based upon (a) any untrue statement or alleged untrue
statement of any material fact made in such registration statement, any such
preliminary prospectus, final prospectus, summary prospectus, amendment or
supplement or (b) any omission or alleged omission to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading, in reliance upon and in conformity with written information
furnished to the Company through an instrument duly executed by such seller
specifically stating that it is for use in the preparation thereof. Such
indemnity shall remain in full force and effect regardless of any investigation
made by or on behalf of such seller or any such director, officer,
participating Person or controlling Person and shall survive the transfer of
such securities by such seller.
Section 8.8.2 The Company may require, as a condition to
including any Restricted Securities in any registration statement filed
pursuant to Section 8.4, that the Company shall have received an undertaking
from the prospective seller of such securities to indemnify and hold harmless
the Company, its directors and officers, legal counsel, accountants and
financial advisors and each other Person, if any, who controls the Company or
any such participating Person within the meaning of the Securities Act, against
any losses, claims, damages or liabilities, joint or several, to which the
Company or any such director, officer, participating Person or controlling
Person may become subject under the Securities Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions or proceedings in
respect thereof) arise out of or are based upon any statement of a material
fact or omission to state a material fact in such registration statement, any
preliminary prospectus or final prospectus contained therein, or any amendment
or supplement thereto, if such statement or omission was made in reliance upon
and in conformity with written information furnished to the Company through an
instrument duly executed by such seller specifically stating that it is for use
in the preparation of such registration statement, preliminary prospectus,
final prospectus, summary prospectus, amendment or supplement. Such indemnity
shall remain in full force and effect regardless of any investigation made by
or on behalf of the Company or any such director, officer or controlling Person
and shall survive the transfer of such securities by such seller.
Section 8.8.3 Promptly after receipt by an indemnified party
of notice of the commencement of any action or proceeding involving a claim
referred to in the preceding paragraphs of this Section 8.8, such indemnified
party will, if a claim in respect thereof is to be made against an indemnifying
party, give written notice to the latter of the commencement of such action;
provided, however, that the failure of any indemnified party to give notice as
provided herein shall not relieve the indemnifying party of its obligations
under the preceding paragraphs of this Section 8.8, except to the extent that
the indemnifying party is actually prejudiced by such failure to give notice.
In case any such action is brought against an indemnified party, the
indemnifying party may (and, upon request by the indemnified party, will), at
its expense, participate in and assume the defense thereof, with counsel
reasonably satisfactory to such indemnified party, and, in the event of any
failure by the indemnifying party diligently to
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assume and conduct such defense, the indemnifying party will pay all costs and
expenses (including legal fees and expenses) incurred by such indemnified party
in connection with such claim or litigation. No indemnifying party, in the
defense of any such claim or litigation, shall, except with the consent of each
indemnified party, consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the giving
by the claimant or plaintiff to such indemnified party of a release from all
liability in respect of such claim or litigation.
Section 8.8.4 Indemnification similar to that specified in
the preceding paragraphs of this Section 8.8 (with appropriate modifications)
shall be given by the Company and each seller of Restricted Securities with
respect to any required registration or other qualification of such Restricted
Securities under any federal or state law or regulation of governmental
authority other than the Securities Act.
Section 8.8.5 In connection with any registration, the
Company will provide at its expense a binder or binders of insurance in form
satisfactory to the holders of Restricted Securities participating in such
registration, and, as soon as practicable thereafter, a policy or policies of
insurance, insuring each such holder, and each Person, if any, who controls
such holder within the meaning of the Securities Act, for the aggregate amount
of the public offering price received for the securities disposed of by such
holder (subject to such deductible as is customarily contained in underwriting
insurance policies at such time) against all losses, claims, damages and
liabilities which arise out of or are based upon any untrue statement, alleged
untrue statement, omission or alleged omission of the character described in
Section 8.8.1 in connection with such registration and disposition and which
are customarily covered under underwriting insurance policies; provided,
however, that the Company shall not be obligated to provide such insurance if
it determines in good faith that such insurance is not available on
commercially reasonable terms at the time of such registration, and the holders
of a majority of the Restricted Securities to be registered reasonably agree.
SECTION 9. PREEMPTIVE RIGHTS
Section 9.1 Preemptive Rights. When and in each case the
Company proposes to issue Common Stock, Options or Convertible Securities to
any Person, the Company shall deliver to the holder of this Warrant (or Other
Securities) written notice specifying the terms and conditions of such proposed
issue. The holder of this Warrant (or Other Securities) or any shares of
Common Stock which have been issued upon the exercise of this Warrant shall
have the preemptive right, exercisable by delivery of written notice to the
Company within 45 days of receipt of the Company's notice of such issue, to
subscribe to that portion of such issue which bears to the total of the Common
Stock, Options or Convertible Securities to be so issued the same proportion as
the total number of shares of Common Stock to which the holder of this Warrant
(or Other Securities) is entitled upon exercise, exchange or conversion
immediately prior to such issuance bears to the number of shares of Common
Stock outstanding, which number shall for purposes of this Section 9.1 include
the Common Stock Deemed
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to be Outstanding, immediately prior to such issuance. In the event the holder
of this Warrant duly elects to exercise such preemptive right, the Company
shall, on the date of such issue, cause to be delivered to such holder that
number of shares of Common Stock, Options or Convertible Securities to which
such holder is entitled, against payment of the purchase price therefor (net of
commissions or underwriting discounts) by certified or official bank check or
wire transfer of immediately available funds to the order of the Company.
Section 9.2 Termination of Preemptive Rights. The
preemptive rights to subscribe to issuances of the Company's securities set
forth in Section 9.1 shall cease and terminate on April 1, 2002 (or, if such
date shall not be a Business Day, on the next day that is a Business Day).
SECTION 10. AVAILABILITY OF INFORMATION
If and so long as the Company is a Public Company, the Company
will comply with the reporting requirements of Sections 13 and 15(d) of the
Securities Exchange Act and will comply with all other public information
reporting requirements of the Commission (including the requirements of Rule
144 promulgated by the Commission under the Securities Act) from time to time
in effect and relating to the availability of an exemption from the Securities
Act for the sale of any Restricted Securities or the sale of securities by
affiliates. The Company will also cooperate with each holder to complete and
file any information reporting forms presently or hereafter required by the
Commission as a condition to the availability of an exemption from the
Securities Act for the sale of any Restricted Securities or the sale of
securities by affiliates. The Company will deliver to each holder of a
Warrant, promptly upon their becoming available, copies of all financial
statements, reports, notices and proxy statements sent or made available
generally by the Company to its stockholders, and copies of all regular and
periodic reports and all registration statements and prospectuses filed by the
Company with any securities exchange or with the Commission.
SECTION 11. RESERVATION OF STOCK, ETC.
The Company will at all times reserve and keep available,
solely for issuance and delivery upon the exercise of the Warrants and free
from preemptive rights, all shares of Common Stock (or Other Securities) from
time to time issuable upon the exercise of the Warrants at the time
outstanding. All such shares (and any such Other Securities consisting of
shares of capital stock) shall be duly authorized and, when issued upon such
exercise, shall be validly issued, fully paid and nonassessable with no
liability on the part of the holders thereof. Any such Other Securities (other
than shares of capital stock) shall be duly authorized and, when issued upon
such exercise, shall be validly issued and legally binding obligations,
enforceable in accordance with their terms, with no liability on the part of
the holders thereof. Without limiting the generality of the foregoing, if any
shares of Common Stock (or Other Securities) required to be reserved for the
purposes of exercise of this Warrant require registration with or approval of
any governmental authority under any federal law (other than
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the Securities Act) or under any state law before such shares (or Other
Securities) may be issued upon exercise of this Warrant, the Company will at
its expense, as expeditiously as possible, cause such shares (or Other
Securities) to be duly registered or approved, as the case may be. The
Company, in addition, will review its stock ledgers, stock transfer books and
other corporate records periodically (and not less often than once in each
calendar quarter) in order to determine whether, as a result of any action
taken by the Company or any officer of the Company, any holder of a Warrant is
or shall have become, directly or indirectly, the beneficial owner of more than
such percentage of any class of its equity securities (as defined in the
Securities Exchange Act) as shall cause such holder to be required to make any
filings or declarations to the Company, the Commission or any national
securities exchange pursuant to the provisions of the Securities Exchange Act
or any comparable federal statute, and the Company will give prompt written
notice to such holder whenever it shall have determined, upon the basis of the
information disclosed by any such review, that such holder is or has become
such a holder because of such action, which notice shall also specify the
information upon which the Company bases such determination; provided, however,
that the Company need give such notice only once in each fiscal year to any
holder whose percentage of beneficial ownership of any class of the Company's
equity securities has not changed since the date of the giving of the
immediately preceding notice.
SECTION 12. LISTING ON SECURITIES EXCHANGES
The Company will list on each national securities exchange (or
the NASDAQ - National Market System) on which any Common Stock may at any time
be listed, subject to official notice of issuance upon the exercise of the
Warrants, and will maintain such listing of, all shares of Common Stock from
time to time issuable upon the exercise of the Warrants; and the Company will
so list on each national securities exchange (or the NASDAQ - National Market
System), and will maintain such listing of, any Other Securities if at the time
any securities of the same class shall be listed on such national securities
exchange (or the NASDAQ - National Market System) by the Company.
SECTION 13. MAINTENANCE OF OFFICE OR AGENCY
The Company will maintain an office or agency in Los Angeles
County, California where books for the registration and registration of
transfer of the Warrants will be kept and where the Warrants may be presented
for exercise, registration of transfer, exchange and replacement pursuant to
the provisions hereof. The principal office of the Company shall be such
office or agency unless the Company, by at least 10 days' prior written notice
to each holder of any Warrants, shall designate the principal office of a law
firm or a bank or trust company in such city or area as such office or agency,
in which case the principal office of such other law firm or bank or trust
company shall thereafter be such office or agency.
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SECTION 14. OWNERSHIP, REGISTRATION OF TRANSFER, EXCHANGE AND
SUBSTITUTION OF WARRANTS
Section 14.1 Ownership of Warrants. Until due presentment
for registration of transfer as permitted by Section 8, the Company may treat
the Person in whose name any Warrant is registered on the register kept at the
office or agency of the Company maintained pursuant to Section 13 as the owner
and holder thereof for all purposes, notwithstanding any notice to the
contrary. Subject to the foregoing provisions and to Section 8, a Warrant, if
properly assigned, may be exercised by the assignee without first having a new
Warrant issued.
Section 14.2 Transfer and Exchange of Warrants. Upon the
surrender of any Warrant, properly endorsed, for registration of transfer or
for exchange (for the purpose of combination of Warrants, split-up of Warrants
or any other purpose) at the office or agency maintained by the Company
pursuant to Section 13, the Company at its expense will (subject to compliance
with Section 8, if applicable) promptly execute and deliver to or upon the
order of the holder thereof a new Warrant or Warrants of like tenor, in the
name of such holder or as such holder (upon payment by such holder of any
applicable transfer taxes) may direct, calling in the aggregate on the face or
faces thereof for the number of shares of Common Stock called for on the face
or faces of the Warrant or Warrants so surrendered, and thereupon the old
Warrant shall be cancelled.
Section 14.3 Replacement of Warrants. Upon receipt of
evidence reasonably satisfactory to the Company of the loss, theft, destruction
or mutilation of any Warrant and, in the case of any such loss, theft or
destruction of any Warrant held by a Person other than III or any institutional
investor, upon delivery of indemnity reasonably satisfactory to the Company in
form and amount, or, in the case of any such mutilation, surrender of such
Warrant for cancellation at the office or agency maintained by the Company
pursuant to Section 13, the Company at its expense will promptly execute and
deliver, in lieu thereof, a new Warrant of like tenor.
Section 14.4 Expenses. The Company will pay all expenses,
taxes (other than transfer taxes) and other charges payable in connection with
the preparation, issuance and delivery from time to time of Warrants.
SECTION 15. DEFINITIONS
For all purposes of this Warrant, the following definitions
shall apply (the definitions to be applicable to both the singular and the
plural forms of the terms defined where either such form is used in this
Warrant):
"Acquiring Corporation" means the continuing or surviving
corporation in a consolidation or merger with the Company (if other than the
Company), the transferee of all or
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substantially all the properties or assets of the Company, the corporation
consolidating with or merging into the Company in a consolidation or merger in
connection with which the Common Stock (or Other Securities) is (or are)
changed into or exchanged for stock or other securities of any other Person or
cash or any other property, or, in the case of a capital reorganization or
reclassification, the Company.
"Acquisition Price", as applied to the Common Stock, means (a)
the Market Price on the date immediately preceding the date on which any
transaction to which Section 3 applies is consummated, or (b) if a purchase,
tender or exchange offer is made by the Acquiring Corporation (or by any of its
affiliates) to the holders of the Common Stock and such offer is accepted by
the holders of more than 50% of the outstanding shares of Common Stock, the
greater of (i) the price determined in accordance with the provisions of the
foregoing clause (a) of this sentence and (ii) the Market Price on the date
immediately preceding the acceptance of such offer by the holders of more than
50% of the outstanding shares of Common Stock.
"Additional Shares of Common Stock" means all shares
(including treasury shares) of Common Stock issued or sold (or, pursuant to
Section Section 2.3 or 2.4, deemed to be issued) by the Company after the
Closing Date, whether subsequently reacquired or retired by the Company, other
than shares issued upon the exercise of the Warrants.
"Business Day" means any day other than a Saturday, Sunday or
day upon which banking institutions are authorized or required by law or
executive order to be closed in Los Angeles, California or in the Borough of
Manhattan in The City of New York, New York.
"Closing Date" means the date of original issuance and
delivery of the Warrants and the Notes, being March 31, 1992.
"Commission" means the Securities and Exchange Commission or
any other federal agency at the time administering the Securities Act.
"Common Stock" means the Common Stock, no par value, of the
Company as constituted on the Closing Date, any stock into which such Common
Stock shall have been changed or any stock resulting from any reclassification
of such Common Stock, and all other stock of any class or classes (however
designated) of the Company, the holders of which have the right, without
limitation as to amount, either to all or to a share of the balance of current
dividends and liquidating dividends after the payment of dividends and
distributions on any shares entitled to preference.
"Common Stock Deemed to be Outstanding" means all shares of
Common Stock that (a) can be acquired upon the conversion of any then
outstanding shares of Convertible Securities, (b) can be purchased upon the
exercise of any then outstanding rights, Options or warrants including, but not
limited to, these Warrants and all Options issued or
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available for issuance under the Stock Option Plan or (c) can be acquired upon
the conversion of any Convertible Securities that can be purchased upon the
exercise of any then outstanding rights, Options or warrants.
"Company" has the meaning set forth in the opening paragraph
of this Warrant, and any corporation which shall succeed to or assume the
obligations of the Company hereunder in compliance with Section 3.
"Convertible Securities" means any evidences of indebtedness,
shares of stock (other than Common Stock) or other securities directly or
indirectly convertible into or exchangeable for Common Stock.
"Current Market Price" on any date of determination means the
average of the daily Market Price per share of Common Stock during the period
of the 20 consecutive days on which national securities exchanges were open for
trading, ending on the day immediately preceding such date of determination;
provided, however, that if and so long as there shall be no exchange or
over-the-counter market for the Common Stock, the Current Market Price shall be
deemed to be the greater of the Warrant Price on the date of determination or
such price, if any, at which the most recent issue and sale by the Company of
Common Stock in a good faith arm's-length transaction has been effected.
"Market Price" per share of Common Stock on any date of
determination means (a) the last sale price, regular way, on such date or, if
no such sale takes place on such date, the average of the closing bid and asked
prices on such date, in each case as officially reported on the principal
national securities exchange on which the Common Stock is then listed or
admitted to trading, or (b) if the Common Stock is not then listed or admitted
to trading on any national securities exchange, the average of the reported
closing bid and asked prices on such date as shown by the National Association
of Securities Dealers automated quotation system, or, if such notices are not
at the time so shown, as determined in good faith by any member of the National
Association of Securities Dealers, Inc. selected by the Company and
satisfactory to the holder of this Warrant; provided, however, that if and so
long as there shall be no exchange or over-the-counter market for the Common
Stock, the Market Price shall be deemed to be the greater of the Warrant Price
on the date of determination or such price, if any, at which the most recent
issue and sale by the Company of Common Stock in a good faith arm's-length
transaction has been effected.
"Market Value" per share of common stock of the Acquiring
Corporation or its Parent on any date of determination means (a) the average of
the last sale prices, regular way, during the period of the 20 consecutive days
on which national securities exchanges were open for trading, ending on the day
immediately preceding such date of determination, or, if there shall have been
no sale on any such day, the average of the closing bid and asked prices on
such date, in each case as officially reported on the principal national
securities exchange on which such common stock is at the time listed or
admitted to trading, or (b) if such common stock is not then listed or admitted
to trading on any national securities exchange, the average
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of the reported closing bid and asked prices on such 20 days as shown by the
National Association of Securities Dealers automated quotation system, or, if
such prices are not at the time so shown, as determined in good faith by any
member of the National Association of Securities Dealers, Inc. selected by the
Company and satisfactory to the holder of this Warrant.
"Notes" has the meaning set forth in the second opening
paragraph of this Warrant.
"Note Purchase Agreement" has the meaning set forth in the
second opening paragraph of this Warrant.
"Options" means rights, options or warrants to subscribe for,
purchase or otherwise acquire either Common Stock or Convertible Securities.
"Other Securities" means any stock (other than Common Stock)
and other securities of the Company or any other Person which the holders of
the Warrants at any time shall be entitled to receive, or shall have received,
upon the exercise of the Warrants, in lieu of or in addition to Common Stock,
or which at any time shall be issuable or shall have been issued in exchange
for or in replacement of Common Stock or Other Securities pursuant to Section 3
or otherwise.
"Parent" means as to any Acquiring Corporation, any
corporation which (a) controls the Acquiring Corporation directly or indirectly
through one or more intermediaries, (b) is (or, if not required to file such
reports, would, if so required, be) required to include the Acquiring
Corporation in the consolidated financial statements contained in such Parent's
Annual Report on Form 10-K under the Securities Exchange Act and (c) is not
itself included in the consolidated financial statements of any other Person
(other than its consolidated subsidiaries).
"Persons" means individuals, corporations, partnerships
(including "joint ventures"), trusts, estates, unincorporated organizations and
governments (including political subdivisions), authorities and agencies.
"Public Company" means the Company, if and so long as the
Common Stock is "held of record" (within the meaning of Rule 12g5-l, as
promulgated by the Commission under the Securities Exchange Act and in effect
on March 31, 1992) by 500 or more Persons, and a registration statement with
respect thereto is effective under Section 12 of the Securities Exchange Act.
"Registration Expenses" means all expenses incident to the
Company's performance of or compliance with Section 8, including, without
limitation, all registration, filing and listing fees, all fees and expenses of
complying with securities or blue sky laws, all printing expenses, the fees and
disbursements of counsel for the Company and of independent
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public accountants, the fees and disbursements of one firm of counsel (other
than in-house counsel) retained by the holders of Restricted Securities being
registered, and the expenses of any special audits required by or incident to
such performance and compliance (but excluding underwriting discounts and
commissions and transfer taxes, if any); provided, however, that in any case
where Registration Expenses are not to be borne by the Company, such expenses
shall not include general overhead expenses of the Company or other expenses
for the preparation of financial statements or other data normally prepared by
the Company in the ordinary course of its business.
"Restricted Securities" means (a) any Warrants bearing the
applicable legend set forth in Section 8.1, (b) any shares of Common Stock (or
Other Securities) which have been issued upon the exercise of Warrants and
which are evidenced by a certificate or certificates bearing the applicable
legend set forth in Section 8.1, and (c) unless the context otherwise
requires, any shares of Common Stock (or Other Securities) which are at the
time issuable upon the exercise of Warrants and which, when so issued, will be
evidenced by a certificate or certificates bearing the applicable legend set
forth in Section 8.1.
"Securities Act" means the Securities Act of 1933, or any
similar federal statute replacing said statute, and the rules and regulations
of the Commission thereunder, all as the same shall be in effect at the time.
"Securities Exchange Act" means the Securities Exchange Act of
1934, or any similar federal statute replacing said statute, and the rules any
regulations of the Commission thereunder, all as the same shall be in effect at
the time.
"Stock Option Plan" means the Company's 1986 Non-Statutory
Stock Option Plan and 1986 Non-Statutory Stock Purchase Plan.
"Transfer" means, with respect to any Restricted Securities,
any sale, assignment, pledge or other disposition thereof, or of any interest
therein, which could constitute a "sale" thereof, as that term is defined in
Section 2(3) of the Securities Act.
"Warrant Price" shall have the meaning specified in
Section 2.1.
"Warrants" has the meaning set forth in the second opening
paragraph of this Warrant.
SECTION 16. REMEDIES
The Company hereby expressly acknowledges and stipulates to
the understanding of the holder of this Warrant that the remedies at law of the
holder of this Warrant in the event of any default or threatened default by the
Company in the performance
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of or compliance with any of the terms of this Warrant are not and will not be
adequate, and agrees that such terms may be specifically enforced by a decree
for the specific performance of any agreement contained herein or by an
injunction against a violation of any of the terms hereof or otherwise.
SECTION 17. NO RIGHTS OR LIABILITIES AS STOCKHOLDER
Nothing contained in this Warrant shall be construed as
conferring upon the holder hereof any rights as a stockholder of the Company,
and nothing shall be construed as imposing any liabilities on such holder to
purchase any securities or as a stockholder of the Company, whether such
liabilities are asserted by the Company or by creditors of the Company.
SECTION 18. WARRANT AGREEMENT
At the written request of the holders of at least 50% of the
Warrants (by number of shares purchasable), the Company will promptly execute
and deliver a Warrant Agreement with a bank or trust company satisfactory to
such holders, as warrant agent, providing for the issuance thereunder, in
exchange for the Warrants at the time outstanding, of new warrants, in readily
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marketable form (subject to Section 8), calling for the purchase of an
aggregate number of shares of Common Stock (as constituted on the Closing Date)
equal to that called for by the Warrants at the time outstanding. Such Warrant
Agreement shall contain the substantive provisions of the Warrants and such
other terms and provisions, not inconsistent with the Warrants, as may be
desirable and as are customarily contained in warrant agreements applicable to
the issuance of warrants, and such Warrant Agreement and such new warrants
shall be satisfactory in form and substance to the holders of the Warrants and
to their respective counsel. Upon the execution and delivery of such Warrant
Agreement, the Company will give prompt written notice thereof to all holders
of Warrants, and issue thereunder, in exchange for such Warrants, new warrants
calling for the purchase of the same number of shares of Common Stock as that
called for on the faces of the Warrants surrendered. Each holder of any
Warrant, by its acceptance thereof, agrees to surrender such Warrant for
exchange in accordance with this Section 18 within a reasonable time after
receipt of such notice. The Company will pay all expenses incident to the
Company's performance of and compliance with this Section 18, including,
without limitation, the expenses of preparing, executing and delivering such
Warrant Agreement and of issuing such Warrants, the reasonable fees and
expenses of counsel for the holders of the Warrants, the fees and compensation
of the warrant agent from time to time acting under such Warrant Agreement, and
all stamp and other taxes applicable to the issuance of such new warrants
(other than transfer taxes, if any, relating to the issuance of any such new
warrant to a Person who was not the holder of the Warrant in exchange for which
such new warrant is issued).
SECTION 19. NOTICES
All notices and other communications provided for herein shall
be mailed by first class mail, postage prepaid, addressed (a) if to any holder
of any Warrant, at the registered address of holder as set forth in the
register kept at the office or agency maintained by the Company pursuant to
Section 13, or (b) if to the Company, at its principal office, being on the
date of original issuance of this Warrant 26601 Agoura Road, Calabasas,
California 91302, or at such other address of the principal office of the
Company of which the Company shall have given notice to each holder of any
Warrants in writing; provided, however, that the exercise of any Warrant shall
be effective if effected in the manner provided in Section 1.
SECTION 20. MISCELLANEOUS
This Warrant and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change,
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waiver, discharge, or termination is sought. THIS WARRANT AND THE NOTE
PURCHASE AGREEMENT ARE TO BE GOVERNED BY AND TO BE CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENT MADE AND TO BE
PERFORMED ENTIRELY WITHIN THE STATE OF NEW YORK. The headings in this Warrant
are inserted for convenience only and shall not be deemed to constitute a part
hereof.
SECTION 21. EXPIRATION
The right to exercise this Warrant shall expire at 5:00 p.m.
Pacific Time, on April 1, 2002 (or, if such date shall not be a Business Day,
on the next day that is a Business Day).
SUPERIOR NATIONAL INSURANCE GROUP, INC.
By: /s/ J. CHRIS SEAMAN
------------------------------------
J. Chris Seaman,
Executive Vice President and
Chief Financial Officer
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SUBSCRIPTION NOTICE
SUPERIOR NATIONAL INSURANCE GROUP, INC.
The undersigned, the registered holder of the foregoing
Warrant, hereby elects to exercise purchase rights represented by said Warrant
for, and to purchase thereunder, _____________________ shares of the Common
Stock covered by said Warrant and herewith makes payment in full therefor of
(i) $_______________ by certified or official bank check payable to the order
of the Company and (ii) $_______________ in unpaid principal amount of 14.5%
Senior Subordinated [Voting] Notes [Series A/Series B] due April 1, 2002 of the
Company, and requests that (a) certificates for such shares (and any Other
Securities issuable upon such exercise) be issued in the name of and delivered
to ____________________________, whose address is _______________________, and
(b) if such shares (or Other Securities) shall not include all of the shares
(or Other Securities) issuable as provided in said Warrant, then a new Warrant
of like tenor and date for the balance of the shares (or Other Securities)
issuable thereunder be delivered to the undersigned.
______________________________
Signature guaranteed:
Dated: ______________________________
32
<PAGE> 37
ASSIGNMENT
For Value Received, the undersigned registered owner hereby
sells, assigns and transfers unto _________________________________
________________________, the rights represented by the foregoing Warrant of
Superior National Insurance Group, Inc., and appoints ________________________
attorney to transfer said rights on the books of said corporation, with full
power of substitution in the premises.
______________________________
Signature guaranteed:
Dated: ______________________________
33
<PAGE> 1
EXHIBIT 10.26
ADDENDUM NO. 2
to the
RETROCESSION AGREEMENT
(hereinafter referred to as "Agreement")
between
SUPERIOR NATIONAL INSURANCE COMPANY
Calabasas, California
(hereinafter referred to as the "Retrocessionaire")
and
ZURICH REINSURANCE CENTRE, INC.
Stamford, Connecticut
(hereinafter referred to as the "Retrocedant")
IT IS HEREBY MUTUALLY AGREED by and between the Retrocedant and the
Retrocessionaire that effective 12:01 a.m., Standard Time as defined in the
underlying Policies, on January 1, 1997, Article 1, Cover, of this Agreement
shall be revised to read as follows:
ARTICLE I
COVER
Reference is made to the Workers' Compensation and Employers' Liability Quota
Share Reinsurance Contract No. WC30006A (hereinafter referred to as the
"Underlying Contract") between the Retrocedant and the Retrocessionaire,
originally effective January 1, 1994. As respects losses occurring on or after
12:00 a.m., Standard Time as defined in the Underlying Policies, January 1,
1997, the Retrocessionaire hereby assumes from the Retrocedant the following
Retrocession Percentage of the gross reinsurance liability of the Retrocedant
under the Underlying Contract and any Assumption of Liability Endorsement
issued thereunder (hereinafter referred to as an "ALE"):
Retrocession Percentage - 93.5% part of 100% quota share of Designated
Policies as set forth in Part II, Article II. Reinsurer's Limit of
Liability of the Underlying Contract, including without limitation,
93.5% of any and all amounts paid by the Retrocedant with respect to any
ALE or any claim thereunder. The Reinsurer shall return to the Company
<PAGE> 2
[LOGO]
the unearned premium applicable to Designated Policies in force as of
December 31, 1996, less the commission allowed therein.
Capitalized terms used herein and not herein defined shall have the meaning
ascribed thereto in the Underlying Contract, a copy of which is attached hereto
and forms a part of this Agreement.
ALL OTHER TERMS AND CONDITIONS SHALL REMAIN UNCHANGED.
IN WITNESS WHEREOF, the parties hereto have caused this Addendum to be executed
in duplicate by their duly authorized representatives.
Signed at NEW YORK, NEW YORK, this 24th day of January, 1997.
ZURICH REINSURANCE CENTRE, INC.
Stamford, Connecticut
Signature: [SIG] Title: SVP
---------------------------- ----------------------------------
Attest: [SIG]
-------------------------------
Signed at CALABASAS, CALIFORNIA, this 24th day of January, 1997.
SUPERIOR NATIONAL INSURANCE COMPANY
Calabasas, California
Signature: /s/ J. CHRIS SEAMAN Title: EVP
---------------------------- ----------------------------------
Attest: [SIG]
-------------------------------
<PAGE> 1
EXHIBIT 12
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION> PRO FORMA
YEAR ENDED DECEMBER 31, --------------------
SEPT. 30 SEPT. 30 ----------------------------------------------- SEPT. DECEMBER
1996 1997 1996 1995 1994 1993 1992 1997 1996
------- ------- ------- ------- ------- ------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income from continuing operations
before provision for income taxes $ 4,502 $ 7,723 $ 5,227 $11,689 $ 4,997 $ 2,204 $15,855 $12,897 $16,865
Add:
Portion of rents representative of
the interest factor 599 914 639 614 570 469 518 914 1,462
Interest on indebtedness 6,922 5,302 7,527 9,619 8,726 6,221 1,258 3,149 6,906
Amortization of debt expense and
premium or discount
(related to indebtedness) - - - - 1,151 86 - - -
------- ------- ------- ------- ------- ------- ------- -------- -------
Income as adjusted $12,023 $13,939 $13,393 $21,922 $15,444 $ 8,980 $17,631 $16,960 $25,233
======= ======= ======= ======= ======= ======= ======= ======= =======
Preferred dividend requirements
("grossed up") $ 1,238 $ 1,387 $ 1,667 $ 1,488 $ 683 $ - $ - $ 5,587 $ 7,450
Ratio of income before provision for
income taxes to net income* 143% 158% 144% 100% 139% 81% 150% 154% 154%
Preferred dividend factor on
pretax basis $ 1,767 $ 2,185 $ 2,400 $ 1,486 $ 948 $ - $ - $ 8,603 $11,475
Fixed charges:
Interest on indebtedness
(exp or capitalized) 6,922 5,302 7,527 9,619 8,726 6,221 1,258 3,149 6,906
Amortization of debt expense and
premium or discount - - - - 1,151 86 - - -
Capital Interest - - - - - - - - -
Portion of rents representative
of the interest factor 599 914 639 614 570 469 518 914 1,462
------- ------- ------- ------- ------- ------- ------- ------- -------
Fixed charges and preferred
dividends $ 9,288 $ 8,401 $10,566 $11,719 $11,395 $ 6,776 $ 1,776 $12,666 $19,843
======= ======= ======= ======= ======= ======= ======= ======= =======
Ratio of earnings to fixed charges
and preferred dividends 1.29 1.66 1.27 1.87 1.36 1.33 9.93 1.34 1.27
Income from continuing operations
after provision for income
taxes and before x-items 3,154 4,902 3,630 11,701 3,599 2,734 10,549 8,376 10,949
</TABLE>
* Represents income from continuing operations before provision for income taxes
divided by income from continuing operations, which adjusts dividends on
preferred securities to a pre-tax basis.
Page 1
<PAGE> 2
Superior National Insurance Group, Inc.
and Pac Rim Holding Corporation
Summary of Historical and Pro-Forma Financial Data
EBITDA Calculation
<TABLE>
<CAPTION>
Year Ended
Nine Months Ended September 30, December 31,
Pro Pro
Forma Forma
EBITDA 1996 1997 1997 1996 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Income 1,916 (7,642) (10,178) 1,963 893
Extraordinary loss retirement 10,361 12,171 1,810
Preferred Security Accretion 1,238 1,387 5,587 1,667 7,450
Discontinued Ops.
Cumulative change in accounting
O/S Loss Debentures 635 635 635
Loss on early Imperial Loan redemption 161 161 161
------- ------- ------- ------- -------
3,154 4,902 8,376 3,630 10,949
Income Tax Expense
[added back in] 1,348 2,821 4,521 1,597 5,916
------- ------- ------- ------- -------
4,502 7,723 12,897 5,227 16,865
Interest Expense 6,922 5,302 3,149 7,527 6,906
------- ------- ------- ------- -------
11,424 13,025 16,046 12,754 23,771
Goodwill Amortization 477 400 534
Dep'n & Amortization 1,596 1,782 1,782 2,110 2,110
Change in DAC (340) (2,142) (2,142) (137) (137)
------- ------- ------- ------- -------
EBITDA $12,680 $13,142 $16,086 $14,727 $26,278
======= ======= ======= ======= =======
Ratio of EBITDA to distributions
on Preferred Securities 155.38% 196.47% 190.01%[b] 160.18% 232.80%[b]
Ratio of Preferred Securities to EBITDA n/a n/a n/a n/a 399.57%
Depreciation Exp -- Capitalized Items 1,390 1,551 1,551 1,832 1,832
WSSC Depreciation 150 150 150 200 200
Amortization -- Leasehold Items 56 81 81 78 78
------- ------- ------- ------- -------
1,596 1,782 1,782 2,110 2,110
======= ======= ======= ======= =======
8,465[a] 11,288[a]
105,000[c]
[a] Preferred Securities -- 1997 interest, gross of tax
[b] Ratio of EBITDA to Preferred Securities -- 1997 interest, gross of tax; Pro Forma only
[c] Balance of Preferred Securities issued in 1997
</TABLE>
<PAGE> 1
Exhibit 21
SUBSIDIARIES OF THE COMPANY
1. Superior Pacific Insurance Group, Inc., a Delaware corporation;
2. Pacific Insurance Brokerage, Inc., a California corporation;
3. InfoNet Management Systems, Inc., a California corporation;
4. SN Insurance Services, Inc., a California corporation;
5. Superior (Bermuda) Ltd., a Bermuda corporation;
6. Superior Pacific Casualty Company, a California corporation;
7. Superior National Insurance Company, a California corporation;
8. Superior National Capital Holding Corporation, a Nevada corporation;
9. Superior National Capital Trust I, a Delaware statutory business trust;
10. Regional Benefits Insurance Services, Inc., a California corporation;
11. Western Select Service Corp., a California corporation; and
12. Superior National Capital, L.P., a Bermuda limited partnership.
The Trust has no subsidiaries.
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Superior National Insurance Group, Inc.:
We consent to the use of our reports included herein and to the reference to our
firm under the heading "Experts" in the registration statement.
KPMG Peat Marwick LLP
Los Angeles, California
December 30, 1997
<PAGE> 1
EXHIBIT 25.1
Registration No.
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM T-1
STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939
OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2)
WILMINGTON TRUST COMPANY
(Exact name of trustee as specified in its charter)
Delaware 51-0055023
(State of incorporation) (I.R.S. employer identification no.)
Rodney Square North
1100 North Market Street
Wilmington, Delaware 19890
(Address of principal executive offices)
Cynthia L. Corliss
Vice President and Trust Counsel
Wilmington Trust Company
Rodney Square North
Wilmington, Delaware 19890
(302) 651-8516
(Name, address and telephone number of agent for service)
SUPERIOR NATIONAL INSURANCE GROUP, INC.
(Exact name of obligor as specified in its charter)
Delaware 95-4610936
(State of incorporation) (I.R.S. employer identification no.)
26601 Agoura Road
Calabasas, California 91302
(Address of principal executive offices) (Zip Code)
10 3/4% Senior Subordinated Notes of
Superior National Insurance Group, Inc.
(Title of the indenture securities)
================================================================================
<PAGE> 2
ITEM 1. GENERAL INFORMATION.
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to
which it is subject.
Federal Deposit Insurance Co. State Bank Commissioner
Five Penn Center Dover, Delaware
Suite #2901
Philadelphia, PA
(b) Whether it is authorized to exercise corporate trust powers.
The trustee is authorized to exercise corporate trust powers.
ITEM 2. AFFILIATIONS WITH THE OBLIGOR.
If the obligor is an affiliate of the trustee, describe each
affiliation:
Based upon an examination of the books and records of the
trustee and upon information furnished by the obligor, the obligor is
not an affiliate of the trustee.
ITEM 3. LIST OF EXHIBITS.
List below all exhibits filed as part of this Statement of
Eligibility and Qualification.
A. Copy of the Charter of Wilmington Trust Company, which includes
the certificate of authority of Wilmington Trust Company to
commence business and the authorization of Wilmington Trust
Company to exercise corporate trust powers.
B. Copy of By-Laws of Wilmington Trust Company.
C. Consent of Wilmington Trust Company required by Section 321(b)
of Trust Indenture Act.
D. Copy of most recent Report of Condition of Wilmington Trust
Company.
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the trustee, Wilmington Trust Company, a corporation organized and
existing under the laws of Delaware, has duly caused this Statement of
Eligibility to be signed on its behalf by the undersigned, thereunto duly
authorized, all in the City of Wilmington and State of Delaware on the 18th day
of December, 1997.
WILMINGTON TRUST COMPANY
[SEAL]
Attest: /s/ Emmett R. Harmon By: /s/ James P. Lawler
------------------------ ---------------------------
Assistant Secretary Name: James P. Lawler
Title: Vice President
2
<PAGE> 3
EXHIBIT A
AMENDED CHARTER
WILMINGTON TRUST COMPANY
WILMINGTON, DELAWARE
AS EXISTING ON MAY 9, 1987
<PAGE> 4
AMENDED CHARTER
OR
ACT OF INCORPORATION
OF
WILMINGTON TRUST COMPANY
WILMINGTON TRUST COMPANY, originally incorporated by an Act of the
General Assembly of the State of Delaware, entitled "An Act to Incorporate the
Delaware Guarantee and Trust Company", approved March 2, A.D. 1901, and the name
of which company was changed to "WILMINGTON TRUST COMPANY" by an amendment filed
in the Office of the Secretary of State on March 18, A.D. 1903, and the Charter
or Act of Incorporation of which company has been from time to time amended and
changed by merger agreements pursuant to the corporation law for state banks and
trust companies of the State of Delaware, does hereby alter and amend its
Charter or Act of Incorporation so that the same as so altered and amended shall
in its entirety read as follows:
FIRST: - The name of this corporation is WILMINGTON TRUST COMPANY.
SECOND: - The location of its principal office in the State of
Delaware is at Rodney Square North, in the City of Wilmington, County
of New Castle; the name of its resident agent is WILMINGTON TRUST
COMPANY whose address is Rodney Square North, in said City. In
addition to such principal office, the said corporation maintains and
operates branch offices in the City of Newark, New Castle County,
Delaware, the Town of Newport, New Castle County, Delaware, at
Claymont, New Castle County, Delaware, at Greenville, New Castle
County Delaware, and at Milford Cross Roads, New Castle County,
Delaware, and shall be empowered to open, maintain and operate branch
offices at Ninth and Shipley Streets, 418 Delaware Avenue, 2120 Market
Street, and 3605 Market Street, all in the City of Wilmington, New
Castle County, Delaware, and such other branch offices or places of
business as may be authorized from time to time by the agency or
agencies of the government of the State of Delaware empowered to
confer such authority.
THIRD: - (a) The nature of the business and the objects and purposes
proposed to be transacted, promoted or carried on by this Corporation
are to do any or all of the things herein mentioned as fully and to
the same extent as natural persons might or could do and in any part
of the world, viz.:
(1) To sue and be sued, complain and defend in any Court of law
or equity and to make and use a common seal, and alter the seal
at pleasure, to hold, purchase, convey, mortgage or otherwise
deal in real and personal estate and property, and to appoint
such officers and agents as the business of the
<PAGE> 5
Corporation shall require, to make by-laws not inconsistent with
the Constitution or laws of the United States or of this State,
to discount bills, notes or other evidences of debt, to receive
deposits of money, or securities for money, to buy gold and
silver bullion and foreign coins, to buy and sell bills of
exchange, and generally to use, exercise and enjoy all the
powers, rights, privileges and franchises incident to a
corporation which are proper or necessary for the transaction of
the business of the Corporation hereby created.
(2) To insure titles to real and personal property, or any
estate or interests therein, and to guarantee the holder of such
property, real or personal, against any claim or claims, adverse
to his interest therein, and to prepare and give certificates of
title for any lands or premises in the State of Delaware, or
elsewhere.
(3) To act as factor, agent, broker or attorney in the receipt,
collection, custody, investment and management of funds, and the
purchase, sale, management and disposal of property of all
descriptions, and to prepare and execute all papers which may be
necessary or proper in such business.
(4) To prepare and draw agreements, contracts, deeds, leases,
conveyances, mortgages, bonds and legal papers of every
description, and to carry on the business of conveyancing in all
its branches.
(5) To receive upon deposit for safekeeping money, jewelry,
plate, deeds, bonds and any and all other personal property of
every sort and kind, from executors, administrators, guardians,
public officers, courts, receivers, assignees, trustees, and
from all fiduciaries, and from all other persons and
individuals, and from all corporations whether state, municipal,
corporate or private, and to rent boxes, safes, vaults and other
receptacles for such property.
(6) To act as agent or otherwise for the purpose of registering,
issuing, certificating, countersigning, transferring or
underwriting the stock, bonds or other obligations of any
corporation, association, state or municipality, and may receive
and manage any sinking fund therefor on such terms as may be
agreed upon between the two parties, and in like manner may act
as Treasurer of any corporation or municipality.
(7) To act as Trustee under any deed of trust, mortgage, bond or
other instrument issued by any state, municipality, body
politic, corporation, association or person, either alone or in
conjunction with any other person or persons, corporation or
corporations.
2
<PAGE> 6
(8) To guarantee the validity, performance or effect of any
contract or agreement, and the fidelity of persons holding
places of responsibility or trust; to become surety for any
person, or persons, for the faithful performance of any trust,
office, duty, contract or agreement, either by itself or in
conjunction with any other person, or persons, corporation, or
corporations, or in like manner become surety upon any bond,
recognizance, obligation, judgment, suit, order, or decree to be
entered in any court of record within the State of Delaware or
elsewhere, or which may now or hereafter be required by any law,
judge, officer or court in the State of Delaware or elsewhere.
(9) To act by any and every method of appointment as trustee,
trustee in bankruptcy, receiver, assignee, assignee in
bankruptcy, executor, administrator, guardian, bailee, or in any
other trust capacity in the receiving, holding, managing, and
disposing of any and all estates and property, real, personal or
mixed, and to be appointed as such trustee, trustee in
bankruptcy, receiver, assignee, assignee in bankruptcy,
executor, administrator, guardian or bailee by any persons,
corporations, court, officer, or authority, in the State of
Delaware or elsewhere; and whenever this Corporation is so
appointed by any person, corporation, court, officer or
authority such trustee, trustee in bankruptcy, receiver,
assignee, assignee in bankruptcy, executor, administrator,
guardian, bailee, or in any other trust capacity, it shall not
be required to give bond with surety, but its capital stock
shall be taken and held as security for the performance of the
duties devolving upon it by such appointment.
(10) And for its care, management and trouble, and the exercise
of any of its powers hereby given, or for the performance of any
of the duties which it may undertake or be called upon to
perform, or for the assumption of any responsibility the said
Corporation may be entitled to receive a proper compensation.
(11) To purchase, receive, hold and own bonds, mortgages,
debentures, shares of capital stock, and other securities,
obligations, contracts and evidences of indebtedness, of any
private, public or municipal corporation within and without the
State of Delaware, or of the Government of the United States, or
of any state, territory, colony, or possession thereof, or of
any foreign government or country; to receive, collect, receipt
for, and dispose of interest, dividends and income upon and from
any of the bonds, mortgages, debentures, notes, shares of
capital stock, securities, obligations, contracts, evidences of
indebtedness and other property held and owned by it, and to
exercise in respect of all such bonds, mortgages, debentures,
notes, shares of capital stock, securities, obligations,
contracts, evidences of indebtedness and other property, any and
all the rights, powers and privileges of individual
3
<PAGE> 7
owners thereof, including the right to vote thereon; to invest
and deal in and with any of the moneys of the Corporation upon
such securities and in such manner as it may think fit and
proper, and from time to time to vary or realize such
investments; to issue bonds and secure the same by pledges or
deeds of trust or mortgages of or upon the whole or any part of
the property held or owned by the Corporation, and to sell and
pledge such bonds, as and when the Board of Directors shall
determine, and in the promotion of its said corporate business
of investment and to the extent authorized by law, to lease,
purchase, hold, sell, assign, transfer, pledge, mortgage and
convey real and personal property of any name and nature and any
estate or interest therein.
(b) In furtherance of, and not in limitation, of the powers conferred
by the laws of the State of Delaware, it is hereby expressly provided
that the said Corporation shall also have the following powers:
(1) To do any or all of the things herein set forth, to the same
extent as natural persons might or could do, and in any part of
the world.
(2) To acquire the good will, rights, property and franchises
and to undertake the whole or any part of the assets and
liabilities of any person, firm, association or corporation, and
to pay for the same in cash, stock of this Corporation, bonds or
otherwise; to hold or in any manner to dispose of the whole or
any part of the property so purchased; to conduct in any lawful
manner the whole or any part of any business so acquired, and to
exercise all the powers necessary or convenient in and about the
conduct and management of such business.
(3) To take, hold, own, deal in, mortgage or otherwise lien, and
to lease, sell, exchange, transfer, or in any manner whatever
dispose of property, real, personal or mixed, wherever situated.
(4) To enter into, make, perform and carry out contracts of
every kind with any person, firm, association or corporation,
and, without limit as to amount, to draw, make, accept, endorse,
discount, execute and issue promissory notes, drafts, bills of
exchange, warrants, bonds, debentures, and other negotiable or
transferable instruments.
(5) To have one or more offices, to carry on all or any of its
operations and businesses, without restriction to the same
extent as natural persons might or could do, to purchase or
otherwise acquire, to hold, own, to mortgage, sell, convey or
otherwise dispose of, real and personal property, of every class
and description, in any State, District, Territory or Colony of
the United States, and in any foreign country or place.
4
<PAGE> 8
(6) It is the intention that the objects, purposes and powers
specified and clauses contained in this paragraph shall (except
where otherwise expressed in said paragraph) be nowise limited
or restricted by reference to or inference from the terms of any
other clause of this or any other paragraph in this charter, but
that the objects, purposes and powers specified in each of the
clauses of this paragraph shall be regarded as independent
objects, purposes and powers.
FOURTH: - (a) The total number of shares of all classes of stock which
the Corporation shall have authority to issue is forty-one million
(41,000,000) shares, consisting of:
(1) One million (1,000,000) shares of Preferred stock, par value
$10.00 per share (hereinafter referred to as "Preferred Stock");
and
(2) Forty million (40,000,000) shares of Common Stock, par value
$1.00 per share (hereinafter referred to as "Common Stock").
(b) Shares of Preferred Stock may be issued from time to time in one
or more series as may from time to time be determined by the Board of
Directors each of said series to be distinctly designated. All shares
of any one series of Preferred Stock shall be alike in every
particular, except that there may be different dates from which
dividends, if any, thereon shall be cumulative, if made cumulative.
The voting powers and the preferences and relative, participating,
optional and other special rights of each such series, and the
qualifications, limitations or restrictions thereof, if any, may
differ from those of any and all other series at any time outstanding;
and, subject to the provisions of subparagraph 1 of Paragraph (c) of
this Article FOURTH, the Board of Directors of the Corporation is
hereby expressly granted authority to fix by resolution or resolutions
adopted prior to the issuance of any shares of a particular series of
Preferred Stock, the voting powers and the designations, preferences
and relative, optional and other special rights, and the
qualifications, limitations and restrictions of such series,
including, but without limiting the generality of the foregoing, the
following:
(1) The distinctive designation of, and the number of shares of
Preferred Stock which shall constitute such series, which number
may be increased (except where otherwise provided by the Board
of Directors) or decreased (but not below the number of shares
thereof then outstanding) from time to time by like action of
the Board of Directors;
(2) The rate and times at which, and the terms and conditions on
which, dividends, if any, on Preferred Stock of such series
shall be paid, the extent of the preference or relation, if any,
of such dividends to the dividends payable on any other class or
classes, or series of the same or other class of
5
<PAGE> 9
stock and whether such dividends shall be cumulative or
non-cumulative;
(3) The right, if any, of the holders of Preferred Stock of such
series to convert the same into or exchange the same for, shares
of any other class or classes or of any series of the same or
any other class or classes of stock of the Corporation and the
terms and conditions of such conversion or exchange;
(4) Whether or not Preferred Stock of such series shall be
subject to redemption, and the redemption price or prices and
the time or times at which, and the terms and conditions on
which, Preferred Stock of such series may be redeemed.
(5) The rights, if any, of the holders of Preferred Stock of
such series upon the voluntary or involuntary liquidation,
merger, consolidation, distribution or sale of assets,
dissolution or winding-up, of the Corporation.
(6) The terms of the sinking fund or redemption or purchase
account, if any, to be provided for the Preferred Stock of such
series; and
(7) The voting powers, if any, of the holders of such series of
Preferred Stock which may, without limiting the generality of
the foregoing include the right, voting as a series or by itself
or together with other series of Preferred Stock or all series
of Preferred Stock as a class, to elect one or more directors of
the Corporation if there shall have been a default in the
payment of dividends on any one or more series of Preferred
Stock or under such circumstances and on such conditions as the
Board of Directors may determine.
(c) (1) After the requirements with respect to preferential dividends
on the Preferred Stock (fixed in accordance with the provisions of
section (b) of this Article FOURTH), if any, shall have been met and
after the Corporation shall have complied with all the requirements,
if any, with respect to the setting aside of sums as sinking funds or
redemption or purchase accounts (fixed in accordance with the
provisions of section (b) of this Article FOURTH), and subject further
to any conditions which may be fixed in accordance with the provisions
of section (b) of this Article FOURTH, then and not otherwise the
holders of Common Stock shall be entitled to receive such dividends as
may be declared from time to time by the Board of Directors.
(2) After distribution in full of the preferential amount, if
any, (fixed in accordance with the provisions of section (b) of
this Article FOURTH), to be distributed to the holders of
Preferred Stock in the event of voluntary or involuntary
liquidation, distribution or sale of assets, dissolution or
winding-up, of the Corporation, the holders of the Common Stock
shall be entitled to
6
<PAGE> 10
receive all of the remaining assets of the Corporation, tangible
and intangible, of whatever kind available for distribution to
stockholders ratably in proportion to the number of shares of
Common Stock held by them respectively.
(3) Except as may otherwise be required by law or by the
provisions of such resolution or resolutions as may be adopted
by the Board of Directors pursuant to section (b) of this
Article FOURTH, each holder of Common Stock shall have one vote
in respect of each share of Common Stock held on all matters
voted upon by the stockholders.
(d) No holder of any of the shares of any class or series of stock or
of options, warrants or other rights to purchase shares of any class
or series of stock or of other securities of the Corporation shall
have any preemptive right to purchase or subscribe for any unissued
stock of any class or series or any additional shares of any class or
series to be issued by reason of any increase of the authorized
capital stock of the Corporation of any class or series, or bonds,
certificates of indebtedness, debentures or other securities
convertible into or exchangeable for stock of the Corporation of any
class or series, or carrying any right to purchase stock of any class
or series, but any such unissued stock, additional authorized issue of
shares of any class or series of stock or securities convertible into
or exchangeable for stock, or carrying any right to purchase stock,
may be issued and disposed of pursuant to resolution of the Board of
Directors to such persons, firms, corporations or associations,
whether such holders or others, and upon such terms as may be deemed
advisable by the Board of Directors in the exercise of its sole
discretion.
(e) The relative powers, preferences and rights of each series of
Preferred Stock in relation to the relative powers, preferences and
rights of each other series of Preferred Stock shall, in each case, be
as fixed from time to time by the Board of Directors in the resolution
or resolutions adopted pursuant to authority granted in section (b) of
this Article FOURTH and the consent, by class or series vote or
otherwise, of the holders of such of the series of Preferred Stock as
are from time to time outstanding shall not be required for the
issuance by the Board of Directors of any other series of Preferred
Stock whether or not the powers, preferences and rights of such other
series shall be fixed by the Board of Directors as senior to, or on a
parity with, the powers, preferences and rights of such outstanding
series, or any of them; provided, however, that the Board of Directors
may provide in the resolution or resolutions as to any series of
Preferred Stock adopted pursuant to section (b) of this Article FOURTH
that the consent of the holders of a majority (or such greater
proportion as shall be therein fixed) of the outstanding shares of
such series voting thereon shall be required for the issuance of any
or all other series of Preferred Stock.
7
<PAGE> 11
(f) Subject to the provisions of section (e), shares of any series of
Preferred Stock may be issued from time to time as the Board of
Directors of the Corporation shall determine and on such terms and for
such consideration as shall be fixed by the Board of Directors.
(g) Shares of Common Stock may be issued from time to time as the
Board of Directors of the Corporation shall determine and on such
terms and for such consideration as shall be fixed by the Board of
Directors.
(h) The authorized amount of shares of Common Stock and of Preferred
Stock may, without a class or series vote, be increased or decreased
from time to time by the affirmative vote of the holders of a majority
of the stock of the Corporation entitled to vote thereon.
FIFTH: - (a) The business and affairs of the Corporation shall be
conducted and managed by a Board of Directors. The number of directors
constituting the entire Board shall be not less than five nor more
than twenty-five as fixed from time to time by vote of a majority of
the whole Board, provided, however, that the number of directors shall
not be reduced so as to shorten the term of any director at the time
in office, and provided further, that the number of directors
constituting the whole Board shall be twenty-four until otherwise
fixed by a majority of the whole Board.
(b) The Board of Directors shall be divided into three classes, as
nearly equal in number as the then total number of directors
constituting the whole Board permits, with the term of office of one
class expiring each year. At the annual meeting of stockholders in
1982, directors of the first class shall be elected to hold office for
a term expiring at the next succeeding annual meeting, directors of
the second class shall be elected to hold office for a term expiring
at the second succeeding annual meeting and directors of the third
class shall be elected to hold office for a term expiring at the third
succeeding annual meeting. Any vacancies in the Board of Directors for
any reason, and any newly created directorships resulting from any
increase in the directors, may be filled by the Board of Directors,
acting by a majority of the directors then in office, although less
than a quorum, and any directors so chosen shall hold office until the
next annual election of directors. At such election, the stockholders
shall elect a successor to such director to hold office until the next
election of the class for which such director shall have been chosen
and until his successor shall be elected and qualified. No decrease in
the number of directors shall shorten the term of any incumbent
director.
(c) Notwithstanding any other provisions of this Charter or Act of
Incorporation or the By-Laws of the Corporation (and notwithstanding
the fact that some lesser percentage may be specified by law, this
Charter or Act of Incorporation or the ByLaws of the Corporation), any
director or the entire Board of Directors of the
8
<PAGE> 12
Corporation may be removed at any time without cause, but only by the
affirmative vote of the holders of two-thirds or more of the
outstanding shares of capital stock of the Corporation entitled to
vote generally in the election of directors (considered for this
purpose as one class) cast at a meeting of the stockholders called for
that purpose.
(d) Nominations for the election of directors may be made by the Board
of Directors or by any stockholder entitled to vote for the election
of directors. Such nominations shall be made by notice in writing,
delivered or mailed by first class United States mail, postage
prepaid, to the Secretary of the Corporation not less than 14 days nor
more than 50 days prior to any meeting of the stockholders called for
the election of directors; provided, however, that if less than 21
days' notice of the meeting is given to stockholders, such written
notice shall be delivered or mailed, as prescribed, to the Secretary
of the Corporation not later than the close of the seventh day
following the day on which notice of the meeting was mailed to
stockholders. Notice of nominations which are proposed by the Board of
Directors shall be given by the Chairman on behalf of the Board.
(e) Each notice under subsection (d) shall set forth (i) the name,
age, business address and, if known, residence address of each nominee
proposed in such notice, (ii) the principal occupation or employment
of such nominee and (iii) the number of shares of stock of the
Corporation which are beneficially owned by each such nominee.
(f) The Chairman of the meeting may, if the facts warrant, determine
and declare to the meeting that a nomination was not made in
accordance with the foregoing procedure, and if he should so
determine, he shall so declare to the meeting and the defective
nomination shall be disregarded.
(g) No action required to be taken or which may be taken at any annual
or special meeting of stockholders of the Corporation may be taken
without a meeting, and the power of stockholders to consent in
writing, without a meeting, to the taking of any action is
specifically denied.
SIXTH: - The Directors shall choose such officers, agent and servants
as may be provided in the By-Laws as they may from time to time find
necessary or proper.
SEVENTH: - The Corporation hereby created is hereby given the same
powers, rights and privileges as may be conferred upon corporations
organized under the Act entitled "An Act Providing a General
Corporation Law", approved March 10, 1899, as from time to time
amended.
EIGHTH: - This Act shall be deemed and taken to be a private Act.
9
<PAGE> 13
NINTH: - This Corporation is to have perpetual existence.
TENTH: - The Board of Directors, by resolution passed by a majority of
the whole Board, may designate any of their number to constitute an
Executive Committee, which Committee, to the extent provided in said
resolution, or in the By-Laws of the Company, shall have and may
exercise all of the powers of the Board of Directors in the management
of the business and affairs of the Corporation, and shall have power
to authorize the seal of the Corporation to be affixed to all papers
which may require it.
ELEVENTH: - The private property of the stockholders shall not be
liable for the payment of corporate debts to any extent whatever.
TWELFTH: - The Corporation may transact business in any part of the
world.
THIRTEENTH: - The Board of Directors of the Corporation is expressly
authorized to make, alter or repeal the By-Laws of the Corporation by
a vote of the majority of the entire Board. The stockholders may make,
alter or repeal any By-Law whether or not adopted by them, provided
however, that any such additional By-Laws, alterations or repeal may
be adopted only by the affirmative vote of the holders of two-thirds
or more of the outstanding shares of capital stock of the Corporation
entitled to vote generally in the election of directors (considered
for this purpose as one class).
FOURTEENTH: - Meetings of the Directors may be held outside
of the State of Delaware at such places as may be from time to time
designated by the Board, and the Directors may keep the books of the
Company outside of the State of Delaware at such places as may be from
time to time designated by them.
FIFTEENTH: - (a) In addition to any affirmative vote required by law,
and except as otherwise expressly provided in sections (b) and (c) of
this Article FIFTEENTH:
(A) any merger or consolidation of the Corporation or any
Subsidiary (as hereinafter defined) with or into (i) any
Interested Stockholder (as hereinafter defined) or (ii) any
other corporation (whether or not itself an Interested
Stockholder), which, after such merger or consolidation, would
be an Affiliate (as hereinafter defined) of an Interested
Stockholder, or
(B) any sale, lease, exchange, mortgage, pledge, transfer or
other disposition (in one transaction or a series of related
transactions) to or with any Interested Stockholder or any
Affiliate of any Interested Stockholder of any assets of the
Corporation or any Subsidiary having an aggregate fair market
value of $1,000,000 or more, or
10
<PAGE> 14
(C) the issuance or transfer by the Corporation or any
Subsidiary (in one transaction or a series of related
transactions) of any securities of the Corporation or any
Subsidiary to any Interested Stockholder or any Affiliate of any
Interested Stockholder in exchange for cash, securities or other
property (or a combination thereof) having an aggregate fair
market value of $1,000,000 or more, or
(D) the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation, or
(E) any reclassification of securities (including any reverse
stock split), or recapitalization of the Corporation, or any
merger or consolidation of the Corporation with any of its
Subsidiaries or any similar transaction (whether or not with or
into or otherwise involving an Interested Stockholder) which has
the effect, directly or indirectly, of increasing the
proportionate share of the outstanding shares of any class of
equity or convertible securities of the Corporation or any
Subsidiary which is directly or indirectly owned by any
Interested Stockholder, or any Affiliate of any Interested
Stockholder,
shall require the affirmative vote of the holders of at least two-thirds of the
outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors, considered for the purpose of this
Article FIFTEENTH as one class ("Voting Shares"). Such affirmative vote shall be
required notwithstanding the fact that no vote may be required, or that some
lesser percentage may be specified, by law or in any agreement with any national
securities exchange or otherwise.
(2) The term "business combination" as used in this Article
FIFTEENTH shall mean any transaction which is referred to any
one or more of clauses (A) through (E) of paragraph 1 of the
section (a).
(b) The provisions of section (a) of this Article FIFTEENTH
shall not be applicable to any particular business combination
and such business combination shall require only such
affirmative vote as is required by law and any other provisions
of the Charter or Act of Incorporation of By-Laws if such
business combination has been approved by a majority of the
whole Board.
(c) For the purposes of this Article FIFTEENTH:
(1) A "person" shall mean any individual firm, corporation or other
entity.
(2) "Interested Stockholder" shall mean, in respect of any business
combination, any person (other than the Corporation or any Subsidiary)
who or which as of the record date for the determination of
stockholders entitled to notice of and to vote on
11
<PAGE> 15
such business combination, or immediately prior to the consummation of
any such transaction:
(A) is the beneficial owner, directly or indirectly, of more
than 10% of the Voting Shares, or
(B) is an Affiliate of the Corporation and at any time within
two years prior thereto was the beneficial owner, directly or
indirectly, of not less than 10% of the then outstanding voting
Shares, or
(C) is an assignee of or has otherwise succeeded in any share of
capital stock of the Corporation which were at any time within
two years prior thereto beneficially owned by any Interested
Stockholder, and such assignment or succession shall have
occurred in the course of a transaction or series of
transactions not involving a public offering within the meaning
of the Securities Act of 1933.
(3) A person shall be the "beneficial owner" of any Voting Shares:
(A) which such person or any of its Affiliates and Associates
(as hereafter defined) beneficially own, directly or indirectly,
or
(B) which such person or any of its Affiliates or Associates has
(i) the right to acquire (whether such right is exercisable
immediately or only after the passage of time), pursuant to any
agreement, arrangement or understanding or upon the exercise of
conversion rights, exchange rights, warrants or options, or
otherwise, or (ii) the right to vote pursuant to any agreement,
arrangement or understanding, or
(C) which are beneficially owned, directly or indirectly, by any
other person with which such first mentioned person or any of
its Affiliates or Associates has any agreement, arrangement or
understanding for the purpose of acquiring, holding, voting or
disposing of any shares of capital stock of the Corporation.
(4) The outstanding Voting Shares shall include shares deemed owned
through application of paragraph (3) above but shall not include any
other Voting Shares which may be issuable pursuant to any agreement,
or upon exercise of conversion rights, warrants or options or
otherwise.
(5) "Affiliate" and "Associate" shall have the respective meanings
given those terms in Rule 12b-2 of the General Rules and Regulations
under the Securities Exchange Act of 1934, as in effect on December
31, 1981.
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<PAGE> 16
(6) "Subsidiary" shall mean any corporation of which a majority of any
class of equity security (as defined in Rule 3a11-1 of the General
Rules and Regulations under the Securities Exchange Act of 1934, as in
effect in December 31, 1981) is owned, directly or indirectly, by the
Corporation; provided, however, that for the purposes of the
definition of Investment Stockholder set forth in paragraph (2) of
this section (c), the term "Subsidiary" shall mean only a corporation
of which a majority of each class of equity security is owned,
directly or indirectly, by the Corporation.
(d) majority of the directors shall have the power and duty to
determine for the purposes of this Article FIFTEENTH on the
basis of information known to them, (1) the number of Voting
Shares beneficially owned by any person (2) whether a person is
an Affiliate or Associate of another, (3) whether a person has
an agreement, arrangement or understanding with another as to
the matters referred to in paragraph (3) of section (c), or (4)
whether the assets subject to any business combination or the
consideration received for the issuance or transfer of
securities by the Corporation, or any Subsidiary has an
aggregate fair market value of $1,00,000 or more.
(e) Nothing contained in this Article FIFTEENTH shall be
construed to relieve any Interested Stockholder from any
fiduciary obligation imposed by law.
SIXTEENTH: Notwithstanding any other provision of this Charter or Act
of Incorporation or the By-Laws of the Corporation (and in addition to
any other vote that may be required by law, this Charter or Act of
Incorporation by the By-Laws), the affirmative vote of the holders of
at least two-thirds of the outstanding shares of the capital stock of
the Corporation entitled to vote generally in the election of
directors (considered for this purpose as one class) shall be required
to amend, alter or repeal any provision of Articles FIFTH, THIRTEENTH,
FIFTEENTH or SIXTEENTH of this Charter or Act of Incorporation.
SEVENTEENTH: (a) a Director of this 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 Delaware
General Corporation Laws as the same exists or may hereafter be
amended.
(b) Any repeal or modification of the foregoing paragraph shall
not adversely affect any right or protection of a Director of
the Corporation existing hereunder with respect to any act or
omission occurring prior to the time of such repeal or
modification."
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<PAGE> 17
EXHIBIT B
BY-LAWS
WILMINGTON TRUST COMPANY
WILMINGTON, DELAWARE
AS EXISTING ON JANUARY 16, 1997
<PAGE> 18
BY-LAWS OF WILMINGTON TRUST COMPANY
ARTICLE I
STOCKHOLDERS' MEETINGS
Section 1. The Annual Meeting of Stockholders shall be held on the
third Thursday in April each year at the principal office at the Company or at
such other date, time, or place as may be designated by resolution by the Board
of Directors.
Section 2. Special meetings of all stockholders may be called at any
time by the Board of Directors, the Chairman of the Board or the President.
Section 3. Notice of all meetings of the stockholders shall be given
by mailing to each stockholder at least ten (10) days before said meeting, at
his last known address, a written or printed notice fixing the time and place of
such meeting.
Section 4. A majority in the amount of the capital stock of the
Company issued and outstanding on the record date, as herein determined, shall
constitute a quorum at all meetings of stockholders for the transaction of any
business, but the holders of a small number of shares may adjourn, from time to
time, without further notice, until a quorum is secured. At each annual or
special meeting of stockholders, each stockholder shall be entitled to one vote,
either in person or by proxy, for each shares of stock registered in the
stockholder's name on the books of the Company on the record date for any such
meeting as determined herein.
ARTICLE II
DIRECTORS
Section 1. The number and classification of the Board of Directors
shall be as set forth in the Charter of the Bank.
Section 2. No person who has attained the age of seventy-two (72)
years shall be nominated for election to the Board of Directors of the Company,
provided, however, that this limitation shall not apply to any person who was
serving as director of the Company on September 16, 1971.
Section 3. The class of Directors so elected shall hold office for
three years or until their successors are elected and qualified.
Section 4. The affairs and business of the Company shall be managed
and conducted by the Board of Directors.
Section 5. The Board of Directors shall meet at the principal office
of the Company or elsewhere in its discretion at such times to be determined by
a majority of its
<PAGE> 19
members, or at the call of the Chairman of the Board of Directors or the
President.
Section 6. Special meetings of the Board of Directors may be called at
any time by the Chairman of the Board of Directors or by the President, and
shall be called upon the written request of a majority of the directors.
Section 7. A majority of the directors elected and qualified shall be
necessary to constitute a quorum for the transaction of business at any meeting
of the Board of Directors.
Section 8. Written notice shall be sent by mail to each director of
any special meeting of the Board of Directors, and of any change in the time or
place of any regular meeting, stating the time and place of such meeting, which
shall be mailed not less than two days before the time of holding such meeting.
Section 9. In the event of the death, resignation, removal, inability
to act, or disqualification of any director, the Board of Directors, although
less than a quorum, shall have the right to elect the successor who shall hold
office for the remainder of the full term of the class of directors in which the
vacancy occurred, and until such director's successor shall have been duly
elected and qualified.
Section 10. The Board of Directors at its first meeting after its
election by the stockholders shall appoint an Executive Committee, a Trust
Committee, an Audit Committee and a Compensation Committee, and shall elect from
its own members a Chairman of the Board of Directors and a President who may be
the same person. The Board of Directors shall also elect at such meeting a
Secretary and a Treasurer, who may be the same person, may appoint at any time
such other committees and elect or appoint such other officers as it may deem
advisable. The Board of Directors may also elect at such meeting one or more
Associate Directors.
Section 11. The Board of Directors may at any time remove, with or
without cause, any member of any Committee appointed by it or any associate
director or officer elected by it and may appoint or elect his successor.
Section 12. The Board of Directors may designate an officer to be in
charge of such of the departments or division of the Company as it may deem
advisable.
ARTICLE III
COMMITTEES
Section I. Executive Committee
(A) The Executive Committee shall be composed of not more
than nine members who shall be selected by the Board of Directors from its own
members and who
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<PAGE> 20
shall hold office during the pleasure of the Board.
(B) The Executive Committee shall have all the powers of the
Board of Directors when it is not in session to transact all business for and in
behalf of the Company that may be brought before it.
(C) The Executive Committee shall meet at the principal
office of the Company or elsewhere in its discretion at such times to be
determined by a majority of its members, or at the call of the Chairman of the
Executive Committee or at the call of the Chairman of the Board of Directors.
The majority of its members shall be necessary to constitute a quorum for the
transaction of business. Special meetings of the Executive Committee may be held
at any time when a quorum is present.
(D) Minutes of each meeting of the Executive Committee shall
be kept and submitted to the Board of Directors at its next meeting.
(E) The Executive Committee shall advise and superintend all
investments that may be made of the funds of the Company, and shall direct the
disposal of the same, in accordance with such rules and regulations as the Board
of Directors from time to time make.
(F) In the event of a state of disaster of sufficient
severity to prevent the conduct and management of the affairs and business of
the Company by its directors and officers as contemplated by these By-Laws any
two available members of the Executive Committee as constituted immediately
prior to such disaster shall constitute a quorum of that Committee for the full
conduct and management of the affairs and business of the Company in accordance
with the provisions of Article III of these By-Laws; and if less than three
members of the Trust Committee is constituted immediately prior to such disaster
shall be available for the transaction of its business, such Executive Committee
shall also be empowered to exercise all of the powers reserved to the Trust
Committee under Article III Section 2 hereof. In the event of the
unavailability, at such time, of a minimum of two members of such Executive
Committee, any three available directors shall constitute the Executive
Committee for the full conduct and management of the affairs and business of the
Company in accordance with the foregoing provisions of this Section. This By-Law
shall be subject to implementation by Resolutions of the Board of Directors
presently existing or hereafter passed from time to time for that purpose, and
any provisions of these By-Laws (other than this Section) and any resolutions
which are contrary to the provisions of this Section or to the provisions of any
such implementary Resolutions shall be suspended during such a disaster period
until it shall be determined by any interim Executive Committee acting under
this section that it shall be to the advantage of the Company to resume the
conduct and management of its affairs and business under all of the other
provisions of these By-Laws.
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<PAGE> 21
Section 2. Trust Committee
(A) The Trust Committee shall be composed of not more than
thirteen members who shall be selected by the Board of Directors, a majority of
whom shall be members of the Board of Directors and who shall hold office during
the pleasure of the Board.
(B) The Trust Committee shall have general supervision over
the Trust Department and the investment of trust funds, in all matters, however,
being subject to the approval of the Board of Directors.
(C) The Trust Committee shall meet at the principal office
of the Company or elsewhere in its discretion at such times to be determined by
a majority of its members or at the call of its chairman. A majority of its
members shall be necessary to constitute a quorum for the transaction of
business.
(D) Minutes of each meeting of the Trust Committee shall be
kept and promptly submitted to the Board of Directors.
(E) The Trust Committee shall have the power to appoint
Committees and/or designate officers or employees of the Company to whom
supervision over the investment of trust funds may be delegated when the Trust
Committee is not in session.
Section 3. Audit Committee
(A) The Audit Committee shall be composed of five members
who shall be selected by the Board of Directors from its own members, none of
whom shall be an officer of the Company, and shall hold office at the pleasure
of the Board.
(B) The Audit Committee shall have general supervision over
the Audit Division in all matters however subject to the approval of the Board
of Directors; it shall consider all matters brought to its attention by the
officer in charge of the Audit Division, review all reports of examination of
the Company made by any governmental agency or such independent auditor employed
for that purpose, and make such recommendations to the Board of Directors with
respect thereto or with respect to any other matters pertaining to auditing the
Company as it shall deem desirable.
(C) The Audit Committee shall meet whenever and wherever the
majority of its members shall deem it to be proper for the transaction of its
business, and a majority of its Committee shall constitute a quorum.
Section 4. Compensation Committee
(A) The Compensation Committee shall be composed of not more
than
4
<PAGE> 22
five (5) members who shall be selected by the Board of Directors from its own
members who are not officers of the Company and who shall hold office during the
pleasure of the Board.
(B) The Compensation Committee shall in general advise upon
all matters of policy concerning the Company brought to its attention by the
management and from time to time review the management of the Company, major
organizational matters, including salaries and employee benefits and
specifically shall administer the Executive Incentive Compensation Plan.
(C) Meetings of the Compensation Committee may be called at
any time by the Chairman of the Compensation Committee, the Chairman of the
Board of Directors, or the President of the Company.
Section 5. Associate Directors
(A) Any person who has served as a director may be elected
by the Board of Directors as an associate director, to serve during the pleasure
of the Board.
(B) An associate director shall be entitled to attend all
directors meetings and participate in the discussion of all matters brought to
the Board, with the exception that he would have no right to vote. An associate
director will be eligible for appointment to Committees of the Company, with the
exception of the Executive Committee, Audit Committee and Compensation
Committee, which must be comprised solely of active directors.
Section 6. Absence or Disqualification of Any Member of a Committee
(A) In the absence or disqualification of any member of any
Committee created under Article III of the By-Laws of this Company, 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 the place of any such
absence or disqualified member.
ARTICLE IV
OFFICERS
Section 1. The Chairman of the Board of Directors shall preside at all
meetings of the Board and shall have such further authority and powers and shall
perform such duties as the Board of Directors may from time to time confer and
direct. He shall also exercise such powers and perform such duties as may from
time to time be agreed upon between himself and the President of the Company.
Section 2. The Vice Chairman of the Board. The Vice Chairman of the
Board of
5
<PAGE> 23
Directors shall preside at all meetings of the Board of Directors at which the
Chairman of the Board shall not be present and shall have such further authority
and powers and shall perform such duties as the Board of Directors or the
Chairman of the Board may from time to time confer and direct.
Section 3. The President shall have the powers and duties pertaining
to the office of the President conferred or imposed upon him by statute or
assigned to him by the Board of Directors in the absence of the Chairman of the
Board the President shall have the powers and duties of the Chairman of the
Board.
Section 4. The Chairman of the Board of Directors or the President as
designated by the Board of Directors, shall carry into effect all legal
directions of the Executive Committee and of the Board of Directors, and shall
at all times exercise general supervision over the interest, affairs and
operations of the Company and perform all duties incident to his office.
Section 5. There may be one or more Vice Presidents, however
denominated by the Board of Directors, who may at any time perform all the
duties of the Chairman of the Board of Directors and/or the President and such
other powers and duties as may from time to time be assigned to them by the
Board of Directors, the Executive Committee, the Chairman of the Board or the
President and by the officer in charge of the department or division to which
they are assigned.
Section 6. The Secretary shall attend to the giving of notice of
meetings of the stockholders and the Board of Directors, as well as the
Committees thereof, to the keeping of accurate minutes of all such meetings and
to recording the same in the minute books of the Company. In addition to the
other notice requirements of these By-Laws and as may be practicable under the
circumstances, all such notices shall be in writing and mailed well in advance
of the scheduled date of any other meeting. He shall have custody of the
corporate seal and shall affix the same to any documents requiring such
corporate seal and to attest the same.
Section 7. The Treasurer shall have general supervision over all
assets and liabilities of the Company. He shall be custodian of and responsible
for all monies, funds and valuables of the Company and for the keeping of proper
records of the evidence of property or indebtedness and of all the transactions
of the Company. He shall have general supervision of the expenditures of the
Company and shall report to the Board of Directors at each regular meeting of
the condition of the Company, and perform such other duties as may be assigned
to him from time to time by the Board of Directors of the Executive Committee.
Section 8. There may be a Controller who shall exercise general
supervision over the internal operations of the Company, including accounting,
and shall render to the Board of Directors at appropriate times a report
relating to the general condition and internal operations of the Company.
6
<PAGE> 24
There may be one or more subordinate accounting or controller officers
however denominated, who may perform the duties of the Controller and such
duties as may be prescribed by the Controller.
Section 9. The officer designated by the Board of Directors to be in
charge of the Audit Division of the Company with such title as the Board of
Directors shall prescribe, shall report to and be directly responsible only to
the Board of Directors.
There shall be an Auditor and there may be one or more Audit Officers,
however denominated, who may perform all the duties of the Auditor and such
duties as may be prescribed by the officer in charge of the Audit Division.
Section 10. There may be one or more officers, subordinate in rank to
all Vice Presidents with such functional titles as shall be determined from time
to time by the Board of Directors, who shall ex officio hold the office
Assistant Secretary of this Company and who may perform such duties as may be
prescribed by the officer in charge of the department or division to whom they
are assigned.
Section 11. The powers and duties of all other officers of the Company
shall be those usually pertaining to their respective offices, subject to the
direction of the Board of Directors, the Executive Committee, Chairman of the
Board of Directors or the President and the officer in charge of the department
or division to which they are assigned.
ARTICLE V
STOCK AND STOCK CERTIFICATES
Section 1. Shares of stock shall be transferrable on the books of the
Company and a transfer book shall be kept in which all transfers of stock shall
be recorded.
Section 2. Certificate of stock shall bear the signature of the
President or any Vice President, however denominated by the Board of Directors
and countersigned by the Secretary or Treasurer or an Assistant Secretary, and
the seal of the corporation shall be engraved thereon. Each certificate shall
recite that the stock represented thereby is transferrable only upon the books
of the Company by the holder thereof or his attorney, upon surrender of the
certificate properly endorsed. Any certificate of stock surrendered to the
Company shall be cancelled at the time of transfer, and before a new certificate
or certificates shall be issued in lieu thereof. Duplicate certificates of stock
shall be issued only upon giving such security as may be satisfactory to the
Board of Directors or the Executive Committee.
Section 3. The Board of Directors of the Company is authorized to fix
in advance a record date for the determination of the stockholders entitled to
notice of, and to vote at, any meeting of stockholders and any adjournment
thereof, or entitled to receive payment of
7
<PAGE> 25
any dividend, or to any allotment or rights, or to exercise any rights in
respect of any change, conversion or exchange of capital stock, or in connection
with obtaining the consent of stockholders for any purpose, which record date
shall not be more than 60 nor less than 10 days proceeding the date of any
meeting of stockholders or the date for the payment of any dividend, or the date
for the allotment of rights, or the date when any change or conversion or
exchange of capital stock shall go into effect, or a date in connection with
obtaining such consent.
ARTICLE VI
SEAL
Section 1. The corporate seal of the Company shall be in the following
form:
Between two concentric circles the words "Wilmington Trust
Company" within the inner circle the words "Wilmington,
Delaware."
ARTICLE VII
FISCAL YEAR
Section 1. The fiscal year of the Company shall be the calendar year.
ARTICLE VIII
EXECUTION OF INSTRUMENTS OF THE COMPANY
Section 1. The Chairman of the Board, the President or any Vice
President, however denominated by the Board of Directors, shall have full power
and authority to enter into, make, sign, execute, acknowledge and/or deliver and
the Secretary or any Assistant Secretary shall have full power and authority to
attest and affix the corporate seal of the Company to any and all deeds,
conveyances, assignments, releases, contracts, agreements, bonds, notes,
mortgages and all other instruments incident to the business of this Company or
in acting as executor, administrator, guardian, trustee, agent or in any other
fiduciary or representative capacity by any and every method of appointment or
by whatever person, corporation, court officer or authority in the State of
Delaware, or elsewhere, without any specific authority, ratification, approval
or confirmation by the Board of Directors or the Executive Committee, and any
and all such instruments shall have the same force and validity as though
expressly authorized by the Board of Directors and/or the Executive Committee.
8
<PAGE> 26
ARTICLE IX
COMPENSATION OF DIRECTORS AND MEMBERS OF COMMITTEES
Section 1. Directors and associate directors of the Company, other
than salaried officers of the Company, shall be paid such reasonable honoraria
or fees for attending meetings of the Board of Directors as the Board of
Directors may from time to time determine. Directors and associate directors who
serve as members of committees, other than salaried employees of the Company,
shall be paid such reasonable honoraria or fees for services as members of
committees as the Board of Directors shall from time to time determine and
directors and associate directors may be employed by the Company for such
special services as the Board of Directors may from time to time determine and
shall be paid for such special services so performed reasonable compensation as
may be determined by the Board of Directors.
ARTICLE X
INDEMNIFICATION
Section 1. (A) 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 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, officer, employee or agent of the Corporation or is or was serving
at the request of the Corporation as a director, officer, employee, fiduciary or
agent of another corporation or of a partnership, joint venture, trust,
enterprise or non-profit entity, including service with respect to employee
benefit plans, against all liability and loss suffered and expenses reasonably
incurred by such person. The Corporation shall indemnify a person in connection
with a proceeding initiated by such person only if the proceeding was authorized
by the Board of Directors of the Corporation.
(B) The Corporation shall pay the expenses incurred in
defending any proceeding in advance of its final disposition, provided, however,
that the payment of expenses incurred by a Director officer in his capacity as a
Director or officer in advance of the final disposition of the proceeding shall
be made only upon receipt of an undertaking by the Director or officer to repay
all amounts advanced if it should be ultimately determined that the Director or
officer is not entitled to be indemnified under this Article or otherwise.
(C) If a claim for indemnification or payment of expenses,
under this Article X is not paid in full within ninety days after a written
claim therefor has been received by the Corporation the claimant 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 claimant
was not entitled to the requested indemnification of payment of expenses
9
<PAGE> 27
under applicable law.
(D) The rights conferred on any person by this Article X
shall not be exclusive of any other rights which such person may have or
hereafter acquire under any statute, provision of the Charter or Act of
Incorporation, these By-Laws, agreement, vote of stockholders or disinterested
Directors or otherwise.
(E) Any repeal or modification of the foregoing provisions
of this Article X shall not adversely affect any right or protection hereunder
of any person in respect of any act or omission occurring prior to the time of
such repeal or modification.
ARTICLE XI
AMENDMENTS TO THE BY-LAWS
Section 1. These By-Laws may be altered, amended or repealed, in whole
or in part, and any new By-Law or By-Laws adopted at any regular or special
meeting of the Board of Directors by a vote of the majority of all the members
of the Board of Directors then in office.
10
<PAGE> 28
EXHIBIT C
SECTION 321(B) CONSENT
Pursuant to Section 321(b) of the Trust Indenture Act of 1939, as
amended, Wilmington Trust Company hereby consents that reports of examinations
by Federal, State, Territorial or District authorities may be furnished by such
authorities to the Securities and Exchange Commission upon requests therefor.
WILMINGTON TRUST COMPANY
Dated: December 18, 1997 By: /s/ James P. Lawler
-----------------------
Name: James P. Lawler
Title: Vice President
<PAGE> 29
EXHIBIT D
NOTICE
This form is intended to assist state nonmember banks and savings banks with
state publication requirements. It has not been approved by any state banking
authorities. Refer to your appropriate state banking authorities for your state
publication requirements.
R E P O R T O F C O N D I T I O N
Consolidating domestic subsidiaries of the
WILMINGTON TRUST COMPANY of WILMINGTON
- --------------------------------------------------- --------------------
Name of Bank City
in the State of DELAWARE , at the close of business on September 30, 1997.
<TABLE>
<CAPTION>
ASSETS
Thousands of dollars
<S> <C>
Cash and balances due from depository institutions:
Noninterest-bearing balances and currency and coins..........................206,619
Interest-bearing balances........................................................ 0
Held-to-maturity securities.......................................................... 364,899
Available-for-sale securities........................................................1,038,826
Federal funds sold and securities purchased under agreements to resell.................126,000
Loans and lease financing receivables:
Loans and leases, net of unearned income............. 3,830,772
LESS: Allowance for loan and lease losses........... 55,936
LESS: Allocated transfer risk reserve............... 0
Loans and leases, net of unearned income, allowance, and reserve...........3,774,836
Assets held in trading accounts..............................................................0
Premises and fixed assets (including capitalized leases)...............................118,895
Other real estate owned................................................................. 1,830
Investments in unconsolidated subsidiaries and associated companies....................... 34
Customers' liability to this bank on acceptances outstanding.................................0
Intangible assets........................................................................5,215
Other assets........................................................................... 91,240
Total assets.........................................................................5,728,394
</TABLE>
CONTINUED ON NEXT PAGE
<PAGE> 30
<TABLE>
<CAPTION>
<S> <C>
LIABILITIES
Deposits:
In domestic offices..................................................................3,980,001
Noninterest-bearing................ 859,817
Interest-bearing................... 3,120,184
Federal funds purchased and Securities sold under agreements to repurchase............ 327,543
Demand notes issued to the U.S. Treasury................................................89,508
Trading liabilities (from Schedule RC-D).....................................................0
Other borrowed money:..................................................................///////
With original maturity of one year or less...................................734,000
With original maturity of more than one year..................................43,000
Bank's liability on acceptances executed and outstanding.....................................0
Subordinated notes and debentures............................................................0
Other liabilities (from Schedule RC-G)............................................... 104,674
Total liabilities....................................................................5,278,726
EQUITY CAPITAL
Perpetual preferred stock and related surplus................................................0
Common Stock...............................................................................500
Surplus (exclude all surplus related to preferred stock)................................62,118
Undivided profits and capital reserves.................................................380,993
Net unrealized holding gains (losses) on available-for-sale securities...................6,057
Total equity capital...................................................................449,668
Total liabilities, limited-life preferred stock, and equity capital..................5,728,394
</TABLE>
2
<PAGE> 1
EXHIBIT 25.2
Registration No.
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM T-1
STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939
OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2)
WILMINGTON TRUST COMPANY
(Exact name of trustee as specified in its charter)
Delaware 51-0055023
(State of incorporation) (I.R.S. employer identification no.)
Rodney Square North
1100 North Market Street
Wilmington, Delaware 19890
(Address of principal executive offices)
Cynthia L. Corliss
Vice President and Trust Counsel
Wilmington Trust Company
Rodney Square North
Wilmington, Delaware 19890
(302) 651-8516
(Name, address and telephone number of agent for service)
SUPERIOR NATIONAL INSURANCE GROUP, INC.
SUPERIOR NATIONAL CAPITAL TRUST I
(Exact name of obligor as specified in its charter)
Delaware 95-4610936
Delaware 52-2069953
(State of incorporation) (I.R.S. employer identification no.)
26601 Agoura Road
Calabasas, California 91302
(Address of principal executive offices) (Zip Code)
10 3/4% Trust Preferred Securities of
Superior National Capital Trust I
(Title of the indenture securities)
================================================================================
<PAGE> 2
ITEM 1. GENERAL INFORMATION.
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to
which it is subject.
Federal Deposit Insurance Co. State Bank Commissioner
Five Penn Center Dover, Delaware
Suite #2901
Philadelphia, PA
(b) Whether it is authorized to exercise corporate trust powers.
The trustee is authorized to exercise corporate trust powers.
ITEM 2. AFFILIATIONS WITH THE OBLIGOR.
If the obligor is an affiliate of the trustee, describe each
affiliation:
Based upon an examination of the books and records of the
trustee and upon information furnished by the obligor, the obligor is
not an affiliate of the trustee.
ITEM 3. LIST OF EXHIBITS.
List below all exhibits filed as part of this Statement of
Eligibility and Qualification.
A. Copy of the Charter of Wilmington Trust Company, which includes
the certificate of authority of Wilmington Trust Company to
commence business and the authorization of Wilmington Trust
Company to exercise corporate trust powers.
B. Copy of By-Laws of Wilmington Trust Company.
C. Consent of Wilmington Trust Company required by Section 321(b)
of Trust Indenture Act.
D. Copy of most recent Report of Condition of Wilmington Trust
Company.
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the trustee, Wilmington Trust Company, a corporation organized and
existing under the laws of Delaware, has duly caused this Statement of
Eligibility to be signed on its behalf by the undersigned, thereunto duly
authorized, all in the City of Wilmington and State of Delaware on the 18th day
of December, 1997.
WILMINGTON TRUST COMPANY
[SEAL]
Attest: /s/ Emmett R. Harmon By: /s/ James P. Lawler
------------------------- ----------------------------
Assistant Secretary Name: James P. Lawler
Title: Vice President
2
<PAGE> 3
EXHIBIT A
AMENDED CHARTER
WILMINGTON TRUST COMPANY
WILMINGTON, DELAWARE
AS EXISTING ON MAY 9, 1987
<PAGE> 4
AMENDED CHARTER
OR
ACT OF INCORPORATION
OF
WILMINGTON TRUST COMPANY
WILMINGTON TRUST COMPANY, originally incorporated by an Act of the
General Assembly of the State of Delaware, entitled "An Act to Incorporate the
Delaware Guarantee and Trust Company", approved March 2, A.D. 1901, and the name
of which company was changed to "WILMINGTON TRUST COMPANY" by an amendment filed
in the Office of the Secretary of State on March 18, A.D. 1903, and the Charter
or Act of Incorporation of which company has been from time to time amended and
changed by merger agreements pursuant to the corporation law for state banks and
trust companies of the State of Delaware, does hereby alter and amend its
Charter or Act of Incorporation so that the same as so altered and amended shall
in its entirety read as follows:
FIRST: - The name of this corporation is WILMINGTON TRUST COMPANY.
SECOND: - The location of its principal office in the State of
Delaware is at Rodney Square North, in the City of Wilmington, County
of New Castle; the name of its resident agent is WILMINGTON TRUST
COMPANY whose address is Rodney Square North, in said City. In
addition to such principal office, the said corporation maintains and
operates branch offices in the City of Newark, New Castle County,
Delaware, the Town of Newport, New Castle County, Delaware, at
Claymont, New Castle County, Delaware, at Greenville, New Castle
County Delaware, and at Milford Cross Roads, New Castle County,
Delaware, and shall be empowered to open, maintain and operate branch
offices at Ninth and Shipley Streets, 418 Delaware Avenue, 2120 Market
Street, and 3605 Market Street, all in the City of Wilmington, New
Castle County, Delaware, and such other branch offices or places of
business as may be authorized from time to time by the agency or
agencies of the government of the State of Delaware empowered to
confer such authority.
THIRD: - (a) The nature of the business and the objects and purposes
proposed to be transacted, promoted or carried on by this Corporation
are to do any or all of the things herein mentioned as fully and to
the same extent as natural persons might or could do and in any part
of the world, viz.:
(1) To sue and be sued, complain and defend in any Court of law
or equity and to make and use a common seal, and alter the seal
at pleasure, to hold, purchase, convey, mortgage or otherwise
deal in real and personal estate and property, and to appoint
such officers and agents as the business of the
<PAGE> 5
Corporation shall require, to make by-laws not inconsistent with
the Constitution or laws of the United States or of this State,
to discount bills, notes or other evidences of debt, to receive
deposits of money, or securities for money, to buy gold and
silver bullion and foreign coins, to buy and sell bills of
exchange, and generally to use, exercise and enjoy all the
powers, rights, privileges and franchises incident to a
corporation which are proper or necessary for the transaction of
the business of the Corporation hereby created.
(2) To insure titles to real and personal property, or any
estate or interests therein, and to guarantee the holder of such
property, real or personal, against any claim or claims, adverse
to his interest therein, and to prepare and give certificates of
title for any lands or premises in the State of Delaware, or
elsewhere.
(3) To act as factor, agent, broker or attorney in the receipt,
collection, custody, investment and management of funds, and the
purchase, sale, management and disposal of property of all
descriptions, and to prepare and execute all papers which may be
necessary or proper in such business.
(4) To prepare and draw agreements, contracts, deeds, leases,
conveyances, mortgages, bonds and legal papers of every
description, and to carry on the business of conveyancing in all
its branches.
(5) To receive upon deposit for safekeeping money, jewelry,
plate, deeds, bonds and any and all other personal property of
every sort and kind, from executors, administrators, guardians,
public officers, courts, receivers, assignees, trustees, and
from all fiduciaries, and from all other persons and
individuals, and from all corporations whether state, municipal,
corporate or private, and to rent boxes, safes, vaults and other
receptacles for such property.
(6) To act as agent or otherwise for the purpose of registering,
issuing, certificating, countersigning, transferring or
underwriting the stock, bonds or other obligations of any
corporation, association, state or municipality, and may receive
and manage any sinking fund therefor on such terms as may be
agreed upon between the two parties, and in like manner may act
as Treasurer of any corporation or municipality.
(7) To act as Trustee under any deed of trust, mortgage, bond or
other instrument issued by any state, municipality, body
politic, corporation, association or person, either alone or in
conjunction with any other person or persons, corporation or
corporations.
2
<PAGE> 6
(8) To guarantee the validity, performance or effect of any
contract or agreement, and the fidelity of persons holding
places of responsibility or trust; to become surety for any
person, or persons, for the faithful performance of any trust,
office, duty, contract or agreement, either by itself or in
conjunction with any other person, or persons, corporation, or
corporations, or in like manner become surety upon any bond,
recognizance, obligation, judgment, suit, order, or decree to be
entered in any court of record within the State of Delaware or
elsewhere, or which may now or hereafter be required by any law,
judge, officer or court in the State of Delaware or elsewhere.
(9) To act by any and every method of appointment as trustee,
trustee in bankruptcy, receiver, assignee, assignee in
bankruptcy, executor, administrator, guardian, bailee, or in any
other trust capacity in the receiving, holding, managing, and
disposing of any and all estates and property, real, personal or
mixed, and to be appointed as such trustee, trustee in
bankruptcy, receiver, assignee, assignee in bankruptcy,
executor, administrator, guardian or bailee by any persons,
corporations, court, officer, or authority, in the State of
Delaware or elsewhere; and whenever this Corporation is so
appointed by any person, corporation, court, officer or
authority such trustee, trustee in bankruptcy, receiver,
assignee, assignee in bankruptcy, executor, administrator,
guardian, bailee, or in any other trust capacity, it shall not
be required to give bond with surety, but its capital stock
shall be taken and held as security for the performance of the
duties devolving upon it by such appointment.
(10) And for its care, management and trouble, and the exercise
of any of its powers hereby given, or for the performance of any
of the duties which it may undertake or be called upon to
perform, or for the assumption of any responsibility the said
Corporation may be entitled to receive a proper compensation.
(11) To purchase, receive, hold and own bonds, mortgages,
debentures, shares of capital stock, and other securities,
obligations, contracts and evidences of indebtedness, of any
private, public or municipal corporation within and without the
State of Delaware, or of the Government of the United States, or
of any state, territory, colony, or possession thereof, or of
any foreign government or country; to receive, collect, receipt
for, and dispose of interest, dividends and income upon and from
any of the bonds, mortgages, debentures, notes, shares of
capital stock, securities, obligations, contracts, evidences of
indebtedness and other property held and owned by it, and to
exercise in respect of all such bonds, mortgages, debentures,
notes, shares of capital stock, securities, obligations,
contracts, evidences of indebtedness and other property, any and
all the rights, powers and privileges of individual
3
<PAGE> 7
owners thereof, including the right to vote thereon; to invest
and deal in and with any of the moneys of the Corporation upon
such securities and in such manner as it may think fit and
proper, and from time to time to vary or realize such
investments; to issue bonds and secure the same by pledges or
deeds of trust or mortgages of or upon the whole or any part of
the property held or owned by the Corporation, and to sell and
pledge such bonds, as and when the Board of Directors shall
determine, and in the promotion of its said corporate business
of investment and to the extent authorized by law, to lease,
purchase, hold, sell, assign, transfer, pledge, mortgage and
convey real and personal property of any name and nature and any
estate or interest therein.
(b) In furtherance of, and not in limitation, of the powers conferred
by the laws of the State of Delaware, it is hereby expressly provided
that the said Corporation shall also have the following powers:
(1) To do any or all of the things herein set forth, to the same
extent as natural persons might or could do, and in any part of
the world.
(2) To acquire the good will, rights, property and franchises
and to undertake the whole or any part of the assets and
liabilities of any person, firm, association or corporation, and
to pay for the same in cash, stock of this Corporation, bonds or
otherwise; to hold or in any manner to dispose of the whole or
any part of the property so purchased; to conduct in any lawful
manner the whole or any part of any business so acquired, and to
exercise all the powers necessary or convenient in and about the
conduct and management of such business.
(3) To take, hold, own, deal in, mortgage or otherwise lien, and
to lease, sell, exchange, transfer, or in any manner whatever
dispose of property, real, personal or mixed, wherever situated.
(4) To enter into, make, perform and carry out contracts of
every kind with any person, firm, association or corporation,
and, without limit as to amount, to draw, make, accept, endorse,
discount, execute and issue promissory notes, drafts, bills of
exchange, warrants, bonds, debentures, and other negotiable or
transferable instruments.
(5) To have one or more offices, to carry on all or any of its
operations and businesses, without restriction to the same
extent as natural persons might or could do, to purchase or
otherwise acquire, to hold, own, to mortgage, sell, convey or
otherwise dispose of, real and personal property, of every class
and description, in any State, District, Territory or Colony of
the United States, and in any foreign country or place.
4
<PAGE> 8
(6) It is the intention that the objects, purposes and powers
specified and clauses contained in this paragraph shall (except
where otherwise expressed in said paragraph) be nowise limited
or restricted by reference to or inference from the terms of any
other clause of this or any other paragraph in this charter, but
that the objects, purposes and powers specified in each of the
clauses of this paragraph shall be regarded as independent
objects, purposes and powers.
FOURTH: - (a) The total number of shares of all classes of stock which
the Corporation shall have authority to issue is forty-one million
(41,000,000) shares, consisting of:
(1) One million (1,000,000) shares of Preferred stock, par value
$10.00 per share (hereinafter referred to as "Preferred Stock");
and
(2) Forty million (40,000,000) shares of Common Stock, par value
$1.00 per share (hereinafter referred to as "Common Stock").
(b) Shares of Preferred Stock may be issued from time to time in one
or more series as may from time to time be determined by the Board of
Directors each of said series to be distinctly designated. All shares
of any one series of Preferred Stock shall be alike in every
particular, except that there may be different dates from which
dividends, if any, thereon shall be cumulative, if made cumulative.
The voting powers and the preferences and relative, participating,
optional and other special rights of each such series, and the
qualifications, limitations or restrictions thereof, if any, may
differ from those of any and all other series at any time outstanding;
and, subject to the provisions of subparagraph 1 of Paragraph (c) of
this Article FOURTH, the Board of Directors of the Corporation is
hereby expressly granted authority to fix by resolution or resolutions
adopted prior to the issuance of any shares of a particular series of
Preferred Stock, the voting powers and the designations, preferences
and relative, optional and other special rights, and the
qualifications, limitations and restrictions of such series,
including, but without limiting the generality of the foregoing, the
following:
(1) The distinctive designation of, and the number of shares of
Preferred Stock which shall constitute such series, which number
may be increased (except where otherwise provided by the Board
of Directors) or decreased (but not below the number of shares
thereof then outstanding) from time to time by like action of
the Board of Directors;
(2) The rate and times at which, and the terms and conditions on
which, dividends, if any, on Preferred Stock of such series
shall be paid, the extent of the preference or relation, if any,
of such dividends to the dividends payable on any other class or
classes, or series of the same or other class of
5
<PAGE> 9
stock and whether such dividends shall be cumulative or
non-cumulative;
(3) The right, if any, of the holders of Preferred Stock of such
series to convert the same into or exchange the same for, shares
of any other class or classes or of any series of the same or
any other class or classes of stock of the Corporation and the
terms and conditions of such conversion or exchange;
(4) Whether or not Preferred Stock of such series shall be
subject to redemption, and the redemption price or prices and
the time or times at which, and the terms and conditions on
which, Preferred Stock of such series may be redeemed.
(5) The rights, if any, of the holders of Preferred Stock of
such series upon the voluntary or involuntary liquidation,
merger, consolidation, distribution or sale of assets,
dissolution or winding-up, of the Corporation.
(6) The terms of the sinking fund or redemption or purchase
account, if any, to be provided for the Preferred Stock of such
series; and
(7) The voting powers, if any, of the holders of such series of
Preferred Stock which may, without limiting the generality of
the foregoing include the right, voting as a series or by itself
or together with other series of Preferred Stock or all series
of Preferred Stock as a class, to elect one or more directors of
the Corporation if there shall have been a default in the
payment of dividends on any one or more series of Preferred
Stock or under such circumstances and on such conditions as the
Board of Directors may determine.
(c) (1) After the requirements with respect to preferential dividends
on the Preferred Stock (fixed in accordance with the provisions of
section (b) of this Article FOURTH), if any, shall have been met and
after the Corporation shall have complied with all the requirements,
if any, with respect to the setting aside of sums as sinking funds or
redemption or purchase accounts (fixed in accordance with the
provisions of section (b) of this Article FOURTH), and subject further
to any conditions which may be fixed in accordance with the provisions
of section (b) of this Article FOURTH, then and not otherwise the
holders of Common Stock shall be entitled to receive such dividends as
may be declared from time to time by the Board of Directors.
(2) After distribution in full of the preferential amount, if
any, (fixed in accordance with the provisions of section (b) of
this Article FOURTH), to be distributed to the holders of
Preferred Stock in the event of voluntary or involuntary
liquidation, distribution or sale of assets, dissolution or
winding-up, of the Corporation, the holders of the Common Stock
shall be entitled to
6
<PAGE> 10
receive all of the remaining assets of the Corporation, tangible
and intangible, of whatever kind available for distribution to
stockholders ratably in proportion to the number of shares of
Common Stock held by them respectively.
(3) Except as may otherwise be required by law or by the
provisions of such resolution or resolutions as may be adopted
by the Board of Directors pursuant to section (b) of this
Article FOURTH, each holder of Common Stock shall have one vote
in respect of each share of Common Stock held on all matters
voted upon by the stockholders.
(d) No holder of any of the shares of any class or series of stock or
of options, warrants or other rights to purchase shares of any class
or series of stock or of other securities of the Corporation shall
have any preemptive right to purchase or subscribe for any unissued
stock of any class or series or any additional shares of any class or
series to be issued by reason of any increase of the authorized
capital stock of the Corporation of any class or series, or bonds,
certificates of indebtedness, debentures or other securities
convertible into or exchangeable for stock of the Corporation of any
class or series, or carrying any right to purchase stock of any class
or series, but any such unissued stock, additional authorized issue of
shares of any class or series of stock or securities convertible into
or exchangeable for stock, or carrying any right to purchase stock,
may be issued and disposed of pursuant to resolution of the Board of
Directors to such persons, firms, corporations or associations,
whether such holders or others, and upon such terms as may be deemed
advisable by the Board of Directors in the exercise of its sole
discretion.
(e) The relative powers, preferences and rights of each series of
Preferred Stock in relation to the relative powers, preferences and
rights of each other series of Preferred Stock shall, in each case, be
as fixed from time to time by the Board of Directors in the resolution
or resolutions adopted pursuant to authority granted in section (b) of
this Article FOURTH and the consent, by class or series vote or
otherwise, of the holders of such of the series of Preferred Stock as
are from time to time outstanding shall not be required for the
issuance by the Board of Directors of any other series of Preferred
Stock whether or not the powers, preferences and rights of such other
series shall be fixed by the Board of Directors as senior to, or on a
parity with, the powers, preferences and rights of such outstanding
series, or any of them; provided, however, that the Board of Directors
may provide in the resolution or resolutions as to any series of
Preferred Stock adopted pursuant to section (b) of this Article FOURTH
that the consent of the holders of a majority (or such greater
proportion as shall be therein fixed) of the outstanding shares of
such series voting thereon shall be required for the issuance of any
or all other series of Preferred Stock.
7
<PAGE> 11
(f) Subject to the provisions of section (e), shares of any series of
Preferred Stock may be issued from time to time as the Board of
Directors of the Corporation shall determine and on such terms and for
such consideration as shall be fixed by the Board of Directors.
(g) Shares of Common Stock may be issued from time to time as the
Board of Directors of the Corporation shall determine and on such
terms and for such consideration as shall be fixed by the Board of
Directors.
(h) The authorized amount of shares of Common Stock and of Preferred
Stock may, without a class or series vote, be increased or decreased
from time to time by the affirmative vote of the holders of a majority
of the stock of the Corporation entitled to vote thereon.
FIFTH: - (a) The business and affairs of the Corporation shall be
conducted and managed by a Board of Directors. The number of directors
constituting the entire Board shall be not less than five nor more
than twenty-five as fixed from time to time by vote of a majority of
the whole Board, provided, however, that the number of directors shall
not be reduced so as to shorten the term of any director at the time
in office, and provided further, that the number of directors
constituting the whole Board shall be twenty-four until otherwise
fixed by a majority of the whole Board.
(b) The Board of Directors shall be divided into three classes, as
nearly equal in number as the then total number of directors
constituting the whole Board permits, with the term of office of one
class expiring each year. At the annual meeting of stockholders in
1982, directors of the first class shall be elected to hold office for
a term expiring at the next succeeding annual meeting, directors of
the second class shall be elected to hold office for a term expiring
at the second succeeding annual meeting and directors of the third
class shall be elected to hold office for a term expiring at the third
succeeding annual meeting. Any vacancies in the Board of Directors for
any reason, and any newly created directorships resulting from any
increase in the directors, may be filled by the Board of Directors,
acting by a majority of the directors then in office, although less
than a quorum, and any directors so chosen shall hold office until the
next annual election of directors. At such election, the stockholders
shall elect a successor to such director to hold office until the next
election of the class for which such director shall have been chosen
and until his successor shall be elected and qualified. No decrease in
the number of directors shall shorten the term of any incumbent
director.
(c) Notwithstanding any other provisions of this Charter or Act of
Incorporation or the By-Laws of the Corporation (and notwithstanding
the fact that some lesser percentage may be specified by law, this
Charter or Act of Incorporation or the ByLaws of the Corporation), any
director or the entire Board of Directors of the
8
<PAGE> 12
Corporation may be removed at any time without cause, but only by the
affirmative vote of the holders of two-thirds or more of the
outstanding shares of capital stock of the Corporation entitled to
vote generally in the election of directors (considered for this
purpose as one class) cast at a meeting of the stockholders called for
that purpose.
(d) Nominations for the election of directors may be made by the Board
of Directors or by any stockholder entitled to vote for the election
of directors. Such nominations shall be made by notice in writing,
delivered or mailed by first class United States mail, postage
prepaid, to the Secretary of the Corporation not less than 14 days nor
more than 50 days prior to any meeting of the stockholders called for
the election of directors; provided, however, that if less than 21
days' notice of the meeting is given to stockholders, such written
notice shall be delivered or mailed, as prescribed, to the Secretary
of the Corporation not later than the close of the seventh day
following the day on which notice of the meeting was mailed to
stockholders. Notice of nominations which are proposed by the Board of
Directors shall be given by the Chairman on behalf of the Board.
(e) Each notice under subsection (d) shall set forth (i) the name,
age, business address and, if known, residence address of each nominee
proposed in such notice, (ii) the principal occupation or employment
of such nominee and (iii) the number of shares of stock of the
Corporation which are beneficially owned by each such nominee.
(f) The Chairman of the meeting may, if the facts warrant, determine
and declare to the meeting that a nomination was not made in
accordance with the foregoing procedure, and if he should so
determine, he shall so declare to the meeting and the defective
nomination shall be disregarded.
(g) No action required to be taken or which may be taken at any annual
or special meeting of stockholders of the Corporation may be taken
without a meeting, and the power of stockholders to consent in
writing, without a meeting, to the taking of any action is
specifically denied.
SIXTH: - The Directors shall choose such officers, agent and servants
as may be provided in the By-Laws as they may from time to time find
necessary or proper.
SEVENTH: - The Corporation hereby created is hereby given the same
powers, rights and privileges as may be conferred upon corporations
organized under the Act entitled "An Act Providing a General
Corporation Law", approved March 10, 1899, as from time to time
amended.
EIGHTH: - This Act shall be deemed and taken to be a private Act.
9
<PAGE> 13
NINTH: - This Corporation is to have perpetual existence.
TENTH: - The Board of Directors, by resolution passed by a majority of
the whole Board, may designate any of their number to constitute an
Executive Committee, which Committee, to the extent provided in said
resolution, or in the By-Laws of the Company, shall have and may
exercise all of the powers of the Board of Directors in the management
of the business and affairs of the Corporation, and shall have power
to authorize the seal of the Corporation to be affixed to all papers
which may require it.
ELEVENTH: - The private property of the stockholders shall not be
liable for the payment of corporate debts to any extent whatever.
TWELFTH: - The Corporation may transact business in any part of the
world.
THIRTEENTH: - The Board of Directors of the Corporation is expressly
authorized to make, alter or repeal the By-Laws of the Corporation by
a vote of the majority of the entire Board. The stockholders may make,
alter or repeal any By-Law whether or not adopted by them, provided
however, that any such additional By-Laws, alterations or repeal may
be adopted only by the affirmative vote of the holders of two-thirds
or more of the outstanding shares of capital stock of the Corporation
entitled to vote generally in the election of directors (considered
for this purpose as one class).
FOURTEENTH: - Meetings of the Directors may be held outside
of the State of Delaware at such places as may be from time to time
designated by the Board, and the Directors may keep the books of the
Company outside of the State of Delaware at such places as may be from
time to time designated by them.
FIFTEENTH: - (a) In addition to any affirmative vote required by law,
and except as otherwise expressly provided in sections (b) and (c) of
this Article FIFTEENTH:
(A) any merger or consolidation of the Corporation or any
Subsidiary (as hereinafter defined) with or into (i) any
Interested Stockholder (as hereinafter defined) or (ii) any
other corporation (whether or not itself an Interested
Stockholder), which, after such merger or consolidation, would
be an Affiliate (as hereinafter defined) of an Interested
Stockholder, or
(B) any sale, lease, exchange, mortgage, pledge, transfer or
other disposition (in one transaction or a series of related
transactions) to or with any Interested Stockholder or any
Affiliate of any Interested Stockholder of any assets of the
Corporation or any Subsidiary having an aggregate fair market
value of $1,000,000 or more, or
10
<PAGE> 14
(C) the issuance or transfer by the Corporation or any
Subsidiary (in one transaction or a series of related
transactions) of any securities of the Corporation or any
Subsidiary to any Interested Stockholder or any Affiliate of any
Interested Stockholder in exchange for cash, securities or other
property (or a combination thereof) having an aggregate fair
market value of $1,000,000 or more, or
(D) the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation, or
(E) any reclassification of securities (including any reverse
stock split), or recapitalization of the Corporation, or any
merger or consolidation of the Corporation with any of its
Subsidiaries or any similar transaction (whether or not with or
into or otherwise involving an Interested Stockholder) which has
the effect, directly or indirectly, of increasing the
proportionate share of the outstanding shares of any class of
equity or convertible securities of the Corporation or any
Subsidiary which is directly or indirectly owned by any
Interested Stockholder, or any Affiliate of any Interested
Stockholder,
shall require the affirmative vote of the holders of at least two-thirds of the
outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors, considered for the purpose of this
Article FIFTEENTH as one class ("Voting Shares"). Such affirmative vote shall be
required notwithstanding the fact that no vote may be required, or that some
lesser percentage may be specified, by law or in any agreement with any national
securities exchange or otherwise.
(2) The term "business combination" as used in this Article
FIFTEENTH shall mean any transaction which is referred to any
one or more of clauses (A) through (E) of paragraph 1 of the
section (a).
(b) The provisions of section (a) of this Article FIFTEENTH
shall not be applicable to any particular business combination
and such business combination shall require only such
affirmative vote as is required by law and any other provisions
of the Charter or Act of Incorporation of By-Laws if such
business combination has been approved by a majority of the
whole Board.
(c) For the purposes of this Article FIFTEENTH:
(1) A "person" shall mean any individual firm, corporation or other
entity.
(2) "Interested Stockholder" shall mean, in respect of any business
combination, any person (other than the Corporation or any Subsidiary)
who or which as of the record date for the determination of
stockholders entitled to notice of and to vote on
11
<PAGE> 15
such business combination, or immediately prior to the consummation of
any such transaction:
(A) is the beneficial owner, directly or indirectly, of more
than 10% of the Voting Shares, or
(B) is an Affiliate of the Corporation and at any time within
two years prior thereto was the beneficial owner, directly or
indirectly, of not less than 10% of the then outstanding voting
Shares, or
(C) is an assignee of or has otherwise succeeded in any share of
capital stock of the Corporation which were at any time within
two years prior thereto beneficially owned by any Interested
Stockholder, and such assignment or succession shall have
occurred in the course of a transaction or series of
transactions not involving a public offering within the meaning
of the Securities Act of 1933.
(3) A person shall be the "beneficial owner" of any Voting Shares:
(A) which such person or any of its Affiliates and Associates
(as hereafter defined) beneficially own, directly or indirectly,
or
(B) which such person or any of its Affiliates or Associates has
(i) the right to acquire (whether such right is exercisable
immediately or only after the passage of time), pursuant to any
agreement, arrangement or understanding or upon the exercise of
conversion rights, exchange rights, warrants or options, or
otherwise, or (ii) the right to vote pursuant to any agreement,
arrangement or understanding, or
(C) which are beneficially owned, directly or indirectly, by any
other person with which such first mentioned person or any of
its Affiliates or Associates has any agreement, arrangement or
understanding for the purpose of acquiring, holding, voting or
disposing of any shares of capital stock of the Corporation.
(4) The outstanding Voting Shares shall include shares deemed owned
through application of paragraph (3) above but shall not include any
other Voting Shares which may be issuable pursuant to any agreement,
or upon exercise of conversion rights, warrants or options or
otherwise.
(5) "Affiliate" and "Associate" shall have the respective meanings
given those terms in Rule 12b-2 of the General Rules and Regulations
under the Securities Exchange Act of 1934, as in effect on December
31, 1981.
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<PAGE> 16
(6) "Subsidiary" shall mean any corporation of which a majority of any
class of equity security (as defined in Rule 3a11-1 of the General
Rules and Regulations under the Securities Exchange Act of 1934, as in
effect in December 31, 1981) is owned, directly or indirectly, by the
Corporation; provided, however, that for the purposes of the
definition of Investment Stockholder set forth in paragraph (2) of
this section (c), the term "Subsidiary" shall mean only a corporation
of which a majority of each class of equity security is owned,
directly or indirectly, by the Corporation.
(d) majority of the directors shall have the power and duty to
determine for the purposes of this Article FIFTEENTH on the
basis of information known to them, (1) the number of Voting
Shares beneficially owned by any person (2) whether a person is
an Affiliate or Associate of another, (3) whether a person has
an agreement, arrangement or understanding with another as to
the matters referred to in paragraph (3) of section (c), or (4)
whether the assets subject to any business combination or the
consideration received for the issuance or transfer of
securities by the Corporation, or any Subsidiary has an
aggregate fair market value of $1,00,000 or more.
(e) Nothing contained in this Article FIFTEENTH shall be
construed to relieve any Interested Stockholder from any
fiduciary obligation imposed by law.
SIXTEENTH: Notwithstanding any other provision of this Charter or Act
of Incorporation or the By-Laws of the Corporation (and in addition to
any other vote that may be required by law, this Charter or Act of
Incorporation by the By-Laws), the affirmative vote of the holders of
at least two-thirds of the outstanding shares of the capital stock of
the Corporation entitled to vote generally in the election of
directors (considered for this purpose as one class) shall be required
to amend, alter or repeal any provision of Articles FIFTH, THIRTEENTH,
FIFTEENTH or SIXTEENTH of this Charter or Act of Incorporation.
SEVENTEENTH: (a) a Director of this 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 Delaware
General Corporation Laws as the same exists or may hereafter be
amended.
(b) Any repeal or modification of the foregoing paragraph shall
not adversely affect any right or protection of a Director of
the Corporation existing hereunder with respect to any act or
omission occurring prior to the time of such repeal or
modification."
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<PAGE> 17
EXHIBIT B
BY-LAWS
WILMINGTON TRUST COMPANY
WILMINGTON, DELAWARE
AS EXISTING ON JANUARY 16, 1997
<PAGE> 18
BY-LAWS OF WILMINGTON TRUST COMPANY
ARTICLE I
STOCKHOLDERS' MEETINGS
Section 1. The Annual Meeting of Stockholders shall be held on the
third Thursday in April each year at the principal office at the Company or at
such other date, time, or place as may be designated by resolution by the Board
of Directors.
Section 2. Special meetings of all stockholders may be called at any
time by the Board of Directors, the Chairman of the Board or the President.
Section 3. Notice of all meetings of the stockholders shall be given
by mailing to each stockholder at least ten (10) days before said meeting, at
his last known address, a written or printed notice fixing the time and place of
such meeting.
Section 4. A majority in the amount of the capital stock of the
Company issued and outstanding on the record date, as herein determined, shall
constitute a quorum at all meetings of stockholders for the transaction of any
business, but the holders of a small number of shares may adjourn, from time to
time, without further notice, until a quorum is secured. At each annual or
special meeting of stockholders, each stockholder shall be entitled to one vote,
either in person or by proxy, for each shares of stock registered in the
stockholder's name on the books of the Company on the record date for any such
meeting as determined herein.
ARTICLE II
DIRECTORS
Section 1. The number and classification of the Board of Directors
shall be as set forth in the Charter of the Bank.
Section 2. No person who has attained the age of seventy-two (72)
years shall be nominated for election to the Board of Directors of the Company,
provided, however, that this limitation shall not apply to any person who was
serving as director of the Company on September 16, 1971.
Section 3. The class of Directors so elected shall hold office for
three years or until their successors are elected and qualified.
Section 4. The affairs and business of the Company shall be managed
and conducted by the Board of Directors.
Section 5. The Board of Directors shall meet at the principal office
of the Company or elsewhere in its discretion at such times to be determined by
a majority of its
<PAGE> 19
members, or at the call of the Chairman of the Board of Directors or the
President.
Section 6. Special meetings of the Board of Directors may be called at
any time by the Chairman of the Board of Directors or by the President, and
shall be called upon the written request of a majority of the directors.
Section 7. A majority of the directors elected and qualified shall be
necessary to constitute a quorum for the transaction of business at any meeting
of the Board of Directors.
Section 8. Written notice shall be sent by mail to each director of
any special meeting of the Board of Directors, and of any change in the time or
place of any regular meeting, stating the time and place of such meeting, which
shall be mailed not less than two days before the time of holding such meeting.
Section 9. In the event of the death, resignation, removal, inability
to act, or disqualification of any director, the Board of Directors, although
less than a quorum, shall have the right to elect the successor who shall hold
office for the remainder of the full term of the class of directors in which the
vacancy occurred, and until such director's successor shall have been duly
elected and qualified.
Section 10. The Board of Directors at its first meeting after its
election by the stockholders shall appoint an Executive Committee, a Trust
Committee, an Audit Committee and a Compensation Committee, and shall elect from
its own members a Chairman of the Board of Directors and a President who may be
the same person. The Board of Directors shall also elect at such meeting a
Secretary and a Treasurer, who may be the same person, may appoint at any time
such other committees and elect or appoint such other officers as it may deem
advisable. The Board of Directors may also elect at such meeting one or more
Associate Directors.
Section 11. The Board of Directors may at any time remove, with or
without cause, any member of any Committee appointed by it or any associate
director or officer elected by it and may appoint or elect his successor.
Section 12. The Board of Directors may designate an officer to be in
charge of such of the departments or division of the Company as it may deem
advisable.
ARTICLE III
COMMITTEES
Section I. Executive Committee
(A) The Executive Committee shall be composed of not more
than nine members who shall be selected by the Board of Directors from its own
members and who
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<PAGE> 20
shall hold office during the pleasure of the Board.
(B) The Executive Committee shall have all the powers of the
Board of Directors when it is not in session to transact all business for and in
behalf of the Company that may be brought before it.
(C) The Executive Committee shall meet at the principal
office of the Company or elsewhere in its discretion at such times to be
determined by a majority of its members, or at the call of the Chairman of the
Executive Committee or at the call of the Chairman of the Board of Directors.
The majority of its members shall be necessary to constitute a quorum for the
transaction of business. Special meetings of the Executive Committee may be held
at any time when a quorum is present.
(D) Minutes of each meeting of the Executive Committee shall
be kept and submitted to the Board of Directors at its next meeting.
(E) The Executive Committee shall advise and superintend all
investments that may be made of the funds of the Company, and shall direct the
disposal of the same, in accordance with such rules and regulations as the Board
of Directors from time to time make.
(F) In the event of a state of disaster of sufficient
severity to prevent the conduct and management of the affairs and business of
the Company by its directors and officers as contemplated by these By-Laws any
two available members of the Executive Committee as constituted immediately
prior to such disaster shall constitute a quorum of that Committee for the full
conduct and management of the affairs and business of the Company in accordance
with the provisions of Article III of these By-Laws; and if less than three
members of the Trust Committee is constituted immediately prior to such disaster
shall be available for the transaction of its business, such Executive Committee
shall also be empowered to exercise all of the powers reserved to the Trust
Committee under Article III Section 2 hereof. In the event of the
unavailability, at such time, of a minimum of two members of such Executive
Committee, any three available directors shall constitute the Executive
Committee for the full conduct and management of the affairs and business of the
Company in accordance with the foregoing provisions of this Section. This By-Law
shall be subject to implementation by Resolutions of the Board of Directors
presently existing or hereafter passed from time to time for that purpose, and
any provisions of these By-Laws (other than this Section) and any resolutions
which are contrary to the provisions of this Section or to the provisions of any
such implementary Resolutions shall be suspended during such a disaster period
until it shall be determined by any interim Executive Committee acting under
this section that it shall be to the advantage of the Company to resume the
conduct and management of its affairs and business under all of the other
provisions of these By-Laws.
3
<PAGE> 21
Section 2. Trust Committee
(A) The Trust Committee shall be composed of not more than
thirteen members who shall be selected by the Board of Directors, a majority of
whom shall be members of the Board of Directors and who shall hold office during
the pleasure of the Board.
(B) The Trust Committee shall have general supervision over
the Trust Department and the investment of trust funds, in all matters, however,
being subject to the approval of the Board of Directors.
(C) The Trust Committee shall meet at the principal office
of the Company or elsewhere in its discretion at such times to be determined by
a majority of its members or at the call of its chairman. A majority of its
members shall be necessary to constitute a quorum for the transaction of
business.
(D) Minutes of each meeting of the Trust Committee shall be
kept and promptly submitted to the Board of Directors.
(E) The Trust Committee shall have the power to appoint
Committees and/or designate officers or employees of the Company to whom
supervision over the investment of trust funds may be delegated when the Trust
Committee is not in session.
Section 3. Audit Committee
(A) The Audit Committee shall be composed of five members
who shall be selected by the Board of Directors from its own members, none of
whom shall be an officer of the Company, and shall hold office at the pleasure
of the Board.
(B) The Audit Committee shall have general supervision over
the Audit Division in all matters however subject to the approval of the Board
of Directors; it shall consider all matters brought to its attention by the
officer in charge of the Audit Division, review all reports of examination of
the Company made by any governmental agency or such independent auditor employed
for that purpose, and make such recommendations to the Board of Directors with
respect thereto or with respect to any other matters pertaining to auditing the
Company as it shall deem desirable.
(C) The Audit Committee shall meet whenever and wherever the
majority of its members shall deem it to be proper for the transaction of its
business, and a majority of its Committee shall constitute a quorum.
Section 4. Compensation Committee
(A) The Compensation Committee shall be composed of not more
than
4
<PAGE> 22
five (5) members who shall be selected by the Board of Directors from its own
members who are not officers of the Company and who shall hold office during the
pleasure of the Board.
(B) The Compensation Committee shall in general advise upon
all matters of policy concerning the Company brought to its attention by the
management and from time to time review the management of the Company, major
organizational matters, including salaries and employee benefits and
specifically shall administer the Executive Incentive Compensation Plan.
(C) Meetings of the Compensation Committee may be called at
any time by the Chairman of the Compensation Committee, the Chairman of the
Board of Directors, or the President of the Company.
Section 5. Associate Directors
(A) Any person who has served as a director may be elected
by the Board of Directors as an associate director, to serve during the pleasure
of the Board.
(B) An associate director shall be entitled to attend all
directors meetings and participate in the discussion of all matters brought to
the Board, with the exception that he would have no right to vote. An associate
director will be eligible for appointment to Committees of the Company, with the
exception of the Executive Committee, Audit Committee and Compensation
Committee, which must be comprised solely of active directors.
Section 6. Absence or Disqualification of Any Member of a Committee
(A) In the absence or disqualification of any member of any
Committee created under Article III of the By-Laws of this Company, 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 the place of any such
absence or disqualified member.
ARTICLE IV
OFFICERS
Section 1. The Chairman of the Board of Directors shall preside at all
meetings of the Board and shall have such further authority and powers and shall
perform such duties as the Board of Directors may from time to time confer and
direct. He shall also exercise such powers and perform such duties as may from
time to time be agreed upon between himself and the President of the Company.
Section 2. The Vice Chairman of the Board. The Vice Chairman of the
Board of
5
<PAGE> 23
Directors shall preside at all meetings of the Board of Directors at which the
Chairman of the Board shall not be present and shall have such further authority
and powers and shall perform such duties as the Board of Directors or the
Chairman of the Board may from time to time confer and direct.
Section 3. The President shall have the powers and duties pertaining
to the office of the President conferred or imposed upon him by statute or
assigned to him by the Board of Directors in the absence of the Chairman of the
Board the President shall have the powers and duties of the Chairman of the
Board.
Section 4. The Chairman of the Board of Directors or the President as
designated by the Board of Directors, shall carry into effect all legal
directions of the Executive Committee and of the Board of Directors, and shall
at all times exercise general supervision over the interest, affairs and
operations of the Company and perform all duties incident to his office.
Section 5. There may be one or more Vice Presidents, however
denominated by the Board of Directors, who may at any time perform all the
duties of the Chairman of the Board of Directors and/or the President and such
other powers and duties as may from time to time be assigned to them by the
Board of Directors, the Executive Committee, the Chairman of the Board or the
President and by the officer in charge of the department or division to which
they are assigned.
Section 6. The Secretary shall attend to the giving of notice of
meetings of the stockholders and the Board of Directors, as well as the
Committees thereof, to the keeping of accurate minutes of all such meetings and
to recording the same in the minute books of the Company. In addition to the
other notice requirements of these By-Laws and as may be practicable under the
circumstances, all such notices shall be in writing and mailed well in advance
of the scheduled date of any other meeting. He shall have custody of the
corporate seal and shall affix the same to any documents requiring such
corporate seal and to attest the same.
Section 7. The Treasurer shall have general supervision over all
assets and liabilities of the Company. He shall be custodian of and responsible
for all monies, funds and valuables of the Company and for the keeping of proper
records of the evidence of property or indebtedness and of all the transactions
of the Company. He shall have general supervision of the expenditures of the
Company and shall report to the Board of Directors at each regular meeting of
the condition of the Company, and perform such other duties as may be assigned
to him from time to time by the Board of Directors of the Executive Committee.
Section 8. There may be a Controller who shall exercise general
supervision over the internal operations of the Company, including accounting,
and shall render to the Board of Directors at appropriate times a report
relating to the general condition and internal operations of the Company.
6
<PAGE> 24
There may be one or more subordinate accounting or controller officers
however denominated, who may perform the duties of the Controller and such
duties as may be prescribed by the Controller.
Section 9. The officer designated by the Board of Directors to be in
charge of the Audit Division of the Company with such title as the Board of
Directors shall prescribe, shall report to and be directly responsible only to
the Board of Directors.
There shall be an Auditor and there may be one or more Audit Officers,
however denominated, who may perform all the duties of the Auditor and such
duties as may be prescribed by the officer in charge of the Audit Division.
Section 10. There may be one or more officers, subordinate in rank to
all Vice Presidents with such functional titles as shall be determined from time
to time by the Board of Directors, who shall ex officio hold the office
Assistant Secretary of this Company and who may perform such duties as may be
prescribed by the officer in charge of the department or division to whom they
are assigned.
Section 11. The powers and duties of all other officers of the Company
shall be those usually pertaining to their respective offices, subject to the
direction of the Board of Directors, the Executive Committee, Chairman of the
Board of Directors or the President and the officer in charge of the department
or division to which they are assigned.
ARTICLE V
STOCK AND STOCK CERTIFICATES
Section 1. Shares of stock shall be transferrable on the books of the
Company and a transfer book shall be kept in which all transfers of stock shall
be recorded.
Section 2. Certificate of stock shall bear the signature of the
President or any Vice President, however denominated by the Board of Directors
and countersigned by the Secretary or Treasurer or an Assistant Secretary, and
the seal of the corporation shall be engraved thereon. Each certificate shall
recite that the stock represented thereby is transferrable only upon the books
of the Company by the holder thereof or his attorney, upon surrender of the
certificate properly endorsed. Any certificate of stock surrendered to the
Company shall be cancelled at the time of transfer, and before a new certificate
or certificates shall be issued in lieu thereof. Duplicate certificates of stock
shall be issued only upon giving such security as may be satisfactory to the
Board of Directors or the Executive Committee.
Section 3. The Board of Directors of the Company is authorized to fix
in advance a record date for the determination of the stockholders entitled to
notice of, and to vote at, any meeting of stockholders and any adjournment
thereof, or entitled to receive payment of
7
<PAGE> 25
any dividend, or to any allotment or rights, or to exercise any rights in
respect of any change, conversion or exchange of capital stock, or in connection
with obtaining the consent of stockholders for any purpose, which record date
shall not be more than 60 nor less than 10 days proceeding the date of any
meeting of stockholders or the date for the payment of any dividend, or the date
for the allotment of rights, or the date when any change or conversion or
exchange of capital stock shall go into effect, or a date in connection with
obtaining such consent.
ARTICLE VI
SEAL
Section 1. The corporate seal of the Company shall be in the following
form:
Between two concentric circles the words "Wilmington Trust
Company" within the inner circle the words "Wilmington,
Delaware."
ARTICLE VII
FISCAL YEAR
Section 1. The fiscal year of the Company shall be the calendar year.
ARTICLE VIII
EXECUTION OF INSTRUMENTS OF THE COMPANY
Section 1. The Chairman of the Board, the President or any Vice
President, however denominated by the Board of Directors, shall have full power
and authority to enter into, make, sign, execute, acknowledge and/or deliver and
the Secretary or any Assistant Secretary shall have full power and authority to
attest and affix the corporate seal of the Company to any and all deeds,
conveyances, assignments, releases, contracts, agreements, bonds, notes,
mortgages and all other instruments incident to the business of this Company or
in acting as executor, administrator, guardian, trustee, agent or in any other
fiduciary or representative capacity by any and every method of appointment or
by whatever person, corporation, court officer or authority in the State of
Delaware, or elsewhere, without any specific authority, ratification, approval
or confirmation by the Board of Directors or the Executive Committee, and any
and all such instruments shall have the same force and validity as though
expressly authorized by the Board of Directors and/or the Executive Committee.
8
<PAGE> 26
ARTICLE IX
COMPENSATION OF DIRECTORS AND MEMBERS OF COMMITTEES
Section 1. Directors and associate directors of the Company, other
than salaried officers of the Company, shall be paid such reasonable honoraria
or fees for attending meetings of the Board of Directors as the Board of
Directors may from time to time determine. Directors and associate directors who
serve as members of committees, other than salaried employees of the Company,
shall be paid such reasonable honoraria or fees for services as members of
committees as the Board of Directors shall from time to time determine and
directors and associate directors may be employed by the Company for such
special services as the Board of Directors may from time to time determine and
shall be paid for such special services so performed reasonable compensation as
may be determined by the Board of Directors.
ARTICLE X
INDEMNIFICATION
Section 1. (A) 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 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, officer, employee or agent of the Corporation or is or was serving
at the request of the Corporation as a director, officer, employee, fiduciary or
agent of another corporation or of a partnership, joint venture, trust,
enterprise or non-profit entity, including service with respect to employee
benefit plans, against all liability and loss suffered and expenses reasonably
incurred by such person. The Corporation shall indemnify a person in connection
with a proceeding initiated by such person only if the proceeding was authorized
by the Board of Directors of the Corporation.
(B) The Corporation shall pay the expenses incurred in
defending any proceeding in advance of its final disposition, provided, however,
that the payment of expenses incurred by a Director officer in his capacity as a
Director or officer in advance of the final disposition of the proceeding shall
be made only upon receipt of an undertaking by the Director or officer to repay
all amounts advanced if it should be ultimately determined that the Director or
officer is not entitled to be indemnified under this Article or otherwise.
(C) If a claim for indemnification or payment of expenses,
under this Article X is not paid in full within ninety days after a written
claim therefor has been received by the Corporation the claimant 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 claimant
was not entitled to the requested indemnification of payment of expenses
9
<PAGE> 27
under applicable law.
(D) The rights conferred on any person by this Article X
shall not be exclusive of any other rights which such person may have or
hereafter acquire under any statute, provision of the Charter or Act of
Incorporation, these By-Laws, agreement, vote of stockholders or disinterested
Directors or otherwise.
(E) Any repeal or modification of the foregoing provisions
of this Article X shall not adversely affect any right or protection hereunder
of any person in respect of any act or omission occurring prior to the time of
such repeal or modification.
ARTICLE XI
AMENDMENTS TO THE BY-LAWS
Section 1. These By-Laws may be altered, amended or repealed, in whole
or in part, and any new By-Law or By-Laws adopted at any regular or special
meeting of the Board of Directors by a vote of the majority of all the members
of the Board of Directors then in office.
10
<PAGE> 28
EXHIBIT C
SECTION 321(b) CONSENT
Pursuant to Section 321(b) of the Trust Indenture Act of 1939, as
amended, Wilmington Trust Company hereby consents that reports of examinations
by Federal, State, Territorial or District authorities may be furnished by such
authorities to the Securities and Exchange Commission upon requests therefor.
WILMINGTON TRUST COMPANY
Dated: December 18, 1997 By: /s/ James P. Lawler
-------------------------
Name: James P. Lawler
Title: Vice President
<PAGE> 29
EXHIBIT D
NOTICE
This form is intended to assist state nonmember banks and savings banks with
state publication requirements. It has not been approved by any state banking
authorities. Refer to your appropriate state banking authorities for your state
publication requirements.
R E P O R T O F C O N D I T I O N
Consolidating domestic subsidiaries of the
WILMINGTON TRUST COMPANY of WILMINGTON
- ------------------------------------------------ ------------------
Name of Bank City
in the State of DELAWARE, at the close of business on September 30, 1997.
----------
<TABLE>
<CAPTION>
ASSETS
Thousands of dollars
<S> <C>
Cash and balances due from depository institutions:
Noninterest-bearing balances and currency and coins..........................206,619
Interest-bearing balances........................................................ 0
Held-to-maturity securities.......................................................... 364,899
Available-for-sale securities........................................................1,038,826
Federal funds sold and securities purchased under agreements to resell.................126,000
Loans and lease financing receivables:
Loans and leases, net of unearned income............. 3,830,772
LESS: Allowance for loan and lease losses........... 55,936
LESS: Allocated transfer risk reserve............... 0
Loans and leases, net of unearned income, allowance, and reserve...........3,774,836
Assets held in trading accounts..............................................................0
Premises and fixed assets (including capitalized leases)...............................118,895
Other real estate owned................................................................. 1,830
Investments in unconsolidated subsidiaries and associated companies....................... 34
Customers' liability to this bank on acceptances outstanding.................................0
Intangible assets........................................................................5,215
Other assets........................................................................... 91,240
Total assets.........................................................................5,728,394
</TABLE>
CONTINUED ON NEXT PAGE
<PAGE> 30
<TABLE>
<S> <C>
LIABILITIES
Deposits:
In domestic offices..................................................................3,980,001
Noninterest-bearing . . . . . . . . 859,817
Interest-bearing. . . . . . . . . . 3,120,184
Federal funds purchased and Securities sold under agreements to repurchase............ 327,543
Demand notes issued to the U.S. Treasury................................................89,508
Trading liabilities (from Schedule RC-D).....................................................0
Other borrowed money:..................................................................///////
With original maturity of one year or less...................................734,000
With original maturity of more than one year..................................43,000
Bank's liability on acceptances executed and outstanding.....................................0
Subordinated notes and debentures............................................................0
Other liabilities (from Schedule RC-G)............................................... 104,674
Total liabilities....................................................................5,278,726
EQUITY CAPITAL
Perpetual preferred stock and related surplus................................................0
Common Stock...............................................................................500
Surplus (exclude all surplus related to preferred stock)................................62,118
Undivided profits and capital reserves.................................................380,993
Net unrealized holding gains (losses) on available-for-sale securities...................6,057
Total equity capital...................................................................449,668
Total liabilities, limited-life preferred stock, and equity capital..................5,728,394
</TABLE>
2
<PAGE> 1
EXHIBIT 25.3
Registration No.
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM T-1
STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939
OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(B)(2)
WILMINGTON TRUST COMPANY
(Exact name of trustee as specified in its charter)
Delaware 51-0055023
(State of incorporation) (I.R.S. employer identification no.)
Rodney Square North
1100 North Market Street
Wilmington, Delaware 19890
(Address of principal executive offices)
Cynthia L. Corliss
Vice President and Trust Counsel
Wilmington Trust Company
Rodney Square North
Wilmington, Delaware 19890
(302) 651-8516
(Name, address and telephone number of agent for service)
SUPERIOR NATIONAL INSURANCE GROUP, INC.
(Exact name of obligor as specified in its charter)
Delaware 95-4610936
(State of incorporation) (I.R.S. employer identification no.)
26601 Agoura Road
Calabasas, California 91302
(Address of principal executive offices) (Zip Code)
Superior National Insurance Group, Inc. Guarantee
with respect to 10 3/4% Trust Preferred Securities
(Title of the indenture securities)
<PAGE> 2
ITEM 1. GENERAL INFORMATION.
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to
which it is subject.
Federal Deposit Insurance Co. State Bank Commissioner
Five Penn Center Dover, Delaware
Suite #2901
Philadelphia, PA
(b) Whether it is authorized to exercise corporate trust powers.
The trustee is authorized to exercise corporate trust powers.
ITEM 2. AFFILIATIONS WITH THE OBLIGOR.
If the obligor is an affiliate of the trustee, describe each
affiliation:
Based upon an examination of the books and records of the
trustee and upon information furnished by the obligor, the obligor is
not an affiliate of the trustee.
ITEM 3. LIST OF EXHIBITS.
List below all exhibits filed as part of this Statement of
Eligibility and Qualification.
A. Copy of the Charter of Wilmington Trust Company, which includes
the certificate of authority of Wilmington Trust Company to
commence business and the authorization of Wilmington Trust
Company to exercise corporate trust powers.
B. Copy of By-Laws of Wilmington Trust Company.
C. Consent of Wilmington Trust Company required by Section 321(b)
of Trust Indenture Act.
D. Copy of most recent Report of Condition of Wilmington Trust
Company.
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the trustee, Wilmington Trust Company, a corporation organized and
existing under the laws of Delaware, has duly caused this Statement of
Eligibility to be signed on its behalf by the undersigned, thereunto duly
authorized, all in the City of Wilmington and State of Delaware on the 18th day
of December, 1997.
WILMINGTON TRUST COMPANY
[SEAL]
Attest: /s/ Emmett R. Harmon By: /s/ James P. Lawler
------------------------- -----------------------
Assistant Secretary Name: James P. Lawler
Title: Vice President
2
<PAGE> 3
EXHIBIT A
AMENDED CHARTER
WILMINGTON TRUST COMPANY
WILMINGTON, DELAWARE
AS EXISTING ON MAY 9, 1987
<PAGE> 4
AMENDED CHARTER
OR
ACT OF INCORPORATION
OF
WILMINGTON TRUST COMPANY
WILMINGTON TRUST COMPANY, originally incorporated by an Act of the
General Assembly of the State of Delaware, entitled "An Act to Incorporate the
Delaware Guarantee and Trust Company", approved March 2, A.D. 1901, and the name
of which company was changed to "WILMINGTON TRUST COMPANY" by an amendment filed
in the Office of the Secretary of State on March 18, A.D. 1903, and the Charter
or Act of Incorporation of which company has been from time to time amended and
changed by merger agreements pursuant to the corporation law for state banks and
trust companies of the State of Delaware, does hereby alter and amend its
Charter or Act of Incorporation so that the same as so altered and amended shall
in its entirety read as follows:
FIRST: - The name of this corporation is WILMINGTON TRUST COMPANY.
SECOND: - The location of its principal office in the State of
Delaware is at Rodney Square North, in the City of Wilmington, County
of New Castle; the name of its resident agent is WILMINGTON TRUST
COMPANY whose address is Rodney Square North, in said City. In
addition to such principal office, the said corporation maintains and
operates branch offices in the City of Newark, New Castle County,
Delaware, the Town of Newport, New Castle County, Delaware, at
Claymont, New Castle County, Delaware, at Greenville, New Castle
County Delaware, and at Milford Cross Roads, New Castle County,
Delaware, and shall be empowered to open, maintain and operate branch
offices at Ninth and Shipley Streets, 418 Delaware Avenue, 2120 Market
Street, and 3605 Market Street, all in the City of Wilmington, New
Castle County, Delaware, and such other branch offices or places of
business as may be authorized from time to time by the agency or
agencies of the government of the State of Delaware empowered to
confer such authority.
THIRD: - (a) The nature of the business and the objects and purposes
proposed to be transacted, promoted or carried on by this Corporation
are to do any or all of the things herein mentioned as fully and to
the same extent as natural persons might or could do and in any part
of the world, viz.:
(1) To sue and be sued, complain and defend in any Court of law
or equity and to make and use a common seal, and alter the seal
at pleasure, to hold, purchase, convey, mortgage or otherwise
deal in real and personal estate and property, and to appoint
such officers and agents as the business of the
<PAGE> 5
Corporation shall require, to make by-laws not inconsistent with
the Constitution or laws of the United States or of this State,
to discount bills, notes or other evidences of debt, to receive
deposits of money, or securities for money, to buy gold and
silver bullion and foreign coins, to buy and sell bills of
exchange, and generally to use, exercise and enjoy all the
powers, rights, privileges and franchises incident to a
corporation which are proper or necessary for the transaction of
the business of the Corporation hereby created.
(2) To insure titles to real and personal property, or any
estate or interests therein, and to guarantee the holder of such
property, real or personal, against any claim or claims, adverse
to his interest therein, and to prepare and give certificates of
title for any lands or premises in the State of Delaware, or
elsewhere.
(3) To act as factor, agent, broker or attorney in the receipt,
collection, custody, investment and management of funds, and the
purchase, sale, management and disposal of property of all
descriptions, and to prepare and execute all papers which may be
necessary or proper in such business.
(4) To prepare and draw agreements, contracts, deeds, leases,
conveyances, mortgages, bonds and legal papers of every
description, and to carry on the business of conveyancing in all
its branches.
(5) To receive upon deposit for safekeeping money, jewelry,
plate, deeds, bonds and any and all other personal property of
every sort and kind, from executors, administrators, guardians,
public officers, courts, receivers, assignees, trustees, and
from all fiduciaries, and from all other persons and
individuals, and from all corporations whether state, municipal,
corporate or private, and to rent boxes, safes, vaults and other
receptacles for such property.
(6) To act as agent or otherwise for the purpose of registering,
issuing, certificating, countersigning, transferring or
underwriting the stock, bonds or other obligations of any
corporation, association, state or municipality, and may receive
and manage any sinking fund therefor on such terms as may be
agreed upon between the two parties, and in like manner may act
as Treasurer of any corporation or municipality.
(7) To act as Trustee under any deed of trust, mortgage, bond or
other instrument issued by any state, municipality, body
politic, corporation, association or person, either alone or in
conjunction with any other person or persons, corporation or
corporations.
2
<PAGE> 6
(8) To guarantee the validity, performance or effect of any
contract or agreement, and the fidelity of persons holding
places of responsibility or trust; to become surety for any
person, or persons, for the faithful performance of any trust,
office, duty, contract or agreement, either by itself or in
conjunction with any other person, or persons, corporation, or
corporations, or in like manner become surety upon any bond,
recognizance, obligation, judgment, suit, order, or decree to be
entered in any court of record within the State of Delaware or
elsewhere, or which may now or hereafter be required by any law,
judge, officer or court in the State of Delaware or elsewhere.
(9) To act by any and every method of appointment as trustee,
trustee in bankruptcy, receiver, assignee, assignee in
bankruptcy, executor, administrator, guardian, bailee, or in any
other trust capacity in the receiving, holding, managing, and
disposing of any and all estates and property, real, personal or
mixed, and to be appointed as such trustee, trustee in
bankruptcy, receiver, assignee, assignee in bankruptcy,
executor, administrator, guardian or bailee by any persons,
corporations, court, officer, or authority, in the State of
Delaware or elsewhere; and whenever this Corporation is so
appointed by any person, corporation, court, officer or
authority such trustee, trustee in bankruptcy, receiver,
assignee, assignee in bankruptcy, executor, administrator,
guardian, bailee, or in any other trust capacity, it shall not
be required to give bond with surety, but its capital stock
shall be taken and held as security for the performance of the
duties devolving upon it by such appointment.
(10) And for its care, management and trouble, and the exercise
of any of its powers hereby given, or for the performance of any
of the duties which it may undertake or be called upon to
perform, or for the assumption of any responsibility the said
Corporation may be entitled to receive a proper compensation.
(11) To purchase, receive, hold and own bonds, mortgages,
debentures, shares of capital stock, and other securities,
obligations, contracts and evidences of indebtedness, of any
private, public or municipal corporation within and without the
State of Delaware, or of the Government of the United States, or
of any state, territory, colony, or possession thereof, or of
any foreign government or country; to receive, collect, receipt
for, and dispose of interest, dividends and income upon and from
any of the bonds, mortgages, debentures, notes, shares of
capital stock, securities, obligations, contracts, evidences of
indebtedness and other property held and owned by it, and to
exercise in respect of all such bonds, mortgages, debentures,
notes, shares of capital stock, securities, obligations,
contracts, evidences of indebtedness and other property, any and
all the rights, powers and privileges of individual
3
<PAGE> 7
owners thereof, including the right to vote thereon; to invest
and deal in and with any of the moneys of the Corporation upon
such securities and in such manner as it may think fit and
proper, and from time to time to vary or realize such
investments; to issue bonds and secure the same by pledges or
deeds of trust or mortgages of or upon the whole or any part of
the property held or owned by the Corporation, and to sell and
pledge such bonds, as and when the Board of Directors shall
determine, and in the promotion of its said corporate business
of investment and to the extent authorized by law, to lease,
purchase, hold, sell, assign, transfer, pledge, mortgage and
convey real and personal property of any name and nature and any
estate or interest therein.
(b) In furtherance of, and not in limitation, of the powers conferred
by the laws of the State of Delaware, it is hereby expressly provided
that the said Corporation shall also have the following powers:
(1) To do any or all of the things herein set forth, to the same
extent as natural persons might or could do, and in any part of
the world.
(2) To acquire the good will, rights, property and franchises
and to undertake the whole or any part of the assets and
liabilities of any person, firm, association or corporation, and
to pay for the same in cash, stock of this Corporation, bonds or
otherwise; to hold or in any manner to dispose of the whole or
any part of the property so purchased; to conduct in any lawful
manner the whole or any part of any business so acquired, and to
exercise all the powers necessary or convenient in and about the
conduct and management of such business.
(3) To take, hold, own, deal in, mortgage or otherwise lien, and
to lease, sell, exchange, transfer, or in any manner whatever
dispose of property, real, personal or mixed, wherever situated.
(4) To enter into, make, perform and carry out contracts of
every kind with any person, firm, association or corporation,
and, without limit as to amount, to draw, make, accept, endorse,
discount, execute and issue promissory notes, drafts, bills of
exchange, warrants, bonds, debentures, and other negotiable or
transferable instruments.
(5) To have one or more offices, to carry on all or any of its
operations and businesses, without restriction to the same
extent as natural persons might or could do, to purchase or
otherwise acquire, to hold, own, to mortgage, sell, convey or
otherwise dispose of, real and personal property, of every class
and description, in any State, District, Territory or Colony of
the United States, and in any foreign country or place.
4
<PAGE> 8
(6) It is the intention that the objects, purposes and powers
specified and clauses contained in this paragraph shall (except
where otherwise expressed in said paragraph) be nowise limited
or restricted by reference to or inference from the terms of any
other clause of this or any other paragraph in this charter, but
that the objects, purposes and powers specified in each of the
clauses of this paragraph shall be regarded as independent
objects, purposes and powers.
FOURTH: - (a) The total number of shares of all classes of stock which
the Corporation shall have authority to issue is forty-one million
(41,000,000) shares, consisting of:
(1) One million (1,000,000) shares of Preferred stock, par value
$10.00 per share (hereinafter referred to as "Preferred Stock");
and
(2) Forty million (40,000,000) shares of Common Stock, par value
$1.00 per share (hereinafter referred to as "Common Stock").
(b) Shares of Preferred Stock may be issued from time to time in one
or more series as may from time to time be determined by the Board of
Directors each of said series to be distinctly designated. All shares
of any one series of Preferred Stock shall be alike in every
particular, except that there may be different dates from which
dividends, if any, thereon shall be cumulative, if made cumulative.
The voting powers and the preferences and relative, participating,
optional and other special rights of each such series, and the
qualifications, limitations or restrictions thereof, if any, may
differ from those of any and all other series at any time outstanding;
and, subject to the provisions of subparagraph 1 of Paragraph (c) of
this Article FOURTH, the Board of Directors of the Corporation is
hereby expressly granted authority to fix by resolution or resolutions
adopted prior to the issuance of any shares of a particular series of
Preferred Stock, the voting powers and the designations, preferences
and relative, optional and other special rights, and the
qualifications, limitations and restrictions of such series,
including, but without limiting the generality of the foregoing, the
following:
(1) The distinctive designation of, and the number of shares of
Preferred Stock which shall constitute such series, which number
may be increased (except where otherwise provided by the Board
of Directors) or decreased (but not below the number of shares
thereof then outstanding) from time to time by like action of
the Board of Directors;
(2) The rate and times at which, and the terms and conditions on
which, dividends, if any, on Preferred Stock of such series
shall be paid, the extent of the preference or relation, if any,
of such dividends to the dividends payable on any other class or
classes, or series of the same or other class of
5
<PAGE> 9
stock and whether such dividends shall be cumulative or
non-cumulative;
(3) The right, if any, of the holders of Preferred Stock of such
series to convert the same into or exchange the same for, shares
of any other class or classes or of any series of the same or
any other class or classes of stock of the Corporation and the
terms and conditions of such conversion or exchange;
(4) Whether or not Preferred Stock of such series shall be
subject to redemption, and the redemption price or prices and
the time or times at which, and the terms and conditions on
which, Preferred Stock of such series may be redeemed.
(5) The rights, if any, of the holders of Preferred Stock of
such series upon the voluntary or involuntary liquidation,
merger, consolidation, distribution or sale of assets,
dissolution or winding-up, of the Corporation.
(6) The terms of the sinking fund or redemption or purchase
account, if any, to be provided for the Preferred Stock of such
series; and
(7) The voting powers, if any, of the holders of such series of
Preferred Stock which may, without limiting the generality of
the foregoing include the right, voting as a series or by itself
or together with other series of Preferred Stock or all series
of Preferred Stock as a class, to elect one or more directors of
the Corporation if there shall have been a default in the
payment of dividends on any one or more series of Preferred
Stock or under such circumstances and on such conditions as the
Board of Directors may determine.
(c) (1) After the requirements with respect to preferential dividends
on the Preferred Stock (fixed in accordance with the provisions of
section (b) of this Article FOURTH), if any, shall have been met and
after the Corporation shall have complied with all the requirements,
if any, with respect to the setting aside of sums as sinking funds or
redemption or purchase accounts (fixed in accordance with the
provisions of section (b) of this Article FOURTH), and subject further
to any conditions which may be fixed in accordance with the provisions
of section (b) of this Article FOURTH, then and not otherwise the
holders of Common Stock shall be entitled to receive such dividends as
may be declared from time to time by the Board of Directors.
(2) After distribution in full of the preferential amount, if
any, (fixed in accordance with the provisions of section (b) of
this Article FOURTH), to be distributed to the holders of
Preferred Stock in the event of voluntary or involuntary
liquidation, distribution or sale of assets, dissolution or
winding-up, of the Corporation, the holders of the Common Stock
shall be entitled to
6
<PAGE> 10
receive all of the remaining assets of the Corporation, tangible
and intangible, of whatever kind available for distribution to
stockholders ratably in proportion to the number of shares of
Common Stock held by them respectively.
(3) Except as may otherwise be required by law or by the
provisions of such resolution or resolutions as may be adopted
by the Board of Directors pursuant to section (b) of this
Article FOURTH, each holder of Common Stock shall have one vote
in respect of each share of Common Stock held on all matters
voted upon by the stockholders.
(d) No holder of any of the shares of any class or series of stock or
of options, warrants or other rights to purchase shares of any class
or series of stock or of other securities of the Corporation shall
have any preemptive right to purchase or subscribe for any unissued
stock of any class or series or any additional shares of any class or
series to be issued by reason of any increase of the authorized
capital stock of the Corporation of any class or series, or bonds,
certificates of indebtedness, debentures or other securities
convertible into or exchangeable for stock of the Corporation of any
class or series, or carrying any right to purchase stock of any class
or series, but any such unissued stock, additional authorized issue of
shares of any class or series of stock or securities convertible into
or exchangeable for stock, or carrying any right to purchase stock,
may be issued and disposed of pursuant to resolution of the Board of
Directors to such persons, firms, corporations or associations,
whether such holders or others, and upon such terms as may be deemed
advisable by the Board of Directors in the exercise of its sole
discretion.
(e) The relative powers, preferences and rights of each series of
Preferred Stock in relation to the relative powers, preferences and
rights of each other series of Preferred Stock shall, in each case, be
as fixed from time to time by the Board of Directors in the resolution
or resolutions adopted pursuant to authority granted in section (b) of
this Article FOURTH and the consent, by class or series vote or
otherwise, of the holders of such of the series of Preferred Stock as
are from time to time outstanding shall not be required for the
issuance by the Board of Directors of any other series of Preferred
Stock whether or not the powers, preferences and rights of such other
series shall be fixed by the Board of Directors as senior to, or on a
parity with, the powers, preferences and rights of such outstanding
series, or any of them; provided, however, that the Board of Directors
may provide in the resolution or resolutions as to any series of
Preferred Stock adopted pursuant to section (b) of this Article FOURTH
that the consent of the holders of a majority (or such greater
proportion as shall be therein fixed) of the outstanding shares of
such series voting thereon shall be required for the issuance of any
or all other series of Preferred Stock.
7
<PAGE> 11
(f) Subject to the provisions of section (e), shares of any series of
Preferred Stock may be issued from time to time as the Board of
Directors of the Corporation shall determine and on such terms and for
such consideration as shall be fixed by the Board of Directors.
(g) Shares of Common Stock may be issued from time to time as the
Board of Directors of the Corporation shall determine and on such
terms and for such consideration as shall be fixed by the Board of
Directors.
(h) The authorized amount of shares of Common Stock and of Preferred
Stock may, without a class or series vote, be increased or decreased
from time to time by the affirmative vote of the holders of a majority
of the stock of the Corporation entitled to vote thereon.
FIFTH: - (a) The business and affairs of the Corporation shall be
conducted and managed by a Board of Directors. The number of directors
constituting the entire Board shall be not less than five nor more
than twenty-five as fixed from time to time by vote of a majority of
the whole Board, provided, however, that the number of directors shall
not be reduced so as to shorten the term of any director at the time
in office, and provided further, that the number of directors
constituting the whole Board shall be twenty-four until otherwise
fixed by a majority of the whole Board.
(b) The Board of Directors shall be divided into three classes, as
nearly equal in number as the then total number of directors
constituting the whole Board permits, with the term of office of one
class expiring each year. At the annual meeting of stockholders in
1982, directors of the first class shall be elected to hold office for
a term expiring at the next succeeding annual meeting, directors of
the second class shall be elected to hold office for a term expiring
at the second succeeding annual meeting and directors of the third
class shall be elected to hold office for a term expiring at the third
succeeding annual meeting. Any vacancies in the Board of Directors for
any reason, and any newly created directorships resulting from any
increase in the directors, may be filled by the Board of Directors,
acting by a majority of the directors then in office, although less
than a quorum, and any directors so chosen shall hold office until the
next annual election of directors. At such election, the stockholders
shall elect a successor to such director to hold office until the next
election of the class for which such director shall have been chosen
and until his successor shall be elected and qualified. No decrease in
the number of directors shall shorten the term of any incumbent
director.
(c) Notwithstanding any other provisions of this Charter or Act of
Incorporation or the By-Laws of the Corporation (and notwithstanding
the fact that some lesser percentage may be specified by law, this
Charter or Act of Incorporation or the ByLaws of the Corporation), any
director or the entire Board of Directors of the
8
<PAGE> 12
Corporation may be removed at any time without cause, but only by the
affirmative vote of the holders of two-thirds or more of the
outstanding shares of capital stock of the Corporation entitled to
vote generally in the election of directors (considered for this
purpose as one class) cast at a meeting of the stockholders called for
that purpose.
(d) Nominations for the election of directors may be made by the Board
of Directors or by any stockholder entitled to vote for the election
of directors. Such nominations shall be made by notice in writing,
delivered or mailed by first class United States mail, postage
prepaid, to the Secretary of the Corporation not less than 14 days nor
more than 50 days prior to any meeting of the stockholders called for
the election of directors; provided, however, that if less than 21
days' notice of the meeting is given to stockholders, such written
notice shall be delivered or mailed, as prescribed, to the Secretary
of the Corporation not later than the close of the seventh day
following the day on which notice of the meeting was mailed to
stockholders. Notice of nominations which are proposed by the Board of
Directors shall be given by the Chairman on behalf of the Board.
(e) Each notice under subsection (d) shall set forth (i) the name,
age, business address and, if known, residence address of each nominee
proposed in such notice, (ii) the principal occupation or employment
of such nominee and (iii) the number of shares of stock of the
Corporation which are beneficially owned by each such nominee.
(f) The Chairman of the meeting may, if the facts warrant, determine
and declare to the meeting that a nomination was not made in
accordance with the foregoing procedure, and if he should so
determine, he shall so declare to the meeting and the defective
nomination shall be disregarded.
(g) No action required to be taken or which may be taken at any annual
or special meeting of stockholders of the Corporation may be taken
without a meeting, and the power of stockholders to consent in
writing, without a meeting, to the taking of any action is
specifically denied.
SIXTH: - The Directors shall choose such officers, agent and servants
as may be provided in the By-Laws as they may from time to time find
necessary or proper.
SEVENTH: - The Corporation hereby created is hereby given the same
powers, rights and privileges as may be conferred upon corporations
organized under the Act entitled "An Act Providing a General
Corporation Law", approved March 10, 1899, as from time to time
amended.
EIGHTH: - This Act shall be deemed and taken to be a private Act.
9
<PAGE> 13
NINTH: - This Corporation is to have perpetual existence.
TENTH: - The Board of Directors, by resolution passed by a majority of
the whole Board, may designate any of their number to constitute an
Executive Committee, which Committee, to the extent provided in said
resolution, or in the By-Laws of the Company, shall have and may
exercise all of the powers of the Board of Directors in the management
of the business and affairs of the Corporation, and shall have power
to authorize the seal of the Corporation to be affixed to all papers
which may require it.
ELEVENTH: - The private property of the stockholders shall not be
liable for the payment of corporate debts to any extent whatever.
TWELFTH: - The Corporation may transact business in any part of the
world.
THIRTEENTH: - The Board of Directors of the Corporation is expressly
authorized to make, alter or repeal the By-Laws of the Corporation by
a vote of the majority of the entire Board. The stockholders may make,
alter or repeal any By-Law whether or not adopted by them, provided
however, that any such additional By-Laws, alterations or repeal may
be adopted only by the affirmative vote of the holders of two-thirds
or more of the outstanding shares of capital stock of the Corporation
entitled to vote generally in the election of directors (considered
for this purpose as one class).
FOURTEENTH: - Meetings of the Directors may be held outside
of the State of Delaware at such places as may be from time to time
designated by the Board, and the Directors may keep the books of the
Company outside of the State of Delaware at such places as may be from
time to time designated by them.
FIFTEENTH: - (a) In addition to any affirmative vote required by law,
and except as otherwise expressly provided in sections (b) and (c) of
this Article FIFTEENTH:
(A) any merger or consolidation of the Corporation or any
Subsidiary (as hereinafter defined) with or into (i) any
Interested Stockholder (as hereinafter defined) or (ii) any
other corporation (whether or not itself an Interested
Stockholder), which, after such merger or consolidation, would
be an Affiliate (as hereinafter defined) of an Interested
Stockholder, or
(B) any sale, lease, exchange, mortgage, pledge, transfer or
other disposition (in one transaction or a series of related
transactions) to or with any Interested Stockholder or any
Affiliate of any Interested Stockholder of any assets of the
Corporation or any Subsidiary having an aggregate fair market
value of $1,000,000 or more, or
10
<PAGE> 14
(C) the issuance or transfer by the Corporation or any
Subsidiary (in one transaction or a series of related
transactions) of any securities of the Corporation or any
Subsidiary to any Interested Stockholder or any Affiliate of any
Interested Stockholder in exchange for cash, securities or other
property (or a combination thereof) having an aggregate fair
market value of $1,000,000 or more, or
(D) the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation, or
(E) any reclassification of securities (including any reverse
stock split), or recapitalization of the Corporation, or any
merger or consolidation of the Corporation with any of its
Subsidiaries or any similar transaction (whether or not with or
into or otherwise involving an Interested Stockholder) which has
the effect, directly or indirectly, of increasing the
proportionate share of the outstanding shares of any class of
equity or convertible securities of the Corporation or any
Subsidiary which is directly or indirectly owned by any
Interested Stockholder, or any Affiliate of any Interested
Stockholder,
shall require the affirmative vote of the holders of at least two-thirds of the
outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors, considered for the purpose of this
Article FIFTEENTH as one class ("Voting Shares"). Such affirmative vote shall be
required notwithstanding the fact that no vote may be required, or that some
lesser percentage may be specified, by law or in any agreement with any national
securities exchange or otherwise.
(2) The term "business combination" as used in this Article
FIFTEENTH shall mean any transaction which is referred to any
one or more of clauses (A) through (E) of paragraph 1 of the
section (a).
(b) The provisions of section (a) of this Article FIFTEENTH
shall not be applicable to any particular business combination
and such business combination shall require only such
affirmative vote as is required by law and any other provisions
of the Charter or Act of Incorporation of By-Laws if such
business combination has been approved by a majority of the
whole Board.
(c) For the purposes of this Article FIFTEENTH:
(1) A "person" shall mean any individual firm, corporation or other
entity.
(2) "Interested Stockholder" shall mean, in respect of any business
combination, any person (other than the Corporation or any Subsidiary)
who or which as of the record date for the determination of
stockholders entitled to notice of and to vote on
11
<PAGE> 15
such business combination, or immediately prior to the consummation of
any such transaction:
(A) is the beneficial owner, directly or indirectly, of more
than 10% of the Voting Shares, or
(B) is an Affiliate of the Corporation and at any time within
two years prior thereto was the beneficial owner, directly or
indirectly, of not less than 10% of the then outstanding voting
Shares, or
(C) is an assignee of or has otherwise succeeded in any share of
capital stock of the Corporation which were at any time within
two years prior thereto beneficially owned by any Interested
Stockholder, and such assignment or succession shall have
occurred in the course of a transaction or series of
transactions not involving a public offering within the meaning
of the Securities Act of 1933.
(3) A person shall be the "beneficial owner" of any Voting Shares:
(A) which such person or any of its Affiliates and Associates
(as hereafter defined) beneficially own, directly or indirectly,
or
(B) which such person or any of its Affiliates or Associates has
(i) the right to acquire (whether such right is exercisable
immediately or only after the passage of time), pursuant to any
agreement, arrangement or understanding or upon the exercise of
conversion rights, exchange rights, warrants or options, or
otherwise, or (ii) the right to vote pursuant to any agreement,
arrangement or understanding, or
(C) which are beneficially owned, directly or indirectly, by any
other person with which such first mentioned person or any of
its Affiliates or Associates has any agreement, arrangement or
understanding for the purpose of acquiring, holding, voting or
disposing of any shares of capital stock of the Corporation.
(4) The outstanding Voting Shares shall include shares deemed owned
through application of paragraph (3) above but shall not include any
other Voting Shares which may be issuable pursuant to any agreement,
or upon exercise of conversion rights, warrants or options or
otherwise.
(5) "Affiliate" and "Associate" shall have the respective meanings
given those terms in Rule 12b-2 of the General Rules and Regulations
under the Securities Exchange Act of 1934, as in effect on December
31, 1981.
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<PAGE> 16
(6) "Subsidiary" shall mean any corporation of which a majority of any
class of equity security (as defined in Rule 3a11-1 of the General
Rules and Regulations under the Securities Exchange Act of 1934, as in
effect in December 31, 1981) is owned, directly or indirectly, by the
Corporation; provided, however, that for the purposes of the
definition of Investment Stockholder set forth in paragraph (2) of
this section (c), the term "Subsidiary" shall mean only a corporation
of which a majority of each class of equity security is owned,
directly or indirectly, by the Corporation.
(d) majority of the directors shall have the power and duty to
determine for the purposes of this Article FIFTEENTH on the
basis of information known to them, (1) the number of Voting
Shares beneficially owned by any person (2) whether a person is
an Affiliate or Associate of another, (3) whether a person has
an agreement, arrangement or understanding with another as to
the matters referred to in paragraph (3) of section (c), or (4)
whether the assets subject to any business combination or the
consideration received for the issuance or transfer of
securities by the Corporation, or any Subsidiary has an
aggregate fair market value of $1,00,000 or more.
(e) Nothing contained in this Article FIFTEENTH shall be
construed to relieve any Interested Stockholder from any
fiduciary obligation imposed by law.
SIXTEENTH: Notwithstanding any other provision of this Charter or Act
of Incorporation or the By-Laws of the Corporation (and in addition to
any other vote that may be required by law, this Charter or Act of
Incorporation by the By-Laws), the affirmative vote of the holders of
at least two-thirds of the outstanding shares of the capital stock of
the Corporation entitled to vote generally in the election of
directors (considered for this purpose as one class) shall be required
to amend, alter or repeal any provision of Articles FIFTH, THIRTEENTH,
FIFTEENTH or SIXTEENTH of this Charter or Act of Incorporation.
SEVENTEENTH: (a) a Director of this 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 Delaware
General Corporation Laws as the same exists or may hereafter be
amended.
(b) Any repeal or modification of the foregoing paragraph shall
not adversely affect any right or protection of a Director of
the Corporation existing hereunder with respect to any act or
omission occurring prior to the time of such repeal or
modification."
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<PAGE> 17
EXHIBIT B
BY-LAWS
WILMINGTON TRUST COMPANY
WILMINGTON, DELAWARE
AS EXISTING ON JANUARY 16, 1997
<PAGE> 18
BY-LAWS OF WILMINGTON TRUST COMPANY
ARTICLE I
STOCKHOLDERS' MEETINGS
Section 1. The Annual Meeting of Stockholders shall be held on the
third Thursday in April each year at the principal office at the Company or at
such other date, time, or place as may be designated by resolution by the Board
of Directors.
Section 2. Special meetings of all stockholders may be called at any
time by the Board of Directors, the Chairman of the Board or the President.
Section 3. Notice of all meetings of the stockholders shall be given
by mailing to each stockholder at least ten (10) days before said meeting, at
his last known address, a written or printed notice fixing the time and place of
such meeting.
Section 4. A majority in the amount of the capital stock of the
Company issued and outstanding on the record date, as herein determined, shall
constitute a quorum at all meetings of stockholders for the transaction of any
business, but the holders of a small number of shares may adjourn, from time to
time, without further notice, until a quorum is secured. At each annual or
special meeting of stockholders, each stockholder shall be entitled to one vote,
either in person or by proxy, for each shares of stock registered in the
stockholder's name on the books of the Company on the record date for any such
meeting as determined herein.
ARTICLE II
DIRECTORS
Section 1. The number and classification of the Board of Directors
shall be as set forth in the Charter of the Bank.
Section 2. No person who has attained the age of seventy-two (72)
years shall be nominated for election to the Board of Directors of the Company,
provided, however, that this limitation shall not apply to any person who was
serving as director of the Company on September 16, 1971.
Section 3. The class of Directors so elected shall hold office for
three years or until their successors are elected and qualified.
Section 4. The affairs and business of the Company shall be managed
and conducted by the Board of Directors.
Section 5. The Board of Directors shall meet at the principal office
of the Company or elsewhere in its discretion at such times to be determined by
a majority of its
<PAGE> 19
members, or at the call of the Chairman of the Board of Directors or the
President.
Section 6. Special meetings of the Board of Directors may be called at
any time by the Chairman of the Board of Directors or by the President, and
shall be called upon the written request of a majority of the directors.
Section 7. A majority of the directors elected and qualified shall be
necessary to constitute a quorum for the transaction of business at any meeting
of the Board of Directors.
Section 8. Written notice shall be sent by mail to each director of
any special meeting of the Board of Directors, and of any change in the time or
place of any regular meeting, stating the time and place of such meeting, which
shall be mailed not less than two days before the time of holding such meeting.
Section 9. In the event of the death, resignation, removal, inability
to act, or disqualification of any director, the Board of Directors, although
less than a quorum, shall have the right to elect the successor who shall hold
office for the remainder of the full term of the class of directors in which the
vacancy occurred, and until such director's successor shall have been duly
elected and qualified.
Section 10. The Board of Directors at its first meeting after its
election by the stockholders shall appoint an Executive Committee, a Trust
Committee, an Audit Committee and a Compensation Committee, and shall elect from
its own members a Chairman of the Board of Directors and a President who may be
the same person. The Board of Directors shall also elect at such meeting a
Secretary and a Treasurer, who may be the same person, may appoint at any time
such other committees and elect or appoint such other officers as it may deem
advisable. The Board of Directors may also elect at such meeting one or more
Associate Directors.
Section 11. The Board of Directors may at any time remove, with or
without cause, any member of any Committee appointed by it or any associate
director or officer elected by it and may appoint or elect his successor.
Section 12. The Board of Directors may designate an officer to be in
charge of such of the departments or division of the Company as it may deem
advisable.
ARTICLE III
COMMITTEES
Section I. Executive Committee
(A) The Executive Committee shall be composed of not more
than nine members who shall be selected by the Board of Directors from its own
members and who
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<PAGE> 20
shall hold office during the pleasure of the Board.
(B) The Executive Committee shall have all the powers of the
Board of Directors when it is not in session to transact all business for and in
behalf of the Company that may be brought before it.
(C) The Executive Committee shall meet at the principal
office of the Company or elsewhere in its discretion at such times to be
determined by a majority of its members, or at the call of the Chairman of the
Executive Committee or at the call of the Chairman of the Board of Directors.
The majority of its members shall be necessary to constitute a quorum for the
transaction of business. Special meetings of the Executive Committee may be held
at any time when a quorum is present.
(D) Minutes of each meeting of the Executive Committee shall
be kept and submitted to the Board of Directors at its next meeting.
(E) The Executive Committee shall advise and superintend all
investments that may be made of the funds of the Company, and shall direct the
disposal of the same, in accordance with such rules and regulations as the Board
of Directors from time to time make.
(F) In the event of a state of disaster of sufficient
severity to prevent the conduct and management of the affairs and business of
the Company by its directors and officers as contemplated by these By-Laws any
two available members of the Executive Committee as constituted immediately
prior to such disaster shall constitute a quorum of that Committee for the full
conduct and management of the affairs and business of the Company in accordance
with the provisions of Article III of these By-Laws; and if less than three
members of the Trust Committee is constituted immediately prior to such disaster
shall be available for the transaction of its business, such Executive Committee
shall also be empowered to exercise all of the powers reserved to the Trust
Committee under Article III Section 2 hereof. In the event of the
unavailability, at such time, of a minimum of two members of such Executive
Committee, any three available directors shall constitute the Executive
Committee for the full conduct and management of the affairs and business of the
Company in accordance with the foregoing provisions of this Section. This By-Law
shall be subject to implementation by Resolutions of the Board of Directors
presently existing or hereafter passed from time to time for that purpose, and
any provisions of these By-Laws (other than this Section) and any resolutions
which are contrary to the provisions of this Section or to the provisions of any
such implementary Resolutions shall be suspended during such a disaster period
until it shall be determined by any interim Executive Committee acting under
this section that it shall be to the advantage of the Company to resume the
conduct and management of its affairs and business under all of the other
provisions of these By-Laws.
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<PAGE> 21
Section 2. Trust Committee
(A) The Trust Committee shall be composed of not more than
thirteen members who shall be selected by the Board of Directors, a majority of
whom shall be members of the Board of Directors and who shall hold office during
the pleasure of the Board.
(B) The Trust Committee shall have general supervision over
the Trust Department and the investment of trust funds, in all matters, however,
being subject to the approval of the Board of Directors.
(C) The Trust Committee shall meet at the principal office
of the Company or elsewhere in its discretion at such times to be determined by
a majority of its members or at the call of its chairman. A majority of its
members shall be necessary to constitute a quorum for the transaction of
business.
(D) Minutes of each meeting of the Trust Committee shall be
kept and promptly submitted to the Board of Directors.
(E) The Trust Committee shall have the power to appoint
Committees and/or designate officers or employees of the Company to whom
supervision over the investment of trust funds may be delegated when the Trust
Committee is not in session.
Section 3. Audit Committee
(A) The Audit Committee shall be composed of five members
who shall be selected by the Board of Directors from its own members, none of
whom shall be an officer of the Company, and shall hold office at the pleasure
of the Board.
(B) The Audit Committee shall have general supervision over
the Audit Division in all matters however subject to the approval of the Board
of Directors; it shall consider all matters brought to its attention by the
officer in charge of the Audit Division, review all reports of examination of
the Company made by any governmental agency or such independent auditor employed
for that purpose, and make such recommendations to the Board of Directors with
respect thereto or with respect to any other matters pertaining to auditing the
Company as it shall deem desirable.
(C) The Audit Committee shall meet whenever and wherever the
majority of its members shall deem it to be proper for the transaction of its
business, and a majority of its Committee shall constitute a quorum.
Section 4. Compensation Committee
(A) The Compensation Committee shall be composed of not more
than
4
<PAGE> 22
five (5) members who shall be selected by the Board of Directors from its own
members who are not officers of the Company and who shall hold office during the
pleasure of the Board.
(B) The Compensation Committee shall in general advise upon
all matters of policy concerning the Company brought to its attention by the
management and from time to time review the management of the Company, major
organizational matters, including salaries and employee benefits and
specifically shall administer the Executive Incentive Compensation Plan.
(C) Meetings of the Compensation Committee may be called at
any time by the Chairman of the Compensation Committee, the Chairman of the
Board of Directors, or the President of the Company.
Section 5. Associate Directors
(A) Any person who has served as a director may be elected
by the Board of Directors as an associate director, to serve during the pleasure
of the Board.
(B) An associate director shall be entitled to attend all
directors meetings and participate in the discussion of all matters brought to
the Board, with the exception that he would have no right to vote. An associate
director will be eligible for appointment to Committees of the Company, with the
exception of the Executive Committee, Audit Committee and Compensation
Committee, which must be comprised solely of active directors.
Section 6. Absence or Disqualification of Any Member of a Committee
(A) In the absence or disqualification of any member of any
Committee created under Article III of the By-Laws of this Company, 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 the place of any such
absence or disqualified member.
ARTICLE IV
OFFICERS
Section 1. The Chairman of the Board of Directors shall preside at all
meetings of the Board and shall have such further authority and powers and shall
perform such duties as the Board of Directors may from time to time confer and
direct. He shall also exercise such powers and perform such duties as may from
time to time be agreed upon between himself and the President of the Company.
Section 2. The Vice Chairman of the Board. The Vice Chairman of the
Board of
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<PAGE> 23
Directors shall preside at all meetings of the Board of Directors at which the
Chairman of the Board shall not be present and shall have such further authority
and powers and shall perform such duties as the Board of Directors or the
Chairman of the Board may from time to time confer and direct.
Section 3. The President shall have the powers and duties pertaining
to the office of the President conferred or imposed upon him by statute or
assigned to him by the Board of Directors in the absence of the Chairman of the
Board the President shall have the powers and duties of the Chairman of the
Board.
Section 4. The Chairman of the Board of Directors or the President as
designated by the Board of Directors, shall carry into effect all legal
directions of the Executive Committee and of the Board of Directors, and shall
at all times exercise general supervision over the interest, affairs and
operations of the Company and perform all duties incident to his office.
Section 5. There may be one or more Vice Presidents, however
denominated by the Board of Directors, who may at any time perform all the
duties of the Chairman of the Board of Directors and/or the President and such
other powers and duties as may from time to time be assigned to them by the
Board of Directors, the Executive Committee, the Chairman of the Board or the
President and by the officer in charge of the department or division to which
they are assigned.
Section 6. The Secretary shall attend to the giving of notice of
meetings of the stockholders and the Board of Directors, as well as the
Committees thereof, to the keeping of accurate minutes of all such meetings and
to recording the same in the minute books of the Company. In addition to the
other notice requirements of these By-Laws and as may be practicable under the
circumstances, all such notices shall be in writing and mailed well in advance
of the scheduled date of any other meeting. He shall have custody of the
corporate seal and shall affix the same to any documents requiring such
corporate seal and to attest the same.
Section 7. The Treasurer shall have general supervision over all
assets and liabilities of the Company. He shall be custodian of and responsible
for all monies, funds and valuables of the Company and for the keeping of proper
records of the evidence of property or indebtedness and of all the transactions
of the Company. He shall have general supervision of the expenditures of the
Company and shall report to the Board of Directors at each regular meeting of
the condition of the Company, and perform such other duties as may be assigned
to him from time to time by the Board of Directors of the Executive Committee.
Section 8. There may be a Controller who shall exercise general
supervision over the internal operations of the Company, including accounting,
and shall render to the Board of Directors at appropriate times a report
relating to the general condition and internal operations of the Company.
6
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There may be one or more subordinate accounting or controller officers
however denominated, who may perform the duties of the Controller and such
duties as may be prescribed by the Controller.
Section 9. The officer designated by the Board of Directors to be in
charge of the Audit Division of the Company with such title as the Board of
Directors shall prescribe, shall report to and be directly responsible only to
the Board of Directors.
There shall be an Auditor and there may be one or more Audit Officers,
however denominated, who may perform all the duties of the Auditor and such
duties as may be prescribed by the officer in charge of the Audit Division.
Section 10. There may be one or more officers, subordinate in rank to
all Vice Presidents with such functional titles as shall be determined from time
to time by the Board of Directors, who shall ex officio hold the office
Assistant Secretary of this Company and who may perform such duties as may be
prescribed by the officer in charge of the department or division to whom they
are assigned.
Section 11. The powers and duties of all other officers of the Company
shall be those usually pertaining to their respective offices, subject to the
direction of the Board of Directors, the Executive Committee, Chairman of the
Board of Directors or the President and the officer in charge of the department
or division to which they are assigned.
ARTICLE V
STOCK AND STOCK CERTIFICATES
Section 1. Shares of stock shall be transferrable on the books of the
Company and a transfer book shall be kept in which all transfers of stock shall
be recorded.
Section 2. Certificate of stock shall bear the signature of the
President or any Vice President, however denominated by the Board of Directors
and countersigned by the Secretary or Treasurer or an Assistant Secretary, and
the seal of the corporation shall be engraved thereon. Each certificate shall
recite that the stock represented thereby is transferrable only upon the books
of the Company by the holder thereof or his attorney, upon surrender of the
certificate properly endorsed. Any certificate of stock surrendered to the
Company shall be cancelled at the time of transfer, and before a new certificate
or certificates shall be issued in lieu thereof. Duplicate certificates of stock
shall be issued only upon giving such security as may be satisfactory to the
Board of Directors or the Executive Committee.
Section 3. The Board of Directors of the Company is authorized to fix
in advance a record date for the determination of the stockholders entitled to
notice of, and to vote at, any meeting of stockholders and any adjournment
thereof, or entitled to receive payment of
7
<PAGE> 25
any dividend, or to any allotment or rights, or to exercise any rights in
respect of any change, conversion or exchange of capital stock, or in connection
with obtaining the consent of stockholders for any purpose, which record date
shall not be more than 60 nor less than 10 days proceeding the date of any
meeting of stockholders or the date for the payment of any dividend, or the date
for the allotment of rights, or the date when any change or conversion or
exchange of capital stock shall go into effect, or a date in connection with
obtaining such consent.
ARTICLE VI
SEAL
Section 1. The corporate seal of the Company shall be in the following
form:
Between two concentric circles the words "Wilmington Trust
Company" within the inner circle the words "Wilmington,
Delaware."
ARTICLE VII
FISCAL YEAR
Section 1. The fiscal year of the Company shall be the calendar year.
ARTICLE VIII
EXECUTION OF INSTRUMENTS OF THE COMPANY
Section 1. The Chairman of the Board, the President or any Vice
President, however denominated by the Board of Directors, shall have full power
and authority to enter into, make, sign, execute, acknowledge and/or deliver and
the Secretary or any Assistant Secretary shall have full power and authority to
attest and affix the corporate seal of the Company to any and all deeds,
conveyances, assignments, releases, contracts, agreements, bonds, notes,
mortgages and all other instruments incident to the business of this Company or
in acting as executor, administrator, guardian, trustee, agent or in any other
fiduciary or representative capacity by any and every method of appointment or
by whatever person, corporation, court officer or authority in the State of
Delaware, or elsewhere, without any specific authority, ratification, approval
or confirmation by the Board of Directors or the Executive Committee, and any
and all such instruments shall have the same force and validity as though
expressly authorized by the Board of Directors and/or the Executive Committee.
8
<PAGE> 26
ARTICLE IX
COMPENSATION OF DIRECTORS AND MEMBERS OF COMMITTEES
Section 1. Directors and associate directors of the Company, other
than salaried officers of the Company, shall be paid such reasonable honoraria
or fees for attending meetings of the Board of Directors as the Board of
Directors may from time to time determine. Directors and associate directors who
serve as members of committees, other than salaried employees of the Company,
shall be paid such reasonable honoraria or fees for services as members of
committees as the Board of Directors shall from time to time determine and
directors and associate directors may be employed by the Company for such
special services as the Board of Directors may from time to time determine and
shall be paid for such special services so performed reasonable compensation as
may be determined by the Board of Directors.
ARTICLE X
INDEMNIFICATION
Section 1. (A) 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 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, officer, employee or agent of the Corporation or is or was serving
at the request of the Corporation as a director, officer, employee, fiduciary or
agent of another corporation or of a partnership, joint venture, trust,
enterprise or non-profit entity, including service with respect to employee
benefit plans, against all liability and loss suffered and expenses reasonably
incurred by such person. The Corporation shall indemnify a person in connection
with a proceeding initiated by such person only if the proceeding was authorized
by the Board of Directors of the Corporation.
(B) The Corporation shall pay the expenses incurred in
defending any proceeding in advance of its final disposition, provided, however,
that the payment of expenses incurred by a Director officer in his capacity as a
Director or officer in advance of the final disposition of the proceeding shall
be made only upon receipt of an undertaking by the Director or officer to repay
all amounts advanced if it should be ultimately determined that the Director or
officer is not entitled to be indemnified under this Article or otherwise.
(C) If a claim for indemnification or payment of expenses,
under this Article X is not paid in full within ninety days after a written
claim therefor has been received by the Corporation the claimant 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 claimant
was not entitled to the requested indemnification of payment of expenses
9
<PAGE> 27
under applicable law.
(D) The rights conferred on any person by this Article X
shall not be exclusive of any other rights which such person may have or
hereafter acquire under any statute, provision of the Charter or Act of
Incorporation, these By-Laws, agreement, vote of stockholders or disinterested
Directors or otherwise.
(E) Any repeal or modification of the foregoing provisions
of this Article X shall not adversely affect any right or protection hereunder
of any person in respect of any act or omission occurring prior to the time of
such repeal or modification.
ARTICLE XI
AMENDMENTS TO THE BY-LAWS
Section 1. These By-Laws may be altered, amended or repealed, in whole
or in part, and any new By-Law or By-Laws adopted at any regular or special
meeting of the Board of Directors by a vote of the majority of all the members
of the Board of Directors then in office.
10
<PAGE> 28
EXHIBIT C
SECTION 321(B) CONSENT
Pursuant to Section 321(b) of the Trust Indenture Act of 1939, as
amended, Wilmington Trust Company hereby consents that reports of examinations
by Federal, State, Territorial or District authorities may be furnished by such
authorities to the Securities and Exchange Commission upon requests therefor.
WILMINGTON TRUST COMPANY
Dated: December 18, 1997 By: /s/ James P. Lawler
-------------------
Name: James P. Lawler
Title: Vice President
<PAGE> 29
EXHIBIT D
NOTICE
This form is intended to assist state nonmember banks and savings banks with
state publication requirements. It has not been approved by any state banking
authorities. Refer to your appropriate state banking authorities for your state
publication requirements.
R E P O R T O F C O N D I T I O N
Consolidating domestic subsidiaries of the
WILMINGTON TRUST COMPANY of WILMINGTON
- ---------------------------------------------- --------------------
Name of Bank City
in the State of DELAWARE, at the close of business on September 30, 1997.
------------
<TABLE>
<CAPTION>
ASSETS
Thousands of dollars
<S> <C>
Cash and balances due from depository institutions:
Noninterest-bearing balances and currency and coins..........................206,619
Interest-bearing balances........................................................ 0
Held-to-maturity securities.......................................................... 364,899
Available-for-sale securities........................................................1,038,826
Federal funds sold and securities purchased under agreements to resell.................126,000
Loans and lease financing receivables:
Loans and leases, net of unearned income............. 3,830,772
LESS: Allowance for loan and lease losses........... 55,936
LESS: Allocated transfer risk reserve............... 0
Loans and leases, net of unearned income, allowance, and reserve...........3,774,836
Assets held in trading accounts..............................................................0
Premises and fixed assets (including capitalized leases)...............................118,895
Other real estate owned................................................................. 1,830
Investments in unconsolidated subsidiaries and associated companies....................... 34
Customers' liability to this bank on acceptances outstanding.................................0
Intangible assets........................................................................5,215
Other assets........................................................................... 91,240
Total assets.........................................................................5,728,394
</TABLE>
CONTINUED ON NEXT PAGE
<PAGE> 30
<TABLE>
<S> <C>
LIABILITIES
Deposits:
In domestic offices..................................................................3,980,001
Noninterest-bearing................ 859,817
Interest-bearing................... 3,120,184
Federal funds purchased and Securities sold under agreements to repurchase............ 327,543
Demand notes issued to the U.S. Treasury................................................89,508
Trading liabilities (from Schedule RC-D).....................................................0
Other borrowed money:..................................................................///////
With original maturity of one year or less...................................734,000
With original maturity of more than one year..................................43,000
Bank's liability on acceptances executed and outstanding.....................................0
Subordinated notes and debentures............................................................0
Other liabilities (from Schedule RC-G)............................................... 104,674
Total liabilities....................................................................5,278,726
EQUITY CAPITAL
Perpetual preferred stock and related surplus................................................0
Common Stock...............................................................................500
Surplus (exclude all surplus related to preferred stock)................................62,118
Undivided profits and capital reserves.................................................380,993
Net unrealized holding gains (losses) on available-for-sale securities...................6,057
Total equity capital...................................................................449,668
Total liabilities, limited-life preferred stock, and equity capital..................5,728,394
</TABLE>
2
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF PAC RIM HOLDING CORPORATION FOR THE YEAR ENDED DECEMBER
31, 1996 (RESTATED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 54,759
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 111,553
<CASH> 1,731
<RECOVER-REINSURE> 785
<DEFERRED-ACQUISITION> 1,065
<TOTAL-ASSETS> 155,435
<POLICY-LOSSES> 100,588
<UNEARNED-PREMIUMS> 6,917
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 364
<NOTES-PAYABLE> 18,941
0
0
<COMMON> 29,719
<OTHER-SE> (10,445)
<TOTAL-LIABILITY-AND-EQUITY> 155,435
82,654
<INVESTMENT-INCOME> 7,013
<INVESTMENT-GAINS> 1,640
<OTHER-INCOME> 8
<BENEFITS> 79,890
<UNDERWRITING-AMORTIZATION> 14,672
<UNDERWRITING-OTHER> 16,752
<INCOME-PRETAX> (22,329)
<INCOME-TAX> 606
<INCOME-CONTINUING> (22,935)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,935)
<EPS-PRIMARY> 0
<EPS-DILUTED> (2.41)
<RESERVE-OPEN> 92,641
<PROVISION-CURRENT> 62,244
<PROVISION-PRIOR> 17,646
<PAYMENTS-CURRENT> 16,398
<PAYMENTS-PRIOR> 58,669
<RESERVE-CLOSE> 97,464
<CUMULATIVE-DEFICIENCY> 17,646
</TABLE>
<PAGE> 1
Exhibit 99.1
LETTER OF TRANSMITTAL
SUPERIOR NATIONAL CAPITAL TRUST I
OFFER TO EXCHANGE ITS
10 3/4% TRUST PREFERRED SECURITIES
(LIQUIDATION AMOUNT $1,000 PER TRUST PREFERRED SECURITY)
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
FOR ITS OUTSTANDING
10 3/4% TRUST PREFERRED SECURITIES
(LIQUIDATION AMOUNT $1,000 PER TRUST PREFERRED SECURITY)
PURSUANT TO THE PROSPECTUS
DATED ____________, 1998
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE
AT 5:00 P.M., NEW YORK CITY TIME, ON ____________,
1998, UNLESS THE OFFER IS EXTENDED.
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
WILMINGTON TRUST COMPANY
BY MAIL/OVERNIGHT DELIVERY/HAND:
Wilmington Trust Company
Corporate Trust Operation
Rodney Square North
100 North Market Street
Wilmington, Delaware 19890-0001
Attn: Jill Rylee
TO CONFIRM BY TELEPHONE OR FOR INFORMATION:
(302) 651-8869
FACSIMILE TRANSMISSIONS:
(302) 651-1079
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET
FORTH ABOVE OR TRANSMISSION OF THIS LETTER OF TRANSMITTAL VIA FACSIMILE TO A
NUMBER OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY.
THE INSTRUCTIONS CONTAINED HEREIN SHOULD BE READ CAREFULLY BEFORE THIS
LETTER OF TRANSMITTAL IS COMPLETED.
Capitalized terms used but not defined herein shall have the same
meaning given them in the Prospectus (as defined below).
This Letter of Transmittal is to be completed by holders of Preferred
Securities (as defined below) either if (i) Preferred Securities are to be
forwarded herewith or (ii) tenders of Preferred Securities are to be made by
book-entry transfer to an account maintained by Wilmington Trust Company (the
"Exchange Agent") at The Depository Trust Company ("DTC") pursuant to the
procedures set forth under "The Exchange Offer--Procedures for Tendering
Preferred Securities" in the Prospectus and an Agent's Message (as defined
herein) is not delivered.
Holders of Preferred Securities whose certificates (the "Certificates")
for such Preferred Securities are not immediately available or who cannot
deliver their Certificates and all other required documents to the Exchange
Agent on or prior to the Expiration Date (as defined in the Prospectus) or who
cannot complete the procedures for book-entry transfer on or prior to the
Expiration Date, must tender their Preferred Securities according to the
guaranteed delivery procedures set forth in "The Exchange Offer--Procedures for
Tendering Preferred Securities" in the Prospectus.
DELIVERY OF DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE
AGENT.
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
<PAGE> 2
DESCRIPTION OF PREFERRED SECURITIES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
LIQUIDATION NUMBER OF
LIQUIDATION AMOUNT OF BENEFICIAL
AMOUNT OF PREFERRED HOLDERS FOR
NAME AND ADDRESS PREFERRED SECURITIES WHICH
OF REGISTERED SECURITIES TENDERED (IF PREFERRED
HOLDER (PLEASE FILL CERTIFICATE (IF ALL ARE LESS THAN ALL SECURITIES ARE
IN IF BLANK) NUMBERS* TENDERED) ARE TENDERED)** HELD
$ $
$ $
$ $
TOTAL AMOUNT TENDERED: $ $
====================== ========== ============== ================ =================
</TABLE>
* Need not be completed by book-entry holders.
** Preferred Securities may be tendered in whole or in part in
denominations of $100,000 and integral multiples of $1,000 in excess
thereof, provided that if any Preferred Securities are tendered for
exchange in part, the untendered liquidation amount thereof must be
$100,000 or any integral multiple of $1,000 in excess thereof. All
Preferred Securities held shall be deemed tendered unless a lesser
number is specified in this column.
- --------------------------------------------------------------------------------
(BOXES BELOW TO BE CHECKED BY ELIGIBLE INSTITUTIONS (defined in Instruction 1)
ONLY)
- - CHECK HERE IF TENDERED PREFERRED SECURITIES ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH DTC AND
COMPLETE THE FOLLOWING:
Name of Tendering Institution _____________________________________________
DTC Account Number ________________________________________________________
Transaction Code Number____________________________________________________
- - CHECK HERE AND ENCLOSE A PHOTOCOPY OF THE NOTICE OF GUARANTEED DELIVERY IF
TENDERED PREFERRED SECURITIES ARE BEING DELIVERED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE
FOLLOWING:
Name of Registered Holder __________________________________________________
Window Ticket Number (if any)_______________________________________________
Date of Execution of Notice of Guaranteed Delivery__________________________
Name of Institution which Guaranteed Delivery_______________________________
If Guaranteed Delivery is to be made By Book-Entry Transfer:
Name of Tendering Institution_______________________________________________
DTC Account Number__________________________________________________________
Transaction Code Number_____________________________________________________
- - CHECK HERE IF PREFERRED SECURITIES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER
AND NON-EXCHANGED OR UNTENDERED PREFERRED SECURITIES ARE TO BE RETURNED BY
CREDITING THE DTC ACCOUNT NUMBER SET FORTH ABOVE.
- - CHECK HERE IF YOU ARE A BROKER-DEALER WHO ACQUIRED THE PREFERRED SECURITIES
FOR ITS OWN ACCOUNT AS A RESULT OF MARKET MAKING OR OTHER TRADING ACTIVITIES
(A "PARTICIPATING BROKER-DEALER") AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF
THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO.
Name:_______________________________________________________________________
Address:____________________________________________________________________
Area Code and Telephone Number:_____________ Contact Person:_______________
2
<PAGE> 3
Ladies and Gentlemen:
The undersigned hereby tenders to Superior National Capital Trust I, a
Delaware business trust (the "Issuer"), and Superior National Insurance Group,
Inc., a Delaware corporation, as Depositor (the "Corporation"), the
above-described aggregate liquidation amount of the Trust's 10 3/4% Trust
Preferred Securities (the "Preferred Securities") in exchange for a like
aggregate liquidation amount of the Trust's 10 3/4% Trust Preferred Securities
(the "Exchange Preferred Securities") which have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), upon the terms and
subject to the conditions set forth in the Prospectus dated , 1998
(as the same may be amended or supplemented from time to time, the
"Prospectus"), receipt of which is acknowledged, and in this Letter of
Transmittal (which, together with the Prospectus, constitute the "Exchange
Offer").
Subject to and effective upon the acceptance for exchange of all or any
portion of the Preferred Securities tendered herewith in accordance with the
terms and conditions of the Exchange Offer (including, if the Exchange Offer is
extended or amended, the terms and conditions of any such extension or
amendment,), the undersigned hereby sells, assigns and transfers to or upon the
order of the Issuer all right, title and interest in and to such Preferred
Securities as are being tendered herewith. The undersigned hereby irrevocably
constitutes and appoints the Exchange Agent as its agent and attorney-in-fact
(with full knowledge that the Exchange Agent is also acting as agent of the
Corporation and the Issuer in connection with the Exchange Offer) with respect
to the tendered Preferred Securities, with full power of substitution (such
power of attorney being deemed to be an irrevocable power coupled with an
interest), subject only to the right of withdrawal described in the Prospectus,
to (i) deliver Certificates for Preferred Securities to the Issuer together with
all accompanying evidences of transfer and authenticity to, or upon the order
of, the Issuer, upon receipt by the Exchange Agent, as the undersigned's agent,
of the Exchange Preferred Securities to be issued in exchange for such Preferred
Securities, (ii) present Certificates for such Preferred Securities for
transfer, and to transfer the Preferred Securities on the books of the Issuer,
and (iii) receive for the account of the Issuer all benefits and otherwise
exercise all rights of beneficial ownership of such Preferred Securities, all in
accordance with the terms and conditions of the Exchange Offer.
THE UNDERSIGNED HEREBY REPRESENTS AND WARRANTS THAT THE UNDERSIGNED HAS FULL
POWER AND AUTHORITY TO TENDER, EXCHANGE, SELL, ASSIGN AND TRANSFER THE PREFERRED
SECURITIES TENDERED HEREBY AND THAT, WHEN THE SAME ARE ACCEPTED FOR EXCHANGE THE
ISSUER WILL ACQUIRE GOOD, MARKETABLE AND UNENCUMBERED TITLE THERETO, FREE AND
CLEAR OF ALL LIENS, RESTRICTIONS, CHARGES AND ENCUMBRANCES, AND THAT THE
PREFERRED SECURITIES TENDERED HEREBY ARE NOT SUBJECT TO ANY ADVERSE CLAIMS OR
PROXIES. THE UNDERSIGNED WILL, UPON REQUEST, EXECUTE AND DELIVER ANY ADDITIONAL
DOCUMENTS DEEMED BY THE CORPORATION, THE ISSUER OR THE EXCHANGE AGENT TO BE
NECESSARY OR DESIRABLE TO COMPLETE THE EXCHANGE, ASSIGNMENT AND TRANSFER OF THE
PREFERRED SECURITIES TENDERED HEREBY, AND THE UNDERSIGNED WILL COMPLY WITH ANY
OBLIGATIONS IT MAY HAVE UNDER THE REGISTRATION RIGHTS AGREEMENT. THE UNDERSIGNED
HAS READ AND AGREES TO ALL OF THE TERMS OF THE EXCHANGE OFFER.
The name and address of the registered holder of the Preferred
Securities tendered hereby should be printed above, if they are not already set
forth above, as they appear on the Certificates representing such Preferred
Securities. The Certificate numbers and the Preferred Securities that the
undersigned wishes to tender should be indicated in the appropriate boxes above.
If any tendered Preferred Securities are not exchanged pursuant to the
Exchange Offer for any reason, or if Certificates are submitted for more
Preferred Securities than are tendered or accepted for exchange, Certificates
for such non-exchanged or untendered Preferred Securities will be returned (or,
in the case of Preferred Securities tendered by book-entry transfer, such
Preferred Securities will be credited to an account maintained at DTC), without
expense to the tendering holder, promptly following the expiration or
termination of the Exchange Offer.
The undersigned understands that tenders of Preferred Securities
pursuant to any one of the procedures described under "The Exchange
Offer--Procedures for Tendering Preferred Securities" in the Prospectus and in
the instructions herein will, upon the Corporation's and the Issuer's acceptance
for exchange of such tendered Preferred Securities, constitute a binding
agreement between the undersigned, the Corporation and the Issuer upon the terms
and subject to the conditions of the Exchange Offer. The undersigned recognizes
that, under certain circumstances set forth in the Prospectus, the Corporation
and the Issuer may not be required to accept for exchange any of the Preferred
Securities tendered hereby.
Unless otherwise indicated herein in the box entitled "Special Issuance
Instructions" below, the undersigned hereby directs that the Exchange Preferred
Securities be issued in the name of the undersigned or, in the case of a
book-entry transfer of Preferred Securities, that such Exchange Preferred
Securities be credited to the account indicated above maintained at DTC. If
applicable, substitute Certificates representing Preferred Securities not
exchanged or not accepted for exchange will be issued to the undersigned or, in
the case of a book-entry transfer of Preferred Securities, will be credited to
the account indicated above maintained at DTC. Similarly, unless otherwise
indicated under "Special Delivery Instructions" below, please deliver Exchange
Preferred Securities to the undersigned at the address shown below the
undersigned's signature.
3
<PAGE> 4
BY TENDERING PREFERRED SECURITIES AND EXECUTING THIS LETTER OF
TRANSMITTAL, THE UNDERSIGNED HEREBY REPRESENTS AND AGREES THAT (I) THE
UNDERSIGNED IS NOT AN "AFFILIATE" OF THE CORPORATION OR THE ISSUER WITHIN THE
MEANING OF RULE 405 UNDER THE SECURITIES ACT, (II) ANY EXCHANGE PREFERRED
SECURITIES TO BE RECEIVED BY THE UNDERSIGNED ARE BEING ACQUIRED IN THE ORDINARY
COURSE OF ITS BUSINESS, (III) THE UNDERSIGNED HAS NO ARRANGEMENT OR
UNDERSTANDING WITH ANY PERSON TO PARTICIPATE IN A DISTRIBUTION (WITHIN THE
MEANING OF THE SECURITIES ACT) OF EXCHANGE PREFERRED SECURITIES TO BE RECEIVED
IN THE EXCHANGE OFFER, AND (IV) IF THE UNDERSIGNED IS NOT A BROKER-DEALER, THE
UNDERSIGNED IS NOT ENGAGED IN, AND DOES NOT INTEND TO ENGAGE IN, A DISTRIBUTION
(WITHIN THE MEANING OF THE SECURITIES ACT) OF SUCH EXCHANGE PREFERRED
SECURITIES. BY TENDERING PREFERRED SECURITIES PURSUANT TO THE EXCHANGE OFFER AND
EXECUTING THIS LETTER OF TRANSMITTAL, A HOLDER OF PREFERRED SECURITIES WHICH IS
A BROKER-DEALER REPRESENTS AND AGREES, CONSISTENT WITH CERTAIN INTERPRETIVE
LETTERS ISSUED BY THE STAFF TO THE DIVISION OF CORPORATION FINANCE OF THE
SECURITIES AND EXCHANGE COMMISSION TO THIRD PARTIES, THAT (A) SUCH PREFERRED
SECURITIES HELD BY THE BROKER-DEALER ARE HELD ONLY AS A NOMINEE, OR (B) SUCH
PREFERRED SECURITIES WERE ACQUIRED BY SUCH BROKER-DEALER FOR ITS OWN ACCOUNT AS
A RESULT OF MARKET-MAKING ACTIVITIES OR OTHER TRADING ACTIVITIES AND IT WILL
DELIVER A PROSPECTUS (AS AMENDED OR SUPPLEMENTED FROM TIME TO TIME) MEETING THE
REQUIREMENTS OF THE SECURITIES ACT IN CONNECTION WITH ANY RESALE OF SUCH
EXCHANGE PREFERRED SECURITIES (PROVIDED THAT BY SO ACKNOWLEDGING AND BY
DELIVERING A PROSPECTUS, SUCH BROKER-DEALER WILL NOT BE DEEMED TO ADMIT THAT IT
IS AN "UNDERWRITER" WITHIN THE MEANING OF THE SECURITIES ACT).
THE CORPORATION AND THE ISSUER HAVE AGREED THAT, SUBJECT TO THE
PROVISIONS OF THE REGISTRATION RIGHTS AGREEMENT, THE PROSPECTUS, AS IT MAY BE
AMENDED OR SUPPLEMENTED FROM TIME TO TIME, MAY BE USED BY A PARTICIPATING
BROKER-DEALER IN CONNECTION WITH RESALES OF EXCHANGE PREFERRED SECURITIES
RECEIVED IN EXCHANGE FOR PREFERRED SECURITIES, WHERE SUCH PREFERRED SECURITIES
WERE ACQUIRED BY SUCH PARTICIPATING BROKER-DEALER FOR ITS OWN ACCOUNT AS A
RESULT OF MARKET-MAKING ACTIVITIES OR OTHER TRADING ACTIVITIES, FOR A PERIOD
ENDING 90 DAYS AFTER THE EXPIRATION DATE (SUBJECT TO EXTENSION UNDER CERTAIN
LIMITED CIRCUMSTANCES DESCRIBED IN THE PROSPECTUS) OR, IF EARLIER, WHEN ALL SUCH
EXCHANGE PREFERRED SECURITIES HAVE BEEN DISPOSED OF BY SUCH PARTICIPATING
BROKER-DEALER. IN THAT REGARD, SECURITIES HAVE BEEN DISPOSED OF BY SUCH
PARTICIPATING BROKER-DEALER. IN THAT REGARD, EACH PARTICIPATING BROKER-DEALER
WHO ACQUIRED PREFERRED SECURITIES FOR ITS OWN ACCOUNT AS A RESULT OF
MARKET-MAKING OR OTHER TRADING ACTIVITIES, BY TENDERING SUCH PREFERRED
SECURITIES AND EXECUTING THIS LETTER OF TRANSMITTAL, AGREES THAT, UPON RECEIPT
OF NOTICE FROM THE CORPORATION OR THE ISSUER OF THE OCCURRENCE OF ANY EVENT OR
THE DISCOVERY OF ANY FACT WHICH MAKES ANY STATEMENT CONTAINED OR INCORPORATED BY
REFERENCE IN THE PROSPECTUS UNTRUE IN ANY MATERIAL RESPECT OR WHICH CAUSES THE
PROSPECTUS TO OMIT TO STATE A MATERIAL FACT NECESSARY IN ORDER TO MAKE THE
STATEMENTS CONTAINED OR INCORPORATED BY REFERENCE THEREIN, IN THE LIGHT OF THE
CIRCUMSTANCES UNDER WHICH THEY WERE MADE, NOT MISLEADING, OR OF THE OCCURRENCE
OF CERTAIN OTHER EVENTS SPECIFIED IN THE REGISTRATION RIGHTS AGREEMENT, SUCH
PARTICIPATING BROKER-DEALER WILL SUSPEND THE SALE OF EXCHANGE PREFERRED
SECURITIES UNTIL THE CORPORATION OR THE ISSUER HAS AMENDED OR SUPPLEMENTED THE
PROSPECTUS TO CORRECT SUCH MISSTATEMENT OR OMISSION AND HAS FURNISHED COPIES OF
THE AMENDED OR SUPPLEMENTED PROSPECTUS TO THE PARTICIPATING BROKER-DEALER OR THE
CORPORATION OR THE ISSUER HAS GIVEN NOTICE THAT THE SALE OF THE EXCHANGE
PREFERRED SECURITIES MAY BE RESUMED, AS THE CASE MAY BE. IF THE CORPORATION OR
THE ISSUER GIVES SUCH NOTICE TO SUSPEND THE SALE OF THE EXCHANGE PREFERRED
SECURITIES, IT SHALL EXTEND THE 90-DAY PERIOD REFERRED TO ABOVE DURING WHICH
PARTICIPATING BROKER-DEALERS ARE ENTITLED TO USE THE PROSPECTUS IN CONNECTION
WITH THE RESALE OF EXCHANGE PREFERRED SECURITIES BY THE NUMBER OF DAYS DURING
THE PERIOD FROM AND INCLUDING THE DATE OF THE GIVING OF SUCH NOTICE TO AND
INCLUDING THE DATE WHEN PARTICIPATING BROKER-DEALERS SHALL HAVE RECEIVED COPIES
OF THE SUPPLEMENTED OR AMENDED PROSPECTUS NECESSARY TO PERMIT RESALES OF THE
EXCHANGE PREFERRED SECURITIES OR TO AND INCLUDING THE DATE ON WHICH THE
CORPORATION OR THE ISSUER HAS GIVEN NOTICE THAT THE SALE OF EXCHANGE PREFERRED
SECURITIES MAY BE RESUMED, AS THE CASE MAY BE.
Holders of Preferred Securities whose Preferred Securities are accepted
for exchange will not receive accumulated Distributions on such Preferred
Securities for any period from and after the last Distribution date to which
Distributions have been paid or duly provided for on such Preferred Securities
prior to the original issue date of the Exchange Preferred Securities or, if no
such Distributions have been paid or duly provided for, will not receive any
accrued Distributions on such Preferred Securities, and the undersigned waives
the right to receive any interest on such Preferred Securities accrued from and
after such Distribution date or, if no such Distributions have been paid or duly
provided for, from and after December 3, 1997.
4
<PAGE> 5
All authority herein conferred or agreed to be conferred in this Letter
of Transmittal shall survive the death or incapacity of the undersigned and any
obligation of the undersigned hereunder shall be binding upon the heirs,
executors, administrators, personal representatives, trustees in bankruptcy,
legal representatives, successors and assigns of the undersigned. Except as
stated in the Prospectus, this tender is irrevocable.
5
<PAGE> 6
================================================================================
HOLDERS SIGN HERE
(SEE INSTRUCTIONS 2, 5 AND 6)
(PLEASE COMPLETE SUBSTITUTE FORM W-9 ON PAGE 14)
(NOTE: SIGNATURES MUST BE GUARANTEED IF REQUIRED BY INSTRUCTION 2)
Must be signed by registered holder exactly as name appears on
Certificates for Preferred Securities hereby tendered or on a security position
listing, or by any person authorized to become the registered holder by
endorsements and documents transmitted herewith (including such opinions of
counsel, certifications and other information as may be required by the
Corporation, the Issuer or the Exchange Agent to comply with the restrictions on
transfer applicable to the Preferred Securities). If signature is by an
attorney-in-fact, executor, administrator, trustee, guardian, officer of a
corporation or another acting in a fiduciary capacity or representative
capacity, please set forth the signer's full title. See Instruction 5.
- -
-------------------------------------------------------------------------------
- -
-------------------------------------------------------------------------------
(SIGNATURE OF HOLDER)
Date , 1998
-------------------------
Name
---------------------------------------------------------------------------
(PLEASE PRINT)
Capacity (full title)
-----------------------------------------------------------
Address
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(INCLUDE ZIP CODE)
Area Code and Telephone Number
--------------------------------------------------
Tax Identification or Social Security Number
------------------------------------
GUARANTEE OF SIGNATURE
(SEE INSTRUCTIONS 2 AND 5)
- -
------------------------------------------------------------------------------
(AUTHORIZED SIGNATURE)
Date , 1998
--------------------------
Name of Firm
--------------------------------------------------------------------
(PLEASE PRINT)
Address
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(INCLUDE ZIP CODE)
Area Code and Telephone Number
--------------------------------------------------
================================================================================
6
<PAGE> 7
================================================================================
SPECIAL ISSUANCE INSTRUCTIONS
(SEE INSTRUCTIONS 1, 5 AND 6)
To be completed ONLY if the Exchange Preferred Securities and/or any Preferred
Securities that are not tendered are to be issued in the name of someone other
than the registered holder of the Preferred Securities whose name appears above.
Issue
- - Exchange Preferred Securities
- - Preferred Securities
to:
Name
---------------------------------------------------------------------------
(PLEASE PRINT)
Address
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(INCLUDE ZIP CODE)
Area Code and Telephone Number
--------------------------------------------------
Tax Identification or Social Security Number
------------------------------------
================================================================================
================================================================================
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 1, 5 AND 6)
To be completed ONLY if the Exchange Preferred Securities and/or any Preferred
Securities that are not tendered are to be sent to someone other than the
registered holder of the Preferred Securities whose name appears above, or to
such registered holder at an address other than that shown above.
Mail
- - Exchange Preferred Securities
- - Preferred Securities
to:
Name
---------------------------------------------------------------------------
(PLEASE PRINT)
Address
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(INCLUDE ZIP CODE)
Area Code and Telephone Number
--------------------------------------------------
Tax Identification or Social Security Number
------------------------------------
================================================================================
7
<PAGE> 8
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF LETTER OF TRANSMITTAL AND CERTIFICATES; GUARANTEED DELIVERY
PROCEDURES. This Letter of Transmittal is to be completed either if (a)
Certificates are to be forwarded herewith or (b) tenders are to be made pursuant
to the procedures for tender by book-entry transfer set forth under "The
Exchange Offer--Procedures for Tendering Preferred Securities" in the Prospectus
and an Agent's Message is not delivered. Certificates, or book-entry
confirmation of a book-entry transfer of such Preferred Securities into the
Exchange Agent's account at DTC, as well as this Letter of Transmittal (or
facsimile thereof), properly completed and duly executed, with any required
signature guarantees, and any other documents required by this Letter of
Transmittal, must be received by the Exchange Agent at its address set forth
herein on or prior to the Expiration Date. Tenders by book-entry transfer may
also be made by delivering an Agent's Message in lieu of this Letter of
Transmittal. The term "book-entry confirmation" means a confirmation of
book-entry transfer of Preferred Securities into the Exchange Agent's account at
DTC. The term "Agent's Message" means a message, transmitted by DTC to and
received by the Exchange Agent and forming a part of a book-entry confirmation,
which states that DTC has received an express acknowledgment from the tendering
participant, which acknowledgment states that such participant has received and
agrees to be bound by the Letter of Transmittal (including the representations
contained herein) and that the Issuer and the Corporation may enforce the Letter
of Transmittal against such participant. Preferred Securities may be tendered in
whole or in part in the liquidation amount of $100,000 (100 Preferred
Securities) and integral multiples of $1,000 in excess thereof, provided that,
if any Preferred Securities are tendered for exchange in part, the untendered
liquidation amount thereof must be $100,000 (100 Preferred Securities) or any
integral multiple of $1,000 in excess thereof.
Holders who wish to tender their Preferred Securities and (i) whose
Preferred Securities are not immediately available or (ii) who cannot deliver
their Preferred Securities, this Letter of Transmittal and all other required
documents to the Exchange Agent on or prior to the Expiration Date or (iii) who
cannot complete the procedures for delivery by book-entry transfer on or prior
to the Expiration Date, may tender their Preferred Securities by properly
completing and duly executing a Notice of Guaranteed Delivery pursuant to the
guaranteed delivery procedures set forth under "The Exchange Offer--Procedures
for Tendering Preferred Securities" in the Prospectus. Pursuant to such
procedures: (i) such tender must be made by or through an Eligible Institution
(as defined below); (ii) a properly completed and duly executed Notice of
Guaranteed Delivery, substantially in the form made available by the Corporation
and the Issuer, must be received by the Exchange Agent on or prior to the
Expiration Date; and (iii) the Certificate (or a book-entry confirmation (as
defined in the Prospectus)) representing all tendered Preferred Securities, in
proper form for transfer, together with a Letter of Transmittal (or facsimile
thereof), properly completed and duly executed, with any required signature
guarantees and any other documents required by this Letter of Transmittal, must
be received by the Exchange Agent within three New York Stock Exchange Inc.
trading days after the date of execution of such Notice of Guaranteed Delivery,
all as provided in "The Exchange Offer--Procedures for Tendering Preferred
Securities" in the Prospectus.
The Notice of Guaranteed Delivery may be delivered by hand or
transmitted by facsimile or mail to the Exchange Agent, and must include a
guarantee by an Eligible Institution in the form set forth in such Notice. For
Preferred Securities to be properly tendered pursuant to the guaranteed delivery
procedure, the Exchange Agent must receive a Notice of Guaranteed Delivery on or
prior to the Expiration Date. As used herein and in the Prospectus, "Eligible
Institution" means a firm or other entity identified in Rule 17Ad-15 under the
Exchange Act as "an eligible guarantor institution," including (as such terms
are defined therein) (i) a bank; (ii) a broker, dealer, municipal securities
broker or dealer or government securities broker or dealer; (iii) a credit
union; (iv) a national securities exchange, registered securities association or
clearing agency; or (v) a savings association that is a participant in a
Securities Transfer Association.
THE METHOD OF DELIVERY OF CERTIFICATES, THIS LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND SOLE RISK OF THE TENDERING
HOLDER AND THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE
EXCHANGE AGENT. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT
REQUESTED, PROPERLY INSURED, OR OVERNIGHT DELIVERY SERVICE IS RECOMMENDED. IN
ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY ON OR
PRIOR TO THE EXPIRATION DATE.
Neither the Corporation nor the Issuer will accept any alternative,
conditional or contingent tenders. Each tendering holder, by execution of a
Letter of Transmittal (or facsimile thereof), waives any right to receive any
notice of the acceptance of such tender.
2. GUARANTEE OF SIGNATURES. No signature guarantee on this Letter of
Transmittal is required if:
(i) this Letter of Transmittal is signed by the registered
holder (which term, for purposes of this document, shall include any
participant in DTC whose name appears on a security position listing as
the owner of the Preferred Securities) of Preferred Securities tendered
herewith, unless such holder has completed either the box entitled
"Special Issuance Instructions" or the box entitled "Special Delivery
Instructions" above, or
8
<PAGE> 9
(ii) Such Preferred Securities are tendered for the account of
a firm that is an Eligible Institution.
In all other cases, an Eligible Institution must guarantee the
signature on this Letter of Transmittal. See Instruction 5.
3. INADEQUATE SPACE. If the space provided in the box captioned
"Description of Preferred Securities" is inadequate, the Certificate numbers
and/or the liquidation amount of Preferred Securities and any other required
information should be listed on a separate signed schedule which is attached to
this Letter of Transmittal.
4. PARTIAL TENDERS AND WITHDRAWAL RIGHTS. Tenders of Preferred
Securities will be accepted only in the liquidation amount of $100,000 (100
Preferred Securities) and integral multiples of $1,000 in excess thereof,
provided that if any Preferred Securities are tendered for exchange in part, the
untendered liquidation amount thereof must be $100,000 (100 Preferred
Securities) or any integral multiple of $1,000 in excess thereof. If less than
all the Preferred Securities evidenced by any Certificate submitted are to be
tendered, fill in the liquidation amount of Preferred Securities which are to be
tendered in the box entitled "Liquidation Amount of Preferred Securities
Tendered (If Less than all are Tendered)." In such case, a new Certificate for
the remainder of the Preferred Securities that were evidenced by your
Certificate for the Preferred Securities will be sent to the holder of the
Preferred Securities, promptly after the Expiration Date unless the appropriate
boxes on this letter of Transmittal are completed. All Preferred Securities
represented by Certificates delivered to the Exchange Agent will be deemed to
have been tendered unless otherwise indicated.
Except as otherwise provided herein, tenders of Preferred Securities may be
withdrawn at any time on or prior to the Expiration Date. In order for a
withdrawal to be effective, a written, telegraphic, telex or facsimile
transmission of such notice of withdrawal must be received by the Exchange Agent
at its address set forth above or in the Prospectus on or prior to the
Expiration Date. Any such notice of withdrawal must specify the name of the
person who tendered the Preferred Securities to be withdrawn, the aggregate
liquidation amount of Preferred Securities to be withdrawn, and (if Certificates
for Preferred Securities have been tendered) the name of the registered holder
of the Preferred Securities as set forth on the Certificates for the Preferred
Securities, if different from that of the person who tendered such Preferred
Securities. If Certificates for the Preferred Securities have been delivered or
otherwise identified to the Exchange Agent, then prior to the physical release
of such Certificates for the Preferred Securities, the tendering holder must
submit the serial numbers shown on the particular Certificates for the Preferred
Securities to be withdrawn and the signature on the notice of withdrawal must be
guaranteed by an Eligible Institution, except in the case of Preferred
Securities tendered for the account of an Eligible Institution. If Preferred
Securities have been tendered pursuant to the procedures for book-entry transfer
set forth under "The Exchange Offer- Procedures for Tendering Preferred
Securities," the notice of withdrawal must specify the name and number of the
account at DTC to be credited with the withdrawal of Preferred Securities, in
which case a notice of withdrawal will be effective if delivered to the Exchange
Agent by written, telegraphic, telex or facsimile transmission on or prior to
the Expiration Date. Withdrawals of tenders of Preferred Securities may not be
rescinded. Preferred Securities properly withdrawn will not be deemed validly
tendered for purposes of the Exchange Offer, but may be retendered at any
subsequent time on or prior to the Expiration Date by following any of the
procedures described in the Prospectus under "The Exchange Offer--Procedures for
Tendering Preferred Securities."
All questions as to the validity, form and eligibility (including time
of receipt) of such withdrawal notices will be determined by the Corporation and
the Issuer, in their sole discretion, whose determination shall be final and
binding on all parties. The Corporation and the Issuer, any affiliates or
assigns of the Corporation and the Issuer, the Exchange Agent or any other
person shall not be under any duty to give any notification of any
irregularities in any notice of withdrawal or incur any liability for failure to
give any such notification. Any Preferred Securities which have been tendered
but which are withdrawn on or prior to the Expiation Date will be returned to
the holder thereof without cost to such holder promptly after withdrawal.
5. SIGNATURES ON LETTER OF TRANSMITTAL, ASSIGNMENTS AND ENDORSEMENTS.
If this Letter of Transmittal is signed by the registered holder of the
Preferred Securities tendered hereby, the signature must correspond exactly with
the name as written on the face of the Certificates without alteration,
enlargement or any change whatsoever.
If any of the Preferred Securities tendered hereby are owned of record
by two or more joint owners, all such owners must sign this Letter of
Transmittal.
If any tendered Preferred Securities are registered in different names
on several Certificates,it will be necessary to complete, sign and submit as
many separate Letters of Transmittal (or facsimiles thereof) as there are
different registrations of Certificates.
If this Letter of Transmittal or any Certificates or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing and must submit proper
evidence satisfactory to the Corporation and the Issuer, in their sole
discretion, of such person's authority to so act.
9
<PAGE> 10
When this Letter of Transmittal is signed by the registered holder of
the Preferred Securities listed and transmitted hereby, no endorsement of
Certificates or separate stock powers are required unless Exchange Preferred
Securities are to be issued in the name of a person other than the registered
holder. Signatures on such Certificates or stock powers must be guaranteed by an
Eligible Institution.
If this Letter of Transmittal is signed by a person other than the
registered holder of the Preferred Securities listed, the Certificates must be
endorsed or accompanied by appropriate stock powers, signed exactly as the name
of the register holder appears on the Certificates, and also must be accompanied
by such opinions of counsel, certifications and other information as the
Corporation, the Issuer or the Exchange Agent may require in accordance with the
restrictions on transfer applicable to the Preferred Securities. Signatures on
such Certificates or stock powers must be guaranteed by an Eligible Institution.
6. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. If Exchange Preferred
Securities are to be issued in the name of a person other than the registered
holder, or if Exchange Preferred Securities are to be sent to someone other than
the registered holder or to an address other than that shown above, the
appropriate boxes on this Letter of Transmittal should be completed.
Certificates for Preferred Securities not exchanged will be returned by mail or,
if tendered by book-entry transfer, by crediting the account indicated above
maintained at DTC unless the appropriate boxes on this Letter of Transmittal are
completed. See Instruction 4.
7. IRREGULARITIES. The Corporation and the Issuer will determine, in
their sole discretion, all questions as to the form of documents, validity,
eligibility (including time of receipt) and acceptance for exchange of any
tender of Preferred Securities, which determination shall be final and binding
on all parties. The Corporation and the Issuer reserve the absolute right to
reject any and all tenders determined by either of them not to be in proper form
or the acceptance of which, or exchange for, may, in the view of counsel to the
Corporation or the Issuer, be unlawful. The Corporation and the Issuer also
reserve the absolute right, subject to applicable law, to waive any of the
conditions of the Exchange Offer set forth in the Prospectus under "The Exchange
Offer--Certain Conditions to the Exchange Offer" or any conditions or
irregularity in any tender of Preferred Securities of any particular holder
whether or not similar conditions or irregularities are waived in the case of
other holders. The Corporation's and the Issuer's interpretation of the terms
and conditions of the Exchange Offer (including this Letter of Transmittal and
the instructions hereto) will be final and binding. No tender of Preferred
Securities will be deemed to have been validly made until all irregularities
with respect to such tender have been cured or waived. The Corporation, the
Issuer, any affiliates or assigns of the Corporation, the Issuer, the Exchange
Agent, or any other person shall not be under any duty to give notification of
any irregularities in tenders or incur any liability for failure to give such
notification.
8. QUESTIONS, REQUEST FOR ASSISTANCE AND ADDITIONAL COPIES. Questions
and requests for assistance may be directed to the Exchange Agent at its address
and telephone number set forth on the front of this Letter of Transmittal.
Additional copies of the Prospectus, the Notice of Guaranteed Delivery and the
Letter of Transmittal may be obtained from the Exchange Agent or from your
broker, dealer, commercial bank, trust company or other nominee.
9. 31% BACKUP WITHHOLDING; SUBSTITUTE FORM W-9. Under U.S. Federal
income tax law, a holder whose tendered Preferred Securities are accepted for
exchange is required to provide the Exchange Agent with such holder's correct
taxpayer identification number ("TIN") on the Substitute Form W-9 below. If the
Exchange Agent is not provided with the correct TIN, the Internal Revenue
Service (the "IRS") may subject the holder or other payee to a $50 penalty. In
addition, payments to such holders or other payees with respect to Preferred
Securities exchanged pursuant to the Exchange Offer may be subject to 31% backup
withholding.
<PAGE> 11
The box in Part 3 of the Substitute Form W-9 may be checked if the
tendering holder has not been issued a TIN and has applied for a TIN or intends
to apply for a TIN in the near future. If the box in Part 3 is checked, the
holder or other payee must also complete the Certificate of Awaiting Taxpayer
Identification Number below in order to avoid backup withholding.
Notwithstanding that the box in part 3 is checked and the Certificate of
Awaiting Taxpayer Identification Number is completed, the Exchange Agent will
withhold 31%of all payments made prior to the time a properly certified TIN is
provided to the Exchange Agent. The Exchange Agent will retain such amounts
withheld during the 60 day period following the date of the Substitute Form W-9.
If the holder furnishes the Exchange Agent with its TIN within 60 days after the
date of the Substitute Form W-9, the amounts retained during the 60 day period
will be remitted to the holder and no further amounts shall be retained or
withheld from payments made to the holder thereafter. If, however, the holder
has not provided the Exchange Agent with its TIN within such 60 day period,
amounts withheld will be remitted to the IRS as backup withholding. In addition,
31% of all payments made thereafter will be withheld and remitted to the IRS
until a correct TIN is provided.
The holder is required to give the Exchange Agent the TIN (e.g., social
security number or employer identification number) of the registered owner of
the Preferred Securities or of the last transferee appearing on the transfers
attached to, or endorsed on, the Preferred Securities. If the Preferred
Securities are registered in more than one name or are not in the name of the
actual owner, consult the enclosed "Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9" for additional guidance on which
number to report.
Certain holders (including, among others, corporations, financial
institutions and ceratin foreign person) may not be subject to these backup
withholding and reporting requirements. Such holders should nevertheless
complete the attached Substitute Form W-9 below, and write "exempt" on the face
thereof, to avoid possible erroneous backup withholding. A foreign person may
qualify as an
10
<PAGE> 12
exempt recipient by submitting a properly completed IRS Form W-8, signed under
penalties of perjury, attesting to that holder's exempt status. Please consult
the enclosed "Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9" for additional guidance on which holders are exempt from
backup withholding.
Backup withholding is not an additional U.S. Federal income tax.
Rather, the U.S. Federal income tax liability of a person subject to backup
withholding will be reduced by the amount of tax withheld. If withholding
results in an overpayment of taxes, a refund may be obtained.
10. LOST, DESTROYED OR STOLE CERTIFICATES. If any Certificates
representing Preferred Securities have been lost, destroyed or stolen, the
holder should promptly notify the Exchange Agent. The holder will then be
instructed as to the steps that must be taken in order to replace the
Certificates. This Letter of Transmittal and related documents cannot be
processed until the procedures for replacing lost, destroyed or stolen
Certificates have been followed.
11. SECURITY TRANSFER TAXES. Holders who tender their Preferred
Securities for exchange will not be obligated to pay any transfer taxes in
connection therewith. If, however, Preferred Securities are to be delivered to,
or are to be issued in the name of, any person other than the registered holder
of the Preferred Securities tendered, or if a transfer tax is imposed for any
reason other than the exchange of Preferred Securities in connection with the
Exchange Offer, then the amount of any such transfer tax (whether imposed on the
registered holder or any other persons) will be payable by the tendering holder.
If satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
IMPORTANT: THIS LETTER OF TRANSMITTAL (OR FACSIMILE THEREOF) AND ALL OTHER
REQUIRED DOCUMENTS MUST BE RECEIVED BY THE EXCHANGE AGENT ON OR PRIOR TO THE
EXPIRATION DATE.
11
<PAGE> 13
================================================================================
PAYER'S NAME: Wilmington Trust Company
SUBSTITUTE Part 1 - PLEASE PROVIDE YOUR TIN IN THE BOX AT Social security
RIGHT AND CERTIFY BY SIGNING AND DATING number OR Employer
BELOW. Identification
Number
FORM W-9 __________________
- --------------------------------------------------------------------------------
Department of the Treasury Part 2 - CERTIFICATION - Under penalties of Internal
Revenue Service perjury, I certify that:
<TABLE>
<S> <C> <C>
Payer's Request for (1) The number shown on this form is my
Taxpayer Identification correct Taxpayer Identification Number
Number (TIN) (or I am waiting for a number to be
issued to me) and
(2) I am not subject to backup withholding
either because: (a) I am exempt from
backup withholding, or (b) I have not
been notified by the Internal Revenue
Service (the "IRS") that I am subject
to backup withholding as a result of a
failure to report all interest or
dividends, or (c) the IRS has notified
me that I am no longer subject to
backup withholding.
- --------------------------------------------------------------------------------
</TABLE>
CERTIFICATION INSTRUCTIONS - You must cross Part 3 -
out item (2) above if you have been notified
by the IRS that you are currently subject Awaiting TIN o
to backup withholding because of under-
reporting interest or dividends on your
tax return. However, if after being notified
by the IRS that you are subject to backup
withholding, you received another notification
from the IRS that you are no longer subject
to backup withholding, do not cross out such
item (2).
THE INTERNAL REVENUE SERVICES DOES NOT
REQUIRE YOUR CONSENT TO ANY PROVISION OF
THIS DOCUMENT OTHER THAN THE
CERTIFICATIONS REQUIRED TO AVOID BACKUP
WITHHOLDING.
SIGNATURE DATE
- ------------------------------------------- --------------------------------
NAME (Please Print)
------------------------------------------------------------
ADDRESS (Please Print)
------------------------------------------------------------
================================================================================
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE OFFER AND CONSENT
SOLICITATION. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF
TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART 3 OF
SUBSTITUTE FORM W-9.
================================================================================
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number
has not been issued to me, and either (1) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or (2)
I intend to mail or deliver an application in the near future. I understand that
if I do not provide a taxpayer identification number by the time of payment, 31%
of all reportable payments made to me will be withheld, but that such amounts
will be refunded to me if I then provide a Taxpayer Identification Number within
sixty (60) days.
Signature Date
---------------------------------------- ------------------------
Name (Please Print)
------------------------------------------------------------
Address (Please Print)
----------------------------------------------------------
================================================================================
12
<PAGE> 1
Exhibit 99.2
NOTICE OF GUARANTEED DELIVERY
TO BE USED IN CONNECTION WITH
SUPERIOR NATIONAL CAPITAL TRUST I
OFFER TO EXCHANGE ITS
10 3/4% TRUST PREFERRED SECURITIES
(LIQUIDATION AMOUNT $1,000 PER PREFERRED SECURITY)
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
FOR ANY AND ALL OF ITS OUTSTANDING
10 3/4% TRUST PREFERRED SECURITIES
(LIQUIDATION AMOUNT $1,000 PER PREFERRED SECURITY)
================================================================================
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS
WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON , 1998 UNLESS THE OFFER IS EXTENDED
---------------
================================================================================
As set forth in the Exchange Offer (as defined below), this Notice of
Guaranteed Delivery, or one substantially equivalent to this form, must be used
to accept the Exchange Offer if (i) certificates for the Trust's (as defined
below) 10 3/4% Trust Preferred Securities (the "Preferred Securities") are not
immediately available, (ii) the Preferred Securities, the Letter of Transmittal
and all other required documents cannot be delivered to Wilmington Trust Company
(the "Exchange Agent") on or prior to the Expiration Date (as defined in the
Prospectus referred to below) or (iii) the procedures for delivery by book-entry
transfer cannot be completed on or prior to the Expiration Date. This Notice of
Guaranteed Delivery may be delivered by hand, overnight courier or mail, or
transmitted by facsimile transmission, to the Exchange Agent on or prior to the
Expiration Date. See "The Exchange Offer--Procedures for Tendering Preferred
Securities" in the Prospectus.
Wilmington Trust Company, Exchange Agent
By Mail, Hand or Overnight Delivery:
Wilmington Trust Company
Corporate Trust Operation
Rodney Square North
1100 North Market Street
Wilmington, Delaware 19890-0001
Attn: Jill Rylee
Facsimile Transmission:
(302) 651-1079
Confirm By Telephone:
Jill Rylee: (302) 651-8869
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE, OR TRANSMISSION OF THIS INSTRUMENT VIA FACSIMILE OTHER THAN AS SET FORTH
ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY.
THIS NOTICE OF GUARANTEED DELIVERY IS NOT TO BE USED TO GUARANTEE
SIGNATURES. IF A SIGNATURE ON A LETTER OF TRANSMITTAL IS REQUIRED TO BE
GUARANTEED BY AN "ELIGIBLE INSTITUTION" UNDER THE INSTRUCTIONS THERETO, SUCH
SIGNATURE GUARANTEE MUST APPEAR IN THE APPLICABLE SPACE PROVIDED IN THE
SIGNATURE BOX OF THE LETTER OF TRANSMITTAL.
<PAGE> 2
Ladies and Gentlemen:
The undersigned hereby tenders to Superior National Capital Trust I, a
Delaware statutory business trust (the "Trust"), upon the terms and subject to
the conditions set forth in the Prospectus dated ____________, 1998 (as the same
may be amended or supplemented from time to time, the "Prospectus"), and the
related Letter of Transmittal (which together constitute the "Exchange Offer"),
receipt of which is hereby acknowledged, the aggregate liquidation amount of
Preferred Securities set forth below pursuant to the guaranteed delivery
procedures set forth in the Prospectus under the caption "The Exchange
Offer--Procedures for Tendering Preferred Securities."
Aggregate Liquidation
Amount Tendered:_____________________________________
Name of Registered Holder:___________________________
Address:_____________________________________________
- -----------------------------------------------------
Certificate Nos.
(if available):______________________________________
Area Code and Telephone Number:______________________
Signature:___________________________________________
The undersigned understands that tenders of Preferred Securities will
be accepted only in liquidation amounts of $100,000 and integral multiples of
$1,000 in excess thereof.
If Preferred Securities will be tendered by book-entry transfer, provide the
following information:
DTC Account Number:____________________________
Date:____________________________, 1998
THE GUARANTEE ON THE REVERSE SIDE MUST BE COMPLETED
2
<PAGE> 3
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a financial institution (including most banks, savings
and loan associations and brokerage houses) that is a participant in the
Securities Transfer Agent Medallion Program, the New York Stock Exchange
Medallion Program or the Stock Exchange Medallion Program (an "Eligible
Institution"), hereby guarantees to deliver to the Exchange Agent, at its
address set forth above, either the Preferred Securities tendered hereby in
proper form for transfer, or confirmation of the book-entry transfer of such
Preferred Securities to the Exchange Agent's account at The Depository Trust
Company, pursuant to the procedures for book-entry transfer set forth in the
Prospectus, in either case together with one or more properly completed and duly
executed Letters of Transmittal (or facsimile thereof or Agent's Message (as
defined in the Letter of Transmittal in lieu thereof) and any other required
documents within three New York Stock Exchange trading days after the date of
execution of this Notice of Guaranteed Delivery.
The undersigned acknowledges that it must deliver the Letters of
Transmittal (or facsimile thereof or Agent's Message in lieu thereof) and the
Preferred Securities tendered hereby (or a book-entry confirmation) to the
Exchange Agent within the time period set forth above and that failure to do so
could result in a financial loss to the undersigned.
Name of Firm:__________________________________________________________________
(Authorized Signature)_________________________________________________________
Title:
Address:_______________________________________________________________________
- -------------------------------------------------------------------------------
(Include Zip Code)
Area Code and Telephone Number:________________________________________________
Date:__________________________________________________________________________
NOTE: DO NOT SEND PREFERRED SECURITIES WITH THIS NOTICE OF GUARANTEED DELIVERY.
ACTUAL SURRENDER OF PREFERRED SECURITIES MUST BE MADE PURSUANT TO, AND BE
ACCOMPANIED BY, A PROPERLY COMPLETED AND DULY EXECUTED LETTER OF TRANSMITTAL AND
ANY OTHER REQUIRED DOCUMENTS.
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EXHIBIT 99.3
[FORM OF EXCHANGE AGENCY AGREEMENT]
December __, 1997
Wilmington Trust Company
Rodney Square North
1100 North Market Street
Wilmington, Delaware 19890-0001
Attention: Corporate Trust Administration
Re: Superior National Capital Trust I, $105,000,000 10 3/4% Trust
Preferred Securities
Ladies and Gentlemen:
Superior National Insurance Group, Inc., a Delaware corporation,
as Depositor (the "Company"), and Superior National Capital Trust I, a Delaware
business trust (the "Trust"), hereby appoint Wilmington Trust Company
("Wilmington Trust") to act as exchange agent (the "Exchange Agent") in
connection with an exchange offer by the Company and the Trust to exchange up to
$105,000,000 10 3/4% Trust Preferred Securities (the "Preferred Securities").
The terms and conditions of the exchange offer are set forth in a Prospectus,
dated ________, 1998 (as the same may be amended or supplemented from time to
time, the "Prospectus"), and in the related Letter of Transmittal, which
together constitute the "Exchange Offer." The registered holders of the
Preferred Securities are hereinafter referred to as the "Holders." Capitalized
terms used herein and not defined shall have the respective meanings described
thereto in the Prospectus.
On the basis of the representations, warranties and agreements of the
Company, the Trust and Wilmington Trust contained herein and subject to the
terms and conditions hereof, the following sets forth the agreement among the
Company, the Trust and Wilmington Trust as Exchange Agent for the Exchange
Offer:
1. APPOINTMENT AND DUTIES AS EXCHANGE AGENT.
a. The Company and the Trust hereby authorize Wilmington Trust to act as
Exchange Agent in connection with the Exchange Offer and Wilmington Trust agrees
to act as Exchange Agent in connection with the Exchange Offer. As Exchange
Agent, Wilmington Trust
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will perform those services as are outlined herein, including, but not limited
to, accepting tenders of Preferred Securities, and communicating generally
regarding the Exchange Offer with brokers, dealers, commercial banks, trust
companies and other persons, including Holders of the Preferred Securities.
b. The Company and the Trust acknowledge and agree that Wilmington Trust
has been retained pursuant to this Agreement to act solely as Exchange Agent in
connection with the Exchange Offer, and in such capacity, Wilmington Trust shall
perform such duties in good faith as are outlined herein.
c. Wilmington Trust will examine each of the Letters of Transmittal and
certificates for the Preferred Securities and any other documents delivered or
mailed to Wilmington Trust by or for Holders of the Preferred Securities, and
any book entry confirmations received by Wilmington Trust with respect to the
Preferred Securities, to ascertain whether: (i) the Letters of Transmittal and
any such other documents are duly executed and properly completed in accordance
with the instructions set forth therein and that such book entry confirmations
are in due and proper form and contain the information required to be set forth
therein, (ii) the Preferred Securities have otherwise been properly tendered,
(iii) the Preferred Securities tendered in part are tendered in liquidation
amounts of $100,000 (100 Preferred Securities) and integral multiples of $1,000
in excess thereof and that if any Preferred Securities are tendered for exchange
in part, the untendered liquidation amount thereof is $100,000 (100 Preferred
Securities) or any integral multiple of $1,000 in excess thereof, and (iv)
Holders have provided their correct Tax Identification Number or required
certification. Determination of all questions as to validity, form, eligibility
and acceptance for exchange of any Preferred Securities shall be made by the
Company and the Trust, which determination shall be final and binding. In each
case where the Letters of Transmittal or any other documents have been
improperly completed or executed or where book-entry conformations are not in
due and proper form or omit certain information, or any of the certificates for
Preferred Securities are not in proper form for transfer or some other
irregularity in connection with the tender or acceptance of the Preferred
Securities exists, Wilmington Trust will endeavor, upon request of the Company
or the Trust, to advise the tendering Holders of the irregularity and to take
any other action as the Company or the Trust may request to cause such
irregularity to be corrected. Notwithstanding the above, Wilmington Trust shall
not be under any duty to give any notification of any irregularities in tenders
or incur any liability for failure to give any such notification.
d. Tenders of Preferred Securities may be made only as set forth in the
Letter of Transmittal and in the section of the Prospectus captioned "The
Exchange Offer" and Preferred Securities shall be considered properly tendered
only when tendered in accordance with such procedures set forth therein.
Notwithstanding the provisions of this paragraph, Preferred Securities which the
Trust and the Chairman of the Board, Chief Executive Officer, President, any
Vice President, the Treasurer or the Secretary of the Company, shall approve
(such approval, if given orally, to be confirmed in writing) as having been
properly tendered shall be considered to be properly tendered.
e. Wilmington Trust shall advise the Company and the Trust with respect
to any Preferred Securities received as soon as possible after 5:00 p.m., New
York City time, on the
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Expiration Date and accept its instructions with respect to disposition of such
Preferred Securities.
f. Wilmington Trust shall deliver certificates for Preferred Securities
tendered in part to the transfer agent for split-up and shall return any
untendered Preferred Securities or Preferred Securities which have not been
accepted by the Company and the Trust to the Holders promptly after the
expiration or termination of the Exchange Offer.
g. Upon acceptance by the Company and the Trust of any Preferred
Securities duly tendered pursuant to the Exchange Offer (such acceptance if
given orally, to be confirmed in writing), the Company and the Trust will cause
Exchange Preferred Securities in exchange therefor to be issued as promptly as
practicable and Wilmington Trust will deliver such Exchange Preferred Securities
on behalf of the Company and the Trust at the rate of $100,000 (100 Preferred
Securities) liquidation amount of Exchange Preferred Securities for each
$100,000 liquidation amount of Preferred Securities tendered as promptly as
practicable after acceptance by the Company and the Trust of the Preferred
Securities for exchange and notice (such notice if given orally, to be confirmed
in writing) of such acceptance by the Company and the Trust. Unless otherwise
instructed by the Company or the Trust, Wilmington Trust shall issue Exchange
Preferred Securities only in denominations of $100,000 (100 Preferred
Securities) or any integral multiple of $1,000 in excess thereof.
h. Tenders pursuant to the Exchange Offer are irrevocable, except that,
subject to the terms and the conditions set forth in the Prospectus and the
Letter of Transmittal, Preferred Securities tendered pursuant to the Exchange
Offer may be withdrawn at any time on or prior to the Expiration Date in
accordance with the terms of the Exchange Offer.
i. Notice of any decision by the Company and the Trust not to exchange
any Preferred Securities tendered shall be given by the Company and the Trust
either orally (if given orally, to be confirmed in writing) or in a written
notice to Wilmington Trust.
j. If, pursuant to the Exchange Offer, the Company and the Trust do not
accept for exchange all or part of the Preferred Securities tendered because of
an invalid tender, the occurrence of certain other events set forth in the
Prospectus under the caption "The Exchange Offer -- Conditions to the Exchange
Offer" or otherwise, Wilmington Trust, upon notice from the Company and the
Trust (such notice if given orally, to be confirmed in writing), promptly after
the expiration or termination of the Exchange Offer, shall return such
certificates for unaccepted Preferred Securities (or effect appropriate
book-entry transfer), together with any related required documents and the
Letters of Transmittal relating thereto that are in Wilmington Trust's
possession, to the persons who deposited such certificates.
k. Certificates for reissued Preferred Securities, unaccepted Preferred
Securities or Exchange Preferred Securities shall be forwarded by (a)
first-class certified mail, return receipt requested under a blanket surety bond
obtained by Wilmington Trust protecting Wilmington Trust, the Company and the
Trust from loss or liability arising out of the non-receipt or non-delivery of
such certificates or (b) by registered mail insured by Wilmington Trust
separately for the replacement value of each such certificate.
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<PAGE> 4
l. Wilmington Trust is not authorized to pay or offer to pay any
concessions, commissions or solicitation fees to any broker, dealer, commercial
bank, trust company or other nominee or to engage or use any person to solicit
tenders.
m. As Exchange Agent, Wilmington Trust:
(i) shall have no duties or obligations other than those
specifically set forth herein or in the Prospectus or in the related
Letter of Transmittal;
(ii) will make no representations and will have no
responsibilities as to the validity, value or genuineness of any of the
certificates for the Preferred Securities deposited pursuant to the
Exchange Offer, and will not be required to and will make no
representation as to the validity, value or genuineness of the Exchange
Offer;
(iii) shall not be obligated to take any legal action hereunder
which might in Wilmington Trust's reasonable judgment involve any
expense or liability, unless Wilmington Trust shall have been furnished
with indemnity satisfactory to it and additional fees for taking of such
action;
(iv) may reasonably rely on and shall be protected in acting in
reliance upon any certificate, instrument, opinion, notice, letter,
telegram or other document or security delivered to Wilmington Trust and
reasonably believed by Wilmington Trust to be genuine and to have been
signed by the proper party or parties;
(v) may reasonably act upon any tender, statement, request,
comment, agreement or other instrument whatsoever not only as to its due
execution and validity and effectiveness of its provisions, but also as
to the truth and accuracy of any information contained therein, which
Wilmington Trust believes in good faith to be genuine and to have been
signed or represented by a proper person or persons acting in a
fiduciary or representative capacity;
(vi) may rely on and shall be protected in acting upon written or
oral instructions from the President, any Senior Vice President, any
Executive Vice President, any Vice President, the Treasurer, any
Assistant Treasurer or any other designed officer of the Company;
(vii) may consult with its own counsel with respect to any
questions relating to Wilmington Trust's duties and responsibilities and
the advice of such counsel shall be full and complete authorization and
protection in respect of any action taken, suffered or omitted to be
taken by Wilmington Trust hereunder in good faith and in accordance with
the advice of such counsel; and
(viii) shall not advise any person tendering Preferred Securities
pursuant to the Exchange Offer as to whether to tender or refrain from
tendering all or any portion of its Preferred Securities or as to the
market value, decline or appreciation in market value of
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<PAGE> 5
any Preferred Securities that may or may not occur as a result of the
Exchange Offer or as to the market value of the Exchange Preferred
Securities. Wilmington Trust shall furnish copies of the Prospectus,
Letter of Transmittal and the Notice of Guaranteed Delivery or such
other forms as may be approved from time to time by the Company and the
Trust, to all persons requesting such documents from Wilmington Trust.
The Company and the Trust will furnish you with copies of such documents
at your request.
n. Wilmington Trust shall advise orally, and promptly thereafter confirm
in writing, to the Company and the Trust and such other person or persons as the
Company and the Trust may request, daily (and more frequently during the week
immediately preceding the Expiration Date and if otherwise reasonably requested)
up to and including the Expiration Date, the aggregate liquidation amount of
Preferred Securities which have been tendered pursuant to the terms of the
Exchange Offer and the items received by Wilmington Trust pursuant to the
Exchange Offer and this Agreement. In addition, Wilmington Trust will also
provide, and cooperate in making available to the Company and the Trust, or any
such other person or persons upon request (such request if made orally, to be
confirmed in writing) made from time to time, such other information in its
possession as the Company and the Trust may reasonably request. Such cooperation
shall include, without limitation, the granting by Wilmington Trust to the
Company and the Trust, and such person or persons as the Company and the Trust
may request, access to those persons on Wilmington Trust's staff who are
responsible for receiving tenders, in order to ensure that immediately prior to
the Expiration Date the Company and the Trust shall have received adequate
information in sufficient detail to enable the Company and the Trust to decide
whether to extend the Exchange Offer. Wilmington Trust shall prepare a final
list of all persons whose tenders were accepted, the aggregate principal amount
of Preferred Securities tendered, the aggregate liquidation amount of Preferred
Securities accepted, and deliver said list to the Company and the Trust.
o. Letters of Transmittal, book-entry confirmations and Notices of
Guaranteed Delivery shall be stamped by Wilmington Trust as to the date and the
time of receipt thereof and shall be preserved by Wilmington Trust as to the
date and the time of receipt thereof and shall be preserved by Wilmington Trust
for a period of time at least equal to the period of time Wilmington Trust
preserves other records pertaining to the transfer of securities, or one year,
whichever is longer, and thereafter shall be delivered by Wilmington Trust to
the Company and the Trust. Wilmington Trust shall dispose of unused Letters of
Transmittal and other surplus materials by returning them to the Company or the
Trust.
2. COMPENSATION.
$5,000.00 will be payable to Wilmington Trust in its capacity as
Exchange Agent; provided, that Wilmington Trust reserves the right to receive
reimbursement from the Company for any reasonable out-of-pocket expenses
incurred as Exchange Agent in performing the services described herein.
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<PAGE> 6
3. INDEMNIFICATION.
a. The Company and the Trust hereby agree to protect, defend, indemnify
and hold harmless Wilmington Trust against and from any and all costs, losses,
liabilities, taxes, expenses (including reasonable counsel fees and
disbursements) and claims imposed upon or asserted against Wilmington Trust on
account of any action taken or omitted to be taken by Wilmington Trust in
connection with its acceptance of or performance of its duties under this
Agreement and the documents related thereto as well as the reasonable costs and
expenses of defending itself against any claim or liability arising out of or
relating to this Agreement and the documents related thereto. This
indemnification shall survive the release, discharge, termination and/or
satisfaction of this Agreement. Anything in this Agreement to the contrary
notwithstanding, neither the Company nor the Trust shall be liable for
indemnification or otherwise for any loss, liability, cost or expense to the
extent arising out of Wilmington Trust's bad faith, gross negligence or willful
misconduct. In no case shall the Company or the Trust be liable under this
indemnification agreement with respect to any claim against Wilmington Trust
until the Company and the Trust shall be notified by Wilmington Trust, by
letter, of the written assertion of a claim against Wilmington Trust or of any
other action commenced against Wilmington Trust, promptly after Wilmington Trust
shall have received any such written assertion or shall have been served with a
summons in connection therewith; provided, that, Wilmington Trust's failure to
give such notice shall not excuse the Company or the Trust from its obligations
hereunder. The Company and the Trust shall be entitled to participate at their
own expense in the defense of any such claim or other action, and, if the
Company and the Trust so elect, the Company or the Trust may assume the defense
of any pending or threatened action against Wilmington Trust in respect of which
indemnification may be sought hereunder with counsel reasonably acceptable to
Wilmington Trust; provided that the Company and the Trust shall not be entitled
to assume the defense of any such action if the named parties to such action
include the Company or the Trust and Wilmington Trust and representation of the
parties by the same legal counsel would, in the reasonable opinion of counsel
for Wilmington Trust, be inappropriate due to actual or potential conflicting
interests between them. In the event that the Company or the Trust shall assume
the defense of any such suit with counsel reasonably acceptable to Wilmington
Trust, the Company or the Trust, as applicable, shall not be liable for the fees
and expenses incurred by Wilmington Trust of any counsel retained by Wilmington
Trust subsequent to such assumption of defense by the Company or the Trust.
b. The Company agrees to indemnify and hold harmless the Trust from and
against any and all losses, claims, damages and liabilities whatsoever, as due
from the Trust under this Section.
4. TAX INFORMATION.
The Company or the Trust shall arrange to comply with all requirements
under the tax laws of the United States, including those relating to missing Tax
Identification Numbers, and shall file any appropriate reports with the Internal
Revenue Service. The Company and the Trust understand that they may be required,
in certain instances, to deduct 31% with respect to interest paid on the
Exchange Preferred Securities and proceeds from the sale, exchange, redemption
or retirement of the Exchange Preferred Securities from Holders who have not
supplied their
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<PAGE> 7
correct Taxpayer Identification Number or required certification. Such funds
will be turned over to the Internal Revenue Service.
5. GOVERNING LAW. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Delaware (without regard to conflict
of laws principles).
6. NOTICES. Any communication or notice provided for hereunder shall be in
writing and shall be given (and shall be deemed to have been given upon receipt)
by delivery in person, telecopy, or overnight delivery or by registered or
certified mail (postage prepaid, return receipt requested) to the applicable
party at the addresses indicated below:
If to the Company:
26601 Agoura Road
Calabasas, California 91302
Telecopier No.: (818)880-5902
Attention: President
If to the Trust:
26601 Agoura Road
Calabasas, California 91302
Telecopier No.: (818)880-5902
Attention: President
If to Wilmington Trust:
Corporate Trust Operations
Rodney Square North
1100 North Market Street
Wilmington, Delaware 19890-0001
Telecopier No.: (302) 651-1079
Attention: Jill Rylee
With a copy to:
Richards, Layton & Finger, P.A.
One Rodney Square
P.O. Box 551
Wilmington, Delaware 19899
Telecopier No.: (302) 658-6548
Attention: Bernard J. Kelley, Esquire
or, as to each party, at such other address as shall be designated by such party
in a written notice complying as to delivery with the terms of this Section.
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<PAGE> 8
7. PARTIES IN INTEREST. This Agreement shall be binding upon and inure
solely to the benefit of each party hereto and nothing in this Agreement,
express or implied, is intended to or shall confer upon any other person any
right, benefit or remedy of any nature whatsoever under or by reason of this
Agreement. Without limitation to the foregoing, the parties hereto expressly
agree that no holder of Preferred Securities shall have any right, benefit or
remedy of any nature whatsoever under or by reason of this Agreement.
8. COUNTERPARTS; SEVERABILITY. This Agreement may be executed in one or
more counterparts, and by different parties hereto on separate counterparts,
each of which when so executed shall be deemed an original, and all of such
counterparts shall together constitute one and the same agreement. If any term
or other provision of this Agreement or the application thereof is invalid,
illegal or incapable of being enforced by any rule of law, or public policy, all
other provisions of this Agreement shall nevertheless remain in full force and
effect so long as the economic or legal substance of the agreements contained
herein is not affected in any manner adverse to any party. Upon such
determination that any term or provision or the application thereof is invalid,
illegal or unenforceable, 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 in a mutually acceptable manner in order that the agreements
contained herein may be performed as originally contemplated to the fullest
extent possible.
9. CAPTIONS. The descriptive headings contained in this Agreement are
included for convenience or reference only and shall not affect in any way the
meaning or interpretation of this Agreement.
10. ENTIRE AGREEMENT; AMENDMENT. This Agreement constitutes the entire
understanding of the parties hereto with respect to the subject matter hereof.
This Agreement may not be amended or modified nor may any provision hereof be
waived except in writing signed by each party to be bound thereby.
11. TERMINATION. This Agreement shall terminate upon the earlier of (a) the
90th day following the expiration, withdrawal, or termination of the Exchange
Offer, (b) the close of business on the date of actual receipt of written notice
by Wilmington Trust from the Company and the Trust stating that this Agreement
is terminated, (c) one year following the date of this Agreement, or (d) the
time and date on which this Agreement shall be terminated by mutual consent of
the parties hereto.
Kindly indicate your willingness to act as Exchange Agent and Wilmington
Trust's acceptance of the foregoing provisions by signing in the space provided
below for that purpose and returning to the Company a copy of this Agreement so
signed, whereupon this Agreement and Wilmington Trust's acceptance shall
constitute a binding agreement among Wilmington Trust, the Company and the
Trust.
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Very truly yours,
SUPERIOR NATIONAL INSURANCE GROUP, INC.
By: ________________________________
Name:
Title:
SUPERIOR NATIONAL CAPITAL TRUST I
By: ________________________________
Name:
Title:
Accepted and agreed to as of the date first written above:
WILMINGTON TRUST COMPANY
By: ________________________________
Name:
Title:
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