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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-25984
------------------------
SUPERIOR NATIONAL INSURANCE GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 95-4610936
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
26601 AGOURA ROAD
CALABASAS, CA 91302
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(818) 880-1600
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [X]
Number of shares of Common Stock, $.01 par value per share, outstanding as
of close of business on November 7, 1997: 5,859,269 shares.
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SUPERIOR NATIONAL INSURANCE GROUP, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
<S> <C>
Part I. Financial Information PAGE
----
Item 1. Financial Statements
Condensed consolidated balance sheets as of September 30, 1997 (unaudited) and
December 31, 1996.............................................................. 1
Condensed consolidated statements of operations for the three and nine months
ended September 30, 1997 (unaudited) and September 30, 1996 (unaudited)......... 2
Condensed consolidated statement of changes in stockholders' equity for the nine
months ended September 30, 1997 (unaudited)..................................... 3
Condensed consolidated statements of cash flows for the nine months ended
September 30, 1997 (unaudited) and September 30, 1996 (unaudited)............... 4
Notes to condensed consolidated financial statements (unaudited)................. 5
Item 2. Management's Discussion and Analysis of Consolidated Financial Condition
and Results of Operations................................................. 8
PART II. OTHER INFORMATION
Item 5. Other Information........................................................... 15
Item 6. Exhibits and Reports on Form 8-K............................................ 16
SIGNATURE............................................................................. 17
</TABLE>
i
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PART I -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
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.
1
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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.
2
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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.
3
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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
4
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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 presented 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>
5
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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.
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
6
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SUPERIOR NATIONAL INSURANCE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
December 15, 1997, including interim periods. The Company has not determined the
impact of SFAS No. 131.
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.
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.
7
<PAGE> 10
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
References to "SNIG" and "the Company" in this quarterly report include the
results of operations of the newly acquired subsidiary Superior Pacific Casualty
Company ("SPCC"), formerly known as The Pacific Rim Assurance Company for the
period beginning April 1, 1997.
This discussion and analysis contains statements that constitute
"forward-looking" statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements relate to future
events or the future financial performance of the Company and involve known and
unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among other things,
inherent uncertainties related to the effect of the acquisition of Pac Rim
Holding Corporation ("PRHC") and its subsidiary SPCC, the Company's leverage,
and general conditions in the economy and in the workers' compensation insurance
market in particular, and such factors could cause actual results to differ
materially from those indicated by such forward-looking statements.
OVERVIEW
The Company recorded an underwriting profit from continuing operations of
$3.5 million or $0.46 per share in the three month period ended September 30,
1997, versus an underwriting profit of $1.6 million or $0.30 per share in the
corresponding period in the prior year, and an underwriting profit of $5.1
million or $1.01 per share for the nine month period ended September 30, 1997,
versus an underwriting profit of $4.8 million or $0.91 per share in the
corresponding period in the prior year. The increase in underwriting profit from
continuing operations was primarily the result of an increase in premiums as a
result of the SPCC acquisition. During the three months ended September 30, 1997
the Company realized net income of $2.1 million or $0.28 per share as compared
to $0.7 million or $0.15 per share for the three months ended September 30,
1996. The primary reason for the increase in net income was the increase in
investment income, resulting from the increase in invested assets. 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.
The Company acquired PRHC for approximately $42 million on April 11, 1997,
and thereupon SPCC became a subsidiary of the Company. The acquisition was
accounted for as a purchase. Total assets, including goodwill, increased to
$397.2 million at September 30, 1997, from $306.6 million at December 31, 1996,
primarily as a result of the acquisition. 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.
The previously announced audit by the Company's independent auditors of the
financial statements of PRHC for the fiscal years ended December 31, 1996, 1995,
and 1994 was completed August 28, 1997. See "Item 6(b) -- Reports on Form 8K."
GENERAL FINANCIAL CONDITION
Total assets increased $169.1 million or 74.1% to $397.2 million at
September 30, 1997, as compared to the same period in 1996. The increase was due
to approximately $189.3 million in assets recorded related to the acquisition of
PRHC, which was partially offset by a reduction of approximately $91.6 million
in receivables due from reinsurers, that were transferred to Chase in exchange
for cancellation of debt.
Total liabilities increased $154.6 million or 96.6% to $314.7 million at
September 30, 1997, as compared to the same period in 1996. The increase was due
to approximately $171.2 million in liabilities recorded
8
<PAGE> 11
related to the acquisition of PRHC, which was partially offset by the early
extinguishment of the $90 million Chase loan and $6.6 million Imperial Bank
debt.
Total equity increased $11.7 million or 25.9% to $56.8 million at September
30, 1997, as compared to the same period in 1996. Approximately $18 million in
additional capital was related to the April 11, 1997, private stock issuance and
sale. This increase was partially offset by expenditures and increases in claims
reserves associated with the acquisition of PRHC and the $10.4 million
extraordinary loss recognized in conjunction with the early extinguishment of
long-term debt.
RESULTS OF OPERATIONS
The following selected financial data and analysis provide an assessment of
SNIG's financial results for the three months ended September 30, 1997, as
compared to the three months ended September 30, 1996. Certain prior period
amounts have been reclassified to conform to the current period presentation.
Selected financial data as reported for the three months ended September
30, 1997 and 1996 are presented below.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1997 1996
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Gross premiums written.................................... $ 43,121 $ 26,033
Net premiums written...................................... $ 32,890 $ 23,337
Net premiums earned....................................... $ 34,760 $ 23,007
Less:
Claim and claim adjustment expenses, net of
reinsurance.......................................... (21,316) (14,201)
Underwriting and general and administrative expenses.... (9,913) (7,911)
Policyholder dividends.................................. -- 715
--------- ---------
Underwriting profit....................................... 3,531 1,610
Net investment income (excluding capital gains and
losses)................................................. 3,696 2,117
Net investment gains...................................... 27 12
Interest expense.......................................... (1,158) (2,126)
Other income (expense), net............................... (296) (173)
Goodwill amortization..................................... (340) --
--------- ---------
Income from continuing operations -- pre-tax.............. 5,460 1,440
Income tax expense........................................ 2,052 300
--------- ---------
Income before preferred securities dividends, accretion
and extraordinary items................................. 3,408 1,140
Preferred securities dividends and accretion, net of
taxes................................................... (480) (428)
Extraordinary loss on retirement of long-term debt, net of
taxes................................................... (796) --
--------- ---------
Net Income...................................... $ 2,132 $ 712
========= =========
PER SHARE:
Underwriting Profit....................................... $ 0.46 $ 0.30
Net Income................................................ $ 0.28 $ 0.15
Total shares used in Per Share calculations............... 7,692,289 5,316,873
UNDERWRITING RATIOS (GAAP BASIS):
Net claims and claim adjustment expense ratio............. 61.3% 61.7%
Underwriting expense ratio................................ 28.5% 34.4%
Policyholder dividends ratio.............................. -- (3.1%)
--------- ---------
Combined ratio............................................ 89.8% 93.0%
========= =========
</TABLE>
9
<PAGE> 12
Gross premiums written increased $17.1 million or 65.6% to $43.1 million in
the third quarter 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 $9.6 million or 40.9% to $32.9 million in
the third quarter of 1997 as compared to the same period in 1996, reflecting the
increase in gross premiums written. Net premiums earned increased $11.8 million
or 51.1% to $34.8 million in the third quarter of 1997 as compared to the same
period in 1996, reflecting the increase in net premiums written.
Net claim and claim adjustment expenses increased $7.1 million or 50.1% to
$21.3 million in the third quarter of 1997 as compared to the same period in
1996, $1.4 million of which resulted from the addition of business written by
SPCC. The remaining $5.7 million increase was due to the return of results in
1997 to historical averages and to unfavorable development in the 1995 accident
year. The net claim and claim adjustment expense ratio slightly decreased to
61.3% in the third quarter of 1997 from 61.7% in the same period of 1996.
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 "Item 5 -- Other
Information."
Underwriting and general and administrative expenses, excluding
policyholder dividends, increased $2.0 million or 25.3% to $9.9 million in the
third quarter of 1997, as compared to the same period in 1996. Net commission
expense increased $.2 million or 6.4% to $2.8 million in the third quarter of
1997, as compared to the same period in 1996. The increase in net commission
expense is due to an increase in premiums. Net underwriting and general and
administrative expenses increased 35% to $7.1 million in the third quarter of
1997 from $5.3 million in the same period of 1996. The Company's underwriting
expense ratio decreased 17.2% to 28.5% for the third quarter of 1997 from 34.4%
for the same period in 1996, due primarily to a reduction in commission expense
relative to the related premium level. Commission expense decreased relative to
premium levels due to an increase in ceding commissions received
No policyholder dividends were paid during the third quarter of 1997, as
compared to the payment of $0.8 million of such dividends during the same period
in 1996. Prior to the elimination of required minimum rates in California ("open
rating"), policyholder dividends served both as an economic incentive to
employers for safe operations and as a means of price differentiation. Estimated
amounts to be returned to policyholders were accrued when the related premium
was earned by the Company, and dividends were paid to the extent that a surplus
was accumulated from premiums on workers' compensation policies. As a result of
consumers' preference for the lowest net price at the policy's inception under
open rating, dividends are 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, SNIC's management declared a
moratorium on the payment of policyholder dividends for California policies. In
December 1996, the Company discontinued policyholder dividend payments.
The Company recorded an underwriting profit from continuing operations of
$3.5 million in the third quarter of 1997, versus $1.6 million for the same
period in 1996. The increase in underwriting profit from continuing operations
was primarily the result of an increase in premiums as a result of the SPCC
acquisition, coupled with a decrease in related expenses relative to the premium
level.
Net investment income, excluding realized investment gains/losses,
increased $1.6 million or 74.6% to $3.7 million in the third quarter of 1997
compared to the same period in 1996. The improvement is due to the increase in
assets available for investment resulting from the SPCC acquisition. Excluding
SPCC, net investment income decreased $0.3 million or 13% to $1.8 million in the
third quarter of 1997 as compared to the same period in 1996. This 13% decrease
was due to a decline in the average amount of invested assets by $21.9 million
or 14.4% to $130.3 million in the third quarter of 1997 as compared to the same
period in 1996. Essentially no realized investment gains or losses were recorded
in the quarters ended September 30, 1997 and 1996.
Interest expense decreased $1.0 million or 45.5% to $1.2 million in the
third quarter of 1997 as compared to the same period in 1996, due primarily to
the elimination of the funds withheld balance and the retirement
10
<PAGE> 13
of approximately $6.6 million in outstanding debt, offset by the Company's
incurrence of a $44.0 million term loan in connection with its acquisition of
Pac Rim.
Selected financial data as reported for the nine months ended September 30,
1997 and 1996 are presented below.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Gross premiums written.................................... $ 114,211 $ 74,192
Net premiums written...................................... $ 96,596 $ 66,133
Net premiums earned....................................... $ 99,148 $ 66,040
Less:
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
--------- ---------
Underwriting profit....................................... 5,075 4,814
Net investment income (excluding capital gains and
losses)................................................. 9,198 6,361
Net investment gains (losses)............................. 46 33
Interest expense.......................................... (5,302) (6,922)
Other income (expense), net............................... (817) 216
Goodwill amortization..................................... (477) --
--------- ---------
Income from continuing operations -- pre-tax.............. 7,723 4,502
Income tax expense........................................ 2,821 1,348
--------- ---------
Income before preferred securities dividends and accretion
and extraordinary items................................. 4,902 3,154
Preferred securities dividends and accretion, net of
taxes................................................... (1,387) (1,238)
Extraordinary loss on retirement of long-term debt, net of
taxes................................................... (11,157) --
--------- ---------
Net (Loss) Income......................................... $ (7,642) $ 1,916
========= =========
PER SHARE:
Underwriting Profit....................................... $ 1.01 $ 0.91
Net Income (Loss)......................................... $ (1.52) $ 0.41
Total shares used in Per Share calculations............... 5,040,360 5,316,873
UNDERWRITING RATIOS (GAAP BASIS):
Net claims and claim adjustment expense ratio............. 66.9% 55.7%
Underwriting expense ratio................................ 28.0% 40.2%
Policyholder dividends ratio.............................. -- (3.2%)
--------- ---------
Combined ratio............................................ 94.9% 92.7%
========= =========
</TABLE>
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 claims 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 or 67.5% of which resulted from business written by SPCC.
The net claims 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 primarily
to business written by SPCC. Excluding SPCC, SNIC's net claim and claim
adjustment expense ratio increased to 68.3% in the first nine
11
<PAGE> 14
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 in 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
"Item 5 -- Other Information."
Underwriting 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. Net commission expense increased $1.8 million or 22.8%
to $9.7 million in the first nine months of 1997 from the same period in 1996.
Excluding the one-time expense of $5.3 million for the cancellation of a
reinsurance contract recorded during the second quarter of 1996, underwriting
expenses increased $6.5 million or 31.0% to $27.8 million in the first nine
months of 1997 as compared to the same period in 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 $5.3 million expense. Excluding SPCC, the
Company's expense ratio decreased 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. 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. As a result of consumers' preference for the lowest net price at the
policy's inception under open rating, dividends are 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, SNIC's
management declared a moratorium in the payment of policyholder dividends for
California policies. In December 1996, the Company discontinued policyholder
dividend payments.
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. The increase in underwriting profit from continuing
operations was primarily the result of a decrease in underwriting expenses
relative to the related premiums. 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.
Net investment income, excluding investment gains/losses, 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 nine months of 1997 as compared to the same period in
1996. Essentially no realized investment gains or losses were recorded for the
nine months ended September 30, 1997 and 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 and the retirement of approximately
$6.6 million in outstanding debt, partially offset by the Company's incurrence
of a $44.0 million term loan in connection with its acquisition of Pac Rim.
12
<PAGE> 15
A summary of net investment income, excluding capital gains (losses), for
the three and nine months ended September 30, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER ENDED SEPTEMBER
30, 30,
--------------- ---------------
1997 1996 1997 1996
------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest on bonds and notes................. $3,234 $1,909 $6,032 $6,060
Interest on invested cash................... 662 324 3,714 656
------ ------ ------ ------
Total investment income..................... 3,896 2,233 9,746 6,716
Capital gains............................... 27 12 46 33
Investment expense.......................... 200 116 548 355
------ ------ ------ ------
Net investment income....................... $3,723 $2,129 $9,244 $6,394
====== ====== ====== ======
</TABLE>
The distribution of SNIG's consolidated investment portfolio is as follows
(in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------- ------------------
CARRYING MARKET CARRYING MARKET
AVAILABLE FOR SALE: VALUE VALUE VALUE VALUE
-------------------------------------- -------- -------- -------- -------
<S> <C> <C> <C> <C>
U.S. Government Agencies and
Authorities......................... $ 49,823 $ 49,823 $ 22,484 $22,484
Collateralized Mortgage Obligations... 48,189 48,189 12,855 12,855
Corporate Instruments................. 43,383 43,383 9,867 9,867
Special Revenue and Special
Assessment.......................... 63,337 63,337 -- --
State and Political Subdivisions...... -- -- 1,124 1,124
-------- -------- ------- -------
Total Available for Sale.............. $204,732 $204,732 $ 46,330 $46,330
======== ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ---------------
MARKET MARKET
EQUITY SECURITIES COST VALUE COST VALUE
---------------------------------------------- ---- ------ ------ ------
DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Corporate..................................... $686 $849 $1,199 $1,173
---- ---- ------ ------
Total......................................... $686 $849 $1,199 $1,173
==== ==== ====== ======
</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. 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.
DISCONTINUED OPERATIONS
Outstanding discontinued operations claims counts and losses were 216 and
$15.6 million, respectively, as of September 30, 1997, which was consistent with
management's expectations. The Company has significant exposure to construction
defect liabilities on property and casualty insurance policies underwritten from
1986 to 1993. Management continues to closely monitor its potential exposure to
construction defect claims and has not changed its estimates of ultimate claim
and claim adjustment expenses 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
13
<PAGE> 16
claims will not occur. Offsetting these liabilities are $14.0 million of
deferred tax assets and $1.6 million in investments that are available to pay
for these liabilities. The Company will continue to closely monitor the adequacy
of its loss reserves in the discontinued operations.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure of an entity's ability to secure sufficient cash to
meet its contractual obligations and operating needs. The Company's cash inflows
are generated from cash collected for policies sold, investment income on the
existing portfolio and sales and maturities of investments. The Company's cash
outflows consist primarily of payments for policyholders' claims, operating
expenses, and 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 are sufficient to meet the needs of the Company 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
inforce premium base 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 for
the nine months ended September 30, 1997, as compared to $2.7 million for 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 $6.6 million was
used to prepay the Company's then outstanding bank debt, $10 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 California Department
of Insurance's (the "DOI") release of excess assets pledged by SNIC to secure
future workers' compensation claims. In addition, the Company has been informed
by the DOI that it will release in the fourth quarter of 1997, an additional $20
million of excess assets currently pledged by SPCC to secure future workers'
compensation claims.
In November 1996, the Company entered into a financing transaction
involving Center Re and 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 of these actions,
the Company's investable assets increased $93.1 million, which should increase
investment income in future periods.
14
<PAGE> 17
The Company has a reverse repurchase facility with a national securities
brokerage firm that allows it to engage in up to $20 million in reverse
repurchase transactions secured either by U.S. Treasury instruments, U.S. Agency
debt, or corporate debt. This arrangement provides the Company 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 the Company 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, the Company had no obligation outstanding
under this facility.
Because SNIG is a holding company, it depends on dividends and tax
allocation payments from its insurance subsidiaries, SNIC and SPCC, for its net
cash flow requirements, which consist primarily of periodic payments on its
outstanding debt obligations. Absent other sources of cash flow, SNIG cannot
expend funds materially in excess of the amount of dividends or tax allocation
payments that could be paid to it by SNIC and SPCC. 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 based on the greater of
(i) net income for the preceding year or (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 2002.
The Company does not foresee any expenditures during the next twelve months
other than those arising in the normal course of business. The Company is
required to make principal payments on the Chase term loan of $3.65 million
twice per annum commencing October 11, 1997.
The Company made a $10 million capital contribution to SPCC upon
consummation of the acquisition, and management believes SPCC is adequately
capitalized for the foreseeable future. In connection with its acquisition of
SPCC, the Company agreed with the DOI that SPCC would operate in a "run-off"
situation and that all new and renewed 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 effect of inflation on the revenues and net income during the three and
nine months ended September 30, 1997 was not significant.
PART II -- OTHER INFORMATION
ITEM 5 -- OTHER INFORMATION
In November 1997, the Company entered into a non-binding letter of intent
with Risk Enterprise Management Limited ("REM"), an affiliate of Zurich
Reinsurance Centre Holdings, Inc. ("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 claim
management program, the Company and Zurich Reinsurance (North America), Inc.
("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.
15
<PAGE> 18
The letter of intent with REM contemplates that REM would provide certain
claims management services, while the Company 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 its
claims processing systems should produce material improvements in the Company'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 the Company
direct claims costs by up to $3,500 per claim (up to an aggregate of $30
million) to the extent that the Company's open claims severity through 1997
exceeds $38,700, and for claims incurred after 1997, ZRNA will credit the
Company direct claims costs by as yet undetermined per claim amounts to the
extent that the Company's ultimate claims severity subsequent to 1997 exceeds
expected severity targets. The Company would pay ZRNA $10 million in 1997, an
estimated $10 million in 1998, and as yet unspecified amounts in 1999 and 2000.
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ --------------------------------------------------------------------------
<C> <S>
10.1 Employment agreement, June 1, 1997, by and between Mr. William L. Gentz,
President and Chief Executive 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
10.40 State of California Department of Insurance Amended Certificate of
Authority
10.65 Amendment No. 1 to 1997 Credit Agreement, dated as of September 25, 1997
11 Computation of Earnings per Share
27 Financial Data Schedule
</TABLE>
(b) REPORTS ON FORM 8-K:
On July 10, 1997, the Company filed a Current Report on Form 8-K reporting
under Item 5 the prepayment of approximately $88.6 million of long-term debt
outstanding to The Chase Manhattan Bank.
On April 25, 1997, the Company filed a Current Report on Form 8-K with
respect to its April 11, 1997 acquisition of PRHC. Such Form 8-K was filed
without the financial statements and pro forma financial information required by
Item 7 of Form 8-K, as it was impractical to do so at that time. On July 25,
1997, the Company announced that it was investigating the possibility that
errors contained in the historical financial statements of PRHC might have to be
corrected in a filing with the Securities and Exchange Commission. SNIG had
engaged its auditors, KPMG Peat Marwick LLP, to re-audit the financial
statements of PRHC for the years ending December 31, 1996, 1995, and 1994. In
SNIG's view, the financial statements provided to SNIG by PRHC's management and
auditors prior to SNIG's April 11, 1997, acquisition of PRHC used methods and
assumptions that may not have been consistent with generally accepted accounting
principles. On September 5, 1997, the Company filed a Form 8-K/A in order to
amend the Form 8-K filed on April 25, 1997, which included the re-audited
financial statements of PRHC and the other financial statements and pro forma
financial information required by Item 7 of Form 8-K with respect to the
Company's acquisition of PRHC. The net effect of the audit was an overall
adjustment to the December 31, 1996 financial statements of PRHC that resulted
in an increase in net loss of $7 million and a net decrease in stockholders'
equity of $7 million.
16
<PAGE> 19
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 11, 1997 SUPERIOR NATIONAL INSURANCE
GROUP, INC.
By /s/ J. CHRIS SEAMAN
----------------------------------
Name: J. Chris Seaman
Title: Executive Vice President and
Chief Financial Officer
17
<PAGE> 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------ --------------------------------------------------------------------- ----
<C> <S> <C>
10.1 Employment agreement, June 1, 1997, by and between Mr. William L.
Gentz, President and Chief Executive 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
10.40 State of California Department of Insurance Amended Certificate of
Authority
10.65 Amendment No. 1 to 1997 Credit Agreement, dated as of September 25,
1997
11 Computation of Earnings per Share
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
This Employee Agreement, made as of JUNE 1, 1997, by and between
SUPERIOR NATIONAL INSURANCE GROUP, INC. ("Superior National"), a Delaware
corporation, and WILLIAM L. GENTZ ("Employee"), an individual, residing at 18108
Chardon Circle, Encino, CA 91316.
W I T N E S S E T H:
WHEREAS, Superior National and Employee wish to establish the terms and
conditions that shall apply to Employee's employment with Superior National;
NOW THEREFORE, in consideration of the mutual covenants and agreements
set forth herein, the parties hereto agree as follows:
1. EMPLOYMENT. Superior National hereby employs Employee, and Employee
hereby accepts this employment as PRESIDENT AND CHIEF EXECUTIVE OFFICER of
Superior National (reference herein to Superior National shall also mean each of
the subsidiary companies of Superior National) and in conformance with the terms
and conditions set forth herein agrees to exercise and perform faithfully and to
the best of Employee's ability and experience on behalf of Superior National the
powers and duties customarily exercised and performed by a PRESIDENT AND CHIEF
EXECUTIVE OFFICER of an insurance group. Employee shall devote Employee's full
time efforts to the business affairs of Superior National. The terms of the
Employment Term Sheet attached hereto as Addendum A are made a part hereof.
2. LOCATION. Employee's services pursuant to this Agreement shall be
performed at Superior National's offices in Los Angeles County, California and
such other locations as Superior National's offices may be located. Employee
shall not be required to relocate outside of Southern California in order to
perform the services hereunder, without the Employee's consent, except for
travel reasonably required in the performance of Employee's duties hereunder.
3. TERM OF EMPLOYMENT. Subject to section 7 hereof, Employer hereby
employs Employee, and Employee agrees to be so employed for an initial term of
two (2) years, commencing on JUNE 1, 1997, and renewing automatically for a term
of twelve (12) months unless notice of non-renewal is given by Employer at least
sixty (60) days prior to the end of the then-current term of this Agreement.
4. COMPENSATION AND OTHER BENEFITS. As compensation in full for services
to be rendered by Employee hereunder, Superior National shall pay and Employee
shall accept the following:
<PAGE> 2
4.1 SALARY. From the date of this Agreement until termination of
employment, Superior National shall pay Employee a salary determined by the
Board of Directors of Superior National, payable in accordance with Superior
National's payroll policies. Employee's starting salary shall be set forth in
Addendum "A".
4.2 BENEFITS. In conformance with Superior National's standard
employment practices for senior executives, Employee shall be entitled to such
vacation, medical, life insurance, accident, disability and dental benefits and
auto allowance, as shall be authorized from time to time by Superior National's
Board of Directors.
4.3 BONUSES. During the term of this Agreement Employee shall be
entitled to such discretionary bonuses or incentive compensation as may be
authorized from time to time by Superior National's Board of Directors.
5. EXPENSES. In addition to the salary and benefits provided hereunder,
Superior National shall pay for or reimburse Employee for those expenses
reasonably incurred in the course of Employee's activities for Superior
National, including transportation, living and related expenses incurred by
Employee during travel on behalf of Superior National away from Superior
National's principal office and for other business and entertainment expenses
reasonably incurred by Employee in connection with the business of Superior
National. Superior National will provide membership in a country club of the
Employee's choice and will pay all incurred costs of monthly dues and other
expenses other than for personal charges.
Superior National will not reimburse a country club membership fee in
excess of twenty thousand dollars ($20,000). The Company will only reimburse up
to $350.00 per month in country club dues assessments. In the event employee
terminates his employment, with or without cause, prior to the below listed
dates, than employee shall reimburse the Company for the country club membership
fee according to the following schedule:
<TABLE>
<CAPTION>
Termination Date Amount of Reimbursement of Membership Fee
<S> <C>
June 1, 1998 four-fifths (4/5)
June 1, 1999 three-fifths (3/5)
June 1, 2000 two-fifths (2/5)
June 1, 2001 one-fifth (1/5)
</TABLE>
6. TERMINATION BY EMPLOYEE.
6.1 VOLUNTARY TERMINATION. In the event Employee voluntarily
resigns or quits employment with Superior National, then, without limitation of
Superior National's other legal or equitable remedies, Superior National shall
have no further obligation hereunder and no further payments of any kind shall
be payable by Superior National to Employee under this Agreement; provided,
however, Employee shall be
2
<PAGE> 3
entitled to receive payments, if any, under any existing vacation pay,
retirement and other benefit plans and policies then maintained by Superior
National and under which Employee may, at such time and under the separate terms
of such plans and policies, be eligible to receive payment or other benefits.
7. TERMINATION BY SUPERIOR NATIONAL.
7.1 TERMINATION FOR CAUSE. In the event Superior National
terminates Employee's employment for cause ("For Cause"), it shall have no
further obligation to compensate Employee other than to pay for services
rendered through the date of such termination For Cause. For the purposes of
this Agreement, termination For Cause shall be limited to the following:
(a) Employee is convicted of, or pleads guilty or nolo
centendere to, any felony or any crime involving fraud, dishonesty or moral
turpitude:
(b) Employee unlawfully misappropriates funds or other
assets of Superior National or its subsidiaries;
(c) Employee becomes unable, due to physical or mental
illness or non job-related injury to carry on the full-time duties and services
required to be performed by Employee for six (6) consecutive months or for a
total of six (6) months during any twelve-month period;
(d) Employee fails or refuses to comply with a reasonable
directive of Superior National's Board of Directors that is consistent with the
terms of this Agreement and with California law (as applicable), or Employee
materially neglects Employee's duties, is grossly negligent in the performance
of those duties, or engages in gross misconduct materially injurious to Superior
National or Employee breaches this Agreement;
(e) Employee engages or participates, directly or
indirectly, without the prior written consent of Superior National's Board of
Directors, in any business that is in competition in any manner with the
businesses of Superior National whether as an employee, agent, employer,
principal, partner, shareholder (except as a shareholder of any outstanding
class of securities of a corporation that has a class of securities traded on a
national securities exchange or in the over-the-counter market), officer,
director or any other individual or representative capacity whatsoever;
(f) Employee's death;
(g) A material conflict of interest between Superior
National and Employee, as defined by the Superior National Conflict of Interest
Policy.
3
<PAGE> 4
For the purpose of effectuating a termination For Cause under
subsection 7.1(e), Superior National shall give Employee thirty (30) days prior
written notice setting forth the alleged basis of the Cause and the fact that
Employee shall have forty-five (45) days from the date of such notice to cure
such Cause. If Employee fails to cure such Cause within forty-five (45) days of
the date of such notice, Employee's employment shall be automatically terminated
on the 46th day following the date of such notice.
7.2 TERMINATION OTHER THAN FOR CAUSE.
(a) Any termination of Employee's employment under this
Agreement by Superior National other than For Cause (as defined in Paragraph
7.1) or significant diminution of Employee's job duties and responsibilities
shall be deemed to be a termination without cause ("Without Cause"). Superior
National may terminate Employee's employment under this Agreement Without Cause
at any time. In the event that Superior National terminates Employee's
employment Without Cause, then from the effective date of this termination and
continuing for the then remaining full term of this Agreement provided for in
section 3, Superior National will pay Employee a termination benefit equal to
One Hundred Percent (100%) of Employee's fixed monthly salary and all other
medical benefits and allowances to which Employee was entitled in the month in
which such termination occurred (the termination benefit). This termination
benefit shall be a minimum of two (2) year's salary.
(b) During the period of payment of monthly termination
benefits Employee shall be entitled to also receive, under the same terms and
conditions, those medical, dental, disability, life and other existing benefits
in effect at the time of termination. Employee shall be responsible for
"employee premium contributions" for such medical and dental coverages on the
same basis that Superior National's full-time senior executives are assessed for
individual and/or dependent coverages, and such contributions will be deducted
from sums due Employee hereunder.
(c) Any termination of Employee or significant diminution
of Employee's duties and responsibilities in connection with any reorganization,
merger, or consolidation of Superior National, a result of which Superior
National does not survive or in which the outstanding voting stock of Superior
National prior to such event represents less than Fifty Percent (50%) of the
outstanding voting stock of the surviving entity (collectively, "Change of
Control:), shall be deemed a termination Without Cause. In the event of a
termination occurring as a result of a Change of Control, this Agreement shall
be deemed to have a three-year term and Superior National or the surviving
entity will pay Employee the full three (3) year fixed monthly salary and
benefits package in accordance with Subparagraph 7.2(a) above.
7.3 During any period (prior to a termination) for which Employee
is unable to carry on the full-time duties and services required of Employee due
to physical or mental illness or injury, salary and benefits, as of the
beginning of the period of incapacity, shall be payable in accordance with
Superior National's policies.
4
<PAGE> 5
7.4 Employee shall be entitled to a pro rata participation in any
bonuses or incentive compensation determined pursuant to section 4.3 for both
the year prior to which a termination under sections 7.1(c) or (f) or 7.2 should
occur and for the year during which such termination occurs.
8. NON-HIRING OF SUPERIOR NATIONAL PERSONNEL. As long as Superior
National is making payments to Employee under the terms of this Agreement and
for a period twelve months subsequent to the termination of any such payments,
Employee will not hire or cause any person employed by Superior National as of
Employee's termination date or during the six-month period prior to such
termination date to be hired by another employer competing in any manner with
the businesses of Superior National. Recognizing the irreparable nature of the
injury that could be caused by Employee's violation of any provision of this
Paragraph 8, Employee agrees that in addition to and without limitation of any
rights which Superior National may have hereunder, any such violation shall be
the proper subject matter for immediate injunctive relief and entitle Superior
National to terminate this Agreement whereupon no further amounts shall be
payable by Superior National to Employee under this Agreement.
9. CONFIDENTIAL INFORMATION. Employee shall not, except as may be
required by law, use any Confidential Information for any purpose other than on
behalf of Superior National and to not use any Confidential Information for any
purpose adverse to Superior National. For purposes of this Agreement, the term
Confidential Information shall refer to certain confidential information
developed by Superior National as a necessary function of the conduct of its
businesses including, but not limited to, the identity, lists and/or
descriptions of producers or policyholders, financial data, projections, plans
and reports developed for management purposes and not otherwise disseminated,
internal policies and procedures, management systems and procedures, employee
records and information, and other information that may be developed from time
to time by Superior National and be designated as confidential. Such
Confidential Information is unique and has been developed and effectively
applied by Superior National in the conduct of its businesses and constitutes a
valuable and essential asset of the businesses of Superior National. Employee
agrees to protect the confidentiality of and to take all appropriate steps to
prevent unauthorized disclosure or use of the Confidential Information, and
otherwise prevent the Confidential Information from entering the public domain
or the possession by unauthorized persons, with the same degree of reasonable
and appropriate care as Employee uses with respect to Employee's own
confidential information.
9.1 All documents or media containing the Confidential
Information are, and at all times shall remain, the sole property of Superior
National.
9.2 Without diminishing or waiving any rights of Superior
National otherwise available under law, the term of Employee's covenants of
non-disclosure set forth in this section 9 shall be continuing and shall survive
the termination of this
5
<PAGE> 6
Agreement. Employee's covenants not to use or disclose the Confidential
Information shall terminate as to any information that is or becomes public
knowledge through no fault of Employee and may be utilized by the public without
obligation to Superior National. Termination of Employee's obligations pursuant
to the previous sentence shall have no effect on Superior National's rights to
enforce the non-disclosure obligations with respect to conduct occurring before
the information became public knowledge.
10. REMEDIES OF SUPERIOR NATIONAL. Employee recognizes and agrees that
the duties and services to be rendered by Employee hereunder are of a special,
unique and intellectual character and that Employee's failure to perform those
duties and services will cause irreparable and immeasurable harm to Superior
National. Employee also recognizes and agrees that the restrictions on
Employee's activities contained in this Agreement are required for the
reasonable protection of Superior National's business. Superior National will be
entitled, if it so elects, to institute and prosecute proceedings at law or in
equity or obtain damages with respect to such breach or to enforce the specific
performance of this Agreement by Employee or to enjoin Employee from engaging in
any activity in violation hereof.
11. NON-COMPETITION. During such employment and for a period of two (2)
years thereafter, Employee shall not at any time, directly or indirectly, use or
disclose to any persons, except Superior National and its duly authorized
officers and employees entitled thereto, Employee's customer, brokers and agents
lists, credit classifications, records, statistics or other information acquired
by Employee in the course of his employment in any capacity whatsoever, nor in
any manner, directly or indirectly, aid or be party to any acts the effect of
which would tend to divert, diminish or prejudice the good will or business of
Superior National.
12. NOTICES. All notices which Superior National is required or
permitted to give to Employee shall be given by first class mail addressed to
Employee at Employee's residence indicated above or such other place as Employee
may, from, time to time, designate in writing to Superior National. All notices
which Employee is required to give to Superior National hereunder will be given
in duplicate by registered mail, one copy addressed to Superior National's Board
of Directors and the other to Superior National's Corporate Secretary, at
Superior National's principal place of business.
13. ENTIRE AGREEMENT; AMENDMENT. This Agreement supersedes and
terminates any and all prior understandings, agreements or contracts, whether
oral or in writing, if any, entered into between Employee and Superior National
as of the effective date of this Agreement with respect to all matters covered
hereunder. This Agreement constitutes the entire agreement between the parties
pertaining to the subject matters hereof. No representative of Superior National
is authorized to make to any person any representation, warranty or promise with
respect to the subject matters hereof not contained or referred to herein. No
change, termination, waiver or other modification of any provision hereof shall
be binding on Superior National or Employee unless in writing and entered into
between Employee and the Board of Directors of Superior National.
6
<PAGE> 7
14. CALIFORNIA LAW; SEVERABILITY. This Agreement shall be governed and
construed in accordance with the laws of the State of California. In the event
any provision of this Agreement or the application of any provision to any
signatory hereto shall be held by a court of competent jurisdiction to the
contrary to any applicable California or Federal law, the remaining provisions
of this Agreement shall remain in full force and effect. In the event of a
declaratory, injunctive or enforcement action or in the event of any other
litigation between Employee or Superior National arising under or with respect
to this Agreement and not found subject to the terms of section 16 following
shall be conducted in a State or Federal court sitting in Los Angeles County,
California.
15. COOPERATION. Each of the parties hereto, without further
consideration, agrees to execute and deliver such other documents and to take
such other actions as may be necessary or appropriate to consummate fully the
transactions that are the subject matter of this Agreement.
16. ARBITRATION.
16.1 In the event of any dispute, claim, question or disagreement
arising out of or relating to this Agreement or the breach thereof, the parties
hereto shall use their best efforts to settle such disputes, claims, questions
or disagreement. To this effect, they shall consult and negotiate with each
other, in good faith and, recognizing their mutual interests, attempt to reach a
just and equitable solution satisfactory to both parties.
16.2 If a dispute arises out of or relates to this Agreement, or
the breach thereof, and if said dispute cannot be settled through direct
discussions, the parties agree to first endeavor to settle the dispute in an
amicable manner by mediation administered by a mediator mutually agreeable to
all parties, before resorting to arbitration. Thereafter, any unresolved
controversy or claim arising out of or relating to this Agreement, or breach
thereof, except for the rights of the parties to apply to a court of competent
jurisdiction for a Temporary Restraining Order to preserve the status quo or
prevent irreparable harm pending the selection and confirmation of any
arbitrator, shall be settled by arbitration administered by and in accordance
with the provisions of California Code of Civil Procedure Sections 1280 et seq.,
and judgment upon the award rendered by the arbitrator(s) may be entered in any
court having jurisdiction thereof.
16.3 The arbitration shall be held in Los Angeles, California or
at such other place as may be selected by mutual agreement.
16.4 Within fifteen days after the demand for commencement of
arbitration, each party shall select one person to act as arbitrator, and the
two selected shall select a third arbitrator within ten days of their
appointment who will act as sole arbitrator of the dispute. If the arbitrators
selected by the parties are unable or fail to agree upon the third arbitrator,
the third arbitrator shall be appointed by a Superior Court
7
<PAGE> 8
Judge pursuant to California Code of Civil Procedure Section 1281.6 on petition
of a party to the arbitration agreement.
16.5 The arbitrator will be selected from a panel of persons
having experience with and knowledge of workers' compensation insurance and the
workers' compensation insurance industry.
16.6 The arbitrator shall have the authority to award any remedy
or relief that a court of this state could order or grant, including, without
limitation, specific performance of any obligation created under the Agreement,
the awarding of punitive damages, the issuance of an injunction, or the
imposition of sanctions for abuse or frustration of the arbitration process.
16.7 The arbitrator shall award to the prevailing party, if any,
as determined by the arbitrator, all of its costs and fees. "Costs and fees'
means all reasonable pre-award expense of the arbitration, including the
arbitrator's fees, administrative fees, travel expenses, out-of-pocket expenses
such as copying and telephone, court costs, witness fees and attorneys' fees.
16.8 Neither party nor the arbitrator may disclose the existence,
content, or results of any arbitration hereunder without the prior written
consent of both parties.
16.9 Limited civil discovery shall be permitted for the
production of documents and taking of depositions. All discovery shall be
governed by the California Rules of Civil Procedure. All issues regarding
conformation with discovery requests shall be decided by the arbitrator.
16.10 The arbitration award shall be in writing and shall specify
the factual and legal bases for the award.
16.11 Within twenty days after receipt of Notice of Decision by
the Arbitrator, either party may appeal the arbitration panel(`s) award to an
appellate arbitrator by filing a written Notice of Appeal served on the opposing
party and the arbitrator.
16.12 Within fifteen days after Notice of Appeal, each party
shall select one person to act as appellate arbitrator, and the two selected
shall select a third appellate arbitrator within ten days of their appointment
who will act as sole arbitrator of the dispute. If the arbitrator selected by
the parties is unable or fails to agree upon the third appellate arbitrator, the
third arbitrator shall by appointed by a Superior Court Judge pursuant to
California Code of Civil Procedure section 1281.6 on petition of party to the
Arbitration Agreement.
16.13 The appellate arbitrator shall be a retired judge of a
court of record in the state in which the arbitration was held.
8
<PAGE> 9
16.14 Within twenty days after selection of an appellate
arbitrator, a written brief, not to exceed twenty pages, stating the reasons why
the panel's decision should be reversed or modified shall be filed with the
appellate arbitrator and served to the opposing party. The opposing party shall
file with the appellate arbitrator and serve on the appealing party, within
twenty days after receiving the appeal brief, an opposition brief, not to exceed
twenty pages. Either party may request oral argument which must be conducted
within fourteen days following the submission of the final brief. The appellate
arbitration shall be based only on the record of the initial hearing and oral
argument, if any. The appellate arbitrator shall render a written decision
affirming reversing, modifying or remanding the arbitration panel's decision
within thirty days after receiving the final appellate submissions.
16.15 The appellate arbitrator may reverse, modify or remand the
matter for further proceedings by the arbitration panel only on one of the
following grounds:
(1) Any ground specified in 901 et. seq. of the California Code
of Civil Procedure;
(2) If the award contains material errors of applicable law;
(3) If the award is arbitrary or capricious;
(4) If there is a demonstration of bias, prejudice or undisclosed
conflict of interest between the arbitrator and the prevailing
party.
16.16 The appellate arbitrator may render a final decision on
appeal or remand the matter for further proceedings by the arbitration panel.
16.17 The arbitrators shall award to the prevailing party, if
any, as determined by the arbitrators, all of its costs and fees. "Costs and
fees" means all reasonable pre-award expenses of the arbitration, including the
arbitrator's fees, administrative fees, travel expenses, out-of-pocket expenses
such as copying and telephone, court costs, witness fees and attorneys' fees.
17. WAIVER. Waiver by Superior National or Employee of any provision or
any rights under any provision of this Agreement in any instance shall not be
taken as a waiver of any subsequent breach of such provision or as a continuing
waiver of the provision itself.
18. ASSIGNMENT. The rights of Employee hereto shall inure to the benefit
of and be binding upon the successors and assigns of Superior National
consistent with the terms of this Agreement and regardless of the form in which
such succession or assignment takes place. This Agreement and the rights,
interest and benefits hereunder are personal to Employee and shall not be
assigned, transferred, pledged, or hypothecated
9
<PAGE> 10
in any way by Employee, and shall not be subject to execution, attachment or
similar process. Any attempted assignment, transfer, pledge, or hypothecation,
or the levy of any execution, attachment of similar process thereon, shall be
null and void and without effect.
19. ATTORNEYS' FEES, COSTS. If either party shall bring an action
against the other party hereto by reason of a breach of any covenant, warranty,
representation or condition herein, or otherwise arising out of this Agreement,
whether for declaratory or other relief, the prevailing party in such suit shall
be entitled to such party's costs of suit and attorneys' fees, which shall be
payable whether or not such action is prosecuted to judgment. Costs and
attorneys fees resulting from any arbitration shall be governed by section 16,
hereof.
20. PARAGRAPH HEADINGS. Paragraph headings are for the purpose of
convenience only and shall not be considered to be any part of this Agreement.
21. COUNTERPARTS. More than one counterpart of this Agreement may be
executed by the parities hereto, and each counterpart shall be deemed an
original, and all counterparts together shall be one agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement to take
effect the date first stated above.
EMPLOYEE
/s/ Date:
- --------------------------------------- -------------------
WILLIAM L. GENTZ
SUPERIOR NATIONAL INSURANCE GROUP, INC.
By: /s/ Date:
------------------------------------ ------------------
C. LEN PECCHENINO
Title: Chairman of the Board
10
<PAGE> 11
ADDENDUM "A"
EMPLOYMENT TERM SHEET - WILLIAM L. GENTZ
<TABLE>
<S> <C>
Position: President and Chief Executive Officer
Superior National Insurance Group, Inc. and subsidiaries
Salary: Effective June 1, 1997, $287,500 annually
Car Allowance: $1,000 per month
Health Insurance: On same terms, conditions and coverages of other
Superior National senior executives.
Expenses: Usual and customary
Country Club Country Club Membership including membership fee and monthly
Membership: dues payments. Membership fee not to exceed $20,000 and
monthly dues to not exceed $350.00 per month.
Hollywood Bowl
Membership: Annual Subscription Fee to Hollywood Bowl
</TABLE>
11
<PAGE> 1
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
This Employee Agreement, made as of JUNE 1, 1997, by and between
SUPERIOR NATIONAL INSURANCE GROUP, INC. ("Superior National"), a Delaware
corporation, and J. CHRIS SEAMAN ("Employee"), an individual, residing at 4936
Kilburn Court, Agoura, CA 91301.
W I T N E S S E T H:
WHEREAS, Superior National and Employee wish to establish the terms and
conditions that shall apply to Employee's employment with Superior National;
NOW THEREFORE, in consideration of the mutual covenants and agreements
set forth herein, the parties hereto agree as follows:
1. EMPLOYMENT. Superior National hereby employs Employee, and Employee
hereby accepts this employment as EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER of Superior National (reference herein to Superior National shall also
mean each of the subsidiary companies of Superior National) and in conformance
with the terms and conditions set forth herein agrees to exercise and perform
faithfully and to the best of Employee's ability and experience on behalf of
Superior National the powers and duties customarily exercised and performed by
an EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER of an insurance group.
Employee shall devote Employee's full time efforts to the business affairs of
Superior National. The terms of the Employment Term Sheet attached hereto as
Addendum A are made a part hereof.
2. LOCATION. Employee's services pursuant to this Agreement shall be
performed at Superior National's offices in Los Angeles County, California and
such other locations as Superior National's offices may be located. Employee
shall not be required to relocate outside of Southern California in order to
perform the services hereunder, without the Employee's consent, except for
travel reasonably required in the performance of Employee's duties hereunder.
3. TERM OF EMPLOYMENT. Subject to section 7 hereof, Employer hereby
employs Employee, and Employee agrees to be so employed for an initial term of
two (2) years, commencing on JUNE 1, 1997, and renewing automatically for a term
of twelve (12) months unless notice of non-renewal is given by Employer at least
sixty (60) days prior to the end of the then-current term of this Agreement.
4. COMPENSATION AND OTHER BENEFITS. As compensation in full for services
to be rendered by Employee hereunder, Superior National shall pay and Employee
shall accept the following:
4.1 SALARY. From the date of this Agreement until termination of
employment, Superior National shall pay Employee a salary determined by the
Board of
<PAGE> 2
Directors of Superior National, payable in accordance with Superior National's
payroll policies. Employee's starting salary shall be set forth in Addendum "A".
4.2 BENEFITS. In conformance with Superior National's standard
employment practices for senior executives, Employee shall be entitled to such
vacation, medical, life insurance, accident, disability and dental benefits and
auto allowance, as shall be authorized from time to time by Superior National's
Board of Directors.
4.3 BONUSES. During the term of this Agreement Employee shall be
entitled to such discretionary bonuses or incentive compensation as may be
authorized from time to time by Superior National's Board of Directors.
5. EXPENSES. In addition to the salary and benefits provided
hereunder, Superior National shall pay for or reimburse Employee for those
expenses reasonably incurred in the course of Employee's activities for Superior
National, including transportation, living and related expenses incurred by
Employee during travel on behalf of Superior National away from Superior
National's principal office and for other business and entertainment expenses
reasonably incurred by Employee in connection with the business of Superior
National. Superior National will provide membership in a country club of the
Employee's choice and will pay all incurred costs of monthly dues and other
expenses other than for personal charges.
Superior National will not reimburse a country club
membership fee in excess of twenty thousand dollars ($20,000). The Company will
only reimburse up to $350.00 per month in country club dues assessments. In the
event employee terminates his employment, with or without cause, prior to the
below listed dates, than employee shall reimburse the Company for the country
club membership fee according to the following schedule:
<TABLE>
<CAPTION>
Termination Date Amount of Reimbursement of Membership Fee
<S> <C>
June 1, 1998 four-fifths (4/5)
June 1, 1999 three-fifths (3/5)
June 1, 2000 two-fifths (2/5)
June 1, 2001 one-fifth (1/5)
</TABLE>
6. TERMINATION BY EMPLOYEE.
6.1 VOLUNTARY TERMINATION. In the event Employee voluntarily
resigns or quits employment with Superior National, then, without limitation of
Superior National's other legal or equitable remedies, Superior National shall
have no further obligation hereunder and no further payments of any kind shall
be payable by Superior National to Employee under this Agreement; provided,
however, Employee shall be
2
<PAGE> 3
entitled to receive payments, if any, under any existing vacation pay,
retirement and other benefit plans and policies then maintained by Superior
National and under which Employee may, at such time and under the separate terms
of such plans and policies, be eligible to receive payment or other benefits.
7. TERMINATION BY SUPERIOR NATIONAL.
7.1 TERMINATION FOR CAUSE. In the event Superior National
terminates Employee's employment for cause ("For Cause"), it shall have no
further obligation to compensate Employee other than to pay for services
rendered through the date of such termination For Cause. For the purposes of
this Agreement, termination For Cause shall be limited to the following:
(a) Employee is convicted of, or pleads guilty or nolo
centendere to, any felony or any crime involving fraud, dishonesty or moral
turpitude:
(b) Employee unlawfully misappropriates funds or other
assets of Superior National or its subsidiaries;
(c) Employee becomes unable, due to physical or mental
illness or non job- related injury to carry on the full-time duties and services
required to be performed by Employee for six (6) consecutive months or for a
total of six (6) months during any twelve-month period;
(d) Employee fails or refuses to comply with a reasonable
directive of Superior National's Board of Directors that is consistent with the
terms of this Agreement and with California law (as applicable), or Employee
materially neglects Employee's duties, is grossly negligent in the performance
of those duties, or engages in gross misconduct materially injurious to Superior
National or Employee breaches this Agreement;
(e) Employee engages or participates, directly or
indirectly, without the prior written consent of Superior National's Board of
Directors, in any business that is in competition in any manner with the
businesses of Superior National whether as an employee, agent, employer,
principal, partner, shareholder (except as a shareholder of any outstanding
class of securities of a corporation that has a class of securities traded on a
national securities exchange or in the over-the-counter market), officer,
director or any other individual or representative capacity whatsoever;
(f) Employee's death;
(g) A material conflict of interest between Superior
National and Employee, as defined by the Superior National Conflict of Interest
Policy.
3
<PAGE> 4
For the purpose of effectuating a termination For Cause under
subsection 7.1(e), Superior National shall give Employee thirty (30) days prior
written notice setting forth the alleged basis of the Cause and the fact that
Employee shall have forty-five (45) days from the date of such notice to cure
such Cause. If Employee fails to cure such Cause within forty-five (45) days of
the date of such notice, Employee's employment shall be automatically terminated
on the 46th day following the date of such notice.
7.2 TERMINATION OTHER THAN FOR CAUSE.
(a) Any termination of Employee's employment under this
Agreement by Superior National other than For Cause (as defined in Paragraph
7.1) or significant diminution of Employee's job duties and responsibilities
shall be deemed to be a termination without cause ("Without Cause"). Superior
National may terminate Employee's employment under this Agreement Without Cause
at any time. In the event that Superior National terminates Employee's
employment Without Cause, then from the effective date of this termination and
continuing for the then remaining full term of this Agreement provided for in
section 3, Superior National will pay Employee a termination benefit equal to
One Hundred Percent (100%) of Employee's fixed monthly salary and all other
medical benefits and allowances to which Employee was entitled in the month in
which such termination occurred (the termination benefit). This termination
benefit shall be a minimum of two (2) year's salary.
(b) During the period of payment of monthly termination
benefits Employee shall be entitled to also receive, under the same terms and
conditions, those medical, dental, disability, life and other existing benefits
in effect at the time of termination. Employee shall be responsible for
"employee premium contributions" for such medical and dental coverages on the
same basis that Superior National's full-time senior executives are assessed for
individual and/or dependent coverages, and such contributions will be deducted
from sums due Employee hereunder.
(c) Any termination of Employee or significant diminution
of Employee's duties and responsibilities in connection with any reorganization,
merger, or consolidation of Superior National, a result of which Superior
National does not survive or in which the outstanding voting stock of Superior
National prior to such event represents less than Fifty Percent (50%) of the
outstanding voting stock of the surviving entity (collectively, "Change of
Control:), shall be deemed a termination Without Cause. In the event of a
termination occurring as a result of a Change of Control, this Agreement shall
be deemed to have a three-year term and Superior National or the surviving
entity will pay Employee the full three (3) year fixed monthly salary and
benefits package in accordance with Subparagraph 7.2(a) above.
7.3 During any period (prior to a termination) for which
Employee is unable to carry on the full-time duties and services required of
Employee due to physical
4
<PAGE> 5
or mental illness or injury, salary and benefits, as of the beginning of the
period of incapacity, shall be payable in accordance with Superior National's
policies.
7.4 Employee shall be entitled to a pro rata participation in any
bonuses or incentive compensation determined pursuant to section 4.3 for both
the year prior to which a termination under sections 7.1(c) or (f) or 7.2 should
occur and for the year during which such termination occurs.
8. NON-HIRING OF SUPERIOR NATIONAL PERSONNEL. As long as Superior
National is making payments to Employee under the terms of this Agreement and
for a period twelve months subsequent to the termination of any such payments,
Employee will not hire or cause any person employed by Superior National as of
Employee's termination date or during the six-month period prior to such
termination date to be hired by another employer competing in any manner with
the businesses of Superior National. Recognizing the irreparable nature of the
injury that could be caused by Employee's violation of any provision of this
Paragraph 8, Employee agrees that in addition to and without limitation of any
rights which Superior National may have hereunder, any such violation shall be
the proper subject matter for immediate injunctive relief and entitle Superior
National to terminate this Agreement whereupon no further amounts shall be
payable by Superior National to Employee under this Agreement.
9. CONFIDENTIAL INFORMATION. Employee shall not, except as may be
required by law, use any Confidential Information for any purpose other than on
behalf of Superior National and to not use any Confidential Information for any
purpose adverse to Superior National. For purposes of this Agreement, the term
Confidential Information shall refer to certain confidential information
developed by Superior National as a necessary function of the conduct of its
businesses including, but not limited to, the identity, lists and/or
descriptions of producers or policyholders, financial data, projections, plans
and reports developed for management purposes and not otherwise disseminated,
internal policies and procedures, management systems and procedures, employee
records and information, and other information that may be developed from time
to time by Superior National and be designated as confidential. Such
Confidential Information is unique and has been developed and effectively
applied by Superior National in the conduct of its businesses and constitutes a
valuable and essential asset of the businesses of Superior National. Employee
agrees to protect the confidentiality of and to take all appropriate steps to
prevent unauthorized disclosure or use of the Confidential Information, and
otherwise prevent the Confidential Information from entering the public domain
or the possession by unauthorized persons, with the same degree of reasonable
and appropriate care as Employee uses with respect to Employee's own
confidential information.
9.1 All documents or media containing the Confidential
Information are, and at all times shall remain, the sole property of Superior
National.
5
<PAGE> 6
9.2 Without diminishing or waiving any rights of Superior
National otherwise available under law, the term of Employee's covenants of
non-disclosure set forth in this section 9 shall be continuing and shall survive
the termination of this Agreement. Employee's covenants not to use or disclose
the Confidential Information shall terminate as to any information that is or
becomes public knowledge through no fault of Employee and may be utilized by the
public without obligation to Superior National. Termination of Employee's
obligations pursuant to the previous sentence shall have no effect on Superior
National's rights to enforce the non-disclosure obligations with respect to
conduct occurring before the information became public knowledge.
10. REMEDIES OF SUPERIOR NATIONAL. Employee recognizes and agrees that
the duties and services to be rendered by Employee hereunder are of a special,
unique and intellectual character and that Employee's failure to perform those
duties and services will cause irreparable and immeasurable harm to Superior
National. Employee also recognizes and agrees that the restrictions on
Employee's activities contained in this Agreement are required for the
reasonable protection of Superior National's business. Superior National will be
entitled, if it so elects, to institute and prosecute proceedings at law or in
equity or obtain damages with respect to such breach or to enforce the specific
performance of this Agreement by Employee or to enjoin Employee from engaging in
any activity in violation hereof.
11. NON-COMPETITION. During such employment and for a period of two (2)
years thereafter, Employee shall not at any time, directly or indirectly, use or
disclose to any persons, except Superior National and its duly authorized
officers and employees entitled thereto, Employee's customer, brokers and agents
lists, credit classifications, records, statistics or other information acquired
by Employee in the course of his employment in any capacity whatsoever, nor in
any manner, directly or indirectly, aid or be party to any acts the effect of
which would tend to divert, diminish or prejudice the good will or business of
Superior National.
12. NOTICES. All notices which Superior National is required or
permitted to give to Employee shall be given by first class mail addressed to
Employee at Employee's residence indicated above or such other place as Employee
may, from, time to time, designate in writing to Superior National. All notices
which Employee is required to give to Superior National hereunder will be given
in duplicate by registered mail, one copy addressed to Superior National's Board
of Directors and the other to Superior National's Corporate Secretary, at
Superior National's principal place of business.
13. ENTIRE AGREEMENT; AMENDMENT. This Agreement supersedes and
terminates any and all prior understandings, agreements or contracts, whether
oral or in writing, if any, entered into between Employee and Superior National
as of the effective date of this Agreement with respect to all matters covered
hereunder. This Agreement constitutes the entire agreement between the parties
pertaining to the subject matters hereof. No representative of Superior National
is authorized to make to any person any
6
<PAGE> 7
representation, warranty or promise with respect to the subject matters hereof
not contained or referred to herein. No change, termination, waiver or other
modification of any provision hereof shall be binding on Superior National or
Employee unless in writing and entered into between Employee and the Board of
Directors of Superior National.
14. CALIFORNIA LAW; SEVERABILITY. This Agreement shall be governed and
construed in accordance with the laws of the State of California. In the event
any provision of this Agreement or the application of any provision to any
signatory hereto shall be held by a court of competent jurisdiction to the
contrary to any applicable California or Federal law, the remaining provisions
of this Agreement shall remain in full force and effect. In the event of a
declaratory, injunctive or enforcement action or in the event of any other
litigation between Employee or Superior National arising under or with respect
to this Agreement and not found subject to the terms of section 16 following
shall be conducted in a State or Federal court sitting in Los Angeles County,
California.
15. COOPERATION. Each of the parties hereto, without further
consideration, agrees to execute and deliver such other documents and to take
such other actions as may be necessary or appropriate to consummate fully the
transactions that are the subject matter of this Agreement.
16. ARBITRATION.
16.1 In the event of any dispute, claim, question or disagreement
arising out of or relating to this Agreement or the breach thereof, the parties
hereto shall use their best efforts to settle such disputes, claims, questions
or disagreement. To this effect, they shall consult and negotiate with each
other, in good faith and, recognizing their mutual interests, attempt to reach a
just and equitable solution satisfactory to both parties.
16.2 If a dispute arises out of or relates to this Agreement, or
the breach thereof, and if said dispute cannot be settled through direct
discussions, the parties agree to first endeavor to settle the dispute in an
amicable manner by mediation administered by a mediator mutually agreeable to
all parties, before resorting to arbitration. Thereafter, any unresolved
controversy or claim arising out of or relating to this Agreement, or breach
thereof, except for the rights of the parties to apply to a court of competent
jurisdiction for a Temporary Restraining Order to preserve the status quo or
prevent irreparable harm pending the selection and confirmation of any
arbitrator, shall be settled by arbitration administered by and in accordance
with the provisions of California Code of Civil Procedure Sections 1280 et seq.,
and judgment upon the award rendered by the arbitrator(s) may be entered in any
court having jurisdiction thereof.
16.3 The arbitration shall be held in Los Angeles, California or
at such other place as may be selected by mutual agreement.
7
<PAGE> 8
16.4 Within fifteen days after the demand for commencement of
arbitration, each party shall select one person to act as arbitrator, and the
two selected shall select a third arbitrator within ten days of their
appointment who will act as sole arbitrator of the dispute. If the arbitrators
selected by the parties are unable or fail to agree upon the third arbitrator,
the third arbitrator shall be appointed by a Superior Court Judge pursuant to
California Code of Civil Procedure Section 1281.6 on petition of a party to the
arbitration agreement.
16.5 The arbitrator will be selected from a panel of persons
having experience with and knowledge of workers' compensation insurance and the
workers' compensation insurance industry.
16.6 The arbitrator shall have the authority to award any remedy
or relief that a court of this state could order or grant, including, without
limitation, specific performance of any obligation created under the Agreement,
the awarding of punitive damages, the issuance of an injunction, or the
imposition of sanctions for abuse or frustration of the arbitration process.
16.7 The arbitrator shall award to the prevailing party, if any,
as determined by the arbitrator, all of its costs and fees. "Costs and fees'
means all reasonable pre-award expense of the arbitration, including the
arbitrator's fees, administrative fees, travel expenses, out-of-pocket expenses
such as copying and telephone, court costs, witness fees and attorneys' fees.
16.8 Neither party nor the arbitrator may disclose the existence,
content, or results of any arbitration hereunder without the prior written
consent of both parties.
16.9 Limited civil discovery shall be permitted for the
production of documents and taking of depositions. All discovery shall be
governed by the California Rules of Civil Procedure. All issues regarding
conformation with discovery requests shall be decided by the arbitrator.
16.10 The arbitration award shall be in writing and shall specify
the factual and legal bases for the award.
16.11 Within twenty days after receipt of Notice of Decision by
the Arbitrator, either party may appeal the arbitration panel(`s) award to an
appellate arbitrator by filing a written Notice of Appeal served on the opposing
party and the arbitrator.
16.12 Within fifteen days after Notice of Appeal, each party
shall select one person to act as appellate arbitrator, and the two selected
shall select a third appellate arbitrator within ten days of their appointment
who will act as sole arbitrator of the dispute. If the arbitrator selected by
the parties is unable or fails to agree upon the third appellate arbitrator, the
third arbitrator shall by appointed by a Superior Court Judge
8
<PAGE> 9
pursuant to California Code of Civil Procedure section 1281.6 on petition of
party to the Arbitration Agreement.
16.13 The appellate arbitrator shall be a retired judge of a
court of record in the state in which the arbitration was held.
16.14 Within twenty days after selection of an appellate
arbitrator, a written brief, not to exceed twenty pages, stating the reasons why
the panel's decision should be reversed or modified shall be filed with the
appellate arbitrator and served to the opposing party. The opposing party shall
file with the appellate arbitrator and serve on the appealing party, within
twenty days after receiving the appeal brief, an opposition brief, not to exceed
twenty pages. Either party may request oral argument which must be conducted
within fourteen days following the submission of the final brief. The appellate
arbitration shall be based only on the record of the initial hearing and oral
argument, if any. The appellate arbitrator shall render a written decision
affirming reversing, modifying or remanding the arbitration panel's decision
within thirty days after receiving the final appellate submissions.
16.15 The appellate arbitrator may reverse, modify or remand the
matter for further proceedings by the arbitration panel only on one of the
following grounds:
(1) Any ground specified in 901 et. seq. of the California Code
of Civil Procedure;
(2) If the award contains material errors of applicable law;
(3) If the award is arbitrary or capricious;
(4) If there is a demonstration of bias, prejudice or undisclosed
conflict of interest between the arbitrator and the prevailing
party.
16.16 The appellate arbitrator may render a final decision on
appeal or remand the matter for further proceedings by the arbitration panel.
16.17 The arbitrators shall award to the prevailing party, if
any, as determined by the arbitrators, all of its costs and fees. "Costs and
fees" means all reasonable pre-award expenses of the arbitration, including the
arbitrator's fees, administrative fees, travel expenses, out-of-pocket expenses
such as copying and telephone, court costs, witness fees and attorneys' fees.
17. WAIVER. Waiver by Superior National or Employee of any provision or
any rights under any provision of this Agreement in any instance shall not be
taken as a waiver of any subsequent breach of such provision or as a continuing
waiver of the provision itself.
9
<PAGE> 10
18. ASSIGNMENT. The rights of Employee hereto shall inure to the benefit
of and be binding upon the successors and assigns of Superior National
consistent with the terms of this Agreement and regardless of the form in which
such succession or assignment takes place. This Agreement and the rights,
interest and benefits hereunder are personal to Employee and shall not be
assigned, transferred, pledged, or hypothecated in any way by Employee, and
shall not be subject to execution, attachment or similar process. Any attempted
assignment, transfer, pledge, or hypothecation, or the levy of any execution,
attachment of similar process thereon, shall be null and void and without
effect.
19. ATTORNEYS' FEES, COSTS. If either party shall bring an action
against the other party hereto by reason of a breach of any covenant, warranty,
representation or condition herein, or otherwise arising out of this Agreement,
whether for declaratory or other relief, the prevailing party in such suit shall
be entitled to such party's costs of suit and attorneys' fees, which shall be
payable whether or not such action is prosecuted to judgment. Costs and
attorneys fees resulting from any arbitration shall be governed by section 16,
hereof.
20. PARAGRAPH HEADINGS. Paragraph headings are for the purpose of
convenience only and shall not be considered to be any part of this Agreement.
21. COUNTERPARTS. More than one counterpart of this Agreement may be
executed by the parities hereto, and each counterpart shall be deemed an
original, and all counterparts together shall be one agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement to
take effect the date first stated above.
EMPLOYEE
/s/ Date:
- --------------------------------------- ---------------------
J. CHRIS SEAMAN
SUPERIOR NATIONAL INSURANCE GROUP, INC.
By: /s/ Date:
------------------------------------ ---------------------
WILLIAM L. GENTZ
Title: President & Chief Executive Officer
10
<PAGE> 11
ADDENDUM "A"
EMPLOYMENT TERM SHEET - J. CHRIS SEAMAN
<TABLE>
<S> <C>
Position: Executive Vice President and Chief Financial Officer
Superior National Insurance Group, Inc. and subsidiaries
Salary: Effective February 17, 1997, $200,000 annually
Car Allowance: $1,000 per month
Health Insurance: On same terms, conditions and coverages of other
Superior National senior executives
Life Insurance: A term life policy with limits up to $600,000 will be
provided annually.
Expenses: Usual and customary
Country Club Country Club Membership including membership fee and monthly
Membership: dues payments. Membership fee not to exceed $20,000 and
monthly dues to not exceed $350.00 per month.
</TABLE>
11
<PAGE> 1
EXHIBIT 10.40
STATE OF CALIFORNIA
DEPARTMENT OF INSURANCE
SAN FRANCISCO
--------
Amended
Certificate of Authority
--------
THIS IS TO CERTIFY, That, pursuant to the Insurance Code of the State of
California,
Superior Pacific Casualty Company
of Woodland Hills, California, organized under the laws of California, subject
to its Articles of Incorporation or other fundamental organizational documents,
is hereby authorized to transact within this State, subject to all provisions
of this Certificate, the following classes of insurance:
Liability and Workers' Compensation
as such classes are now or may hereafter be defined in the Insurance Laws of
the State of California.
THIS CERTIFICATE is expressly conditioned upon the holder hereof now and
hereafter being in full compliance with all, and not in violation of any, of
the applicable laws and lawful requirements made under authority of the laws of
the State of California as long as such laws or requirements are in effect and
applicable, and as such laws and requirements now are, or may hereafter be
changed or amended.
IN WITNESS WHEREOF, effective as of the 15th day
of May, 1997, I have hereunto set my hand and
caused my official seal to be affixed this 15th
day of May, 1997.
[SEAL]
Chuck Quackenbush
Insurance Commissioner
By /s/ Victoria S. Sidbury
-------------------------
Victoria S. Sidbury
Deputy
NOTICE
Qualification with the Secretary of State must be accomplished as required by
the California Corporations Code promptly after issuance of this Certificate of
Authority. Failure to do so will be a violation of Ins. Code Sec. 701 and will
be grounds for revoking this Certificate of Authority pursuant to the covenants
made in the application therefor and the conditions contained herein.
<PAGE> 2
STATE OF CALIFORNIA CHUCK QUACKENBUSH, Insurance Commissioner
DEPARTMENT OF INSURANCE
45 FREMONT STREET, 24TH FLOOR
SAN FRANCISCO, CA 94105 [SEAL]
May 15, 1997
Mr. Franklin L. Damon
11845 West Olympic Blvd., Ste. 1000
Los Angeles, CA 90064
SUBJECT: Certificate of Authority - California
Superior Pacific Casualty Company
Permanent No. 3118-7*
Dear Mr. Damon:
Transmitted herewith is Amended Certificate of Authority No. 6504 issued and
effective May 15, 1997, and superseded Amended Certificate of Authority No.
5624. All insurers must contact the Secretary of State at 1230 J Street,
Sacramento, CA 95814, in order to obtain a Certificate of Qualification as
required by California Corporations Code Section 2105 before transacting an
insurance business in California. Failure to do so will be in violation of
Insurance Code Section 701 and will be grounds for revoking the Certificate of
Authority pursuant to the covenants made in the application therefor and the
conditions contained therein.
This Certificate of Authority does not permit the writing of any insurance
contracts within this State until you are in full compliance with the provision
of Proposition 103 (California Insurance Code Section 1861 et seq.). It is the
licensee's responsibility to obtain prior approval of its rates in accordance
with those provisions. The classes of insurance which are exempt from the rate
filing requirements include reinsurance, life, title, marine (certain types),
disability, workers' compensation, mortgage and insurance transacted by county
mutual life insurers. All rate filing applications must be submitted to the
Department of Insurance, Rate Filing Bureau, 45 Fremont Street, San Francisco,
CA 94105.
California has adopted comprehensive regulations governing claims handling.
See Title 10, California Code of Regulations, Section 2695.1 et seq., for
insurer duties, which include the training of employees and agents.
Additionally, pursuant to Insurance Code Section 1875.20, every insurer
admitted to do business in this State shall maintain a Special Investigative
Unit ("SIU") to investigate possible fraudulent claims by insureds or by
persons making claims for services or repairs against policies held by
insureds. Insurers are required to file a written statement with the
Department attesting to the existence and maintenance of a SIU within the
organization. Failure to comply may subject
<PAGE> 3
Mr. Franklin L. Damon
May 15, 1997
Page 2
insurers to fines and penalties. See California Code of Regulations, Section
2698.40, et. seq.
California insurance regulations may be obtained by calling Barclay's Law
Publishers at (800) 888-3600 and ordering a copy of Title 10, Chapter 5, of the
California Code of Regulation. California insurance statutes may be obtained
by calling West Publishing Company at 1-800-328-9352 and ordering a copy of the
California Insurance Code.
If Life, Disability or Workers' Compensation will be written, see the following:
Disability, workers' compensation, group life, variable life and annuity,
credit life and credit disability insurance policies are subject to approval
prior to use. Except as noted below, the submission of other individual life
forms is not required except credit life forms and those forms required to be
filed under California Insurance Code Sections 10271 and 10292.
California-based insurers must receive approval of all separate account
pension, retirement or profit-sharing plans. The procedures for filing the
required forms are contained in Title 10, California Code of Regulations
Sections 2200 through 2218.10. Licensees should become familiar with these
filing regulations before submitting forms for approval.
Forms required to be submitted for approval (other than workers' compensation)
should be sent to the Insurance Commissioner, Policy Approval Bureau, 45
Fremont Street, San Francisco, CA 94105. Worker's compensation forms are first
filed with the Workers' Compensation Insurance Rating Bureau of California,
Spear Street Tower, One Market Plaza, San Francisco, CA 94105. Individual life
policies of the type described in California Insurance Code Section 10489.10
and this Department's Bulletin No. 82-5 must be filed with the Insurance
Department's Actuarial Division (California Insurance Department, 300 South
Spring Street, Los Angeles, CA 90013) prior to use in this State.
Very truly yours,
/s/ GLORIA R. MUNAR
-------------------------
Gloria R. Munar
Legal Division
(415) 538-4437
* This is the company's permanent number. It must be used on all
correspondence (including "Action Notice") addressed to the Department's License
bureau; otherwise, the computer will reject
<PAGE> 4
Mr. Franklin L. Damon
May 15, 1997
Page 3
the notice. Please do not send correspondence to the License Bureau until at
least one week after receipt of your Certificate of Authority to allow time for
computer processing of the company name.
Enclosures
<PAGE> 1
EXHIBIT 10.65
AMENDMENT AND WAIVER NO. 1 TO CREDIT AGREEMENT
AMENDMENT AND WAIVER NO. 1 (this "Amendment"), dated as of September
25, 1997, among SUPERIOR NATIONAL INSURANCE GROUP, INC., a Delaware corporation
("SNIG"), SUPERIOR PACIFIC INSURANCE GROUP, INC., a Delaware corporation (the
"Borrower"), the financial institutions party to the Credit Agreement referred
to below (the "Banks"), THE CHASE MANHATTAN BANK, as Administrative Agent (the
"Administrative 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 modified,
supplemented and amended to the date hereof, the "Credit Agreement"); and
WHEREAS, SNIG and the Borrower have requested, and the Banks party
hereto are willing (subject to the terms and conditions hereof) to grant, a
waiver in connection with a certain covenant contained in the Credit Agreement,
and further the parties hereto wish to amend the Credit Documents as set forth
below;
NOW THEREFORE, it is agreed:
1. On the Amendment Effective Date (as defined below), the Banks
hereby waive compliance by the Borrower with the provisions set forth in Section
6.01(b) of the Credit Agreement solely with respect to the fiscal quarter ended
on June 30, 1997.
2. On the Amendment Effective Date, the Banks hereby waive compliance
by the Borrower with the provisions of Section 7.02 of the Credit Agreement
solely with respect to the Financial Reinsurance Contract entered or to be
entered into between the Borrower and Centre Re having terms and conditions
substantially the same as set forth in the Term Sheet dated June 30, 1997, a
copy of which has been distributed to the Banks.
3. On the Amendment Effective Date, the definition of "Statutory
EBIT" in Section 9 of the Credit Agreement is hereby amended by (i) replacing
the words "line 14(b)" therein with the words "line 14" and (ii) inserting at
the end of such definition the following sentence:
"Notwithstanding the foregoing, with respect to any period
which includes the quarter ended on June 30, 1997,
Statutory EBIT shall be calculated without giving effect to
up to $9,800,000 of expenses
<PAGE> 2
which relate to the Acquisition and otherwise would result
in a charge against earnings for such quarter."
4. In order to induce the Administrative Agent and the Banks to enter
into this Amendment, SNIG and the Borrower hereby represent and warrant that (x)
no Default or Event of Default exists on the Amendment Effective Date after
giving effect to this Amendment and (y) all of the representations and
warranties contained in the Credit Agreement or the other Credit Documents shall
be true and correct in all material respects on the Amendment Effective Date
with the same effect as though such representations and warranties had been made
on and as of such date (it being understood that any representation or warranty
made as of a specific date shall be true and correct in all material respects as
of such specific date).
5. This Amendment is limited as specified and shall not constitute a
modification, acceptance or waiver of any other provision of the Credit
Agreement or any other Credit Document.
6. This Amendment may be executed in any number of counterparts and
by the different parties hereto on separate counterparts, each of which
counterparts when executed and delivered shall be an original, but all of which
shall together constitute one and the same instrument. A complete set of
counterparts shall be lodged with SNIG, the Borrower and the Administrative
Agent.
7. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE
STATE OF NEW YORK.
8. This Amendment shall become effective as of the date hereof on the
date (the "Amendment Effective Date") when each of SNIG, the Borrower, the
Administrative Agent and the Required Banks shall have signed a copy hereof
(whether the same or different copies) and shall have delivered (including by
way of telecopier) the same to the Administrative Agent at its Notice Office.
2
<PAGE> 3
IN WITNESS WHEREOF, each of the parties hereto has caused a
counterpart of this Amendment to be duly executed and delivered as of the date
first above written.
SUPERIOR NATIONAL INSURANCE GROUP,
INC.
By: /s/
-----------------------------------
Name:
Title:
SUPERIOR PACIFIC INSURANCE GROUP, INC,
By: /s/
-----------------------------------
Name:
Title:
THE CHASE MANHATTAN BANK,
Individually and as Administrative Agent
By: /s/
-----------------------------------
Name:
Title:
3
<PAGE> 4
DRESDNER BANK AG, New York Branch and
Grand Cayman Branch
By: /s/
-----------------------------------
Title:
By: /s/
-----------------------------------
Title:
4
<PAGE> 5
UNION BANK OF CALIFORNIA, N.A.
By: /s/
-----------------------------------
Title:
BANKBOSTON, N.A.
By: /s/
-----------------------------------
Title:
SANWA BANK CALIFORNIA
By: /s/
-----------------------------------
Title:
IMPERIAL BANK
By: /s/
-----------------------------------
Title:
5
<PAGE> 1
EXHIBIT 11
The following is a summary of the calculation of EPS.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, 1997
--------------------
1997 1996
------- ------
<S> <C> <C>
Net income (A)........................................................ $ 2,132 $ 712
Elimination of interest expense as a result of pro forma exercise of
options and warrants (B)............................................ -- 84
Number of shares used in calculating fully diluted earnings per share
(C).................................................................
Weighted average outstanding shares during period..................... 5,837 3,433
Additional common shares issuable under employee stock options using
the treasury stock method (1)....................................... 1,855 1,884
7,692 5,317
Net income per share [(A)+(B)]/(C).................................... $ 0.28 $ 0.15
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1997
--------------------
1997 1996
------- ------
<S> <C> <C>
Net income (A)........................................................ $(7,642) $1,916
Elimination of interest expense as a result of pro forma exercise of
options and warrants (B)............................................ -- 261
Number of shares used in calculating simple and fully diluted earnings
per share in 1997 and 1996 respectively (C).........................
Weighted average outstanding shares during period..................... 5,040 3,433
Additional common shares issuable under employee stock options using
the treasury stock method (1)....................................... -- 1,884
5,040 5,317
Net income per share [(A)+(B)]/(C).................................... $ (1.52) $ 0.41
</TABLE>
- ---------------
(1) Based on the ending market price at the end of the period.
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 204,732
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 204,732
<EQUITIES> 849
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 238,804
<CASH> 33,223
<RECOVER-REINSURE> 852
<DEFERRED-ACQUISITION> 5,834
<TOTAL-ASSETS> 397,192
<POLICY-LOSSES> 222,625
<UNEARNED-PREMIUMS> 14,988
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 1,370
<NOTES-PAYABLE> 42,366
25,672
0
<COMMON> 34,128
<OTHER-SE> 22,676
<TOTAL-LIABILITY-AND-EQUITY> 397,192
99,148
<INVESTMENT-INCOME> 9,198
<INVESTMENT-GAINS> 46
<OTHER-INCOME> 0
<BENEFITS> 66,311
<UNDERWRITING-AMORTIZATION> 13,647
<UNDERWRITING-OTHER> 14,115
<INCOME-PRETAX> 7,723
<INCOME-TAX> 2,821
<INCOME-CONTINUING> 4,902
<DISCONTINUED> 0
<EXTRAORDINARY> (11,157)
<CHANGES> 0
<NET-INCOME> (7,642)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 195,131
<PROVISION-CURRENT> 61,472
<PROVISION-PRIOR> 4,839
<PAYMENTS-CURRENT> 12,362
<PAYMENTS-PRIOR> 80,490
<RESERVE-CLOSE> 168,590
<CUMULATIVE-DEFICIENCY> 4,839
</TABLE>
